In an unprecedented move, the Federal Trade Commission (the "FTC") sued U.S. Anesthesia Providers, Inc. ("USAP") and its private equity sponsor, Welsh, Carson, Anderson & Stowe ("Welsh Carson") alleging an anticompetitive scheme to consolidate anesthesiology practices in Texas through a series of systematic roll-ups; price setting arrangements; and a market allocation agreement to dominate the anesthesia market in Texas.
I. Systematic Roll-Ups
Welsh Carson co-founded USAP with the goal to achieve "high market share" in order to have "[n]egotiating leverage with commercial payors," and began acquiring anesthesiology practices throughout Texas in 2012. The FTC noted that the target practices to be acquired were often the next largest competitor. The Texas markets the FTC alleged in the complaint include Houston, with USAP handling about 60% of hospital-only anesthesia and accounting for 70% of payors' hospital-only anesthesia, and being eight times larger than its next biggest competitor in Houston in terms of revenue; Dallas, with USAP handling about 60% of hospital-only anesthesia and accounting for 70% of payors' hospital-only anesthesia and having a 68% market share by revenue; and Austin, having greater than 50% market share by revenue and controlling nearly 44% of commercially insured hospital-only anesthesia cases. These acquisitions resulted in USAP having significantly higher reimbursement rates and an increased market share that left hospitals and insurers to limited, and in some cases, no other options for anesthesia providers.
II. Price-Setting Arrangements
In addition to systematic roll-ups, the FTC alleged that USAP extended its anticompetitive conduct through price-setting arrangements. These arrangements involved USAP charging higher prices for services rendered by anesthesia providers who chose to not sell to USAP and remained independent. Under these arrangements, USAP would bill for services provided by the independent practices under USAP's own provider or tax information, and effectively higher negotiated rate, and USAP would then share a portion of the mark-up amount with the independent providers. Although USAP gained exclusive contracts at some of these affected hospitals, the FTC alleged that the reality was that the independent providers continued to work at these hospitals, as often expressly required by the hospitals, which resulted in these hospitals paying higher rates for anesthesia services provided by the same doctors as before.
III. Market Allocation Agreement
To offset any direct competition, USAP and Welsh Carson also entered into an alleged unlawful horizontal market allocation agreement with another large Texas anesthesia provider. The allegations in the FTC complaint are largely redacted, but notes that the unnamed direct competitor agreed that it would not compete in the commercially insured hospital-only anesthesia services in the unnamed market in exchange for consideration.
V. Key Takeaways
1. Private Equity Firms May Be Liable, Even with a Minority Ownership Stake
While Welsh Carson's ownership stake in USAP was just over 50% in 2012, such ownership decreased since then and is now approximately 23%. While now owning less than a quarter of USAP, the FTC alleges that Welsh Carson actively directed USAP's acquisition strategy and decisions in the Texas market. Furthermore, even with this decrease in ownership interest, at all times Welsh Carson has been guaranteed at least two seats on USAP's board of directors and maintained control over USAP as Welsh Carson remained the "most influential" members of the board.
2. Assessment of Narrow Healthcare Markets
Here, the relevant service market for the FTC complaint is limited to "hospital-only anesthesia services sold to commercial insurers and their insured members" and excludes anesthesia services provided at ambulatory surgery centers or outpatient surgery centers. The FTC here supports such a narrow healthcare market definition noting that patients typically do not have the option to seek anesthesia providers elsewhere, and that there are specific requirements for inpatient anesthesia services that differ from those of outpatient services. This hyper narrow market definition indicates that antitrust risk associated with healthcare transactions should be assessed in narrow, as well as broad, product and geographic markets.
3. The Importance of Document Creation and Compliance Protocols
The FTC complaint highlights the importance of document creation during proposed acquisitions, partnerships and joint ventures. The complaint includes numerous quotes from USAP and Welsh Carson and even quotes a prior email from USAP's leadership team member to a partner at Welsh Carson that notes its "aggressive 'buy and build' consolidation strategy" for USAP. Given the important role that document creation plays in antitrust cases, businesses and its employees should have antitrust training and compliance protocols in place to avoid the creation of a paper trail wherever possible. Even casual remarks from one employee can have a significant impact on an FTC investigation or a plaintiff's case.
Conclusion
This case is part of federal government trend more carefully examining mergers and transactions of many types. As more private equity firms enter the health care space, care should be given to a variety of antitrust concerns. As a best practice, private equity firms and businesses should assess their acquisition strategy and business practices to determine where there is any antitrust risk.
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