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Phoebe buyout of Palmyra

By   /   April 26, 2011  /   Comments

Saying that the buyout would hurt health care consumers by creating a monopoly, the U.S. Federal Trade Commission filed this complaint, which successfully halted Phoebe Putney Memorial Hospital’s purchase of Palmyra Medical Center.

The text of the complaint, which is heavily redacted:

COMPLAINT
Pursuant to the provisions of the Federal Trade Commission Act, and by virtue of the
authority vested in it by said Act, the Federal Trade Commission, having reason to believe that
Respondents Phoebe Putney Health System, Inc. (“PPHS”), Phoebe Putney Memorial Hospital,
Inc. (“PPMH”), Phoebe North, Inc. (“PNI”) (collectively, “Phoebe Putney”); Respondents HCA
Inc. (“HCA”) and Palmyra Park Hospital, Inc. (“Palmyra”); and Respondent Hospital Authority
of Albany-Dougherty County (“the Authority”), having entered into an agreement pursuant to
which control of Palmyra shall be transferred to Phoebe Putney (the “Transaction”), in violation
of Section 5 of the FTC Act, 15 U.S.C. § 45, and which if consummated would violate Section 7
of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, and it appearing
to the Commission that a proceeding by it in respect thereof would be in the public interest,
hereby issues its complaint pursuant to Section 11(b) of the Clayton Act, 15 U.S.C. § 21(b), and
Section 5(b) of the FTC Act, 15 U.S.C. § 45(b), stating its charges as follows:
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I.
NATURE OF THE CASE
1. The Transaction creates a virtual monopoly for inpatient general acute care services sold
to commercial health plans and their customers in Albany, Georgia and its surrounding
area. The Transaction will eliminate the robust competitive rivalry between Phoebe
Putney and Palmyra – the only two hospitals in Albany and in Dougherty County – that
has benefitted consumers for decades. The result will be significant increases in
healthcare costs for local residents, many of whom are already struggling to keep up with
rising medical expenses, and the stifling of beneficial quality improvements.
2. Phoebe Putney and Palmyra knew that creating a virtual monopoly would not pass
muster with the antitrust authorities; indeed, Palmyra conditioned the deal on
So Phoebe Putney – without even informing the
Authority that it was doing so – structured the Transaction in hopes of using the state
action doctrine to shield the Transaction from potential antitrust challenges. The
Transaction positions the Authority as a strawman to transfer control of Palmyra to
Phoebe Putney in a three-step process: first, the Authority will purchase Palmyra’s assets
from HCA using PPHS’s money; second, the Authority will immediately give control of
Palmyra to Phoebe Putney under a management agreement; and third, Phoebe Putney
will enter into a lease giving it control of the Palmyra assets for 40 years. In a nutshell,
the Authority, using Phoebe Putney’s money, would buy Palmyra, and then upon closing,
immediately turn it over to Phoebe Putney.
3. Thus, the Authority is the acquirer of Palmyra on paper only. By using the Authority as a
strawman, Phoebe Putney sought to shield this overtly anticompetitive Transaction from
antitrust scrutiny. The Authority played no meaningful role in the Transaction. Phoebe
Putney initiated and negotiated the deal. The Authority undertook no substantive
analysis of the Transaction or its effect on the community and played no independent role
in negotiating it. The parties included the Authority at the eleventh hour solely in an
effort to avoid antitrust enforcement by having the Authority rubber-stamp this sale from
one private party to another. Indeed, the entire Transaction is premised on the immediate
handover of Palmyra’s assets to Phoebe Putney; the Authority has considered no other
options.
4. So certain was Phoebe Putney that the Authority would rubber-stamp the Transaction,
that it with Palmyra. Before the Transaction was even
presented to the Authority, Phoebe Putney agreed with Palmyra that if the Authority
failed to
Phoebe Putney would .
5. Phoebe Putney’s confidence that the Authority would rubber-stamp the deal comes from
years of operating without active supervision by the Authority under its long-term Lease
and Management Agreement of the hospital’s assets to Phoebe Putney’s subsidiary,
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PPMH (“the Lease”). As the explained to a new Authority member
and to Phoebe Putney’s CEO,
.” The has similarly expressed that
he did not consider hospital oversight a function of the Authority.
6. Phoebe Putney, a private hospital system determined to increase its already dominant
market share, acted alone when it sought out the Transaction. And Phoebe Putney alone
will benefit from it at the expense of area businesses and residents. There is no bona fide
state action whatsoever associated with the Transaction. Even under a new prospective
lease arrangement, the expects it to be business as usual, as
the Authority does not plan to engage in any meaningful additional oversight of the de
facto monopoly, falling far short of the active state supervision required to satisfy the
state action doctrine.
7. Following the Transaction, Phoebe Putney will control 100% of the licensed general
acute care hospital beds in Dougherty County. Even in an expansive geographic market
encompassing the six counties surrounding Albany, Phoebe Putney’s pre-Transaction
market share based on commercial patient discharges nears 75%. With the Transaction,
this will jump to approximately 86%. The hospital with the next-largest share (of less
than 4%) is located 40 miles from Albany. The Transaction dramatically increases
concentration in an already highly concentrated market, giving rise to a presumption of
unlawfulness by a wide margin under the relevant case law and the U.S. Department of
Justice and Federal Trade Commission Horizontal Merger Guidelines (“Merger
Guidelines”).
8. Phoebe Putney and Palmyra are each other’s closest competitors, and they are regarded
as closest substitutes for one another by both health plans and their members. The two
hospitals have battled fiercely for inclusion in health-plan networks and have gone to
great lengths to increase their appeal to health-plan members. While Palmyra has
relative to Phoebe Putney, the latter has for years offered
its deepest commercial payor discounts to health plans that exclude Palmyra from their
networks.
9. The Transaction will end that beneficial competition. The CEO of Phoebe Putney stated
publicly that the Transaction affords the opportunity to “get the rivalry behind us.” A
requirement of the Transaction is that Palmyra drop its pending monopolization lawsuit
against Phoebe Putney.
10. Other southwest Georgia hospitals offer scant competition to Phoebe Putney and
Palmyra. The nearest independent hospitals, located over 30 miles from Albany, are
small and serve only their own local communities. Given health-plan members’
unwillingness to travel significant distances for inpatient general acute care services,
these hospitals are simply too distant to serve as practical substitutes for residents of the
Albany area, even in the event of a small but significant price increase at the Albany
hospitals. Health plans and local employers have testified that their networks must
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include PPMH or Palmyra, or both, in order to be commercially viable for Albany-area
employers and other groups.
11. The Transaction greatly enhances Phoebe Putney’s bargaining position in negotiations
with health plans, giving it the unfettered ability to raise reimbursement rates without
fear of losing customers. Without Palmyra or any other independent competitive
alternative to PPMH, health plans will be forced either to accept the higher rates or to
exit the local marketplace. Higher hospital rates are ultimately borne by the health plans’
customers – local employers that pay their employees’ healthcare claims directly or pay
premiums to health plans on their employees’ behalf – and by the individual health-plan
members themselves. Those increased costs impact local employers’ ability to compete,
expand, and remain vibrant.
12. The vigorous price and non-price competition eliminated by the Transaction will not be
replaced by other hospitals in the next several years, if ever. Significant barriers to entry
and expansion, including Certificate of Need (“CON”) and funding requirements, prevent
other hospitals from extending their reach into the Albany area. Even Palmyra has
struggled mightily to expand into new service lines, such as obstetrics, due to stringent
CON requirements and fierce opposition from Phoebe Putney. Phoebe Putney has stated
it would take many years to construct a new facility comparable to Palmyra. Any
purported efficiencies associated with the Transaction are insufficient to offset the great
anticompetitive harm almost certain to result from the Transaction.
II.
BACKGROUND
A.
Respondents
13. All Phoebe Putney Respondents are not-for-profit corporations under Internal Revenue
Code § 501(c)(3) and the Georgia Nonprofit Corporate Code, with their principal places
of business at 417 Third Avenue, Albany, Georgia 31701. Respondent PPMH, directly
or indirectly, is a Georgia corporation wholly-owned or controlled by PPHS, a Georgia
corporation. PPHS is responsible for the operation of all Phoebe Putney hospital
facilities in Albany, Georgia as well as the hospital in Sylvester, Georgia (in the Albany
Metropolitan Area), where Phoebe Worth Medical Center, Inc. is located. Respondent
Phoebe North, Inc. is an entity that was created by PPHS in connection with the
Transaction, to manage and operate Palmyra, under the control of PPHS and PPMH.
14. PPMH is a 443-bed hospital located at 417 Third Avenue, Albany, Georgia 31701.
Opened in 1911 at its current site, the hospital offers a full range of general acute care
hospital services, as well as emergency care services, tertiary care services, and
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outpatient services. PPMH serves its local community, but also draws tertiary-service
referrals from a broader region.
15. Total annual patient revenues for Phoebe Putney for all services, at all facilities, are over
$1.16 billion. Total discharges for all services are over 19,000. Phoebe Putney’s annual
net income or surplus is over $19 million. General acute care hospital services account
for the majority of its services and revenues.
16. Phoebe Putney’s reach extends beyond Dougherty County, operating, through its
wholly-owned subsidiary Phoebe Worth Medical Center, Inc., a 25-bed critical access
hospital located at 807 S. Isabella Street, Sylvester, Georgia 31791, and Phoebe Sumter
Medical Center, a 76-bed general acute care hospital located in Americus, Georgia.
17. Respondent HCA is a for-profit health system that owns or operates 164 hospitals in 20
states and Great Britain. Founded in 1968, HCA is one of the nation’s largest healthcare
service providers with almost 40,000 licensed beds. Total annual revenues for HCA for
all services and facilities are over $30.68 billion. HCA is incorporated in the State of
Delaware. Its offices are located at One Park Plaza, Nashville, Tennessee 37203.
18. HCA owns and operates Respondent Palmyra Park Hospital, Inc., doing business as
Palmyra Medical Center, a 248-bed acute care hospital incorporated in the State of
Georgia, and located at 2000 Palmyra Road, Albany Georgia 31701. Palmyra was built
in 1971 in response to requests by local physicians and community leaders to broaden the
healthcare options available to residents of Dougherty County and the surrounding
counties. Palmyra provides general acute care services, including but not limited to
services in non-invasive cardiology, gastroenterology, general surgery, gynecology,
oncology, pulmonary care, and urology.
19. Respondent Authority is organized and exists pursuant to the Georgia Hospital
Authorities Law, O.C.G.A. §§ 31-7-70 et seq., a statute which governs 159 counties over
the entire state, where at least 92 hospital authorities currently exist. The Authority
maintains its principal place of business at 417 Third Avenue, Albany, Georgia 31701,
the same address as PPMH; it has no budget, no staff, and no employees. Phoebe Putney
pays all the Authority’s expenses. The Authority’s nine unpaid/volunteer members are
appointed to five-year terms by the Dougherty County Commission. The Authority holds
title to the hospital’s assets, but leased them in 1990 to PPMH for $1.00 per annum under
the Lease, which has been extended several times and will expire in 2042. The Lease
establishes certain contractual rights, duties, and responsibilities PPMH and the
Authority owe with respect to one another. PPHS itself is not a party to the Lease and
does not report to the Authority.
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B.
Jurisdiction
20. Respondents, and each of their relevant operating subsidiaries and parent entities are, and
at all relevant times have been, engaged in activities in or affecting “commerce” as
defined in Section 4 of the FTC Act, 15 U.S.C. § 44, and Section 1 of the Clayton Act, 15
U.S.C. § 12.
21. The Transaction, including the Authority’s acquisition of Palmyra and lease of Palmyra’s
assets to Phoebe Putney, constitutes an acquisition subject to Section 7 of the Clayton
Act.
C.
Phoebe Putney’s Private Interests
22. Under the terms of the Lease, the relationship between the Authority and PPMH is
defined as and limited to that of landlord and tenant. Section 10.18 reads in pertinent
part that “no provisions in this Agreement nor any acts of the parties hereto shall be
deemed to create any relationship between Transferor and Transferor [sic] other than the
relationship of landlord and tenant.”
23. The Lease (and the attachments incorporated into the Lease as stipulated in Sections
4.02(h) and 4.15) provides that PPHS, through its Board of Directors, controls the assets
and operations of PPMH. Under the terms of the December 3, 1990, Contract Between
Dougherty County, Georgia and the Authority of Albany-Dougherty County, an
attachment to the Lease, the Authority and Dougherty County stipulate in paragraph no.
4, on page five, that PPMH “has the sole discretion to establish its rate structure.”
24. Since the Lease took effect in 1990, the Authority has not and does not countermand,
approve, modify, revise, or in other respects actively supervise Phoebe Putney’s actions
regarding competitively significant matters. It is Phoebe Putney’s executives, not the
Authority, who control Phoebe Putney’s revenues, expenditures, salaries, prices, contract
negotiations with health insurance companies, available services, and other matters of
competitive significance. At no time, from the date the Authority and PPMH entered
into the Lease, has the Authority exercised management, control, or active supervision
over the affairs of PPMH. Indeed, during all those years, the Authority never asked once
for lower prices at PPMH.
25. As if to illustrate its deference to Phoebe Putney, the Authority waived its right to acquire
Palmyra or any other hospital in Albany as a term of the Lease. Section 4.21 of the
Lease, at page 26, stipulates that “[d]uring the term of this Agreement, Transferor
[Authority] shall not own, manage, operate or control or be connected in any manner
with the ownership, management, operation or control of any hospital or other health care
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facility other than the [Phoebe Putney Memorial] Hospital in Albany, Georgia . . . .”
Once the Authority rubber-stamped the Transaction and the Management Agreement that
would put Phoebe Putney in control of its only Dougherty County competitor, however,
PPMH agreed to waive this condition.
D.
The Transaction
26. In the Spring and Summer of 2010, two important events occurred: (1) in April, the
Eleventh Circuit reinstated Palmyra’s antitrust suit accusing Phoebe Putney of using its
monopoly power in obstetrics, neonatal and cardiovascular care to foreclose competition;
and (2) in July, Mr. Joel Wernick, PPHS’s President and Chief Executive Officer,
authorized Mr. Robert J. Baudino, a consultant and attorney engaged by PPHS, to begin
discussions with HCA regarding the possible acquisition of Palmyra by Phoebe Putney.
27. Mr. Baudino played a number of roles in the Transaction. Through his Baudino Law
Group, he provides legal counsel to PPHS with regard to the deal and other matters. He
is also a member of the Sovereign Group which was engaged by PPHS to represent it in
the Transaction in a non-legal capacity. The Sovereign Group is charging PPHS a fee of
percent of the $ million transaction value, plus expenses, the payment of which is
contingent on closing the Transaction. More recently, Mr. Baudino has also claimed to
represent the Authority as “special counsel” in the Transaction, although the Authority
was unaware of his representation of PPHS or his nearly $ contingency fee.
28. Mr. Baudino and his Sovereign Group began negotiations on behalf of PPHS to acquire
Palmyra in August 2010. At this point, Phoebe Putney had not notified the Authority that
it was considering buying its rival. HCA, Palmyra’s owner, did not intend to sell the
hospital and informed Mr. Baudino that “ ”
Palmyra’s business was improving, and HCA executives expected its financial
performance to continue improving; they also expected to be successful in the battle with
Phoebe Putney in both the antitrust lawsuit and in obtaining Palmyra’s obstetrics CON.
29. HCA was open to hearing an offer for Palmyra, but it expected “
,” “ ,” and “
.” PPHS set out to meet those requirements and to acquire Palmyra.
30. The was the easiest condition. Although it is a non-profit,
PPHS operates the very lucrative PPMH, leased from the Authority for $1 per year.
Phoebe Putney has cash reserves of over a quarter of a billion dollars.
31. As the negotiations progressed, HCA made clear that an offer would
have to meet or exceed times Palmyra’s annual net revenue. HCA’s expectations
were shared with PPHS’s bankers who analyzed similar transactions and found that
HCA’s demand far exceeded
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CA’s demand presented an obvious obstacle: it would be difficult to find an
independent investment bank to issue a fairness opinion to PPHS opining that the price to
be paid for Palmyra is fair, as is often done in significant transactions. But Mr. Baudino
had a ready solution: structure the deal so that the Authority would acquire Palmyra,
likely eliminating the need for a fairness opinion. Mr. Baudino was right. When Phoebe
Putney finally presented the Transaction and the sale price to the Authority, the Authority
neither sought a fairness opinion nor asked a single question about the price, despite
never before having reviewed a transaction of this magnitude.
32. Mr. Baudino believed he had an easy answer to the antitrust risk as well. In a
purportedly “ ” method, Phoebe Putney would not buy Palmyra directly. Rather, it
would structure the Transaction so that the Authority would acquire Palmyra, with PPHS
guaranteeing the purchase price and the Authority’s performance under the purchase
agreement. Once the Authority obtained title, it would simply lease Palmyra to PPHS for
$1.00 per year for 40 years on terms similar to the PPMH lease. Subsequently, in an
effort to head-off an antitrust enforcement action by the Commission and the State of
Georgia, the Authority approved a term sheet prepared by Mr. Baudino for implementing
the new lease with ostensibly more oversight than had been exercised in the past two
decades under the original 1990 Lease. But admitted that
the term sheet is a wish list, to which Phoebe Putney has not agreed, and that the
Authority’s role after the Transaction will not differ meaningfully from its current one –
i.e., it will continue to let Phoebe Putney do “whatever it takes to make the wheels turn.”
33. HCA’s demand that there not be any until the
Transaction was signed also did not pose a problem. PPHS does not consider itself
subject to Georgia’s Open Meetings Act, and it strictly limited the knowledge of the
Transaction to people with a “need to know.” Although PPHS was negotiating an
agreement that included the Authority as a key party, PPHS did not consider the
Authority to be among those with a “need to know.”
34. Unlike PPHS, the Authority must comply with Georgia’s Open Meetings Act. But PPHS
sidestepped that problem by not presenting the Transaction to the Authority until all of its
terms were definitively determined and the vote was a “ ” The
Authority could then rubber-stamp the completed deal at an open meeting, thereby
addressing all of HCA’s antitrust and confidentiality concerns.
35. On October 7, 2010, PPHS’s board approved management’s recommendation that it
make a formal offer to HCA for Palmyra.
36. PPHS’s negotiations for Palmyra were well underway before PPHS even mentioned them
to any of the Authority’s nine members. On October 21, Mr. Wernick and Tommy
Chambless, PPHS’s General Counsel, held a 30-minute informational session with two of
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the Authority’s members, Ralph Rosenberg and Charles Lingle. The Authority had
neither delegated responsibility for the Transaction to them nor designated them to speak
on its behalf. Mr. Wernick informed them that PPHS intended to acquire Palmyra, but
gave them no documents explaining the acquisition or justifying the substantial premium
PPHS was contemplating. Rosenberg and Lingle signed confidentiality agreements,
which they understood prevented them from discussing the Transaction with other
Authority members.
37. Two weeks later, on November 4, 2010, the Authority had its regularly scheduled
quarterly meeting. There was no discussion of the Transaction at that meeting.
38. On November 10, 2010, Mr. Baudino, acting as “counsel to Phoebe Putney Health
System Inc.,” explained to HCA in a six-page letter how PPHS would structure the
Transaction to eliminate antitrust risks. He believed that, under the state action doctrine,
having the Authority make the acquisition would insulate the deal from notice to, or
antitrust law enforcement by, the Commission and the United States Department of
Justice. Mr. Baudino went on to explain that “the Authority would acquire Palmyra and,
after the acquisition, lease Palmyra to a non-profit corporation controlled by PPHS. That
lease would be on substantially the same terms as the Authority’s existing lease of
Phoebe Putney Memorial Hospital Inc.”
39. On November 16, 2010, PPHS made a formal offer to HCA for Palmyra for its net
patient revenue for the prior 12 months. The Authority did not review or approve the
offer.
40. On December 2, the PPHS Board approved the final terms of the deal between PPHS and
HCA. PPHS and HCA concluded their negotiations shortly thereafter. The Transaction
had still not been presented to, or vetted by, the Authority. PPHS agreed to guarantee a
$195 million payment, which according to reports generated by PPHS’s advisors, was
The
Authority played no role in negotiating that price, and the
prepared by PPHS’s advisors was not shared with the Authority.
41. PPHS also agreed to pay a $ million break-up fee, representing nearly % of the
purchase price. In addition, under Section 10.1(a) of the Respondents’ Asset Purchase
Agreement, PPHS likewise agreed to pay HCA a $ million “rescission fee” if, after
closing, there is a final court order rescinding the transaction. The Authority had no role
in negotiating the break-up or rescission fees.
42. With the negotiations between PPHS and HCA concluded, it was time to present the
Transaction to the Authority. But first, on December 20, 2010, the eve of the meeting at
which it would be presented to the Authority, PPHS
would approve the Transaction without any changes.
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If, once presented, the Authority failed to
PPHS would pay within two business days’ time.
During the preceding week, Mr. Wernick had met in small groups with other Authority
members without the knowledge of the Authority Chairman.
43. On December 21, 2010, at a special meeting, the Transaction was presented to the
Authority for the first time. In a 94-minute meeting, PPHS’s CEO and its advisor, Mr.
Baudino (who appeared as special counsel to the Authority without addressing his work
for Phoebe Putney or the Sovereign Group’s financial interest in the Transaction),
presented the terms of the Transaction and the related transactions using a PowerPoint
presentation recycled from PPHS’s December 2 Board meeting.
the Authority did just what PPHS
expected it would do. The members did not seek to change a single term of the
Transaction. Indeed, they asked no questions and sought no extra counsel or independent
analysis. Having no reason to acquire Palmyra independent of PPHS’s desire to do so,
the Authority rubber-stamped the Asset Purchase Agreement exactly as PPHS had
negotiated it.
44. At that meeting, the Authority also approved a 17-page Management Agreement that will
give Phoebe Putney control over Palmyra’s operations immediately upon closing the
Transaction.
45. The Authority understood that the Transaction negotiated and entered into by PPHS was
an integrated transaction which included the expected lease of Palmyra to Phoebe Putney.
46. On April 4, 2011, the Authority approved a lease term sheet prepared by Mr. Baudino
that makes abundantly clear that the Authority’s plan remains to lease Palmyra’s and
PPMH’s assets to Phoebe Putney under a single lease. The term sheet is a wish list that
has not even been presented to Phoebe Putney, let alone agreed upon. But even assuming
Phoebe Putney were to agree to every single proposed term,
does not expect the Authority to make significant changes from its current
activities, such as hiring staff to oversee Phoebe Putney’s de facto monopoly or involving
itself in Phoebe Putney’s pricing or arrangements with commercial health-plan providers.
In other words, Phoebe Putney will have free rein, just as it has for the last 20 years, only
now it will operate as a virtual monopolist.
III.
THE RELEVANT SERVICE MARKET
47. The Transaction threatens substantial harm to competition in the relevant market for
inpatient general acute-care hospital services sold to commercial health plans.
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48. Inpatient general acute care hospital services encompasses a broad cluster of basic
medical and surgical diagnostic and treatment services that include an overnight hospital
stay. It is appropriate to evaluate the Transaction’s likely effects across this cluster of
services, rather than analyzing effects as to each service independently, because the
group of services in the market is offered by Phoebe Putney and Palmyra under very
similar competitive conditions. There are no practical alternatives to the cluster of
inpatient general acute care hospital services.
49. The inpatient general acute care services market excludes outpatient services because
health plans and patients cannot substitute them for inpatient care in response to a price
increase. Similarly, the general acute care hospital services market does not include
highly specialized tertiary or quaternary hospital services, such as those involving major
surgeries and organ transplants, because they too are not practical substitutes for general
acute care hospital services.
50. Phoebe Putney and Palmyra negotiate reimbursement-rate contracts with commercial
health plans. These contracts set the reimbursement rates that the health plans (and their
self-insured customers) will pay the hospital for the services provided to health-plan
members.
IV.
THE RELEVANT GEOGRAPHIC MARKET
51. The relevant geographic market in which to analyze the effects of the Transaction is no
broader than the six-county region consisting of Dougherty, Terrell, Lee, Worth, Baker,
and Mitchell Counties in Georgia.
52. Health-plan members strongly prefer to obtain inpatient hospital services close to their
homes. Members’ physicians typically have admitting privileges at their local hospitals,
but not more distant facilities. Close proximity provides convenience for patients and
also their visiting family members. Members are generally unwilling to travel outside of
their communities for inpatient general acute care services, unless a particular needed
service is unavailable locally, or the quality offered by local facilities is perceived as
insufficient.
53. The only hospitals available to health plans to serve residents of the Albany area are
located in Dougherty County, in the City of Albany. Health plans must have either
Phoebe Putney or Palmyra, or both, in their networks in order to offer commercially
viable insurance products to residents of Albany and the six-county area.
54. The nearest independently owned hospitals located outside of Albany are Mitchell
County Hospital (31 miles away), Crisp Regional Hospital (39 miles away), and Calhoun
Memorial Hospital (39 miles away). Health plans and their members do not view these
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hospitals, given their distance and limited service offerings, as practical substitutes for
Phoebe Putney or Palmyra.
55. Health plans could not steer their members to hospitals outside the six-county area in
response to a small but significant rate increase at the hospitals within the area. It would
therefore be profitable for a hypothetical monopolist controlling all hospitals in the
relevant geographic market to increase commercial reimbursement rates by a significant
amount.
56. As reflected by their ordinary-course documents and their actions, Phoebe Putney and
Palmyra focus their competitive efforts and attention on one another, to the exclusion of
any hospitals located outside the six-county area. Phoebe Putney’s longstanding
contracting strategy was to require health plans to exclude Palmyra, but no other
hospitals, from their provider networks.
57. Hospitals outside the six-county area do not regard themselves as, and are not,
meaningful competitors of Phoebe Putney or Palmyra for inpatient general acute care
services as defined herein.
V.
MARKET STRUCTURE AND PRESUMPTIVE ILLEGALITY
58. The Transaction is for all practical purposes a merger to monopoly, by any measure.
59. In addition to Phoebe Putney and Palmyra, there is only one other independently owned
hospital located within the expansive six-county region set forth above. That is 25-bed
Mitchell County Hospital, a very small limited care facility about 31 miles away. In
addition, there are two hospitals located outside the six-county area – Tift Regional
Medical Center and John D. Archbold Medical Center – which account for a small but
nontrivial share of discharges for health-plan members residing within the six-county
area. The two other hospitals mentioned above, Crisp Regional and Calhoun Memorial,
are also located outside the six-county area and account for an insignificant share of the
relevant market.
60. Under relevant case law and the Merger Guidelines, the Transaction is presumptively
unlawful. PPHS’s post-Transaction market share, based on discharges for commercial
patients residing in the six-county area, is approximately 86%. This extraordinarily high
market share easily exceeds levels that the United States Supreme Court has found
presumptively unlawful.
61. The Merger Guidelines measure market concentration using the Herfindahl-Hirschman
Index (“HHI”). A merger or acquisition is presumptively likely to create or enhance
market power (and presumed illegal) when the post-merger HHI exceeds 2,500 points
and the transaction increases the HHI by more than 200 points.
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62. The market concentration levels here exceed these thresholds by a wide margin. The
post-Transaction HHI will increase by 1,675 points to 7,453, as shown in the following
table:
Hospital Discharges
Pre-Transaction
Share of
Discharges
Post-Transaction
Share of
Discharges
PPHS 6,662 74.9%
86.1%
Palmyra 1,000 11.2%
Tift Regional Medical
Center 351 3.9% 3.9%
John D. Archbold Memorial
Hospital 218 2.5% 2.5%
Others (each 1% or less) 659 7.4% 7.4%
Total 8,890
Pre-Transaction HHI: 5,778
Delta: 1,675
Post-Transaction HHI: 7,453
VI.
ANTICOMPETITIVE EFFECTS
A.
The Transaction Eliminates a Unique Pricing Constraint Upon Phoebe Putney
63. By eliminating vigorous competition between Phoebe Putney and Palmyra, the
Transaction enhances Phoebe Putney’s ability and incentive to increase reimbursement
rates for commercial health plans and their membership.
64. In its actions, documents, testimony, and public statements, Phoebe Putney has
acknowledged the intense competition between it and Palmyra. For example, Phoebe
Putney had a longstanding contracting strategy in which it offered substantially more
attractive reimbursement rates to commercial health plans, including Blue Cross Blue
Shield of Georgia, that were willing to enter into an exclusive in-network relationship
with Phoebe Putney but not Palmyra. In essence, Phoebe Putney recognized that its
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financial success depended on keeping health-plan members away from Palmyra, its only
true competitor.
65. Cognizant of Palmyra’s competitive threat, Phoebe Putney has repeatedly challenged
Palmyra’s efforts to obtain a CON for obstetrics. Palmyra was initially granted a CON to
build an obstetrics department, after which Phoebe Putney appealed the decision twice,
and lost. Phoebe Putney then sued in state court to block Palmyra from going forward
with its plans and was successful. Palmyra’s appeal of that decision is currently pending.
Palmyra is also prosecuting an antitrust lawsuit against Phoebe Putney, alleging
monopolization and illegal tying.
66. Palmyra has demonstrated the ability to capture market share from Phoebe Putney.
testified that Palmyra’s market share has increased during
the last two years, while Phoebe Putney’s share has declined by an equal amount. And
Mr. Wernick’s December 21, 2010 presentation to the Authority states that one of the
strategic consequences to Phoebe Putney were it not to buy Palmyra is “
.”
67. In a fact sheet prepared by Phoebe Putney, the Authority stated on December 21st:
68. The overt competitive rivalry between Phoebe Putney and Palmyra has yielded price
benefits to health plans and their members. While Phoebe Putney has
Palmyra’s competitive strategy in the marketplace has been to
versus Phoebe Putney. As the two hospitals will operate as a
single entity under one lease, the Transaction eliminates incentives for either hospital to
discount its rates in an effort to gain business from health plans and their members.
69. Following the Transaction, the combined Phoebe Putney/Palmyra will become an
absolute “must-have” hospital for health plans, which will have no available practical
alternative hospitals to offer their members. This significant change in the negotiating
dynamic will enhance Phoebe Putney’s ability and incentive to obtain rate increases for
its own services, as well as for Palmyra’s services. Health plans anticipate that
Palmyra’s rates will increase significantly, and that Phoebe Putney’s rates will rise
incrementally as well, due to the elimination of its only significant competitor.
70. Rate increases resulting from the Transaction ultimately will be shouldered by local
employers and their employees. A significant percentage of the commercial health-plan
15
membership in the Albany area is self-insured. Self-insured employers rely on health
plans to negotiate rates and provide administrative support, while directly paying the full
cost of their employees’ healthcare claims. As a result, self-insured employers and
employees immediately and directly bear the full burden of higher rates, including higher
premiums, co-pays, and out-of-pocket costs. Fully-insured employers also are inevitably
harmed by higher rates, because health plans pass on at least a portion of hospital rate
increases to these customers through premium increases and administrative fees. To
avoid having to pay the higher prices, some Albany-area employers may opt no longer to
provide healthcare coverage for their employees, and some Albany area residents may be
forced to forego or delay healthcare services because of the higher prices.
71. Non-profit hospitals such as Phoebe Putney are no less likely than their for-profit
counterparts to negotiate aggressively with health plans over reimbursement rates and to
exercise market power gained through acquisition of a competitor.
C.
The Loss of Quality Competition
72. The Transaction will reduce the quality and breadth of services available in the Albany
area.
73. Absent the Transaction, Phoebe Putney and Palmyra would continue to be close rivals
with differentiated competitive offerings in the market for general acute care hospital
services. Health plans perceive little quality difference between the two hospitals
currently.
74. Competition between Phoebe Putney and Palmyra has spurred the two hospitals to offer
additional services; it also has fostered other non-price benefits for residents of the
Albany area. For example, in response to Palmyra advertising its real-time emergency
room wait times on its website and electronic billboards, Phoebe Putney executives
sought to improve their own services. After Palmyra was granted a CON for an
obstetrics department, Phoebe Putney developed plans to increase the availability of
private rooms to its obstetrics patients. If the Transaction moves forward, these benefits
of competition will be lost.
VII.
ENTRY BARRIERS
75. Entry by new hospitals will not deter or counteract the Transaction’s likely harm to
competition in the relevant service market. There is little chance that other firms would
be able to enter to counter Phoebe Putney’s anticompetitive practices.
16
76. The regulatory environment in which hospitals are permitted to operate prevents other
institutions from entering. Under Georgia law, GA. Code Ann. §§ 31-6-42 (a)(3), only
specially licensed facilities are permitted to offer general acute care hospital services, and
before they may do so, the State must issue a CON before a new facility may be built.
77. Even if a CON were obtained, the construction of a new general acute care hospital
comparable to Palmyra would cost millions of dollars and take well over two years –
indeed, years according to Phoebe Putney’s counsel – from initial planning to opening
doors to patients.
78. The construction of Palmyra in 1971 was the last example of new hospital entry in the
Albany area. No other hospitals in southwest Georgia – the most likely candidates for
new entry or expansion – have stated they will enter, or even are considering entering,
the relevant geographic market.
VIII.
ANTICIPATED AFFIRMATIVE DEFENSES
A.
State Action
79. The Transaction was motivated and planned exclusively by Phoebe Putney, which acts in
its independent, private, and pecuniary interests. Rather than acting in furtherance of the
public interest, or even evaluating those interests, the Authority served only as a
strawman to permit Phoebe Putney to attempt to shield this overtly anticompetitive
Transaction from antitrust scrutiny.
80. The Authority engaged in no independent analysis to determine whether the Transaction
would be in the public’s interest. Having no reasons for acquiring Palmyra other than
those advanced by Phoebe Putney, it authorized a $195 million purchase of Palmyra –
using Phoebe Putney’s money – without even considering: (i) the adverse effect this
virtual merger to monopoly would have on healthcare pricing in the community; (ii) the
valuation of Palmyra; (iii) alternatives to leasing Palmyra’s to Phoebe Putney; or (iv)
who specifically from Phoebe Putney would run Palmyra immediately after the
Transaction.
81. Just as it played no supervisory role in the Transaction, since at least 1990 when the
Lease became effective, the Authority has not actively supervised Phoebe Putney in any
sense, including with respect to strategic planning, pricing, and other competitively
sensitive affairs. Rather, the Authority’s oversight is limited to conducting quarterly
breakfast meetings (the minimum required by statute) lasting approximately one hour.
The testified that he cannot remember an instance in which a vote
was less than unanimous, and he had never seen a price list for the services provided by
17
the hospital, despite serving on the Authority for over five years. The believes
pricing is a function of the hospital board, not the Authority. Consistent with that belief,
the Authority made no effort to challenge, or even evaluate, PPMH’s most recent price
increases. The testified that he was not aware of PPMH’s price changes
in the last several years or how much PPMH’s prices have increased during his eight-plus
years on the Authority. And, the Authority has no authority to oversee PPHS.
82. By contract, beginning immediately after the Transaction, Phoebe Putney will assume
responsibility for setting prices for the services furnished at Phoebe North, the hiring and
firing of Phoebe North employees, and other competitively significant decisions
necessary for the operation of a hospital or hospital annex. The
does not expect any of that to change when it officially leases Palmyra’s assets
to Phoebe Putney.
83. In sum, there is no state action here. Rather, it is the private, self-interested Phoebe
Putney that has agreed to purchase Palmyra and will exercise – unfettered and unchecked
by the Authority or any hospital competitor – the extraordinary market power gained
through the Transaction.
B.
Efficiencies
84. Extraordinary efficiencies that cannot be achieved absent the merger are necessary to
justify the Transaction in light of its vast potential to harm competition. Such
efficiencies are lacking here.
IX.
VIOLATION
85. The allegations of Paragraphs 1 through 84 above are incorporated by reference as
though fully set forth.
86. The Transaction constitutes a violation of Section 5 of the FTC Act, as amended, 15
U.S.C. § 45.
87. The Transaction, if consummated, would substantially lessen competition in the relevant
markets in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and
Section 5 of the FTC Act, as amended, 15 U.S.C. § 45.
NOTICE
Notice is hereby given to the Respondents that the 19th day of September, 2011, at 10:00
a.m. is hereby fixed as the time, and Federal Trade Commission offices, 600 Pennsylvania
18
Avenue, N.W., Room 532, Washington, D.C. 20580, as the place when and where an evidentiary
hearing will be had before an Administrative Law Judge of the Federal Trade Commission, on
the charges set forth in this complaint, at which time and place you will have the right under the
Federal Trade Commission Act and the Clayton Act to appear and show cause why an order
should not be entered requiring you to cease and desist from the violations of law charged in the
complaint.
You are notified that the opportunity is afforded you to file with the Commission an
answer to this complaint on or before the fourteenth (14th) day after service of it upon you. An
answer in which the allegations of the complaint are contested shall contain a concise statement
of the facts constituting each ground of defense; and specific admission, denial, or explanation of
each fact alleged in the complaint or, if you are without knowledge thereof, a statement to that
effect. Allegations of the complaint not thus answered shall be deemed to have been admitted.
If you elect not to contest the allegations of fact set forth in the complaint, the answer
shall consist of a statement that you admit all of the material facts to be true. Such an answer
shall constitute a waiver of hearings as to the facts alleged in the complaint and, together with
the complaint, will provide a record basis on which the Commission shall issue a final decision
containing appropriate findings and conclusions and a final order disposing of the proceeding.
In such answer, you may, however, reserve the right to submit proposed findings and
conclusions under Rule 3.46 of the Commission’s Rules of Practice for Adjudicative
Proceedings.
Failure to file an answer within the time above provided shall be deemed to constitute a
waiver of your right to appear and to contest the allegations of the complaint and shall authorize
the Commission, without further notice to you, to find the facts to be as alleged in the complaint
and to enter a final decision containing appropriate findings and conclusions, and a final order
disposing of the proceeding.
The Administrative Law Judge shall hold a prehearing scheduling conference not later
than ten (10) days after the answer is filed by the last answering respondent. Unless otherwise
directed by the Administrative Law Judge, the scheduling conference and further proceedings
will take place at the Federal Trade Commission, 600 Pennsylvania Avenue, N.W., Room 532,
Washington, D.C. 20580. Rule 3.21(a) requires a meeting of the parties’ counsel as early as
practicable before the pre-hearing scheduling conference (but in any event no later than five (5)
days after the answer is filed by the last answering respondent). Rule 3.31(b) obligates counsel
for each party, within five (5) days of receiving a respondent’s answer, to make certain initial
disclosures without awaiting a discovery request.
NOTICE OF CONTEMPLATED RELIEF
Should the Commission conclude from the record developed in any adjudicative
proceedings in this matter that the Transaction challenged in this proceeding violates Section 7
of the Clayton Act, as amended, and Section 5 of the FTC Act, as amended, the Commission
19
may order such relief against Respondents as is supported by the record and is necessary and
appropriate, including, but not limited to:
1. If the merger is consummated, (a) rescission of the Asset Purchase
Agreement and/or (b) divestiture of Palmyra, and associated assets, in a
manner that restores Palmyra as a viable, independent competitor in the
relevant market, with the ability to offer such services as Palmyra was
offering and planning to offer prior to the Transaction. Any ordered
divestiture may be to, among other entities, Respondents HCA and/or
Palmyra.
2. A ban, for a period of time, on any transaction involving Phoebe Putney, the
Authority, or Palmyra through which Phoebe Putney would acquire, manage, or
control the operations of Palmyra or which would combine Phoebe Putney’s and
Palmyra’s businesses in the relevant market, except as may be approved by the
Commission.
3. A requirement that, for a period of time, Phoebe Putney provide prior notice to
the Commission of acquisitions, mergers, consolidations, or any other
combinations of its hospital or other health facilities in the relevant market with
other hospitals or health facilities in the relevant market.
4. A requirement to file periodic compliance reports with the Commission.
5. Any other relief appropriate to correct or remedy the anticompetitive effects of
the Transaction or to ensure the creation of one or more viable, competitive
independent entities to compete against Phoebe Putney and Palmyra in the
relevant market.
IN WITNESS WHEREOF, the Federal Trade Commission has caused this complaint to be
signed by its Secretary and its official seal to be hereto affixed, at Washington, D.C., this 19th
day of April, 2011.
By the Commission.
Richard J. Donohue
Acting Secretary
SEAL

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About the author

Owner / Editor / Writer

Tom Knighton is the publisher of The Albany Journal. In November, 2011, he became the first blogger to take over a newspaper anywhere in the world. In August of 2012, he made the difficult decision to take the Journal out of print circulation and become an online news agency, a first for the Albany area.

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