Transactions and other investments in the health care industry by private equity firms are a hot enforcement topic at both the U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the U.S. Department of Justice (“DOJ”). The terms of a recent FTC proposed merger consent order in the veterinary services industry reflect the concern of the agency’s leadership that serial acquisitions by private equity firms enable those firms to accumulate market power and reduce incentives to compete. Current leadership at the DOJ has expressed similar concerns about the involvement of private equity firms in the health care industry.
FTC Merger Enforcement: JABCP/SAGE
On 13 June 2022, the FTC announced a proposed consent agreement in connection with JAB Consumer Partners SCA SICAR’s (“JABCP’s”) proposed $1.1 billion acquisition of SAGE Veterinary Partners, LLC (“SAGE”). 1 JABCP is a private equity firm that owns Compassion-First Pet Hospital and National Veterinary Associates, Inc. (together, “Compassion-First/NVA”).
Under the proposed consent order, the FTC requires JABCP to divest six veterinary facilitates to United Veterinary Care, LLC to resolve concerns that the transaction may substantially lessen competition or tend to create a monopoly in the markets for certain veterinary services in and around Austin, TX, San Francisco, CA, as well as in and between Oakland, Berkeley, and Concord, CA.2
In addition to requiring JABCP to divest six veterinary facilities, the consent agreement also includes a prior approval provision requiring that for 10 years, JABCP must seek the FTC’s prior approval for any acquisition of a specialty or emergency veterinary clinic that is within 25 miles of a JABCP specialty or emergency clinic in California or Texas. Under a prior notice provision, JABCP must also provide the FTC with at least 30 days’ prior notice for any acquisition of a specialty or emergency clinic that is within 25 miles of a JABCP specialty or emergency clinic anywhere in the United States. 3In a statement, Chair Lina Khan, joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, asserts that this prior notice provision is “the first of its kind in a Commission order.”4
The scope of the FTC’s prior approval and prior notice provisions in this case extend beyond the bounds of the relevant markets defined by the FTC in its complaint. From a service perspective, both provisions extend to any veterinary specialty service—not just to those specialty veterinary services defined in the complaint—as well as to emergency services. Furthermore, from a geographic perspective, the prior approval provision extends to the entirety of California and Texas while the prior notice provision extends to the entire country—not just to the three local areas defined in the complaint.
The broad scope of the prior approval provision and prior notice provision were the subject of a heated debate between Chair Khan, Commissioner Slaughter and Commissioner Bedoya (the Democratic Commissioners) and Commissioners Noah Phillips and Christine Wilson (the Republican Commissioners) over the circumstances in which imposing out-of-market remedies may be appropriate.
Underlying that debate is a heated disagreement between the Commissioners over whether transactions involving private equity firms pose unique competitive concerns that warrant imposing broader remedial requirements as a condition to allowing those deals to close.
The Position of the Democratic Commissioners: The Khan Statement
According to the Democratic Commissioners, the “extra protections” of the broad prior approval provision and the prior notice provision are justified in this case because JABCP was previously subject to an FTC consent order, and due to “the rapid pace of JAB[CP]/NVA’s ongoing acquisitions of veterinary clinics throughout the country, and the ongoing consolidation in the industry.”
Describing the rationale for the prior approval and prior notice provisions more generally, the Democratic Commissioners explained that these types of provisions serve at least two purposes. First, these provisions allow the FTC to “more closely monitor the potentially unlawful dealmaking activities of companies . . . that have repeatedly attempted acquisitions the Commission alleged were unlawful.” And second, these types of provisions enable the FTC “to better address stealth roll-ups by private equity firms like JAB[CP]/NVA and serial acquisitions by other corporations.”
The Democratic Commissioners also raised more fundamental concerns about private equity firms, cautioning that “[a]ntitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition.” According to the Democratic Commissioners, this is particularly the case in the health care context, where private equity’s “focus on short-term profits in the health care context can incentivize practices that may reduce quality of care, increase costs for patients and payors, and generate appalling patient outcomes.”
The Position of the Republican Commissioners: The Concurring Statement of Commissioners Phillips and Wilson
Commissioners Phillips and Wilson issued a Concurring Statement, challenging the broad prior approval and prior notice provisions in this case.5 Phillips and Wilson argued that, “[w]hile untethered to any impact on competition, the allegation of the purported trend in nationwide consolidation appears to form the sole basis in the Complaint for imposing out-of-market prior approval and prior notice requirements,” along with “the majority’s obvious distaste for private equity as a business model.” While Phillips and Wilson accepted that there may be cases in which these “more onerous remedies” may be appropriate, they argued that this is not such case for a number of reasons, including because competition in veterinary markets occurs locally and not on a national basis, and because “there are no discernible anticompetitive effects” from any trend towards consolidation at a national level (to the extent such a trend is taking place).
Phillips and Wilson criticized the Democratic Commissioners for imposing broad prior approval and prior notice provisions in this case merely or largely because JABCP is a private equity firm: “Imposing 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.”
DOJ Concerns About Private Equity and Health care
DOJ is also focused on potential antitrust concerns arising from private equity’s involvement in the health care industry. For example, in a June 3, 2022 speech before the American Bar Association’s Antitrust in Health care Conference, Deputy Assistant Attorney General Andrew Forman stated that “there is a lot going on in the division’s thinking about the intersection between antitrust, health care, and private equity.”6 Echoing the concerns raised by the FTC’s Democratic Commissioners in JABCP/SAGE, Forman also expressed concerns about the role of private equity in the health care industry more broadly: “To the extent that private equity transactions and conduct are focused on short-term gains and aggressive cost-cutting in the health care space, they can lead to disastrous patient outcomes and, depending on the facts, may create competition concerns.”
In his speech, Forman identified a number of specific areas of potential enforcement that the DOJ is considering with respect to private equity, such as:
- Private equity roll-ups and “investments creating or enhancing power across a ‘stack’ of technology or other products/services;”
- Whether private equity investments may “chill fierce competition on the merits,” such as by dampening a target company’s incentive to disrupt health care markets or by causing a target company to focus only on short-term financial gains and not on innovation or quality;
- Potential board interlocks, in violation of Section 8 of the Clayton Act; 7and
- “HSR filing deficiencies in the private equity space,” presumably a reference to a concern that private equity firms are failing to comply with the merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The U.S. antitrust agencies are likely to continue to scrutinize private equity firms’ involvement in the health care industry, particularly in the transaction context. Companies considering deals in the health care industry that involve private equity should take into account the agencies’ skepticism toward private equity firms in assessing the antitrust risk of the transaction. Where divestitures may be required, it is important to consider the potential for the agency to impose broad prior approval and prior notice provisions that may extend beyond the relevant markets at issue in a given deal and affect the antitrust risk profile of future transactions.