The Federal Trade Commission targeted a widely used healthcare consolidation strategy via a recent lawsuit, although the litigation isn’t expected to slow roll-up acquisitions.
Last month, the FTC sued U.S. Anesthesia Partners, one of the nation's largest anesthesia providers, and its private equity owner, Welsh, Carson, Anderson & Stowe, for allegedly combining physician practices in Texas to drive up prices for patients. The lawsuit represents the commission’s latest push to crack down on healthcare mergers and acquisitions that the agency contends stifle competition, inflate costs and reduce care quality.
Here’s what to know about the lawsuit and its implications:
What are roll-up acquisitions?
Companies combine a number of smaller entities in a specific industry or sector, seeking to leverage scale to lower overhead. These acquisitions often fall under the current $111.4 million threshold for a buyer to report a particular transaction to federal regulators.
Private equity firms, as well as health systems and other healthcare stakeholders, have been using the roll-up strategy for many physician specialties for more than a decade.
What are the potential effects?
Federal and state regulators and healthcare economists have warned that some private equity firms prioritize profits over patient care, evidenced through research on private equity roll-ups in healthcare.
A 2022 peer-reviewed analysis of six years of data published in JAMA Internal Medicine found hospital outpatient departments and ambulatory surgery centers served by private equity-backed anesthesia companies raised prices by an average of 26% more than facilities served by independent anesthesia practices.
“We are 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,” Deputy Assistant Attorney General Andrew Forman said in remarks at the American Bar Association's June 2022 conference on antitrust in healthcare.
Will the lawsuit deter roll-up strategies?
While potential buyers may spend more time assessing potential antitrust risks involving roll-ups, the lawsuit isn’t expected to slow related deals, lawyers said.
Physician groups are often attracted to roll-ups, given that a parent company would manage administrative duties such as billing and compliance. In addition to bolstering contract negotiations with insurers and financing equipment upgrades, private equity firms may be able to offer physicians better compensation packages than nonprofit health systems, said Ken Vorrasi, an antitrust attorney at the law firm Faegre Drinker Biddle & Reath.
“Private equity solves those issues for physicians,” he said. “There is a lot of momentum behind physician group roll-ups. Private equity sees physician practices as valuable inputs in the industry, and their interest in those assets will continue.” The antitrust risk of roll-up acquisitions isn’t any higher as a result of the lawsuit, Vorrasi added.
The allegations in the lawsuit go beyond roll-up strategies, potentially signaling that stricter oversight would mainly apply to the most egregious offenders. The FTC accuses U.S. Anesthesia Partners and Welsh Carson of making price-setting agreements with remaining independent anesthesia practices in Texas and striking a deal with an unnamed competitor to keep it out of the market.
“It remains to be seen what effect the lawsuit has, because the allegations in the complaint go beyond just executing a roll-up strategy,” said Bill Katz, an antitrust attorney with the law firm Holland & Knight. “Certainly, the FTC would like PE firms to think twice before executing a roll-up strategy.”
Private equity firms and other stakeholders rolling up physician groups will likely be more diligent on the front end of transactions to ensure they aren’t overly exposed to litigation risk, said Robert Miller, an attorney at the healthcare law firm Hooper, Lundy & Bookman.
“If you are a PE firm, you are paying very close attention to market share and your dealings with payers,” he said.
What other actions target private equity?
The FTC published a proposed rule in June that would, in part, require merging parties to disclose minority investors and information about prior acquisitions. Those details “can be especially important in sectors where acquisitions are typically not [Hart-Scott-Rodino]- reportable, but nonetheless can cause competitive harm," the rule states.
If approved, the changes would be the first update to the Hart-Scott-Rodino Act pre-merger notification program in 45 years. The comment period closed on Sept. 27, and it's unlikely any new rule would take effect before 2024.
In July, the Justice Department and FTC released draft merger guidelines designed to crack down on anticompetitive mergers. The draft guidelines state that the agencies may evaluate acquisitions as part of an industry trend, suggesting continued scrutiny of roll-up transactions involving private equity firms.
And under a proposed rule issued in February by the Centers for Medicare and Medicaid Services, nursing homes would have to disclose whether private equity firms or real estate investment trusts own or help operate their facilities.
“The FTC is watching private equity closely,” Vorrasi said. “They are putting their money where their mouth is.”