The Federal Trade Commission (FTC) on Sept. 21, 2023, sued a private equity firm in the U.S. District Court for the Southern District of Texas over an alleged decade-long "roll-up" strategy to consolidate anesthesiology practices in Texas.
Case Background
The FTC alleges that the private equity firm Welsh, Carson, Anderson & Stowe created U.S. Anesthesia Partners Inc. (USAP) in 2012 "for the purpose of rolling up anesthesia practices in Texas." According to the FTC, Welsh Carson and USAP have since 1) acquired nearly every large anesthesia practice in Texas, raising each acquired practice's rates, 2) established price-setting arrangements with independent anesthesia groups in Texas they did not acquire, and 3) entered a market allocation agreement with a significant anesthesia provider to avoid competing with the rival group. The result – according to FTC Chair Lina Khan, who published an op-ed in the Financial Times on the same day as the FTC brought its lawsuit – is that USAP "is now the dominant provider of anesthesia services in Texas" and "patients, employers, hospitals and insurers have been left with fewer choices and higher costs." The FTC's complaint seeks a permanent injunction and "structural relief" – likely unwinding certain past transactions – to remedy what it claims are violations by Welsh Carson and USAP's violations of the Sherman Act, Clayton Act and FTC Act.
The FTC's action follows through on repeated threats by its leaders and leaders of the U.S. Department of Justice (DOJ) Antitrust Division. The antitrust agencies have repeatedly signaled their concerns with what they have described as private equity roll-up strategies – a series of multiple transactions in one market the agencies contend lead to undue concentration in that market – with those threats often directed at acquisitions of healthcare provider practices. They have signaled their concerns in speeches by agency leaders, the FTC's enforcement proceedings against veterinary clinics (resolved through settlements), new proposed reporting requirements under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act and proposed revisions to their Merger Guidelines.
With this lawsuit, the FTC has confirmed that, in this administration, risks of challenges to serial acquisitions across large spans of time are real and that owners of healthcare providers are in the agencies' crosshairs. The antitrust agencies' recent litigation track record certainly raises questions about the ultimate litigation outcome. Welsh Carson will likely contest the FTC's decision to name it as a defendant. Khan explained in her Financial Times op-ed that the antitrust laws "may apply" to parent companies and investors when they "directly participate or conspire to participate in anti-competitive conduct." At least with respect allegations that Welsh Carson conspired with its own portfolio company, there likely will be litigation over whether such a conspiracy is cognizable under the antitrust laws. Other likely issues in the litigation will be whether a "hospital-only" market will be sustainable, as the parties will likely point to other anesthesiology providers in Texas. But regardless of the ultimate outcome of the litigation, companies that have pursued roll-up strategies in healthcare and other industries might need to evaluate their market positions and their potential risks of being targeted by a similar action in the future and should work with antitrust counsel to evaluate that risk.
Past Signals Regarding "Roll-Up" Strategies
In the months leading up to the instant lawsuit against Welsh Carson and USAP, the FTC and the DOJ's Antitrust Division expressed growing concern with so-called "roll-up" strategies by private equity firms that acquire multiple players in a single industry.
First, leaders in both agencies have commented that the agencies had their sights set on roll-ups. Andrew Forman, Deputy Assistant Attorney General at the DOJ, stated in a June 2022 speech that, specifically in the healthcare space, the DOJ was "focused on potential antitrust enforcement on private equity 'roll-ups,' namely whether in particular circumstances a series of often smaller transactions can cumulatively or otherwise lead to a substantial lessening of competition or tendency to create a monopoly." Jonathan Kanter, the DOJ's Assistant Attorney General, also stated in an interview with the Financial Times that the DOJ was confronting private equity roll-ups, and that, "to be effective, we cannot just look at each individual deal in a vacuum detached from the private equity firm." Further, Khan echoed these comments in another interview with the Financial Times, stating that "[e]very individual transaction [by a private equity firm] might not raise problems, but in the aggregate you've got a huge private equity firm controlling, say, veterinary clinics. So that's a concern."
Second, as Khan referenced in her comment, the FTC brought an antitrust enforcement action against private equity firm JAB Consumer Partners based on JAB's acquisition of a series of veterinary clinics. According to Holly Vedova, Director of the FTC's Bureau of Competition, "[p]rivate equity firms increasingly engage in roll up strategies that allow them to accrue market power off the Commission's radar." To prevent JAB from continuing with that strategy – which the FTC characterized as "serial acquisitions of 'buy and buy' tactics" – the FTC demanded that JAB agree to obtain prior approval from the FTC before acquiring any further veterinary clinics within 25 miles of any other clinics the company owned in California or Texas and to provide prior notice to the FTC of any clinic acquisitions anywhere in the United States (even if not reportable under the HSR regulations).
Third, on June 27, 2023, the FTC announced its intention to expand the information parties must provide to the antitrust agencies with HSR filings. The new proposal imposed several new reporting requirements, including a new requirement tailored to uncover serial acquisitions or roll-up strategies. Under this proposal, merging parties would be required to identify all prior acquisitions of any size in the preceding 10 years in any industry in which the merging parties report a horizontal overlap. This proposed requirement further reflects the agencies' views that the cumulative effect of a series of small transactions can violate the antitrust laws, even if no single transaction might substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Act. If this provision of the FTC's proposed HSR reporting regulations are ultimately finalized, merging parties will for the first time provide advance notice of roll-up efforts.
Finally, on July 19, 2023, the FTC and DOJ jointly announced the release of revised Merger Guidelines that would significantly expand the number and types of transactions subject to antitrust challenge. Among other things, the draft guidelines indicate that the FTC and DOJ will consider whether a transaction under review is part of the acquiring company's roll-up strategy of multiple acquisitions in a single industry. The FTC and DOJ state that they may consider the cumulative effect of the pattern of acquisitions on competition, rather than simply focusing on the impact of the latest transaction. As with the above signals, the agencies' proposed guidelines further reflect their growing concern about so-called roll-up strategies.
Pending Lawsuit Against Texas Anesthesiology Group
While the FTC and DOJ had voiced concerns about roll-up strategies, the new complaint against Welsh Carson and USAP constitutes their first litigated challenge to such a strategy. The 416-paragraph, 106-page complaint alleges that Welsh Carson and USAP's efforts since 2012 to acquire anesthesia practices across Houston, Dallas, Austin and other parts of Texas and strike agreements with independent anesthesiologist groups constitutes an unlawful anticompetitive scheme to suppress competition and raise prices under the Sherman Act, Clayton Act and FTC Act.
The FTC's complaint alleges that Welsh Carson, a private equity firm, founded USAP in 2012 "for the purpose of rolling up anesthesia practices in Texas" and consolidated and monopolized the Texas anesthesiology market through a three-part strategy. First, the FTC alleges that Welsh Carson and USAP executed a roll-up acquisition scheme, systematically acquiring multiple large anesthesiology practices in Texas to achieve a dominant market position and drive up prices. The FTC alleges that USAP has combined 17 anesthesia practices across Texas, such that USAP now controls nearly 60 percent of hospital-only anesthesia costs statewide and approximately 43 percent of cases, and that USAP is more than 10 times larger than the next-largest anesthesiology group by revenue and seven times larger by volume of cases. Moreover, the FTC alleges that, with each acquisition, USAP raised the acquired group's rates to USAP's higher rates. The FTC alleges that, although USAP charges the highest rates of any anesthesiology group in Houston, Dallas and Austin, it has retained nearly 100 percent of its hospital contracts because hospitals have nowhere else to turn.
The second part of Welsh Carson and USAP's alleged strategy has been to enter into price-setting arrangements with independent anesthesiology groups that USAP has not acquired. These agreements, according to the FTC, have allowed USAP to bill payers for the anesthesia services offered by both groups at USAP's higher rates, further driving up prices for anesthesiology services.
Lastly, the FTC alleges that Welsh Carson and USAP have further impeded competition by reaching a market allocation agreement with a large rival anesthesiology provider, the identity of which is not disclosed in the redacted version of the complaint filed by the FTC on the public docket.
Through this alleged three-part roll-up strategy, FTC claims that Welsh Carson and USAP have harmed consumers and competition by driving up the price of anesthesiology services in Texas. The FTC alleges that USAP has so increased its negotiating leverage that insurers cannot effectively constrain USAP's demands to raise prices, and USAP has used this leverage to significantly increase prices for hospital-only anesthesiology services in Houston, Dallas, Austin and the rest of Texas.
Takeaways
The FTC's lawsuit makes plain that the FTC and DOJ's previous statements targeting roll-up were not idle threats. In the healthcare context – a focus of significant attention by the antitrust agencies – the agencies maintain the position that private equity roll-up strategies pose material antitrust concerns and have now indicated their willingness to challenge the cumulative effect of past acquisitions and sue to seek to potentially unwind such serial acquisitions. The legitimacy of the agencies' position remains subject to judicial review, but firms should consider the potential risks of serial acquisitions in the same industry – individually and in the aggregate – as such efforts may now be ripe for agency challenge.
