amurinoFeatured Expert Column – Antitrust/Federal Trade Commission

Andrea Agathoklis Murino, Goodwin Proctor LLP

Many months ago, I wrote about the ongoing saga that was the Federal Trade Commission’s (“FTC”) attempt to unwind the acquisition of Palmyra Park Hospital (“Palmyra”) by Phoebe Putney Health System Inc. (“Phoebe”) in Albany, Georgia. There were visits to all three levels of the federal court system (yes, even the Supremes!), as well as unexpected detours through various Georgia regulatory bodies. With the FTC’s announcement late last month that it was settling its administrative litigation with a behavioral remedy, we now know how this story ends.

Where We’ve Been

This journey began back in early-2011 with the FTC’s attempt to block the deal outright on the grounds that the combined entity would have had market shares in excess of 85% in the provision of acute care services in a six-county region. The FTC initially secured a preliminary injunction at the district court level but Phoebe successfully argued that despite the concentration levels, its acquisition was legal under the state action doctrine. The state action doctrine provides that where (1) there is a clearly articulated state policy to displace competition and (2) there is active supervision by the state of the policy or activity, otherwise anticompetitive activity will be permitted. Here, Phoebe argued the acquisition was immune under both prongs of the test because it was owned by the Hospital Authority of Albany-Dougherty County, and operated under Georgia’s Hospital Authorities Law.

The district court granted dismissal on that basis and the U.S. Court of Appeals for the Eleventh Circuit affirmed, while also dissolving the injunction that prohibited Phoebe from integrating the assets of Palmyra at the end of 2011. Phoebe and Palmyra integrated while the FTC appealed to the Supreme Court; its petition for certiorari was granted in June 2012. In February 2013, the Supreme Court issued a unanimous decision overturning the prior decisions. The Supreme Court held that, inter alia, the lower courts’ interpretation of the state action doctrine was overbroad and inconsistent with the governing principle that “state-action immunity is disfavored.” The FTC then restarted the administrative litigation process in the hopes of securing a divesture.

In August 2013, however, following a deeper review of the Georgia Certificate-of-Need (“CON”) laws, the FTC concluded it could not force a divestiture even if it won on the merits because of the CON laws. As with most states, Georgia’s CON laws require approvals before the transfer of health care facilities on the theory that over-supply of such facilities can lead to higher costs. Here, the FTC believed approval under the CON laws would be impossible.   The FTC then accepted for comment a non-structural remedy. Story over, right? Wrong.

During that comment period, the FTC received new information suggesting that the CON laws may not in fact bar a structural remedy, so the FTC withdrew its provisional acceptance in September 2014 and announced its decision to seek divestiture as its preferred method of resolving the dispute. Again. The final twist, however, came in October 2014 when it became clear that Georgia state officials responsible for interpreting the CON laws forced the FTC to reverse course (again). The Georgia state officials determined that the CON laws would, in fact, apply, and that here the proposed divestiture of any assets would need to satisfy the CON test, a standard that could not be met because this region is deemed as “over-bedded.” Shortly thereafter, it became clear that the ruling on the CON laws would remain in force and not be overturned.

Where We Are

In late-March 2015, the FTC issued a statement explaining it had removed the matter from adjudication and accepted a consent agreement. The consent agreement did not include a divestiture and required only modest behavioral remedies: Phoebe must give the FTC notice of certain future transactions and is barred from opposing certain applications for new entrants into its market. Phoebe also stipulated that the Palmyra acquisition would have been anticompetitive.

While applauding its victory at the Supreme Court, the FTC’s statement accompanying the consent agreement is somber in tone. It notes in multiple parts that “divestiture—the Commission’s preferred remedy to restore competition—is simply unavailable,” that this decision is “less than ideal,” and that this decision is to be viewed as an outlier because of the Georgia CON laws. It acknowledges that “[i]n light of these developments, [it] believes it is unlikely that continuing with the administrative proceeding, even after a finding of liability, would yield a substantially different outcome than is available through this consent.” It’s clear the FTC wishes it did not have to take this action but felt it had no choice.

So what does it all mean? In reading the FTC’s statement, there are at least three lessons to be drawn. First, the FTC (and very likely its sister antitrust enforcement agency, the Antitrust Division of the Department of Justice), will be more committed than ever to obtaining injunctive relief that prevents consummation of the transaction. The “scrambling of the eggs” here worked against the FTC in obtaining its preferred remedy. It is not new news, but those with merger requests before the antitrust agencies should expect staff to work tirelessly to keep each entity’s assets operating separately during the pendency of any litigation to avoid a repeat of this situation. Second, this case is a reminder that especially in healthcare markets—but potentially in other sectors of the economy—divestiture and not behavioral remedies, will always be the FTC’s preference. There is simply not much “meat” that can be tacked onto most behavioral remedy bones. The FTC could not have made its frustration with this behavioral remedy any more plain. And finally, state CON laws could be a target for FTC/DOJ scrutiny. While in theory they are designed to be procompetitive by reducing costs, the FTC noted CON laws can sometimes have the opposite effect and instead act as a barrier to entry and operate to inhibit competition.

With its decision to remove the matter from adjudication once and for all, the FTC has closed the book on Phoebe. But stay tuned. Who knows where the next story will lead.