Even small deals are drawing greater government interest
Private equity firms have reportedly invested more than $750 billion in U.S. health care in the last 10 years alone. While some of this investment has been in large systems or ancillary services, a significant amount has been targeted toward physician practices. With an increase in private equity funding and ownership comes a corresponding uptick in attention from federal regulators. In his Executive Order on Promoting Competition in the American Economy, President Biden emphasized that his administration would take “decisive action to reduce the trend of corporate consolidation” and “increase competition.”
Although the federal government’s interest in health care consolidation is not new, both the U.S. Department of Justice and Federal Trade Commission—the two federal agencies primarily responsible for enforcing the U.S. antitrust laws—have publicly pronounced that private equity investment and acquisitions are a top priority for the agencies and are setting their sights on health care. In a 2022 speech, senior DOJ official Andrew Forman announced that the DOJ is scrutinizing various aspects of the private equity model, including roll up transactions.
The roll-up model
Much of the current government scrutiny pertains to so-called “roll up” strategies. Under a roll-up model, a private equity firm acquires a number of smaller firms—often in the same or similar lines of business—to create a larger, integrated firm. Although the roll-up model is not limited to either private equity or health care, it has been applied with increasing frequency in that sector, particularly with physician practices. Physician practices are drawn to private equity investment for multiple reasons, including efficiency gains by consolidating operations and reducing back-office costs as well as opportunities for better practices and technologies—reasons that courts have typically found procompetitive and lawful. For the private equity firms, they often can improve the financial performance of the practices they acquire, often leading to higher-than-average growth.
The government concerns
The agencies, however, have expressed concerns that these types of investments may violate the antitrust laws by “creating or enhancing power across a ‘stack’ of technology or other products/services.” According to the agencies, private equity’s focus on cost-cutting and short-term returns could negatively impact competition and innovation, resulting in reduced access and quality of care over the long term. Jonathan Kanter, the assistant attorney general overseeing the Antitrust Division at DOJ, views the private equity model as “very much at odds with the law and very much at odds with the competition we’re trying to protect.”
Underlying the agencies’ concern may be the fact that many roll-up transactions, particularly of physician practices, are not large enough to trigger the federal reporting thresholds for mergers or acquisitions under the Hart-Scott-Rodino Antitrust Improvements Act. Under the HSR Act, parties must report transactions meeting certain size thresholds and other criteria to the agencies. But, according to the FTC, “roll-up strategies” allow private equity firms “to accrue market power off the commission’s radar.” FTC Chair Lina Khan noted that while “[e]very individual transaction might not raise problems,” those transactions “in the aggregate” could be problematic. The FTC recently brought an enforcement action against a private equity firm for engaging in roll ups of certain veterinary clinics, signaling there may be more investigations and enforcement actions to follow.
Even though such transactions often do not meet the HSR Act thresholds and thus are not reportable, the agencies indicated they plan to use the tools within their toolbox to identify and challenge such deals that they view may harm competition. For one, the HSR Act is simply a reporting statute; it does not limit the agencies’ ability to challenge transactions that fall under the reporting thresholds, and the agencies have made clear that they will dedicate resources to investigate and challenge non-HSR-reportable deals where warranted—even if the agencies only learn about the deals after they already have closed. Another example is the Federal Trade Commission Act, which allows the agency to challenge “unfair methods of competition” and “unfair or deceptive acts and practices” under Section 5 of the Act. In 2022, the FTC released a policy statement that “a series of mergers or acquisitions that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust law,” would be a violation of Section 5. One more example is the new Draft Merger Guidelines the agencies released in July. The guidelines preview how the agencies may approach merger enforcement and are often relied on by the federal courts if and when there is a challenge. Under the guidelines, the agencies said they may consider the cumulative effect of a “pattern or strategy of multiple small acquisitions in the same or related business lines” even if a “single acquisition on its own” might not cause substantial competitive harm.
Finally, the agencies recently announced proposed changes to the premerger notification form for transactions reportable under the HSR Act. As part of the proposed changes, filing parties would be required to provide more information about prior transactions. If the agencies adopt these proposed changes, the agencies will be getting more information than they historically have from parties about other transactions, including roll ups.
As a result of this increased interest from government regulators and enforcers, private equity firms—and companies backed or owned by private equity firms—should be aware of the regulatory interest and accompanying risk when making investment decisions. You cannot assume that a transaction will evade government attention merely because it is small. It is now more than a theoretical possibility that the federal or state governments may take an interest in any perceived impacts on competition because of private equity investments or interlocking board or director roles. As a result, diligent companies should be thinking of these issues at the outset as we are sure to see more interest under this administration.
Diane R. Hazel, JD, is partner in Foley’s Antitrust Practice Group. Previously, Hazel was an attorney at the FTC’s Bureau of Competition Health Care Division.