|September 2, 2013|
Previously published on August 2013
The U.S. Federal Trade Commission has settled its long running dispute with the Phoebe Putney Health System, Palmyra Park Hospital, and the Hospital Authority of Albany-Dougherty County over the Hospital Authority's acquisition of Palmyra in Albany, Georgia. Memorialized in a consent decree, the settlement in this merger challenge is unusual for what it does not include - a requirement that the Hospital Authority divest Palmyra. According to the FTC, Georgia's certificate-of-need ("CON") law precludes a divestiture of either hospital. And beyond that, the FTC chose not to seek the sort of conduct remedies it has sought in a past consummated case, such as separate health plan negotiation teams. The FTC itself (correctly) describes this settlement as "highly unusual."
In April 2011, the FTC issued a complaint challenging the Hospital Authority's acquisition of Palmyra. The FTC alleged that Phoebe Putney and Palmyra were using the Hospital Authority as a front for Phoebe Putney to acquire Palmyra without antitrust scrutiny. According to the FTC, this was effectively a merger of the two competing hospitals. The Hospital Authority had no funds other than the $195 million advanced by Phoebe Putney to complete the purchase, and Phoebe Putney would be responsible for the day-to-day operations and strategic direction of Palmyra after the transaction.
The FTC's complaint alleged that the transaction was "essentially a merger-to-monopoly" as Phoebe Putney and Palmyra were two of only three general acute-care hospitals in the Albany area. The only other hospital in the area is a 25-bed critical access hospital 31 miles away. Phoebe Putney and Palmyra together have 86 percent of general acute-care hospital services in the Albany area.
The district court granted the parties' motion to dismiss the FTC's complaint. It held that the Hospital Authority was immune from antitrust scrutiny under the state action doctrine, which immunizes from federal antitrust challenge conduct that is controlled by state regulation, and the Hospital Authority is a state entity. The Eleventh Circuit affirmed this dismissal and allowed the transaction to proceed. The parties completed the merger in December 2011. The FTC appealed to the Supreme Court, which in February 2013 unanimously reversed the Eleventh Circuit, holding the state action defense did not apply. After the Supreme Court's ruling, the FTC obtained a temporary restraining order prohibiting any further integration of the two hospitals. Subsequently, in June 2013, the parties agreed to halt the integration pending the outcome of an administrative trial on the merits, which was set to begin in early August.
FTC Consent Decree
The remedy is most notable not for what is in it, but what is missing. The consent decree does not require a divestiture or even impose any conduct remedy to address the alleged anticompetitive effect of the combination. According to the FTC, it did not seek a divestiture of Palmyra because it was powerless to do so under the Georgia CON statute. The sale of Palmyra would require a CON filing under Georgia law. But there is a surplus of hospital beds under the law's definition of bed need, so no buyer could prove unmet need in the Albany area that would justify the issuance of a CON, the FTC concluded.
The consent decree does impose minor requirements to prevent the parties from limiting future competition. The parties must (1) stipulate that the transaction substantially lessened competition for hospital services in Albany, (2) refrain from "objecting to or providing negative comments about" any CON applications for general-acute care hospitals, (3) submit any CON-related objections to the FTC related to inpatient or outpatient clinic facilities, and (4) provide prior notice to the FTC before acquiring any a general acute-care hospital, inpatient or outpatient facilities that provide any of the same services as the parties, or controlling interest in any physician group practice of five or more physicians.
The proposed settlement is subject to public comment through September 23, 2013. After the public comment period, the FTC will decide whether to make the proposed consent order final.
Although structural remedies have been and will continue to be the default fix for horizontal mergers that lessen competition, this case may signal that the FTC is tempering the agency's use of conduct remedies. Both the FTC and Department of Justice have in recent years welcomed the use of conduct remedies, as discussed in prior alerts (see June 2010 and April 2013 Antitrust Alerts). And the FTC has imposed a conduct remedy in the similar matter involving an already-completed hospital merger. In settling its challenge to the acquisition by Evanston Northwestern Healthcare of Highland Park Hospital, the FTC in 2008 stopped short of requiring a full divestiture. However, the FTC there did require that Evanston and Highland Park maintain separate payor negotiation teams and negotiate contracts with health plans independently of one another. The FTC reported that it decided against a conduct remedy in the Phoebe Putney case because such remedies are insufficient to replicate premerger competition, involve monitoring costs, are unlikely to address the loss of competition on quality, and may dampen incentives to improve quality.
Without an acceptable structural or conduct remedy in such cases, in the future the FTC may point to the Phoebe Putney case to encourage judges to grant temporary restraining orders and preliminary injunctions to preserve the status quo pending an administrative trial on the merits.