Private equity sponsors can exhale: A federal court recently stopped the Federal Trade Commission's (FTC) antitrust action that targeted private equity sponsor Welsh, Carson, Anderson & Stowe for the healthcare "roll-up" strategy of its anesthesia practice management portfolio company. The case, Federal Trade Commission v. U.S. Anesthesia Partners, Inc. et al., might prove to be a milestone – and perhaps a turning point – in the recent trend of federal and state scrutiny of private equity sponsor investment in the healthcare industry. The decision came only a few months after the U.S. Department of Justice (DOJ), FTC and U.S. Department of Health and Human Services published a public request for information (RFI) about the role of private equity sponsors, private payers and health systems on healthcare markets. In fact, the public comment period was recently extended to June 5, 2024. This RFI followed updates to FTC and DOJ Merger Guidelines issued in late 2023 that many private equity sponsors feared might impede healthcare transactions.

However, this recent court decision, as summarized in Holland & Knight's previous alert, "Private Equity Firm Welsh Carson Dismissed from FTC Antitrust Action," May 15, 2024, affirms that many private equity sponsor investment models in healthcare are not per se antitrust violations. The court also determined that the following conduct by Welsh Carson did not violate the antitrust laws:

• receiving profits from investments in a healthcare company¹
• holding noncontrolling, minority interests in a healthcare company²
• participating in acquisition strategies and finding deal targets for a healthcare company³
• specializing in the healthcare industry and having the capacity to consolidate certain markets⁴
• investing in other healthcare companies that utilize an acquisition roll-up strategy⁵
• having executives make comments about the consolidation of other markets within the healthcare industry⁶

To state the obvious, this is a win for private equity sponsors.

What comes next, however, mandates further attention. The following additional pathways for the FTC to scrutinize private equity sponsor-backed healthcare companies are anticipated:

• Conduct-Based Relief Under Section 5 of the FTC Act. The FTC may seek to take action under its Section 5 authority if it believes the private equity sponsor and/or healthcare company has been violating antitrust laws. Notably, the court in the Welsh Carson case stated that the FTC could not use advantageous elements of that authority in its Section 13(b) action against Welsh Carson. Adding fuel to the fire, the FTC in 2021 withdrew a 2015 antitrust policy statement that constrained Section 5 authority and replaced it with a new policy that identifies as a potential Section 5 violation "a series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws." The new policy reflects the FTC's view that its authority under Section 5 is broad and encompasses a wide range of unfair methods of competition, even if the conduct at issue is not an antitrust violation under the Sherman Antitrust Act or Clayton Act. The FTC has thus tried to maximize its discretion and flexibility to bring Section 5 cases, regardless of whether there is an underlying antitrust violation.
• Injunctive Relief Under Section 13(b) of the FTC Act. Private equity sponsors that hold controlling interests in, or have substantial overlapping ownership with, healthcare companies are still vulnerable to a Section 13(b) action by the FTC. The court cited examples of successful antitrust actions against parent companies and their subsidiaries, but the parent company had ownership interests of 95 percent to 100 percent. It is unclear whether a private equity sponsor with ownership interests of 51 percent to 95 percent would be captured. It is also unclear what level of control would be needed – in this case, the ability to appoint two of 14 directors on the board was not sufficient. It does present the question of whether the private equity sponsor could appoint up to seven directors and still disclaim control. Finally, since this is a trial court decision, it could always be appealed by the FTC, which, if successful, could broaden the FTC's Section 13(b) pathway for future scrutiny.
• Hart-Scott-Rodino Act (HSR) Notification Process for Future Platform Investments/Sales and Add-On Transactions. The FTC could subject more private equity sponsor-backed transactions that meet the HSR notification thresholds to second requests in an effort to chill transactions involving roll-up strategy platforms. One of the proposed changes includes a requirement of all parties to disclose significantly more information about the structures of the merging parties, including information about all minority investors in any entities associated with either of the merging parties, others (such as creditors) in a position to influence competitive decisions and members of their bords of directors (as well as board overseers).⁷ A second proposed change would require "merging parties to identify all prior acquisitions in the preceding 10 years."⁸ These and other proposed requirements would inevitably make the HSR filing process longer and more cumbersome. Furthermore, the HSR rules will require disclosure of new and additional information that will be used to challenge more cases based on the new theories of harm in the Merger Guidelines. These changes to the HSR rules are due in the near future, according to DOJ antitrust officials.

In the face of this anticipated scrutiny and avenues for challenges, private equity sponsors who innovate best-in-class solutions that address the underlying antitrust concerns have an opportunity to differentiate themselves – initially during regulatory reviews and later during fundraising and deal sourcing.

As a starting point, what can private equity sponsors do to prepare for the inevitable FTC scrutiny of their healthcare company investments?

• proactively conduct market concentration reviews of existing platform investments to see if there are any high concentrations of specialized services in key markets:
  • Under the new Merger Guidelines, there is a 30 percent threshold for triggering certain presumptions that would automatically make any transaction anticompetitive.
  • If your private equity sponsors' portfolio company is approaching or over the 30 percent threshold, you should contact Holland & Knight to discuss how best to address your mergers and acquisitions (M&A) strategy on a go-forward basis.
• review relationships that existing platform investments have with competitors in key markets, if any
• consider how platform acquisition and add-on transactions might increase access to care, reduce costs and improve quality of care in key markets and adopt such assumptions into the letters of intent, transaction documents and the business case materials for investment committees of the private equity sponsors; define metrics and reward leadership for driving measurable improvements
• review investment committee materials and related deal valuation materials to help ensure that post-acquisition strategies that may increase market concentration are not material factors in driving the approval or value of such transactions
• maintain better documentation that describes the separateness of the investment company and investor and help ensure that organizational processes are in place to reflect and document such separation:
  • The FTC argued that Welsh Carson was responsible for creating its investment position in the marketplace by executing "multiple letters of interest, letters of intent and confidentiality agreements for [U.S. Anesthesia Partners, Inc.] ["]USAP["]'s creation, USAP's acquisition and USAP's horizonal agreements."⁹
  • The FTC also noted that "Welsh Carson hired multiple consultants to identify anesthesia practices for USAP to acquire. Welsh Carson reviewed and approved every single acquisition USAP made. [And,] Welsh Carson drafted the specific contractual language at issue, the tuck-in clauses that USAP uses."¹⁰
  • Despite the FTC's arguments, the court focused on the fact that "the Welsh Carson Fund XII owned no more than 23 percent, of USAP and did not have control of the board."¹¹
  • To the extent that other private equity sponsors have greater control of the board or ownership of their investment companies, they should consider how the degree of separateness between them and their investment companies might impact a future challenge by a government regulator or private plaintiff and the likelihood of a court finding that there has been an antitrust violation.

Conclusion

Private equity-backed healthcare is in the early innings of the new wave of antitrust scrutiny. Although the U.S. Anesthesia case is a win for private equity – without doubt – a close review of the case signals the importance of detail and proactive strategy going forward. Operators and investors should consult with experienced antitrust and industry counsel from the inception of business strategy, not merely when the time comes to transact. The future will likely necessitate not only having, but proving, best-in-class compliance with the new era of antitrust scrutiny under the FTC’s rules, including the Merger Guidelines.

Holland & Knight Partners David G. Marks and Eric A. Scalzo also contributed to this alert.

Notes

¹ The court noted that "the FTC does not cite any authority for the proposition that receiving profits from an entity that may be violating antitrust laws is itself a violation of antitrust laws…the act of receiving profits from USAP is not an ongoing antitrust violation." Memo. Op. at 9.

² The court refused to "expand liability to minority investors whose subsidiaries reduce competition." Memo. Op. at 13. In fact, the court noted that "[i]t is not clear how owning a minority share in a company that reduces competition satisfies the statute." Memo. Op. at 11.

³ The court noted that "[t]he fact that [ ] Welsh Carson entities…helped create both USAP and its acquisition strategy does not change the analysis." Memo. Op. at 12. The court stated that it was not willing to adopt a novel interpretation of Section 13(b), "expand[ing] liability to minority investors show subsidiaries reduce competition." Memo. Op. at 13.

⁴ In terms of the "about to violate" standard in Section 13(b), the court stated that "the mere capacity to do something [like have blueprints, finances, and personnel] does not meet the requirement that the think is likely to recur." Memo. Op. at 17.

⁵ The court noted that it would "not be the first to use this specialized statute to expand antitrust liability to reach active investors in companies that are alleged to violate antitrust law." Memo. Op. at 16.

⁶ The court stated that "comments from Welsh Carson executives indicating a desire to consolidate other healthcare markets do not show that Welsh Carson is about to violate antitrust laws." Memo. Op. at 15.

⁷ "Killing Deals Softly: FTC Proposes 107-Hour Increase in Hart-Scott-Rodino Burden," Holland & Knight alert, June 28, 2023.

⁸ Id.

⁹ Transcript of Motion Hearing, 46:3-6.

¹⁰ Transcript of Motion Hearing, 46:10-15.

¹¹ Transcript of Motion Hearing, 39:6-7.