Private Equity & Healthcare: Antitrust Enforcement in 2023–PE Roll-Ups in the Cross Hairs
It is widely reported that healthcare is a top antitrust enforcement priority in the U.S. The healthcare industry has undergone a transformation over the over the last twenty years and now comprises 17.7% of the U.S. gross domestic product and over $3,795.4 billion of the U.S. government budget. Mega-deals among national payors and household names have grabbed headlines and been targets of enforcement by the U.S. Department of Justice, Antitrust Division (the “DOJ”) and Federal Trade Commission (“FTC”) (collectively, “the Agencies”).
What is less understood is the Agencies’ keen interest in private equity (“PE”) and its impact on the healthcare industry—particularly healthcare providers. As previewed in President Biden’s Executive Order, the Agencies have had new leadership in place for approximately 18 months and have focused on add-on acquisitions by PE-backed healthcare providers, also known as “roll-ups” and other investments in the healthcare industry by private equity firms.
As we move into the new year, private equity firms engaging in healthcare transactions should take into account recent enforcement actions and guidance from the Agencies when evaluating possible transactions to minimize risks.
Why Focus on Private Equity Investments in Healthcare?
Private equity’s role in the healthcare industry, as measured by dollars invested, is significant and has grown exponentially in last twenty years. PE deals in U.S. healthcare reached $5 billion in 2000, $725.4 billion in 2018 and $1 trillion in 2021. This kind of growth attracts attention. But, it isn’t the dollars invested that garner the Agencies’ interest, but rather the way those investment dollars are spent.
From the Agencies’ perspective, the PE investment model is at the core of their concerns. PE investments are predicated on higher than average returns to investors, which in turn require higher than average growth of the portfolio companies owned by the PE fund. Organic growth (growth without acquisition) can be elusive and can take much longer than growth through M&A activity. In some cases, it truly is easier to “buy,” rather than “build” growth. Hence, the “roll-up” is a “tried and true” PE strategy for growth. The roll-up process consists of acquiring a number of smaller players in different and sometimes adjacent market geographies at relatively lower valuation multiples to build a company with greater presence and improved financial performance, that will yield a higher valuation multiple when the company is sold. While these consolidation plays can create all-around better companies, can improve quality and access to care, as well as open opportunities for adoption of better practices and technologies that elevate an industry or change the standard of care, there is a public perception, which is shared by the Agencies, that they are more likely to reduce access and quality of care and increase prices in certain markets. Thus, the Agencies have been focused on roll-up acquisitions by PE backed healthcare companies, many of which occur over a sustained period of time, but are not reported or noticed by the Agencies because the transaction values fall below the Hart-Scott-Rodino size of transaction threshold (currently $101 million).
Recent Public Statements and Guidance from Antitrust Agencies:
In April 2022, the Agencies hosted a health care forum to provide a platform for stakeholders with a variety of roles and experience to provide their views. Registered nurses, professors, physicians, pharmacists, patients, and others discussed potential harms of consolidation, noting that consolidation has resulted in the reduction of research, staffing shortages, and decreased quality of care.
Soon afterwards, Andrew Forman gave his first public remarks as the DOJ’s Deputy Assistant Attorney General in June. In this speech, Forman asserted that although private equity can play an important role in the U.S. economy, certain private equity transactions and conduct suggest an “undue focus on short-term profits and aggressive cost-cutting,” which can lead to “disastrous patient outcomes” and “may create competition concerns.” Specifically, Forman identified four areas of enforcement that the DOJ is prioritizing:
Whether private equity roll-ups reduce competition and/or enhance power across a stack of services;
Whether certain investments chill fierce competition on the merits;
Section 8 enforcement; and
HSR filing deficiencies.
Similarly, in June, FTC Chair Lina Khan published a statement regarding an acquisition of a veterinary group by a PE fund, in which she noted that prior notice and prior approval provisions will “allow the FTC to better address stealth roll-ups by private equity firms” and serial acquisitions by other corporations. Though this order is the first public action against a private equity firm under the new antitrust authorities, FTC has made it clear that it will not be the last.
Most recently, on Friday, December 9, the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) signed a memorandum of understanding (“MOU”) “to better protect health care consumers and workers from collusion, ensure compliance with laws enforced by OIG and the Antitrust Division, and promote competitive health care markets.” DOJ states that the MOU will allow both agencies to make referrals of potentially illegal activity to each other, as appropriate, and to coordinate on policy, strategy, and training, indicating that the Agencies’ antitrust enforcement will continue to ramp up in the upcoming year.
Looking Forward and Identifying & Mitigating Risk
To some extent, the Agencies’ recent track record in investigating and challenging transactions across industries belies their rhetoric. In healthcare, several large transactions were cleared by the FTC or DOJ without enforcement action in Michigan, Georgia, and across the Southwest.
The apparent dichotomy between talk and action may reflect the fact that (a) the legal standard for challenging mergers under the federal antitrust laws (i.e., whether a transaction “substantially lessens competition” under the Clayton Act) has not changed and (b) the Agencies have finite resources to devote to investigating and challenging deals.
That said, because government merger investigations are almost entirely non-public, the available data provides an incomplete picture of the current enforcement landscape and does not reflect, for example, the instances where transactions trigger questions or concerns from Agency staff during the HSR waiting period, or investigations of non-HSR reportable deals. Furthermore, companies, health systems, and PE firms may be taking antitrust risks more into account and declining to do deals all together.
Given this enforcement environment, what strategies should PE firms investing in the healthcare industry consider to identify and mitigate antitrust risks of potential transactions? In addition to the traditional methods of screening deals for antitrust risks (e.g., whether they combine competitors in concentrated markets and are HSR-reportable), PE firms should:
Evaluate minority interests in any companies or practices in similar spaces;
Examine whether the deal is combining practices/systems in close geographic proximity to one another;
Assess whether the deal involves any household/big names, including companies or firms that have engaged in several recent transactions, which are more likely to attract enforcement interest;
Gauge potential reactions from payors and unions, where relevant, and attempt to work with these key constituencies and mitigate any concerns;
Ensure that there are sufficiently protective antitrust provisions in the transaction documents such that the firm is taking on appropriate levels of risk for the deal; and
Mitigate risk by documenting pro-competitive rationales and effects of the transaction, such as how the transaction will improve quality and reduce costs. This is most effective where parties to the deal can point to their existing data, policies, and track record as a basis for these rationales.
 Section 8 of the Clayton Act prohibits any person from simultaneously serving as an officer or director of two competing corporations under certain circumstances.