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By a 5-0 vote, the Federal Trade Commission challenged Phoebe Putney Health System, Inc.’s (Phoebe’s) proposed acquisition of rival Palmyra Park Hospital, Inc. (Palmyra) from HCA, in Albany, Georgia. The FTC’s administrative complaint alleges that the deal will reduce competition significantly and allow the combined Phoebe/Palmyra to raise prices for general acute-care hospital services charged to commercial health plans, substantially harming patients and local employers and employees.

The FTC also alleges that Phoebe has structured the deal in a way that uses the Hospital Authority of Albany-Dougherty County (the Authority) in an attempt to shield the anticompetitive acquisition from federal antitrust scrutiny under the “state action” doctrine.

The FTC’s staff, together with the Attorney General of the State of Georgia, is filing a separate complaint in federal district court in Albany, Georgia, seeking an order to halt any transaction involving Phoebe, the Authority, or Palmyra, under which Phoebe would acquire control of Palmyra’s operations, until the conclusion of the FTC’s administrative proceeding and any subsequent appeals.

“We have challenged this transaction for one very simple reason,” said Richard Feinstein, Director of the Commission’s Bureau of Competition. “By eliminating vigorous competition between Phoebe and Palmyra, this merger to monopoly will cause consumers and employers in the Albany region to pay dramatically higher rates for vital health care services, and will likely reduce the quality and choice of services available in the community as well.”

The FTC’s Complaint. The FTC’s complaint alleges that the Phoebe/Palmyra transaction would violate federal law by eliminating the vigorous competition that currently exists between Phoebe and Palmyra in providing inpatient general acute-care hospital services sold to commercial health plans in Albany and the surrounding six-county area. For all practical purposes, the complaint states, the transaction is a merger to monopoly because Phoebe and Palmyra are the only two competing hospitals in the Albany, Georgia area.

Besides Phoebe and Palmyra, there is only one other independently-owned hospital within the six-county area. After Phoebe’s acquisition of Palmyra, the FTC alleges, Phoebe would have a market share of more than 85 percent. According to the complaint, by eliminating the direct and substantial competition between Phoebe and Palmyra, the transaction would enhance Phoebe’s ability and incentive to increase reimbursement rates charged to commercial health plans and their members, leading to higher health care costs for the area’s employers and their employees.

The complaint also alleges that Phoebe’s acquisition of Palmyra will adversely impact the quality and breadth of services available in the Albany area. For example, before the transaction, Phoebe and Palmyra have been close rivals who competed for patients in the general acute-care hospital services market. That competition has spurred each to increase the quality of its patient care; this “non-price” competition would be eliminated by the proposed transaction.

The Proposed Transaction. Phoebe is a 443-bed hospital in Albany that currently offers a full range of general acute-care hospital services. The Authority, which has no employees, holds title to the assets of Phoebe, which Phoebe operates under a long term lease entered in 1990. HCA, one of the nation’s largest health care services providers, owns Palmyra, which also is located in Albany.

On October 7, 2010, Phoebe’s board approved a recommendation from its management that it make a formal offer to HCA for Palmyra. However, instead of directly approaching HCA with its offer, Phoebe developed a plan under which the Authority would acquire Palmyra and then lease it to a non-profit corporation controlled by Phoebe. The FTC contends this structure was arranged by Phoebe in an attempt to avoid federal antitrust scrutiny of the deal. On November 16, 2010, Phoebe made a formal offer to HCA for Palmyra. When the offer was made it was not reviewed or approved by the Authority.

On December 2, 2010, Phoebe’s board approved the final terms of the deal, but the transaction still had not been presented to the Authority. The deal was presented to the Authority for the first time at a special meeting held on December 21, 2010. At that meeting, the Authority approved the deal and a management agreement that would give Phoebe control over Palmyra immediately after the transaction is closed.

The State Action Defense. The FTC anticipates that Phoebe, the Authority, and HCA will contend that the transaction is exempt from federal antitrust liability under the “state action” doctrine. This doctrine provides a narrow exception to the antitrust laws for anticompetitive conduct if it is an act of government. In this case, the FTC alleges the transaction was motivated and planned exclusively by Phoebe, acting in its own independent, private interests, and not in the interest of patients. According to the FTC’s complaint, rather than acting in the State of Georgia’s interests, the Authority served only as a “strawman” in an attempt to shield an overtly anticompetitive transaction from antitrust scrutiny.

The complaint states that the transaction was presented to the Authority at the eleventh hour. The Authority engaged in no independent analysis of the proposed acquisition, committed $195 million to the purchase of Palmyra without considering the adverse effects the deal would have on healthcare prices in the area, and played no supervisory role in connection with the transaction. In fact, since at least 1990, the complaint states, the Authority has not actively supervised Phoebe in any way, and has made no effort to review any of the hospital’s recent price increases. Thus, according to the complaint, the “state action” doctrine cannot be used as a defense to Phoebe’s proposed acquisition of Palmyra.

The Commission vote to issue the administrative complaint and authorize staff to file a complaint for preliminary injunction in federal district court was 5-0. The administrative complaint was issued today, and a public version will be available on the agency’s website shortly. The evidentiary hearing is scheduled before an administrative law judge at the FTC, beginning on September 19, 2011.

The administrative complaint announced today was issued against Phoebe Putney Health System, Inc.; Phoebe Putney Memorial Hospital, Inc.; Phoebe North, Inc.; HCA, Inc.; Palmyra Park Hospital, Inc.; and the Hospital Authority of Albany-Dougherty County, Georgia.

NOTE: The Commission issues or files a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the named parties have violated the law.

The administrative complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing by an administrative law judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them.  To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357).  The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,800 civil and criminal law enforcement agencies in the U.S. and abroad.  The FTC’s website provides free information on a variety of consumer topics.  “Like” the FTC on Facebook and “follow” us on Twitter.

(FTC File No. 111-0679)