Investment in the healthcare industry requires careful consideration, as it involves numerous distinct areas of the law. Venable's Private Equity Investment in Healthcare webinar series explores the unique issues and timely developments that shape deals within the industry.
As part of this series, Corporate Group chair Mark Vecchio recently moderated a conversation between partners Len Gordon and Bill Vigen on recent developments in antitrust enforcement in healthcare mergers and acquisitions (M&A). This is the second webinar in our series relating to healthcare M&A.
The Current State of Antitrust Enforcement
In recent years, the Federal Trade Commission (FTC) and Department of Justice (DOJ) have ramped up antitrust enforcement in virtually every industry. Government scrutiny of mergers has not just intensified; it has also shifted from focusing exclusively on consumer welfare to considering additional factors, including privacy and employee concerns. Agencies are looking closely at private equity in healthcare as part of a broader agenda directed against industry consolidation. In some cases, criminal investigations have stemmed from merger reviews.
An Antitrust Policy Shift
Early enforcement in the healthcare industry encouraged competition, with enforcers going after advertising restrictions that discouraged price competition. There was a major policy shift in the 1990s with President Clinton's healthcare reforms that provided safe harbors, encouraging information sharing and joint ventures, with the idea that it would drive down patient costs.
The FTC and DOJ withdrew those safe harbor guidelines last year, as the agencies had grown concerned that there was too much information sharing. Those actions increased uncertainty in antitrust enforcement, and that uncertainty will likely remain, as both agencies have explicitly stated that they do not plan to provide any replacement guidance.
Antitrust Issues Specific to the Healthcare Sector
Regulation of the healthcare industry is uniquely complex, as the DOJ and the FTC share enforcement. Certain deals automatically go to one agency or the other, but some could go either way. Health insurer consolidation always goes to the DOJ, while hospital mergers mostly go to the FTC—but not always. The FTC can challenge mergers among nonprofit hospitals or nonprofit healthcare providers, but it does not have jurisdiction over conduct remedies. So, if two nonprofits were allegedly fixing prices, the FTC couldn't challenge those practices.
The healthcare marketplace is also unique in that everyone needs access to healthcare providers and wants the best possible care. The normal competitive dynamic that you would rely on to analyze the market for a product or service is more complex when you have something that everyone needs. Additionally, you have the intersection of insurance companies, patients, providers, and employers, which makes the analysis trickier.
There are also issues regarding the high prices of advanced healthcare equipment and the costs associated with modern technology. In rural or exurban communities, local hospitals may not be able to afford the most state-of-the-art equipment without consolidation. Local market conditions and state certificate of need laws bring additional challenges when hospital mergers are being analyzed.
State attorneys general add another layer to the intricate healthcare antitrust enforcement landscape. An increasing number of states are now requiring notification of mergers, with a focus on the healthcare sector. Those notifications may apply to deals valued as low as $25 million, while the federal minimum threshold is significantly higher. State regulations can sometimes displace federal antitrust laws, and some state agencies, such as New York's Department of Health, actively supervise hospital mergers.
Non-Compete and No-Poach Agreements
A federal judge in the Southern District of Texas recently struck down the FTC's rule banning non-compete agreements. The FTC issued that rule in April after almost a year of notice of comment, and it was set to go into effect on September 4. The FTC is considering appealing this decision to the Fifth Circuit.
From the perspective of an investor looking at businesses in the healthcare provider space, the greatest assets often are the practitioners and the ability to keep those employees. If there is now a situation where non-competes are not effective, doctors, nurses, anesthesiologists, and other practitioners can leave to work for a competitor, which obviously adversely affects valuations.
Increasing Scrutiny of Private Equity in Healthcare
Regulators remain hyper-focused on the impact of private equity on healthcare costs and market competition, as evidenced by hearings and notices for public comment specifically targeting private equity. The FTC and DOJ may be reacting partly out of a fear of the unknown, as they feel they lack control over the rapid, sometimes opaque changes in the healthcare market driven by private equity. Smaller acquisitions escape regulatory oversight, so the agencies are likely concerned about local practice groups being bought out without any type of notification.
Additionally, some members of Congress have considered advancing legislation that would impose criminal penalties on private equity firms and their executives if people die from perceived profiteering at hospitals owned by private equity firms. There's been some private litigation against private equity firms as well.
Legal Risks for Private Equity Firms
When a firm is actively involved in the management of its portfolio companies, it could be found liable for the anti-competitive practices of those companies. Passive investment, however, is generally not enough to incur legal risk.
Most private equity investments fall somewhere in the middle of that spectrum. Depending upon the equity interest, an investor might have veto rights, or a board representative might have information that could relate to price fixing or other conduct. The key factors are the involvement of the private equity firm and the directors it appoints to the company's board in the conduct that is alleged to violate the antitrust laws.
In the next session of this webinar series, members of our Healthcare Litigation and Investigations and White Collar Defense teams will discuss the major federal fraud and abuse laws and the risks involved in healthcare investments and business relationships.
