A lesson in Federal Antitrust and State Certificate Need Laws: Phoebe Putney Settle with the FTC

Phoebe Putney SettlementThe FTC has recently announced that it has reached a settlement with Phoebe Putney Health System, Inc., the Hospital Authority of Albany-Dougherty County, and HCA Inc. resolving charges that the Hospital Authority’s acquisition of Palmyra Park Hospital, Inc. from HCA Inc. – which created an effective hospital monopoly in the Albany, Georgia area – was anticompetitive.  Under the consent agreement with the FTC, Phoebe Putney and the Hospital Authority must notify the FTC in advance of acquiring any part of a hospital or a controlling interest in other healthcare providers in the Albany, Georgia area for the next 10 years, and will be prohibited from objecting to regulatory applications made by potential new hospital providers in the same area for up to five years.

The settlement is similar to the one proposed in 2013.  Like the earlier settlement, it: 1) requires Phoebe Putney and the Hospital Authority to give the FTC prior notice before acquiring any part of a hospital or a controlling interest in other healthcare providers in the Albany, Georgia area; 2) prohibits the Hospital Authority and Phoebe Putney from opposing a Certificate of Need application for a general acute-care hospital in the Albany area; and 3) contains a stipulation that the effect of the transaction may be substantially to lessen competition within the relevant service and geographic markets alleged in the complaint.

However, the consent agreement has not come without a significant fight from Phoebe Putney and the other defendants.  In fact, the consent agreement follows a major U.S. Supreme Court victory in 2013 that reaffirmed the narrow scope of state action immunity and allowed the FTC to challenge this transaction.  At issue in the Supreme Court case was whether a Georgia law that creates special-purpose public entities called hospital authorities and gives those entities general corporate powers, including the power to acquire hospitals, clearly articulates and affirmatively expresses a state policy to permit acquisitions that substantially lessen competition.   On that issue, the Court held that, “Because Georgia’s grant of general corporate powers to hospital authorities does not include permission to use those powers anticompetitively, we hold that the clear-articulation test is not satisfied and state action immunity does not apply.”

Also of importance in this case is the issue surrounding any proposed relief aimed at restoring competition lost as a result of the merger.  However, under Georgia’s strict Certificate of Needs (“CON”) laws any such relief is precluded.  It is interesting to note that a divestiture was available when the FTC first filed the case, but an Eleventh Circuit decision allowing the merger to go forward cemented the fact that no relief would be allowed going forward.

In general, CON laws and programs seek to reduce healthcare costs by requiring state approval before construction of certain new health facilities or capital improvements of certain existing health facilities, based on community need.  The Phoebe Putney case is not the first time that the FTC has raised concerns about the inconsistency between federal antitrust policy and state CON laws and programs. In 2008, the FTC and the Antitrust Division of the U.S. Department of Justice issued a Joint Statement to the Illinois Task Force on Health Planning Reform, arguing that Illinois’s CON laws impede the efficient performance of healthcare markets.  In the joint statement, the agencies set forth several arguments against CON laws: 1) the market cost-control rationale, which initially drove adoption of CON laws, no longer applies, because costs are negotiated. In fact, CON laws have not controlled market costs; 2) CON laws impose additional costs and may even facilitate anticompetitive behavior, because they interfere with the entry of firms that could provide higher-quality services than incumbents. CON laws also can be subject to abuse by incumbents who use the ensuing lengthy regulatory processes to delay entry of new competition (through diversion of competitors’ time and resources), preserving the anticompetitive status quo; 3) there are several examples where the CON process itself facilitated the establishment of anticompetitive agreements; and 4) CON laws do not protect incumbent hospitals’ financial investments and resources and maintain revenue that can be put to charitable use.  Instead, CON laws stifle competition that could otherwise encourage incumbents to improve performance and efficiency.

The tension between federal antitrust policy and state CON laws, as demonstrated in the Phoebe Putney case, is an issue that is likely to continue to arise in cases where the FTC challenges consummated hospital mergers.  An overwhelming majority of states still have CON laws or programs in place, even though the federal mandate was withdrawn almost two decades ago.  In unconsummated mergers under review by the FTC, CON laws may be cited as a barrier to entry that may count against arguments in favor of consolidation.  Conversely, as was the case in the Phoebe Putney acquisition, CON laws also may prevent divestiture of healthcare entities by larger conglomerates, preventing market innovation and harming consumers.  The FTC’s inability to restore competitive market conditions in the Phoebe Putney case may prompt states to reconsider their CON programs in the future.