FTC and DOJ Increase Scrutiny of Private Equity’s Role in Healthcare

On March 5, 2024, the Federal Trade Commission (FTC) hosted a virtual workshop titled “Private Capital, Public Impact: an FTC Workshop on Private Equity in Healthcare” (the Workshop). The agenda, together with a recording of the Workshop can be found here. Immediately prior to the Workshop, the FTC, DOJ, and HHS (collectively, the Agencies) announced a joint public inquiry, issuing a Request for Information (RFI) seeking public comments on a joint press release entitled, “Impacts of Corporate Ownership Trend in Health Care.” A copy of the RFI can be found here.

We set forth below a brief summary of the Workshop, the RFI, and some key takeaways for providers.

Key Takeaways

1. The Biden administration is highly focused on scrutinizing corporate ownership of healthcare providers, and, among other things, intends to continue to use federal antitrust laws to do so. Investors should expect increased scrutiny of private equity’s (PE’s) role in healthcare and horizontal and vertical consolidation across the healthcare sector to continue for remainder of this administration.
2. During the Workshop’s closing conversation between Commissioner Slaughter and Rhode Island Attorney General Peter Neronha, such speakers issued an edict to states to examine and potentially challenge PE acquisitions of healthcare providers. Given this, it is likely that states may follow the federal government’s lead and also investigate the role of PE and its ownership of healthcare providers within their respective states. Besides challenging proposed transactions and seeking to unwind closed ones, other resulting actions at the state level could include strengthening or introducing corporate practice of medicine prohibitions or otherwise limiting private ownership of healthcare providers.
3. Prior to any strategic acquisition where there is an overlap with existing providers, it is important for a PE firm to engage antitrust counsel to assess the proposed transaction’s competitive impact, including evaluating its procompetitive, the parties’ (e.g., the buyer and the seller) ordinary course documents regarding competition and strategic planning, anticipated reaction by commercial payors, employers, other providers and the community, and details regarding all providers in the relevant geographic and product markets.
4. When evaluating potential horizontal acquisitions, PE firms should be aware that each additional acquisition may result in increased risk that a regulatory agency will likely review not only the proposed transaction, but the PE firm’s acquisition history and its future investment strategy.

Overview of the Workshop

The Workshop featured speakers from the FTC, DOJ, HHS, academia, and providers, beginning with opening remarks by FTC Chair Lina Khan. In her opening remarks, FTC Chair Khan emphasized that the FTC is concerned with the following:

• The purported “flip and strip” approach, pursuant to which it has been alleged that PE firms use large amounts of debt to acquire companies with the goal of increasing profits quickly so they can resell healthcare assets. In the FTC’s view, this approach is inconsistent with the arguments it hears from the private sector that PE’s acquisitions of healthcare providers are designed to improve the quality of care and lower costs.
• Horizontal acquisition strategies that allow firms to consolidate ownership in a specific market through a series of smaller transactions that do not trigger Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) reporting requirements.

The Workshop included moderated discussions including agency officials, healthcare workers, and scholars. Speakers highlighted concerns regarding (i) the purported “harmful effects” of PE investment in healthcare, (ii) the ability of the Agencies to regulate PE within the healthcare sector, specifically pointing to horizontal acquisition strategies across specific geographic regions that fall below the HSR Act reporting thresholds, and (iii) how corporate ownership structures of PE firms can potentially make it difficult for regulatory agencies to understand a provider’s upstream and indirect ownership. Notably, the Workshop’s speakers appeared eager to criticize PE and its role in the healthcare sector. Such individuals also appeared to have a homogeneous view of PE – one that was premised on the notion that private capital negatively impacts providers and patients.

Overview of the RFI

Through the RFI, the Agencies intend to gather information on smaller transactions that would not be reported to the DOJ or FTC for antitrust review under the HSR Act. The public will have until May 6^th, 2024 to submit comments. The Agencies are requesting input regarding the following types of transactions: (1) those conducted by PE funds or other alternative asset managers; (2) transactions conducted by health systems; and (3) transactions conducted by private payors.

The RFI poses five questions related to investments involving health care providers by PE funds, alternative asset managers, health systems, and private payers, and included a specific request for input as to what actions the Agencies should take “to identify and address transactions that, due to market consolidation or corporate control issues, may have major adverse impacts.”