August 9, 2023
In October 2022, the Federal Trade Commission issued a Public Comment opposing a Certificate of Public Advantage (COPA) for the merger of State University of New York Upstate Medical University (SUNY Upstate) and Crouse Health System, Inc. The FTC’s Public Comment advised the New York State Department of Health that the merger would harm competition, and more generally reflects the Commission’s continued hostility to COPAs. So what are COPAs, and why is the FTC so critical of them?
Parker Immunity and New York’s COPA Statute
The antitrust laws apply broadly. However, the Supreme Court in Parker v. Brown and California Retail Liquor Dealers Association v. Midcal Aluminum held that the Sherman Act does not preempt state regulation, nor does it proscribe private conduct endorsed by the states. In a nutshell, COPAs give merging parties a limited exemption from the antitrust laws.
Like other COPA statutes, New York’s aims to “promote improved quality and efficiency of, and access to, health care services” by “encourag[ing] … mergers and acquisitions among health care providers … under the active supervision of the commissioner.” The state allows parties to apply for certificates of public advantage, which grants immunity from both federal antitrust action and private claims under state law. Relevant factors in issuing a COPA include: (i) the “financial condition of the parties to the cooperative agreement, including whether any health care provider party is experiencing financial distress,” (ii) “the level of competition in the primary service area,” (iii) “difficulties in recruiting and retaining health care professionals,” and (iv) the general pro- and anti-competitive effects of the merger. These factors, among others, are considered in the context of active supervision by state regulators.
The SUNY Upstate-Crouse Merger
In April 2022, SUNY Upstate announced plans to acquire Crouse, which would be renamed Upstate-Crouse. The two healthcare systems lie directly opposite each other in Syracuse, New York. The merger was intended, according to the parties, to bolster financial health and improve patient services. Perhaps expecting an FTC challenge, the parties applied for a COPA. The FTC separately reviewed the merger.
The FTC argued in its 57-page Public Comment that the merger would create a “substantial risk of serious competitive and consumer harm in the form of higher healthcare costs, lower quality, reduced innovation, reduced access to care, and depressed wages for hospital employees.” In its view, a combined SUNY Upstate-Crouse would have resulted in a 45% market share for commercially insured inpatient hospital services and an even more concentrated 67% market share in Onondaga County, the home of Syracuse. The Public Comment took the position that competition, not regulation, is the key to better and more affordable healthcare. In support, the FTC cited case studies of previous COPA mergers, including healthcare combinations in North Carolina and Maine. According to the FTC, the studies show price increases after those mergers, notwithstanding COPA oversight. It also highlights the risk that COPAs could be repealed or expire, as in the case of the North Carolina and Maine mergers, respectively, removing state oversight and leading to even higher prices.
The FTC Comment followed an August 2022 FTC Staff Policy Paper on COPAs in which the FTC found that COPA oversight is both an inadequate substitute for market competition and burdensome for states to conduct. In recent years, FTC staff has expressed concern about proliferating COPA laws. “In some situations,” the FTC notes, “state legislatures have passed COPA legislation with the intent of exempting specific proposed hospital mergers from anticipated antitrust challenges.” The Federal Trade Commissioners, including former Commissioner Noah Phillips, voted 5-0 to issue the critical Policy Paper, suggesting the FTC’s position on COPA laws enjoys bipartisan support.
In February 2023, SUNY Upstate and Crouse announced that they were abandoning their plans to merge, citing the operational and economic headwinds facing the health care industry.
The Future of COPAs
COPAs offer a path for pursuing healthcare mergers that might not pass muster under §-7 of the Clayton Act. This is especially true where the parties view a merger as a remedy for financial difficulties. The notoriously narrow failing-and flailing-firm defenses rarely resonate with federal enforcers. According to the horizontal merger guidelines, currently under review, a failing firm must show “(1) the allegedly failing firm would be unable to meet its financial obligations in the near future; (2) it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger.” The current FTC is unlikely to loosen those requirements anytime soon.
Still, healthcare providers should expect the FTC to continue challenging COPAs. While COPA laws are a state issue and the FTC thus has no authority to block them, the Commission will continue to intervene and provide its view on legal proceedings that impact its competition mandate. It remains to be seen whether the FTC’s clout will be enough to turn the COPA tide. Stay tuned.
The full article in its original form can be found here.
Carl Hittinger (LAW ’79, BA ’76) is a Partner at BakerHostetler, serving as the firm’s Antitrust and Competition Practice National Team Leader.
Marc Schildkraut is a Partner at BakerHostetler in the firm’s Antitrust and Competition group.
Tyson Herrold serves as Counsel at BakerHostetler, focusing on antitrust and competition litigation.