Since the beginning of Chair Khan’s tenure at the Federal Trade Commission (and in line with President Biden’s aim to curb rising health care costs), the current FTC has committed to bring enforcement actions against health care consolidation and rising prices. Over the past two years the FTC has employed novel competition tools to achieve this purpose, as demonstrated by the Commission’s suit last week against a private equity firm and its related specialty practice—alleging violations of Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act and Section 5 of the FTC Act.  The complaint alleges that a series of serial acquisitions by two firms constitutes a “multi-year anticompetitive scheme to consolidate anesthesia practices in Texas, drive up the price of anesthesia services provided to Texas patients, and increase their own profits.”[1]

The Complaint

In its 106-page complaint, filed in the United States District Court for the Southern District of Texas, the FTC alleges that private equity firm, Welsh, Carson, Anderson & Stowe (“Welsh Carson”) and its acquisition vehicle, U.S. Anesthesia Partners, Inc. (“USAP”), engaged in a series of “roll up” acquisitions of Texas anesthesia practices and additional conduct that violates Sections 1 and 2 of the Sherman Act and Section 7 of the Clayton Act’s prohibition on mergers that substantially lessen competition or tend to create a monopoly—and that the overall roll up strategy and business practices are an unfair method of competition in violation of Section 5 of the FTC Act.[2]  Specifically, the FTC alleges that the firms engaged in a “multi-year anticompetitive scheme” which included not only a series of roll up acquisitions for the purpose of gaining increased bargaining leverage with commercial insurers but also price-setting agreements with other anesthesia practices and a market allocation agreement meant to “sideline” a significant rival.[3]

The complaint alleges that the firms acquired a large Houston anesthesiology practice as a platform for its roll up strategy and then pursued a series of “tuck-in acquisitions” in order to gain leverage with insurers and raise anesthesia rates.[4]  The complaint further alleges that Welsh Carson and USAP continued to execute this strategy and subsequently raised prices through a series of additional acquisitions across the state of Texas, including in Dallas, Austin, Tyler, Amarillo, and San Antonio.[5]

The FTC asserts that this roll-up scheme expanded to the Dallas market and eventually spread across Texas—leading to additional anticompetitive practices including entering price-setting arrangements and engaging in market allocation.  The suit comes after two years of increased focus by the antitrust agencies on serial acquisitions—including a focus in the FTC’s Section 5 Policy Statement and the revised draft merger guidelines, which we have written about previously.

The FTC has expressed concern with firms engaging in M&A activity which may not individually constitute an antitrust violation but cumulatively tends to generate the competitive harms that the antitrust laws seek to prevent.[6]  Notably, the complaint alleges that Welsh Carson and USAP bought “nearly every large anesthesia practice in Texas” and amassed monopoly power in the Houston, Dallas, and Austin metropolitan areas.[7]  The complaint further alleges that the conduct has resulted in higher prices and that USAP’s pricing power is “durable in part because there are no close substitutes for patients undergoing procedures requiring anesthesia” in the market for commercially insured hospital-only anesthesia services.[8]

The FTC alleges that the market for commercially insured hospital-only anesthesia services is characterized by high barriers to entry— such as limited operating room capacity and schedule availability, onerous postsecondary education and training requirements, switching costs, hospital contracting practices, and the use of physician non-competes by USAP. The FTC’s complaint alleges that these barriers help protect USAP’s market share in major Texas cities.[9]  With each acquisition, the FTC says, USAP’s negotiating leverage with insurers increased and “cemented” high prices.[10]  The complaint alleges that USAP was able to raise its own prices through this conduct but also that other anesthesia practices across Texas followed suit and “successfully demanded price increases by threatening to otherwise raise their reimbursement rates by selling their practices to USAP.”[11]

The complaint also alleges that USAP’s price setting arrangements with other anesthesia practices at academic medical centers and its market allocation agreement with another large anesthesia services provider have contributed to increasing prices—stifling competition and harming consumers.[12]

In line with the draft revised merger guidelines, the complaint pre-emptively rejects that any procompetitive justifications or efficiencies result from the alleged conduct, noting that USAP acquires practices with “an already-strong reputation for quality and does little (if anything) to improve their services once they join USAP.”[13]  The FTC claims that USAP and Welsh Carson’s “consolidation strategy” has been effective in making USAP the “dominant provider of anesthesia services in Texas and in many of its major metropolitan areas, including Houston and Dallas.”[14] The FTC claims this dominance is ongoing and that restoring competition would require the court to enter a permanent injunction against USAP and Welsh Carson’s conduct, as well as structural relief.[15]

Key Takeaways

The FTC’s suit follows shortly after an FTC settlement with another private equity firm, which required divestiture of shares and other expansive remedies, and on the heels of the antitrust agencies’ attempt to revise the merger guidelines to include a guideline focusing on agency review of series of transactions which cumulatively may “exhibit a pattern or strategy of growth through acquisition” or present a cumulative effect of substantially lessening competition in a given market.[16]

The lawsuit demonstrates the FTC’s commitments to scrutinize both private equity and the health care industry.  The lawsuit also presents an opportunity for the FTC to test its policy positions in court, though the action is not purely a “stand alone” Section 5 “unfair methods of competition” case, as it includes allegations against what is traditionally thought to be “hardcore” conduct (i.e., price-setting and market allocation agreements).

Industry should be aware that a series of transactions that do not trigger a HSR filing requirement may still invite retrospective scrutiny by the antitrust agencies depending on the amount of consolidation in a market.  Additional scrutiny may arise in the health care space. We expect the agencies, given their recent public positions on the issue, to continually increase review of and enforcement against private equity transactions and acquisitions of physician groups and specialty practices.