At11108 Materials

REDACTED PUBLIC VERSION
UNITED STATES OF AMERICA

BEFORE THE FEDERAL TRADE COMMISSION
COMMISSIONERS: Jon Leibowitz, Chairman William E. Kovacic J. Thomas Rosch Edith Ramirez Julie Brill
In the Matter of Docket No. 9343 THE NORTH CAROLINA STATE BOARD OF DENTAL EXAMINERS
OPINION OF THE COMMISSION By KOVACIC, Commissioner, for a Unanimous Commission:1 I. INTRODUCTION
This case presents us with an opportunity to decide whether the principles of federalism embodied in the state action doctrine shield respondent, the North Carolina State Board of Dental Examiners (the Board), from antitrust challenge to its pattern of conduct alleged to have impaired competition in the market for teeth whitening services. The Supreme Court held nearly seventy years ago that Congress did not intend the federal antitrust laws to cover the acts of sovereign states. Parker v. Brown, 317 U.S. 341 (1943). Since then, a line of Supreme Court cases, which has come to form the state action doctrine, has developed to exempt acts of the sovereign from antitrust scrutiny. This doctrine does not prevent a state from delegating its sovereign ability to pursue anticompetitive market regulation to non-sovereign actors, such as cities or even private actors. Because the balance between competition policy and federalism embodied in the state action doctrine exempts only sovereign policy choices from federal antitrust scrutiny, non-sovereign defendants invoking the state action defense must clear additional hurdles to ensure that their challenged conduct truly comports with a state decision to forego the benefits of competition to pursue alternative goals. These requirements vary depending on the extent to which a tribunal is concerned that decisionmakers are pursuing private rather than sovereign interests. For example, municipalities can enact anticompetitive regulations as long as they can show that their actions are consonant with a clearly articulated and affirmatively expressed state policy. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 40 (1985). Private parties that engage in anticompetitive conduct, on the
Commissioner Julie Brill has not participated in this matter.
other hand, can avail themselves of the state action exemption only if they can show that their actions were both taken pursuant to a clearly articulated and affirmatively expressed state policy and actively supervised by the state itself. Cal. Retail Liquor Dealers Assn v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980). In the case before us, the decisive majority of the Board, which is charged with regulating the practice of dentistry in North Carolina, earns a living by practicing dentistry. The Complaint alleges that the Board determined on its own that teeth whitening was a practice that could be performed only under the supervision of a dentist and used the imprimatur of state authority to drive lower-priced non-dentists from the relevant market. We conclude that given the Boards obvious interest in the challenged restraint, the state must actively supervise the Board in order for the Board to claim state action protection from the antitrust laws. Because we find such supervision lacking, we further hold that the Federal Trade Commission Act reaches the Boards conduct. II. PROCEDURAL BACKGROUND
The Commission issued an administrative complaint against the respondent Board on June 17, 2010. The complaint alleges that the Board violated Section 5 of the FTC Act by classifying teeth whitening as the practice of dentistry and by enforcing this determination through cease and desist orders that were neither authorized nor supervised by the state, and that were designed to, and did, drive non-dentist teeth whiteners from the relevant North Carolina market. The evidentiary hearing before the Administrative Law Judge is currently scheduled for February 17, 2011. Before us are the Boards motion to dismiss the entire administrative complaint on the ground that its conduct is exempted from antitrust liability by the state action doctrine, and Complaint Counsels motion for partial summary decision on the propriety of the Boards invocation of the state action doctrine as an affirmative defense. The parties have filed memoranda in support of their motions and their respective responses, replies, and supplemental filings, the latest of which was filed on January 20, 2011.2 Pursuant to our Rules of Practice, 16 C.F.R. 3.24(a)(1)-(2), the parties have also filed their respective statements of material facts as to which Complaint Counsel contends there is no genuine issue for trial,3 and as to some of which the Board contends that a genuine dispute does exist.4 Our decision here is based on our
The Board filed a motion for leave to file a surreply brief, along with the surreply brief, on January 20, 2011. We note that there are no provisions in the Commission Rules to file a surreply brief. Further, the Boards brief is untimely coming a month after the last filing by Complaint Counsel and it does not respond to any new arguments raised by Complaint Counsels reply brief. Nonetheless, as a matter of discretion, we have considered the Boards filing. See Compl. Counsels Rule 3.24 Separate Statement of Material Facts As to Which There Is No Genuine Issue (hereinafter CCSMF). See Respts Separate Statement of Material Facts As to Which There Are and Are Not Genuine Issues (hereinafter BSMF). 2
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review of those statements, including their accompanying affidavits and exhibits, as well as on matters of official or judicial notice, such as judicial decisions, statutes, regulations, and records and reports of administrative bodies. S.C. State Bd. of Dentistry, 138 F.T.C. 229, 240 (2004) (internal quotation marks and citation omitted). Under our revised Rules of Practice, [m]otions to dismiss filed before the evidentiary hearing . . . and motions for summary decision shall be directly referred to the Commission and shall be ruled on by the Commission unless the Commission in its discretion refers the motion to the Administrative Law Judge. 16 C.F.R. 3.22(a) (2011). The Commission issued those revisions in 2009 in order to further expedite its adjudicative proceedings, improve the quality of adjudicative decision making, and clarify the respective roles of the Administrative Law Judge (ALJ) and the Commission in Part 3 proceedings. 73 Fed. Reg. 58,832 (Oct. 7, 2008) (Proposed Rule Amendments); see also 74 Fed. Reg. 1804 (January 13, 2009) (Interim Final Rules); 74 Fed. Reg. 20205 (May 1, 2009) (Amendments Adopted As Final). Thus, an early ruling on a dispositive motion may expedite resolution of a matter and save litigants resources where the legal issue is the primary dispute. 73 Fed. Reg. at 58,836; see also S.C. State Bd., 138 F.T.C. at 231. We accordingly decide the motions here ab initio. In light of the close of discovery and the fact that the motion of Complaint Counsel for partial summary decision is based on the same issue underlying the Boards motion to dismiss the opposition to which the Board has fully briefed, supported by affidavits and other evidence and in the interests of clarity and efficiency, we exercise our discretion to treat the Boards motion to dismiss as a motion for summary decision on the issue of its qualification for state action exemption. See S.C. State Bd., 138 F.T.C. at 242 ([T]he Commission always has discretion to consider extra-pleading material and to convert a motion to dismiss to one for summary judgment.); see also United States v. Purdue Pharma L.P., 600 F.3d 319, 326 (4th Cir. 2010) (converting a motion to dismiss into one for summary judgment where the parties provided evidence and thoroughly briefed the matter at issue); Bosiger v. US Airways, Inc., 510 F.3d 442, 450 (4th Cir. 2007) (It is well settled that district courts may convert a Rule 12(b)(6) motion to dismiss into a Rule 56 motion for summary judgment, allowing them to assess whether genuine issues of material fact do indeed exist.). III. APPLICABLE STANDARD OF REVIEW
We review the parties motions pursuant to Rule 3.24 of our Rules of Practice, whose provisions are virtually identical to the provisions of Fed. R. Civ. P. 56, governing summary judgment in the federal courts. Polygram Holding, Inc., 136 F.T.C. 310, 2002 WL 31433923, at *1 (FTC Feb. 26, 2002); see also 16 C.F.R. 3.24(a)(2) (If the Commission . . . determines that there is no genuine issue as to any material fact regarding liability or relief, it shall issue a final decision and order.). Such a motion or an opposition thereto may be supported by affidavits, depositions, answers to interrogatories, or other appropriate evidence not in dispute, but a party opposing the motion may not rest upon the mere allegations or denials of his or her pleading; the response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue of material fact for trial. 16 C.F.R. 3.24(a)(3). Thus, [t]he mere existence of a factual dispute will not in and of itself defeat an otherwise 3
properly supported motion. Polygram, 2002 WL 31433923, at *1 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)). Once the moving party has adequately supported its motion, the nonmoving party must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). It must instead establish specific facts showing that there is a genuine issue for trial. Id. at 587 (internal citations and quotation marks omitted); see also 16 C.F.R. 3.24(a)(3). And [w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Matsushita, 475 U.S. at 587. IV. UNDISPUTED FACTS
No facts material to the antitrust exemption questions before us are in genuine dispute. For purposes of summary judgment on the state action defense issue, we need not determine whether the Boards activities violate the relevant antitrust laws. Instead we focus only on whether the Boards conduct is exempt from antitrust scrutiny.5 The Board is an agency of the State of North Carolina, tasked with regulating the practice of dentistry in that state. N.C. Gen. Stat. 90-22(a)-(b). It consists of six licensed dentists, one licensed dental hygienist, and one consumer member, who is neither a dentist nor a dental hygienist. N.C. Gen. Stat. 90-22(b); CCSMF at 1, 1-2; BSMF at 6, 1-2. The licensed dentists of North Carolina elect dentist members to the Board for a three-year term. N.C. Gen. Stat. 90-22(b); CCSMF at 1, 3-4; BSMF at 6, 3-4. During their tenure, Board members may continue to provide for-profit dental services, including teeth whitening. See Each Board member must submit annual financial disclosures to the Ethics Commission, which list their assets and liabilities, state that they are engaged in the practice of dentistry, and identify the professional associations to which they belong and businesses other than their dental practices. N.C. Gen. Stat. 138A-22(a); CCSFM at 22-23, 75-76; Newson Decl. at 5, 11; CX0395; CX0396. The Board must submit an annual report to the Secretary of State, the State Attorney General, and the Joint Legislative Administrative Procedure Oversight Committee (JLAPOC), which provides, inter alia, aggregate information on the number and disposition of investigations by type. N.C. Gen. Stat. 93B-2; CX0085; CX0086; CX0088; CX0089; CX0091. The Board also must comply with North Carolinas Public Records Act (N.C. Gen. Stat. 132-1 et seq.), Administrative Procedure Act (N.C. Gen. Stat. 150B-1 et seq.), and open meetings law (N.C. Gen. Stat. 143-318.9 et seq.). BSMF at 53, 72. Further, the JLAPOC has the power [t]o review the activities of the State occupational licensing boards
Throughout the opinion we use the following abbreviations for the parties filings: Boards Memorandum in Support of Motion to Dismiss (Corrected) (Bd. Memo); Boards Memorandum in Opposition to Complaint Counsels Motion for Summary Judgment (Bd. Opp.); Boards Reply Memorandum in Support of Motion to Dismiss (Bd. Reply); Complaint Counsels Memorandum in Support of Motion for Summary Judgment (CC Memo); Complaint Counsels Memorandum in Opposition to Respondents Motion to Dismiss (CC Opp.). 4
to determine if the boards are operating in accordance with statutory requirements. N.C. Gen. Stat. 120-70.101(3a). The complaints allegations concern the market for teeth whitening services in North Carolina. Compl. 7. Teeth whitening services are offered both by dentists, as an in-office procedure or a take-home kit, and by non-dentists, in salons, retail stores, and mall kiosks. CCSMF at 3-4, 16; BSMF at 10-11, 16. Dentist and non-dentist teeth whiteners differ in terms of the strength of the solution used, the time involved, and the procedures used. See generally CCSMF at 4-7, 17-26; BSMF at 11-16, 17-26. The price for non-dentist teeth whitening typically is less than teeth whitening performed by dentists in their offices. CCSMF at 5,7, 19, 25; BSMF at 12, 15, 19, 25. The complaint charges that the Board, reacting to the competitive threat by non-dentist providers, sought to exclude, and did exclude, non-dentists from the market for teeth whitening services in North Carolina. Compl. 13-23. The undisputed facts show that the Board on numerous occasions sent letters to non-dentist providers, alleging that those recipients were engaging in the unauthorized practice of dentistry in violation of North Carolina laws, and ordering the recipients to cease and desist from providing teeth-whitening services in North Carolina. CCSMF at 17-18, 55, 60; BSMF at 37, 44, 55, 60. The Board also has sent letters to some mall operators asserting that teeth whitening services offered at mall kiosks are illegal, and asking these mall operators to refrain from leasing space to non-dentist teeth whiteners. CCSMF at 19, 61; BSMF at 44-45, 61. The complaint does not challenge any attempts by the Board to bring civil or criminal proceedings against alleged violators of the North Carolina Dental Practice Act (N.C. Gen. Stat. 90-22 et seq.). V. DISCUSSION AND CONCLUSIONS OF LAW A. Jurisdiction
Citing California Dental Assn v. FTC, 526 U.S. 756 (1999), the Board argues that it is not subject to the Commissions jurisdiction. See Bd. Memo at 17. We disagree. California Dental is inapposite in this case where jurisdiction is asserted over a person, not a corporation. The complaint in this case, consistent with this established precedent, asserted jurisdiction because [t]he Dental Board is a person within the meaning of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45. Compl. 5. Under Section 5 of the FTC Act, the FTC may exercise jurisdiction over persons, partnerships, or corporations, with certain exceptions not relevant here. 15 U.S.C. 45(a)(2). The jurisdictional question at issue in California Dental concerned the scope of the statutory definition of corporation and, in particular, whether an entity formally organized as a non-profit could nonetheless be subject to the Commissions jurisdiction as a corporation if it were organized to carry on business for its own profit or that of its members. 526 U.S. at 765-66 (quoting 15 U.S.C. 44). California Dentals test for jurisdiction over corporations, therefore, has no relevance to this case. The Supreme Court has held that states and their regulatory bodies constitute persons under the antitrust laws. See, e.g., Jefferson Cnty. Pharm. Assn v. Abbott Labs., 460 U.S. 150, 5
155 (1983); Lafayette v. La. Power & Light Co., 435 U.S. 389, 395 (1978); Georgia v. Evans, 316 U.S. 159, 162 (1942). Consistent with this precedent, and recognizing that the antitrust statutes should be construed together, the Commission has many times exercised jurisdiction over state boards as persons under the FTC Act. See, e.g., Va. Bd. of Funeral Dirs. & Embalmers, 138 F.T.C. 645 (2004); S.C. State Bd., 138 F.T.C. 229; Mass. Bd. of Registration in Optometry, 110 F.T.C. 549 (1988).6 B. The State Action Doctrine
In our dual system of government, . . . the states are sovereign. Parker, 317 U.S. at 351. As such, with nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature, the Supreme Court concluded that when [t]he state itself exercises its legislative authority in making the regulation and in prescribing the conditions of its application, it is exempt from the prohibitions of the Sherman Act. Id. at 350-52. Thus, anticompetitive regulation is allowed to withstand antitrust challenge as long as a court is satisfied that the restraint at issue is truly state action. See Hoover v. Ronwin, 466 U.S. 558, 574 (1984) (the litmus test of the state action exemption has always been whether the conduct at issue can be deemed to be that of the State acting as a sovereign) (internal quotation marks and citation omitted). When non-sovereign entities engage in conduct that otherwise would violate the antitrust laws, they too can avail themselves of state action protection as long as the sovereign has put into place sufficient safeguards to assure that non-sovereign actors are pursuing state goals rather than their own. See id. at 568 (when the activity at issue is carried out by someone other than the sovereign, closer analysis is required because it becomes important to ensure that the anticompetitive conduct of the States representative was contemplated by the State.). For example, in Midcal, the Supreme Court held that private parties can use the state action doctrine
In Massachusetts Bd. of Registration in Optometry, the Commission reasoned that because the Supreme Court had held local governments, as agents of the state, to be persons within the meaning of the Sherman Act and the Clayton Act, so too should they be considered persons under the FTC Act. 110 F.T.C. 549, 608-09 (1988) (citing United States v. American Bldg. Maintenance Indus., 422 U.S. 271, 277-78 (1975)). The Commission also noted that its holding was consistent with Commission precedent, including Indiana Fedn of Dentists, 93 F.T.C. 231 n.1 (1979), and the Statement of Basis and Purpose for the Trade Regulation Rule on Advertising of Ophthalmic Goods and Services, 43 Fed. Reg. 23992, 24004 (1979). The Commission found its holding further supported by the legislative history of the FTC Act. Mass. Bd., 110 F.T.C. at 609 n.19. The D.C. Circuits decision in California State Bd. of Optometry v. FTC, 910 F.2d 976 (D.C. Cir. 1990), is not contrary to the general rule that for purposes of jurisdiction, states and their agents are persons under the FTC Act. That decision merely holds that the FTC is not authorized to reach the acts or practices of States acting in their sovereign capacity. Id. at 980 (citations omitted). Because we conclude that the Board is not acting as a sovereign, California State Bd. of Optometry has no bearing on this case. 6
as a shield to avoid antitrust liability if they can show that the challenged restraint is (1) pursuant to a clearly articulated and affirmatively expressed [] state policy;and (2) actively supervised by the State itself. 445 U.S. at 105 (internal quotation marks omitted). Although [a] municipality must demonstrate that it is engaging in the challenged activity pursuant to a clearly expressed state policy before it is entitled to state action exemption from the antitrust laws, Town of Hallie, 471 U.S. at 40, municipalities are not subject to Midcals active supervision prong. Id. at 46. As the Court explained, the requirement of active state supervision serves essentially an evidentiary function: it is one way of ensuring that the actor is engaging in the challenged conduct pursuant to state policy. Id. Accordingly, municipalities should be subject to a lower evidentiary threshold, because unlike the case of a private party where there is a real danger that he is acting to further his own interests, . . . there is little or no danger that [a municipality] is involved in a private price-fixing agreement. Id. at 47 (emphasis in original); see also id. at 45 (We may presume, absent a showing to the contrary, that the muncipality acts in the public interest. A private party, on the other hand, may be presumed to be acting primarily on his or its own behalf.). The Board in this matter is not the sovereign.7 The questions before us now are whether the Board must meet both of Midcals requirements to qualify for state action protection, and, if so, whether the Board has met them as a matter of law. We conclude that the Board must meet both prongs of the Midcal test and that it has failed to show sufficient state supervision.8 Complaint Counsel is therefore entitled to partial summary judgment dismissing the state action doctrine as an affirmative defense.9
The Supreme Court has held that the legislature and the states highest court acting in its regulatory capacity are sovereign, but has left open the possibility that the executive may also be sovereign. See Hoover, 466 U.S. at 568 & n.17. It is undisputed that the Board is not an arm of the North Carolina legislature or the North Carolina Supreme Court. Moreover, as discussed below, the Board functions in a manner that makes it wholly inappropriate to treat its actions as presumptively sovereign, even if actions of the Governor or executive agencies subject to plenary gubernatorial control might be. For purposes of this motion, we have assumed, but not decided, that the Board has satisfied the clear articulation requirement. Cf. Patrick v. Burget, 486 U.S. 94, 100 (1988) (We need not consider the clear articulation prong of the Midcal test because the active supervision requirement is not satisfied.) (internal quotation marks omitted). The Board makes fleeting reference to the Noerr-Pennington doctrine in the memorandum supporting its Motion to Dismiss. See Bd. Memo at 39-40 (citing United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965); E. R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961)). Such perfunctory recitation of authority, without development, fails to constitute a colorable basis to dismiss the complaint. Accordingly, we do not address this issue. 7
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1.
The Board Must Meet Both Prongs of Midcal
In its motion, the Board argues that its challenged conduct is exempt from the federal antitrust laws because, as an instrumentality of the State of North Carolina, its actions are protected by the state action doctrine. See Bd. Memo at 7. More specifically, the Board argues that, to qualify for state action protection, its conduct need only meet, and as a matter of law does meet, the first prong of the Supreme Courts standard, enunciated in Midcal that the challenged restraint must be one clearly articulated and affirmatively expressed as state policy. 445 U.S. at 105 (internal quotation marks and citation omitted). The Board argues, moreover, that even if the second prong of that test that the policy must be actively supervised by the State itself, id. applies in this case, then North Carolinas structural legal oversight of the Board is sufficient as a matter of law to satisfy that condition. See Bd. Memo at 34-37. Complaint Counsel argues that the Board is financially interested in the exclusion of nondentists from the market for teeth whitening services, and also is beholden to the industry it purports to regulate, by virtue of the fact that it is controlled by its dentist members, who are privately elected by North Carolinas licensed dentists. Therefore, says Complaint Counsel, the Board must meet both of Midcals prongs in order to qualify for state action exemption. See CC Memo at 17-29. Further, Complaint Counsel argues that the North Carolina Dental Practice Act, through which the Board was constituted and from which it derives its authority, does not authorize the Board to order non-dentist teeth whitening providers to cease and desist from providing such services, nor to communicate with prospective providers and third parties that the provision of teeth whitening services by dentists is unlawful. Rather, the Dental Act merely authorizes the Board to petition the North Carolina courts for relief relating to any allegedly unauthorized practice of dentistry. Accordingly, argues Complaint Counsel, the Board cannot satisfy either of the Midcal prongs, and thus does not qualify for antitrust exemption. See CC Memo at 29-34. Midcals active supervision requirement serves to ensure that the State has exercised sufficient independent judgment and control so that the details of the [challenged restraint on competition] have been established as a product of deliberate state intervention. FTC v. Ticor Title Ins. Co., 504 U.S. 621, 634 (1992); see also Burget, 486 U.S. at 100 (noting that the active supervision requirement stems from the recognition that where a private party is engaging in the anticompetitive activity, there is a real danger that he is acting to further his own interests, rather than the governmental interests of the State.) (quoting Hallie, 471 U.S. at 47). The Court has held that the active supervision requirement applies to private parties (e.g., Midcal; Patrick; Ticor), and does not apply to political subdivisions of the State such as municipalities (e.g., Hallie). Respondent argues, however, that the Court has never ruled directly on the question of whether state agencies must be supervised too, and therefore we should take our guidance from a footnote suggesting they need not10 and from lower court cases in accord.
10
Bd. Memo at 30 n.7 (quoting Hallie, 471 U.S. at 46 n.10). 8
Whatever the case may be with respect to state agencies generally, however, the Court has been explicit in applying the antitrust laws to public/private hybrid entities, such as regulatory bodies consisting of market participants. The Courts jurisprudence in this area leads us to conclude that when determining whether the states active supervision is required, the operative factor is a tribunals degree of confidence that the entitys decision-making process is sufficiently independent from the interests of those being regulated. As the Court emphasized repeatedly, the real danger in not insisting on the states active supervision is that the entity engaged in the challenged restraint turns out to be acting to further [its] own interests, rather than the governmental interests of the State. Hallie, 471 U.S. at 47; Patrick, 486 U.S. at 100. Thus, in Goldfarb v. Virginia State Bar, a fee schedule for real estate title searches that was enforced by the Virginia state bar was found to violate the antitrust laws, even though the enforcement agency was a state agency by law. 421 U.S. 773, 783, 790 (1975). The Courts reasoning in that case is particularly illuminating. The Court rejected the state action defense, in part, because the state bars enforcement of the unlawful fee schedule via its issuance of ethical opinions was deemed to be undertaken for the benefit of its members, and, equally significantly, there was no indication . . . that the Virginia Supreme Court approves the [ethical] opinions. Id. at 790-91. We draw two conclusions from Goldfarb: First, as the Court reasoned, that the State Bar is a state agency for some limited purposes does not create an antitrust shield that allows it to foster anticompetitive practices for the benefit of its members. Id. at 791 (emphasis added). Thus, the inquiry into the public/private character of the governmental entitys challenged conduct should focus not on the formalities of state law (after all, the subject entity in Goldfarb was a state agency by law, id. at 790), but rather on the realities of the decision-makers independent judgment. The state bars enforcement of a minimum fee schedule was deemed clearly for the benefit of its member lawyers, not the general public. Second, it seems reasonable to conclude that had the states supervisory role, in the form of the Virginia Supreme Courts approval of the state bars ethical opinions, been more vigorous, the Courts conclusion on the application of the state action doctrine may well have been different. Instead, the Courts analysis strongly suggests that such active supervision is crucial, even for a state agency, in circumstances where the state agencys decisions are not sufficiently independent from the entities that the agency regulates. Although the courts of appeals have been less than consistent on this issue, there is ample support for the proposition that financially interested governmental bodies must meet the active supervision prong of Midcal. See, e.g., Wash. State Elec. Contractors Assn, Inc. v. Forest, 930 F.2d 736, 737 (9th Cir. 1991) (whether an entity must show active supervision depends on the realities of its structure, such as having private members who have their own agenda which may or may not be responsive to state . . . policy); FTC v. Monahan, 832 F.2d 688, 689-90 (1st Cir. 1987) (Breyer, J.) ([W]hether any anticompetitive Board activities are essentially those of private parties and hence subject to active supervision depends upon how the Board functions in practice, and perhaps upon the role played by its members who are private pharmacists.); Normans on the Waterfront, Inc. v. Wheatley, 444 F.2d 1011, 1018 (3rd Cir. 1971) (in determining whether state action exemption applies to a state regulatory board, the relevant distinction is between genuine governmental action controlling the anticompetitive practice, and an attempt by government officials to authorize individuals to perform acts which 9
violate the antitrust laws) (quoting Asheville Tobacco Bd. of Trade, Inc. v. FTC, 263 F.2d 502, 509 (4th Cir. 1959)); Asheville Tobacco Bd., 263 F.2d at 509 ([T]he state may regulate that industry in order to control or, in a proper case, to eliminate competition therein. It may even permit persons subject to such control to participate in the regulation, provided their activities are adequately supervised by independent state officials.) (citation omitted). Leading antitrust commentary supports this view. In their antitrust treatise, for example, Professors Areeda and Hovenkamp also reject the formalities of a governmental bodys status under state law in determining whether active supervision should be deemed necessary. They conclude that it is good policy to classify as private for state action purposes any organization in which a decisive coalition (usually a majority) is made up of participants in the regulated market. Phillip E. Areeda & Herbert Hovenkamp, 1A ANTITRUST LAW : AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 227b, at 501 (3d ed. 2009); see also id. 224a, at 500 (Without reasonable assurance that the body is far more broadly based than the very persons who are to be regulated, outside supervision seems required.). Professor Elhauge, moreover, concludes that financially interested action is always private action subject to antitrust review. Einer Richard Elhauge, The Scope of Antitrust Process, 104 HARV . L. REV . 667, 689 (1991); see also id. at 696 ([A]n anticompetitive restraint is immune from antitrust liability whenever a financially disinterested and politically accountable actor controls and makes a substantive decision in favor of the terms of the restraint.). Lastly, requiring active supervision by the state itself in circumstances where the state agency in question has a financial interest in the restraint that the agency seeks to enforce, especially when the state agency is not accountable to the public but rather to the very industry it purports to regulate, is entirely consistent with the policies underlying the Parker doctrine. The Supreme Court created the state action doctrine in recognition that states, in their sovereign capacities, may choose to supplant competition to effect other policy goals. A state decision to take action that contravenes the antitrust laws in theory represents a choice by citizens of that state to forego the benefits of competition in favor of alternative ends. If a state legislature adopts a policy that restricts competition against the wishes of its citizens, it faces political consequences. The Court has explained that the rationale behind the Midcal requirements is to assure political accountability: States must accept political responsibility for actions they intend to undertake. . . . Federalism serves to assign political responsibility, not to obscure it. Neither federalism nor political responsibility is well served by a rule that essential national policies are displaced by state regulations intended to achieve more limited ends. For States which do choose to displace the free market with regulation, our insistence on real compliance with both parts of the Midcal test will serve to make clear that the State is responsible for the price fixing it has sanctioned and undertaken to control. Ticor, 504 U.S. at 635. Accordingly, if a state permits private conduct to go unchecked by market forces, the only assurance the electorate can have that private parties will act in the public 10
interest is if the state is politically accountable for any resulting anticompetitive conduct; when conduct subject to political review is not in the public interest, it can be stopped at the ballot box. Decisions that are made by private parties who participate in the market that they regulate are not subject to these political constraints unless these decisions are reviewed by disinterested state actors to assure fealty to state policy. Without such review, there is no realistic assurance that a private partys anticompetitive conduct promotes state policy, rather than merely the partys individual interests. Patrick v. Burget, 486 U.S. 94, 101 (1988). Therefore, allowing the antitrust laws to apply to the unsupervised decisions of self-interested regulators acts as a check to prevent conduct that is not in the public interest; absent antitrust to police their actions, unsupervised self-interested boards would be subject to neither political nor market discipline to serve consumers best interests. Although requiring active supervision of state regulatory bodies that are controlled by private market participants may impose additional costs on states, we believe that this rule is faithful to the Supreme Courts decisions striking the correct balance between our national policy in favor of competition, on the one hand, and principles of federalism on the other. As discussed above, the risk to competition posed by regulatory bodies comprising private market participants is greater than the risk posed by elected representatives, who are accountable directly to the public. At the same time, deference to policy-making by private parties who occasionally are cloaked in a modicum of state authority does not vindicate federalism to the same degree as granting the state sovereign itself wide berth to regulate markets. We find unconvincing the Boards arguments that a regulatory body controlled by private market participants should not be asked to show active state supervision of its exclusionary conduct. The Board first relies on certain decisions of the courts of appeal that found state agencies need not show active supervision, even in circumstances where the Boards independent judgment and control are not manifest. See Bd. Opp. at 18 (citing Earles v. State Bd. of Certified Public Accountants of Louisiana, 139 F.3d 1033, 1041 (5th Cir. 1998); Bankers Ins. Co. v. Florida Residential Property & Casualty Joint Underwriting Ass 'n, 137 F.3d 1293, 1296-97 (11th Cir. 1998); Hass v. Oregon State Bar, 883 F.2d 1453, 1460 (9th Cir. 1989); Gambrel v. Kentucky Board of Dentistry, 689 F.2d 612 (6th Cir. 1982)). These decisions, however, appear in large part to be based on those courts examination of a laundry list of attributes of the respective governmental entities (e.g., open records, general financial and ethical oversight) to determine the extent to which they resembled the municipality in Hallie, rather than an inquiry into whether the challenged restraint was effected by a body controlled by market participants who stood to benefit from the regulatory action. See, e.g., Earles, 139 F.3d at 1041 (examining a list of factors and concluding that the Board is functionally similar to a municipality); Hass, 883 F.2d at 1460 (state law provisions governing its public records and meetings, financial audits, and ethical conduct leave no doubt that the Bar is a public body, akin to a municipality, for the purposes of the state action exemption.). The Eleventh Circuit in Bankers Insurance, moreover, appeared to find the fact that the members of the underwriting association did not compete in the market that they regulated key to its decision not to require active supervision. 137 F.3d at 1297 (This impossibility of competition is an indicator that the
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Association represents public interests, rather than competing private interests.).11 Gambrell, a case on which the respondent relies heavily, is also distinguishable from the instant case. There, the Kentucky Board of Dentistry was enforcing a clear, unambiguous legislative prohibition on denture producers taking orders from anyone other than licensed dentists. 689 F.2d at 618 (defendants conduct emanates directly from the mandate of the state law in a well-developed and long-established statutory scheme. It is not left to the private sector to decide what the policy is and whether it is to be complied with.). Here, by contrast, the Board has exercised discretion to implement a policy to exclude non-dentists from a market in which they compete against North Carolina dentists. Accordingly, with the possible exception of Earles, which we decline to follow, we do not read these cases to be contrary to our holding here.12 The Board also argues that Goldfarb and Bates predate Hallies dicta that state agencies likely would not be required to show active state supervision, and thus those cases should not be accorded much weight in our analysis. Bd. Reply at 10. We disagree. First, Midcals twopronged test itself was extracted from the Courts prior state-action decisions, including Goldfarb. See 445 U.S. at 104-05 (These decisions establish two standards for antitrust immunity under Parker v. Brown) (referring to Goldfarb; Cantor v. Detroit Edison Co., 428 U.S. 579 (1976); and New Vehicle Motor Bd. of Cal. v. Orrin W. Fox Co., 439 U.S. 96 (1978)). A Supreme Court decision that is directly on point here should not be ignored because of a subsequent passing comment by the Court, especially when the Hallie Court made it amply clear that it was not deciding the state agency issue. See Hallie, 471 U.S. 46 n.10. Second, the dicta in footnote 10 of Hallie must be reconciled with the Courts other language and reasoning in that same decision. The Hallie Court distinguished Goldfarb and Cantor on the basis that those cases concerned private parties not municipalities. Id. at 45. The party claiming the state action exemption in Goldfarb was the Virginia State Bar, explicitly acknowledged by the Court to be a state agency by law. See Goldfarb, 421 U.S. at 789-90. Yet, the Hallie Court distinguished the Virginia State Bar from a municipality, on the ground that the latter is an arm of the State and thus is presumed to act[] in the public interest, while [a] private party, on the other hand, may be presumed to be acting primarily on his or its own behalf. 471 U.S. at 45. Thus, the Court clearly did not view state regulatory bodies such as the Virginia State Bar as equivalent to
Further, the rule at issue in Hass required participation in a malpractice insurance pool; the challenged regulation did not implicate competition among the regulators themselves. Although the Hass court did not focus on this fact as a ground for its decision, the absence of such competition suggests that there was limited danger that private parties were further[ing their] own interests, rather than the governmental interests of the State. Town of Hallie, 471 U.S. at 47. As Complaint Counsel points out in its opposition memorandum, see CC Opp. at 7 n.8, the Earles courts reliance on cases it perceived as relevant precedents, but which do not in fact involve regulatory bodies controlled by private market participants, confirms our view that the courts holding there is not squarely on point with the allegations here. Moreover, unlike the Board here, the Earles Board members are chosen by the governor . . . and they must be confirmed by the state senate, 139 F.3d at 1035, thus providing some of the political accountability lacking in this case. 12
12
11
municipalities with respect to their incentives to pursue public as opposed to private ends and therefore excused from Midcals active supervision requirement as the Board would have us read footnote 10 of the Hallie opinion. The Hallie Court based its public/private distinction on the realities of the specific economic interests involved, as we do here. We accordingly hold that a state regulatory body that is controlled by participants in the very industry it purports to regulate must satisfy both prongs of Midcal to be exempted from antitrust scrutiny under the state action doctrine.13 We further conclude that the Board is such a state regulatory body. Because North Carolina law requires that six of the eight Board members be North Carolina licensed dentists, the Board is controlled by North Carolina licensed dentists. See CCSMF at 1, 1; BSMF, at 6, 1; N.C. Gen. Stat. 90-22(b). Although there may be some factual dispute over the relative importance of teeth whitening revenues to a dental practices total revenues, the undisputed facts show that North Carolina dentists including some of those dentists who complained to the Board about non-dentist teeth whitening perform teeth whitening in their private practices. See CCSMF at 11-12, 37-40; BSMF at 21-23, 37-40. Non-dentists also provide teeth whitening services in North Carolina, and advertise themselves as a lower-priced alternative for dentist teeth whitening. CCSMF at 6, 9, 23, 30; BSMF at 14, 18, 23, 30. Under these circumstances, common sense and economic theory, upon both of which the FTC may rely, FTC v. Indiana Fedn of Dentists, 476 U.S. 447, 456 (1986), dictate the conclusion that Board actions in this area could be self interested. Absent some form of state supervision, we lack assurance that the Boards efforts to exclude non-dentists from providing teeth whitening services in North Carolina represent a sovereign policy choice to supplant competition rather than an effort to benefit the dental profession. Our conclusion that the Board must meet the active supervision requirement is reinforced by the Boards accountability to North Carolinas licensed dentists; the six dentist members of the Board are elected directly by their professional colleagues, the other licensed dentists in North Carolina. N.C. Gen. Stat. 90-22(b); see also CCSMF at 1, 1-3; BSMF at 6, 1-3. The dentist members of the Board can run for reelection, and some of them have served two or more terms. CCSMF at 1, 4; BSMF at 6-7, 4. The Boards judgment under such economic and political pressures can hardly be characterized as sufficiently independent that the Board may bypass active supervision by the state, yet still enjoy the antitrust exemption accorded only to a states sovereign acts. The Board argues that Complaint Counsel has presented no evidence that the individual dentist members of the Board have a financial conflict of interest or that they derived substantial revenues in their private practice from teeth whitening services. See, e.g., Bd. Memo at 38, 40; Bd. Reply at 13-14. We find this argument unpersuasive. First, we hold that the determinative factor in requiring supervision is not the extent to which individual members may benefit from
Because the Board is so clearly controlled by market participants, we need not consider the extent to which the active supervision prong should apply to state regulatory bodies comprising other types of private actors, where the risk of harm to competition and the level of political accountability might be balanced differently. 13
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the challenged restraint, but rather the fact that the Board is controlled by participants in the dental market. North Carolina dentists stand to reap economic gains when the Board takes actions to exclude non-dentists from competing to provide certain services. Second, although our holding is not predicated on the Board members actual financial interests, the undisputed facts show that many of the Board members do perform teeth whitening in their private practice. See Third, Respondents reference to conflicts of interest is misplaced. The complaint allegations here, and the policies underlying the Midcal test for antitrust exemption, do not concern issues of official misconduct or unethical behavior which might be addressed by a state ethics law but rather target the incumbent dentists efforts to exclude their competitors from a particular economic market.14 That alleged conduct lies at the heart of the federal antitrust laws, and is the only conduct with which we deal here. The Board points to the various ways in which the State of North Carolina purportedly is heavily involved in the State Boards proceedings, and argues that the Board thus meets the criteria articulated in Hass and Bankers Insurance that would allow it to bypass the active supervision requirement. Bd. Memo at 32-33. As discussed above, however, rather than formalities such as financial audits of Board funds and taking oaths to uphold the state law, the most salient factor to consider in determining whether active state supervision ought to be required is that the Board is controlled by members who continue to participate in the private market that the Board is charged with regulating. This latter factor, bolstered in this case by the fact that the Board members are selected by other North Carolina dentists, strongly suggests a lack of judgment and control independent of the regulated industry, which are the hallmarks of the Midcal active supervision test. Accordingly, we conclude that for the Board to succeed in its claim of antitrust exemption under the state action doctrine, it must show that it satisfies both prongs of Midcal. 2. The Boards Conduct Was Not Actively Supervised
The Board argues that even if it were subject to Midcals active supervision requirement, the state of North Carolinas oversight of the Board would be sufficient to confer state action protection. See Bd. Memo at 34; Bd. Reply at 16-17. We disagree. As discussed above, the active supervision requirement exists to guarantee that self-interested parties are restricting competition in a manner consonant with state policy. In this manner, the active supervision converts private conduct, which is subject to antitrust review, into a sovereign policy choice, which is not. Toward this end, the active supervision requirement mandates that the State exercise ultimate control over the challenged anticompetitive conduct[;] . . . [t]he mere presence of some state involvement or monitoring does not suffice. Burget, 486 U.S. at 101 (emphasis added); see also 324 Liquor Corp. v. Duffy, 479 U.S. 335, 345 n.7 (1987) (holding that certain forms of state scrutiny of a private restraint did not constitute active supervision because they did
As discussed infra, the Ethics Commission review for financial conflicts of interest does not include an examination of substantive Dental Board policies. 14
14
not exert any significant control over the terms of the restraint); Midcal, 445 U.S. at 105-06 (California system for wine pricing fails the active supervision requirement because [t]he State does not . . . engage in any pointed reexamination of the program); Parker, 317 U.S. at 352 (stressing that the challenged marketing plan could not take effect unless approved by state board). On prior occasions, the Commission has explained that it would consider the following elements in determining whether a state has actively supervised private anticompetitive conduct: (1) the development of an adequate factual record; (2) a written decision on the merits; and (3) a specific assessment both quantitative and qualitative of how the private action comports with the substantive standards established by the legislature. See Opinion of the Commission, Kentucky Household Goods Carriers Assn, 139 F.T.C. 405, 420-21 (2005), affd sub nom. Kentucky Household Goods Carriers Assn v. FTC, 199 Fed. Appx. 410, 2006 WL 2422843 (6th Cir. 2006); see also Analysis of Proposed Order to Aid Public Comment, Indiana Household Movers and Warehousemen, Inc., 135 F.T.C. 535, 555-561 (2003); FEDERAL TRADE COMMISSION , OFFICE OF POLICY PLANNING , REPORT OF THE STATE ACTION TASK FORCE 55 (Sept. 2003). Although no single one of these elements is necessarily a prerequisite for active supervision, the Board has presented no evidence that any of these elements are satisfied here. The lack of any evidence that an arm of the State of North Carolina developed a record, or rendered a decision that assessed the extent to which the Boards policy toward non-dentist teeth whitening comported with North Carolina state policy, strongly suggests a lack of state supervision. Respondent cites a litany of North Carolina statutes and constitutional provisions as evidence that the Boards actions are subject to review by various state entities. See, e.g., BSMF at 51-53, 72. Most of these laws are irrelevant to the active supervision inquiry.15 Other, potentially more relevant provisions of North Carolina law that the Board highlights as evidence of active supervision include requirements that: each Board member submit detailed financial disclosures to the Ethics Commission; the Board submit an annual report to the Secretary of State, the State Attorney General, and the JLAPOC; and the Board submit an annual audited
See, e.g., N.C. Gen. Stat. 6-19.1 (attorneys fees to parties appealing or defending against agency decision); N.C. Gen. Stat. 7A-3 (judicial power, transition provisions); N.C. Gen. Stat. 50-13.12(a)(1) (forfeiture of licensing privileges for failure to pay child support or for failure to comply with subpoena issued pursuant to child support or paternity establishment proceedings); N.C. Gen. Stat. 55B-2(3) (definition of professional corporation); N.C. Gen. Stat. 66-58(a) & (e) (sale of merchandise by government units); N.C. Gen. Stat. 66-68(a) & (e) (certificate to be filed; contents; exemption of certain partnerships and limited liability companies engaged in rendering professional services; withdrawal or transfer of assumed name); N.C. Gen. Stat. 114-8.2 (charges for legal services); N.C. Gen. Stat. 115C-457.1 (creation of civil penalty forfeiture fund; administration); N.C. Gen. Stat. 115D-89 (state board of community colleges to administer Article; issuance of diplomas by schools; investigation and inspection; rules); N.C. Gen. Stat. 147-69.3 (administration of State Treasurers investment programs); N.C. Gen. Stat. 153A-134, 160A-194 (regulating and licensing businesses). 15
15
financial report. See Bd. Opp. at 29; BSMF at 51-53, 72. This sort of generic oversight, however, does not substitute for the required review and approval of the particular anticompetitive acts that the complaint challenges. Patrick, 486 U.S. at 101 (emphasis added). For instance, the Boards annual reports provide only aggregate information on the number and disposition of investigations by type, providing no hint as to the underlying substance of any of these matters, let alone a discussion of the Boards policy toward non-dentist teeth whitening. See CCSMF at 22, 74; CX0085; CX0086; CX0088; CX0089; CX0091. Board members financial disclosures to the Ethics Commission list only their assets and liabilities, state that they are engaged in the practice of dentistry, and identify the professional associations to which they belong and businesses other than their dental practices. See CCSMF at 22-23, 75-76; Newson Decl. at 5, 11; CX0395; CX0396. The declaration of the Executive Director of the North Carolina Ethics Commission states that the Commission . . . has not assessed whether Dental Board members have sought to regulate or restrict the business practices of non-dentist providers of teeth whitening services. Newson Decl. at 6, 14; see also id. at 6, 15 (The Commissions primary focus is on the avoidance of unlawful conflicts of interest by individual members of covered Boards and other entities; not on the specific substantive actions taken by covered boards.). Similarly, the Boards audited financial statements include no information regarding the Boards actions generally, or its policy regarding non-dentist teeth whitening, specifically. See CCSMF at 22, 73. In sum, none of these legislative provisions suggest that a state actor was even aware of the Boards policy toward non-dentist teeth whitening, let alone reviewed or approved it in fulfillment of the active supervision requirement. The Board also points to requirements that it comply with North Carolinas Public Records Act, Administrative Procedure Act, and open meetings law when conducting its business, see Bd. Opp. at 29, and to the JLAPOCs power [t]o review the activities of the State occupational licensing boards to determine if the boards are operating in accordance with statutory requirements. N.C. Gen. Stat. 120-70.101(3a).16 The Board, however, presents no evidence that any state actor became aware of the Boards non-dentist teeth whitening policy pursuant to these, or any other, provisions of North Carolina law. Even had these provisions made a disinterested state actor aware of the Boards non-dentist teeth whitening policy, moreover, the Board provides no evidence that the JLAPOC, or any other state actor, reviewed or approved the Boards challenged conduct. For state action purposes, silence on the part of the state does not equate to supervision. In Ticor, for example, the Supreme Court rejected the argument that private conduct was adequately supervised when the state merely was made aware
It is unclear whether the JLAPOC even has the ability to review the Boards non-dentist teeth whitening policy to the extent that the Boards actions were classified as individual disciplinary actions. See N.C. Gen. Stat. 120-70.101(3a) (JLAPOC review shall note include decisions concerning . . . individual disciplinary actions.). Further, the open records requirement does not guarantee that enforcement actions regarding the unauthorized practice of dentistry will not be addressed in closed session. See Boards Resp. and Objections to Compl. Counsels First Set of RFAs at 17, 44. 16
16
of privately-set rates and took no action, holding that [t]he mere potential for state supervision is not an adequate substitute for a decision by the State. 504 U.S. at 638. Rather, to satisfy the active supervision standard, a state official must have and exercise power to review particular anticompetitive acts. Patrick, 486 U.S. at 101 (emphasis added). Further, the Supreme Court has made clear that ex-post consideration of a restraint via the political process is also insufficient to satisfy Midcals active supervision requirement. See Lafayette, 435 U.S. at 406; Duffy, 479 U.S. at 345. Accordingly, the mere fact that the Boards decisions possibly could have been discovered by the public or subject to review by the JLAPOC is not active supervision for state action purposes. The Board also argues that several other means by which it could exclude non-dentists from performing teeth whitening are subject to state supervision. See Bd. Memo at 35. For example, a criminal suit or civil suit to enjoin illegal teeth whitening must be brought in a North Carolina court; a rule on teeth whitening is subject to the states Administrative Procedure Act and subject to review by legislative committees; and a binding interpretation of the Dental Practice Act regarding teeth whitening must be made pursuant to the states Administrative Procedure Act. Id. Even if ex-post review by a North Carolina court of the Boards decision to classify teeth whitening as the practice of dentistry were to constitute adequate supervision an issue on which the Supreme Court has yet to decide, see Burget, 504 U.S. at 104, and which we do not address the Board did not choose this path. Rather, the Board evaded judicial review of its decision to classify teeth whitening as the practice of dentistry by proceeding directly to issue cease and desist orders purporting to enforce that unsupervised decision.17 Similarly, although ex-post judicial, legislative, or executive review of a formal rule making or binding interpretation of the Dental Practice Act might constitute adequate supervision for state action purposes in some circumstances, the Board chose to forgo these formal means to address nondentist teeth whitening. In the end, the Board has presented no evidence to suggest that its decision to classify teeth whitening as the practice of dentistry and to enforce this decision with cease and desist orders was subject to any state supervision, let alone sufficient supervision to convert the Boards conduct into conduct of the state of North Carolina. *** We conclude that because the Board is controlled by practicing dentists, the Boards challenged conduct must be actively supervised by the state for it to claim state action exemption from the antitrust laws. Because we find no such supervision, we hold that the antitrust laws reach the Boards conduct.
Our holding is not meant to suggest that the Board must always proceed directly to court against individuals whom it suspects may be involved in the unauthorized practice of dentistry. For example, the Board may be authorized to send warning letters as incidental to its authority to bring civil actions. We hold only that for the Board to enjoy state action exemption from the antitrust laws, the state of North Carolina must supervise the Boards actions that restrain competition. 17
17
VI.
CONCLUSION
For the reasons discussed above, we deny the Boards motion to dismiss (which we have treated as a motion for summary decision) based on a claim of state action exemption from the antitrust laws, and we grant Complaint Counsels motion for partial summary decision on the same issue. We issue herewith an order rejecting the Boards invocation of the state action doctrine as a basis for exempting its challenged conduct from the federal antitrust laws.
18
Case 1:11-cv-00058-WLS Document 91
Filed 06/27/11 Page 1 of 40
IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF GEORGIA ALBANY DIVISION FEDERAL TRADE COMMISSION and THE STATE OF GEORGIA, : : : Plaintiffs, : : v. : : PHOEBE PUTNEY HEALTH SYSTEM : INC., PHOEBE PUTNEY MEMORIAL : HOSPITAL, INC., PHOEBE NORTH, INC.,: PALMYRA PARK HOSPITAL INC., and : HOSPITAL AUTHORITY OF ALBANY- : DOUGHERTY COUNTY, : : Defendants. : ____________________________________:
CASE NO.: 1:11-cv-58 (WLS)
ORDER Before the Court are Plaintiffs Federal Trade Commissions (FTC) and State of Georgias Motion for Preliminary Injunction (hereinafter PI Motion) (Doc. 5); Hospital Authority of Albany-Dougherty Countys (the Authority)1 Motion to Dismiss or Alternatively, for Summary Judgment and to Vacate the Temporary Restraining Order (TRO) (Doc. 45); HCA, Inc.s (HCA) and Palmyra Park Hospital, Inc.s (Palmyra)2 Cross-Motion to Dismiss or Alternatively, for Summary Judgment and to Dissolve the TRO (Doc. 46); and Defendants Phoebe Putney Health System Inc.s (PPHS), Phoebe Putney Memorial Hospital, Inc.s (PPMH), and Phoebe North, Inc.s (PNI) (hereinafter collectively referred to as Phoebe
The Authority, a hospital authority organized and existing under the Georgia Hospital Authorities Law, O.C.G.A. 31-7-70, et seq., owns Phoebe Putney Memorial Hospital, the hospital currently leased and operated by Phoebe Putney Health System, Inc. affiliate Phoebe Putney Memorial Hospital, Inc. (Doc. 2 27). 2 HCA is a for-profit health system that owns Palmyra Park Hospital, Inc., which was created in 1973 and does business as Palmyra Medical Center, an acute care hospital incorporated in the State of Georgia. (Doc. 2 25-26).
Putney)3 Motion to Dismiss and Vacate the TRO (Doc. 53) (hereinafter collectively referred to as Motions to Dismiss). For reasons thoroughly set forth below, the Court DENIES Plaintiffs Motion for Preliminary Injunction (Doc. 5), and GRANTS Defendants Motions to Dismiss (Docs. 45, 46, 53)4. PROCEDURAL and RELEVANT FACTUAL BACKGROUND Pursuant to section 13(b) of the Federal Trade Commission Act (hereinafter FTCA), see 15 U.S.C. 53(b),5 and section 16 of the Clayton Act, see id. 26,6 on April 21, 2011, Plaintiffs commenced this suit and filed a Motion for a Temporary Restraining Order (TRO) and
All Phoebe Putney Defendants are not-for-profit corporations under IRS Code 501(c)(3) and the Georgia Nonprofit Corporate Code. PPMH, Inc. is a Georgia corporation wholly-owned by PPHS, also Georgia corporation, and was created to operate Phoebe Putney Memorial Hospital, which was founded in 1911. Like Palmyra, PPMH offers a full range of general acute care hospital services. (Doc. 2 22-23). According to the Complaint, Phoebe North, Inc., is the entity created by PPHS in connection with the subject transaction to manage and operate Palmyra under the control of PPHS. (Doc. 2 21). 4 Except where otherwise indicated, for concision and because Defendants make identical arguments in their supporting briefs, the instant Order often only cites to one of Defendants supporting briefs instead of the briefs of all three Defendants. Similarly, this Order often only cites to one of Plaintiffs briefs instead of both. 5 Section 13(b) of the FTCA reads, in pertinent part: Whenever the Commission has reason to believe (1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and (2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public the Commission . . . may bring suit in a district court of the United States to enjoin any such act or practice. Upon a proper showing that, weighing the equities and considering the Commissions likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond . . . . FTCA 13(b), 15 U.S.C. 53(b). 6 Section 16 of the Clayton Act permits [a]ny person, firm, corporation, or association . . . to sue for and have injunctive relief, in any court of the United States having jurisdiction over the parties, against threatened loss or damage by a violation of the antitrust laws . . . , when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity, under the rules governing such proceedings, and upon . . . a showing that the danger of irreparable loss or damage is immediate, . . . . Clayton Act 16, 15 U.S.C. 26.
3
PI Motion, which is pending before the Court, seeking to temporarily as well as preliminarily enjoin Defendants, including their divisions, parents, subsidiaries, affiliates, partnerships, or joint ventures, from consummating the completion of the alleged acquisition of Palmyra by Phoebe Putney. (See Doc. 2 at 1-2; see also Doc. 5 at 1-2). They base their Complaint on the following chronology of facts, which they, in turn, assert as grounds for the Courts grant of their PI Motion: In July 2010, Joel Wernick, PPHSs President and CEO, authorized Robert Baudino, a consultant and attorney engaged by PPHS, to begin discussions with HCA regarding the possible acquisition of Palmyra by Phoebe Putney. (Doc. 2 32). According to the Complaint, Baudino began negotiations on behalf of PPHS to acquire Palmyra in August 2010. (Id.). HCAs significant cash offer demand, however, made it difficult for PPHS to find an independent investment bank to issue a fairness opinion opining that the price required by HCA for Palmyra was fair. Consequently, Baudino proposed that the transaction be structured so that the
Authority would acquire Palmyra, a solution that would also avoid the risk of antitrust enforcement, as demanded by HCA. (Id. 37). As proposed, the Authority would simply buy Palmyra, with PPHS guaranteeing the purchase price and the Authoritys performance under the purchase agreement. (Id. 38). Once the Authority obtained title, it would lease Palmyra to PPHS for $1.00 per year for forty years on terms similar to the 1990 Lease between PPMH, Inc. and the Authority. (Id.). On October 21, 2010, Wernick and Tommy Chambless, PPHSs general counsel, held a thirty-minute informational session with two of the Authoritys members, Ralph Rosenberg and Charles Lingle. The entire Authority, however, was not presented with the proposed transaction until December 21, 2010, after PPHS made a formal offer to HCA for Palmyra on November 16,
2010; the PPHS Board approved the final terms of the deal between PPHS and HCA on December 2, 2010, including PPHSs guarantee of $195 million payment and agreement to pay a $35 million break-up fee and/or rescission fee; and PPHS and HCA entered into a Termination Agreement that required PPHS to pay $17.5 million if the Authority did not approve, in the exact form as negotiated, the Asset Purchase Agreement. (Id. 47-49). At the December 21, 2010 special Authority meeting on the proposed transaction, Baudino, who appeared as special counsel to the Authority, presented the terms of the transaction using a presentation from PPHSs December 2, 2010 Board meeting. (Doc. 2 37, 49). The members then voted to approve the Asset Purchase Agreement and the Termination Agreement, exactly as negotiated, Ex. PX008-04, as well as a Management Agreement between the Authority and Phoebe Putney. (Id. 50). Effective March 1, 2011, and set to automatically terminate upon the effective date of [the putative] executed lease, the Management Agreement granted the entity formed by PPHS control over Palmyras operations immediately upon the closing of the transaction. Ex. PX009 7.03(c). Several months later, on April 4, 2011, the Authority approved a lease term sheet prepared by Baudino that clarifies the December 21, 2011 Resolutions approved by the Authority as well as the Authoritys plan to lease Palmyras and PPMHs assets to Phoebe Putney under a single lease. (Doc. 2 52). On these facts, Plaintiffs assert in their Complaint and Memorandum in Support of their PI and TRO Motions that Phoebe Putney and the Authority have structured the subject transaction to avoid antitrust enforcement by the FTC through the sale of Palmyra to the Authority, the grant of management and operational control over Palmyras assets to PPHS pursuant to the Management Agreement, and the subsequent lease of Palmyra to a PPHS entity for forty years. (Id. 2-7). Thus, the acquisition of Palmyrathe acquirer of which Plaintiffs
claim is the Authority only on paper but Phoebe Putney in realitywill create a virtual monopoly for inpatient general acute care services in Albany, Dougherty County, Georgia, by eliminating competition between PPMH and Palmyra, the only two major hospitals that service not only the Albany, Dougherty County community, but the communities of the surrounding six counties. (Id. 1). Accordingly, Plaintiffs center their Complaint on the need for the Court to aid in the maintenance of the status quo during the FTCs ongoing administrative proceedings, which includes a September 19, 2011 trial on the merits of the legality of Phoebe Putneys alleged acquisition of Palmyra. (See id. 91-95; see also Doc. 7). They further maintain that
Defendants are not entitled to state action immunity because the Authority was not sufficiently involved in the transaction, and PPHS, as a private party, entirely negotiated, structured, and executed the subject transaction without the independent analysis and oversight of the Authority. (See Doc. 2 85-89). Injunctive relief, according to Plaintiffs, is therefore necessary and appropriate in this case to prevent competitive harm during the pendency of the FTC administrative proceedings. (Doc. 7 at 6-7). In consideration of the foregoing factual allegations and assertions, the Court granted Plaintiffs Motion for TRO (Doc. 4) on April 22, 2011 (Doc. 9).7 Approximately a month thereafter, Defendants filed their Motions to Dismiss,8 wherein they argue that the state action
The Courts grant of temporary injunctive relief has been extended, pursuant to Defendants consent, until the Courts issuance of a decision on the pending PI Motion. 8 Defendants HCA, Palmyra, and the Authority alternatively move for summary judgment in their Motions to Dismiss. (The Phoebe Defendants only move to dismiss and vacate the TRO.) However, the Court construes Defendants HCAs, Palmyras, and the Authoritys Motions as motions to dismiss instead of ones for summary judgment because the Courts findings and conclusions herein with respect to the state action immunity issue are made without reference to matters outside of the pleadings. Harper v. Lawrence County, Ala., 592 F.3d 1227, 1232 (11th Cir. 2010) (A judge need not convert a motion to dismiss into a motion for summary judgment as long as he or she does not consider matters outside the pleadings.). And to the degree the Court has referred to matters beyond the pleadings that are attached to Defendants Motions to Dismissfor example, the Asset Purchase Agreement, Management Agreement, and documents concerning the negotiations for the transactionthe Court is
doctrine indisputably immunizes their conduct from antitrust scrutiny and thereby moots Plaintiffs PI Motion and require its denial. (See generally Docs. 45-46, 53). To Defendants, the Authoritys acquisition of Palmyra as documented in the Asset Purchase Agreement is state action that is immune from the federal antitrust laws. (Doc. 45-1 at 19). After a day-long hearing on June 13, 2011, on Plaintiffs PI Motion and Defendants Motions to Dismiss, said Motions are left pending for the Court to decide. The Parties have fully briefed the issues surrounding Plaintiffs request for preliminary injunctive relief and Defendants request for dismissalnamely, state action antitrust immunity. Before assessing the substance of the Parties arguments in the context of the relevant law, the Court first must resolve a preliminary dispute between the Parties concerning the scope of issues for the Courts review under section 7 of the Clayton Act. It then turns to Defendants Motions to Dismiss (Docs. 45, 46, 53)specifically, the potential application of state action to the Authority, Phoebe Putney, and HCA/Palmyraand if the Court finds that state action is inapplicable, to Plaintiffs PI Motion (Doc. 5).
permitted to do so because these matters are (1) central to the complaint and (2) undisputed. See Horne v. Potter, 392 F. Appx 800, 802 (11th Cir. 2010) (citing Fed. R. Evid. 201)). For this reason, Defendants Motion to Strike (Doc. 73) Plaintiff FTCs Statement of Undisputed Material Facts (Doc. 64) is DENIED, for the decision herein does not reference or rely on the FTCs or Defendants Rule 56 Statements. For this reason, the Court also OVERRULES the Authoritys objection to the exhibits that Plaintiffs moved to admit into evidence at the close of the June 13, 2011 hearing on Defendants Motions to Dismiss and Plaintiffs PI Motion. The Authority contends that these exhibits are irrelevant to Defendants Motions to Dismiss because they do not deal with the state action defense; rather, the Authority assets, they deal with Plaintiffs application for a preliminary injunction. The Court finds, however, that these documents are relevant to the state action defense in that they provide context for the Courts assessment of the transaction, specifically whether Defendants actions qualify for state action. Furthermore, all of the documents on Plaintiffs Exhibit List on which the Courts analysis relies are referenced in the Complaint, which is the only focus of a Courts ruling on a motion to dismiss. Finally, many of the most relevant documents to which the Authority objectsand all of the documents relied on by the Courtwere previously filed by Plaintiffs as well as Defendantsfor example, the 1990 Leaseor were provided to Defendants.
DISCUSSION I. Defendants Motions to Dismiss a. Standard of Review In light of Defendants asserted antitrust immunity, Defendants Motions to Dismiss are brought pursuant to Fed. R. Civ. P. 12(b)(6)9 for what Defendants contend is Plaintiffs failure to state claims against Defendants for violations of the Clayton Act and FTCA. (See Docs. 45, 46, 53). As a defense to a claim for relief in any pleading, Rule 12(b)(6) may be raised as a motion to dismiss. See Fed. R. Civ. P. 12(b)(6). Such a motion should not be granted unless the plaintiff fails to plead enough facts to state a claim to relief that is plausible, and not merely just conceivable, on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). The recent Supreme Court decision of Ashcroft v. Iqbal reaffirmed the pleading standards enunciated in Twombly. 129 S. Ct. 1937, 1949-54 (2009). There, the Supreme Court instructed that while on a motion to dismiss a court must accept as true all of the allegations contained in a complaint, this principle is inapplicable to legal conclusions, which must be supported by factual allegations. Id. at 1949-50 (citing Twombly, 550 U.S. at 555, for the proposition that courts are not bound to accept as true a legal conclusion couched as a factual allegation in a complaint). In other words, [a] motion to dismiss is granted only when the movant demonstrates beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Spain v. Brown & Williamson Tobacco Corp., 363 F.3d 1183, 1187 (11th
Defendants also move to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction, seemingly asserting that because the state action doctrine immunizes Defendants from antitrust laws, the Court lacks federal subject matter jurisdiction to hear Plaintiffs Complaint. Defendants Motions to Dismiss, however, are more appropriately grounded in 12(b)(6), instead of in Rule 12(b)(1), as they require the Court to review the sufficiency of the pleadings. As such, the Courts review of Plaintiffs Complaint is governed by Rule 12(b)(6) standards.
Cir. 2004) (citation omitted). In evaluating the sufficiency of a plaintiffs pleadings, while the court must accept[ ] the allegations in the complaint as true[,] constru[e] them in the light most favorable to the plaintiff, Hill v. White, 321 F.3d 1334, 1335 (11th Cir. 2003), and make reasonable inferences in [p]laintiffs favor, . . . [the court is] not required to draw plaintiffs inference, Sinaltrainal v. Coca-Cola Co., 578 F.3d 1252, 1260 (11th Cir. 2009) (quoting Aldana v. Del Monte Fresh Produce, N.A., Inc., 416 F.3d 1242, 1248 (11th Cir. 2005)). Thus, although the threshold of sufficiency that a complaint must meet to survive a motion to dismiss for failure to state a claim is . . . exceedingly low[, it is not nonexistent]. Ancata v. Prison Health Servs. Inc., 769 F.2d 700, 703 (11th Cir. 1985) (citation and quotation marks omitted). In view of these legal standards applicable to the pleading stage, the Court now turns to its discussion of a preliminary issue concerning the scope of its review, and then addresses Defendants state action argument in opposition to Plaintiffs Complaint and PI Motion. b. The Meaning and Scope of the Alleged Transaction The Parties differ as to the events constituting the transaction that Plaintiffs contend violate antitrust laws under section 7 of the Clayton Act. As a result, the parameters of the conduct to which the state action immunity exception may apply are blurred. Plaintiffs allege that the acquisition includes three stages: (1) the Authoritys purchase of Palmyras assets from HCA using PPHSs money, (2) the Authoritys immediate provision of control of Palmyra to Phoebe Putney, specifically PNI, under a Management Agreement, and (3) Phoebe Putneys entry into a lease with the Authority to grant Phoebe Putney managerial control of Palmyra assets for forty years. (Doc. 2 at 2). In contrast, Defendants contend that the first stage of the alleged transaction is the only event relevant to the Courts analysis of the state action immunity issue. Thus, they contest the
inclusion of the third stage as part of an acquisition subject to antitrust review. This third stage, particularly with respect to the alleged lack of adequate supervision by the Authority of Phoebe Putneys control of Palmyra operations, is speculative, Defendants maintain, because the lease and its terms do not yet exist and have not even been negotiated. (See Docs. 45-47, 53 (arguing that Article III of the U.S. Constitution prohibits Court from enjoining Authoritys acquisition of Palmyra based on non-existent lease)). Moreover, Defendants argue that neither the putative lease nor the Management Agreement is alleged to have competitive impact beyond the acquisition of Palmyra itself by the Authority. (Doc. 75 at 6). Accordingly, they also seemingly contest the inclusion of the second stage regarding the Management Agreement as part of the acquisition subject to antitrust review because it is unexecuted. (See, e.g., Doc. 472 at 14). Section 7 of the Clayton Act provides, in pertinent part, no person subject to the jurisdiction of the [FTC] shall acquire the whole or any part of the assets of another person . . . , where . . . the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.10 15 U.S.C. 18. [W]hen it prohibited the acquisition of the whole or any part of the assets of another corporation, Congress was painting with a broad brush . . . . United States v. Archer-Daniels-Midland Co., 584 F. Supp. 1134, 1137 (S.D. Iowa 1984) (emphases added) (quoting United States v. Columbia Pictures Corp., 189 F. Supp. 153, 181-82 (S.D.N.Y. 1960)). As such, section 7 has been construed as forward looking: unlawful conduct triggers the provisions protections as soon as the potential anticompetitive results can be detected. Cine 42nd Street Theater Corp. v. Nederlander Org., Inc., 790 F.2d 1032, 1040 (2d
10
Section 7 also applies to stock or share capital acquisitions. See 15 U.S.C. 18. Many nonprofit entities like Phoebe Putney and Palmyra, however, have no stock or share capital to acquire. This part of section 7 is therefore inapplicable to many acquisitions of nonprofit enterprises such as the one at issue here. FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 n.14 (11th Cir. 1991) (finding inapplicable stock-acquisition clause of section 7 to acquisition of nonprofit hospital).
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Cir. 1986) ([The Clayton Acts] focus is . . . on the future, . . . whether todays acquisition will bring tomorrows loss of competition.). Language on the breadth of section 7 from a popularly quoted case from a court in the Southern District of Illinois is particularly instructive: [section 7] is primarily concerned with the end result of a transfer of a sufficient part of the bundle of legal rights and privileges from the transferring person to the acquiring person to give the transfer economic significance and the proscribed adverse effect. The broad sweep to be given to the term acquire is also suggested by the circumstance that the following words are unrestricted, i.e., the whole or any part of the assets. . . . Those words likewise must be given a liberal interpretation. . . The language [of section 7] was deliberately couched in general and flexible terms. . . . Archer-Daniels-Midland Co., 584 F. Supp. at 1137 (emphases added) (quoting Columbia Pictures Corp., 189 F. Supp. at 181-82). Thus, as one court in the Northern District of Georgia held, [t]he words acquire and assets are not terms of art or technical legal language[, but] . . . are generic, imprecise terms encompassing a broad spectrum of transactions whereby the acquiring person may accomplish the acquisition by means of purchase, assignment, lease, license, or otherwise. See S. Concrete Co. v. U.S. Steel Corp., 394 F. Supp. 362, 374 (N.D. Ga. 1975) (emphases added) (quoting Columbia Pictures Corp., 189 F. Supp. at 181-82). Therefore, [t]he test [for whether an acquisition falls under section 7] is pragmatic, . . . . Archer-DanielsMidland, 584 F. Supp. at 1137 (quoting Columbia Pictures Corp., 189 F. Supp. at 181-82). Courts have consequently found the consummation of an acquisition unnecessary for a Clayton Act violation; a planned acquisition created by the parties entry into an agreement is sufficient. Nelson v. Pacific Southwest Airlines, 399 F. Supp. 1025, 1027 (S.D. Cal. 1975). Accordingly, courts have applied the term acquisition to a wide variety of transactions,
10
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including putative and ongoing leases.
See, e.g., Cine 42nd Street, 790 F.2d at 1047-48
(indicating that lease of property by private parties, as approved by city and urban development corporation, constituted acquisition under Clayton Act); Archer-Daniels-Midland Co., 584 F. Supp. at 1137-38 (construing operating lease as acquisition within reach of section 7, as lessee of operating lease acquires property rights of possession and use in leased assets); Nelson, 399 F. Supp. at 1028-1030 (holding that despite abandonment of agreement for acquisition between parties, acquirers ability to have gained substantial control over decision-making process of airline during pendency of acquisition agreement created genuine issue of threat of acquirers purchase of corporations controlling of stock in airline to airline transportation competition). Such broad applications of section 7 are sensible in light of the Clayton Acts purpose to prevent acquisitions that may or tend to cause specified harm. Gottesman v. General Motors Corp., 414 F.2d 956, 961 (2d Cir. 1969) (explaining that acquisitions that directly bring about harm or that even make possible acts that do, can violate Clayton Act). Based on the above rationale, this Court finds that the inchoate or unexecuted nature of the subject transaction should not limit this Courts review. The putative lease alleged in Plaintiffs Complaint should constitute a part of the subject acquisition and therefore part of the transaction that this Court must review and assess. According to the well-pleaded allegations of the Complaint, the moment the acquisition by the Authority is consummated, all Dougherty County hospital competition will cease and Phoebe Putney will be able to control Palmyra assets pursuant to the Management Agreement. Following the consummation of the sale to the Authority and execution of the Management Agreement between the Authority and PPHS, any additional steps that any Defendant takes such as the execution of the lease agreementno matter the number of months
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and steps required before such a lease may be created and executedare in furtherance of the alleged merger to monopoly and thus, the transaction. In fact, if it were not for the Courts grant of Plaintiffs Motion for TRO to block the acquisition, Defendants would have proceeded with their plans to consummate the acquisition; execute the Management Agreement for Phoebe Putneys maintenance and operation of Palmyras assets; and begin steps to negotiate, draft, and execute the purported lease of Palmyra to Phoebe Putney. In effect, therefore, along with the acquisition of Palmyra by the Authority, the lease, which will follow the execution of the Management Agreement under which Phoebe Putney will immediately control Palmyra assets, makes possible the alleged harm of the acquisition on hospital competition in the relevant market of Albany, Dougherty County, Georgia. The
inclusion of the lease stage in the Courts review of the acquisition is consistent with the courts finding in Nelson that a terminated acquisition agreement, which was never executed, fell within the purview of section 7. It also comports with Cine 42nd Streets decision to implicitly construe a lease granted to private parties as an acquisition under the Clayton Act. It is the mere alleged plausibility that Phoebe Putney could achieve control of the decision making processes of Palmyra, its only competitoreven through an unexecuted Management Agreement and unnegotiated lease arrangement with the Authoritythat triggers the Clayton Act. Several documents referenced in the Complaint, including a Memorandum on the Required Terms for a Revised Lease between the Authority and PPMH, Inc., as well as the Resolutions adopted by the Authority at the December 21, 2010 special meeting, indicate that Phoebe Putney and the Authority intended to draft a lease for PPHSs control of Palmyra. See, e.g., Ex. PX0082. One of the Resolutions adopted by the Authority states that Phoebe Putney and the Authority would enter into a lease for the operation of Palmyra by Phoebe Putney on
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terms substantially similar to those of the 1990 Lease between PPMH, Inc. and the Authority for PPMHs operation.11 See Ex. PX0082. Additionally, the applicable provisions of the Hospital Authorities law, see infra note 16 & Part I.c.ii.1.a, and controlling legal authority within this Circuit indicate that an arrangement for an acquisition and/or lease between a hospital authority and private hospital similar to the arrangement between the Authority and Phoebe Putney is often necessary, given an authoritys inability to operate for profit and thus, its lack of offices, staff, and funds; and an authoritys statutory power to delegate to other entities, even those private in nature, its responsibility to provide healthcare to the community. For all of the above reasons, the Court similarly finds no reason to exclude the Management Agreement from the purview of the alleged transaction, as the Authoritys approval of the Management Agreement represents the transfer of a sufficient part of the bundle of legal rights and privileges [in Palmyra] from [the Authority, the owner, as lessor,] to [Phoebe Putney, as lessee,] to give the transfer economic significance and the prescribed adverse effect under the Clayton Act. See Archer-Daniels-Midland Co., 584 F. Supp. at 1137 (quoting
Columbia Pictures Corp., 189 F. Supp. at 181-82). These facts, coupled with the approximately $200 million Phoebe Putney has guaranteed for the transaction, remove the lease of Palmyra to PPHS by the Authority from the speculative realm into the realistic. Accepting the truth of these allegations, as the Court is required to do at this pleading stage, the Court rejects Defendants narrow view of the breadth of section 7 that excludes the purported second and third stages of the transaction.
11
On November 10, 2010, Baudino, acting as special counsel to PPHS, also detailed this proposition in a six-page letter to HCA, which explained that the Authority would lease Palmyra to a non-profit entity controlled by PPHS . . . [on] substantially the same terms as the Authoritys existing lease of [PPMH]. Ex. PX207-02.
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c. State Action Immunity Having determined the scope of the transaction that is subject to the Courts review, the Court is left to resolve the issue of Defendants asserted entitlement to state action immunity. In their Motions to Dismiss, all six Defendants argue that the Authoritys acquisition of Palmyra, as well as any subsequent lease of Palmyra to Phoebe by the Authority, triggers state action; thereby immunizes the subject transaction from antitrust laws; and requires the dismissal of Plaintiffs Complaint, the denial of Plaintiffs PI Motion, and an order vacating the TRO. (Doc. 45-1 at 4, 7, 13, 17). Defendants base this proposition on the proposed transactions satisfaction of all three elements of the state action immunity doctrine. (See id. (analogizing and relying on FTC v. Hosp. Bd. of Directors of Lee County, 38 F.3d 1184 (11th Cir. 1994); Crosby v. Hosp. Auth. of Valdosta & Lowndes County, 93 F.3d 1515 (11th Cir. 1996))). As to the Authoritys immunity, they contend that (1) the Authority is a political subdivision of the state; (2) Georgia state statutes authorize the Authority to acquire other hospitals as part of its authority to operate, control, and maintain a public hospital and other hospital facilities; and (3) the anticompetitive effect of the Authoritys acquisition is reasonably foreseeable by the Georgia state legislature, given the express acquisition powers broadly conferred by the Georgia legislature to hospital authorities. (Id. at 4-5, 17-18, 21-23).
According to Defendants, because a hospital authority can operate only within its sponsoring city or county, the Georgia legislature certainly knew that any acquisition was likely to be of a competing local hospital and that intra-county acquisitions would often result in the combination of two or more hospitals in a single county. (Id. at 21 (citing O.C.G.A. 31-1-71(1)). Because such a conclusion flowed from similar express acquisition, operational, and management powers conferred on Florida hospital authorities by the Florida legislature in Lee County, the same
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conclusion logically flows from the powers legislatively granted to Georgia hospital authorities to acquire and operate hospitals. (Id.). Defendants further argue that the actions of HCA, Palmyra, and Phoebe Putney are also immune from antitrust laws. As private parties that contract with a political subdivision of the state such as the Authority, they contend that HCA and Palmyra are immune under state action immunity doctrine by extension, and Phoebe Putney, as a non-profit affiliated with the Authority, does not require active supervision by the state. (See, e.g., Doc. 53-1 at 14). Defendants state, as a result, that an antitrust plaintiff challenging the act of a public hospital authority cannot avoid the state action doctrine by re-characterizing the transaction as one between private parties (in this case, as a sale from Palmyra to Phoebe Putney) (Doc. 75 at 3) and thus, cannot argue that the transaction is a mere pretext to advance private, anticompetitive interests rather than the public good (Doc. 45-1 at 25 to 26 (citing City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 369-70 (1991))). Once the state action doctrine is established, Defendants argue, the individual motives underlying the transactionspecifically, Phoebe Putneys financial interests in acquiring Palmyrabecome irrelevant. (Doc. 45-1 at 25 to 27; see also Doc. 72 at 3 ([There is simply no point at which] the influence of a private actor becomes so great that that . . . the state doctrine [does not] appl[y].)). Rather, the fact that the Authority is the only entity acquiring Palmyra, as determined from a plain reading of the Asset Purchase Agreement, confirms that the transaction is immune from antitrust laws under the state action doctrine. (Doc. 75 at 4). Phoebe Putney goes further to state that because no Phoebe entity is the buyer of the assets underlying Plaintiffs allegations, only the Authority will own Palmyra and will have
15
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ultimate responsibility for its operation.12 (Doc. 53-1 at 17). Thus, it maintains that there is no cause of action involving a private actor in this case. (Id.). According to Phoebe Putney, PPHS has neither the ability nor the incentive to engage in actions for its private benefit given that it must function as a non-profit and in a way that furthers state policy and that all Palmyra assets, like the current ownership of all PPMH assets, will be owned by the Authority. (Id. at 19). Thus, active supervision of Phoebe Putney by the Authority is unnecessary to conclude that state action applies in this case, argues Phoebe Putney. (Id. at 18-19 (PPMHs interests are
completely aligned with, and controlled by, the interests of the Authority and the State.)). And even if active supervision does apply, Phoebe Putney argues that the existing longstanding lease terms between PPMH and the Authority, plus the Authoritys recent resolution to lease Palmyra only if it contains certain terms that clearly constitute active supervision under the relevant law, is sufficient. (Id. at 20). Lastly, Phoebe Putney as well as HCA, Palmyra, and the Authority argue that under the Noerr-Pennington doctrine, the only conduct alleged against Phoebe Putney is legally and constitutionally protected petitioning of a government entity under the First Amendment of the U.S. Constitution. (Doc. 53 at 2; Doc. 53-1 at 12 to 13; see also Doc. 45-1 at 6, 26 to 27, 35). In response, Plaintiffs argue that the state action defense to antitrust enforcement cannot be invoked by Defendants for several reasons. First, according to Plaintiffs, Defendants have failed to discuss or even mention the standards of review applicable to a motion to dismiss, as
Phoebe Putney as well as the Authority and HCA/Palmyra, who join Phoebe Putney in this argument, assert a number of other grounds for this proposition, including the Courts lack of jurisdiction over non-profit entities. (See Docs. 45, 46). However, the Court does not address those arguments given its discussion of the application of the relevant state action tests to each Defendant. See infra Part I.c.ii. The Court also must note that non-profit entities are subject to section 7 and thus, FTC jurisdiction. See Univ. Health, Inc., 938 F.2d at 1215, 1216 (explaining congressional intent for FTCs expansive and vigorous enforcement of section 7 of Clayton Act, regardless of distinction between type of corporation); see also supra note 10.
12
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they fail to construe all facts in a light most favorable to Plaintiffs.13 (Doc. 61 at 9-10, 17). Second, Plaintiffs state that the transaction is an undisguised attempt to apply a cloak of state involvement to a de facto merger to monopoly, thereby eliminating Defendants ability to immunize their action from antitrust scrutiny. (Id. at 17, 20; see also Doc. 62 at 19). As to the Authority, Plaintiffs contend that although the Authority is a political subdivision of state, Georgia Hospital Authorities Law does not authorize the usurpation of the decision and supervision powers of an authority by private actors for the private actors benefit and without meaningful oversight by an authority. (Doc. 62 at 8-9, 12, 18-19; see also Doc. 7 at 21, 22-23). Thus, Plaintiffs maintain that the Authority cannot be considered to have acted pursuant to state policy authorized by the state legislature, and the displacement of private competition by Palmyras sale to the Authority and subsequent lease by Phoebe Putney cannot be considered to be reasonably foreseeable by the Georgia legislature. (See Doc. 7 at 21-23
(distinguishing Lee County, 38 F.3d 1184, and Askew v. DCH Regl Health Care Auth., 995 F.2d 1033, 1040-41 (11th Cir. 1993), because law at issue in Lee County was special act[ ] of Florida Legislature that applied to that specific countys health system, and health care authorities act in Askew expressly exempted authorities whose exercise of their authorized powers resulted in anticompetitive activities)). As to Phoebe Putney, Plaintiffs contest the ability of the Phoebe entities, as private parties, to show that (1) the challenged transaction was clearly articulated and affirmatively expressed as state policy, and (2) that such policy was actively supervised by the state, so as to receive state action immunity. (Doc. 7 at 21-24; see also Doc. 61 at 20). They base this
Plaintiffs also state that Defendants do not apply the correct standard of review for summary judgment because Plaintiffs fail to raise undisputed material facts. However, as previously noted, the Court does not resolve Defendants Motions to Dismiss as ones for summary judgment but as ones to dismiss. See supra note 8. Thus, the Court does not need to apply the standards applicable at the summary judgment stage and thus, declines to consider Plaintiffs allegations and Defendants arguments within the context of summary judgment.
13
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contention on the role of Phoebe Putney, and not the Authority, as the effective decision maker in planning, funding, and executing the transaction. (Doc. 7 at 7). In support thereof, Plaintiffs highlight the Authoritys lack of meaningful review of the acquisition, failure to acknowledge the transaction until shortly before the day of its approval, and failure to ask questions during the presentation of the transaction. (Id. at 8-12). Plaintiffs further note that the Resolutions for the transaction for the Authoritys approval were prepared by Phoebe Putney for the Authority members signatures. Such conduct by Phoebe Putney, according to Plaintiffs, was beyond the type of state action that may qualify for antitrust immunity. (Doc. 62 at 9). As to HCA and Palmyra, they contend that a mere contract with the state does not immunize private conduct.14 (Doc. 61 at 23). The foregoing dispute between the Parties as to the application of state action immunity raises the following central question for the Court to resolve: whether the Authoritys approval of the acquisition as negotiated and structured by Phoebe Putney is sufficient to shield the transaction from antitrust scrutiny under the state action immunity doctrine. Pursuant to the Courts conclusion as to the scope of the subject acquisition, see supra Part I.b., and Phoebe Putneys role in bringing about and executing the transaction, this question must be answered as to the Authoritys conduct as well as to Phoebe Putneys and HCA-Palmyras conduct. Such an analysis begins with an exploration of the controlling and authoritative case law on state action immunity.
14
For purposes of deciding the application of state action immunity to Defendants, the Court combines its assessment of the immunity of Phoebe Putney with that of HCA/Palmyra for reasons explained below. See infra note 21 and accompanying text.
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i. U.S. Supreme Court and Eleventh Circuit Case Law on State Action Immunity The origins of the state action doctrine derive from the reasoning of the U.S. Supreme Courts decision in Parker v. Brown. See 317 U.S. 341 (1943). In Parker, relying on principles of federalism and state sovereignty,15 the Supreme Court refused to construe the Sherman Act as applicable to the anticompetitive conduct of a state acting through its legislaturespecifically a marketing program adopted for the 1940 raisin crop by the California Director of Agriculture. Id. at 350-51. The marketing program was adopted pursuant to the California Agricultural Prorate Act, which authorized state officials to establish marketing programs of agricultural commodities in the state to restrict competition among growers and to maintain prices in the distribution of their commodities to packers. Id. at 346. Although the establishment of the challenged marketing program, approved by the Prorate Advisory Commission, was initially petitioned by private producers and was approved by referendum of producers, the Court found that the state . . . ha[d] created the machinery for establishing the prorate program. Id. at 346-47, 352. The prerequisite approval of the program upon referendum by a prescribed number of producers [wa]s not the imposition by them of their will upon the minority by force of agreement or combination . . . .; rather, the required vote on the referendum was one condition of the application of the regulations enacted and prescribed by the state under the enabling language of the Agricultural Prorate Act. Id. at 352 (citation omitted). According to Parker, therefore, the Sherman Actand by extension, the Clayton Actis not meant to restrain acts of the state that are directed by the legislature. Id. at 350-51;
Cine 42nd Street explained the conflict between these principles and a competitive free market that are raised by a states attempt to anticompetitively regulate its own domestic economy under the shield of state action immunity. Principles of federalism and state sovereignty, embedded in the United States federalist system, hold that states are sovereign powers and are entitled to act independently, even where such leads to anticompetitive economic activity. The tenet surrounding the free market, however, is that the U.S. economy is grounded on the free enterprise system and that anticompetitive economic activity is prohibited by antitrust law. Cine 42nd Street, 790 F.2d 1032, 1035 (2d Cir. 1986).
15
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see also Lee County, 38 F.3d at 1186 (holding that state action doctrine is available under Clayton Act). Several years later, in Cal. Retail Liquor Dealers Assoc. v. Midcal Aluminum, Inc., the U.S. Supreme Court extended the parameters of Parker to apply to alleged restraints of trade brought about by private actors. 445 U.S. 97 (1980). There, the Court held that to qualify private action for state action immunity, the challenged action first must be one clearly articulated and affirmatively expressed as state policy; [and] second, . . . must be actively supervised by the State itself. Id. at 105 (quoting City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 410 (1978)). Applying these elements to the wine pricing scheme established by private wine producers under the California Business and Professionals Code, the Court found that although the relevant provisions of the state Code represented a policy to permit the price resale maintenance by California wine sellers, the price setting program did not meet second requirement of Parker immunity because the state merely authorized price setting, enforced prices established by private parties, and never reviewed the reasonableness of price schedules or regulated the terms of the fair trade contracts. Simply put, the wine producers held the power to prevent price competition by dictating the prices charged by wholesalers, while the state played a passing, indirect role in pricing and management that was insufficient to establish antitrust immunity. Id. at 103-04 (explaining that without extensive official oversight by state, Parker, 317 U.S. at 351, may have found violation of Sherman Act). Since Parker and Midcal, the Supreme Court and Eleventh Circuit have determined that state action immunity is applicable to political subdivisions such as municipalities, City of Columbia, 499 U.S. 365, and hospital authorities, Lee County, 38 F.3d at 1188 (applying Parker
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immunity to Florida hospital authority); Askew, 995 F.2d at 1039 (same as to Alabama hospital authority). Yet, the determination that a political subdivisions anticompetitive activities
constitute state action is not a purely formalistic inquiry that a party can establish by simply declaring the political subdivisions actions to be lawful. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 39 (1985). Nonetheless, anticompetitive effects can result from broad authority to regulate. Id. In fact, the [political subdivision] need not be able to point to a specific, detailed legislative authorization in order to assert a successful Parker defense to an antitrust suit, as a requirement for such explicit authorization would unnecessarily impose on municipalities local authority and autonomy. Id. at 39, 42, 44 (finding that state statute broadly empowering cities to provide sewage services and to refuse to provide sewage services to unannexed areas clearly contemplated that city could engage in anticompetitive conduct that would result in monopoly over provision of sewage services). Rather, to obtain protection under state action immunity doctrine, a political subdivision of the state must demonstrate that their anticompetitive activities were authorized by the state pursuant to state policy to displace competition with regulation or monopoly public service. Bolt v. Halifax Hosp. Med. Ctr., 980 F.2d 1381, 1385 (quoting Town of Hallie, 471 U.S. at 3839)). This requires proof of the challenged action (1) by a political subdivision of the state, (2) undertaken pursuant to state statutes authorizing the challenged action, (3) the anticompetitive effects of which are reasonably foreseeable to the legislature based on the statutory power granted to the political subdivision. Id. at 1386.
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1. Immunity of Hospital Authorities Here, Plaintiffs do not contest the Authoritys satisfaction of the first and second elements of state action immunity, nor does the Court reject Defendants contention that these items have been met. It is well established that the Authority is a political subdivision of the state under Eleventh Circuit law. See Crosby, 93 F.3d at 1525 (treating Hospital Authority of Valdosta and Lowndes County, Georgia, as Georgia political subdivision). The Georgia Code also authorizes Defendants to perform the challenged conduct of acquiring and leasing hospital property for purposes of meeting the healthcare needs of the community.16 For this reason, the Courts analysis as to the Authoritys immunity hinges on the third element: whether the suppression of competition in the manner alleged in the Complaint is a reasonably foreseeable result of the conduct authorized and the powers granted to the Authority under Georgia Hospital Authorities law. To answer this question in the affirmative, the Court must be satisfied that the Georgia legislature reasonably foresaw a private entity taking managerial and operational control of its only former competitor through a management agreement and lease granted to it by a hospital authority following the authoritys acquisition of that competitor. In Lee County, the primary authority on which Defendants rely in their Motions to Dismiss, the Eleventh Circuit easily found this element met, even without an explicit[ ]
16
O.C.G.A. 31-7-75(4) and (6), respectively, authorize a hospital authority to acquire by lease, purchase, or otherwise, and to sell to others or lease to others for any number of years not to exceed forty, any land, buildings, structures, or facilities constituting any part of an existing or future project, O.C.G.A. 31-7-75(4), (6), (7), which includes the acquisition, construction, and equipping of hospitals, health care facilities, . . . and other public health facilities . . . under the supervision and control of any hospital authority or leased by the hospital authority for operation by others to promote the public health needs of the community . . . , O.C.G.A. 31-7-71(4) (emphases added). Section 31-7-75(7) also authorizes a hospital authority to lease for any number of years not to exceed forty for the operation of any project by another, provided that authority determines that lease will promote public health needs of community by making additional facilities available or reducing healthcare costs, and that authority retains sufficient control over any project so leased so as to ensure that lessee will not in any event receive more than reasonable rate of return on its investment in the project. Id. 31-7-75(7).
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[statement by the legislature] that it expect[ed] anticompetitive conduct to result from [the subject] legislation. 38 F.3d at 1188 (citing and quoting Town of Hallie, 471 U.S. at 41-43; Askew, 995 F.2d at 1040-41); see also Askew, 995 F.2d at 1040, 1041 (explaining that although enabling legislation, unlike that in Lee County, explicitly recognized potential anticompetitive results of state codes provision of broad acquisition and operational powers to healthcare authority, court was not required to find such explicit language to render such results foreseeable). The court held that the Florida legislature foresaw possible anticompetitive effects of the Hospital Board of Directors of Lee Countys (The Board) proposed in-county purchase of a private non-profit hospital, Cape Coral Medical Center, Inc., when the state legislatively authorized the Board to make acquisitions of medical facilities and to own general acute care hospitals in Lee County. Lee County, 38 F.3d at 1186. According to the Court, only one hospital, Lee Memorial Hospital, existed in Lee County when the Board was created in 1963; once authorized by the 1963 legislation, the Boards purchase of the hospital thereby created a monopoly. Id. Thus, when the Boards power was legislatively extended in 1987 to permit it to establish and provide for the operation and maintenance of additional hospitals . . . and other facilities devoted to the provision of healthcare services in Lee County only, the court held that the legislature must have reasonably anticipated that further acquisitions would increase the Boards market share in an anticompetitive manner. Id. at 1186, 1192 (emphases added) (quoting Florida Special Laws (citation omitted)). Similarly, in Askew, the Eleventh Circuit granted state action to DCH, a public healthcare facility created by Alabama legislature, when it sought to expand through the acquisition of a private healthcare facility. The court found that the states legislative
authorization to hospital authorities to acquire, . . . enlarge, expand, alter, . . . and operate
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health care facilities and create, establish, acquire, operate or support subsidiaries and affiliates, . . . for profit or non-profit made the displacement of competition foreseeable at the time the legislature gave DCH the power to acquire other hospitals. Askew, 995 F.2d at 1035 n.2 (quoting Ala. Code 22-21-318; 22-21-358). According to Lee County and Askew, therefore, anticompetitive conduct need only be reasonably anticipated rather than inevitable, ordinary, or routine. See Lee County, 38 F.3d at 1191. Anticompetitive conduct by a political subdivision under Eleventh Circuit law is even reasonably foreseeable when it is heavily influenced by the interests of, or involves, a private party. In City of Columbia, for example, the Court found that because the South Carolina statutes under which the city acted authorized municipalities to regulate the use of land and the construction of buildings and other structures within their boundaries, the suppression of billboard advertising competition from newcomers and the protection of existing billboards, including those owned by the company which had enjoyed a majority of the market share, were reasonably anticipated to result from the city ordinances at issue that regulated the size, location, and spacing of billboards. 499 U.S. at 373. The Court reached this finding notwithstanding the citys and private billboard companys alleged involvement in a secret anticompetitive agreement to protect the companys monopoly position in billboard advertising, the close relationship between city officials and the company, and the alleged efforts of the company to lobby the city to enact the challenged ordinances. Id.; cf. Cine 42nd Street, 790 F.2d at 1046-48 (permitting private parties, as well as urban development corporation (UDC), to enjoy states immunity from antitrust liability for anticompetitive consequences resulting from acquisition and lease of five movie houses to private party theatre operators, to which UDC had designated operational powers).
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The absence of public health, safety, morals, or the general welfare of the community from the city ordinances, as well as the companys alleged motivation of the enactment of the ordinances, was immaterial, for public officials, the Court reasoned, often agree to do what groups of private citizens urge upon them. City of Columbia, 499 U.S. at 374, 368, 375, 378; cf. Cine 42nd Street, 790 F.2d at 1035 (acknowledging necessity of government involvement in effectuating policies and goals to cure ailing economy and reverse urban blight when private parties in the free market enterprise cannot alone do so). It was enough that the suppression of competition was, at the very least, a foreseeable result of the states enabling legislation. City of Columbia, 499 U.S. at 368; see also Town of Hallie, 471 U.S. at 39 (explaining that although compulsion is often best evidence of state policy, clear articulation requirement of state action test does not require that defendant show state compelled it to act, but at minimum, to only show reasonable anticipation). So long as this requirement is met, the [state] action is exempt from private antitrust liability regardless of the States motives in taking the action, City of Columbia, 499 U.S. at 377-78 (citation omitted), and even where an authority conspires to bring about anticompetitive conduct based on a pretext for the public good, Bolt, 980 F.2d at 1387. For this reason, the Supreme Court and Eleventh Circuit have rejected inquiries into the motives and reasons for a governments anticompetitive actions. Not only are very few
government actions . . . immune from charges that they are not in the public interest, but judicial [probing] and assessment of the public interest after the fact . . . compromise[s] the ability of the states to regulate their own commerce, thereby rendering state action immunity meaningless. Id. at 1388-89 (quoting City of Columbia, 499 U.S. at 377) (prohibiting inquiry into whether authoritys allegedly anticompetitive denial of staff privileges to plaintiff were pretextual or furthered public good).
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2. Immunity of State Actors Agents and of Private Parties Because of this prohibition into possible private motives of state anticompetitive action, federal antitrust laws cannot regulate the conduct of private individuals in seeking anticompetitive action or in influencing government officials to engage in conduct of such behavior. See City of Columbia, 499 U.S. at 378-80. This action is protected by the NoerrPennington doctrine, a corollary to the state action doctrine, which shields from antitrust review concerted efforts to influence public officials regardless of intent or purpose, and even where anticompetitive results are brought about by deception or bribery.17 Id. Furthermore, actions of a private party also can be considered actions taken by the same as an agent of a political subdivision, such that it should share the political subdivisions immunity. See Crosby, 93 F.3d at 1529. The appropriate inquiry for this rule focuses on whether there is little or no danger that the actor is involved in . . . private conduct as opposed to state action vindicating a truly governmental interest. Id. at 1530 (emphases added) (quoting Town of Hallie, 471 U.S. at 47). If the action is truly that of the state and not of an individual or private actor, then the private parties will receive the state action immunity of the political subdivision, and the need for evaluation of the Midcal active state supervision element for private parties is eliminated. Id. at 1530-31; see, e.g., Cine 42nd Street, 790 F.2d at 1047-48 (declining to apply active supervision requirement because private party theatre operators operating in concert with urban development corporation enjoyed states antitrust
17
Noerr-Pennington has recognized a sham exception to this rule: where a private partys petitioning of a governmental entity is not a genuine attempt to procure favorable government action but is instead an attempt to directly interfere with the business relationships of a competitor through improper means, for example, of delay and expense, federal antitrust laws apply. See City of Columbia, 499 U.S. at 380, 381 (explaining as example where delay is sought to be achieved by lobbying process itself and not by governmental action that lobbying seeks). Here, however, Plaintiffs have not alleged that this exception applies, and for reasons explained in Part I.c.ii, see supra pp. 31-39, the Court does not find that the facts warrant the application of this exception.
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immunity, given clearly articulated state policy that private parties and government necessarily work together to effectuate citys mission to cure urban blight). To illustrate, in Crosby, a suit challenging an allegedly anticompetitive peer review decision to deny a doctor staff privileges at a hospital, the Eleventh Circuit considered the actions of individual doctors on peer review committees as the actions of a hospital authority, without an assessment of the active supervision element. 93 F.3d at 1530-31; cf. Univ. Hosp., Inc., 938 F.3d at 1213 (explaining that where states policy is exercised by hospital authority even where it has delegated its statutory powers to university hospitalactive supervision is not required). The courts ruling was based on the fact that the (1) the control exercised by the hospital authority over the peer review decisions, specifically its retention of power over decisions to grant or deny hospital privileges, and (2) the overall statutory context of peer review in Georgia, that is, the statutory requirement that hospitals provide for the review of professional practices in a hospital. Id. at 1530-31. Had the court held otherwisethat is, had the authority but not the private defendants been deemed immune for an action performed with or on behalf of the authorityit would have defeated the purpose of antitrust immunity by permitting the plaintiff to sue the private defendants for the conduct of the authority that had already been declared immune. See id.; see also Cine 42nd Street, 790 F.2d at 1048. In sum, therefore, a greater level of state involvement in anticompetitive conduct must be demonstrated if the defendant is a private party rather than a political subdivision. If not a state actor or a private party, a defendant travels under the three-part test from Bolt and Town of Hallie to show clear articulation; if, however, the defendant is a private party, it travels under the two-prong Midcal testi.e., defendant must show clear articulation and active supervision,
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unless it can establish that it acted pursuant to Noerr-Pennington or as an agent of the political subdivision which has received antitrust immunity. Thus, the Court now turns to its analysis of whether the Authority, Phoebe Putney, and HCA/Palmyra should be evaluated as private actors, political subdivisions, or agents thereof. 18 ii. Analysis 1. Immunity of the Authority of Albany-Dougherty County, Georgia The Court first analyzes the Authoritys entitlement to state action immunity. As
previously established, the enabling legislation need not explicitly authorize the exact actions undertaken to establish foreseeability. Rather, it is only necessary that the permitted actions produce anticompetitive consequences that foreseeably flow from the grant of state authority; that is, the enabling statute must . . . create grounds for a reasoned belief that some anticompetitive activity could be envisioned. Cine 42nd Street, 790 F.2d at 1043-44 (emphases added). To grant state action immunity to the Authority in this case, the Court, therefore, must find it reasonably foreseeable that when the legislature equipped a hospital authority with the power to lease a hospital to another (the lessee) and grant the lessee the right to operate said hospital, it contemplated that the lessee could have once been a competitor of the Authoritys
What raises the close but difficult question for the Court to decide in this case is the identification of the exact Defendants that Plaintiffs can actually enjoin under the Clayton Act and the FTCA. The difficulty arises based on the factual distinctions between the structure of the alleged transaction in this case and the acquisitions at issue in Supreme Court and Eleventh Circuit state action immunity precedent. Lee County and Askew, for example, primarily concern a partys challenge to a political subdivisions (or state actors) acquisition of the competitor of the entity already owned and operated by the political subdivision. Plaintiffs, however, do not solely challenge the Authoritys acquisition of the competitor (Palmyra) of the hospital which it already owns (PPMH). Rather, the crux of the challenged action is the Authoritys intended assignment of its control and operation of the acquired hospital, Palmyra, to the parent company of the acquired hospitals only current competitor, PPHS, so as to circumvent the antitrust laws. In light of this distinction, the Parties rightfully dispute whether the challenged acquisition is being directed by the Authority or the private Phoebe Putney and HCA/Palmyra Defendants or both. Accordingly, the Court assesses both the challenged conduct of the Authority as a political subdivision as well as the conduct of Phoebe Putney and HCA/Palmyra as private entities under the appropriate state action immunity tests, which vary based on the nature of the party which seeks its protection.
18
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newly acquired and leased hospital. To reach such a finding, a review of Georgia Hospital Authorities Law is required. a. Formation, Purpose, and Powers of the AlbanyDougherty County Hospital Authority Pursuant to the Hospital Authorities Law, O.C.G.A. 31-7-70, et seq., the Georgia legislature created in and for each county and municipal corporation of the state a public body corporate and politic to be known as the Hospital Authority of such county or city . . . . O.C.G.A. 31-7-72(a) (emphasis added). A hospital authority is deemed to exercise public and essential governmental functions and [has] all the powers necessary and convenient to carry out and effectuate the purposes and provisions of [the Hospital Authorities Law]. O.C.G.A. 31-775. An authority may not operate for profit, however, and must set its rates and charges only in amounts sufficient to operate, service debt and bond obligations, and maintain reserves for improvement, replacement, or expansion of its facilities or services. O.C.G.A. 31-7-77. In 1941, the Hospital Authority of Albany-Dougherty County, Georgia, was jointly activated pursuant to a resolution by the City of Albany and Dougherty County, Georgia, to execute the goals represented by the Georgia Hospital Authorities Law. See Ex. PX008. As noted above, see supra note 16, a hospital authoritys powers include, in addition to those necessary to operate a hospital, [t]o acquire by purchase, lease, or otherwise and to operate projects, O.C.G.A. 31-7-75(4), which are defined as the acquisition . . . and equipping of hospitals . . . to promote the public health needs of the community, O.C.G.A. 317-71(5). Section 31-7-75(7) also authorizes a hospital authority to lease for any number of years not to exceed forty for the operation of any project by another, provided that authority determines that lease will promote public health needs of community by making additional facilities available or reducing healthcare costs, and that authority retain sufficient control over
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any project so leased so as to ensure that lessee will not in any way receive more than reasonable rate of return on its investment in the project. Id. 31-7-75(7). Hospital authorities may also execute their acquisition and leasing powers by partnering directly or indirectly with other hospitals, facilities, and health care providers to arrange for the provision of health care services. 31-7-75(27). Thus, an authoritys powers, including those of the Authority in this case, appear to be as broad and diverse as the problems they are designed to address. b. The 1990 Lease of PPMH by the Authority Pursuant to the Hospital Authorities Law, in December 1990, the Authority entered into a Lease and Transfer Agreement, with respect to the assets and operation of PPMH. Under the Lease, which has been extended on several occasions to a 2042 expiration date (Doc. 2 27), the Authority operates PPMH as a lessee for purposes of carrying out the mission of the Authority. Ex. PX002; see also Ex. PX008 (resolutions explaining acknowledgments of Authority). Although the Authority leases PPMH assets to PPMH, Inc. for $1.00 annum under the Lease, the Authority holds title to and is therefore the legal owner of PPMHs assets (Doc. 2 27). In fact, because PPMH and PPHS are dissolved upon the expiration or earlier termination of the Lease, Ex. PX002-007, all leased assets, along with PPMHs and PPHSs assets, revert to the full control of the Authority upon such expiration, Ex. PX002 3.02. Pursuant to the Lease terms, the Authority has delegated to PPMH, Inc., among other responsibilities, its powers to provide indigent care in fulfillment of the Authoritys agreement with Dougherty County, Ex. PX002 4.02, 4.18, and to set rates and charges for PPMH, Ex. PX002 4.03(b). Moreover, Phoebe Putney, which owns PPMH, Inc., pays all expenses of the Authority, which has no budget, no staff and no employees, and the Authority is composed of appointed, unpaid members. (Doc. 2 27). Despite the delegation of rights to Phoebe Putney
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with respect to PPMH, the Authority may terminate the Lease if PPMH, Inc. materially fails to operate PPMH in compliance with the Lease terms and delegated responsibilities. Ex. PX000246 9.01-9.03, 9.07. Plaintiffs reason that this relationship between Phoebe Putney and the Authority under the 1990 Lease indicates that the Authority will have no authority over or interest in overseeing the administration of Palmyra once the transaction now at issue is consummated. (Doc. 61 at 26). On the totality of the foregoing allegations, along with those provided in the Procedural and Relevant Factual Background Section, see supra, Plaintiffs claim that the Authority rubberstamped the transaction and used the Authority as a strawman, thereby disqualifying Defendants for antitrust immunity (See id. at 17, 23; see also Doc. 2 85). Defendants, however, submit that this relationship represented by the 1990 Lease evidences that PPMH, Inc. exists to operate and support PPMH and does so only for so long as it complies with the 1990 Lease. To Defendants, therefore, a similar relationship will exist
between Phoebe Putney, specifically PNI, and the Authority for the formers operation of Palmyra pursuant to the terms of the subject transaction and in a manner immune from antitrust scrutiny. (Doc. 45-1 at 9-10). The Court agrees for reasons discussed below. While the Court must accept Plaintiffs well-pleaded version of the facts as true and view them in a light most favorable to Plaintiffs, it is not required to accept Plaintiffs legal conclusions as to the unavailability of state action immunity to Defendants. Pursuant to its own review of the Supreme Court and circuit precedent and relevant Georgia statutes, the Court concludes that the provisions of Georgia Hospital Authorities Law, O.C.G.A. 31-7-70, et seq., that concern the powers of hospital authorities in the State of Georgia have created a scheme for
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establishing and enforcing anticompetitive conduct, particularly through leasing authority-owned hospital facilities or property to another hospital or its affiliated entity as manager and lessee. As previously established, see supra pp. 29-30, Georgia has broadly authorized the Authority to acquire by purchase hospital projects and to lease these hospitals to others for a period of up to forty years, O.C.G.A. 31-7-75(4), (6), limited the Authoritys execution of such powers to the city or county that activated the Authority, i.e., its area of operation, id. 31-771(1), and required that the Authority operate on a non-profit basis, id. 31-7-77. Moreover, 31-7-75(27) authorizes a hospital authority [t]o form and operate, either directly or indirectly, one or more networks of hospitals, physicians, and other health care providers and to arrange for the provision of health care services through such networks. Id. 31-7-75(27) (emphases added). The totality of these grants of authority, the geographic limitation, and the non-profit requirement demonstrates that the Georgia legislature intended to guarantee that hospital authorities could accomplish their mission of promoting public health notwithstanding the anticompetitive results. 19 Much like the language of the hospital authorities law at issue in Lee County, the Hospital Authorities Laws restriction of a hospital authoritys power to acquire and lease in the city or county in which it was created, so as to carry out its statutorily designated duties and powers, is bound to result in an authorityshere, the Authority of AlbanyDougherty, Countysacquisition of multiple hospitals that possibly were once competitors of each other, and its lease of those hospitalsPalmyra and PPMHto other hospital entities or networkshere, PPHSthat may own, operate, or manage existing hospitals that once
19
By inference, therefore, the public may benefit from anticompetitive acquisitions authorized under Georgia Hospital Authorities Law. In this light, state action that results in public good and state action that results in anticompetitive effects are not absolutely mutually exclusive if such actions are taken pursuant to the aforementioned hospital authorities powers.
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competed with those authority-owned and -acquired hospitals.
Specifically, because the
authoritys exercise of the abovementioned powers, which was restricted to Lee County in Lee County was likely to result in an authoritys monopolistic control of hospitals in Lee County, the Authoritys exercise of the same powers here, which are restricted to the area of operation of Albany, Dougherty, County, Georgia, makes the Authoritys ownership and lease of PPMH and Palmyra, the two major hospital competitors in Albany, Dougherty County, Georgia, reasonably foreseeable. The same reasoning flows from Askew.20 Only one hospital, PPMH, existed in Albany, Dougherty County, when the Authority was created. Thus, once authorized to acquire additional hospitals and in view of the reality of its lack of funds and resources, the Authority was foreseeably likely to acquire and lease hospitals in the manner proposed in this case. And the fact that the Authority, with no staff or budget of its own, is statutorily empowered to add new facilities and to lease facilities to other hospitals which, once again, must be within its area of operationincreases the likelihood that it may enter into a lease for the operation of one of its acquired hospitals by another hospital or hospital network with which the acquired hospital once competed. Such a finding is underscored by the fact that significant barriers to entry into the healthcare market already exist, for example, under Georgia Certificate of Need (CON) laws, which require the issuance of a CON prior to a hospitals provision of specific types of healthcare services at newly built facilities. O.C.G.A. 31-6-41, 31-6-42. The Court reaches this finding notwithstanding the accomplishment of a hospital authoritys acquisition and lease of a hospital with the assistance of private parties. In fact, the Court finds that the statutory language concerning hospital authorities powers encourages and
Although the Georgia legislation does not explicitly authorize the anticompetitive acquisition and operation of multiple hospitals in a single county, as did the Alabama legislation in Askew, controlling precedent has confirmed that the enabling legislation need not be explicit. See supra pp. 22-23.
20
See
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may reasonably require hospital authorities to work with private parties so as to realize hospital authorities statutorily imposed duties and powers. Sections 31-7-75(4), (6), (7), and (27), see supra, indicate that the governmental obligation of a hospital authority to provide for the health of the people can be discharged by its acquisition of existing hospital facilities (as well as by the construction of new hospitals) and by the sale or lease of the hospital to others, including private corporations which operate the hospitals to promote the health functions of government. Bradfield v. Hosp. Auth. of Muscogee County, 174 S.E.2d 92, 99 (Ga. 1970). Provided the lease is consistent with the authoritys obligation to provide for the health of the people, an authority may even delegate its duties of operation to a private non-profit corporation. 31-7-75(7), (27); see, e.g., Richmond County Hosp. Auth. v. Richmond County, 336 S.E.2d 562, 564 (Ga. 1985) (holding that Hospital Authorities Law authorizes corporate restructuring of hospital authority through lease and transfer of hospital assets to a new 501(c)(3), nonprofit corporation and establishment of parent holding company structure). Furthermore, the absence of the Authoritys own budget, as well as the statutory prohibition on authorities operation for profit, makes it reasonably foreseeable that hospital authorities would work with private hospitals or hospital networks to operate hospitals. Without the assistance of third parties for funding, resources, and personnel, hospital authorities likely find it difficult to operate and discharge their mission for the provision of healthcare services. The Court finds that this represents a reality that the legislature reasonably foresaw, similar to the courts acknowledgment in Cine 42nd of the reasonable foreseeability of the necessary collaboration between private entities and the local government to revitalize blighted urban areas in New York City.
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Therefore, so long as the Authority determines that the proposed transaction will continually fulfill the Authoritys mission to promote public health needs of the community and allow it to retain public control of Palmyra as is contemplated by the Hospital Authorities Law which it has done here, see Ex. PX008the Authority may collaborate with private parties such as Phoebe Putney to execute the proposed transaction, without being subject to antitrust liability. In this light, the subject transaction, including the lease stage, merely represents the application of approved principles of the Hospital Authorities Law to new conditions. See Richmond County, 336 S.E.2d at 564. The Court reaches the above findings, even accepting Plaintiffs allegations that the subject transaction was effectively motivated and controlled by PPHS through its own independent private and pecuniary interests and that the transaction was structured to circumvent antitrust law. Not only does City of Columbia expressly forbid the Courts inquiry into such reasons for and motivations behind acquisitions and their structure, but it, along with Cine 42nd Street, also illustrates that the private Defendants, specifically Phoebe Putney, can motivate, influence, and work on behalf of and with a political subdivision to knowingly bring about anticompetitive results, free of the risk of antitrust enforcement. Contrary to Plaintiffs claims, therefore, whether the Authority authorized the purchase of Palmyra without considering, among other factors, the anticompetitive adverse effect of the acquisition on healthcare in the community and alternatives to leasing Palmyra to Phoebe Putney becomes irrelevant. Like the Courts treatment of the producers required referendum and approval of the marketing program in Parker, the Court here finds that [the Authority]. . . has created the machinery for structuring and executing the transaction, although Phoebe Putney negotiated, promoted, and lobbied for the transaction. Parker, 317 U.S. at 346-47, 352. The
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power to produce anticompetitive effects rests with hospital authorities like the Hospital Authority of Albany-Dougherty County, which has the authority to structure hospital management and operation in a number of ways. Simply put, the state therefore has put the ultimate say-so for the provision and management of healthcare in the hands of the healthcare authorities, even if private actors whose conduct brings about anticompetitive conduct have some role in that decisionmaking process. For this reason, as well as those previously discussed, the Court holds that the Authority is immune from antitrust scrutiny in the current case. The Hospital Authority of Albany-Dougherty Countys Motion to Dismiss (Doc. 45) is therefore GRANTED. 2. The Immunity of Phoebe Putney and HCA/Palmyra The Court also holds that state action immunity applies to the private Defendants as well, as the challenged action at issue here is really directed by the Authority and not Phoebe Putney.21 While PPHS allegedly served as the negotiator, guarantor, and funder of the transaction, the Court holds that such conduct constitutes private encouragement of, private involvement in, or agency action on behalf of a local government that is permitted under Noerr-Pennington or the principles established in Cine 42nd Street and Crosby that establish a private actors enjoyment of the states antitrust immunity under Parker. Accordingly, as Defendants note, Plaintiffs are incorrect in their implied position that even if the Authority is entitled to immunity, Phoebe Putney is not. Once the Authority is deemed immune for its anticompetitive conduct, any actions taken by the private actors to prompt or engender that conduct must also be immune.
21
The Courts analysis solely centers on the immunity of Phoebe Putney, as Plaintiffs claim that Phoebe Putney, not HCA/Palmyra, directed, engaged in, and brought about the anticompetitive conduct. Phoebe Putney, along with the Authority, is therefore the primary alleged violator of the FTCA and Clayton Act. (See generally Doc. 2). Moreover, any finding as to the application of immunity to Phoebe Putney would necessarily extend to HCA/Palmyra, as the transaction cannot proceed without HCA/Palmyras sale of Palmyra to the Authority.
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Noerr-Pennington, along with the state action doctrine, therefore forbids Plaintiffs attempt to hold Phoebe Putney, a private party, liable for a hospital acquisition by the Authority, a local government actor that has received antitrust immunity. The fact that Phoebe Putney may have an interest in controlling Palmyra and that it has acted on this interest in petitioning the Authority and negotiating and structuring the transaction means nothing; what governs is the enabling legislation, as assessed above and whether it expresses a policy that makes the anticompetitive conduct now at issue reasonably foreseeable. See supra Part I.c. Because the Court has found that it does, Phoebe Putneys interest in controlling Palmyra and its associated actions to actualize their interests are protected and thereby have no relevance to this Courts analysis of Phoebe Putneys entitlement to state action immunity as a private party. Moreover, even if Phoebe Putney is not considered a private party whose actions are protected under Noerr-Pennington, it may be considered an effective agent of the Authority based on its negotiation of, planning for, and funding and facilitation of the subject transaction. The Phoebe Putneys actions which are challenged in this case can thereby be considered actions taken in performance of its official duties as an agent of the Authority, such that Phoebe Putney should share the Authoritys state action immunity. Several of the documents associated with the execution of the transaction confirm this agency role assumed by Phoebe Putney and that the Authority, not Phoebe Putney, is responsible for actions relevant to the Courts review and will retain legal and economic control over Palmyra. To illustrate, the Asset Purchase Agreement between PPHS and Palmyra states that it is being entered into by the Authority, as buyer, Palmyra, as seller, [Phoebe Putney], as guarantor of the obligations of the Authority and PNI. Ex. PX226-01 (emphases added); see also Ex. PX009 2.02 (explaining that Authority remains owner of Palmyras sold assets and therefore,
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shall at all times have during the Operating Period have ultimate control over the assets and operations of [Palmyra]). As such, pursuant to the terms of the Management Agreement, PNI was created by PPHS to serve, under PPHSs control, as the day-to-day Manager of assets used exclusively in the operation of Palmyra. Yet Phoebe Putney is still required to operate Palmyra , through PNI, according to the Authoritys instructions and not its own desires: it shall be responsible for the performance of all acts reasonably necessary or required in connection with the operation of [Palmyra] in accordance with the Authoritys directions and in managing [Palmyra] shall follow the charity and indigent care policies of Authority and shall assist Authority in meeting all of Authoritys required obligations under Hospital Authorities Law. See, e.g., Ex. PX009 3.03(c), (e) (Management Agreement) (emphases added). Much like the private party theatre operators in Cine 42nd Street who operated in concert with the urban development corporation and to whom the urban development corporation had delegated its rights for the operation of the theatres, any actions of Phoebe Putney in its operation of Palmyra are therefore intended to effectuate the Authoritys purpose. Although the Authority has delegated control and authority for overseeing Medical Staff affairs, treatment and related functions [at Palmyra] to [Phoebe Putney], Phoebe Putney is merely an agent of the Authority in operating Palmyra, see, e.g., Ex. PX009 3.03(b) (stating that Phoebe Putney acts in Authoritys name and as agent for Authority in making deposits and disbursements), and as stated in the Management Agreement, owes the Authority a fiduciary duty with regard to the performance of its responsibilities on the Authoritys behalf, Ex. PX009 2.01; see also Ex. PX009 3.09, 3.10 (explaining Phoebe Putneys obligation to ensure Authoritys continuous compliance with applicable laws required for ongoing operation of Palmyra and protection of confidentiality of records of Authority).
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Thus, while Phoebe Putney or a PPHS entity such as PNI will operate Palmyra as lessee once it is acquired and leased by the Authority to Phoebe Putney, the Management Agreement and to a degree, the Asset Purchase Agreement thereby ensure that Phoebe Putney understands that it does not operate Palmyra independent of the Authority and that the Authority is the ultimate decisionmaker of all project decisions.22 For example, Phoebe Putney must obtain prior Authority approval for its retention of consultants, accountants, or other professional personnel or for its entry into contracts on behalf of the Authority whose costs exceed $10,000, Ex. PX009 3.02, 3.05; its Chief Compliance Officer must report directly to the Authority, Ex. PX009 3.13(g); Phoebe Putney must prepare and present to the Authority for its review annual budgets for Palmyra, Ex. PX009 3.04(g); and Phoebe Putney shall not make any change in the licensure, payment model, classification or operations of [Palmyra, without the Authoritys] . . . prior written approval, Ex. PX009 3.14. Because Phoebe Putney will not be able to exercise control over Palmyras operations independent of the Authority, the Court therefore holds that Phoebe Putneys actions in the transaction are considered those of the Authority, which the Court has already ruled is entitled to immunity. Were the Court to hold otherwise, the state action immunity afforded to the Authority would be meaningless. See Crosby, 93 F.3d at 1532. Phoebe Putneys and HCA/Palmyras Motions to Dismiss (Docs. 46, 53) are thereby GRANTED. II. Plaintiffs PI Motion
In view of the Courts grant of Defendants Motions to Dismiss, the Court need not further address Plaintiffs PI Motion. See Lee County, 38 F.3d at 1192 ([If] the allegedly anticompetitive results were foreseeable under the state action doctrine, it is unnecessary to
22
As a corollary to this power of the Authority, the Authority also bears the ultimate risk of loss with respect to Palmyras operations as well as the ultimate liability incurred by the Authority as a result of Phoebe Putneys performance of its duties under the Management Agreement. Ex. PX009 4.01, 4.02.
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determine whether the acquisition [potentially] violates the Clayton Act [for purposes of granting preliminary injunctive relief.). Plaintiffs PI Motion (Doc. 5) is thus DENIED. CONCLUSION For all of the foregoing reasons, the Court rules that Defendants are immune from antitrust liability under the Clayton Act and the Federal Trade Commission Act. Thus, the Hospital Authority of Albany-Dougherty Countys Motion to Dismiss or Alternatively, for Summary Judgment and to Vacate the Temporary Restraining Order (Doc. 45); HCA, Inc.s and Palmyra Park Hospital, Inc.s Cross-Motion to Dismiss or Alternatively, for Summary Judgment and to Dissolve the TRO (Doc. 46); and Defendants Phoebe Putney Health System Inc.s, Phoebe Putney Memorial Hospital, Inc.s, and Phoebe North, Inc.s Motion to Dismiss and Vacate the TRO (Doc. 53) are GRANTED.23 Plaintiffs Complaint (Doc. 2) is also
DISMISSED WITH PREJUDICE. Plaintiffs Motion for Preliminary Injunction (Doc. 5) is therefore DENIED, and the Courts April 22, 2011 Order (Doc. 9) granting Plaintiffs Motion for Temporary Restraining Order (Doc. 4) is DISSOLVED. SO ORDERED, this 27th day of June 2011.
/s/ W. Louis Sands THE HONORABLE W. LOUIS SANDS, UNITED STATES DISTRICT COURT
23
For this reason, and for reasons stated in note 8, see supra, the Authoritys and HCAs and Palmyras Alternative Motions for Summary Judgment (Docs. 45, 46) are DENIED.
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UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION
UNITED STATE OF AMERICA and STATE OF MICHIGAN, Case No. 10-14155 Plaintiffs, HONORABLE DENISE PAGE HOOD v. BLUE CROSS BLUE SHIELD OF MICHIGAN, Defendant. ___________________________________/
MEMORANDUM OPINION AND ORDER DENYING MOTION TO DISMISS and ORDER REGARDING VARIOUS MOTIONS
I.
BACKGROUND/FACTS On October 18, 2010, Plaintiffs United States of America (United States) and the State of
Michigan (Michigan) filed the instant action against Defendant Blue Cross Blue Shield of Michigan (Blue Cross) alleging that Blue Cross use of most favored nation (MFN) clauses in its agreements with various hospitals violate: Section 1 of the Sherman Act, 15 U.S.C. 1 (Count One) and Section 2 of the Michigan Antitrust Reform Act, M.C.L. 445.772 (Count Two). The Complaint alleges that each of the provider agreements between Blue Cross and Michigan hospitals containing an MFN provision is a contract, combination and conspiracy within the meaning of Section 1 of the Sherman Act, 15 U.S.C. 1. (Comp., 85) The Complaint further alleges that Blue Cross entered into agreements with hospitals in Michigan that unreasonably restrain trade and commerce in violation of Section 2 of the Michigan Antitrust Reform Act, M.C.L. 445.772.
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(Comp., 90) Blue Cross is a Michigan nonprofit healthcare corporation headquartered in Southfield, Michigan. (Comp., 7) Blue Cross is subject to federal taxation but is exempt from state and local taxation under Michigan law. (Id.) Directly and through its subsidiaries, Blue Cross provides commercial and other health insurance products, including preferred provider organization (PPO) health insurance products and health maintenance organization (HMO) health insurance products. (Id.) Blue Cross is the largest provider of commercial health insurance in Michigan. (Comp., 1) Blue Cross competes with for-profit and nonprofit health insurers. (Id.) Blue Cross commercial health insurance policies cover more than three million Michigan residents, more than 60% of the commercially insured population. (Id.) Blue Cross insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor. (Id.) Blue Cross had revenues in excess of $10 billion in 2009. (Id.) Blue Cross is also the largest non-governmental purchaser of health care services, including hospital services, in Michigan. (Comp., 2) As part of its provision of health insurance, Blue Cross purchases hospital services on behalf of its insureds from all 131 general acute care hospitals in Michigan. (Id.) Blue Cross purchased more than $4 billion in hospital services in 2007. (Id.) Blue Cross has sought to include MFNs (sometimes called most favored pricing, most favored discount, or parity clauses) in many of its contracts with hospitals over the past several years. (Comp., 3) Blue Cross currently has agreements containing MFNs or similar clauses with at least 70 of Michigans 131 general acute care hospitals. (Id.) These 70 hospitals operate more than 40% of Michigans acute care hospital beds. (Id.) Blue Cross generally enters into two types of MFNs, which require a hospital to provide
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hospital services to Blue Cross competitors either at higher prices than Blue Cross pays or at prices no less than Blue Cross pays. (Comp., 4) Both types of MFNs inhibit competition. (Id.) The first type is known as MFN-plus. (Comp., 4(A)) Blue Cross existing MFNs include agreements with 22 hospitals that require the hospital to charge some or all other commercial insurers more than the hospital charges Blue Cross, typically by a specified percentage differential. (Id.) These hospitals include major hospitals and hospital systems, and all of the major hospitals in some communities. (Id.) These 22 hospitals operate approximately 45% of Michigans tertiary care hospital beds (providing a full range of basic and sophisticated diagnostic and treatment services, including many specialized services.) (Id.) Blue Cross MFN-plus clauses require that some hospitals charge Blue Cross competitors as much as 40% more than they charge Blue Cross. (Id.) Two hospital contracts with MFN-plus clauses also prohibit giving Blue Cross competitors better discounts than they currently receive during the life of the Blue Cross contracts. (Id.) Blue Cross MFN-plus clauses guarantee that Blue Cross competitors cannot obtain hospital services at prices comparable to the prices Blue Cross pays, which limits other health insurers ability to compete with Blue Cross. (Id.) Blue Cross has sought and, on most occasions, obtained MFN-plus clauses when hospitals have sought significant rate increases. (Id.) The second type of MFN clause is considered as Equal-to MFNs. (Comp., 4(B)) Blue Cross entered into agreements containing MFNs with more than 40 small, community hospitals, which typically are the only hospitals in their communities, requiring the hospitals to charge other commercial health insurers at least as much as they charge Blue Cross. (Id.) Under these agreements, Blue Cross agreed to pay more to community hospitals, which Blue Cross refers to as Peer Group
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5 hospitals, raising Blue Cross own costs and its customers costs, in exchange for the equal-to MFN. (Id.) A community hospital that declines to enter into these agreements would be paid approximately 16% less by Blue Cross than if it accepts the MFN clause. (Id.) Blue Cross also entered into equal-to MFNs with some larger hospitals as well. (Id.) Blue Cross sought and obtained MFNs in many hospital contracts in exchange for increases in the prices it pays for the hospitals services. (Comp., 5) In these instances, Blue Cross has purchased protection from competition by causing hospitals to raise the minimum prices they can charge to Blue Cross competitors but, in doing so, has also increased its own costs. (Id.) Blue Cross has not sought or used MFNs to lower its own cost of obtaining hospital services. (Id.) The United States and Michigan argue Blue Cross MFNs have caused many hospitals to (1) raise prices to Blue Cross competitors by substantial amounts, or (2) demand prices that are too high to allow competitors to compete, effectively excluding them from the market. (Comp., 6) By denying Blue Cross competitors access to competitive hospital contracts, the MFNs have deterred or prevented competitive entry and expansion in health insurance markets in Michigan. (Id.) This has resulted in increased prices for health insurance sold by Blue Cross and its competitors, in addition to higher prices for hospital services paid by insureds and self-insured employers. (Id.) Michigan purchases group health insurance for approximately 52,000 employees and 180,000 retirees and dependents, including residents of each of the areas directly affected by Blue Cross conduct. (Comp., 9) In particular, Michigan purchases health insurance for its employees from Blue Cross and others, and 60% of Michigan employees and nearly all Michigan retirees are covered by Blue Cross health plans. Michigan employees covered by Blue Cross are self-insured by Michigan, and increases in hospital costs are borne directly by Michigan and its employees. (Id.)
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Michigan claims it has been injured, and is likely to be injured, in its business and property as a result of Blue Cross violations. (Id.) In lieu of an Answer, Blue Cross filed a Motion to Dismiss. The United States and Michigan have filed responses to the motion. Blue Cross replied. A hearing was held on the matter on April 19, 2011. At a hearing on related cases on June 7, 2011, the Court briefly indicated it would deny Blue Cross Motion to Dismiss and would issue a written order with its analysis. On June 30, 2011, Blue Cross filed a Motion for Leave to File Supplemental Authority. The United States and Michigan oppose the motion in their Response filed on July 6, 2011. Blue Cross filed a reply to the response on July 7, 2011 arguing that the Court had yet to prepare a written order pursuant to Rule 581 of the Rules of Civil Procedure and without such a written order, Blue Cross is unable to formulate whether it is able to file a motion for reconsideration. Despite Blue Cross representation that it is unable to formulate arguments in response to the Courts denial of its Motion to Dismiss and without the Courts ruling on Blue Cross Motion for Leave to File Supplemental Authority, Blue Cross filed a Notice of Interlocutory Appeal on August 5, 2011. It is noted Blue Cross filed the Notice of Interlocutory Appeal without first seeking permission from this Court and without allowing Plaintiffs to argue whether an interlocutory appeal is appropriate. See, 28 U.S.C. 1292 and Rule 5 of the Federal Rules of Appellate Procedure; Huron Valley Hosp., Inc. v. City of Pontiac, 792 F.2d 563 (6th Cir. 1986).
Fed. R. Civ. P. 58 applies to judgments where either the court or a jury decides a case. See, Rule 58 Comments, 1937 Adoption, 1963 Amendment. No such decision has been rendered in this case. 5
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II.
ANALYSIS A. Motion to Dismiss Standard of Review
Rule 12(b)(6) of the Rules of Civil Procedure provides for a motion to dismiss based on failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the Supreme Court explained that a plaintiff's obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.] Factual allegations must be enough to raise a right to relief above the speculative level.... Id. at 555 (internal citations omitted). Although not outright overruling the notice pleading requirement under Rule 8(a)(2) entirely, Twombly concluded that the no set of facts standard is best forgotten as an incomplete negative gloss on an accepted pleading standard. Id. at 563. To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Id. at 570. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id. at 556. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. Ibid. Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief. Id. at 557. Such allegations are not to be discounted because they are unrealistic or nonsensical, but rather because they do nothing more than state a legal conclusioneven if that conclusion is cast in the form of a factual allegation. Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1951, 173 L.Ed.2d 868 (2009). In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content and the
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reasonable inferences from that content, must be plausibly suggestive of a claim entitling a plaintiff to relief. Id. Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not show[n]-that the pleader is entitled to relief. Fed. Rule Civ. Proc. 8(a)(2). The court primarily considers the allegations in the complaint, although matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint may also be taken into account. Amini v. Oberlin College, 259 F.3d 493, 502 (6th Cir. 2001). B. Section 1 of the Sherman Act 1. Elements
In order to establish a violation of Section 1 of the Sherman Act, three elements must be met: 1) an agreement 2) affecting interstate commerce 3) that unreasonably restrains trade. White and White, Inc. v. American Hospital Supply Corp., 723 F.2d 495, 504 (6th Cir. 1983). Reviewing the Complaint, the United States and Michigan assert that Blue Cross entered into agreements with various hospitals which affect interstate commerce, satisfying elements one and two. (Comp., 85) Blue Cross does not move to dismiss based on these two elements but moves to dismiss under the third elementwhether the MFN clauses at issue unreasonably restrain trade. The parties agree that in order to assess whether the MFN clauses unreasonably restrain trade, the rule of reason is applied. An agreement violates the rule of reason if it may suppress or even destroy competition, rather than promote competition. American Needle, Inc. v. National Football League, 130 S.Ct. 2201, 2217 n. 10 (2010)(quoting, Board of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918)). To state a claim under the rule-of-reason test, a plaintiff must allege, inter alia, that the purportedly unlawful contract, combination or conspiracy produced adverse anticompetitive effects
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within relevant product and geographic markets. Warrior Sports, Inc. v. National Collegiate Ath. Assn, 623 F.3d 281, 286 (6th Cir. 2010). In order to survive a motion to dismiss under the rule of reason test, the complaint must plausibly allege that the MFNs produced adverse anticompetitive effects within relevant product and geographic markets. Blue Cross argues that the Complaint fails to plausibly allege relevant product markets, geographic markets, market power, anticompetitive effects arising from the use of MFNs in any relevant market and facts supporting a viable legal theory of harm such as recoupment or foreclosure. The United States and Michigan argue that the Complaint sufficiently alleges plausible markets, anticompetitive effects and a legal theory of harm. 2. Product Markets
Relevant product or geographic markets are sufficiently alleged as long as the complaint bears a rational relation to the methodology courts prescribe to define a market. Todd v. Exxon Corp., 275 F.3d 191, 199-200 (2d Cir. 2001). Courts hesitate to grant motions to dismiss for failure to plead a relevant product market because market definition is a fact-intensive inquiry only after a factual inquiry into the commercial realities faced by the consumers. Id. at 199-200; Eastman Kodak Co., v. Image Tech., Servs., Inc., 504 U.S. 451, 467 (1992). A product market consists of products that have reasonable interchangeability. Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917, 933 (6th Cir. 2005). Blue Cross argues that the Complaint fails to allege a market-by-market explanation of the insurance companies involved and their products and services. The United States and Michigan assert that there is no requirement at the pleading stage to allege such a market-by-market explanation. They argue that the Complaint sufficiently alleges two product markets, not two to six
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as asserted by Blue Cross. The two product markets affected by the MFN clauses alleged in the Complaint are: commercial group health insurance and commercial individual health insurance. (Comp., 20, 22, 24) Although the reason why these product markets are not interchangeable need not be alleged at the pleading stage as argued by the United States and Michigan, they claim that the Complaint sets forth the reason why these product markets are not interchangeable. The Complaint alleges that commercial group health insurance sold in Michigan includes access to a provider network which is considered to be an important element of a health insurance product because the network specifies the physicians and hospitals to which patients can turn for service with substantially lower costs to themselves. (Comp., 20) As to commercial individual health insurance, the Complaint alleges that this product is significantly more expensive than group health insurance and lacks group insurances tax benefits. (Comp., 21) There is no other product which is reasonably interchangeable because this is the only product available to individuals without access to group coverage or government programs that allows them to reduce the financial risk of adverse health conditions and to have access to health care providers at discounted prices negotiated by commercial health insurers. (Comp., 21-22) A review of the Complaint finds that it plausibly alleges the product markets at issuethe commercial group health insurance and the commercial individual insurance product markets. The Court finds no requirement at the pleading stage that a market-by-market analysis is required to be alleged in the Complaint. The United States and Michigan have plausibly stated the product markets in their Complaint. 3. Geographic Markets
Blue Cross asserts that the Complaint fails to allege plausible facts to establish geographic
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markets. Blue Cross argues that use of statistical data is not appropriate in establishing the appropriate geographic markets. Blue Cross further argues that health insurance markets are national rather than local and that the Complaint fails to focus on whether capital for spreading financial risk can be supplied on a national basis. The United States and Michigan respond that the Complaint sufficiently alleges the geographic markets at issue and that the Complaint need not detail specific facts to support the geographic markets at issue. Geographic markets need not be alleged or proven with scientific precision, nor be defined by metes and bounds as a surveyor would lay off a plot of ground. United States v. Conn. Natl Bank, 418 U.S. 656, 669 (1974); United States v. Pabst Brewing Co., 384 U.S. 546, 549 (1966); White and White, 723 F.2d at 503. The complaint need only present sufficient information to plausibly suggest the contours of the relevant geographic market. Jacobs v. Tempur-Pedic International, Inc., 626 F.3d 1327, 1336 (11th Cir. 2010). There are 17 specific geographic markets alleged in the Complaint. The Complaint further alleges that geographic markets for health insurance are local because the purchasers of health insurance demand access to networks of hospitals and physicians close to their homes and workplaces. (Comp., 25) The effect of Blue Crosss MFNs as to geographic markets is the area in which the hospital subject to the MFN operates and in which employers and insureds can practicably turn for hospitals included in the provider network offered for sale as part of a commercial health insurance product. (Comp., 26) An example of a geographic area used in the Complaint is the Lansing area: Lansing area employers and insureds cannot practicably turn to commercial health insurers that do not offer network access to [physicians and] hospitals in Lansing Metropolitan Statistical Area (MSA). (Comp., 27) Geographic markets are analyzed
10
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by using a localized approach and a metropolitan area may be an appropriate geographic market. Conn. Natl Bank, 418 U.S. at 670; United States v. Marine Bancorporation, Inc., 418 U.S. 602, 619 (1974). The Courts review of the Complaint shows that it plausibly alleges sufficient facts to establish geographical markets. At the pleading stage, the Complaint states a claim that consumers demand access to local providers and, therefore, the health insurance markets are local. Access to provider networks within the consumers geographical area is plausible. The use of statistical metropolitan data, such as the MSA, is plausible to establish the geographical area alleged in the Complaint. 4. Market Power
Blue Cross argues that the Complaint fails to allege market shares because the Complaint does not allege market shares by geographic market separately for group and individual health insurance. The United States and Michigan argue that the Complaint sufficiently alleges market power. To sufficiently plead market power, a complaint must provide a sufficient factual predicate to support its allegations that the defendants enjoy market power in the relevant market. Foundation for Interior Design v. Savannah College, 244 F.3d 521, 531 (6th Cir. 2001). Market power can be inferred from high market shares. Spirit, 431 F.3d at 935. The Complaint in this case alleges that Blue Cross market share in the geographic market ranges from 40% to more than 80%. (Comp., 28) Blue Cross admits that it is the dominant health insurer in Michigan. (B.C. Br., at 16) Estimations of market share is sufficient to infer market power. See, Toys R Us, Inc. v. F.T.C., 221 F.3d 928, 937 (7th Cir. 2000)(Shares between 20% to
11
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49% is sufficient to sustain an antitrust claim.). The Complaint alleges that the MFNs have excluded competitors and caused price increases. (Comp., 41-79) The Court finds that the allegations as to market share in the Complaint are plausible at this pleading stage. 5. Anticompetitive Effects
Blue Cross asserts that the MFNs are procompetitive, therefore, the Complaint fails to state the MFNs anticompetitive effects. The United States and Michigan respond that the Complaint alleges detailed allegations as to how Blue Cross MFN clauses have negatively affected competition in the health insurance markets throughout Michigan. Although MFNs may be procompetitive, the United States and Michigan argue that a factual inquiry and, ultimately, a balancing of anticompetitive and procompetitive effects must be made but not at the pleading stage. The Complaint alleges that the MFN clauses have negatively impacted competition in the health insurance markets throughout Michigan, by raising competitors costs, likely increasing premiums, and directly increasing costs to self-insured employers. (Comp., 41-48) The Complaint sets forth various examples, such as the Upper Peninsula, Alpena County and the Lansing area. In the Upper Peninsula, the Complaint alleges that the MFN-plus entered into by Blue Cross with Marquette General, affects competition because the hospital is the only tertiary care hospital in the Upper Peninsula. The United States and Michigan claim the requirement that the hospital charge competing insurers at least 23% more than it charges Blue Cross affects potential competitors, such as Priority Health. (Comp., 49) Blue Cross has asserted that its contract will keep blue lock on U.P. (Comp., 57) In Alpena County, Blue Cross offered Alpena Regional Medical Center, the only hospital in the area, a substantial rate increase in exchange for an MFN-
12
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plus and a commitment that during the term of the contract, the hospital would not improve the discount it gave to any other health insurer. (Comp., 68) The United States and Michigan claim this has resulted in loss of competition in that Priority Healths prices have increased. (Comp., 69) Blue Cross entered into a ten-year contract with Sparrow Hospital in Lansing that requires Sparrow to charge most other insurers at least 12% more than Blue Cross pays. The Complaint alleges that this will likely result in a price increase to other insurers in Lansing and could cause other hospitals in the area to increase prices charged to Sparrows own health plan. (Comp., 60, 63-64) Based on the allegations in the Complaint, it is plausible that the MFNs entered into by Blue Cross with various hospitals in Michigan establish anticompetitive effects as to other health insurers and the cost of health services in those areas. 6. Harm
Blue Cross argues that the Complaint fails to allege plausible harm such as foreclosure and recoupment. In response, the United States and Michigan argue that the Complaint specifically alleges foreclosure and that recoupment is not at issue in this case. A competitor is foreclosed from competing when it is denied or disadvantaged in its access to significant sources of input or distribution. United States v. Dentsply Intl., Inc., 399 F.3d 181, 189-90 (3d Cir. 2005) The Complaint alleges that Blue Cross has entered into MFNs with major hospitals and health systems and community hospitals which have resulted in competitors being excluded from these markets. (Comp., 4, 14, 69, 77-79, 56) As noted above, it is claimed that Priority has been unable to enter the market in the Upper Peninsula because of the MFN clause between Blue Cross and Marquette General. Although the term foreclose is not set forth in the Complaint, it plausibly alleges facts that other insurers have been excluded or may be excluded or
13
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foreclosed from entering the markets because of the MFN clauses between Blue Cross and these hospitals. As to recoupment, the case cited by Blue Cross involved a predatory bidding claim which is not the claim in this case. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 322 (2007). The claim in this case involves the MFNs used by Blue Cross which prevent other insurers from entering the market. C. Michigan Antitrust Reform Act
Blue Cross argues that its conduct is exempt from the Michigan Antitrust Reform Act (MARA), M.C.L. 445.774. Michigan responds that Blue Cross is not exempt. MARA applies to entities engaged in trade or commerce in Michigan. There are exemptions: This act shall not apply to a transaction or conduct of an authorized health maintenance corporation, health insurer, medical care corporation, or health service corporation or health care corporation when the transaction or conduct is to reduce the cost of health care and is permitted by the commissioner. This subsection shall not affect the enforcement of the federal antitrust act by federal courts or federal agencies. M.C.L. 445.774(6). The exemption only applies to health insurers when the transaction or conduct is to reduce the cost of health care and is permitted by the commissioner. Id. The Complaint alleges that the MFNs have not led, and likely will not lead, to lower hospital prices for Blue Cross or other insurers. On no occasion has a Blue Cross MFN resulted in Blue Cross paying less for hospital services. (Comp., 81) The Complaint has plausibly alleged that the MFNs at issue did not reduce the cost of health care. At this stage of the proceedings, Blue Cross has not shown it is exempt under M.C.L. 445.774(6).
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Blue Cross also argues that it is exempt under the following: * * * (4) This act shall not apply to a transaction or conduct specifically authorized under the laws of this state or the United States, or specifically authorized under laws, rules, regulations, or orders administered, promulgated, or issued by a regulatory agency, board, or officer acting under statutory authority of this state or the United States. (5) A transaction or conduct made unlawful by this act shall not be construed to violate this act where it is the subject of a legislatively mandated pervasive regulatory scheme, including but not limited to, the insurance code of 1956, being sections 500.100 to 500.8302 of the Michigan Compiled Laws, which confers exclusive jurisdiction on a regulatory board or officer to authorize, prohibit or regulate the transaction or conduct. M.C.L. 450.774(4)-(5). Michigan argues that Blue Cross is not mentioned in this section whereas Blue Cross is mentioned in subsection (6) above. The Court agrees with Michigans argument given that Blue Cross is specifically mentioned in subsection (6). Subsections (4) and (5) do not apply to Blue Cross. Even if these two subsections applied, the transaction at issuethe use of MFNs to prevent competitionhas not been authorized by either federal or state law. Additionally, the Michigan Attorney General is authorized to bring actions against Blue Cross. M.C.L. 550.1619(2), 550.1515(1). The Court finds that the Complaint plausibly alleges a violation under the MARA and denies Blue Cross Motion to Dismiss this claim. D. Defenses/Abstention
Blue Cross bases its motion on various defenses, such as state action immunity because Michigan heavily regulates the insurance industry. Another reason set forth by Blue Cross is that 15
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any decision in this case would disrupt substantial state law bearing on Blue Cross special status as a quasi-public entity agency and designation as the insurer of last resort. Blue Cross urges the Court to abstain from hearing the case because there is adequate state remedy, such as review by the Insurance Commissioner of these MFN clauses. The United States and Michigan argue that state action immunity is not applicable and that the Court should not abstain from hearing this case. They respond that Blue Cross mischaracterizes the Complaint because the Complaint is not seeking to prevent Blue Cross from obtaining the lowest prices from hospitals. The United States and Michigan allege that the Complaint attacks Blue Cross use of MFNs to prevent its competitors from obtaining the best prices that the competitors can obtain, without interference from Blue Cross. The United States argues that it has no remedy before the State, therefore the Court should not abstain from hearing the case. 1. State Action Immunity
The Supreme Court established a two-part test for determining whether state action immunity saves certain actions from preemption by the Sherman Act: First, the challenged restraint must be one clearly articulated and affirmatively expressed as state policy; second, the policy must be actively supervised by the State itself. First Amer. Title Co. v. Devaugh, 480 F.3d 438, 445 (6th Cir. 2007); Liquor Dealers Assn v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980); FTC v. Ticor Title Ins. Co., 504 U.S. 621, 636 (1992). The state action immunity doctrine, like other judiciallyimposed exemptions from the antitrust laws, must be narrowly construed. First Amer. Title, 480 F.3d at 445. As to the first prongthe challenged restraint must be one clearly articulated and affirmatively expressed as state policythe Court finds that Blue Cross has failed to meet this prong.
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The challenged restraint in the Complaint is Blue Cross use of the MFNs to unreasonably restrain competition with other insurers. The purpose and policy of the Nonprofit Health Care Corporation Reform Act (NHCCRA) isto promote an appropriate distribution of health care services for all residents of this state, to promote the progress of the science and art of health care in this state, and to assure for nongroup and group subscribers, reasonable access to, and a reasonable cost and quality of, health care services, in recognition that the health care financing system is an essential part of the general health, safety, and welfare of the people of this state. * * * It is the intention of the legislature that this act shall be construed to provide for the regulation and supervision of nonprofit health care corporations by the commissioner of insurance so as to secure for all of the people of this state who apply for a certificate, the opportunity for access to health care services at a fair and reasonable price. M.C.L. 550.1102(1) and (2). With respect to providers, Blue Cross shall contract with such providers to assure subscribers reasonable access to, and reasonable cost and quality of, health care services, ... M.C.L. 550.1504(1). The following goals of the contract are: (a) There will be an appropriate number of providers throughout this state to assure the availability of certificate-covered health care services to each subscriber. (b) Providers will meet and abide by reasonable standards of health care quality. (c) Providers will be subject to reimbursement arrangements that will assure a rate of change in the total corporation payment per member to each provider class that is not higher than the compound rate of inflation and real economic growth. M.C.L. 500.1504. Provider class plans retained by the commissioner or approved by a hearing officer shall maintain certain standards and, as to hospitals, also include:
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Pg ID 1877
(a) To the extent practicable, reimbursement control shall be expressed in the aggregate to individual hospitals. (b) No portion of the health care corporations fair share of the hospitals reasonable financial requirements shall be borne by other health care purchasers. However, this portion shall not preclude reimbursement arrangements which include financial incentives and disincentives. (c) The health care corporations programs and policies shall not unreasonably interfere with the hospitals ability and responsibility to manage its operations. M.C.L. 500.1516. Blue Cross may enter into provider contracts executed under the Prudent Purchaser Act, M.C.L. 550.1502a and 550.51-63. Blue Cross argues that, based on the extensive regulatory scheme governing Blue Cross existence and because Blue Cross is considered a quasi-public creation of statute, Blue Cross is immune under the state action doctrine. Narrowly construing the state action immunity doctrine, the Courts review of the statutes governing Blue Cross actions reveals that the legislature did not clearly articulate nor affirmatively express the act sought to be restrainedusing MFNs to deter competition with other insurers. The NHCCRAs express stated purpose and policy are set forth aboveto secure for all of the people of this state who apply for a certificate, the opportunity for access to health care services at a fair and reasonable price. M.C.L. 550.1102(1) and (2). The main goal of the NHCCRA is to assure access by the people to health care services; not for Blue Cross to enter into contracts with providers which discourages competition with other insurersfor profit or otherwise. The NHCCRA states that no portion of Blue Cross fair share of the hospitals reasonable financial requirements shall be borne by other health care purchasers. M.C.L. 550.1516(2)(b). Although the Act allows Blue Cross to include reimbursement arrangements which include financial incentives and disincentives, such arrangements cannot result in cost shifting to 18
2:10-cv-14155-DPH-MKM Doc # 66
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Pg ID 1878
other health care purchasers. The purpose of the NHCCRA is to make certain that the people of Michigan are able to access health care services at a fair and reasonable price. There is no provision in the NHCCRA that allows Blue Cross to stifle competition. The Complaint alleges sufficiently, as previously noted, that the MFNs at issue prevent other insurers from competing with Blue Cross. The second prong for determining whether state action immunity applies is whether the State actively supervises the policy. Based on the many provisions of the NHCCRA and other regulations relating to the statute, the State actively supervises the policy of ensuring that the people of the State are able to access health care services at a fair and reasonable price. However, Blue Cross is unable to point to any provision of the NHCCRA which allows MFNs with hospital providers which prevent other insurers from competing with Blue Crosswhich is the challenged restraint alleged in the Complaint. Blue Cross argument that the Insurance Commissioner has the authority to investigate and modify Blue Cross provider contracts is not found in the statute. There is no provision that mandates the Insurance Commissioners review of specific contracts and review of MFN clauses before Blue Cross enters into such contracts with hospitals. The Act only allows the Insurance Commissioner to review provider plans and to examine the plan and determine only if the plan contains a reimbursement arrangement and objectives for each goal provided in section 504 .. M.C.L. 550.1506(2). Narrowly construing the state action immunity doctrine, for the reasons above, the Court finds that such immunity does not apply to Blue Cross use of MFNs in the contracts with hospitals as set forth in the Complaint. 2. Quasi-Public Entity
19
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Pg ID 1879
Blue Cross argues that it is a quasi-public entity. Courts have held that Blue Cross is not a public entity but a private entity and that Blue Cross, itself, has continued to so argue in other cases. Riverview Investments, Inc. v. Ottawa Cmty. Improvement Corp., 899 F.2d 474, 480-82 (6th Cir. 1992). Blue Cross manages its own business, controls its contracting relationship with providers and controls its substantive surpluses. M.C.L. 550.1301(2), 550.1301(1), 550.1206(1). This Court in another case has accepted Blue Cross argument that it is a private entity, not a state actor. Loftus v. Blue Cross Blue Shield of Michigan, 2010 WL 1139338, *4 (E.D. Mich. Mar. 24, 2010)(Hood). 3. Abstention
Blue Cross abstention argument under Burford v. Sun Oil Co., 319 U.S. 315 (1943) is not applicable because there is no available review of the MFN clauses by the Commissioner under the NHCCRA. Blue Cross has not shown that the Commissioner, in fact, reviewed the MFN clauses at issue. The United States only forum for enforcing federal antitrust laws is in the federal district court, which has exclusive jurisdiction under Sherman Act claims. 15 U.S.C. 4. This section precludes Burford abstention. Andrea Theaters, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 63 (2d Cir. 1986)(Abstention in a federal antitrust case would run counter to Congress intent in granting exclusive federal jurisdiction over these claims). The Court declines to abstain from hearing this case. E. Blue Cross Motion to Strike Letter from Michigan Attorney General
Blue Cross seeks to strike a letter from the Attorney General (Doc. #32) explaining why Michigan supports the arguments raised by the United States as to abstention and state action immunity because Blue Cross claims the letter is not a properly filed surreply.
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Pg ID 1880
It is true that the letter, filed after Blue Cross submitted its reply to the responses is considered a surreply and is not authorized under the Rules. However, because Blue Cross extensively argues its position in the Motion to Strike, its original Motion to Dismiss and reply, Blue Cross is not prejudiced by the surreply. The surreply does not raise any new arguments not raised by the United States or Michigan. As noted below, Blue Cross has also filed a supplemental document to support is Motion to Dismiss which is not authorized by the Rules as well. The Court has the discretion to allow documents to be filed and, since there is no prejudice to Blue Cross, the Court will not strike the letter. F. Blue Cross Motion for Leave to File Supplemental Authority
The Court grants Blue Cross Motion for Leave to File Supplemental Authority since, at the time Blue Cross filed the motion on June 30, 2011, the Court had yet to enter its Order on the motion. The United States and Michigan are not prejudiced given that they had the opportunity to respond to the motion. However, the Court finds that the case attached, FTC and Georgia v. Phoebe Putney Health System, Case No. 1:11-cv-58 (M.D. Ga. Order dated June 27, 2011)(unpublished), is not applicable because the transaction at issue in that casea certain acquisitionwas found to be regulated by the Georgia Legislature. In this case, as set forth above, the transaction at issuethe use of MFNsis not regulated by the Michigan statutes governing Blue Cross conduct. G. Blue Cross Motion to Stay Discovery Pending Ruling
Blue Cross seeks a stay in discovery pending a ruling on the Motion to Dismiss. The parties Rule 26(f) report indicates they have not exchanged disclosures based on Blue Cross request to stay discovery pending this ruling. The Court has now ruled on the Motion to Dismiss rendering this motion moot.
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Pg ID 1881
H.
The United States and Michigans Motion to Compel Discovery
The United States and Michigan seek production of documents in response to their First Request for the Production of Documents served on February 4, 2011 under Rule 34. Blue Cross objected to the discovery for two reasons: the pending Motion to Dismiss, and relevancy as to the documents from 2004 to 2005 relating to Blue Cross development of the MFN provisions, claiming that these documents antedate the dates in the Complaint. The Court finds the documents from 2004 to 2005 are relevant since the documents may establish Blue Cross intent as to the MFNs. The documents must be produced within 30 days from the entry of this Order. III. CONCLUSION For the reasons set forth above, IT IS ORDERED that Blue Cross Blue Shield of Michigans Motion to Dismiss (Doc. No. 12, filed December 17, 2010) is DENIED. IT IS FURTHER ORDERED that Blue Cross Blue Shield of Michigans Motion to Stay Discovery Pending a Ruling on Defendants Motion to Dismiss (Doc. No. 20, filed January 24, 2011) is MOOT. IT IS FURTHER ORDERED that Blue Cross Blue Shield of Michigans Motion to Strike Letter from the Michigan Attorney General (Doc. No. 34, filed March 7, 2011) is DENIED. IT IS FURTHER ORDERED that Blue Cross Blue Shield of Michigans Motion to Compel Production of Documents (Doc. No. 38, filed March 18, 2011 (redacted) and Doc. No. 39, filed March 18, 2011 (sealed and unredacted)) is GRANTED. IT IS FURTHER ORDERED that Blue Cross Blue Shield of Michigans Motion for Leave
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Pg ID 1882
to File Supplemental Authority (Doc. No. 55, filed June 30, 2011) is GRANTED.
s/Denise Page Hood Denise Page Hood United States District Judge Dated: August 12, 2011 I hereby certify that a copy of the foregoing document was served upon counsel of record on August 12, 2011, by electronic and/or ordinary mail. s/LaShawn R. Saulsberry Case Manager
23
Case 1:11-cv-01625-JEJ Document 3-1
IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA COMMONWEALTH OF PENNSYLVANIA, : Plaintiff, CIVIL ACTION NO. t: tt-cv-Ot625-JEJ Electronically Filed
v.
UROLOGY OF CENTRAL PENNSYLVANIA, INC. UROLOGY ASSOCIATES OF CENTRAL PENNSYLVANIA, P .C., MID-PENN UROLOGY INC., and HARRISBURG URO-CARE GROUP, P.C. Defendants. FINAL ORDER I. Introduction
Plaintiff, the Commonwealth of Pennsylvania, filed its Complaint on August 30, 2011, under Section 2 of the Sherman Act, 15 U.S.C. 2, and Sections 4C, 7 and 16 of the Clayton Act, 15 U.S.C. 15C, 18 and 26, and under the common law of the Commonwealth of Pennsylvania alleging that the merger of five urology practices into Urology of Central Pennsylvania, Inc.
substantially lessened competition in one or more relevant health care services markets. Defendants contest the allegations of the Complaint, and believe that competition has not been lessened. Plaintiff and Defendants, by their respective attorneys, have consented to the entry of this Final Order without trial or adjudication of any issue of fact or law, and without this Final Order constituting any evidence against, or any admission by, any party regarding any such issue of fact or law. Therefore, before any testimony is taken, without trial or adjudication of any issue of fact or law, and upon consent of the parties, it is ORDERED, ADJUDGED AND DECREED: II. 1. Jurisdiction
This Court has jurisdiction over the Defendants and subject matter
of this action pursuant to Sections 4C and 16 of the Clayton Act (15 U.S.C. 15C and 26). This Court has jurisdiction over the state claims pursuant to 28 U.S.C. 1367(a). III. As used in this Final Order: 2. "Acquire" (except as otherwise provided in Section 21.1 hereof) Definitions
means to purchase the whole or the majority of the assets, stock, equity, capital or other interest of a corporation or other business entity or to receive the right or
ability to designate or otherwise control the majority of directors or trustees of a corporation or. other business entity. 3. "Geographic Market," for purposes of this Final Order, but without
constituting Defendants' agreement that the same is a relevant geographic market for antitrust purposes, means the Greater Harrisburg Metropolitan Area consisting of an area within a 20-mile radius of Harrisburg, Pennsylvania, and includes portions of Cumberland, Dauphin and Perry Counties. 4. "Health Plan" means any particular organized health-service
purchasing program, including, but not limited to, health insurance and managed-care plans, whether offered by for-profit or non-profit, third-party payors, providers or any other private entity, including Medicare Advantage and Medicaid managed care plans, but not including purely government programs, such as Medicare or Medicaid. 5. "Hospital" means a health care facility, licensed as a hospital,
having a duly-organized governing body with overall administrative and professional responsibility and an organized professional staff that provides 24hour inpatient care, that may also provide outpatient services, and that has as a primary function the provision of inpatient services for medical diagnosis, treatment and care of physically injured or sick persons with short-term or episodic health problems or infirmities.
6.
(a)
"Inflation Index" means the Consumer Price Index - All
Urban Consumers Seasonally Adjusted Medical Care Services - All City Average ("CPI-MCS"), published by the Bureau of Labor Statistics. (b) "Extrapolated Inflation Index" shall mean the average growth in
the Inflation Index for the three calendar years prior to the expiration of Your Contract times the number of years in the proposed contract between UCPA and the Health Plan. Thus, if a proposed contract is for four years in duration, the Extrapolated Inflation Index would result from multiplying the annual average growth of the Inflation Index times four. 7. "Most Favored Nations Clause" ("MFN") means any written or
unwritten agreement between UCPA and a Health Plan that requires the Health Plan to receive the benefit of a better payment rate, term or condition than UCPA gives to another Health Plan. 8. "Payment Demand" means the aggregate dollar amount for the CPT
codes constituting 85% of the total Urology Services payments by a Health Plan to UCPA during the prior calendar year submitted to the Health Plan (on behalf of the Health Plan's members) multiplied times the demanded payment rates for each such CPT code. To determine the top CPT codes, the actual utilization per code will be multiplied times the current contractual payment rate for that code resulting in an extended value per CPT code.
9.
"Payor Contract" means a contract between UCPA and a Health
Plan for the furnishing of Urology Services and all other services by UCPA to Health Plan members. 10. "Provider" means hospital, laboratory, physician, physician
network or other health care professional. 11. "Professional Urology Services" refers to professional services
provided by a urologist who is especially trained in the medical specialty of urology - a surgical specialty focusing on the genitourinary portions of both the male and female body - and do not include radiation therapy, CT imaging or other ancillary services. 12. "Urology Services" refers to services provided by a urologist who
is especially trained in the medical specialty of urology - a surgical specialty focusing on the genitourinary portions of both the male and female body. 13. "Urology of Central Pennsylvania, Inc." ("UCPA") means the
urology practice created by the merger of Urology Associates of Central Pennsylvania, P.C.; Keystone Urology, P.C.; Mid-Penn Urology, Inc.; Harrisburg Uro-Care Group; and William K. Daiber, D.O. UCPA is a corporation organized under the laws of the Commonwealth of Pennsylvania having its principal address at 1023 Mumma Road, Lemoyne, Pennsylvania.
14.
"Your Contract" means a contract between UCPA and a Health Plan
for the furnishing ofUCPA services to Health Plan members and that was in effect on January 1, 2008.
IV.
Terms
For the period set forth below UCPA shall comply with the following: 15.
Negotiations Between UCPA and Health Plans

15.1 Any Health Plan licensed by the Pennsylvania Insurance
Department to serve the Geographic Market may, at its option, initiate the contract resolution provisions of this Final Order contained in Paragraphs 15.2 to 15.12, at least 90 days prior to contract expiration if the following conditions have been met. A. The Health Plan and UCPA have been attempting to negotiate a contract for at least 180 days. B. For Health Plans with a current contract with UCPA, UCPA's last Payment Demand is greater than the payment terms of its current contract with the Health Plan plus the Extrapolated Inflation Index; and C. The difference between the Health Plan's offer and UCPA's Payment Demand (calculated based on the relative utilization referenced in the definition of
Payment Demand above) would equal more than $500,000 if that offer and demand were applied to the number of the Health Plan's patients treated by UCPA in the previous calendar year. 15.2 In the event a Health Plan does not have a contract with UCPA, such Health Plan may request contract resolution if it meets subparagraphs 15.1 A and C above. 15.3 A Health Plan may opt into the contract resolution provisions of this Final Order if it meets the conditions identified in Paragraph 15.1 or 15.2 for initiating the contract resolution provision. Such provisions shall only apply to Professional Urology Services. 15.4 Contract resolution under this Final Judgment shall be accomplished by last best offer arbitration utilizing the Health Plan offer and UCPA Payment Demand referenced in 15.1C above. A. The arbitration panel will be an independent body made up of three representatives. A representative and his or her employer shall have none of the following relationships, currently or within the past five years, with UCP A or the Health Plan: employment, board membership, staff privileges, or acted as consultant or
advisor. The Health Plan shall appoint one member of the Panel. The representative appointed by the Health Plan shall come from an employer covered by any Health Plan in the Geographic Market. UCPA shall appoint a second member. The two members so appointed shall appoint a third. B. The Health Plan and UCPA shall each submit to the independent body its last contract payment offer. C. The independent body may retain experts or consultants to aid it in its deliberations, none of whom have any of the following relationships, currently or within the past five years, with either UCPA or the Health Plan: Employment, board membership, staff privileges, or acted as a consultant or advisor. 15.5 The independent body shall not prohibit the presentation to it for consideration any information provided by UCPA or the Health Plan, but must consider the following: A. The existing contract, if any between the Health Plan andUCPA.
B.
Prices paid by the Health Plan for comparable services in the Geographic Market, or such other counties UCPA and the Health Plan find agreeable.
C.
The costs incurred in providing urology services to UCPA's patients.
D.
The rate of increase or decrease in the median family income in the Geographic Market, as measured by the United States Department of Labor, Bureau of Labor Statistics.
E.
The rate of inflation as measured by the Inflation Index and (i) the extent to which any price increases under the existing contract between the Health Plan and UCPA were commensurate with the rate of inflation and (ii) the extent to which the Health Plan's premium increases, if any, were commensurate with the rate of inflation.
F.
The rate of increase, ifany, in appropriations for Managed Care Organizations participating in Pennsylvania's Medical Assistance program for the Department of Public Welfare, in the case of a
Filed 08/31/11 Page 10 of 28
Medicaid Managed Care Organization participant in this arbitration process. G. The actuarial impact of a proposed contract or rates paid by the Health Plan and a comparison of these rates in Pennsylvania with health plan rates in other parts of the country. H. The expected patient volume which likely will result from the contract.
I.
The independent body shall not consider the extent to which a Health Plan is or is not purchasing other services from UCPA.
15.6 Once the arbitration process has been invoked, the independent body shall set rules for confidentiality, exchange and verification of information and procedures to ensure the fairness for all involved and the confidentiality of the process and outcome. In general, the Health Plan and UCPA may submit confidential, competitively-sensitive information. Therefore, the independent body should ensure that it and any consultants it retains keep this information strictly confidential and do not disclose this information to other Health Plans or to other Providers.
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15.7 The independent body must select either the Health Plan's proposed payment terms or UCPA's proposed payment terms in making a decision. 15.8 Because of the important interests affected, the independent body shall commence the arbitration process within twenty (20) days after it is triggered by a written request from a Health Plan. It shall hold an arbitration hearing, not to exceed three (3) days, within forty-five (45) days of the commencement of the arbitration process. The independent body shall render its determination within seven (7) days after the conclusion of the hearing. The parties, by agreement, or the independent body, because of the complexity of the issues involved, may extend any of the time periods in this section, but the arbitration process shall take no more than ninety (90) days from its commencement. 15.9 UCPA and the Health Plan shall each bear the cost of their respective presentations to the independent body and shall each bear onehalf of any other costs associated with the independent review. 15.10 During the above arbitration process, if a Health Plan has a contract for UCPA's services, it will continue to pay the reimbursement rates set forth in that contract. This amount will promptly (within 60 days
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after determination) be adjusted retroactively, and any shortfalls will be paid, to reflect the actual pricing determined by the independent body. 15.11 Ifa Health Plan has no contract for UCPA's services, the Health Plan shall pay for all services by UCPA, for which payment has not been made, in an amount equal to rates proposed in its contract during the arbitration process. This amount will promptly (within 60 days after determination) be adjusted retroactively and any shortfalls will be paid, to reflect the actual pricing determined by the independent body. 15.12 If the amounts paid pursuant to Paragraphs 15.10 and 15.11 are less than the amounts owed under the contract awarded as the result of arbitration, the Health Plan shall pay interest on the difference. If such amounts are greater than the amounts owed under the contract awarded as the result of arbitration, UCPA shall pay interest on the difference. For purposes of calculating interest due under this paragraph, the interest rate shall be the U.S. prime lending rate offered by PNC Bank or its successor as of the date of the independent body's decision on arbitration. 16.
Nondiscriminatory Access to UCPA

16.1 Commencing 30 days from the date of entry of this Final
Order, UCPA shall not refuse to treat, provided that the patient meets UCPA's payment requirements, or refuse to release medical records or
12
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information about, patients on the basis of the identity or affiliation of a patient's primary care or other specialty physician, the patient's Health Plan or the patient's utilization of non-UCPA Providers. 17. Referrals 17.1 Commencing 30 days from the date of entry of this Final Order, UCPA shall not require its employed and shareholder physicians to refer patients to a UCPA physician or service in situations where the patient is covered by a Health Plan that does not participate with UCPA for some physician or service or otherwise expresses a preference to be referred to a non-U CPA Provider. 17.2 Commencing 30 days from the date of entry of this Final Order, UCPA shall not refuse to refer a patient, whether for diagnosis or treatment, to a non-UCPA Provider, if such referral is requested by the patient, the patient's representative when such representative is authorized to make care decisions for a patient, or the patient's physician, provided that UCPA physicians shall not be required to make referrals to sources they believe to be medically inappropriate. Based on current information, referrals for brachytherapy or to cancer centers in the Geographic Market, if desired by the patient, would not be viewed by UCPA doctors as medically inappropriate.
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18.
Health Plan Contracting 18.1 Commencing 30 days from the date of entry of this Final
Order, UCPA shall not enter into any Payor Contract with a Health Plan that expressly limits UCPA's ability to contract with another Health Plan. UCPA will not condition its contract with a Health Plan, or its provision of reasonable competitive prices to a Health Plan, on a limitation on the Health Plan's ability to contract with non-UCPA Providers. "Reasonable competitive prices" shall be defined as prices not substantially different from those charged to other Health Plans for similar volumes of services. 18.2 Commencing 30 days from the date of entry of this Final Order, UCPA shall not enter into any agreement with any Health Plan constituting 15% or more ofUCPA's patient volume that includes a MFN to the benefit ofUCPA or any Health Plan. The patient volume shall be calculated by dividing the number of UCPA patients covered by that Health Plan by the total number ofUCPA patients covered by health plans of that Health Plan's type, whether commercial health plans, Medicare Advantage health plans or Medicaid managed care health plans. UCPA may not renew or extend any agreement without abandoning any term or provision which constitutes an MFN. UCPA shall inform the Attorney General of the presence ofa MFN in any existing agreement ofUCPA, by
14
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providing a list of such agreements to the Attorney General not more than sixty (60) days from entry of this Final Order. 19.
Disclosures
19.1 Commencing 30 days from the date of entry of this Final Order, UCPA shall not require any Health Plan or patient to purchase radiation oncology or CT imaging services from itself or an entity affiliated with UCPA. 19.2 Commencing 30 days from the date of entry of this Final Order, when UCPA determines that a patient may require radiation oncology or CT imaging services, UCPA shall affirmatively inform the patient of the availability of such services from non-UCPA Providers. To convey such information, UCPA shall provide patients a list of radiation oncology or CT services Providers (as applicable) that request to be listed, participate in the Medicare program and that are located in the Geographic Market. The names of the radiation oncology or CT services Providers on the list shall all be of the same font and type. The list shall disclose to the patient the amount UCPA estimates that the patient and his or her Health Plan shall pay UCPA for its radiation oncology or CT services.
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19.3 UCPA must explain to the patients that the list is being provided to the patient because the patient has a choice of providers for radiation oncology or CT services. The list must be provided and explained to the patient prior to UCPA making arrangements for these services for patients. 19.4 UCPA must document that the list was presented to the patient or to the individual acting on behalf of the patient. 19.5 UCPA shall provide a copy of the List to the Attorney General as part of its Annual Report to the Attorney General described in Paragraph 22 of this Final Order. 19.6 UCPA shall provide the number of patients monthly who received radiation oncology or CT imaging services (to the extent known to UCPA) as part of its Annual Report to the Attorney General described in Paragraph 22 of this Final Order, and the number of those patients that were treated at a UCPA-owned facility. 19.7 Commencing 30 days from the date of entry of this Final Order, UCPA shall not reprimand or discipline employed physicians for referring patients for radiation oncology or CT imaging services to nonUCPA Providers.
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20.
PACE Urological Prescription Drug Assistance

20.1 Within 30 days of entry of this Final Order, Defendants shall
pay the Commonwealth of Pennsylvania, Office of Attorney General $100,000 to fund prescription drug purchases for urological diseases. This fund shall be used by the Department of Aging, PACE program to pay for prescription drug purchases for Pennsylvania citizens with urological diseases who apply to the PACE clearing house and who otherwise do not have prescription drug insurance and do not qualify for PACE or Medicare PartD. 21.
Future Sales and Acquisitions in the Geographic Market

21.1 UCPA shall not, directly or indirectly, acquire any urology
practice in the Geographic Market, or permit itself to be acquired in its entirety as a single unit, without providing written notice to the Attorney General at least ninety (90) days prior to the date of closing. 21.2 UCP A agrees, in regard to Paragraph 21.1 above, to waive the confidentiality protections under the Hart-Scott-Rodino Act, 15 U.S.C. 18a (h), the Antitrust Civil Process Act, 15 U.S.C. 1311 et seq and any other applicable confidentiality provisions in effect as of the date of this Final Order, for the sole purpose of allowing the United States Department of
17
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Justice or the Federal Trade Commission and the Pennsylvania Office of Attorney General to share documents, information and analyses. 22. Annual Report - Within 120 days of the closing of each fiscal year,
UCPA shall submit to the Attorney General an Annual Report on compliance with all of the provisions of this Final Order. This Annual Report shall be public, provided that UCPA's proprietary information (including any information relating to the specifics ofUCPA's business, operations, finances, prices or plans) shall be redacted from the public version. Any unredacted report submitted by UCP A pursuant to this section, and any documents or information relating to the specifics ofUCPA's business, operations, finances, prices or plans obtained from UCPA during any investigation pursuant to any of the terms of this Judgment, including without limitation investigations pursuant to Sections 21 or 33 hereof, shall be deemed confidential and not a public record pursuant to the Pennsylvania Right to Know Law (collectively "the Confidential Information"). The Office of Attorney General shall classify the Confidential Information under, and shall assert one or more of the following Right to Know Law exemptions to any request or inquiry relating to the Confidential Information: (a) the non-criminal investigation exception under 65 P.S. 67.708(b)(17)(i), (ii) and (iv); (b) the trade secret and proprietary information exception under 65 P.S. 67.708(b)(11); (c) the individually identifiable health information exception under 65 P.S.
18
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67. 708(b)(5); or (d) any other applicable exception. In the event a request is filed seeking Confidential Information, the Office of Attorney General shall issue a Denial based on one of the foregoing reasons pursuant to 65 P.S. 67.903. If an appeal is filed from the Attorney General's Denial, the Office of Attorney General shall provide notice to UCPA of such an appeal pursuant to Paragraph 30 relating to notice and defend its position in any subsequent challenge or litigation consistent with applicable law. 23.
Binding on Successors and Assigns - The terms of this Final Order
are binding on UCPA, its directors, officers, shareholders, managers, employees (in their respective capacities as such), and to its successors and assigns, subject to the provisions of paragraph 32 hereof, and provided that this Order shall not be applicable to a purchaser of only a portion of the assets of UCPA which are less than the entirety ofUCPA as a single unit. 24.
Complaint Procedure - Any person, Provider, Health Plan or
consumer of medical services who wishes to report a possible violation of this Final Order shall send a written description of the alleged violation to the Chief Deputy Attorney General, Antitrust Section, Office of Attorney General, 14th Floor, Strawberry Square, Harrisburg, Pennsylvania 17120. The Office of Attorney General shall transmit the complaint, keeping confidential the name of the complainant, if necessary, to UCPA. UCPA shall respond in writing to
19
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the complainant and to the Attorney General within thirty (30) days from the receipt of any complaint. If the complaint is still unresolved, the Attorney General will attempt to negotiate a satisfactory resolution. IfUCPA believes a complaint to be unjustified, it may so advise the Attorney General and its obligations under this paragraph will be satisfied unless it is otherwise reasonably advised by the Attorney General to respond more fully to the complaint. UCPA will reasonably cooperate with the Attorney General to attempt to resolve any complaints that have merit. 25.
Compliance - To determine or secure compliance with this Final
Order or if the Attorney General receives a complaint pursuant to Paragraph 24 of this Final Order, upon reasonable notice during normal business hours, any duly authorized representative of the Attorney General shall be permitted: A. Reasonable access to all non-privileged books, ledgers, accounts, correspondence, memoranda, other records and documents, in the possession or under the control 'of UCPA, relating to any matters contained in this Final Order; and B. To interview officers, shareholders, managers or employees of UCPA regarding any matters contained in this Final Order. 26.
Reimbursement of Expenses - Within 180 days after entry of this
Final Order, UCPA shall pay a total of$100,000 to reimburse the Attorney
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General's costs incurred to conduct its investigation, which payment shall be used for future Public Protection Division purposes. 27.
Enforcement
27.1 If the Attorney General believes that there has been a violation of this Final Order, UCPA shall be promptly notified thereof. thereafter give UCPA a reasonable
The Attorney General shall
opportunity to cure any alleged violation without instituting legal action. If the alleged violation is not substantially cured by UCPA within sixty (60) days of the notification, the Attorney General may thereafter request this Court to undertake any remedial action deemed appropriate. This time period shall be extended in circumstances where the sixty (60) day period is not sufficient time to cure the alleged violation. 27.2 If the Attorney General prevails in any action or proceeding it brings to enforce this Final Order, the Court shall award costs and expenses, including a reasonable sum for attorney's fees. 28.
Limited Release - This Final Order releases the Defendants and
their officers, directors, agents, employees, and all of their successors and assigns, from any claims the Attorney General may have in connection with or resulting from or alleged to result from the formation or operation of UCPA, provided that this release shall not apply to activities of a purchaser of all or
21
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part ofUCPA, to the extent that activities occur after the expiration of this Final Order. Nothing in this Final Order shall prevent the Attorney General from investigating and prosecuting UCPA for any other alleged violations of Federal and State antitrust laws. Nothing in this Final Judgment shall authorize UCPA, its employees or subsidiaries or any UCPA employed or shareholder physician to engage in other conduct that would violate sections 1 or 2 of the Sherman Act. 15 U.S.C. 1 or 2, or Pennsylvania common law doctrine against monopolies and unfair restraints of trade. 29.
Legal Exposure - No provision of this Final Order shall be
interpreted or construed to require UCPA to take any action or to prohibit UCPA from taking any action if that requirement or prohibition would expose UCPA to liability for negligence (including negligence in making referrals) or malpractice. Further, this Final Order and any reports required hereunder shall not be introduced as evidence and cannot be used for any purpose or in any proceeding by a third party. 30.
Notices - All notices required by this Final Order shall be sent by
certified or registered mail, return receipt requested, postage prepaid or by hand delivery to:
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If to the Attorney General: Chief Deputy Attorney General Antitrust Section Office of Attorney General 14th Floor, Strawberry Square Harrisburg, PA 17120
If to UCPA:
Urology of Central Pennsylvania, Inc. 1023 Mumma Road Lemoyne, P A 17043 Copies to: David A. Ettinger Honigman Miller Schwartz and Cohn LLP 2290 First National Building 660 Woodward Avenue Detroit, Michigan 48226 31. Averment of Truth - UCPA avers that, to the best of their
knowledge, the information they have provided to the Attorney General in connection with this Final Order is true. 32. Termination - This Final Order shall expire on July 1,2015 or
upon the sale of UCPA unless this Court has determined that this Final Judgment shall apply to the Purchaser ofUCPA, pursuant to the provisions of paragraph 33 hereof.
23
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33.
Modification A.
If either the Attorney General or UCPA believes that
modification of this Final Order would be in the public interest, that party shall give notice to the other and the parties shall attempt to agree on a modification. If the parties agree on a modification, they shall jointly petition the Court to modify the Final Order. If the parties cannot agree on a modification, the party seeking modification may petition the Court for modification and shall bear the burden of persuasion that the requested modification is in the public interest. B. If after receiving notice pursuant to Paragraph 21.1, the Attorney General believes that this decree should apply to the purchaser ofUCPA, the Attorney General shall (within the 90 day period after notice) request this Court to apply this Final Order to such purchaser. Any such request shall include allegations and supporting evidence sufficient to provide the level of specificity required by Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009).
In that event, the Attorney General shall possess the burden of
proving to this Court that continuation of this Order to apply to
24
Filed 08/31/11 Page 25 of 28
proving to this Court that continuation of this Order to apply to such purchaser is necessary to avoid substantial future competitive harm from the formation ofUCPA; and is in the public interest; and that the benefit from such continuation outweighs the harm to the purchaser therefrom. UCPA may request that this Court determine, within the 90 day period, whether there is a sufficient basis for the Attorney General's request to justify further proceedings after conclusion of the 90 day period. C. In no event shall this Order (i) have a term which extends beyond four years; or (ii) result in application of the terms of this Order to any services or operations of the purchaser other than those acquired from UCPA. Moreover, in no event shall the provisions of Section 15 hereof apply to any managed care negotiations of the purchaser except if, and to the extent that, the purchaser seeks separate and distinct prices for Professional Urology Services.
25
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34.
Accountable Care Organizations
34.1 If UCPA becomes part of an Accountable Care Organization ("ACO") approved by the Centers for Medicare and Medicaid Services, this Final Judgment shall not apply to the conduct of such ACO. 34.2 IfUCPA participates in a venture involving one or more other Providers offering bundled (primarily complementary) services to Health Plans through a program intended to offer greater efficiencies, higher quality and/or greater cost savings, the provisions of~~ 32 (with regard to expiration) and 33A and C (including those provisions applicable to purchasers) hereof shall also apply to such organization and UCPA's participation therein. 35.
Retention of Jurisdiction - Unless this Final Order is terminated
~
early pursuant to
32, jurisdiction is retained by the United States District Court
for the Middle District of Pennsy lvania until July 1, 2015 to enable any party to apply to this Court for such further orders and directions as may be necessary and appropriate for the interpretation, modification and enforcement of this Final Order.
26
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36.
No Admission of Liability - UCPA, desiring to resolve the
Attorney General's concerns without trial or adjudication of any issue of fact or law, has consented to entry of this Final Order, which is not an admission of liability by UCPA as to any issue of fact or law and may not be offered or received into evidence in any action as an admission of liability, whether arising before or after the transaction referenced herein. 37. Counterparts - This Final Order may be executed in counterparts.
v.
38.
Public Interest Determination
The Court, upon averment of the Commonwealth of Pennsylvania,
finds that entry of this Final Order is in the public interest.
27
Filed 08/31/11 Page 28 of 28
Dated this 30th day of August, 2011
COMMONWEALTH' OF PENNSYLVANIA
UCPA
Linda L. KeUy Attorney General (717) 787-3391
By: ____ David A. Ettinger Honigman Miller Schwartz and Cohn LLP 2290 First National Building 660 Woodward Avenue Detroit, MI 48226
M...::::..:::,~_ _ _-
Alexis L. Barbieri Executive DeputyAttomey General Public Protection DiVision
B~~ esA:
,. Donahue, TIl '. . Chief Deputy Attorney General Antitrust Section (717) 787-4530 Tracy W. Wertz Deputy Attorney General Antitrust Section Jennifer A. Thomson Deputy Attorney General Antitrust Section Attorneys for the Commonwealth of Pennsylvania Office of Attorney General 14th Floor, Strawberry Square
Harrisburg, PA 17120
So Ordered: Judge U.S.DJ.
28
UCPA Final Order 823-11
FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580
Office of Policy Planning Bureau of Economics Bureau of Competition
June 8, 2011 Senators Eric D. Coleman and John A. Kissel Representatives Gerald Fox and John W. Hetherington Connecticut General Assembly Room 2500 L.O.B. 300 Capitol Avenue Hartford, CT 06106-1591 Dear Senators Coleman and Kissel and Representatives Fox and Hetherington: The staffs of the Federal Trade Commission=s Office of Policy Planning, Bureau of Competition, and Bureau of Economics 1 are pleased to respond to your request for comments on the antitrust provisions of House Bill No. 6343 (H.B. 6343 or the Bill). The Bill, among other things, intends to exempt health care provider-members of certified cooperative arrangements from state and federal antitrust laws. 2 The exemption is aimed at immunizing a cooperatives contract negotiations with managed care organizations, but appears to extend to a broad range of other activities as well. We are very concerned that the antitrust provisions of the Bill, if enacted, are likely to lead to dramatically increased costs and decreased access to health care for Connecticut consumers. The review provisions in the Bill appear unlikely to prevent these harmful effects. The Bill is not needed to allow procompetitive cooperative activities by health care providers because antitrust law already permits collaborations that benefit consumers. To the extent that H.B. 6343 is designed to authorize conduct not already permitted under the antitrust laws, it threatens to deprive health care consumers of the benefits of competition. In addition, the regulatory regime contemplated by the Bill may be insufficient to meet the rigorous standards required to confer state action immunity from the federal antitrust laws if that is indeed the intent of the Bill.
This letter expresses the views of the Federal Trade Commissions Office of Policy Planning, Bureau of Competition, and Bureau of Economics. The letter does not necessarily represent the views of the Federal Trade Commission (Commission) or of any individual Commissioner. The Commission has, however, voted to authorize staff to submit these comments.
2
Although the Bill explicitly grants antitrust immunity only under Connecticut law, for purposes of this letter we assume that the immunity is intended to extend to federal antitrust law as well. See Town of Hallie v. City of Eau Claire, 471 US 34, 42 (1985) (state legislatures explicit statement recognizing anticompetitive conduct and expectation of antitrust immunity is not necessary for state action doctrine immunity to apply).
Interest and Experience of the Federal Trade Commission Congress has charged the Federal Trade Commission (FTC or Commission) with enforcing the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices in commerce. 3 Pursuant to its statutory mandate, the FTC seeks to identify business practices and governmental regulations that may impede competition without also offering countervailing benefits to consumers. Health care competition is critically important to the economy and consumer welfare. For this reason, anticompetitive conduct in health care markets has long been a key focus of FTC activity. The agency has brought numerous antitrust enforcement actions involving the health care industry. 4 In addition, the Commission and its staff have given testimony, 5 issued reports, 6 and engaged in advocacy to state legislatures regarding various aspects of competition in the health care industry. Of particular relevance, the Commission and its staff have long advocated against federal and state legislative proposals that would create antitrust exemptions for collective negotiations by health care providers when such exemptions are likely to harm consumers. 7
3 4
Federal Trade Commission Act, 15 U.S.C. ' 45.
See Federal Trade Commission, Overview of FTC Antitrust Actions in Health Care Services and Products, Sept. 2010, available at: http://www.ftc.gov/bc/110120hcupdate.pdf.
See Prepared Statement of the Fed. Trade Commn Before the H. Comm. on the Judiciary, Subcomm. On Courts and Competition Policy, On Antitrust Enforcement in the Health Care Industry, Dec. 1, 2010; Prepared Statement of the Fed. Trade Commn Before the Subcomm. On Consumer Protection, Product Safety, and Insurance, Comm. on Commerce, Science & Transportation, On The Importance of Competition and Antitrust Enforcement to Lower-Cost, Higher-Quality Health Care, July 16, 2009 (all testimonies available at: http://www ftc.gov/ocr/testimony/index.shtml).
See FED. TRADE COMMN, EMERGING HEALTH CARE ISSUES: FOLLOW-ON BIOLOGIC DRUG COMPETITION (Jun. 2009); FED. TRADE COMMN, PHARMACY BENEFIT MANAGERS: OWNERSHIP OF MAIL-ORDER PHARMACIES (Aug. 2005); FED. TRADE COMMN AND DEPT OF JUSTICE, IMPROVING HEALTH CARE: A DOSE OF COMPETITION (Jul. 2004) (all reports available at: http://www.ftc.gov/reports/index.shtm). See FTC Staff Comment to the Hon. Elliott Naishtat Concerning Texas S.B. 8 to Exempt Certified Health Care Collaboratives From the Antitrust Laws (May 2011); FTC Staff Comment to Rep. Tom Emmer of the Minnesota House of Representatives Concerning Minnesota H.F. No. 120 and Senate Bill S.F. No. 203 on Health Care Cooperatives (Mar. 2009); FTC Staff Comment to the Hon. William J. Seitz Concerning Ohio Executive Order 2007-23S to Establish Collective Bargaining for Home Health Care Workers (Feb. 2008); FTC Staff Comment Before the Puerto Rico House of Representatives Concerning S.B. 2190 to Permit Collective Bargaining by Health Care Providers (Jan. 2008) (all advocacies available at: http://www ftc.gov/opp/advocacy date.shtm). See also Letter to Hon. Rene O. Oliveira, Concerning Texas Physician Collective Bargaining (May 1999) (available at: http://www ftc.gov/be/v990009.shtm); Prepared Statement of the Fed. Trade Commn Before the H. Comm. on the Judiciary, Concerning H.R. 1304, the Quality Health-Care Coalition Act of 1999, June 22, 1999, available at: http://www ftc.gov/os/1999/06/healthcaretestimony htm.
7
The Connecticut Bill H.B. 6343 allows the establishment of cooperative arrangements agreements among health care providers and apparently intends to provide them with an exemption from the antitrust laws upon approval by the Connecticut Attorney General. That immunity would extend to sharing, allocating or referring patients, personnel, instructional programs, support services or facilities or medical, diagnostic or laboratory facilities or procedures, or negotiating fees, prices or rates with managed care organizations, and includes, but is not limited to, a merger, acquisition or joint venture. 8 The Bill also prohibits managed care organizations from refusing to negotiate in good faith with parties in a certified cooperative arrangement. A managed care organization that violates this prohibition is subject to a penalty of up to $25,000 per day. 9 To qualify as a cooperative arrangement under the Bill, the health care providers must apply for and receive a certificate of public advantage from the Connecticut Attorney General. 10 The Attorney Generals review of an application must consider the benefits of the arrangement, including enhancement of the quality of health services to consumers; gains in cost efficiency of providing health services; improvement in utilization of and access to health services and equipment; and avoidance of duplication of health resources. 11 The Attorney General must compare these benefits against any disadvantages, including the potential reduction in competition; the adverse impact on quality, access or price of health care services to consumers; and the availability of arrangements that achieve the same benefits with less restriction on competition. 12 The Attorney General must then determine whether the benefits outweigh the disadvantages and approve or deny the application within ninety days of receiving it. 13 The Attorney General is also responsible for overseeing the cooperative arrangements by reviewing annual progress reports. 14 If, through this review, the Attorney General determines that the benefits of the cooperative arrangement no longer outweigh the disadvantages, he must hold a hearing to determine whether to revoke or modify the certificate. 15 The Attorney General, however, may not modify or revoke a certificate of public advantage more than three years after the initial issuance of the certificate. 16
8
H.B. 6343 1(a)(1) (Conn. 2011). H.B. 6343 1(e) (Conn. 2011). H.B. 6343 1(b) (Conn. 2011). H.B. 6343 1(c)(2) (Conn. 2011). Id. H.B. 6343 1(c)(1) (Conn. 2011). H.B. 6343 1(c)(4) (Conn. 2011). H.B. 6343 1(c)(5) (Conn. 2011). Id.
9
10 11 12 13 14 15 16
The Likely Effects of H.B. 6343 The antitrust exemption in the Bill is unnecessary to promote health care benefits to consumers through cooperative arrangements. This is because the antitrust laws already allow procompetitive collaborations among competitors. The Bill, which is designed to allow coordinated activity among health care competitors beyond that permitted by the antitrust laws, poses a substantial risk of consumer harm by increasing costs, impeding innovation, and decreasing access to health care. Even with oversight by the Attorney General, that consumer harm may be difficult to prevent once a cooperative is certified. (a) The Bill Is Unnecessary to Promote Arrangements That Will Benefit Consumers Federal antitrust law already permits joint activity by health care providers that benefits consumers. First, even providers price agreements are lawful when reasonably necessary to create efficiencies (such as reducing the cost or improving the quality of health care provided to patients), and have an overall procompetitive effect. For example, antitrust standards distinguish between effective clinical integration among health care providers that has the potential to achieve cost savings and improve health outcomes and those provider arrangements that exist merely to give the providers greater bargaining leverage with health plans. Both the FTC and its staff and the U. S. Department of Justice have provided substantial guidance to providers to make clear that the antitrust laws do not prevent health care providers from engaging in beneficial collaborations. 17 The antitrust laws are designed to stop actions that raise prices or inhibit new forms of competition; they do not block activities that benefit consumers. We therefore not only see no need for legislation to authorize collective fee negotiations that would arguably benefit consumers, we are also concerned that any new legislation may instead have the effect of immunizing agreements among providers, and potentially harm consumers. Second, no antitrust exemption is needed to permit health care providers to
See, e.g., Dept of Justice & Fed. Trade Commn, Statements of Antitrust Enforcement Policy In Health Care (1996), available at: http://www ftc.gov/bc/healthcare/industryguide/policy/index htm; TriState Health Partners, Inc., Letter from Markus Meier, FTC to Christi Braun, Ober, Kaler, Grimes & Shriver, April 13, 2009; Greater Rochester Independent Practice Association, Inc., Letter from Markus Meier, FTC to Christi Braun & John J. Miles, Ober, Kaler, Grimes & Shriver, September 17, 2007, letters available at: http://www ftc.gov/bc/healthcare/industryguide/advisory.htm. See also Fed. Trade Commn & U.S. Dept of Justice, Antitrust Guidelines for Collaborations Among Competitors, April 2000, available at: http://www ftc.gov/os/2000/04/ftcdojguidelines.pdf. Most recently, the FTC and DOJ released a joint statement explaining how the reviewing antitrust agency will enforce U.S. antitrust laws against the new Accountable Care Organizations groups of health care providers that, if they are likely to lower costs and cause improvements in the availability of health care, will be permitted under the Affordable Care Act of 2010 to operate. Fed. Trade Commn and the Antitrust Division of the Department of Justice: Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating In the Medicare Shared Savings Program, available at: http://www ftc.gov/os/fedreg/2011/03/110331acofrn.pdf..
17
discuss their concerns regarding health plan practices, whether among themselves or with health plans. We understand that some supporters of the Bill may be under the impression that any such discussions would violate the antitrust laws. But that is not the case. Health care professionals may, under existing antitrust law, engage in collective advocacy, both to promote the interests of their patients and to express their opinions about other issues, such as payment delays, dispute resolution procedures, and other matters. 18 (b) The Bill Poses a Substantial Risk of Consumer Harm The Bill is intended to extend antitrust immunity to a broad range of agreements among health care providers to eliminate competition. Regardless of any stated intent by a health care provider to improve health care quality and control costs, the practical effect of the Bill will be to exempt anticompetitive conduct from antitrust scrutiny. We think this would pose an unnecessary and substantial risk of consumer harm. It is well-recognized that antitrust exemptions routinely threaten broad consumer harm for the benefit of a few. The bipartisan Antitrust Modernization Committee observed [t]ypically, antitrust exemptions create economic benefits that flow to small, concentrated interest groups, while the costs of the exemption are widely dispersed, usually passed on to a large population of consumers through higher prices, reduced output, lower quality and reduced innovation. 19 The Bill appears intended to shield a broad range of potentially anticompetitive conduct from antitrust challenge. Such anticompetitive conduct may include cooperative agreements not to compete with regard to patients, procedures, personnel, or support services, agreements on the fees providers will accept from health plans, and agreements that will have the effect of eliminating beneficial competition through merger. In addition, the Bills requirement that managed care organizations negotiate with parties to a cooperative agreement backed up with a potential civil penalty of $25,000 per day for a failure to negotiate in good faith compounds the likely consumer harm. 20 This requirement not only will decrease the incentives of cooperatives to
The 1996 Statements of Antitrust Enforcement Policy In Health Care issued by the Commission and the Department of Justice explain the ways in which antitrust law permits health care providers to collectively provide both fee and non-fee related information to health plans. (Dept of Justice & Fed. Trade Commn, Statements of Antitrust Enforcement Policy In Health Care (1996), available at: http://www ftc.gov/bc/healthcare/industryguide/policy/index htm) See also Letter to Gregory G. Binford (February 6, 2003) (advisory opinion explaining that physicians proposed formation of advocacy group to collect and disseminate information about health plan policies and procedures, including fees paid to local physicians compared to fees paid in other areas, did not appear likely to have anticompetitive effects). See also American Medical Assn, Model Managed Care Contract (4th Ed. 2005), available at http://www.amaassn.org/ama1/pub/upload/mm/368/mmcc 4th ed.pdf. Antitrust Modernization Commission, Report and Recommendations (April 2007) at 335, available at: http://govinfo.library.unt.edu/amc/report recommendation/amc final report.pdf.
20 19 18
Antitrust jurisprudence recognizes a partys long-established right to exercise its discretion over with whom it deals. See United States v. Colgate & Co., 250 U.S. 300, 307 (1919).
compete on price and quality, but also threatens the ability of health plans to effectively use selective contracting, a key mechanism for promoting quality and cost-containment goals. Furthermore, the lack of clarity surrounding what constitutes good faith negotiation in this context may discourage plans from actively pursuing programs and contract terms that would benefit consumers. Moreover, determining liability based on a failure to negotiate in good faith could require courts to assess the reasonableness of prices and other terms of dealing, a role for which they are ill-suited. 21 It will be difficult, if not impossible, for the Attorney Generals review to protect consumers from the harmful effects of this legislation. First, it is not clear that the Attorney General has the necessary funds or available resources to conduct the type of fact-intensive, time-consuming market analysis needed to evaluate the competitive effects of a health care cooperative during the certification process. The time allotted for the Attorney Generals review is limited to ninety days and the standards under which the Attorney General may assess the cooperatives are unclear. Second, the Attorney Generals ability to remedy the harm caused by an anticompetitive cooperative, once formed, is limited. The Attorney Generals oversight relies solely on his or her review of a cooperatives annual progress report. Moreover, even if the Attorney General finds a cooperative arrangement has caused consumer harm, the power to address such problems is circumscribed by the limited remedy (revocation or modification of certification) as well as the limited grounds for exercising that remedy. Thus, if a cooperative has used its market power to increase prices without countervailing benefit, there is no means to remedy that harm. Third, once three years have passed since a cooperatives certification, the Attorney General has no power to modify or revoke the purported antitrust immunity conveyed by the certification, regardless of the circumstances. Thus, the review provisions will not protect consumers from the likely harm created by the Bill. The Bill Likely Will Not Create State Action Immunity The federal antitrust immunity that the Bill apparently purports to confer on cooperative arrangements is effective only if the State of Connecticut has clearly articulated an intention to replace competition in this area with a regulatory scheme, and actively supervises this private conduct. 22 The active supervision test seeks to determine whether the State has exercised sufficient independent judgment and control so that the details [of the restraint] have been established as a product of deliberate state intervention, not simply by agreement among private parties. 23 As explained by the Supreme Court in Patrick v. Burget, state officials must have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy. 24
21 22
Verizon Commcns. Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004).
Parker v. Brown, 317 U.S. 341, 351 (1943); see also Cal. Retail Liquor Dealers Assn v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980). Federal Trade Commission v. Ticor Title Insurance Co., 504 U.S. 621, 634 (1992). 486 U.S. 94, 101 (1988).
23 24
Here, the States review proposed under the Bill does not appear sufficient to meet the requirements of the state action doctrine. Notwithstanding the requirement that annual progress reports be filed by the health care providers during the initial three-year period, the Bill seemingly would not require State officials to review particular contracts and fee arrangements between groups of providers and payers to assess whether they comport with State policy goals (including but not limited to the goals stated under section 1(c)(2) of the Bill), and to remedy on an ongoing basis situations that may violate those goals. Notably also, the Bill does not appear to mandate any state monitoring and review of cooperative arrangements three years after the initial issuance of a certificate. As the Supreme Court has made clear, parties claiming state action immunity face a high bar. The regulatory program proposed by the Bill appears not to clear that bar. Conclusion Our analysis of H.B. 6343 suggests that its passage would pose a significant risk of increased health care costs and decreased access to care for Connecticut consumers. The antitrust immunity provisions in this legislation are unnecessary and would allow groups of private health care providers to engage in unsupervised anticompetitive conduct. In summary, FTC staff is concerned that this legislation is likely to foster anticompetitive conduct that is inconsistent with federal antitrust law and policy, and that such conduct could work to the detriment of Connecticut health care consumers.
We appreciate your consideration of these issues. Respectfully submitted,
Susan S. DeSanti, Director Office of Policy Planning
Joseph Farrell, Director Bureau of Economics
Richard A. Feinstein, Director Bureau of Competition
FEDERAL TRADE COMMISSION

WASHINGTON, D.C. 20580 Office of Policy Planning Bureau of Economics Bureau of Competition
May 11, 2011 The Honorable Rodney Ellis The Honorable Royce West The Senate of the State of Texas P.O. Box 12068 Austin, Texas 78711 Dear Senators Ellis and West: The staffs of the Federal Trade Commission=s Office of Policy Planning, Bureau of Economics, and Bureau of Competition 1 (FTC staff) are pleased to respond to your invitation for comments on Texas Senate Bills 1260 and 1339 (S.B. 1260 and S.B.1339 or the Bills) and the regulation of Advanced Practice Registered Nurses (APRNs). 2 S.B. 1260 would remove physician supervision and delegation requirements for APRNs, allowing these health care professionals to practice to the full extent of their education and training. S.B. 1339 similarly would remove physician oversight requirements and grant diagnostic and prescriptionwriting authority to APRNs, 3 but prescription-writing authority would require 500 hours of practice under the supervision of a physician or another APRN with full prescriptive authority. You have asked FTC staff to analyze the likely competitive impact of S.B. 1260 and S.B. 1339. Based on current evidence, the Bills elimination of supervision and delegation requirements appears to be a procompetitive improvement in the law that likely will benefit Texas health care consumers, and FTC staff therefore urge the Texas legislature to adopt either S.B. 1260 or S.B. 1339. In fact, in its January 2011 report to the 82nd Texas Legislature, the Texas Legislative Budget Board staff found that Texass site-based, delegated model of prescriptive authority limits patient access to affordable, quality healthcare providers, particularly in rural and health professional shortage areas. 4 The Institute of Medicine (IOM) recently noted similar concerns
This letter expresses the views of the Federal Trade Commissions Office of Policy Planning, Bureau of Economics, and Bureau of Competition. The letter does not necessarily represent the views of the Federal Trade Commission (Commission) or of any individual Commissioner. The Commission has, however, voted to authorize staff to submit these comments. Letter from Hon. Rodney Ellis and Hon. Royce West, Texas State Senate, to Susan DeSanti, Director, Office of Policy Planning, Federal Trade Commission (Apr. 6, 2011) [hereinafter Ellis/West Letter].
3 2 1
Id. (discussing requirements in Tex. Occ. Code Ann. 157, which governs the conditions under which physicians may delegate diagnostic and prescriptive authority to nurse practitioners and physician assistants).
TEXAS LEGISLATIVE BUDGET BOARD STAFF, TEXAS STATE GOVERNMENT EFFECTIVENESS AND EFFICIENCY: SELECTED ISSUES AND RECOMMENDATIONS 297 (Jan. 2011) (submitted to the 82nd Texas Legislature) [hereinafter
Page 1 of 8
with restrictive state scope of practice laws and specifically recommended that the FTC [r]eview existing and proposed state regulations concerning advanced practice registered nurses [and urge states] with unduly restrictive regulations . . . to amend them to allow advanced practice registered nurses to provide care to patients in all circumstances in which they are qualified to do so. 5 We therefore urge the Texas Legislature to consider the impact of the current restrictions on the scope of practice of APRNs, and to adopt either S.B. 1260 or S.B. 1339. Doing so would allow APRNs to provide health care services in a manner consistent with their training and the protection of patients. 6 Interest and Experience of the Federal Trade Commission The FTC is charged with enforcing the FTC Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. 7 Effective competition is at the core of Americas economy; 8 vigorous competition among sellers in an open marketplace gives consumers the benefits of lower prices, higher quality products and services, more choices, and greater innovation. Health care competition is of particular importance to the economy and consumer welfare. For this reason, anticompetitive restraints in health care markets have long been a key focus of FTC law enforcement, 9 research, 10 and advocacy. 11 Of direct relevance to the proposed
BUDGET BOARD STAFF REPORT]. As you also noted in your letter, physician supervision requirements vary based on the APRNs practice setting, . . . the various requirements create a complicated regulatory scheme, and APRNs at an alternative practice site must find a supervising physician that lives or practices within 75 miles, which may exclude APRNs otherwise willing to practice in rural and underserved areas. Ellis/West Letter, supra note 2, at 1-2.
5
INSTITUTE OF MEDICINE, THE FUTURE OF NURSING: LEADING CHANGE, ADVANCING HEALTH 10-11 (2011) [hereinafter IOM REPORT]. The IOM was established in 1970 as the health arm of the National Academy of Sciences and is an independent, nonprofit organization that works outside of government to provide unbiased and authoritative advice to decision makers and the public. About the Institute of Medicine, available at http://www.iom.edu/About-IOM.aspx. We do not offer an opinion as to whether S.B. 1260 or S.B. 1339 is a preferable regulatory environment for Texas. Fed. Tr. Commn Act, 15 U.S.C. 45.
7 8
See National Society of Professional Engineers v. United States, 435 U.S. 679, 695 (1978) (The heart of our national economy long has been faith in the value of competition.).
See generally FED. TR. COMMN, FTC ANTITRUST ACTIONS IN HEALTH CARE SERVICES AND PRODUCTS (Sept. 2010), available at http://www ftc.gov/bc/110120hcupdate.pdf; Fed. Tr. Commn Website, Competition in the Health Care Marketplace, available at http://www.ftc.gov/bc/healthcare/antitrust/index.htm. See, e.g., FED. TR. COMMN & U.S. DEPT OF JUSTICE, IMPROVING HEALTH CARE: A DOSE OF COMPETITION (2004), available at http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf [hereinafter FTC/DOJ, A DOSE OF COMPETITION]; Fed. Tr. Commn, Centers for Medicare & Medicaid Servs., & Dept of Health & Human Servs. Office of Inspector Genl, Workshop Regarding Accountable Care Organizations and Implications Regarding Antitrust, Physician Self-Referral, Anti-Kickback and Civil Monetary Penalty (CMP) Laws (Oct. 5, 2010), available at http://www ftc.gov/opp/workshops/aco/index.shtml; Fed. Tr. Commn, Workshops on Emerging Health Care Competition and Consumer Issues (Oct. 30, 2008 & Nov. 21, 2008), available at http://www.ftc.gov/bc/workshops/hcbio/index.shtml; FED. TR. COMMN, EMERGING HEALTH CARE ISSUES: FOLLOWON BIOLOGIC DRUG COMPETITION (JUNE 2009), available at http://www ftc.gov/os/2009/06/P083901biologicsreport.pdf; Fed. Tr. Commn, Workshop on Clinical Integration in Health Care: a Check-Up (May 29, 2008), available at http://www ftc.gov/bc/healthcare/checkup/index.shtm; Fed.
10
Page 2 of 8
Texas APRN legislation, the FTC has closely followed issues relating to competition by health care providers such as nurse practitioners, physician assistants, and dental hygienists. Recently, FTC staff urged several states to reject or narrow restrictions that curtail competition among health care providers because they limit patients access to health care and raise prices. 12 In particular, staff examined APRN scope of practice restrictions that appear to have exceeded what is necessary to protect consumers. 13 As noted above, the recent IOM Report on the Future of Nursing recognizes the importance of this competition perspective and, more specifically, the Commissions expertise and experience in addressing anticompetitive restrictions on the scope of various healthcare professionals practice. 14 I. Background A. APRNs
APRNs are licensed under the Texas Nursing Practice Act. 15 Under this Act, advanced practice nurse means a registered nurse approved by the Texas Board of Nursing on the basis of
Tr. Commn, Workshop on Innovations in Health Care Delivery (Apr. 24, 2008), available at http://www ftc.gov/bc/healthcare/hcd/index.shtm. Advocacy by the Commission and its staff may comprise letters or comments addressing specific policy issues, Commission or staff testimony before legislative or regulatory bodies, amicus briefs, or reports. See, e.g., Letter from FTC Staff to Hon. Daphne Campbell, Florida House of Representatives (Mar. 22, 2011) (regarding proposed legislation to eliminate certain restraints on the scope of practice of Advanced Registered Nurse Practitioners), available at http://www.ftc.gov/os/2011/03/V110004campbell-florida.pdf; Letter from FTC Staff to Hon. Timothy Burns, Louisiana Legislature, (May 1, 2009) (regarding proposed restrictions on mobile dentistry), available at http://www ftc.gov/os/2009/05/V090009 louisianadentistry.pdf; Fed Tr. Commn & U.S. Dept of Justice Written Testimony before the Illinois Task Force on Health Planning Reform Concerning Illinois Certificate of Need Laws (Sept. 2008), available at http://www ftc.gov/os/2008/09/V080018illconlaws.pdf; FTC Amicus Curiae Brief in In re Ciprofloxacin Hydrochloride Antitrust Litigation Concerning Drug Patent Settlements Before the Court of Appeals for the Federal Circuit (Case No. 2008-1097) (Jan. 2008), available at http://www.ftc.gov/os/2008/01/080129cipro.pdf; FTC/DOJ, A DOSE OF COMPETITION, supra note 10.
12 11
See, e.g., Letter from FTC Staff to Hon. Daphne Campbell, supra note 11; Letter from FTC Staff to Hon. Timothy Burns, supra note 11; Letter from FTC Staff to Elain Nekritz, Illinois Legislature (May 29, 2008) (regarding proposed limited service clinic (LSC) regulations), available at http://www.ftc.gov/os/2008/06/V080013letter.pdf; Letter from FTC Staff to Massachusetts Dept of Health (Sept. 27, 2007) (regarding proposed LSC regulations), available at http://www ftc.gov/os/2007/10/v070015massclinic.pdf. Many of these advocacy efforts have been influential in preserving competition. For example, following the above-referenced advocacy letters, the Louisiana and Illinois legislatures rejected the proposed restrictions on competition, and Massachusetts followed FTC staffs recommendations in adopting its final LSC regulations.
See, e.g., Letter from FTC Staff to Hon. Daphne Campbell, supra note 11; Letter from FTC Staff to Kentucky Cabinet for Health and Family Services (Jan. 28, 2010) (regarding restrictions on the scope of practice for nurse practitioners, and others, that would have applied in LSCs but not in other limited care settings, such as urgent care centers), available at http://www.ftc.gov/os/2010/02/100202kycomment.pdf; FTC Staff Comment Before the Alabama State Board of Medical Examiners Concerning the Proposed Regulation of Interventional Pain Management Services (Nov. 3, 2010) (regarding restrictions on the scope of practice of certified registered nurse anesthetists, a specialized sub-category of APRNs), available at http://www ftc.gov/os/2010/11/101109alabamabrdme.pdf.
14 15
13
IOM REPORT, supra note 5, at 5, 10, 105 (2011). Tex. Occ. Code Ann. 301.001 et seq. (2011) (Nursing Practice Act).
Page 3 of 8
the nurse having completed an advanced educational program, which must include pharmacology and related pathology education. 16 In addition, the Texas Board of Nursing has promulgated rules requiring that the educational program, at a minimum, include a masters degree, and meet certain standards set by the [nursing] board or by a national accrediting body recognized by the board. 17 Nationally, [m]ore than a quarter of a million nurses are APRNs . . . who hold masters or doctoral degrees and pass national certification exams. 18 According to the January 2011 Budget Board Staff Report, Texas has some of the most restrictive scope of practice guidelines in the U.S. for APRNs. 19 According to the report, the number of advanced practice nurses is lower in states with restrictive regulatory environments, and these restrictions may limit the expansion of retail clinics, which generally employ APRNs to provide a limited range [of] primary healthcare. 20 The Budget Board Staff Report also noted that approximately 26 percent of Texass population lives in a health professional shortage area and that Texas is below the U.S. average in its primary care physicians-to-population ratio. 21 Finally, the report stated that researchers have compared physician and APRN patient outcomes and found them comparable and no findings have shown better health outcomes for patients in states with more restrictive regulatory environments. 22 B. S.B. 1260 and S.B. 1339
S.B. 1260 would remove physician supervision and delegation requirements, allow APRNs to practice independently, and define an APRNs scope of practice to include advanced assessment, diagnosing, prescribing, and ordering. Under the new law, APRN status would be based upon (1) successful completion of a graduate-level program accredited by a national accrediting body and (2) current certification by a national certifying body recognized by the Texas Board of Nursing. 23
Tex. Occ. Code Ann. 301.152(c)(1). Texas Board of Nursing, Rules and Regulations, at Chapter 221, available at http://www.bon.state.tx.us/nursinglaw/pdfs/bon-rr-0111.pdf.
17 18 16
IOM REPORT, supra note 5, at 23; see also BUDGET BOARD STAFF REPORT, supra note 4, at 299 (although certification exams are administered nationally, licensure requirements are determined on a state-by-state level and may vary widely). Different states refer to advanced practice registered nurses by various names and abbreviations, including APRNs, ARNPs, nurse practitioners, etc. For an overview of nurse practitioner requirements generally, see IOM REPORT, supra note 5, at 26, table 1 (types of practice) and 38-45.
19
BUDGET BOARD STAFF REPORT, supra note 4, at 299 (further noting [t]wenty states and the District of Columbia allow APRNs to practice as autonomous, or very nearly autonomous, healthcare providers). See also IOM REPORT, supra note 5, at 157-61 (chart summarizing the state practice regulations for nurse practitioners). BUDGET BOARD STAFF REPORT, supra note 4, at 300. Id. Id.
20 21
22
These amendments would be to Chapter 301 of the Occupations Code, the Nursing Practice Act, as well as conforming amendments and deletions to other chapters, including Chapter 157 of the Occupations Code (governing the authority of physicians to delegate certain medical acts).
23
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S.B. 1339 also would revise current Texas law to allow APRNs to make diagnoses and to prescribe and order prescription drugs and medical devices. Unlike S.B. 1260, however, S.B. 1339 would require APRNs seeking independent prescriptive authority to first practice with prescriptive authority for a minimum of 500 hours under the supervision of a physician or APRN who already has prescriptive authority. 24 II. Likely Effects on Texas Health Care Consumers
Texas health care consumers are likely to benefit from the passage of either S.B. 1260 or S.B. 1339 for several reasons, including lower health care costs, greater access to care, and greater choice among settings where health care is provided. Both S.B. 1260 and S.B. 1339 are likely to reduce the cost of basic health care services in two important ways. First, APRN care is generally less expensive. As noted by the Texas Legislative Budget Board staff, [a]ll APRNs who bill the Texas Medicaid Program are directly reimbursed at 92 percent of the physicians rate and if they bill Medicare they are paid 85 percent of the fee paid to physicians. 25 Second, the cost of APRN care itself would be decreased; under the current law, supervision and delegation requirements create administrative costs for APRNs, and these costs would be reduced under either of the Bills. Some of these cost savings may be passed on to public and private third-party payers, and ultimately to Texas health care consumers, in the form of lower prices. Both S.B. 1260 and S.B. 1339 likely will encourage greater usage of APRNs, which will also play an important role in improving access to health care services by Texas consumers. The Texas Legislative Budget Board staff noted that APRNs have helped mitigate the effects of a general practice physician shortage and that reduced restrictions on APRNs would increase the availability of lower-cost primary healthcare providers. 26 The IOM, too, recently recognized the important role that APRNs can play in improving access to health care.27 Among other things, the IOM observed that [r]estrictions on scope of practice . . . have undermined the nursing professions ability to provide and improve both general and advanced care. 28 FTC staff agree that the Bills likely will reduce barriers to entry and permit health care providers greater flexibility to offer basic health care through APRN-staffed offices and clinics. To the extent both S.B. 1260 and S.B. 1339 would increase the deployment of APRNs in a variety of health care delivery settings and thereby widen the range of choices available to consumers, both Bills also are likely to spur innovation in health care delivery and increase competition to provide basic health care services. This may generate additional benefits for
24
See S.B. 1339, amendments to Tex. Occ. Code Ann. 301.152, 301.357, and 157.051. BUDGET BOARD STAFF REPORT, supra note 4, at 302. Id. at 297. See generally IOM REPORT, supra note 5 (especially Summary, 1-15). Id. at 4.
25
26 27 28
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Texas health care consumers. For example, APRN-staffed clinics generally offer weekend and evening hours, which provides greater flexibility for patients, and may provide competitive incentives for other types of clinics to offer extended hours as well. 29 In addition, APRNs have played an important role in the recent increase in so-called limited service clinics (LSCs) in many states. LSCs typically are staffed by APRNs 30 and offer consumers a convenient way to obtain basic medical care at competitive prices. 31 As the January 2011 Budget Board Staff Report noted, restrictions on APRNs scope of practice may limit both the number and types of LSCs available to Texas consumers. 32 III. Potential Consumer Protection Concerns Raised by Reduced Scope of Practice and Supervision Requirements
Patient safety or consumer protection concerns may justify licensure requirements and scope of practice restrictions. 33 FTC staff recognize that particular health care procedures may require specialized training or heightened supervision if they are to be safely administered. There does not appear to be any evidence, however, that the safety of care provided by APRNs varies according to differences in physician supervision or scope of practice requirements. 34
Cf. Rena Rudavsky, Craig Evan Pollack, & Ateev Mehrotra, The Geographic Distribution, Ownership, Prices, and Scope of Practice at Retail Clinics, 151 ANNALS INTERNAL MED. 315, 317 (2009) (In a random sample of 98 [limited service] clinics, all had weekday and weekend hours and 95 (97%) had evening hours (after 6 p.m.) on weekdays.). See generally William M. Sage, Might the Fact that 90% of Americans Live Within 15 Miles of a Wal-Mart Help Achieve Universal Health Care?, 55 U. KAN. L. REV. 1233, 1238 (2007) (describing the size and scope of LSCs); Mary Kay Scott, Scott & Company, Health Care in the Express Lane: Retail Clinics Go Mainstream, at 22 (Sept. 2007) (report prepared for the California HealthCare Foundation), available at http://www.chcf.org/publications.
31 30 29
See Massachusetts Dept. Pub. Health, Commonwealth to Propose Regulations for Limited Service Clinics: Rules May Promote Convenience, Greater Access to Care (Jul. 17, 2007), available at http://www mass.gov/?pageID=pressreleases&agId=Eeohhs2&prModName=dphpressrelease&prFile=070717 clini cs.xml. The types of care offered at LSCs are similar to those offered in urgent care centers and other limited care, outpatient settings. See, e.g., Ateev Mehrotra et al., Retail Clinics, Primary Care Physicians, and Emergency Departments: A Comparison of Patients Visits, 27 HEALTH AFFAIRS 1272, 1279 (September/October, 2008). Evidence shows that the quality of care provided by APRNs in retail clinics is similar to that provided in physician offices and urgent care centers and slightly superior to that of emergency departments. Ateev Mehrotra et al., Comparing Costs and Quality of Care at Retail Clinics with that of Other Medical Settings for 3 Common Illnesses, 151 ANNALS INTERNAL MED. 321, 326 (2009) (analysis of 14 quality metrics for commonly treated ailments, including ear, strep, and urinary tract infections, and finding [f]or most measures, quality scores of retail clinics were equal to or higher than those of other care settings). Id.
32
BUDGET BOARD STAFF REPORT, supra note 4, at 300.
In competition terms, licensure requirements or scope of practice restrictions may sometimes offer an efficient response to certain types of market failure that can occur in professional services markets. See CAROLYN COX & SUSAN FOSTER, FEDERAL TRADE COMMISSION, BUREAU OF ECONOMICS, THE COSTS AND BENEFITS OF OCCUPATIONAL REGULATION, 5-6 (1990), available at http://www ftc.gov/be/consumerbehavior/docs/reports/CoxFoster90.pdf.
34
33
FTC staff have not found empirical studies indicating a relationship between additional APRN supervision requirements and greater safety. See IOM REPORT at 85-161, 98-99 (discussing nursing scope-of-practice issues and quality of care, and noting [n]o studies suggest that care is better in states that have more restrictive scope-of-
Page 6 of 8
Available evidence suggests that APRNs generally are safe providers of health care services when they provide services consistent with their training. 35 More broadly, the available empirical evidence indicates that APRN-delivered care across settings, is at least equivalent to that of physician-delivered care as regards safety and quality, 36 and that increased APRN care may even be associated with improved outcomes for particular disease indications or patient populations. 37 Studies of LSCs which, as discussed above, offer certain basic primary care services and tend to be staffed by APRNs without direct on-site physician supervision indicate that the clinics provide high-quality health care. 38 In addition, studies of APRN subspecialties, such as certified registered nurse anesthetists, suggest safe delivery of care. 39
practice regulations for APRNs than in those that do not); Brian Dulisse & Jerry Cromwell, No Harm Found When Nurse Anesthetists Work Without Supervision by Physicians, 29 HEALTH AFFAIRS 1469, 1474 (2010) (reviewing Medicare data for more than 480,000 patients and finding data do not support the hypothesis that patients are exposed to increased surgical risk if nurse anesthetists work without physician supervision).
35
See, e.g., BUDGET BOARD STAFF REPORT, supra note 4, at 300 (discussing research demonstrating safety of APRNs); Florida House of Representatives Staff Analysis, Bill # HB 699 CS Health Care (Mar. 8, 2006), at note 5 and accompanying text (citing Linda Aiken, director of the University of Pennsylvania's Center for Health Outcomes and Policy Research, for the proposition that over 100 studies have examined the care delivered by nurse practitioners and none demonstrated a negative impact of their care on health).
Eileen T. OGrady, Advanced Practice Registered Nurses: The Impact on Patient Safety and Quality, in AGENCY FOR HEALTHCARE RESEARCH AND QUALITY, PATIENT SAFETY AND QUALITY: AN EVIDENCE-BASED HANDBOOK FOR NURSES (ed. Ronda G. Hughes) 2-606 (2008). The study surveys empirical research on APRN quality and safety generally, id. at 2-605 2-607, as well as research regarding safety and quality of care for APRN subspecialties. Id. at 2-602 2-604 (regarding nurse midwives, nurse anesthetists, and clinical nurse specialists). See also Sue Horrocks et al., Systematic Review of Whether Nurse Practitioners Working in Primary Care Can Provide Equivalent Care to Doctors, 324 BMJ 819 (2002) (British review of 11 trials and 23 observational studies finding increased satisfaction and no health disparities for patients treated by nurse practitioners versus physicians). See, e.g., Mary D. Naylor et al., Transitional Care of Older Adults Hospitalized with Heart Failure: A Randomized, Controlled Trial, 52 J. AM. GERIATRIC SOCY 675, 682-684 (2004) (AP[R]N-directed intervention associated with increased time to first readmission or death and reduced total number of rehospitalizations in care of older adults and management of heart failure); cf. Jack Needelman et al., Nurse-Staffing Levels and the Quality of Care in Hospitals, 346 N. ENGL. J. MED. 1715, 1719-20 (2002) (increased care by registered nurses which include APRNs as subset associated with improved outcomes/reduced adverse events for medical and surgical patients). Ateev Mehrotra et al., Comparing Costs and Quality of Care at Retail Clinics with that of Other Medical Settings for 3 Common Illnesses, 151 ANNALS INTERNAL MED. 321, 326 (2009). See, e.g., A.F. Smith, et al., Comparative Effectiveness and Safety of Physician and Nurse Anaesthetists: A Narrative Systematic Review, 93 BRIT. J. ANAESTHESIA 540, 544 (2004) (review article examining U.S. and foreign studies finding no recent, high-level evidence that there are significant differences in safety between different anaesthesia providers); Paul F. Hogan, et al., Cost Effectiveness Analysis of Anesthesia Providers, 28 NURSING ECON. 159, 161 (2010) (there are no studies that show a significant difference between CRNAs and anesthesiologists in patient outcomes.); Dulisse & Cromwell, supra note 34 (no increased surgical risk when unsupervised CRNAs are used); Michael Pine, et al., Surgical Mortality and Type of Anesthesia Provider, 71 AM. ASSN NURSE ANESTHETISTS J. 109, 116 (2003) (After adjustment for differences in case mix, clinical risk factors, hospital characteristics, and geographic location, the current study found similar risk-adjusted mortality rates whether anesthesiologists or CRNAs worked alone.).
39 38 37
36
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Conclusion Requiring physician supervision of APRNs imposes costs on Texas health care consumers. Both S.B. 1260 and S.B. 1339 would reduce those costs, and the Bills likely would improve access and increase choices for Texas health care consumers as well. Absent evidence that the current statutory restrictions are required to address patient harms, FTC staff urge the Texas legislature to enact either S.B. 1260 or S.B. 1339 to remove those restrictions. If particular medical procedures require heightened supervision requirements, staff recommends the legislature tailor supervision requirements to address those particular services. We appreciate your consideration of these issues.
Respectfully submitted,
Susan S. DeSanti, Director Office of Policy Planning
Joseph Farrell, Director Bureau of Economics
Richard A. Feinstein, Director Bureau of Competition
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U.S. Department of Justice

Antitrust Division
Liberty Square Building 450 5th Street, N.W. Suite 4000 Washington, D.C. 20530-0001
May 18, 2011 Representative Phillip Johnson State Representative, 78th Legislative District 104 War Memorial Building Nashville, Tennessee 37243 RE: Proposed Repeal of State Action Exemption for Public Hospitals
Dear Chairman Johnson: You have requested that the Antitrust Division comment on a proposed amendment to Tennessee law that would repeal the states antitrust exemption for private act metropolitan hospital authorities (also known as public hospitals) found in Tenn. Code Ann. 7-57-501 et seq.1 The Antitrust Division believes that by enabling the antitrust laws to apply to the conduct of public hospitals in Tennessee, this amendment will help promote hospital competition to the benefit of Tennessee consumers. 1. Background
Tenn. Code Ann. 7-57-501 et seq. grants broad authority to public hospitals in Tennessee. Under this statute, public hospitals may exercise all powers necessary or convenient to effect any or all the purposes for which [they are] organized,2 and they may do so regardless of the competitive consequences.3 In 2005, the U.S. Court of Appeals for the Sixth Circuit held that this statute creates an antitrust exemption for public hospitals for a wide range of potentially anticompetitive actions, including exclusive contracts with health insurers. See Jackson, Tennessee Hosp. Co., LLC v. West
Letter from Representative Phillip Johnson, Tennessee House of Representatives, to Scott Fitzgerald, Attorney, Litigation I Section, Antitrust Division, U.S. Department of Justice, April 21, 2011. 7-57-502(b)(10). 7-57-502(c).
2 3
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Tennessee Healthcare, Inc., 414 F.3d 608, 612 (6th Cir. 2005) (Jackson) (holding that the plain language of the Tennessee statute is most sensibly read as an [express] authorization to act without regard for the antitrust laws).4 Your letter describes the potential impact of the current law on two acute-care hospitals in Jackson, Tennessee. One hospital, Jackson-Madison County General Hospital, is a 635-bed facility chartered as a public hospital; the other, Regional Hospital of Jackson (Regional Hospital), is a 154-bed privately owned hospital. JacksonMadison County General Hospital is part of a larger system of affiliated hospitals operating as West Tennessee Healthcare. Your letter states that Jackson-Madison County General Hospital has used its organizational structure, size and market presence to demand exclusive insurance contracts with many of the major insurance plansfor the past fifteen years.5 It is the Antitrust Divisions experience that such exclusive contracts can restrict competition between hospitals and harm consumers. 2. Competition in Health Care
Although the Antitrust Division has not investigated hospital competition in the Jackson, Tennessee region, it has analyzed competition in health-care markets for many years. For example, during the Divisions extensive health-care hearings with the Federal Trade Commission in 2003, the federal agencies obtained substantial evidence about the role of competition in health care and concluded that vigorous competition among healthcare providersincluding hospitalspromotes the delivery of high-quality, costeffective health care.6 The Division has also had extensive experience in analyzing the application of the state action doctrine to health-care providers. Together with the FTC, the Division has long opposed unwarranted extensions of the state action doctrine. Our concerns about extensions of the state action doctrine are informed by the fundamental principle that market forces tend to improve the quality and lower the costs of health-care goods and services. In our antitrust investigations, we often hear the argument that health care is different and that competition principles do not apply to the provision of health-care services. However, this proposition is not supported by the evidence or law.7 Similar arguments made by engineers and lawyersthat competition does not work and, in fact
In Jackson, the court did not require the defendant to show that its conduct was actively supervised by the state. Id. at 612, n.5.
5 6 4
Letter from Rep. Phillip Johnson, supra note 1.
Fed. Trade Commn and U.S. Dept of Justice, Improving Health Care: A Dose of Competition (2004), Executive Summary at 4.
7
See id.
-2-
is harmful to public policy goalshave been rejected by the courts, and private restraints on health-care competition have long been condemned. Moreover, just as competition between hospitals can lead to lower prices and higher-quality care, so, too, restraints on competition by hospitals can lead to lower quality and more expensive care. Accordingly, the Antitrust Division has pursued formal investigations and prosecutions across the full range of health-care products and services, including challenges to anticompetitive vertical arrangements between hospitals and health insurers. Most recently, the Antitrust Division brought an enforcement action challenging de facto exclusive contracts with commercial health insurers obtained by United Regional Health Care System, the dominant, not-for-profit hospital in Wichita Falls, Texas.8 United Regional was formed in October 1997 by the merger of what were then the only two general acute-care hospitals in Wichita Falls. To complete the 1997 merger, the two hospitals sought and obtained an antitrust exemption from the Texas legislature relating to the merger.9 Shortly after the legislature permitted the merger, a group of doctors began planning for a hospital that would compete with United Regional. United Regional responded to this threat by systematically entering into contracts that contained a significant pricing penalty if an insurer contracted with United Regionals rivals. As a result, United Regionals rivals could not obtain contracts with most insurers. In February 2011, the United States and the State of Texas filed a complaint that challenged United Regionals contracts, which alleged that by denying United Regionals rivals access to most insurers, United Regional had (1) delayed and prevented the expansion and entry of United Regionals competitors; (2) limited price competition for price-sensitive patients; and (3) reduced quality competition between United Regional and its competitors. The United States and Texas settled the case by entering into a consent decree with United Regional that prohibits United Regional from using exclusive and other types of anticompetitive contracts with insurers.
United States and State of Texas v. United Regional Health Care System, No. 7:11-cv-00030-O (N.D. Tex., Feb. 25, 2011). In 1997, the Texas Legislature enacted Tex. Health & Safety Code Ann. 265.037(d), which provides that a county-city hospital board existing in a county with a population of more than 100,000 and a municipality with a population of more than 75,000 . . . may purchase, construct, receive, lease, or otherwise acquire hospital facilities, including the sublease of one or more hospital facilities, regardless of whether the action might be considered anticompetitive under the antitrust laws of the United States or this state. In an attempt to qualify for the state action antitrust exemption enacted by the legislature, the two hospitals entered into a leasing arrangement that involved the local county-city hospital board.
9
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3.
Analysis
The Antitrust Division believes that repealing the state action exemption for public hospitals in Tennessee will likely promote competition and benefit consumers. In the United Regional case, the Antitrust Division and Texas challenged United Regionals contracting practices because we did not think that the antitrust exemption under Texas law (that allowed for United Regionals formation) extended to United Regionals contracting practices. By contrast, if a public hospital in Tennessee engaged in similar conduct, under current state law, that conduct would be exempt from an antitrust challenge under Jackson. As explained above, anticompetitive conduct by dominant hospitalsincluding dominant public hospitalscan lead to higher prices and lower quality to Tennessees health-care consumers. This type of conduct can include exclusive contracting with commercial insurers, as illustrated by the United Regional case. It can also include anticompetitive acquisitions, unlawful predatory pricing, certain types of economic credentialing, and even horizontal agreements with competitors. By repealing the antitrust exemption, this type of conduct could be investigated, prosecuted, and deterredhelping protect competition. Thank you for the opportunity to comment. In conclusion, we urge the Tennessee legislature to adopt the legislation under consideration, which may be expected to bring the salutary benefits of hospital competition to health-care consumers in Tennessee.
Sincerely yours,
Joshua H. Soven Chief, Litigation I Section Antitrust Division
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UNITED STATES OF AMERICA

OPINION OF THE COMMISSION By KOVACIC, Commissioner, for a Unanimous Commission:1 I. INTRODUCTION

Commissioner Julie Brill has not participated in this matter.

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The Board Must Meet Both Prongs of Midcal

Bd. Memo at 30 n.7 (quoting Hallie, 471 U.S. at 46 n.10). 8

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