US government targets healthcare private equity: Top points for risk management

Healthcare private equity firms are in the crosshairs of the US antitrust agencies, the White House, state legislators, and some prominent members of Congress.

In recent weeks, Federal Trade Commission (FTC) Chair Lina Khan has argued that private equity acquisitions of healthcare practices have “enabled firms to amass significant control over key services in local markets,” resulting in “fewer choices and higher costs” for patients and payors. States such as California, New York and several others are enacting new laws and restrictions on private equity ownership of healthcare companies.

Meanwhile, the Chair of the Senate Finance Committee has argued that healthcare consolidation, particularly by private equity, allegedly results in “increasing costs without improving the quality of care.”

The risk factors are intensifying as Congress contemplates legislation specifically targeting healthcare private equity, and as the FTC focuses more attention on this industry. The current regulatory uncertainty looms large, and the upcoming election cycle could be impactful. The result is converging antitrust enforcement and legislative risks which demand creative and proactive solutions.

The government’s playbook

Antitrust agencies, state agencies, and Congress – and, in some cases, key players themselves – have provided clear indications of the methods the government will use to target healthcare private equity going forward.

• Congressional investigations. Congressional activity has intensified in recent weeks as Senators on both sides of the aisle, including Elizabeth Warren (D-MA), Richard Blumenthal (D-CT), Sheldon Whitehouse (D-RI), and Chuck Grassley (R-IA), have sent demands for documents to private equity sponsors and their portfolio companies specifically focused on private equity acquisitions of healthcare practices. Expect these Senate investigations to continue and potentially be mirrored by House committees, especially if Democrats take control of the House in 2024. Private equity sponsors are encouraged to remain mindful of the Congressional activity – and the opportunity to shape any legislation – as they seek to protect their interests.
  
  
• Increased state oversight. A growing number of states have recently introduced or passed legislation to regulate "material change" transactions in healthcare, addressing concerns related to private equity investment or significant ownership changes in healthcare companies. These bills vary in approach, with some requiring disclosure of impending deals and providing documents to state agencies for review; others granting states authority to approve, conditionally approve, or reject transactions; and some appropriating funds for studying consolidation and regulatory options. Notably, laws have been enacted in Oregon (2021), California (2022), New York (2023), Illinois (2023), and Minnesota (2023), along with a "study" bill in Washington (2023) and several other states seeking new legislation in the 2024 upcoming sessions.
  
  
• Familiar legal theories. Even when pursuing issues, like PE acquisition strategies, that have not historically been a focus, antitrust enforcers tend to favor well-trod legal theories over novel approaches whenever possible. This means that enforcers will be more likely to challenge private equity acquisition strategies when they see evidence of traditional antitrust offenses, such as allocating markets between competitors. This trend has already played out in recent high-profile cases.
  
  
• Familiar targets. When the agencies learn about a company or market through an investigation or enforcement action, they tend to return to the same areas again for future scrutiny. PE funds that have faced enforcement in the past, or which notice that competing funds investing in similar medical specialties or geographies have been facing enforcement, should expect heightened scrutiny.
  
  
• Focus on local geographies. Hospital merger cases have long been won or lost based on geographic market definition, and the same is likely to be true in future challenges to healthcare private equity acquisitions. The FTC may be expected to argue for small markets based on patient location, which in turn makes it easier for the FTC to treat a transaction as presumptively anticompetitive.
  
  
• Labor market effects. Another lesson to draw from recent hospital merger cases is a focus on the labor market effects of a proposed transaction. In the last two years, the FTC has stopped three hospital mergers that it believed would reduce competition among employers for physician labor (and, in one case, nurse labor). Similar concerns animate the FTC’s proposal to ban employee non-competes. PE funds should expect labor market effects to be a central consideration when proposed transactions are being evaluated by antitrust agencies.
  
  
• Leveraging new rules. The forthcoming changes to the Hart-Scott-Rodino Antitrust Improvements Act (HSR) rules serve several objectives – including, in all likelihood, to act as a deterrent to mergers generally. One of the most significant changes is providing the FTC and Department of Justice (DOJ) visibility into past, non-reportable transactions by the parties filing a notification. The agencies believe PE firms are accumulating dominant positions through serial non-reportable transactions, and plan to closely review patterns of acquisitions by the same fund families. The agencies have also proposed significant changes to the Merger Guidelines, which inform their substantive analysis of proposed mergers and acquisitions. For the first time, these Guidelines expressly encourage enforcers’ review of the totality of a firm’s pattern or strategy across acquisitions. At the same time, the Guidelines lower the bar for what the agencies consider to be a concentrated market. This will provide a government-friendly yardstick against which the agencies will measure patterns of acquisitions.
  
  
• Information exchange. The agencies have expanded their conception of anticompetitive information exchanges while withdrawing prior safe harbors, and the FTC has begun aggressively invoking its unique authority to challenge as “unfair methods of competition” information exchanges that would not otherwise violate the primary antitrust laws. Going forward, the FTC is likely to challenge both public and private communications by PE firms and portfolio companies related to pricing or other competitively sensitive topics as alleged “invitations to collude.” The FTC may also increase scrutiny of information exchanged in the course of transactions, including during due diligence.

Risk management strategies

The government playbook described above suggests a number of concrete steps that PE firms can implement to manage risk in this area. Private equity groups are encouraged to tread carefully amidst the FTC, state and congressional scrutiny to avoid becoming the focal point of an antitrust investigation, a congressional hearing, or congressional inquiry. Proactive measures can shield private equity firms from being singled out, in addition to protecting their interests in an increasingly regulated landscape.

Firms may consider the following steps:

• Take stock of existing strategies. Start by taking stock of existing strategies. This means not only evaluating individual investment or exit plans, but also reviewing strategies at a macro level. If a PE firm employs roll-up strategies, has created physician networks or other integrated delivery systems, or has accumulated investments in multiple potentially competing providers in similar geographies, recognize such firm likely may face a heightened risk of antitrust scrutiny.
  
  
• Government relations and lobbying. Build relationships with key state and Washington, DC decisionmakers before you have an "ask," and identify opportunities to steer the conversation. Stay informed about congressional, state, FTC, DOJ, and AG activity related to private equity. Work with advisors to shape legislation and engage in government relations efforts to protect private equity interests, recognizing the potential risks associated with evolving regulatory landscapes.
  
  
• No unforced errors. The greatest risks arise if a PE is alleged to have entered into anticompetitive agreements (formal or informal) with potentially competing medical practices. These may include agreements related to pricing or the territories or customer segments the practices serve. They may also include agreements related to dealing with payors. Work with legal counsel to conduct a privileged risk evaluation of any such agreements.
  
  
• Local markets. Carefully consider the local geographic markets in which the PE firm makes acquisitions, recognizing that its market power may be viewed at a very local level. Antitrust counsel, and in some cases expert economists, can assist with developing realistic risk evaluations of acquisition strategies and mitigating risk.
  
  
• Labor stakeholders. When evaluating transactions and macro-level strategies, carefully account for any effects on competition for labor, particularly for physicians and nurses in the relevant specialties. Likewise, be attuned to labor groups, including nurses’ unions, that might be affected by a proposed transaction. These groups have the ear of the antitrust agencies.
  
  
• Competitively sensitive information. Carefully evaluate any sharing or receiving of non-public information related to pricing, salaries, future strategic plans, or other competitively sensitive topics. This includes any benchmarking or other activities related to operations, as well as information shared during due diligence. Antitrust counsel can advise on risk mitigation strategies, such as black box anonymization of sensitive information.
  
  
• Proactive merger control planning. Analyze potential acquisitions and exit strategies through the lens of the updated merger guidelines and HSR rules. This enables PE firms to make more informed decisions about the relative risk profiles of different strategies.
  
  
• Internal training and controls. Establish procedures for escalating to in-house or external legal personnel any complaints the company might receive from concerned employees, regulators, or other market participants. Likewise, educate physicians and other members of portfolio company leadership on the basics of antitrust compliance.

The risks presented by the current environment are significant but can be mitigated. DLA Piper is routinely ranked among the most active law firms for private equity deal volume in the US and globally, and our Antitrust and Government Affairs are equipped to address the needs of private equity clients.

For more information, please contact the authors.