Health care is always a high priority for the Department of Justice Antitrust Division (“DOJ”) and the Federal Trade Commission (“FTC”). The emphasis on antitrust compliance within the health care industry was recently reiterated by Andrew Forman, a Deputy Assistant Attorney General at the DOJ.
Specifically, at the American Bar Association’s Antitrust in Healthcare Conference, Mr. Forman explained that increased consolidation within the health care market leads to reduced research, staffing shortages and decreased quality of care. Additionally, consolidation within health care typically leads to increased third-party influence between a physician and their patient. For example, as health care organizations merge, they tend to have increased influence over the tests provided, the drugs prescribed and the procedures offered.
During his remarks, Mr. Forman highlighted several areas where the DOJ intends to focus its enforcement efforts. Notably, Mr. Forman emphasized that the DOJ is particularly focused on private equity transactions.
Private Equity in the Health Care Market
Private equity groups are increasingly active in the health care market. In 2020, the second leading sector for private equity was health care. While Mr. Forman acknowledged the important role private equity investment plays within the United States economy, he also cited concerns that private equity groups often “focus on short-term profits and aggressive cost-cutting,” which can “lead to disastrous patient outcomes and, depending on the facts, may create competition concerns.”
Mr. Forman’s remarks echo statements from Lina Khan, the current Chair of the FTC. Chair Khan recently criticized private equity activity related to nursing homes, stating that the downstream effects could result in life or death consequences “when buyouts place large sections of the economy under the control of Wall Street.” To demonstrate the impact that private equity transactions may have on the health care market, Chair Khan highlighted that nursing homes typically experience an increase in mortality rates after being acquired by private equity. Based on the perceived impact of private equity activity within the health care market, Chair Khan announced that the FTC would take a “muscular” approach to regulating transactions moving forward.
To many antitrust experts, Chair Khan’s comments regarding private equity activity in health care are unsurprising. Since assuming her role as FTC Chair in 2021, Khan has taken an aggressive stance against private equity activity across industries. For instance, the FTC recently challenged two transactions by the same private equity-backed veterinary company. According to the FTC’s complaint, the proposed transactions “would have enabled the firm to establish a dominant position in key markets for specialty and emergency veterinary services in California and Texas.” The FTC also imposed prior approval and notice requirements on the private equity-backed veterinary company to ensure compliance with antitrust laws and prevent market concentration moving forward. In commentary to the complaint, Chair Khan added that, “[w]hile private equity firms can support capacity expansion and upgrades, firms that seek to strip and flip assets over a relatively short period of time are focused on increasing margins over the short-term, which can incentivize unfair or deceptive practices and the hollowing out of productive activity.”
Although Chair Khan appears intent on restricting private equity activity, her approach is not unanimously supported within the FTC. Specifically, FTC Commissioners Phillips and Wilson criticized Chair Khan’s decision to impose prior approval and notice requirements on the private equity-backed veterinary company. The FTC Commissioners stated that “[i]mposing heightened legal obligations on disfavored groups – including private equity – because of who they are rather than what they have done raises rule of law concerns.” Despite the criticism from Commissioners Phillips and Wilson, with the relatively recent confirmation of Commissioner Bedoya, Chair Khan generally maintains a 3-2 majority of votes at the Commissioner level, so her approach towards private equity transactions is likely to mean more enforcement actions in the future. Therefore, private equity companies must be prepared for increased antitrust scrutiny of transactions and increased enforcement actions that may include future prior approval and notice requirements.
The FTC’s and DOJ’s skepticism surrounding private equity activity in the health care market is consistent with the Biden administration’s increased focus on antitrust enforcement. With respect to the DOJ, Mr. Forman stressed that the DOJ intends to focus enforcement efforts on the following private equity activities:
- The DOJ will closely review private equity “roll-ups,” a key component of the private equity playbook. In other words, the DOJ will scrutinize groups of smaller transactions that could potentially lead to monopolization within the industry.
- The DOJ will scrutinize private equity investments that could limit competition within the health care market. Specifically, the DOJ will discern whether a private equity investment would lead to less innovation or potentially cause a target company to focus on short-term gains rather than long-term innovation.
- The DOJ plans to strictly enforce Section 8 of the Clayton Act, which prevents the interlocking of board members across organizations.
- The DOJ plans to enforce HSR filing deficiencies during private equity transactions. The DOJ believes that a lack of compliance with HSR filing requirements demonstrates a lack of commitment within the health care market.
Proper planning and involvement of antitrust counsel to evaluate and assist in potential mergers and acquisitions continue to be a crucial step for private equity investors and potential acquisition targets. Given the stated position of the DOJ and FTC, private equity firms and related portfolio companies should expect to see increased antitrust scrutiny in future acquisitions. Early involvement of antirust counsel can assist in avoiding unnecessary pitfalls and navigating risk.