On Monday November 26, 2012, the Supreme Court of the United States heard oral argument on two issues under the state action doctrine in connection with the Federal Trade Commission’s (FTC) challenge of Phoebe Putney Health System Inc.’s acquisition of Palmyra Park Hospital, LLC in Albany, Georgia.  View the full transcript of oral arguments.

In April 2011, the FTC filed an administrative complaint challenging the transaction and a complaint in federal district court seeking an injunction.  The FTC alleged that the transaction is a merger to monopoly for inpatient general acute care services sold to commercial health plans and is presumptively unlawful.  The federal district court dismissed the case, and the U.S. Court of Appeals for the 11th Circuit affirmed.  Both courts found that the transaction was immune from antitrust scrutiny under the state action doctrine, which exempts government entities from federal antitrust laws when they act pursuant to a clearly articulated state policy to displace competition with regulation, and the suppression of competition is a reasonably foreseeable result of that policy.  A local hospital authority district in Georgia, Hospital Authority of Albany-Dougherty County, owns the assets of Phoebe Putney Memorial Hospital and leases them to a not-for-profit corporation, Phoebe Putney Health System, which operates the hospital.  The hospital authority also acquired the assets of Palmyra Park Hospital LLC and leases them to Phoebe Putney Health System.

The Supreme Court certified two issues for review.  The first issue is whether the Georgia Hospital Authorities Law, 1941 Ga. Laws 241 (Ga. Code Ann. §§ 31-7-70 et seq.), “clearly articulated and affirmatively expressed” a “state policy to displace competition” with regulation.  The second question related more to the unique facts in this case; that is, if the Georgia Hospital Authorities Law did clearly articulate a state policy to displace competition with regulation, whether the state actively supervised the Hospital Authority of Albany-Dougherty County’s exercise of that power.

The 11th Circuit found that the Georgia Hospital Authorities Law gave the hospital district the power to acquire and lease out hospitals in a defined geographic area, and “contemplates anticompetitive effects, including just the sort of anticompetitive conduct challenged here.”  In their questions during oral argument, the Justices focused almost entirely on where they are to find within the state statutory scheme the clear articulation by the Georgia legislature of a state policy authorizing the Hospital Authority of Albany-Dougherty County to acquire a hospital when doing so would be anticompetitive.  The Assistant Solicitor General of the United States, arguing for petitioner FTC, contended that no such authorization exists—that the relevant statutes do no more than convey a general power to acquire hospitals that is equivalent to that of all other hospitals, i.e., a power limited by the antitrust laws.  “The most natural understanding” of the statutes, petitioner’s counsel argued, “is that the state expects them to be exercised in conformity with the background principles that bind everybody.” 

Counsel for the respondent hospitals (himself a former Solicitor General of the United States) replied that the state policy to supplant antitrust restrictions is, consistent with Supreme Court precedent, reasonably foreseeable from “the context of the law as a whole.”  He pointed to the overall statutory scheme that replaces a pure market model with one that places mandates on the Hospital Authority of Albany-Dougherty County to provide services, within a defined area, to the indigent population, to price on a not-for-profit basis, to have limits on its rate of return, to “acquire hospitals, plural” and other factors.

The Supreme Court’s ruling will give both states and lawyers counseling clients more guidance on the applicability of the state action doctrine and the antitrust immunity it provides as the number of public/private collaborations and acquisitions increases.  However, it is unlikely to result in any meaningful changes in the way hospitals approach acquisitions.  If the Supreme Court reverses the 11th Circuit, there will likely be more efforts, from both sides, to seek amendments to current laws to clarify whether the state intends to displace competition and thereby make the applicability of state action immunity explicit.  Thus, the battle over application of the state action doctrine may move from the courts to the legislature. 

Until the Supreme Court rules, hospitals should be mindful of the scope of and powers conferred by the government-owned or -operated hospital’s enabling legislation, as well as their federal circuit court of appeal’s construction and applicability of the state action immunity doctrine.