FTC Gets More Muscle in Policing Hospital Mergers

 Brent Kendall

WASHINGTON—The Supreme Court on Tuesday gave more muscle to federal antitrust enforcers’ ability to police hospital mergers, the latest win for the government in its campaign to monitor the fast-consolidating industry.

The high court, in a unanimous decision, revived the Federal Trade Commission’s challenge to a Georgia hospital deal, ruling the merger wasn’t immune to federal antitrust scrutiny. The decision placed limits on the circumstances in which local governments are exempt from federal antitrust laws.

At issue was an FTC challenge to a merger in Albany, Ga., that combined Phoebe Putney Memorial Hospital, a subsidiary of a nonprofit corporation created by a local hospital board, and competitor Palmyra Park Hospital, a for-profit hospital owned by HCA Holdings Inc.

The FTC in its challenge argued the hospital combination would create a local monopoly, leading to higher prices for patients and health insurers. The Georgia case was part of a recent batch of merger lawsuits the FTC has brought in an attempt to revive its hospital enforcement program. It and the Justice Department suffered a series of court defeats in hospital cases in the 1990s.

Hospitals across the country are merging to improve their bargaining power with health insurers and to prepare for provisions of the 2010 federal health law taking effect next year. The FTC has won recent rulings against hospital deals in Illinois and Ohio, and the latter case is scheduled to be heard by a federal appeals court next month.

Lower courts ruled in favor of the Georgia hospitals. They found federal antitrust laws didn’t apply if the acquiring party was a government body, such as the local hospital board.

State governments are generally immune to federal antitrust laws, but under legal precedents, local governing bodies aren’t exempt unless the state has clearly authorized them to engage in anticompetitive conduct.

The Supreme Court, in a 19-page opinion by Justice Sonia Sotomayor, said Georgia’s general grant of power to the hospital board didn’t amount to such authorization.

“There is no evidence the state affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership,” Justice Sotomayor wrote in a decision that sent the case back to lower courts for further proceedings.

The FTC already had the ability to review hospital deals between private parties. The agency alleged Phoebe Putney and HCA were concerned about the anticompetitive nature of their merger and ran it through the local hospital board hoping to evade antitrust review.

“We were very worried that if we lost the case, there would have been a road map for manipulating the antitrust laws,” said the FTC’s outgoing chairman, Jon Leibowitz. He called the ruling a victory for Americans who want to see lower health-care costs. Mr. Leibowitz also said the agency would consider seeking some type of divestiture.

Phoebe Putney said it was disappointed by the decision. It said it wanted to buy the HCA hospital because it needed to expand to meet the needs of the community, and the acquisition was cheaper than building new facilities.

HCA said it doesn’t currently own or operate any assets in the Albany, Ga., area and “is not an active participant in the continuing litigation.”

Thomas Chambless, general counsel for Phoebe Putney, said the hospitals have been merged for more than a year without anticompetitive effects.

“There has been no spike in the costs of health care,” he said.

Because lower courts found the deal was immune from review, there has been no ruling on whether the merger is in fact anticompetitive.

In the past, similar local-government immunity questions have arisen in antitrust cases involving electricity markets, sewage services and cable-television rights.

Write to Brent Kendall at brent.kendall@dowjones.com