Antitrust Enforcement – Private Equity Roll-up Strategy
On September 21, 2023, the U.S. Federal Trade Commission (“FTC”) sued Texas-based U.S. Anesthesia Partners (“USAP”) and its private equity backer, Welsh, Carson, Anderson & Stowe (“Welsh Carson”), in Texas federal court, accusing Welsh Carson in a “first of its kind” lawsuit of anti-competitive trade practices resulting from USAP’s horizontal acquisition strategy. While the FTC has historically targeted market participants that are directly involved in alleged anti-competitive behaviors, here the FTC has taken the position that Welsh Carson, a minority, indirect owner in USAP, engaged in a “multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits.”
Specifically, the FTC alleged that Welsh Carson’s physician practice “roll-up” strategy, an approach routinely employed by private equity firms across the country, has resulted in decreased competition and higher prices for anesthesia services.1Complaint, FTC v. U.S. Anesthesia Partners, Inc. and Welsh, Carson, Anderson & Stowe XI, L.P., No. 4:23-cv-03560 (S.D. Tex., Sept. 21, 2023), ECF No. 1., available at https://www.ftc.gov/system/files/ftc_gov/pdf/2010031usapcomplaintpublic.pdf. (last visited Sept. 25, 2023). The FTC also alleged that USAP and Welsh Carson engaged in price-setting and market allocation agreements with other anesthesia service competitors. USAP and Welsh Carson have disputed these charges and maintain, among other things, that USAP’s commercial rate increases have not exceeded the rate of medical cost inflation for the past ten years.
Established in 2012, USAP began in Texas. Since such time, USAP has spread to nine other states. Much of USAP’s growth is the result of the company’s acquisition of leading anesthesiology firms in major cities, followed by repeated acquisitions of other anesthesia practices in the local market. Both USAP and Welsh Carson have been the subject of prior media and regulatory agency scrutiny.2Peter Whoriskey, Financiers bought up anesthesia practices, then raised prices, The Washington Post, June 29, 2023, available at https://www.washingtonpost.com/business/2023/06/29/private-equity-medical-practices-raise-prices/. (last visited Sept. 25, 2023).
Why This Matters
The FTC’s complaint is an escalation in the ongoing U.S. antitrust agencies’ concerns about consolidation in the healthcare industry generally, and in particular, hostility to acquisitions by private equity buyers in healthcare (and other sectors). Such agencies’ attack on private equity transactions has been multifaceted and continuous during the Biden administration. Jonathan Kanter, the head of Antitrust Division for the Department of Justice, and FTC Chair Lina Khan have criticized private equity firms for “hollowing out” or “rolling up” and thereby “controlling” an industry. Chair Khan and Deputy Assistant Attorney General Andrew Forman also have specifically called out private equity acquisitions in the healthcare sector as a particular focus.
New antitrust rules have also targeted the private equity sector. As detailed in a prior client alert from King & Spalding, the proposed revisions to the Hart-Scott-Rodino Act (“HSR”) process will impose substantial new burdens on private equity, requiring new information about minority investors, limited partners and corporate structure, along with disaggregated entity data. The draft Merger Guidelines have also expressly called out the purported harm from multiple small, serial acquisitions, i.e., a market-wide roll-up strategy.
In this context, the FTC’s enforcement action against USAP and Welsh Carson is significant in two keys ways:
- The FTC is signaling its willingness, and intent, to challenge well-funded and prominent private equity firms participating in the healthcare sector, even if such entities only maintain minority investment interests in the market participants. Although Welsh Carson does not own a majority interest in USAP, the complaint emphasizes that the private equity firm “masterminded” the roll-up plan and has remained “deeply involved in crafting and executing” the plan. The complaint alleges that Welsh Carson “developed the overarching strategy” and recognized that doing so would yield “market power and higher prices.” Furthermore, the complaint cites to an internal communication stating that Welsh Carson was USAP’s “primary architect.”
- The core of the anticompetitive conduct alleged in the complaint is Welsh Carson’s acquisition of more than a dozen practices throughout Texas from 2012 to 2020. Each transaction standing alone was not HSR-reportable, and many would be considered “tuck-in acquisitions” as cited in the FTC’s complaint.
According to the FTC, this incremental roll-up of anesthesia practices resulted in establishing USAP as the dominant provider of anesthesia services in Texas and its major metropolitan areas. From this position of dominance, “the predictable (and intended) effect is that anesthesia services . . . cost Texans tens of millions of dollars more each year than they did before USAP was created.” The complaint supports the allegation that a goal of Welsh Carson’s roll-up strategy was to increase prices and cites to a number of internal documents referencing increased bargaining leverage versus insurers and touting the resulting higher prices as a transaction “synergy.”
In a Financial Times editorial published on the same day as the complaint issued, Chair Khan emphasized the flexibility of antitrust laws to address “new and evolving” anticompetitive business practices.3Lina Khan, It’s time to halt roll up schemes that violate antitrust laws, Financial Times, Sept. 21, 2023, available at https://www.ft.com/content/93103af9-768a-4545-9166-20389c254edc. (last visited Sept. 25, 2023). In pointing out the potential harm from serial acquisitions, Chair Khan noted that private equity firms and large technology companies could “consolidate control over certain markets” under the radar because each acquisition itself is small and did not rise to enforcers’ attention.
An FTC victory in the USAP/Welsh Carson litigation is, of course, not guaranteed, but the complaint may signal the beginning of a wave of serial acquisition enforcement actions. Investors should be aware that the risk of a regulatory agency taking issue with the deployment of the roll-up strategy – in any market sector – is increased if there are also allegations of other anticompetitive behaviors (i.e., price fixing, side agreements with other industry competitors, or non-competition arrangements that may emphasize the investor’s acquisition history). Private equity firms should individually assess their risk tolerance and adjust potential anti-competitive behaviors accordingly. Further, investors should consider the following key takeaways:
- Antitrust agencies view serial acquisitions in the same sector as inherently suspect, and roll-up acquisitions will likely face greater scrutiny, particularly if focused on specific geographic markets, and coupled with other factors, including allegations of other types of anti-competitive behaviors.
- Upstream owners, such as private equity firms, that do not maintain a direct or majority ownership interest in the market participant, may still be subject to enforcement actions if such entities are viewed as directing, or implementing, the roll-up strategy. The role of upstream owners in company governance and management should be structured carefully and circumscribed with this risk in mind.
- Smaller, non-HSR reportable acquisitions remain subject to investigation by the DOJ and FTC under various antitrust statues, including Sherman Act Section 2 (monopolization), Clayton Act Section 7 (anticompetitive acquisitions) and FTC Act Section 5 (FTC’s power to address “unfair” competition). Accordingly, the competitive impact of seemingly insignificant add-on acquisitions should be evaluated.
- As always, documents containing hyperbolic statements and inflammatory language may prove to be detrimental to the company’s interest, particularly in the event of an enforcement action or review of the transaction by a regulatory agency
- Internal documentation regarding the transaction’s procompetitive benefits may prove valuable in the event a regulatory agency initiates a prospective or retrospective review of the transaction or company strategy. With respect to the healthcare industry, examples of such benefits may include improved healthcare quality, cost efficiencies in the delivery of care, and the promotion of value based care and risk-bearing agreements with payers.