On September 21, 2023, the Federal Trade Commission (FTC) sued U.S. Anesthesia Partners Inc. (USAP) and Welsh, Carson, Anderson & Stowe XI L.P. (collectively, with other private equity fund defendants, “Welsh Carson”), among other private equity funds, in the United States District Court for the Southern District of Texas under the antitrust laws. Specifically, the FTC alleges that USAP and Welsh Carson engaged in an anti-competitive scheme to consolidate anesthesia practices in Texas and to force other independent anesthesia groups into price-setting arrangements that violated Section 2 of the Sherman Act, Section 7 of the Clayton Act and Section 5 of the FTC Act.
- The complaint marks the first time that the FTC has challenged serial acquisitions or “roll-ups” by a private equity firm and is required reading for in-house counsel at firms that do repeated transactions in particular industries.
- Private equity firms with portfolio companies engaged in healthcare or life sciences businesses should pay particular attention to the FTC’s challenge.
- The complaint is part of a larger antitrust enforcement focus on private equity deals by the FTC and the Department of Justice that includes key changes in the draft Merger Guidelines, expanded pre-merger notification requirements and increased attention on interlocking directorates.
Welsh Carson is a private equity firm that created USAP in 2012. According to the complaint, “USAP’s founding purpose was to purse an ‘aggressive’ strategy to ‘consolidat[e] practices with high market share in a few key markets.’” Over the past several years, USAP acquired over a dozen anesthesia practices consisting of over 1,000 doctors and 750 nurses in Houston, Dallas, San Antonio, Austin, Amarillo and Tyler. In addition to its consolidation strategy, USAP is alleged to have entered into price-setting arrangements with independent anesthesia groups in certain strategic areas like Houston and Dallas. Pursuant to these arrangements, USAP is allegedly able to charge higher prices for services provided by independent anesthesia groups through contracts styled as collaboration agreements, professional services agreements or independent contractor agreements.
The FTC alleges that the relevant service market affected by this anticompetitive behavior is the market for commercially insured, hospital-only anesthesia services. This market includes:
(1) all inpatient anesthesia services, including surgical and obstetric anesthesia performed while the patient is admitted to a hospital; and (2) any other anesthesia services that must be provided in a hospital setting because the procedure subjects the patient to an elevated risk such that it requires quick access to emergency medical services.
This proposed market excludes anesthesia services at academic medical centers related to their educational mission and services performed outside a hospital as well as services provided by government-sponsored plans. The three relevant geographic markets allegedly harmed by this anticompetitive conduct include the Houston, Dallas-Fort Worth and Austin metropolitan statistical areas. The FTC alleges that USAP has a greater than 50 percent market share, by both number of cases and by revenue, in both Houston and Dallas-Fort Worth and that its share in Austin is 44.2 percent by cases and 52.5 percent by revenue.
The complaint alleges that USAP’s anticompetitive scheme has increased prices for hospital-only anesthesia services in Texas and that USAP cannot advance any valid procompetitive justifications for or efficiencies from its conduct.
Implications for Private Equity Firms
The complaint is the first time that the FTC has challenged serial acquisitions by a private equity firm and follows a series of warnings from the FTC that it intends to scrutinize roll-up deals, a practice common to private equity firms. In a policy statement issued last November, the FTC highlighted its concern that serial acquisitions by private equity industry aggregators could violate Section 5 of the FTC Act. The draft Merger Guidelines also target private equity and other industry roll-ups by suggesting that either a trend of consolidation or a pattern or strategy of growth through acquisition may cause the agencies to investigate the impact of the merger in accelerating the trend or the impact of the cumulative acquisition strategy, even though the language of Section 7 of the Clayton Act expressly addresses the effect of the acquisition. Proposed changes to the information required to be submitted to the agencies as part of the pre-merger notification process under the Hart-Scott-Rodino Act include expanded disclosures of prior acquisitions in the past 10 years, instead of five, without current size filters, and applies to both the acquiring person and acquired entity.
The increased scrutiny of roll-up deals is part of a larger antitrust enforcement focus on private equity deals, including increased attention on interlocking directorates. The trend could signal increased risk for private equity firms, in particular those focused on the healthcare and life sciences industries where roll-up transactions have become more common.
For More Information
If you have questions about this Alert, please contact Sean P. McConnell, any of the attorneys in our Antitrust and Competition Group or the attorney in the firm with whom you are regularly in contact.
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