June was a very busy month for FTC enforcement actions and may signal a potential sea change in the near-term viability of large healthcare deals for both hospital and private equity-backed provider platforms. While the industry has expected increased scrutiny in the hospital context, the recent expanded focus on private equity-backed “roll-up” provider transactions has been somewhat more surprising because, despite rhetoric in recent headlines, such transactions rarely have the type of market dynamics that invoke antitrust scrutiny.
June began with the FTC voting to file an administrative complaint and a lawsuit in federal court to block two proposed hospital transactions – HCA’s merger with Steward Health Care System in Utah and RWJBarnabas Health’s acquisition of Saint Peter’s Healthcare System in New Jersey. Both cases involved traditional antitrust analysis of market shares for general acute care services, and in both cases, the Commission voted 5-0 to seek administrative trials. The FTC issues an administrative complaint when it believes the law has been or is being violated. If the Commission determines that an administrative trial is in the public interest, allegations will be tried before an administrative law judge.
In the HCA/Steward case, the FTC alleged that, as the second and fourth largest healthcare systems in the Wasatch Front region of Utah, HCA and Steward helped to keep costs down by competing with one another. In the RWJBarnabas/Saint Peter’s case, the FTC complaint alleged that the proposed acquisition would eliminate head-to-head competition between the parties in Middlesex County, New Jersey. Saint Peter’s University Hospital and RWJBarnabas are the only two hospitals in New Brunswick, New Jersey and are located just a mile apart.
In both cases, the parties abandoned the challenged transaction within just two weeks, with RWJBarnabas abandoning its deal on June 14 and HCA and Steward taking the same action three days later. These cases are consistent with the FTC’s and DOJ’s prior pronouncements about healthcare being an area of focus and are likely to have a chilling effect on hospital mergers for the indefinite future.
One day after the hospital complaints were filed, the FTC filed a complaint alleging that the acquisition of SAGE Veterinary Partners by a wholly owned subsidiary of private equity fund JAB Consumer Partners would eliminate head-to-head competition and increase the likelihood that the combined company could unilaterally exercise market power, resulting in higher prices and a loss of quality in the provision of specialty and emergency veterinary services. JAB is a $55 billion fund whose investments include Compassion-First Pet Hospitals and National Veterinary Associates, Inc. The complaint alleged that, as originally proposed, the acquisition was likely to be anticompetitive in three geographic markets for various types of veterinary care: in and around Austin, Texas, and San Francisco, Oakland, Berkeley, and Concord, California. The acquisition would substantially increase concentration in each market, leaving the combined firm as the only provider in some markets and as one of only two providers in other markets, according to the complaint.
On June 13, 2022, the FTC Commissioners voted 5-0 to approve a Consent Agreement regarding the transaction. The Consent Agreement will require JAB to divest several clinics in the markets at issue in Texas and California. More significantly, under the Consent Agreement, JAB also grants the FTC prior approval and prior notice rights relating to future acquisitions of veterinary clinics. Specifically, JAB must get prior approval from the FTC before acquiring a specialty or emergency veterinary clinic within 25 miles of any JAB-owned clinic anywhere in California or Texas (not just the local markets at issue) within the next 10 years. This type of preapproval remedy has been reinstituted by the FTC in the Biden administration and is now common in FTC settlements. In addition, JAB must notify the FTC 30 days prior to acquiring any specialty or emergency veterinary clinic within 25 miles of its current clinics anywhere in the United States, even if the acquisition would otherwise not be reportable under the Hart-Scott-Rodino Act. Both restrictions apply to JAB clinic locations acquired in the future as well as currently owned clinics. The proposed Consent Agreement also requires divestiture buyer United Veterinary Care to obtain prior approval from the FTC before transferring any of the divested assets to any buyer for 10 years after acquiring the assets, except in the case of a sale of all or substantially all of its business.
The Consent Agreement for the JAB/SAGE transaction puts teeth into what previous orders and statements by the Biden Administration, the FTC and the Department of Justice have hinted at over the last year, an intent to focus on private equity roll-up transactions and using prior notice settlements to increase the policing of such transactions. FTC Chair Lina Khan highlighted “roll-up plays” as an area for further investigation in the joint DOJ-FTC (the “Agencies”) announcement regarding the Agencies’ merger guidelines review in January. In a statement supporting the Consent Agreement, she reiterated her concern with the trend of consolidation in certain industries as a result of private equity firms, stating that prior approval and prior notice remedies like the ones in this settlement will “allow the FTC to better address stealth roll-ups by private equity firms.” Chair Khan indicated that the broad remedies seen in this settlement could become more common, especially for private equity firms, stating that “strategic use of prior notice and prior approval provisions is one way that the Commission can better track and prevent unlawful acquisitions by private equity firms.” Along these same lines, Holly Vedova, Director for the FTC’s Bureau of Competition, said “Private equity firms increasingly engage in roll up strategies that allow them to accrue market power off the Commission’s radar. The prior notice and approval provisions will ensure the Commission has full visibility into future consolidation and the ability to address it.”
Chair Khan noted that the FTC’s requirement for advance notice of all future unreported acquisitions nationwide is the first of its kind in a Commission order. She stated that this remedy “ensures that the FTC will have advance notice of any unreported purchases that would ordinarily escape our review, providing the agency with the opportunity to investigate those transactions before they are consummated.” Chair Khan in part justified the restrictions based on the fact that JAB had previously proposed an acquisition that the FTC believed would violate the antitrust laws and resulted in the divestiture of three veterinary clinics.
Not all of the FTC Commissioners agreed with the use of the broad prior notice and prior approval remedies. The Republican Commissioners issued a concurring statement disagreeing with the nationwide prior notice requirement, arguing that it is based more on “the majority’s obvious distaste for private equity” than on clear evidence of any anticompetitive harms resulting from consolidation on a national level. In their view, the heightened state-wide and national remedies are overbroad given the Commission’s targeted finding that the proposed acquisition raised competition concerns in only very specific local markets in California and Texas. Additionally, they criticized the FTC’s bias against private equity buyers as unwarranted – both in this deal specifically and more generally as an enforcement focus. Describing private equity as an example of a “disfavored group,” the dissenting statement warns that imposing extra burdens on such groups “because of who they are rather than what they have done” is inconsistent with the rule of law.
Overall, the Consent Agreement for this transaction should make private equity firms, especially those pursuing a roll-up strategy, aware that antitrust enforcers will not only review their transactions more carefully but may also seek to enforce broad prior approval and prior notice remedies that inhibit future transactions in the same space, resulting in additional time and cost to complete future transactions. Private equity firms will want to involve antitrust counsel in reviewing their transactions early in the process to ensure that they will not attract the attention of the antitrust enforcers, especially since enforcement actions may resulting in broad restrictions with respect to future transactions. The fact that a transaction is not reportable under the HSR Act does not make it immune from challenge under the federal antitrust laws, especially with respect to roll-up types of transactions.
The FTC closed out the month of June by taking a second action against JAB Consumer Partners, resulting in a consent agreement imposing conditions on National Veterinary Associates’ proposed $1.65 billion acquisition of the parent company of veterinary clinic owner Ethos. As part of the consent agreement, Ethos must divest clinics in Richmond, Va., Denver, San Francisco, and the Washington, D.C. area. Similar to the conditions applied to the JAB/SAGE transaction, the FTC is imposing prior approval and prior notice requirements on both JAB and the divesture buyers for future acquisitions of specialty and emergency veterinary clinics.
The FTC actions discussed above follow the intense groundwork that has been laid since the start of the Biden administration for increased antitrust enforcement. The Executive Order on Promoting Competition in the American Economy created a White House Competition Council and announced a policy of enforcement focused on certain markets, including healthcare markets related to prescription drugs, hospital consolidation and insurance. The FTC and DOJ suspended HSR early terminations and introduced the HSR warning letter, essentially negating the 30-day waiting period in any transactions with potential competitive concerns. The FTC pre-consummation warning letters notify merging parties that a review is ongoing and that they consummate the deal at their own risk. In October 2021, the FTC voted along party lines to approve a new Prior Approval Policy Statement restoring the FTC’s pre-1995 practice of routinely restricting future acquisitions by companies that pursue mergers the FTC deems to be anticompetitive. As shown by the JAB/SAGE Consent Agreement, the FTC intends to include prior approval provisions in all merger divestiture orders, effectively requiring the merging parties to seek FTC approval before closing any future transaction affecting each relevant market for which a violation was alleged (and in some cases, such as in the JAB/SAGE transaction, even broader markets) for a minimum of 10 years.
As a result of recent enforcement activities, hospitals, health systems and private equity funds (particularly those with a roll-up strategy) cannot look at antitrust risk in isolation. In looking at whether to do a deal today, they will need to consider the regulatory risk posed to future deals (some of which may have more significant strategic importance) that could be subject to a prior approval requirement. Moreover, for both large and small healthcare transactions, it will be hard to avoid scrutiny. Even deals that do not present any obvious competitive issues may face an uncertain regulatory path, given the Agencies’ acknowledged priorities, which they have been enforcing with increased frequency and success. Parties pursuing these types of transactions should actively consider this layer of risk in consultation with antitrust counsel, so as to ensure that all possible risks are understood and mitigated.
For HSR-reportable deals where the Agencies’ concerns persist beyond the initial review period, parties should expect to receive an expansive “Second Request.” Such requests are likely to be broader in scope, including requests for information needed to support an expanded set of possible legal theories. Second requests may therefore include new questions about facets of transactions that have traditionally not been considered, such as a transaction’s expected impact on labor markets or how the involvement of private equity firms may affect a party’s incentives to compete post-transaction.
Finally, as transaction agreements are negotiated, the parties should be sure to clearly articulate regulatory obligations and risk allocation. Whether the parties are unwilling to continue the transaction if it is challenged or they want to be sure that both sides will follow an investigation through to its conclusion, they should address their intentions with language in the purchase agreement. Parties should also consider building extra time into their transaction timetables to allow for possible antitrust challenges.