Certificates of Public Advantage: Bypassing the Ftc in Healthcare Mergers?
| Jurisdiction | United States,Federal |
| Author | By Lisl Dunlop |
| Publication year | 2018 |
| Citation | Vol. 27 No. 1 |
By Lisl Dunlop1
Over the past several years, faced with rising costs, pressures to improve quality, changes to insurance reimbursements, and other regulatory developments, the healthcare field has witnessed increasing consolidation. This is particularly true for physician practice groups and hospitals. But, this consolidation also has been subject to increased scrutiny from federal antitrust regulators. Whether it is a merger between the two leading providers of general acute care inpatient hospital services near Chicago, Illinois2 or the acquisition of a clinic employing 60 physicians in North Dakota,3 healthcare entities in regions with few competitors face significant antitrust obstacles in their efforts to merge.
At the same time, state policymakers have recognized that collaboration among healthcare providers, including mergers, can lead to better public health outcomes while reducing costs. To promote such collaborations, some states have stepped in and enacted laws that permit competing hospitals or healthcare systems to apply for a Certificate of Public Advantage ("COPA") under which they can engage in joint activities, including merger transactions, that otherwise may be prohibited by the federal antitrust laws.4 According to the states, the benefits of these arrangements to state healthcare goals outweigh the potential harms resulting from lost competition.
The Federal Trade Commission ("FTC") staunchly opposes COPA laws. Because the antitrust laws do not prohibit all competitor collaborations, only anticompetitive ones, the FTC believes that COPAs are unnecessary to permit procompetitive transactions and merely serve to protect anticompetitive ones.5 While the FTC maintains that there is strong economic evidence supporting its view that consolidation harms healthcare pricing and quality, several states have rejected FTC concerns and granted COPAs to merging healthcare providers.6
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There has been limited experience with COPA-enabled mergers to date, so it remains to be seen whether COPAs will actually deliver the public health outcomes and other public benefits sought by state regulators. Given the current uncertainty and complexity of healthcare markets today, however, permitting states to experiment with different models and to have greater visibility and control over healthcare entities within their own borders may make public health goals more attainable, even at the cost of an independent competitive environment.
Beginning with its success in challenging the consummated Evanston Northwestern/ Highland Park merger in 2008,7 the FTC has logged a consistent track record of success in litigating against merging healthcare entities. Most recently, in 2016, the FTC litigated two merger challenges almost simultaneously—one in Pennsylvania and the other in Illinois—winning preliminary injunctions against both at the appeals level.8 Today, the FTC's approach to healthcare merger enforcement, and the economic literature supporting that approach, have clearly been accepted by the federal courts.
Notably, in the course of this impressive history of merger challenges, the FTC and the courts have given short shrift to hospitals' claims that their transactions result in efficiencies and cost-savings that outweigh the potential anticompetitive effects of a merger. The courts have endorsed FTC requirements that claimed efficiencies be merger-specific, verifiable and not themselves result in anticompetitive outcomes. Where transactions lead to clear increases in concentration, the FTC and the courts have required the efficiencies to offset the potential anticompetitive harm to be "extraordinary" and subject to a high level of proof.9 In fact, going further, several appellate courts have questioned whether efficiencies can ever be sufficient to overcome competitive concerns.10
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The various court decisions also agree with the FTC that the healthcare policy dictates of the Affordable Care Act do not support a drive by hospitals to "unite and survive."11 The FTC has consistently rejected this concept in numerous speeches, advocacy letters and merger challenges, arguing that there is nothing in healthcare policy that displaces the antitrust laws, and collaborations seeking to advance the aims of healthcare policy can be equally effective operating within the existing antitrust framework.12
As a result, in the current enforcement landscape it is very difficult for transactions leading to high levels of concentration in acute care hospital markets and physician markets to pass antitrust muster, even where there are significant overriding considerations of continued survival of local services, better management of the care continuum, and potential public health or other benefits that may be gained from a transaction.
Under the state action doctrine, state governments and certain private actors may be immunized from antitrust liability by the operation of a state regulatory scheme. The FTC has had considerable experience and success in narrowly confining state-action immunity, including its most recent Supreme Court victories in North Carolina State Board of Dental Examiners13 and Phoebe Putney.14 As currently articulated by the Supreme Court, the Sherman Act does not interfere with a state's own anticompetitive policies, but does not shield the anticompetitive conduct of non-sovereign actors unless they "result from procedures that suffice to make it the State's own."15
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The party seeking immunity must first demonstrate that the challenged collaboration was undertaken pursuant to a "clearly articulated" affirmative state policy to supplant competition with regulation. This first prong ensures that the state has indeed, as a matter of policy, authorized departures from the norm of free market competition. Second, state action immunity requires "active supervision" of the private conduct by the state, such that any restraint on competition is a result of knowing, deliberate, state intervention rather than simply an agreement among private parties.
Phoebe Putney illustrates the first prong of the state action doctrine in a hospital merger case.16 In that case, a county hospital in Georgia acquired a competing hospital and, essentially, a monopoly on acute-care services in the county. The hospital claimed that the state action doctrine immunized the merger from antitrust review because Georgia law specifically authorized county hospitals to make acquisitions. However, the Supreme Court found that although the state enabling statutes permitted acquisitions, they did not declare that the state had authorized monopolies or exempted county hospital mergers from antitrust law. Thus, the transaction was not immune from the antitrust laws.17
The second prong of the state action doctrine was at issue in the FTC's March 2015 victory in the North Carolina State Dental Board case. In the North Carolina Dental Board case, the Dental Board, consisting of practicing dentists, had excluded non-dentists from the teeth-whitening market, granting practicing dentists a monopoly on teeth-whitening services. The Dental Board invoked the state action doctrine on the grounds that its actions were the actions of the "sovereign." But the Supreme Court concluded that state boards, when controlled by practicing professionals, are not "sovereign" and do not enjoy state action immunity because their actions represent the interests of private parties. The Court held that when state boards or agencies are controlled by practicing professionals, their actions need to be "actively" supervised by the state. The FTC subsequently issued guidance on what is needed to meet the "active supervision" requirement.18
Certificate of Public Advantage laws seek to utilize the state action doctrine to shield healthcare collaborations and transactions from federal antitrust oversight. The laws typically authorize "cooperative agreements" among providers (usually including mergers) on the grounds that they can improve quality, moderate cost increases, improve access to healthcare services, and help keep smaller hospitals open, particularly in rural areas. COPA laws typically direct that competition is one issue to be taken into account in considering the grant of a COPA, but not the only issue.
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COPA laws are typically expressly drafted to meet the requirements of the state action doctrine. Most include direct language clearly expressing the intention to displace the antitrust laws. For example, New York's COPA law states: "To the extent such arrangements, or the planning and negotiations that precede them, might be anti-competitive within the meaning and...
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