Summary

Private equity is squarely in the cross hairs of regulators; the Department of Justice Antitrust Division, the Federal Trade Commission, and the U.S. Department of Health and Human Services recently announced the launch of a joint inquiry into private equity ownership in the health care field.

The Upshot

• The FTC is actively pursuing enforcement through litigation, as evidenced by a recent case against a portfolio company, alleging an anti-competitive scheme to roll-up anesthesia practices in Texas and thereby drive up the price of anesthesia services.

• Private equity firms engaging in roll-up strategies should be aware of the requirements of antitrust law and compliance. Roll-up acquisitions, and even individual acquisitions that are part of a pattern, can be scrutinized by the antitrust agencies, especially when accompanied by evidence of rising prices.

The Bottom Line

We expect to see the FTC and DOJ continue to increase antitrust scrutiny on private equity and aggressively pursue enforcement actions against private equity roll-up acquisitions, particularly of companies in the health care industry.

On March 5, 2024, at a workshop focused on the impact of private equity investment in the health care market, the Antitrust Division of the Department of Justice (DOJ), the Federal Trade Commission (FTC) and the U.S. Department of Health and Human Services (HHS) announced the launch of a public inquiry into private equity ownership in the health care field. This probe marks the latest effort by antitrust enforcers to target private equity, especially in the health care field. From the DOJ and FTC’s extensive changes to the Merger Guidelines and proposed changes to the premerger filing requirements under the Hart-Scott-Rodino Act (HSR), which are in part designed to target private equity acquisitions, to FTC lawsuits against private equity firms based on acquisitions in the health care market, the agencies have placed private equity squarely in its cross hairs.

At the FTC’s recent workshop on the impact of private equity investment in the health care market, FTC Chair Lina Khan stated that “growing financialization in the health care industry can force medical professionals to subordinate their medical judgment to corporate decision-makers’ profit motives at the expense of patient health[.]” The FTC specifically referred to emergency care. Jonathan Kanter, Assistant Attorney General in the Antitrust Division at DOJ, also participated in the workshop, reinforcing that the antitrust enforcement focus on the role of private equity in health care extends to DOJ, as well. In conjunction with the recent workshop, the DOJ, the FTC, and HHS announced a public inquiry into private equity acquisitions in the health care field. Their request for information seeks public comment regarding the effects of transactions involving health care providers, facilities, or ancillary products or services, conducted by private equity funds or other alternative asset managers, health systems, or private payors. The public will have 60 days, or until May 6, to submit comments.

The FTC is actively pursuing enforcement through litigation. In September 2023, the FTC sued private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) and its portfolio company U.S. Anesthesia Partners, Inc. (USAP), alleging an anticompetitive scheme to roll up anesthesia practices in Texas and thereby drive up the price of anesthesia services. In announcing the suit, Commissioner Khan warned, “The FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes that unlawfully undermine fair competition and harm the American public.”

Filed in the U.S. District Court for the Southern District of Texas, the FTC complaint against Welsh Carson and USAP alleges Welsh Carson founded USAP in order to consolidate the fragmented anesthesiology market in Texas and create a dominant provider through roll-up acquisitions. The FTC allegations center on three types of conduct. First, the FTC alleges that USAP and Welsh Carson engaged in a roll-up, buying nearly every large anesthesia practice in Texas and raising the acquired groups’ prices as they did so. Second, USAP and Welsh Carson allegedly supplemented this roll-up strategy by entering price -setting arrangements with other anesthesia groups. Third, the FTC alleges that USAP and Welsh Carson agreed to allocate the anesthesiology market with another large anesthesia services provider. The result of all of this conduct, the FTC alleges, is that USAP has become the dominant provider of anesthesia services in Texas, able to charge supracompetitive prices. The FTC alleges that USAP and Welsh Carson have violated the antitrust laws, including Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act, and Section 5 of the FTC Act. The FTC seeks injunctive relief necessary to remedy the impact of USAP and Welsh Carson’s anticompetitive conduct and to prevent the recurrence of such conduct. Welsh Carson filed a motion to dismiss arguing retroactive enforcement against long-completed serial acquisitions is well beyond the authority of the FTC. USAP also filed a motion to dismiss, arguing the FTC falls short of stating a monopolization claim. The motions to dismiss are currently pending.

Following the FTC suit, U.S. Senators Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.) sent a letter to USAP, requesting that USAP respond to a set of questions concerning USAP’s alleged use of monopoly power to drive up prices for patients and insurers and its treatment of its physicians.

The FTC suit is the latest entry in the FTC’s efforts to ramp up enforcement against private equity roll-up acquisitions through litigation. In June 2022, the FTC initiated two enforcement actions against JAB Consumer Partners and their portfolio companies National Veterinary Associates and SAGE Veterinary Partners. These actions targeted JAB’s roll-up of specialty and emergency veterinary clinics. The FTC announced a Consent Agreement in August 2022 that required JAB’s divestiture of some of the clinics and imposed strict limits on future acquisitions, including expansive prior notice and approval provisions that required JAB to get prior approval from the FTC before acquiring any specialty or emergency veterinary clinic within 25 miles of any JAB-owned clinic anywhere in California or Texas and to notify the FTC 30 days prior to acquiring any specialty or emergency veterinary clinic within 25 miles of its current clinics anywhere in the United States, even if the acquisition would otherwise not be reportable under the HSR Act.

Commissioner Khan warned in her statement about the JAB actions that “[a]ntitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition.” She also noted a particular enforcement focus on private equity rollups in the health care industry, writing that “[p]rivate equity firms have been particularly active in health care, including anesthesiology, emergency medicine, hospice care, air ambulances, and opioid treatment centers.” Id. The FTC is concerned that roll-up acquisitions in the health care industry could “incentivize practices that may reduce quality of care, increase costs for patients and payors, and generate appalling patient outcomes. Research and reporting suggests these effects are especially pronounced in specialty practices, such as elder care and disability care facilities.” Id. Indeed, in a recent interview Commissioner Khan explained the agency’s focus on health care, commenting that “the FTC oversees markets across the economy, but that includes health care. And health care markets are some of the most important ones that we oversee precisely because this is not a matter of buying toasters or vacuum cleaners, right? This is essential health care.”

The FTC’s recent enforcement focus on private equity roll-ups in the health care industry does not mean that private equity firms that have engaged in or plan to engage in multiple acquisitions in this area should necessarily expect an investigation. But private equity firms engaging in these roll-up strategies should be aware of the risks posed by the antitrust enforcers. Roll-up acquisitions, and even individual acquisitions that are part of a pattern, can be scrutinized by the antitrust agencies, especially when accompanied by evidence of rising prices. And the likelihood of investigations and enforcement is greater if there are allegations of other anti-competitive conduct such as price fixing, market allocation agreements, or other non-compete arrangements that can bring attention to a private equity firm’s acquisition history.

These increased private equity-focused enforcement efforts coincide with changes to the merger and acquisition process itself. In December 2023, the FTC and DOJ issued revised Merger Guidelines, which guide the agencies’ review of mergers and acquisitions to determine compliance with federal antitrust law. Press Release, Federal Trade Commission and Justice Department Release 2023 Merger Guidelines (December 18, 2023). Many of these changes target private equity acquisitions. Guideline 8 provides that if a proposed “transaction is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy[.]” The Guidelines also focus on potentially anti-competitive effects of transactions involving “partial ownership or minority interests[.]” Guideline 11.

In a similar vein, in June 2023, the FTC and DOJ proposed changes to the HSR pre-merger filing requirements. 16 C.F.R. §§ 801, 803 (2023). Unless an exemption applies, parties are required to submit a premerger filing for any reportable transaction – that is, any transaction valued over $119.5 million, provided the parties are of sufficient size. (The reportability thresholds are adjusted annually.) These proposed changes significantly expand the information that parties must submit relating to the transaction. Among other things, these expanded disclosures appear to be targeted at revealing private equity involvement in acquisitions. Parties would be required to identify all minority shareholders, including the general partners of limited partnerships (LPs), of the acquiring entity, any entity that controls or is controlled by the acquiring entity, or any entity that has been or will be created for completing the transaction. Moreover, in order to make private equity involvement evident, the FTC is proposing the disclosure of LPs, even though LPs generally do not exert influence or control over the fund or the fund’s portfolio companies. Protecting the identity of LP investors traditionally has been paramount for private equity investment firms. Parties also would be required to identify all prior acquisitions of entities in the same industry from the past 10 years, which expanded the timeframe from the past five years and included prior transactions previously not required to be reported because they were below the dollar threshold. Private equity investors will need to be mindful of potential antitrust concerns raised by every transaction, even if a transaction is not itself reportable, because a subsequent reportable deal may require its disclosure and subject it to antitrust scrutiny. Other aspects of the proposed form would impose additional burdens on private equity firms. For example, the new form would require descriptions of all markets in which the parties compete, are expected to compete, or are in a vertical supplier-customer or other relationships. This could impose a significant burden on private equity investment firms with portfolio companies in the same lines of business as the other party. Parties would also be required to describe the strategic rationale for the transaction–a step that was previously only required at the second-look phase—including by referencing company documents. There are also requirements to submit more business documents with the filing. Expect the regulations setting forth the new HSR requirements to be finalized soon.

As the FTC and DOJ have made clear with their announcement of their inquiry into private equity ownership in the health care field, we can expect to see the FTC and DOJ continue to increase antitrust scrutiny on private equity and aggressively pursue enforcement actions against private equity roll-up acquisitions, particularly of companies in the health care industry.

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