Leave it to the Biden Administration to put additional burdens on a struggling industry. In recent years, private equity add-on-deals—also known as “rollups”—in the area of healthcare have declined. Despite this, the Federal Trade Commission and the Justice Department want to bring antitrust actions against these deals.
A rollup occurs when a private equity firm buys up companies in the same market and merges them into a larger company. According to the firm Pitchbook Data, in 2021 there were over 1,000 rollups in the healthcare sector. That dropped to just over 750 in 2023. This year is on pace to see fewer than 500.
FTC chair Lina Khan and assistant attorney general of the DOJ Antitrust Division Jonathan Kanter seem determined to reduce the rate of rollups to a trickle. In December 2023, the FTC and the DOJ finalized new merger guidelines that will result in mergers facing longer and more burdensome investigations. Earlier this year, Khan decried firms that “have sometimes sidestepped antitrust review” by using “a series of smaller deals” to increase market share. “Antitrust enforcers are taking action to stop these anticompetitive roll ups,” Khan declared. In May, Kanter announced the formation of a Task Force on Health Care Monopolies and Collusion that “will identify and root out monopolies and collusive practices that increase costs, decrease quality and create single points of failure in the health care industry.”
The test case for this aggressive approach to rollups is the suit filed by Khan’s FTC in 2023 against Texas-based U.S. Anesthesia Partners and private equity firm Welsh, Carson, Anderson & Stowe. The suit alleges that Welsh had monopoly control of the Texas anesthesiology market because it has a 23% stake in U.S. Anesthesia Partners. In late May a federal court threw out the case against Welsh, stating that applying antitrust law to a “minority, noncontrolling investor…would expand the FTC's reach further than any court has yet seen fit.”
The court let stand the suit against U.S. Anesthesia Partners, but that part of the FTC’s case also rests on shaky ground. The FTC contends that U.S. Anesthesia Partners has monopoly control of the anesthesiology market in metropolitan areas of Dallas-Fort Worth, Houston and Austin. But the company’s market share is 60% of anesthesia cases in Dallas-Forth Worth and Houston, and only 44% in Austin. Additionally, there are over a dozen anesthesia companies competing in those areas.
Facing a tough election, the Biden Administration will no doubt point to its antitrust actions as fighting for healthcare consumers. However, that could backfire by creating higher prices for consumers. Rollups enable companies to reduce their costs by creating economies of scale. Those cost savings are passed on to consumers.
Rollups also come with risks. A recent study of 750 business failures found that poorly planned rollups were a significant cause. Other research has found that two-thirds of rollups fail to create value for shareholders.
The slowdown in healthcare rollups suggests the industry is facing new risks as well.
Private-equity firms rely heavily on debt finance. That makes rollups highly attractive when interest rates are low. But interest rates are currently high, and by the middle of 2023 saw their fastest increase in about 40 years.
Private-equity firms may also be getting wise to what have become known as “serial founders.” entrepreneurs who clone businesses to sell off to private-equity firms. Consider the hospice and home healthcare provider Traditions Health and its lawsuit against Luminos Opco and its owner Christopher Willis. In 2019, Traditions purchased the Guiding Hospice from Willis. In 2022 Willis founded the Luminos hospice in violation of the noncompete clause he had signed as part of the Traditions-Guiding deal. The Traditions suit alleges that Luminos engaged in hacking and theft and “seed[ed] confusion, and caus[ed] chaos and trauma” for hospice patients (to be in hospice, a patient must be in their fina six months of life). Willis appears to be a serial founder. Records show he has started at least a dozen companies since 2014, eight of which are registered to his home address.
More FTC and DOJ lawsuits and investigations only add to those risks. In an industry that is already facing serious challenges, the aggressive tactics of the Biden Administration will only make it worse. The FTC and DOJ should stand down.
David Hogberg is a writer focusing on health care policy and related topics. He has written for Real Clear Health, National Review, and the Washington Examiner among other publications.
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