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The Verdict Is In

Phoebe Putney Rolls Snake Eyes

Tony Francis, MD, Orthopaedic Surgery, 02:52PM May 5, 2013

As has been discussed on this blog before, the Galbraith model of corporatization fits very well in understanding what is likely to happen in ObamaCare.  There were two antithetical forces at work in the writing of ObamaCare.  One was a plan to backdoor everyone into a single payer system using Medicaid.  This was  bad for a lot of reasons which won't be mentioned here.  The idea was to create incentives for businesses to drop employer based insurance leaving people to sign up for Medicaid.  Over a decade or two, Medicaid would become the default single payer.   However SCOTUS shot that down when it made Medicaid expansion optional at the state level. So that isn't happening in the near future. 

The other side of ObamaCare was written by the corporate lawyers who foresaw the conglomeration of hospitals into four or five megacorporations.  We have seen this kind of thing in the history of US businesses.  In fact it is the norm.  A company starts out small offering a good or service at the lowest possible price so as to create maximum shareholder value, or to increase market share.  When the business reaches a certain size, it can no longer grow by normal market forces.  So it must get sustenance from the government. At this point, the role of the business changes. It becomes a method to further some government policy.  This is called corporatization.  It started with the railroads in the 1830s.  Most of these were funded by private bond holders who mostly went broke.  When the time came to build the transcontinental railroad, it was too big for private capital.  So the federal government funded it, costing several hundred millions of dollars through land grants and money lent or given to Credit Mobilier.  That is the equivalent of several hundred billion in today's currency.  And it was a Republican idea.  Through a century and a quarter of regulatory fights, there are now four main railroads and a few regionals.  Fifty years ago, there were dozens which were never allowed to merge because of anti-competitive concerns.  Looking back, arguments against railroad monopolies never made much sense. 

Similar patterns are seen in all the large corporations - the Nifty Fifty, the Fortune 500 - you name it.  Boeing started out as a small builder.  When the government needed bombers, and later, airliners to exert national policy aims, Boeing became massive.  Same thing with IBM and Social Security.  And DuPont and gunpowder.  The paradigm is this:  dozens or hundreds of companies start out.  Most go out of business.  The rest eventually consolidate into a few megacorporations.  Big Business needs Big Government.  And Big Government needs Big Business.  That is the Galbraith model. 

There were editorials as far back as the 1970s criticizing medical delivery as a "cottage industry of artisans and craftsmen."  It just didn't fit into the modern scheme of things.  So we have seen the creeping corporatization of medicine for some decades.  But ObamaCare really greased the skids.  And it makes sense.  It is more efficient for the government to grant some X billions of dollars to four or five megacorporations, and let the business people get all the boys and girls (read employed doctors)  pulling on the same rope and in the same direction.  They can do this with peer review. That is a lot more cost friendly than dealing with hundreds or thousands of little clinics.    

Along comes Phoebe Putney, a once small hospital in Albany Georgia.  It got the name when Judge Putney left $20,000 to start a hospital that would treat all comers, whether they could pay or not.  He mandated the hospital must have his mother's name.  And so it does to this day.  In the mean time, Phoebe Putney got to be a big player in the area.  It seemed like the natural course of things that Putney should become the sole dispenser of medical care in Albany by absorbing the last independent hospital, previously owned by HCA, another big player.  A shell non-profit corporation was set up to get around any antitrust concerns.  It passed muster with Georgia regulatory agencies.  However, there is another big player in all this we haven't considered.  It is the insurance industry.  They don't like hospital monopolies.  Prices tend to go up costing the insurance companies a lot of money.  They have the studies to prove it.  And are willing to show them to you. 

So the Federal Trade Commission (FTC) filed suit against the merger on an antitrust theory.  They lost in federal district court in Georgia.  The Eleventh Circuit upheld the federal district ruling.  So the case was appealed to the US Supreme Court.  SCOTUS shot the merger down, ruling narrowly that the Georgia regulatory scheme was superseded by federal antitrust laws.  It was a 9-0 ruling.  Not even close.  An abridged version of the decision written by Justice Sotomayor is contained infra.   

Supreme Court rules against Phoebe Putney

Posted: February 19, 2013

The U.S. Supreme Court has issued a ruling that could jeopardize a $200 million hospital acquisition involving Phoebe Putney Health System in Georgia, after a unanimous court decided that the hospital deal was not immune from antitrust laws.

The Federal Trade Commission has been fighting since 2010 to block the acquisition of a former HCA hospital by its only competitor in Albany, Ga., the public hospital authority that also owns not-for-profit Phoebe Putney's hospitals. But until the Supreme Court ruled on Tuesday, the lower federal courts had said the deal was beyond the reach of federal antitrust laws because of the hospital authority's ownership.
Phoebe Putney vows to fight

“We hold that Georgia has not clearly articulated and affirmatively expressed a policy to allow hospital authorities to make acquisitions that substantially lessen competition,” Justice Sonia Sotomayor wrote for the unanimous court. “The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings.”

Not only does the ruling potentially narrow state hospital authorities' use of so-called “state-action” immunities, it could also imperil Phoebe Putney's acquisition of the 102-bed hospital, which is now called Phoebe North.

Read more: Supreme Court rules against Phoebe Putney | Modern Healthcare

U.S. Supreme Court


February 19, 2013


Under Georgia's Hospital Authorities Law (Law), political subdivisions may create special-purpose public entities called hospital authorities to provide "for the operation and maintenance of needed health care facilities in the several counties and municipalities of th[e] state." The Law permits authorities to "exercise public and essential governmental functions" and delegates to them numerous general powers, including the ability to acquire and lease hospitals and other public health facilities. Ga. Code Ann. §31-7-75.

The Hospital Authority of Albany-Dougherty County (Authority) owns Phoebe Putney Memorial Hospital (Memorial), one of two hospitals in the county. The Authority formed two private nonprofit corporations to manage Memorial: Phoebe Putney Health System, Inc. (PPHS) and Phoebe Putney Memorial Hospital, Inc. (PPMH). After the Authority decided to purchase the second hospital in the county and lease it to a subsidiary of PPHS, the Federal Trade Commission (FTC) issued an administrative complaint alleging that the transaction would substantially reduce competition in the market for acute-care hospital services, in violation of §5 of the Federal Trade Commission Act and § 7 of the Clayton Act. The FTC and Georgia subsequently sued the Authority, PPHS, PPMH, and others (collectively respondents), seeking to enjoin the transaction pending administrative proceedings. The District Court denied the request for a preliminary injunction and granted respondents' motion to dismiss, holding that respondents are immune from antitrust liability under the state-action doctrine. The Eleventh Circuit affirmed. It concluded that the Authority, as a local governmental entity, was entitled to state-action immunity because the challenged anticompetitive conduct was a foreseeable result of the Law. The court reasoned that the state legislature could have readily anticipated an anticompetitive effect, given the breadth of the powers delegated to hospital authorities, particularly leasing and acquisition powers that could lead to consolidation of hospital ownership.

Held: Because Georgia has not clearly articulated and affirmatively expressed a policy allowing hospital authorities to make acquisitions that substantially lessen competition, state-action immunity does not apply.

(a) This Court recognized in Parker v. Brown, that the federal antitrust laws do not prevent States from imposing market restraints "as an act of  government ... ." Under the state-action doctrine, immunity from federal antitrust law may extend to nonstate actors carrying out the State's regulatory program. But given the antitrust laws' values of free enterprise and economic competition, "state-action immunity is disfavored,"  and is recognized only when it is clear that the challenged anticompetitive conduct is undertaken pursuant to the "State's own" regulatory scheme.  Immunity will attach only to activities of substate governmental entities that are undertaken pursuant to a "clearly articulated and affirmatively expressed" state policy to displace competition. A state legislature need not "expressly state" that intent, but the anticompetitive effect must have been the foreseeable result" of what the State authorized,

(b) Respondents' state-action immunity defense fails under the clear-articulation test because there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership. The Authority's powers, including its acquisition and leasing powers, mirror general powers routinely conferred by state law on private corporations. More is required to establish state-action immunity; the Authority must show that it has been delegated authority not just to act, but to act or regulate anticompetitively.

That principle controls here. Grants of general corporate power allowing substate governmental entities to participate in a competitive marketplace are typically used without raising federal antitrust concerns, so a State cannot be said to have contemplated that such powers will be used anticompetitively. Here, though the Law allows the Authority to acquire hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.

(c) In concluding otherwise, the Eleventh Circuit applied the concept of "foreseeability" too loosely. This Court, recognizing that no legislature "can be expected to catalog all of the anticipated effects" of a statute delegating authority to a substate governmental entity..."

(d) Respondents' additional arguments are also unpersuasive. They contend that because hospital authorities are granted unique powers and responsibilities to fulfill Georgia's objective of providing access to adequate and affordable health care, it was foreseeable that they would decide that the best way to serve their communities was to acquire an existing local hospital, instead of incurring the additional expense and regulatory burden of expanding, or constructing, a facility. But even though the authorities may differ from private corporations offering hospital services, neither the Law nor any other state-law provision clearly articulates a state policy allowing authorities to exercise their general corporate powers without regardto anticompetitive effects. Respondents also contend that when there is doubt about whether the clear-articulation test is satisfied, federal courts should err on the side of recognizing immunity to avoid improper interference with state policy choices. But the Law here is not ambiguous, and respondents' suggestion is inconsistent with the principle that "state-action immunity is disfavored,"

Reversed and remanded.


United States: FTC V. Phoebe Putney Health System, Inc., Et Al.

11 April 2013

On February 19, 2013, the United States Supreme Court in Federal Trade Commission v. Phoebe Putney Health System, Inc., et al., unanimously rejected a Georgia state-sanctioned hospital authority's claim that its acquisition of a competing hospital was immune from antitrust scrutiny under the state-action doctrine, which the Supreme Court recognized in Parker v. Brown back in the 1940s. Under this doctrine, where a local government entity acts pursuant to a clearly articulated and affirmatively expressed state policy to displace competition, such action is exempt from the antitrust laws. The Court held that the hospital authority, a local government entity and a lesser political subdivision of the state, could not claim immunity because Georgia's Hospital Authorities Act did not clearly and affirmatively express an intent to displace the antitrust laws and allow anticompetitive hospital mergers. The Court reached this conclusion because anticompetitive consequences were not the "foreseeable result" flowing inherently, logically, or ordinarily from the general authority conferred by the state legislature on hospital authorities to acquire hospital facilities and related assets.

Background and Supreme Court Opinion

Two hospitals operate in Dougherty County, Georgia: Palmyra Medical Center ("Palmyra"), a private hospital, and Phoebe Putney Memorial Hospital ("Memorial"), a private nonprofit hospital owned by a local government hospital authority, Albany-Dougherty Hospital Authority ("Authority"). The two hospitals are located just two miles apart and together they allegedly account for 86 percent of the market for acute-care hospital services provided to commercial health care plans and their customers in a six-county radius. In the 1990s, the Authority formed a private non-profit subsidiary, Phoebe Putney Health System, Inc., ("PPHS"), to manage and operate Memorial. Under the arrangement with PPHS, the Authority leased Memorial to PPHS for $1 per year for 40 years. In 2010, PPHS entered into discussions with a private for profit hospital corporation, Hospital Corporation of America ("HCA"), about acquiring its subsidiary, Palmyra. After negotiating a deal with HCA, PPHS presented the Authority with a plan calling for the Authority to purchase Palmyra with PPHS-controlled funds and then lease Palmyra to a PPHS subsidiary for $1 per year under PPHS's present Memorial lease agreement with the Authority.

In response to this proposed acquisition, the Federal Trade Commission ("FTC") issued an administrative complaint, alleging that the transaction would create a virtual monopoly, and would substantially reduce competition in the market for acute-care hospital services, in violation of § 5 of the FTC Act.

Shortly thereafter, the FTC and the State of Georgia filed suit against the Authority, PPHS, Palmyra, and HCA seeking to enjoin the transaction pending administrative proceedings. The Defendants filed a motion to dismiss, arguing that they had made the acquisition pursuant to powers granted to the Authority in its authorizing statute, and therefore qualified for immunity from antitrust scrutiny under the state-action doctrine. The FTC claimed that state-action doctrine did not apply, and further claimed that the transaction was actually an acquisition of a hospital from a private company, by a private company, and that the Authority was merely a "strawman" used solely to evade antitrust liability.

The United States District Court of the Middle District of Georgia granted the defendants' motion to dismiss, agreeing that the defendants were immune from antitrust liability under the state-action doctrine. The Eleventh Circuit affirmed. Although the Court of Appeals agreed with the FTC that the transaction would create a virtual monopoly, it affirmed the district court's conclusion that the state-action doctrine immunized the parties, because the Hospital Authorities Act expressly authorizes hospital authorities in Georgia to acquire hospitals, and that the legislature that passed the Act could have reasonably foreseen that certain acquisitions might narrow or even eliminate competition entirely in certain markets within Georgia. Because the Court dismissed the FTC's case at the motion to dismiss stage, the lower courts made no findings about whether the acquisition actually would lessen competition.

The Supreme Court's opinion holds that the state-action doctrine does not apply to a hospital authority's acquisition of a competing hospital under the Hospital Authorities Law. The Court based this holding on its ruling that the Hospital Authorities Law did not "clearly articulate" and "affirmatively express" a state policy to displace competition in the market for hospital services. The Court applied its two-prong test articulated in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc.: that the challenged conduct must (1) be clearly articulated and affirmatively expressed as state policy, and (2) be actively supervised by the State. Local government actors, such as the Authority, generally do not need to satisfy the active supervision prong of the Midcal test. But they still need to satisfy the "clear articulation" prong to establish state-action immunity. While the legislature does not need to state explicitly in a statute or its legislative history that it intends or expects the authorized activity to have anticompetitive effects, such effects must be the "foreseeable result" of whatever action the state authorized.

The Court concluded that while the Hospital Authorities Act authorizes the Authority to acquire other hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to engage in merger and acquisition activities that will substantially lessen competition. Unlike a state authority, a local governmental entity, like the Authority, must show that it has been delegated authority to act in an anticompetitive manner. Mere authority to act on its own is insufficient. The Court held that the Act did not delegate such authority to the Authority expressly, and that the anticompetitive effect of the Palmyra acquisition was not foreseeable. The Court analogized it to state statutes conferring general power on private corporations, which unquestionably do not extend state-action protection over any and all acts by a private corporation. The Court concluded that a general grant of authority to acquire other hospitals did not mean anticompetitive effects were the foreseeable result of such acquisition because
"only a relatively small subset of the conduct permitted as a matter of state law . . . has the potential to negatively affect competition."

The Court remanded the case back to the lower courts for further proceedings.


This case represents a significant victory for the FTC in two areas it has prioritized: the relaunch of its hospital enforcement efforts in the last few years, following a long absence after a series of significant defeats in the 1990s, and its efforts to narrow the scope of state-action immunity. In an October 2012 speech, former FTC Commissioner J. Thomas Rosch noted that the agency believed that state-action immunity had been impermissibly expanded due to federal courts applying the doctrine in circumstances where a state did not have a "deliberate and intended policy" to curtail competition in a particular area. Presumably, the FTC's victory here will lead the agency to take a more aggressive stance on hospital acquisitions, which have increased in anticipation of the Affordable Care Act.

The opinion suggests that merely anticipating some anticompetitive consequences in a small portion of events will not be enough to establish foreseeability.

One thing is certain – the decision will make it more difficult for both local government actors and private parties to establish entitlement to state-action immunity.

About This Blog

We will discuss current legal issues related to the practice of medicine.

Disclosure: Tony Francis, MD, JD, has disclosed no relevant financial relationships.

  • Tony Francis

    Graduated with MD degree in 1977, performed residency in Orthopedic Surgery,  Graduated with a JD and LLD in 1987. Graduated with Master of Science in Quantum Mechanics and Computational Chemistry in 1999.

    Director of  "Legal Medicine Research" and writes advisory reports for US Federal Judges. 


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