FTC Sues Private Equity Firm Over Alleged Anticompetitive Scheme Involving Roll-up Acquisitions

The US Federal Trade Commission is suing US Anesthesia Partners Inc. and its private equity founder for allegedly enacting an anticompetitive scheme to gain market power through a series of roll-up acquisitions.

FTC V. US ANESTHESIA PARTNERS INC.

On September 21, 2023, the US Federal Trade Commission (FTC) sued US Anesthesia Partners Inc. (USAP), and its private equity founder, Welsh Carson Anderson & Stowe (Welsh Carson) for a series of small acquisitions that, according to the complaint, enabled the firm to gain market power. The FTC alleges that in 2012, Welsh Carson and USAP began a scheme to consolidate anesthesia practices in Texas through a series of roll-up acquisitions.

In addition, the complaint alleges that USAP entered into a series of “price-setting” arrangements with independent anesthesia groups and a market allocation agreement with an unnamed anesthesia provider. According to the complaint, USAP’s anticompetitive conduct and high market share allowed it to charge supracompetitive prices for “hospital-only anesthesia services sold to commercial insurers and their insured members” in Houston, Dallas-Fort Worth, and Austin.

The FTC alleges that each acquisition made by USAP is a violation of Section 7 of the Clayton Act as part of a multi-year rollup. In the Houston market, for example, the FTC alleges that USAP’s separate acquisitions of anesthesia provider groups in 2014, 2017, and 2020 violated Section 7 “whether considered individually or as a series of acquisitions.” Similarly, in the Dallas market, FTC alleges that six separate transactions between 2015 and 2016 violated Section 7. In Austin, the Section 7 claim is limited to a single acquisition in 2018.

Many of the acquired anesthesia practices were small, with market shares under 3%, but in aggregate the acquisitions, according to the FTC, result in high shares—between 44% and 70%—in certain geographic markets.

In addition to the merger claims, the FTC brought claims for unlawful monopolization and conspiracy to monopolize the Houston and Dallas markets, and for violations of Section 1 of the Sherman Act for alleged price-setting arrangements and market allocation agreements with competitors. The FTC alleged that the price-setting arrangements—which allegedly involved having independent providers bill under the USAP name and thus utilize higher USAP reimbursement rates—had a “similar effect” to outright acquisitions.

The FTC seeks (1) a permanent injunction preventing USAP and Welsh Carson from “engaging in similar and related conduct in the future” and (2) other equitable relief, including structural relief. It is possible that the FTC will try to break up USAP and undo the acquisitions.

HIGHLIGHTS AND KEY TAKEAWAYS

• Welsh Carson was included as a defendant even though the private equity firm has not owned a majority stake in USAP since at least 2017. In fact, according to the complaint, Welsh Carson currently owns only 23% of USAP.
• The FTC alleges harm from acquisitions that occurred many years ago. For example, in Houston, USAP’s initial acquisition occurred in 2012, and the alleged roll-up acquisitions took place in 2014, 2017, and 2020.
• The FTC pleads the Section 7 claims as a single violation for the series of acquisitions and as individual violations for each acquisition. Thus, some of the alleged violations are for acquisitions of very small firms. For example, two of the six Dallas acquisitions were of practices with market shares below 1%, which increased the Herfindahl-Hirschman Index (a measure of market concentration) by less than 100 points.
• The FTC is willing to allege harm in narrow healthcare product markets. Here, the market is limited to “hospital-only anesthesia services sold to commercial insurers and their insured members.” This suggests that antitrust risk associated with healthcare transactions—including assessments of market shares and competitive dynamics—should be evaluated in both broad and narrow product and geographic markets.
• The complaint suggests that USAP’s market share in Texas gives it increased bargaining leverage in local markets even when there is no change in market concentration in those locales. For example, the FTC claims that USAP was able to negotiate better rates for anesthesia services in Amarillo “even though the acquisition did not increase market concentration in Amarillo.” This is a unique allegation that the FTC has not historically included in litigation against providers.
• The FTC seeks expansive and unspecified relief from Welsh Carson and/or USAP. The prayer for relief suggests that structural relief—for example, divesting of assets—may be warranted, but it does not request that any specific assets be divested or state whether owning some of the assets may be permissible. In addition, the FTC broadly seeks to prevent defendants from “engaging in similar and related conduct in the future,” which could, in theory, be read to prevent future so-called roll-up transactions in both anesthesia and potentially other product markets.
• This case highlights the importance of document creation during consideration of acquisitions, partnerships, and joint ventures. The complaint includes many quotes from Welsh Carson and USAP documents in support of the FTC’s case, including quotes suggesting that USAP has significant bargaining power.
• The case was filed in the US District Court for the Southern District of Texas in Houston and any dispositive decision in the case will be subject to review by the US Court of Appeals for the Fifth Circuit, which has been adverse to aggressive agency action, including litigations by the FTC. It is thus questionable whether the FTC’s novel roll-up theory will survive judicial scrutiny.

CONCLUSION

The FTC’s complaint is likely just the beginning, as the agencies take a closer look at healthcare transactions, particularly transactions that are not reportable under the Hart-Scott-Rodino Act, as well as private equity firms and their acquisition strategies. Both the FTC and the Department of Justice have made statements confirming that they are focused on similar roll-up acquisition strategies.

It is clear that healthcare acquisitions, including those by private equity firms, will be subject to increased scrutiny by regulators regardless of the size or structure of the transactions.

As a practical matter, firms should assess their acquisition strategies to determine whether there is any existing or prospective antitrust risk. The documents quoted in the complaint highlight the importance of antitrust training, and serve as a reminder for companies and private equity firms to ensure that training and compliance programs are up to date.