Yesterday, the Supreme Court announced its decision in FTC v. Phoebe Putney, a case concerning the Federal Trade Commission’s attempt to block the merger of the only two hospitals located in Albany, Georgia – Phoebe Putney Memorial Hospital and Palmyra Health Center. The Court ruled that the lower courts had erred in dismissing the FTC’s challenge to the merger because the local hospital authority’s facilitation and approval of the hospital transaction did not constitute “state action” and thus could not immunize the transaction from antitrust scrutiny.

The Transaction

Georgia law authorizes each county or municipality to establish hospital authorities to ensure that residents have access to adequate health care. Under the law, hospital authorities have the power to exercise public and essential functions and have powers akin to a private corporation, including the power to acquire and lease. Pursuant to this law, the city of Albany and Dougherty County established the Hospital Authority of Albany-Dougherty County (Authority) in 1941. The Authority ran Phoebe Putney Memorial Hospital until 1990, at which time the Authority began leasing the hospital to Phoebe Putney Health System, a private corporation created by the Authority.

In 2010, Phoebe Putney Health System acquired control of Palmyra in a two-step process using the Authority as the intermediary: first, the Authority purchased Palmyra (which was owned by Hospital Corporation of America (HCA)) using Phoebe Putney funds; and second, the Authority leased Palmyra to Phoebe Putney for one dollar. Phoebe Putney and HCA presented the transaction agreements to the Authority, which in turn approved the transaction.

The Decision

In response to the FTC’s action to block the merger in April 2011, Phoebe Putney argued successfully that the transaction was immune from the antitrust laws under the so-called “state action” doctrine. It asserted that because the legislature gave the Authority the acquisition and leasing powers it exercised in the transaction, and that the acquisition of Palmyra was a foreseeable result of legislature’s delegation of authority, the conduct was therefore immune as state action.

Beginning with Parker v. Brown (1943) and in subsequent cases, the Supreme Court has held that in certain circumstances the conduct of private actors and local governmental entities may be immune from antitrust scrutiny to the extent that they are carrying out a state’s regulatory program. In the case of local governmental entities, such as the Authority, the essential element of immunity is a demonstration that the anticompetitive conduct of the Authority was undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition.

The Supreme Court held that this standard was not met to confer antitrust immunity on the Authority’s action. In doing so, it reached the following conclusions:

1. The Court held that state-law authority to act – here, the general powers given to the Authority to acquire and lease – was insufficient alone to create state-action immunity. The Authority must also show that the state has given it “authority to act or regulate anticompetitively” (emphasis added).

2. Although a state’s affirmative choice to displace competition does not need be express, at a minimum, the displacement of competition must be an inherent, logical, or ordinary result of the exercise of the authority. Here, the Court found that the general corporate powers to acquire and lease that the state gave to the Authority are not inherently anticompetitive and were not designed to negatively affect competition (including through anticompetitive mergers or acquisitions).

3. Lastly, the Court rejected the parties’ argument that hospital authorities should be viewed differently because they differ in substance and authority than private corporations that also provide hospital services. It explained that the fact that the hospital authorities’ objective is to improve access to affordable health care; that hospital authorities are required to operate on a non-profit basis; or that the state does limit competition through a certificate of need requirement does not mean the state clearly articulated a policy that allows authorities to engage in transactions or exercise their corporate powers without regard to their effects on competition.

The Implications for Health Care Providers

Health care providers are confronted from time to time with opportunities to collaborate, deal, or engage in transactions with subordinate governmental entities. This may occur, for example, when a community hospital joint ventures a clinical service line with a university teaching hospital, or when a county-owned community hospital affiliates with a private nonprofit health system.

The Supreme Court’s decision yesterday in FTC v. Phoebe Putney is a reminder for health care providers to be wary of assuming that their dealings with such governmental entities are immune from antitrust challenge. A governmental entity’s mere exercise of general corporate powers conferred by the state or the bare fact that the governmental entity has a specific state mandate to improve health care are insufficient to confer state-action immunity. Unless the state also has clearly expressed an intention to allow the governmental entity to displace competition or otherwise act in an anticompetitive manner, the antitrust laws will continue to apply to those transactions.