In brief
On 21 September 2023, the Federal Trade Commission (FTC) announced that it was suing US Anesthesia Partners, Inc. (USAP) and its private equity owner Welsh, Carson, Anderson & Stowe (WCAS) in the US District Court for the Southern District of Texas1. The lawsuit targets a common private equity strategy known as a “roll-up.” A roll-up merger typically occurs when a private equity company acquires several small companies in the same market and subsequently merges those companies.
The FTC alleges that USAP and WCAS “executed a multi-year anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits2.” The FTC’s complaint alleges that USAP and WCAS engaged in a three-part strategy to monopolize the Texas anesthesiology market.
- According to the FTC, first, the companies executed a roll-up scheme, systematically buying up nearly every large anesthesia practice in Texas.
- Second, the companies drove up prices by reaching price-setting agreements with the remaining independent practices.
- And third, USAP purportedly struck a deal with its most significant competitor to keep it out of USAP’s territory. Based on this scheme, the FTC contends that Texans have expended tens of millions of dollars more on anesthesia than before the creation of USAP.
Key takeaways
- This is a landmark case for the FTC. Companies should be on notice that antitrust agencies are continuing to heavily scrutinize private equity transactions. It is one of the first challenges to “roll-up” deals.
- Sherman Act Section 1 conduct cases like this have historically been brought by the Department of Justice (DOJ) because the DOJ has jurisdiction to pursue those cases civilly or criminally. This lawsuit may signal an increase in Section 1 conduct cases also being brought by the FTC under the FTC Act.
- This lawsuit continues the trend of increasing the depth and breadth of cases the FTC will prosecute moving forward.
In depth
In 2012, WCAS announced the formation of USAP, “a single-specialty physician services organization focused on anesthesia and perioperative care3.” They now have grown and have over 700 anesthesia facility partners in 12 states and Washington, D.C., servicing more than two million cases annually4.
The FTC’s lawsuit focuses on USAP’s conduct in Texas. It asserts that the companies created an anticompetitive scheme to drive up the prices of anesthesia services offered to Texas patients and increase its own profits. The FTC contends that WCAS created USAP for the purpose of executing a large-scale consolidation process that would create a “dominant provider with the power to extract high prices.” The scheme in which WCAS and USAP engaged began with a roll-up merger in which the companies bought “nearly every large anesthesia practice in Texas.” To further the success of the roll-up, the FTC asserts that USAP entered into or maintained price-setting arrangements with the remaining independent anesthesia groups in Texas. Finally, USAP and WCAS are alleged to have entered into a market allocation agreement with another large provider to ensure that USAP was the only provider in given areas of Texas. Because of the scheme, USAP is the dominant provider of anesthesia in Texas—it is four times larger than the next largest competitor.
USAP is also the most expensive provider. Thus, the purported monopoly has cost Texans tens of millions of dollars. Indeed, the focus of the lawsuit is on the harm to consumers, namely the impact the companies’ alleged conduct has had on “Texans’ wallets.” The Complaint contends that WCAS created USAP in an effort to consolidate the “fragmented” anesthesia market in Texas and “exploit the fact that anesthesia services are critical to modern surgery.” According to the FTC, WCAS engaged in a campaign of “illegal tactics” to eliminate competitors and centralize USAP’s power to raise prices and increase profits.
The Complaint asks the federal court to permanently enjoin the companies’ behavior, putting an end to the scheme and restoring competition across Texas.
Historically, the FTC has sued only the company that it believes has violated the antitrust laws. However, this case demonstrates that the FTC will pursue evidence to sue the private equity owners as well.
Over time, the FTC has made attempts to expand its power and litigate additional cases. For example, in May 2019, the FTC obtained a preliminary injunction under Sections 13(b) and 19 of the FTC Act against an individual defendant that resulted in a freeze of his assets and a receivership over his businesses. It then litigated the viability of that injunction and was successful, including on appeal. Following the Supreme Court’s decision in AMG Capital Management, LLC v. FTC, 141 S. Ct. 1341 (2021), the FTC also made clear its intentions to focus enforcement efforts on targeting executives, directors, and owners, including private equity, in order to hold anyone profiting from anti-competitive conduct or conduct harmful to consumers accountable. Late last year, the FTC announced a policy statement expanding its interpretation of the scope of unfair methods of competition under Section 5 of the FTC Act.
The FTC has additionally expanded merger reviews under the Hart-Scott-Rodino Act (HSR) beyond initial inquiries and is increasingly using second requests to look into the private equity funds behind the deals and the entities owned by those funds5. As we highlighted in June, new proposed HSR requirements related to corporate structures and relationships suggest that the agencies will apply greater scrutiny to mergers involving private equity firms and other financial purchasers.
The DOJ has echoed the FTC’s intent to scrutinize private equity transactions. In May 2022, in an Interview with the Financial Times, Assistant Attorney General Jonathan Kanter of the US Department of Justice Antitrust Division stated, “Many of the mergers we’re confronting are as a result of [private equity] roll-ups… If we’re going to be effective, we cannot just look at each individual deal in a vacuum6.”
The FTC voted to approve the lawsuit 3-0, demonstrating that none of the recently departed Republican Commissioners participated in the vote.
1 FTC v. US Anesthesia Partners, Inc., Complaint for Injunctive and Other Equitable Relief, available at https://www.ftc.gov/system/files/ftc_gov/pdf/2010031usapcomplaintpublic.pdf.
2 Press Release, Federal Trade Commission, FTC Challenges Private Equity Firm’s Scheme to Suppress Competition in Anesthesiology Practices Across Texas (21 September 2023), https://www.ftc.gov/news-events/news/press-releases/2023/09/ftc-challenges-private-equity-firms-scheme-suppress-competition-anesthesiology-practices-across?utm_source=govdelivery.
3 Press Release, US Anesthesia Partners, Welsh, Carson, Anderson & Stowe and Healthcare Industry Veteran Announce Formation of US Anesthesia Partners, Inc, https://www.usap.com/news-and-events/news/welsh-carson-anderson-stowe-and-healthcare-industry-veteran-announce-formation.
4 US Anesthesia Partners, Who We Are, https://www.usap.com/about/who-we-are.
5 See Memorandum from Chair Lina M. Khan to Commission Staff and Commissioners (22 September 2021), https://www.ftc.gov/system/files/documents/public_statements/1596664/agency_priorities_memo_from_chair_lina_m_khan_9-22-21.pdf.
6 James Fontanella-Khan and Stefania Palma, Crackdown on Buyout Deals Coming, Warns Top US Antitrust Enforcer, Financial Times (19 May 2022), https://www.ft.com/content/7f4cc882-1444-4ea3-8a31-c382364aace1?utm_source=newsletter-hubwire&utm_medium=email&utm_campaign=pe-hub-wire-subscriber&utm_content=20-05-2022.
