FTC v. Phoebe Putney and the background of the antitrust state-action exemption

I’ve been posting about the FTC v. Phoebe Putney antitrust case (released Tuesday) here, here, and here. Now I’ve written up the opinion and its doctrinal background in a post on the Reason Foundation’s web site. Here’s an excerpt:

Supreme Court Antitrust Ruling Supports Public-Private Neutrality, Reduces Barriers to Privatization

On February 19, 2013, the Supreme Court handed down its decision in an important antitrust case, FTC v. Phoebe Putney Health Sytem, Inc. The Court clarified an ambiguity in existing federal antitrust law: to what extent are government entities exempt from the antitrust laws that govern private companies? This makes a difference for privatization: if government bodies are immune from a body of law that applies to the private sector, then keeping a function in-house appears cheaper for the government than contracting it out to the private sector. The asymmetric treatment of public and private operators can thus discourage privatization. In this case, the Eleventh Circuit Court of Appeals had advanced a very broad interpretation of the so-called “state action” exemption to federal antitrust law—one that would immunize a great many government operations from antitrust scrutiny. The Supreme Court reversed the Eleventh Circuit’s expansive reading, confirming a somewhat narrower view of the state action exemption.

. . .

Narrow though it is, though, the Phoebe Putney decision seems to be at least a small victory for sound policy. There are certainly strong arguments against antitrust policy, at least in its current state. But endorsing Phoebe Putney doesn’t require endorsing antitrust in any form. Perhaps antitrust law is justified and perhaps it isn’t; but whichever is the case, it’s unlikely that the optimal policy would be that the private sector is subject to antitrust law while the public sector isn’t. Such differential treatment artificially lowers the cost of in-house provision relative to privatization or contracting out and thus encourages governments to keep services in-house even when the efficiencies suggest otherwise.

If public entities could be counted on to serve the public good (and if private entities couldn’t be regulated to achieve the same result), then perhaps a two-tiered approach might be justified. But public entities can be easily captured by private interests; indeed, in this case, there were allegations that the Phoebe Putney Hospital had used its near-monopoly position to engage in aggressive anticompetitive conduct; that Palmyra Hospital had sued to stop this conduct; that Phoebe Putney’s purchase of Palmyra was designed to put an end to the legal action and cement Phoebe Putney’s monopoly status; and that the hospital authority was involved merely to avoid antitrust scrutiny under the state action exemption. Moreover, Phoebe Putney’s nonprofit status provides little reason to treat it more charitably under federal antitrust law: economic theory and empirics alike suggest that nonprofit hospitals, just as much as for-profit hospitals, are willing to use their market power to increase prices. Thus, any public-interested justification for a broad exemption from antitrust laws for governmental actors but not private ones is suspect.

This, then, is a case where advocates of a level playing field for privatization should rejoice at the outcome, regardless of their views on antitrust. All nine Supreme Court Justices voted to reiterate the longstanding view that “state-action immunity is disfavored.” They cast their vote, not for aggressive antitrust enforcement, but for (a limited form of) public-private neutrality.

Click here to read the rest of the piece on the Reason web site.