Federal Trade Commission Challenges Private Equity-Backed “Roll-Up Scheme” to Suppress Competition in Texas Anesthesiology Services

On September 21, 2023, the Federal Trade Commission filed a complaint alleging that Welsh, Carson, Anderson & Stowe (Welsh Carson) and U.S. Anesthesia Partners (USAP) implemented a “multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and increase their own profits.”

The complaint reflects the antitrust agencies’ scrutiny of private equity roll-up strategies, particularly in the healthcare sector. “Roll-ups” refer to the practice of serially buying and integrating multiple small or mid-sized businesses in a single industry. Last year, FTC Chair Lina Khan warned of “life and death consequences” of large-scale, private equity investment in healthcare, and signaled the agency’s intent “to go after this in a more muscular way.”¹ Jonathan Kanter, Assistant Attorney General of DOJ’s Antitrust Division, called private equity-backed roll-ups “very much at odds with the law, and very much at odds with the competition we’re trying to protect.”²

According to the FTC’s complaint, Welsh Carson and USAP executed a three-pronged strategy: First, they systematically acquired over a dozen large anesthesia practices across Texas to create a large provider with the power to demand higher prices. Second, they entered into “price-setting arrangements” with independent anesthesia groups that allowed USAP to charge its own high prices for services provided by the independent anesthesia groups that had been charging lower prices. Third, they struck a market-allocation deal with another large anesthesia provider to keep it out of USAP’s territory.

Welsh Carson allegedly developed the roll-up strategy in 2012. Newly created USAP made its first acquisition shortly thereafter, an anesthesiology practice that provided nearly 40% of the commercially insured hospital anesthesia services in Houston. According to the complaint, the practice charged higher rates than its competitors. Between 2014 and 2020, USAP acquired three of the largest remaining independent insurance groups in Houston, and then raised their rates to match USAP’s. These three practices each had single-digit market shares, but after the series of acquisitions was complete, USAP’s market share by revenue had grown from just over 50% to nearly 70% in Houston. USAP made a similar series of seven acquisitions in Dallas, and also acquired multiple practices elsewhere in Texas. After each acquisition, USAP raised the acquired group’s rates to USAP’s higher rates.

The complaint quoted extensively from Welsh Carson documents laying out the acquisition strategy. This is an important reminder that the parties’ documents are an important element in any merger challenge, and firms should consider their internal documents, including emails and text messages, when evaluating antitrust risks.

The FTC bolstered its case by describing at length additional anticompetitive conduct—the price-setting arrangements and market allocation agreement—that the FTC alleged “supported the ‘roll-up’ strategy” and also led to higher prices.

The agencies’ new scrutiny of roll-up strategies is a departure from previous enforcement priorities, which traditionally focused on larger transactions. According to Chair Khan, “the FTC will continue to scrutinize and challenge serial acquisitions, roll-ups and other stealth consolidation schemes,” which may involve a series of smaller acquisitions in which each may fall below the HSR-filing threshold.

The FTC’s complaint does not indicate whether any of the defendants’ acquisitions triggered an HSR filing obligation. But the antitrust agencies have authority to investigate whether a transaction lessens competition even if it falls below the HSR threshold or even if the parties filed HSR and observed the waiting period. The HSR regime simply requires merging parties to notify the antitrust agencies of a proposed transaction and observe a waiting period; the agencies are empowered to investigate transactions independent of the HSR process.

The antitrust agencies have announced several recent changes that support their scrutiny of serial acquisition strategies.

• Draft Merger Guidelines Call for Scrutiny of Roll-Ups: In the new Draft Merger Guidelines, the antitrust enforcement agencies explain that they will seek to identify patterns of serial acquisitions, looking to both the firm’s history of acquisitions and also its strategic initiatives. According to the Guidelines, if the agencies identify a pattern, they will investigate the series as a whole, “even if no single acquisition on its own would risk substantially lessening competition.”
• Enhanced HSR Reporting Rules: The FTC’s proposed changes to the HSR reporting rules also will facilitate investigations of serial acquisitions by requiring parties to provide more robust disclosures about previous acquisitions.
• Expanded Pursuit of Unfair Methods of Competition: The FTC’s charging decisions reflect the novel nature of the case. As it does in all merger challenges, the FTC alleges the defendants’ conduct violates Section 7 of the Clayton Act, which prohibits mergers and acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” The FTC also alleges that the strategy violates Section 5 of the FTC Act, which prohibits unfair methods of competition. The FTC’s reliance on Section 5 builds on its recent policy statement that describes its new, expansive interpretation of Section 5 of the FTC Act. According to the statement, conduct that may violate Section 5 includes “a series of mergers or acquisitions that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.” Chair Khan has indicated that the Commission will rely on it to pursue serial acquisition strategies. (The FTC also charged that the strategy violates Section 1 and Section 2 of the Sherman Act, which prohibit agreements in restraint of trade and monopolization, respectively.)
• Remedies May Include Divestitures or Prior Notice and Approval Requirements: To remedy the effects of the defendants’ strategy, the FTC is seeking an injunction barring defendants from engaging in “similar and related conduct” in the future. In addition, the FTC is seeking other equitable relief, “including but not limited to structural relief,” which could require unwinding some of the acquisitions described in the complaint. As part of an injunction (or consent decree, if the case settles), the FTC may follow its recent practice of seeking a “prior approval” provision requiring defendants to obtain FTC approval for subsequent acquisitions related to the acquisitions at issue in the case, or a “prior notice” provision requiring defendants to notify the FTC of any proposed transaction—including transactions falling below the HSR threshold—and observe a waiting period before closing.

Private equity firms and other companies pursuing multiple acquisitions should continue to be alert to these developments: In an Opinion piece³ published the day the complaint was filed, Chair Khan noted that serial acquisition strategies are not limited to private equity firms, but also have been used by “large technology companies and others.”

¹ Stefania Palma, Mark Vandevelde, and James Fontanella-Khan, Lina Khan vows ‘muscular US antitrust approach on private equity deals, Financial Times (June 9, 2022), https://www.ft.com/content/ef9e4ce8-ab9a-45b3-ad91-7877f0e1c797.

² Stefania Palma and James Fontanella-Khan, Crackdown on buyout deals coming, warns top US antitrust enforcer, Financial Times (May 18, 2022), https://www.ft.com/content/7f4cc882-1444-4ea3-8a31-c382364aace1.

³ Lina Khan, It’s time to halt roll-up schemes that violate antitrust laws, Financial Times (September 21, 2023), https://www.ft.com/content/93103af9-768a-4545-9166-20389c254edc.

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