Federal agencies continue eyeing private equity

Announcing further scrutiny of private equity’s role in healthcare, the Federal Trade Commission (FTC), the Antitrust Division of the US Department of Justice (DOJ) and the US Department of Health and Human Services (HHS) have launched a joint inquiry into “private-equity and other corporations’ increasing control over health care.”

Issued the same day as the FTC’s workshop on private equity and health care, the agencies’ Request for Information on Consolidation in Health Care Markets (RFI) seeks public comment on transactions involving private equity firms, health systems, private payors and other alternative asset managers that involve health care, including those not reportable under the Hart-Scott-Rodino Antitrust Improvements (HSR) Act, and whether such transactions “may generate profits for those firms at the expense of patients’ health, workers’ safety, and affordable health care for patients and taxpayers.”

While the emphasis on private equity investment in health care should come as no surprise, last week’s announcement confirms that enforcers remain focused on common strategies employed by private equity, including direct roll-up transactions and indirect investment transactions (for example, the management services organization (MSO) model), leading to market consolidation. We note that the RFI specifically requests information regarding transactions “structured to facilitate private equity investment, circumventing applicable corporate practice of medicine restrictions.” These restrictions, which exist in a majority of states, are intended to restrict non-licensed entities and individuals from influencing the professional judgement of physicians and other licensed professionals.

Public comments are due May 6, 2024, and, per the agencies, such comments will be used to “inform the agencies’ identification of enforcement priorities and future actions, including new regulations, aimed at promoting and protecting competition in health care markets and ensuring appropriate access to quality, affordable health care items and services.”

Beware of state enforcers and be aware of pre-transaction notifications

Federal agencies are not the only ones focused on the role of private equity in health care—on February 27, 2024, the Colorado Attorney General concluded its investigation and reached resolution with a private equity backed national anesthesia provider. Accused of cornering the surgical anesthesia market servicing the Denver Metro Area through a series of acquisitions, the national anesthesia provider agreed to several remedies, including divesting its exclusive contracts at five Colorado hospitals, releasing, modifying and ending its non-competes with clinicians, and paying restitution. While this marks the end of the State of Colorado’s investigation, the national anesthesia provider continues to battle the FTC’s federal court allegations of a similar pattern of consolidation in Texas.

In the background, many state legislatures, including California, Connecticut, Massachusetts, Minnesota, Nevada, Oregon, Washington and New York, have imposed or are actively seeking to adopt notification requirements for health care transactions. These “mini-HSR acts” are specifically focused on transactions involving private equity, and the applicable thresholds can be implicated by transactions that would not need to be reported under the HSR Act and can potentially require public disclosure of competitively sensitive information.

Heightened scrutiny in the face of capital needs

This increased scrutiny of the role of private equity funds in the health care industry comes at a time when health care providers face financial distress and ever-increasing downward pressure on reimbursement as payers continue to move towards value-based care and risk-sharing payment models. To that end, a prominent credit agency recently reported that non-profit hospitals’ operating margins remain “far below” pre-pandemic levels and are in “danger of a permanent reset” to lower levels.

In the face of such pressure, private equity continues to serve as a critical source of capital. For instance, one of the largest private equity firms closed a US$4.0B fund dedicated to heath care investments in 2022 and new private equity firm closed a US$3.9B inaugural fund dedicated to health care investments in 2023. The question thus remains how industry players should engage with private equity while minimizing antitrust and health care regulatory risk.

Based on recent industry analysis, one increasingly common vehicle is the joint venture. In the past few years, hospitals and health systems and private equity backed enterprises have entered into an increasing number of joint ventures, primarily focused on single specialties such as home care, hospice, behavioral health and urgent care. Such transactions may be gaining traction because they allow health care providers to access necessary capital, critical to maintaining their core inpatient services, while still maintaining control over the quality of care. This combination of factors may potentially assuage the agencies’ concerns regarding the level of control exercised by private equity in connection with the management of health care services.

Takeaways

• Health care providers and private equity funds should engage antitrust counsel early on in transactions, even transactions that are not HSR-reportable; doing so will lower the likelihood of antitrust roadblocks down the line.
• Parties should take care to document the procompetitive business justifications for transactions and business practices following the transaction; merger investigations and litigation often turn on evidence of efficiencies, so long as that evidence accurately reflects market and economic realities.
• Parties should ensure that transactions are structured in a way that (i) evidences the parties’ commitment to advancing as many of the agencies’ stated health care goals (i.e., “higher quality, lower cost health care, greater access to care, increased innovation, higher wages, and better benefits for health care workers”) as possible and (ii) complies with all applicable federal and state health care regulations, including state corporate practice of medicine restrictions. One potential structure to consider is the previously discussed joint-venture model.
• Interested industry participants should submit any comments to the RFI by the stated deadline to ensure that any future actions taken by the agencies are balanced and well informed.

Industry participants looking to engage in private equity transactions in the health care industry should ensure that they involve experienced legal counsel early in the transaction cycle to help navigate this rapidly evolving and complex regulatory environment. Norton Rose Fulbright’s health care transactions, private equity, and antitrust teams are closely following this and other regulatory updates. For more information, please reach out to one of the authors or the attorneys that you work with at the firm.