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 advises 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. Section 7 of the Clayton Act, for example, appears at first glance to bar all mergers that may “substantially lessen competition.” However, in 1943 the Supreme Court in Parker v. Brown found “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.” Thirty-seven years later, the Supreme Court in California Retail Liquor Dealers Association v. Midcal Aluminum clarified that even conduct by private parties is immune from antitrust liability so long as the challenged conduct is pursuant to “clearly articulated and affirmatively expressed … state policy” and is “actively supervised” by the state.
Therein lies the purpose of state COPA statutes: as the FTC puts it, “to replace marketplace competition among hospitals with state oversight.” New York’s COPA statute is no exception. It 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.” New York’s COPA regulations leave no doubt about antitrust immunity: “Parties that have received a certificate of public advantage … shall be provided state action immunity under Federal antitrust laws and immunity from private claims under state antitrust laws.” 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, connected by a pedestrian bridge. The merger is intended, according to the parties, to bolster their financial health and provide better patient services. Per the FTC, “[t]he parties have asserted that the proposed merger is necessary to preserve Crouse’s assets in the market, and that without the merger [redacted] the Parties may have to eliminate some services due to financial distress.” Perhaps expecting an FTC challenge, the parties applied for a COPA. The FTC is separately reviewing the merger, and, as it often does in merger challenges, may seek a preliminary injunction in federal court pending full administrative review, assuming the COPA application is denied.
The FTC argues in its 57-page Public Comment that the merger creates 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 result 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 takes the position that competition, not regulation, is the key to better and more affordable healthcare: “[I]t is doubtful that the regulatory conditions imposed by the NY DOH would effectively mitigate all of the potential anticompetitive harms to patients in the Syracuse area—both in the short term and in the decades to come.” In support, the FTC cites 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 follows an August 2022 FTC Staff Policy Paper on COPAs in which the FTC finds: “Experience and research demonstrate that COPA oversight is an inadequate substitute for competition among hospitals, and a burden on the states that must conduct it.” 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.
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, as is often the case with COPA applications. 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.
By Carl Hittinger, Marc Schildkraut and Tyson Herrold