As this fall’s election approaches, headwinds have been brewing in DC and state legislatures for private equity health care dealmaking, many of them with bipartisan support. While a key Senate committee scrutinized patient care ramifications from the Steward Health Care bankruptcy and California passed the first attorney general review of health care acquisitions, the FTC’s muscular opposition to health care roll-ups and noncompetition covenants continues to reverberate.
On Sept. 12, the Senate Health, Education, Labor and Pensions (HELP) Committee held a hearing titled “Examining the Bankruptcy of Steward Health Care: How Management Decisions Have Impacted Patient Care.” The hearing focused on the consequences of the mismanagement of Steward Health Care and impacts on surrounding communities. Chairman Bernie Sanders (I-VT) labeled the U.S. health care system as broken, prioritizing corporate profits over patient care. He blamed the role of private equity, particularly Steward Health Care CEO Ralph de la Torre deploying financial strategies that left hospitals deeply in debt and forced to close while he and his partners profited significantly. Chairman Sanders described private equity as driving up health care costs and diminishing care quality and demanded both accountability and reform. Ranking Member Bill Cassidy (R-LA) shared concerns about the level of patient care and mismanagement of hospitals by Steward Health Care. Chair Sanders and Ranking Member Cassidy critiqued de la Torre’s absence and indicated they are considering holding the CEO in criminal contempt for violating the congressional subpoena.
At the same time, states are increasingly placing the corporate consolidation of medicine under a microscope. Indeed, officials in 10 other states have adopted rules or passed laws requiring closer scrutiny of health care markets. Earlier this month, the California state legislature passed a bill to require attorney general review for all health care acquisitions by private-equity firms and hedge funds.
Meanwhile, a federal judge in Texas in Ryan vs. Federal Trade Commission set aside the Federal Trade Commission’s (FTC) controversial noncompete rule last month ruling that it would not become effective on Sept. 4 as previously scheduled and cannot be enforced by the FTC (see Brownstein’s prior alert on the case here). The case narrowly averted, for the time being, the FTC’s noncompete rule banning all noncompete agreements for workers both proactively and retroactively, except under certain narrow circumstances, including an exception for a noncompete agreement entered into in the context of a sale of a business. However, numerous state legislatures have already taken up the charge of severely limiting or outright banning noncompetition covenants, with outright bans in California, Minnesota, North Dakota and Oklahoma and many other states including Colorado banning noncompetes with limited exceptions, such as high earners or key employees.
While some state legislatures around the country have included carve-outs from their noncompete bans for high earners and for protection of legitimate intellectual property interests, particularly when developed by the departing employee, as well as noncompetes restricting a seller in connection with the sale of a business, the FTC did not permit these carve-outs from its noncompete ban. Without these tools, businesses would need to identify other approaches to secure intellectual property from unfair competition and protect the goodwill that they acquire upon the acquisition of another business.
The FTC’s aggressive opposition to noncompetes followed its lawsuit against U.S. Anesthesia Partners, Inc. (USAP) and its private equity sponsor, Welsh, Carson, Anderson & Stowe, asserting they crafted a “multi-year anticompetitive scheme” to consolidate anesthesiology practices in Texas by “rolling up” and monopolizing the market for anesthesiology in Texas. In so doing, FTC Chair Lina Khan staked out a strong position on roll-up strategies, alleging that Welsh Carson created USAP in 2012 to acquire large anesthesia practices as part of a plan to increase prices and drive profits. The complaint further alleged that the private equity sponsor and USAP entered into price-setting agreements with independent anesthesiology practices and allocated markets under an agreement with a significant competitor. While the court later granted private equity firm Welsh Carson's motion to dismiss it from the lawsuit, the case is still pending against USAP.
For its part, private equity argues that it plays a critical role in supporting quality, affordable health care in the United States. According to the American Investment Council, private equity has invested nearly $1 trillion into U.S. health care since 2006, representing nearly 12.7% of all health care investments during this period, helping fund innovations, deliver more effective treatments and increase access to care for millions of Americans and, in some cases, significantly decreasing patient mortality.
While the FTC may yet appeal the Texas court’s ruling on its noncompete ban, it has maintained its aggressive stance against health care mergers generally and private equity-backed rollups specifically. Meanwhile, the bankruptcy of Steward Health Care has created a rare moment of bipartisanship, with both the left and the right scrutinizing patient care and mismanagement.
Dealmakers should proceed with caution in navigating a challenging regulatory environment for competition and consolidation issues.
