FTC lawsuit targets serial acquisitions by private equity

The Federal Trade Commission has brought its first antitrust lawsuit under chair Lina Khan challenging serial acquisitions by private equity firms, accusing Welsh, Carson, Anderson & Stowe of a “multiyear anti-competitive scheme” targeting anaesthesiology practices.

The defendants are Welsh Carson, a New York-based buyout group, and US Anesthesia Partners, a business it created in 2012 that has acquired more than a dozen anaesthesiology practices in Texas. The FTC alleged they carried out a “roll-up scheme, systematically buying up nearly every large anaesthesia practice in [the state] to create a single dominant provider with the power to demand higher prices”.

As of 2021, USAP was nearly seven times larger than the second-biggest anaesthesia group in Texas, according to the FTC’s complaint.

The agency also accused the companies of raising anaesthesia prices via “price-setting agreements” with independent practices, and said USAP inked a deal that kept out a “significant competitor”.

“What happened in Texas is happening across the US,” Khan wrote in an opinion piece for the Financial Times, highlighting private equity firms’ serial acquisitions in nursing homes, apartment buildings, emergency medicine clinics and opioid treatment centres.

The regulator is seeking a permanent injunction for alleged violations including unlawful monopolisation and acquisitions, conspiracy to monopolise, unfair methods of competition and unlawful restraints on trade.

Welsh Carson in a statement said it was “profoundly disappointed” that the FTC chose “to bring this unwarranted case”. It said that USAP’s commercial rates did not exceed the rate of medical cost inflation for nearly 10 years.

The decision to pursue the case “is unprecedented and disregards well-settled principles of law”, the company said.

US antitrust agencies have taken steps to quash some private equity practices they deem anti-competitive, such as directors sitting on boards of rival companies. Thursday’s complaint marks the first direct challenge to a strategy that sits at the core of the buyout business model.

Khan is among a cohort of progressive antitrust officials appointed by US president Joe Biden in an effort to tackle excessive corporate power in the US. They argue that lax enforcement in recent decades has allowed anti-competitive conduct to flourish and US law to ossify around bad precedent.

The complaint will be a big test for the new trustbusters’ application of US law to the private equity sector, which for decades has largely skirted antitrust watchdogs’ scrutiny.

In her FT op-ed, Khan argued Congress crafted US antitrust laws to be “flexible” and that they “can be squarely applied to a wide range of business practices, including serial acquisitions”.

“As antitrust enforcers, we must update our application of the law to new realities,” she added.

The complaint makes good on a pledge Khan outlined to the FT last year: adopt a more “muscular” approach towards private equity deals, which may not raise problems individually but may trigger antitrust “concern” in the aggregate.

Her comments came just a few weeks after Jonathan Kanter, head of the US Department of Justice’s antitrust division, warned in the FT of an impending crackdown on buyout groups aiming to “hollow out or roll up” large swaths of the US economy — a business model he argued “is often very much at odds with the law and very much at odds with the competition we’re trying to protect”.

As a result of the acquisition spree, the FTC alleged in Thursday’s complaint that anaesthesia services “cost Texans tens of millions of dollars more each year than they did before USAP was created”. In response to one acquisition, a USAP executive said “Cha-ching!”, according to the filing.

According to an insurance executive quoted in the complaint, USAP and Welsh Carson used acquisitions to “take the highest rate of all . . . and then peanut butter spread that across the entire state of Texas”.

The FTC’s allegations include a violation of Section 5 of the FTC Act, an enforcement tool Khan has sought to revive. The law prohibits “unfair methods of competition” and has a broader scope than other antitrust statutes.

The FTC and DoJ have heightened scrutiny of buyout groups in several ways, including a proposal in June to expand disclosures in merger notification forms that industry insiders argue would have an outsized impact on private equity groups.

The agencies in July proposed new merger guidelines that signalled a tougher stance against private equity. The draft addressed mergers that are part of a series of acquisitions, specifying that agencies can consider the entire series, rather than the individual deal.