Private equity investment in health care remains in U.S. antitrust enforcers’ crosshairs

The FTC workshop included speakers from federal government agencies including the FTC, Department of Justice (DOJ), and Department of Health and Human Services (HHS), as well as academics, health care practitioners, economists, and public interest groups.  The workshop concluded with a Q&A between Rhode Island Attorney General Peter Neronha and FTC Commissioner Rebecca Slaughter.

The workshop coincided with an announcement from the FTC, DOJ and HHS that the agencies have issued a joint request for information as part of an inquiry into the impacts of corporate ownership in health care (the RFI).  The RFI is intended to help the agencies “understand how certain health care market transactions may increase consolidation and generate profits for firms while threatening patients’ health, workers’ safety, quality of care and affordable health care for patients and taxpayers.”  While the focus of the FTC workshop was on private equity, the RFI reflected agency concerns regarding transactions across the continuum of health care, with implications for transactions even outside of the health care context.

FTC workshop on private equity investment in health care

Speakers and panelists at the FTC workshop did not deviate from the “party line,” claiming that private equity investment in health care leads to, among other things, decreased quality of care for patients, increased costs for health care facilities, and deteriorating working conditions and wages for providers and health care staff.  The workshop notably did not include any participants to counter this narrative, which was reinforced throughout the event.  The themes of the workshop are discussed below.

Highly leveraged transactions

Chair Khan alleged that private equity firms are engaged in “low-consequence ownership” that has the primary goal of increasing profits in order to resell at a premium within a relatively short amount of time.   Eileen Appelbaum, Co-Director of the Center for Economic Policy and Policy Research, claimed that highly leveraged private equity transactions leave the acquired business responsible for repaying a significant amount of debt.   She asserted that to pay this debt, the health care facilities often must reduce staffing levels and decrease other necessary investments in patient care.  Dr. Appelbaum also argued that patient care suffers when profits from real estate sales and leaseback and management fee agreements are routed back to the private equity company or used to pay investor dividends in lieu of investing in staff and upgrading facilities.   

Serial acquisitions

Multiple panelists and speakers also warned against the purported risk of increased consolidation in certain health care markets via a “roll-up” model of serial acquisitions.  Private equity “roll-ups” have been a stated area of focus for the FTC and DOJ under the leadership of Chair Khan and AAG Kanter.  At the workshop, Chair Khan expressed concern over what she termed the “buy and build” model, which she alleged allows private equity firms to “consolidate power  gradually and incrementally through a series of smaller deals,” sometimes by “sidestep[ing] antitrust review” if the individual deals fall below the HSR merger notification thresholds.  Chair Khan highlighted the new Merger Guidelines, which state that a firm may violate the antitrust laws if it “engages in an anticompetitive pattern or strategy of multiple small acquisitions in the same or related business lines.” Chair Khan said that the new Merger Guidelines “make clear that in order to faithfully enforce the Clayton Act, [enforcers] cannot turn a blind eye to serial acquisitions and just look at each deal in isolation.”

Transparency

Another theme of the workshop was a purported lack of transparency regarding the scope of private equity ownership in health care.  Panelists touted increased ownership transparency as a necessary tool for enforcers to be able to regulate the industry effectively.  Jonathan Blum, Principal Deputy Administrator and COO, Centers for Medicare & Medicaid Services (CMS), claimed that his agency is working to ensure that there is more transparency regarding the ownership interests of nursing homes, hospice organizations, and managed care facilities.  Christi Grimm, Inspector General of HHS, cited the agency’s efforts to increase transparency with respect to how nursing home facilities use Medicare and Medicaid dollars by making publicly available nursing home ownership data.

Interlocking directorates

Both Chair Khan and AAG Kanter asserted that their respective agencies have made significant efforts to crack down on interlocking directorates between competing companies, including companies organized by private equity firms.  Kanter said that, because of these efforts, 15 interlocking directors have resigned from 11 different boards.  Chair Khan argued that the interlocking directorate provision in Section 8 of the Clayton Act is applicable to corporations as well as individual directors, and said that the FTC is committed to continuing to “reinvigorate[e] the full scope of Section 8’s prohibition on interlocking directorates.”  In addition to its Section 8 authority, the FTC posited in a November 2022 policy statement that interlocking directorates outside the scope of Section 8 are an example of an unfair method of competition that the agency may challenge under Section 5 of the FTC Act. 

Labor concerns

Numerous workshop participants opined that private equity ownership allegedly leads to decreased staffing levels, poor working conditions, and reduced wages for providers and other staff.  Panelists also claimed the use of non-compete and non-disclosure agreements prevents staff from leaving or speaking out about these issues.  The FTC’s proposed rule on non-compete agreements – introduced in January 2023 but not yet finalized—would classify employee non-compete agreements as an “unfair method of competition” under Section 5 of the FTC Act.

RFI

While the FTC Workshop was focused on the role of private equity in health care, the RFI announced during the FTC Workshop is considerably broader.  In that RFI, the FTC, DOJ, and HHS expressed concern that transactions involving health care providers conducted by private equity funds or other alternative asset managers (such as private credit funds and real estate investments), health systems, or private payers “may generate profits for those firms at the expense of patients’ health, workers’ safety, quality of care, and affordable health care for patients and taxpayers.”  The RFI is intended to “inform the agencies’ identification of enforcement priorities in health care markets” and ensure appropriate access to quality, affordable health care items and services. 

Types of transactions targeted

The agencies requested public input about the following types of transactions:

• Transactions where private equity funds make direct acquisitions;
• Transactions structured to facilitate private equity investment, circumventing applicable corporate practice of medicine restrictions;
• Transactions involving other alternative asset classes, which are investments in assets other than stock and bonds, such as private credit funds and real estate investment trusts (REITs);
• Transactions conducted by non-profit or for-profit health systems (e.g. vertical integrations such as when a health system acquires an independent physician practice, an ambulatory surgery facility, or nursing home, or horizontal integrations such as when a health system partially acquires a hospital); and
• Transactions conducted by private payers (e.g., when insurers purchase primary care practices outright or when they become partial owners of these practices).

The RFI provides the following examples of the types of health care providers, facilities or ancillary products or services these transactions may involve, including, but not limited to:

Information requested

The RFI seeks public input regarding the goals or objectives of these deals, as well as their “effects on participants in the health care market including patients, doctors, nurses, health care administrators, communities, payers, employers’ providers, consumer advocates, PBMs, GPOs, nursing homes, hospices, home health agencies, hospitals, and other health care providers and facilities.”  The RFI also asks for commentary directly from patients and health care workers about how their experiences in the health care system changed after a facility or other provider where they work or receive treatment or services was acquired or underwent a merger.  The RFI specifically requests information about transactions that would not be noticed by DOJ and FTC under the Hart-Scott-Rodino Act (HSR Act). 

Implications beyond private equity

Although the antitrust agencies have been very vocal on the role of private equity in health care, the underlying competition concerns the agencies and panelists identified in the Workshop are not specific to private equity, or even to health care.  For example, the 2023 Merger Guidelines includes an entire Guideline to address concerns about industry roll-ups / serial acquisition strategies: “Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.”1

In addition, the agencies have challenged board interlocks both within and outside of the private equity context, and in a variety of different industries.

Finally, labor issues remain a priority for the FTC and DOJ across industries.  In addition to the FTC’s January 2023 proposed rulemaking banning employee non-compete agreements, the DOJ/FTC 2023 Merger Guidelines reflect the antitrust agencies’ view that labor considerations are integral to their merger review investigations. 

Implications for your business

With private equity’s involvement in health care a key area of focus for the antitrust agencies, clients considering transactions involving private equity and health care should consider the agencies’ likely interest in the deal when analyzing the transaction risk and timeline.

But regardless of company type or industry, counsel would be wise to draw the following lessons from the recent FTC workshop and RFI:

• When advising a fund or company that has a history of acquisitions, consider the impact of the series of acquisitions as a whole rather than assessing the antitrust risk from a given transaction.
• Take extra care in drafting documents to avoid references to industry “roll ups” and similar consolidation strategies.
• Evaluate carefully any potential board appointments and avoid interlocks with competing companies.
• Seek the guidance of counsel before entering into any non-competes, including non-competes with employees.

Looking ahead

The concerns raised by the U.S. antitrust agencies are not unique to the United States.  For example, on March 12, the UK Competition and Markets Authority (CMA) announced that it had provisionally decided to open an in-depth market investigation into veterinary services in the UK, including because of concerns about industry consolidation and the incentives of “large, integrated corporate groups.”2  The formal investigation follows a preliminary inquiry into veterinary services, which was initiated by the CMA in 2023.  Even beyond the U.S. and UK, the role of private equity may become more of a focus for regulators around the world. 

In the U.S., the March 8 confirmation of Commissioners Andrew Ferguson and Melissa Holyoak make this the first time in nearly a year that the FTC has had at least one sitting Republican Commissioner.  The participation of all three Democratic FTC commissioners in the FTC workshop demonstrates the strong likelihood that there will continue to be majority support at the Commission for the current policy priorities regarding private equity in health care.  However, moving forward, Commissioners Ferguson and Holyoak may provide the on-the-record pushback to Chair Khan’s majority that has been lacking since the resignation of former Republican Commissioner Christine Wilson in March 2023.   Whether and how that plays out with respect to private equity and health care – or any other industry – remains to be seen.

Authored by Chuck Loughlin, Ilana Kattan, Ashley Ifeadike, and Jill Ottenberg.

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