The Biden administration has been keen to take on corporate consolidation, appointing a new generation of antitrust officials to the Department of Justice (DOJ), the Federal Trade Commission (FTC) and the White House that has promised to pay closer attention to private equity deals.
One area of focus is healthcare. For years, PE firms have been buying up healthcare players. In 2018, for the first time, there were more physicians who were employees than owners of their practices. While PE can help drive operational efficiencies, there is growing concern—and evidence—that their motive for profit can conflict with maintaining quality care.
Recent studies and investigative reporting have found that after PE takes over a nursing home, patients die more often. PE firms have been investigated for their role in surprise bills and slashing benefits for emergency room doctors early in the pandemic; they have been known to push clinical staff out of important decisions. They are also linked to higher Medicare and private insurance spending.
While critics claim the DOJ and FTC are not following traditional interpretations of antitrust laws, the agencies argue there is a need to more closely scrutinize these deals and the impact they have on competition.
“Ripe for potential investigation”
The DOJ has recently indicated a particular focus on rollup transactions that consolidate market share and, with it, negotiating power. Payers and providers have been merging for years, even throughout the pandemic, spurring concerns about price gouging. The FTC’s own study has found that several recent hospital mergers have resulted in significant price hikes and reduced quality care.
The agency is also concerned about filing deficiencies and conflicts of interest related to board appointments of PE representatives at competing companies. In September, the DOJ began digging into antitrust concerns in the New England fishing industry. That’s an indicator that probe efforts are ramping up, Austin Ownbey, an antitrust attorney at D.C.-based law firm Foley Hoag, told Fierce Healthcare.
“Given the fact that they are obviously looking at corners of the market that they haven’t traditionally looked at,” Ownbey said, “my advice would be don’t assume that you can just look at the standard antitrust concerns you’ve looked at for years.” Any PE involvement, including in smaller markets, seems “ripe for potential investigation.”
In particular, Ownbey suspects, those being targeted will include verticals with promising returns from consolidation, namely outpatient services like gastroenterology, ambulatory and wound care centers.
Or, regulators might target areas where the patient population is especially vulnerable, such as nursing homes, explained Arman Oruc, co-chair of Goodwin’s antitrust practice. Though there haven’t been any enforcement actions that he has seen so far, Oruc says parties need to be prepared to answer a lot of questions.
“It’s something that any healthcare executive should consider if they’re looking at any transactions,” Oruc said.
Adjusting to enforcement
Funds will likely reconsider what companies they go after and in what order, according to Matt Simpson, an M&A lawyer at Mintz. They will be thinking of higher priority targets first, and likely those they have expertise in already.
Healthcare markets tend to be large, fragmented and localized—so “a lot of this comes down to how you define competition and where does the competition actually occur,” Simpson said. “It is a very fact-specific analysis in these transactions.”
Though it is helpful to have a business run by someone with prior investments in the same space, “you’ve got to weigh the fact that we don’t want to see consolidation reach the point where prices are going up,” Ownbey explained. If investors decide to avoid scrutiny by sticking to one investment per market, “it makes capital more expensive.” A company may need to look for other sources of funding; if that fails, it may need to pull out altogether, which could harm competition.
In Oruc’s view, PE provides needed capital to underfunded businesses; it doesn’t go in to crush them. If added regulatory scrutiny has a chilling effect on activity in the sector, “it’s only going to harm consumers and patients out there,” Oruc said.
Healthcare entities should be mindful of this shift in enforcement. “Even if the focus of the investigation is on the private equity fund,” Ownbey noted, “a DOJ investigation will be incredibly disruptive.” The agency might seek months' worth of documents and interviews —and ultimately, might not approve the deal. Investors might decide to scrap a deal themselves for the same reasons. It would be “way better” to avoid getting into a deal with a fund that will draw scrutiny, Ownbey added.
The safest path forward is to seek antitrust legal counsel and identify the risks ahead of time. Transaction costs may go up; prices may go down. But ultimately, Simpson believes dealmaking will adjust: “Innovation and regulation—they can coexist.”