United States: As Consolidation In Healthcare Increases, So Does Antitrust Enforcement : An Application Of The State Action Doctrine And An Analysis Of Two Instructive Cases

Last Updated: February 17 2012
Article by L. Pahl Zinn and Christian G. Ohanian

As healthcare providers look to consolidation as a way to remain competitive, regulatory agencies are aggressively staking out their turf and challenging consolidations which have the potential to yield anticompetitive results.

Recently, the FTC challenged two similar consolidations, however, the courts that reviewed the actions by the FTC reached different results. In F.T.C. v. Phoebe Putney Health System and In the Matter of ProMedica Health System, Inc., the FTC challenged acquisitions of acute care inpatient rural hospitals by competitors. In challenging the transaction, the FTC argued in both cases that consolidation in rural geographic areas would result in unacceptably high post-acquisition market shares and has the potential of reducing competition by allowing the newly merged entity to demand and receive higher reimbursement rates.

The two cases differ in one important aspect: in Phoebe, the Eleventh Circuit found that the state action defense exempted the acquisition of a privately owned hospital in the market by a statutorily authorized public health authority (called the "Authority" in its opinion). The Authority acquired the assets of the privately run hospital and then leased the newly acquired assets to the same non-profit entity which operated the only competitor hospital. As a result, the Authority owned directly the assets of both competitor hospitals which were operated by a non-profit entity controlled by the Authority in the rural market.

Although the Eleventh Circuit acknowledged the acquisition of the second hospital by the Authority likely would violate Section 7 of the Clayton Act, it ultimately upheld both the acquisition and the subsequent lease of the acquired assets to the Authority's nonprofit subsidiary. The Court reasoned that a Georgia state statute clearly authorized the acquisition. The Court explained that, "a political subdivision, like the Authority, enjoys state action immunity if it shows that, through statutes, the state generally authorizes [it] to perform the challenged action and that, through statutes, the state has clearly articulated a state policy authorizing anticompetitive conduct." In ProMedica, however, neither hospital could avail itself of the state action immunity because there was no specific statute authorizing the contemplated conduct. Ultimately, the FTC invalidated the acquisition and ordered total divestiture.

Both Phoebe and ProMedica involved rural health systems attempting to consolidate services, create efficiencies and ensure economic viability in the face of a precarious economy and the ever changing landscape of federal healthcare reform. A few conclusions can be reached from a close analysis of these two cases. First, considering the current economic state and uncertainty regarding the effect of federal healthcare legislation, healthcare systems undoubtedly will look for opportunities to consolidate services, programs and facilities to remain viable. Second, healthcare systems will want to take a closer look at Phoebe and the use of governmental units to serve as a "straw man" and exempt the transaction from antitrust scrutiny as state action. Third, although there might be a case like Phoebe where the Court unequivocally held the state action doctrine to apply, every indication is that the FTC will vigorously challenge any healthcare consolidations it feels stand a chance at significantly reducing competition.

What remains to be seen, however, is how the other Federal Circuits, and other federal agencies might react to what could be an effective strategy to avoid increased antitrust enforcement. Further, in those states which may not have sufficient statutory authority or other state mechanisms in place to facilitate acquisitions of hospitals (particularly if a governmental agency is a "straw man" and does not bear the economic risk of operations post-acquisition), watch out for legislative lobbying from healthcare. Regardless, 2012 is already shaping up as an interesting year as antitrust and healthcare law continue to intersect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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