Antitrust & Competition Healthcare Quarterly Update Q3 2023

Key Takeaways

• Private equity roll-up and serial acquisition practices are under heightened scrutiny as the FTC backed up its recent rhetoric by challenging Welsh Carson’s roll-up of anesthesia practices in Texas.
• California published draft regulations outlining pre-notification requirements for healthcare transactions that will require additional information and extend closing timelines. These regulations specifically reference private equity roll-up transactions and appear to be part of an ongoing effort, in line with the FTC’s actions, to scrutinize private equity firms’ activity in the healthcare space.
• The FTC continues to oppose state laws, referred to as Certificate of Public Advantage (COPA) laws, that enable such states to grant healthcare mergers immunity from federal and state antitrust laws. However, the agency lost its challenge involving Louisiana’s laws in federal court, adding to its tally of litigation losses and resulting in a setback to its ongoing campaign against COPA.
• The DOJ, with encouragement from members of Congress, continues to closely examine mergers involving major healthcare players, including UnitedHealth Group’s acquisition of Amedisys.
• Regulators in Europe joined the FTC in formally ordering Illumina to divest cancer detection test maker Grail.

The FTC Alleges Private Equity Firm Engaged in Anticompetitive Roll-up Scheme of Anesthesia Practices in Texas

In September, the FTC took a long-anticipated step and filed suit against a private equity firm based on a “roll-up scheme” in the healthcare space. The FTC alleges that Welsh Carson and its portfolio company, U.S. Anesthesia Partners, Inc. (USAP), violated various antitrust laws in “systemically buying up nearly every large anesthesia practice in Texas to create a single dominant provider with the power to demand higher prices.”¹ The complaint is not based merely on the alleged acquisition of high market shares through serial acquisitions; Welsh Carson and USAP are alleged to have engaged in additional anticompetitive behavior, including price-fixing and market allocation.

As noted in our Q2 update, the FTC and DOJ (Agencies) have long signaled their intention to crack down on firms pursuing roll-up strategies as a way to gain “dominant” market shares while sidestepping HSR merger clearance review. FTC Chair Lina Khan, when speaking about consolidation of provider practices, stated that the agency’s priority is to tackle roll-ups that “allow private equity firms to consolidate power and jack up prices.”² The Agencies have proposed new merger guidelines and HSR filing modifications that would strengthen their ability to evaluate roll-up schemes and other multiple acquisitions, as detailed in our Q2 update. Under the proposed HSR changes, transacting parties will need to disclose their prior transactions in greater detail, for the past 10 years for both buyer and seller, and the Agencies will analyze these prior deals when evaluating the competitive effects of proposed transactions. This new HSR form, Khan explained, will allow the agency to ask, “Is this a private equity firm that’s looking to roll up a market in ways that may harm competition?,” and if so, the FTC can “act on the front end rather than years later, when the harm’s already been done.”³

The Welsh Carson suit demonstrates the FTC’s willingness to challenge conduct that occurs outside of the HSR review process. The FTC alleges that Welsh Carson has routinely created portfolio companies that acquire a series of healthcare practices of various specialties, from radiology to neonatology to anesthesiology. In 2012, Welsh Carson created USAP to partner with anesthesia practices in Texas and nationally. The FTC alleges that USAP then acquired practices in Houston, Dallas, and Austin and throughout Texas, ultimately gaining significant shares of the anesthesia market statewide.

The FTC alleges this roll-up strategy harmed customers in three ways. First, the FTC claims that as USAP acquired practices, it raised reimbursement rates of acquired practices to be consistent with rates of other USAP practices. Second, the FTC argues that USAP and Welsh Carson entered into agreements with nonaffiliated anesthesia practices to bill payors at USAP’s rates for the work performed by these other practices. Third, USAP allegedly entered into an agreement with one of its competitors to keep it out of USAP’s territory. The FTC argues that USAP’s high market shares gave it leverage to raise rates in negotiations with payors, who had few alternatives to act as a competitive constraint. Together, the FTC claims, these actions led to less competition and higher reimbursement rates, without any benefit to patients or hospitals. To address these harms, the FTC is seeking equitable relief, including possible divestitures, to restore competition.

Despite the FTC’s shot across the bow, not all private equity firms should expect similar extended investigations or challenges of serial acquisitions. As noted above, the Welsh Carson case involves allegations of other anticompetitive conduct. Specifically, the FTC alleges that USAP’s agreements with competitors amount to price-fixing and market allocation — conduct long recognized as illegal under the antitrust laws. Additionally, USAP’s practices were already under media scrutiny as a result of the publicity around preexisting private litigation with UnitedHealthcare Group (UHG) over rising physician reimbursement rates.

Nevertheless, private equity firms should be cognizant that prior non-HSR reportable acquisitions in the same space may attract added antitrust scrutiny, particularly in markets that are concentrated or have experienced rising reimbursement rates or prices. As FTC Chair Khan noted recently when discussing roll-ups: “I would say for anybody contemplating those type of schemes, you know, the FTC’s recent work here should be top of mind.”⁴

California Publishes Proposed Regulations on Pre-notification Requirement for Healthcare Transactions, Including Specific Mention of Private Equity “Roll-Up” Transactions

With the passage of SB-184, California joined several other states in adding new requirements to provide prior notice to state regulators of certain healthcare transactions. SB-184 established the Office of Health Care Affordability (OHCA) to monitor cost trends by conducting research and studies on the healthcare market, including the impact of consolidation, market power, venture capital activity, profit margins, and other market effects on competition, prices, access, quality, and equity.⁵ Recently, OHCA published for public comment (which ended on October 17, 2023) its second draft regulations (the Regulations), which clarify the thresholds that trigger a notification and required disclosures by parties.⁶ Healthcare entities should be aware of these pre-notification requirements as they will increase both the cost and the time needed to secure approval of reportable deals. Consistent with the federal Agencies’ proposed HSR changes, the Regulations will allow OHCA to closely scrutinize multiple acquisitions in the healthcare space.

A. Who is subject to pre-notification requirements?

The Regulations clarify and expand the vague definition of “health care entities” that are subject to SB-184. These “health care entities” include payors, providers, pharmacy benefit managers, and affiliated entities that perform the functions of a healthcare entity. The Regulations set forth certain thresholds that a healthcare entity that is party to a transaction needs to meet to trigger a notification:

• Entity with annual revenue of at least $25 million or that owns or controls California assets of at least $25 million
• Entity with annual revenue of at least $10 million or that owns or controls California assets of at least $10 million and is involved in a transaction with any healthcare entity satisfying the $25 million annual revenue threshold
• Entity located in a designated mental health or primary care Health Professional Shortage Area (HPSA, an area, population, or facility with a lack of healthcare services as determined by the US Health Resources and Services Administration)

B. Which transactions require notifications?

Even for parties that meet the revenue or HPSA thresholds, only transactions that constitute a “material change” are reportable. The Regulations lay out 10 different instances of “material change,” including the sale or transfer of control; proposed fair market value of $25 million; and the transfer of 25% or more of the total California assets or transactions resulting in the increase by $10 million or 20% or more of annual California-derived revenue. The Regulations clarify that “material change transaction” will not include “ordinary course transaction” typical in the day-to-day operations of the healthcare entity or transactions under common ownership, for example when going under corporate restructuring.

However, the Regulations will limit the abilities of private equity firms and other parties to avoid mandatory notifications by conducting a series of below-threshold transactions. Under the Regulations, transactions that change the form of ownership from a physician-owned entity to a private-equity-owned entity constitute a “material change,” and when a transaction is part of a “series” of transactions of the same heath care services, the “series” will constitute one transaction for purpose of determining the revenue and assets thresholds. This is consistent with the FTC and DOJ’s renewed focus on private equity “roll-up” and serial transactions.

C. What disclosures must parties provide?

Under the Regulations, parties will submit a form that would include, among other things, a description of the organization and entities involved, ownership structure, and a description of the transactions (including why the transaction is necessary or desirable). Healthcare providers will also need to describe provider type, facilities owned or operated, number of staff, service lines, geographic service areas, and capacity of patients served. Parties are also required to disclose past M&A that involved the same healthcare-related services from the last 10 years (which is in line with proposed HSR changes). The notification form also requires parties to describe potential post-transaction changes and to provide documents related to the valuation of the transaction. If the transaction triggered an HSR filing, the HSR form and any attachments will need to be submitted to the OHCA as well.

D. How long will OHCA review transactions?

The review process could take OHCA six months or more to complete. Parties will have at least 90 days before the closing of the transaction to submit notice to OHCA, for transactions expected to close on or after April 1, 2024. Within 60 days of the submission of a complete notice, the OHCA shall inform the parties of any determination to initiate a cost and market impact review. OHCA will then have 90 days to complete the review and can extend for an additional 45 days, although OHCA can toll the review period by asking for additional information or if the transaction is under review by another state or federal agency. There is an option for parties to request an “expedited review” in case of “severe financial distress” or a significant reduction in the provision of critical healthcare services.

Ultimately, by joining other states in implementing a notification regime for healthcare deals, California imposes new requirements that underscore that healthcare deals are increasingly likely to face scrutiny amid concerns about consolidation in healthcare markets, and merging parties should expect such notification requirements to increase the time and cost of healthcare deals generally.

FTC Fails in Challenge to Louisiana-Based Hospital Merger Under COPA Laws

The FTC suffered a setback in its campaign against COPA laws in late September, when a federal judge dismissed the FTC’s lawsuit challenging the sale of three Louisiana hospitals approved by the Louisiana Department of Justice under state COPA law. As described in our prior alerts, the FTC has consistently pushed back on state-level COPA laws, a regulatory regime passed by state governments to shield hospital mergers and other collaborations from federal antitrust scrutiny, since these laws reduce federal antitrust regulators’ ability to evaluate or challenge transactions they deem anticompetitive. State governments pass COPA laws with the goal of immunizing these transactions where the state believes the benefits of the deal outweigh any anticompetitive concerns. Consistent with its more aggressive regulatory approach in the healthcare space, the FTC, however, has sought to maintain its review powers and has vigorously campaigned against COPA laws for more than five years, including a COPA assessment project that alleged that COPA laws create concentrated healthcare markets and are often detrimental to patient costs, patient care, and healthcare worker wages. The FTC regularly opposes the passage of proposed COPA laws and supports repealing COPA laws on the books, including in West Virginia (2016), Tennessee and Virginia (2016-17), Texas (2020), North Carolina (2022), and Maine (2023).

As described in detail in our Q2 update, the FTC challenged the acquisition of three hospitals, alleging the merging parties failed to abide by federal antitrust laws and submit proper HSR notifications. The merging parties and the Louisiana attorney general argued that the acquisition was exempted from federal laws through Louisiana’s COPA statute and hence a filing was not required. A federal judge sided with the merging parties and state attorney general, who filed motions for summary judgment, and affirmed that the transaction was exempt from federal review under COPA.⁷

It is too early to determine whether this setback will dampen the FTC’s future efforts against state-level COPA laws. However, this defeat is a clear sign that courts may not be receptive to the FTC’s arguments that COPA laws should not take precedence over federal antitrust laws.

Regulators Continue to Investigate and Challenge High-profile Healthcare Deals

A. DOJ continues scrutiny of UnitedHealth Group and proposed acquisition of home health company

The DOJ is conducting an in-depth investigation of UHG’s proposed acquisition of home health company Amedisys. The DOJ has not yet signaled whether it will formally challenge the deal, but it is facing congressional pressure to investigate thoroughly. Sen. Elizabeth Warren (D-MA) and Rep. Pramila Jayapal (D-WA) wrote a letter to the FTC and DOJ to lodge their “concerns with the ongoing consolidation and vertical integration in the health care industry” generally, and with UHG specifically.⁸ Healthcare industry deals involving large players like UHG have been the focus of significant regulatory attention and, while DOJ failed in its previous challenge to UHG/Optum’s acquisition of Change Healthcare in 2022, it may be undeterred in bringing similar challenges.

Sen. Warren and Rep. Jayapal urged the Agencies to evaluate the transaction taking into account that UHG previously acquired a home health agency, LHC Group, in early 2023. Under the proposed merger guidelines, the Agencies have signaled that they intend to examine the competitive effects of serial acquisitions.

B. EC orders Illumina to divest Grail

In a long-expected announcement, the EC ordered Illumina to unwind its 2021 acquisition of Grail Inc., a cancer detection test maker.⁹ This decision comes after years of investigation and court battles in which the EC recently levied a fine of $476 million against Illumina for prematurely closing the transaction without EC approval. Under the new order, Illumina has 12 months to divest Grail and must comply with certain obligations to maintain Grail as a viable and distinct operation until that time. Illumina has appealed this order, along with the fine, to the European Court of Justice but faces long odds in retaining Grail.

As described in earlier client alerts, Illumina has appealed to the Fifth Circuit Court of Appeals a similar decision by the full FTC to block the merger. In September, the FTC and Illumina made oral arguments before a Fifth Circuit panel. The stakes of the action on either side of the Atlantic are high for Illumina, which must divest Grail if it is unsuccessful in either appeal.

 

 

 

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^[1] Federal Trade Commission, “FTC Challenges Private Equity Firm’s Scheme to Suppress Competition in Anesthesiology Practices Across Texas,” (Sept. 21, 2023).  
^[2] MedPage Today, "Have a Story About Private Equity Ownership? The FTC Wants to Hear From You,” (Oct. 13, 2023).
^[3] American College of Emergency Physicians, “FTC Chair Khan at ACEP23: “Your Voices are Just Essential for Us,” (Oct. 11, 2023).
^[4] Insight, “US FTC doubling down enforcement focus on ‘stealth consolidation schemes,’ Chair Khan tells veterinarians,” (Oct. 24, 2023).
^[5] See Goodwin Procter LLP, “Starting in April 2024, California Joins Growing Trend of Implementing Advance Review Processes for Healthcare Transactions,” (June 21, 2023).
^[6] California’s Office of Health Care Affordability, “Proposed Emergency Regulation REVISED Text: Promotion of Competitive Health Care Markets; Health Care Affordability (CMIR).”
^[7] Federal Trade Commission v. HCA et al., 2:23-cv-0105, Order & Reasons (Sept. 27, 2023).
^[8] Letter from Sen. Elizabeth Warren and Rep. Pramila Jayapal to Asst. Atty. Gen. Jonathan Kantar and Chair Lina Khan (Oct. 3, 2023).
^[9] European Commission, “Commission orders Illumina to unwind its completed acquisition of GRAIL” (Oct. 12, 2023).