On September 21, 2023, the Federal Trade Commission (FTC) filed a pivotal antitrust lawsuit against a large anesthesiology group and the private equity (PE) firm that created and invested in the group — alleging that their roll-up acquisition strategy allowed the provider to monopolize the anesthesiology market in Texas. The case has significant ramifications for antitrust oversight of PE deals and could impact the trend of growing PE-backed consolidation in the health care industry.
In the past two decades, PE activity in health care has boomed, with firms acquiring more hospitals, nursing homes, clinics, and other operators across various medical, dental, and veterinary specialties. In the past decade, PE firms have spent nearly $1 trillion on almost 8,000 health care deals and crossed $200 billion in 2021 alone.
Though providers are often eager to sell their practices in exchange for increased financial stability and bargaining power with insurers, many recent studies have found that these efficiencies come at a price — specifically, higher costs and lower-quality care for patients, as well as undesirable changes in the workforce.
Structural barriers often prevent regulatory review of PE transactions. The individual acquisitions in PE and other industries, known as roll-ups, usually fall below the reporting threshold of the Hart-Scott-Rodino (HSR) Act (over $111 million in 2023). Since the FTC and the Department of Justice (DOJ) can only investigate or challenge mergers reported under the HSR Act, PE transactions have largely fallen under their radar.
Lawmakers and federal agencies have raised similar concerns about the effect of PE ownership, and several policymakers are advocating for greater regulatory review of PE transactions. Recently, the Centers for Medicare and Medicaid Services issued a final rule requiring nursing homes to publicly disclose PE ownership information. Similarly, the Securities and Exchange Commission now requires increased transparency about investors’ identities in certain PE arrangements. Meanwhile, in recent years, the FTC and DOJ have committed to preventing harmful PE roll-ups and enhancing antitrust enforcement around PE.
Acting on this commitment, the FTC proposed revisions to the HSR reporting guidelines in August 2023 to allow the FTC to flag cases where a PE firm was consolidating in a particular market. A month later, the FTC sued in federal court, the Southern District of Texas — including ten counts of violations of federal antitrust law — and sought a permanent injunction against a PE-backed anesthesiology provider’s consolidation strategy.
Ongoing Briefing in FTC v. U.S. Anesthesia Partners
In its 106-page complaint, the FTC argued that the PE firm created the anesthesiology group “to pursue an aggressive strategy to consolidate practices with high market share” in Houston, Austin, and Dallas. Under this strategy, the FTC asserted that the PE firm and the anesthesiology group rolled up nearly every large anesthesiology practice in Texas — acquiring “over a dozen practices, 1,000 doctors, and 750 nurses.” The FTC alleged that the provider group raised the prices of each newly acquired group’s services and often entered into price-setting arrangements with other independent provider groups to yield additional revenues.
The FTC alleged that this strategy has enabled the anesthesiology group to dominate the market in Texas, calculating that the group was ten times larger than the next largest anesthesiology group by revenue. Ultimately, the FTC claimed that the anesthesiology group leveraged its monopoly power in negotiations with health insurers, resulting in higher “costs of anesthesia care in Texas by dozens of millions of dollars every year” without corresponding improvements in quality of care.
PE Firm and Anesthesiology Group Move to Dismiss
First, the PE firm argued that the FTC may not sue them for the anesthesiology group’s business activities, alleging that the two businesses must be treated separately under corporate law theories. The PE firm claimed that it was not responsible for the group’s actions despite providing advice, financial support, and oversight as a minority investor in the group. The PE firm also argued it did not undertake any independent anticompetitive actions. Elaborating on this point, the American Investment Council filed an amicus brief in November 2023 that emphasized the importance of treating the actions of each business separately.
Second, both defendants argued that the FTC lacks the authority to bring this case in federal court, because the agency failed to bring a corresponding administrative action. Under their reading of the FTC Act, the defendants asserted that the FTC may only sue in federal court when there is a parallel administrative filing and that Congress would not have allowed the FTC to bypass the administrative proceeding requirement. They also argued that, under the statute, the FTC may not challenge closed acquisitions or expired contracts.
Finally, the PE firm pursued a constitutional argument, claiming that the FTC lacks the authority to file enforcement actions as an independent agency, rather than an agency supervised by the president. The PE firm claimed that when Congress took steps to allow the FTC to seek injunctions in federal court, it granted too much executive power to the FTC without a mechanism to hold the agency directly accountable to the president. Under this separation of powers argument — which has become more common in recent years — the defendants argued that allowing FTC enforcement would violate the Constitution, meaning that the court should strip the FTC of its authority to bring such enforcement actions in federal court. The defendants suggested, however, that this claim is one of last resort and that the court should resolve the case in their favor without addressing whether the FTC has the authority to bring this case.
Aside from challenging the FTC’s authority to bring the lawsuit, the defendants also argued that the FTC failed to allege plausible antitrust claims. The defendants contended that the product market is broader than just hospital-only services, so there is more competition for anesthesiology services in Texas than the FTC alleges. Further, they argued that the FTC has not properly established the existence of a monopoly or price-fixing agreements. They also asserted that consumers have not sustained any cognizable harm due to the group’s roll-up acquisitions.
On January 19, 2023, the FTC submitted oppositions to both the anesthesiology group’s and the PE firm’s motions to dismiss. Noting that both defendants are “unable to engage on the merits” of the antitrust claims, the FTC highlighted existing precedent to shut down the challenges to the FTC’s enforcement authority and move forward on the alleged antitrust violations.
The FTC reiterated that the PE firm may not evade responsibility for its actions as the “primary architect” of the anesthesiology group by portraying itself as a “hapless passive investor.” The FTC noted that the firm has, in its own words, acted as the group’s “control investors” — by appointing members to the group’s board, directing the group’s acquisitions, and reaping significant profits from the group’s roll-up acquisitions. Therefore, the FTC alleged that the PE firm conceded it formed a single enterprise with the anesthesiology group by pointing out that the two were not separate economic actors. And even otherwise, the FTC argued, the claims against the PE firm are plausible, because the firm independently directed and participated in the alleged anticompetitive conduct.
Next, the FTC argued it may bring this case in federal court without an adjacent administrative proceeding — relying on existing precedent, including a 2021 Supreme Court ruling. The FTC noted that every other circuit that has addressed the issue, including the Fifth Circuit, has also made the same call.
In response to the defendants’ claim that the FTC cannot bring enforcement actions due to its structure, the FTC cited a holding in December 2023 where the Fifth Circuit rejected this exact argument and upheld the agency’s ability to request an injunction in federal court.
Finally, the FTC reiterated that the PE firm and the anesthesiology group violated antitrust laws by consolidating anesthesiology practices in Texas. The FTC emphasized the resulting consumer harms from the alleged anticompetitive consolidation scheme, asserting that “Texans, their employers, and insurers have endured significant increases in the cost of anesthesia care—paying tens of millions of dollars more each year” than they did before the anesthesiology group was created.
This lawsuit confirms the FTC’s determination to ramp up its antitrust enforcement strategy against PE firms in the health care industry. Briefing on this case is scheduled to continue through spring 2024. Adding fuel to the fire, a union health care plan has followed in the FTC’s path, filing an independent suit with similar claims against the same anesthesiology group and PE firm.
Notwithstanding PE’s attempts to tap into ongoing headwinds threatening the robust use of federal regulatory and enforcement authority, a recent binding Fifth Circuit opinion concerning a potential merger in the cancer detection industry upheld the FTC’s constitutional authority to bring certain enforcement actions. In a press release, the FTC stated that the opinion “provides a clear roadmap for future cases.”
The new attention to antitrust enforcement against PE-backed consolidation will likely change the landscape of PE acquisitions of health care providers. If left unchecked, the increasing monopolization of health care services may further allow providers to maintain greater leverage within the commercial market and inflate health care costs even more for patients.