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Phoebe Putney
Phoebe Putney bought the contested hospital, above, in 2010 for $195 million.

Phoebe Putney's legal setback

Supreme Court says deal not exempt from antitrust scrutiny, may affect ACOs

By Beth Kutscher
Posted: February 23, 2013 - 12:01 am ET

In 2010, Phoebe Putney Health System agreed to write a $195 million check to buy its smaller crosstown competitor in southwest Georgia, a facility with just over 100 beds.

But the legal battle with the Federal Trade Commission that ensued—culminating last week with a U.S. Supreme Court ruling that the acquisition is not exempt from antitrust scrutiny—could have outsized implications for other deals across the country.

On its surface, the case involving two healthcare organizations in Albany, Ga., turned on a legal issue that comes up relatively infrequently with hospital takeovers, given the unique ownership structure of Phoebe Putney. However, it's an issue that could receive more attention as states attempt to write regulations that will allow them to shield Medicaid accountable care organizations from antitrust scrutiny.

Phoebe Putney, which acquired Palmyra Medical Center from hospital giant HCA, is a not-for-profit health system that operates public hospitals under a $1-a-year lease from the Albany-Dougherty Hospital Authority. Therefore, its argument in front of the court turned on the scope of the “state action immunity doctrine,” which gives states wide latitude to regulate competition.

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Since the authority is a state entity, the four-hospital health system argued, it is immune from federal antitrust scrutiny.

However, the high court pushed back on that line of reasoning. Writing for a unanimous court, Justice Sonia Sotomayor overturned decisions from a district and an appeals court in her opinion that states must expressly grant antitrust immunity to local entities.

The state of Georgia, she wrote, had not “clearly articulated and affirmatively expressed a policy to allow hospital authorities to make acquisitions that substantially lessen competition.”

The Phoebe Putney case was also unique, said Matthew Cantor, an antitrust attorney at law firm Constantine Cannon, because the health system didn't dispute that it would control 86% of a six-county market after the sale.

“No one is questioning that this was creating a monopoly,” Cantor said. “The only reason this was even attempted was because the 11th Circuit had this expanded view (of the state action doctrine.) The reality was the hospital authority really wasn't a state agency; it really was a private agency.”

Jay Levine, an antitrust attorney at law firm Bradley Arant Boult Cummings, noted that the decision no longer allows hospital authorities to be used to circumvent antitrust scrutiny. “I don't think you can have a knee-jerk reaction that the state said we can play in this market so therefore we're exempt,” Levine said.

For medical centers concerned about local hospital authorities gaining too much power through acquisitions, this could be a welcome result, he said.

The state action doctrine also has come into play in other areas of healthcare. For example, Cantor pointed to a 2011 FTC decision that found the North Carolina State Board of Dental Examiners couldn't restrict nondentists from performing teeth whitening services.

And it also could affect Medicaid ACOs. “The state action doctrine has been expanded, expanded, expanded to essentially immunize them,” Cantor said. “The Supreme Court is going to look a bit wary about stark anti-competitive behavior.”

But Tara Adams Ragone, a research fellow and lecturer at Seton Hall University School of Law who has written about how to structure Medicaid ACOs to avoid antitrust scrutiny, noted that the laws in New Jersey, New York, Oregon and Washington do state that they intend to authorize anti-competitive behavior.

“It doesn't change things from my analysis,” she said about the Phoebe Putney decision. Yet she added that states may have to review statutes that don't contain that explicit language.

The Phoebe Putney decision also doesn't address the second prong of the state action doctrine, which requires states to actively oversee the anti-competitive behavior. “That's where there's a lot of work to be done,” she said.

Ragone and Cantor pointed out that it's still unclear whether the FTC and U.S. Justice Department even intend to challenge ACOs as anti-competitive. A classic antitrust case involves entities colluding to fix prices—but the whole goal of an ACO is to reduce costs.

For its part, Phoebe Putney, which has vowed to continue its fight for Palmyra Medical Center, will return to district court with one of its key defenses stripped away.

“I think there's nothing much for us to do but follow the litigation through its course,” said Thomas Chambless, senior vice president and general counsel at Phoebe Putney Health System. “We'll follow the case as it travels and continue to assert our position.”

Chambless emphasized that there has never been a decision about whether the takeover is anti-competitive. And, he stressed, “This is not an anti-competitive acquisition.”

Still, attorneys following the case suggested that the health system may be forced to unwind its deal, which closed in 2011.

Levine called the continued fight an “uphill battle” and added that the FTC could require Phoebe Putney to divest the facility, now known as Phoebe Putney Memorial Hospital North Campus.

“I think it's going to be almost impossible, if not impossible, to get this through the courts,” Cantor said. “What it means to me is that this transaction will be derailed.”

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