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Alerts and newsletters | March 11, 2024
Authors: Aleksandr B. Livsh*ts, Lexi Michaud, Sadé Harper
Private equity firms, REITs and other alternative asset managers should expect increased regulatory scrutiny of investments in the healthcare industry. Last week, the FTC held a public workshop during which leadership from the FTC, DOJ Antitrust Division, HHS and CMS discussed their concerns regarding private equity’s role in the healthcare industry and the associated risk of harm to competition, reduction in quality of care, and higher prices.[1] Coinciding with the workshop, the FTC, DOJ and HHS issued a joint Request for Information seeking information about prior healthcare transactions conducted by private equity firms, REITs, and other alternative asset managers, especially those that may not have required filings under the HSR Act.[2] These announcements raise two major implications:
- Acquisitions in the healthcare industry by private equity and other alternative asset managers are more likely to be investigated prior to closing if a filing is required to one of these agencies, and the intensity of those investigations is likely to increase, even where the transaction does not pose traditional antitrust issues; and
- Consummated transactions that are identified to the agencies through the RFI’s public comment process or otherwise may be subject to in-depth and costly investigations, with particular focus on changes to pricing and quality of care post-closing.
During the workshop and in the RFI, the agencies highlighted four core practices that they believe may be employed by some investors and could pose a risk of harm to competition and reduced healthcare quality:
- Serial acquisitions and roll-ups, particularly where transactions fall below the HSR threshold;
- Common ownership and director interlocks involving competing companies, including interlocks in non-corporate entities that are not prohibited by the text of Section 8 of the Clayton Act;
- So-called “strip-and-flip” tactics, where a private equity firm uses significant debt to acquire a business and cuts costs, sacrificing patient care in order to increase short-term profits, and then resells; and
- Sale-leaseback transactions, where a private equity firm sells underlying real estate for a hospital or nursing home to a REIT, the REIT leases the real estate back to the facility, and the income from the sale is paid as a dividend to the private equity firm (rather than, for example, invested into patient care).
The two latter concerns seem to depart from the core antitrust and consumer protection mandates of the DOJ and the FTC. Nevertheless, Assistant Attorney General Jonathan Kanter emphasized that the RFI will give the agencies the “information to tackle private equity and corporate greed head on.”[3]
In line with the Biden administration’s “whole-of-government” approach to competition,[4] the FTC, DOJ and HHS underscored their intent to collaborate and share information to better assess and regulate private equity investments in healthcare organizations. CMS also committed to enhancing transparency regarding the ownership structures of hospice organizations, nursing homes, managed care plans and other healthcare organizations to make it easier for regulators and enforcers to identify potential bad actors.
These developments should place private equity and other asset managers on notice of increased scrutiny of their existing and future healthcare investments, especially those involving so-called “roll-up” strategies. Firms should also review board representation across their minority investments to ensure compliance with prohibitions on certain director interlocks. In addition, investors considering multiple acquisitions in a particular healthcare industry should make clear the benefits of those investments to all constituencies, including healthcare providers and patients, through enhanced services, greater efficiencies, and increased investments in innovation and quality of care.
[1] Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care (Mar. 5, 2024), available at https://www.ftc.gov/news-events/events/2024/03/private-capital-public-impact-ftc-workshop-private-equity-health-care.
[2] Justice Department, Federal Trade Commission and Department of Health and Human Services Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care (Mar. 5, 2024), available at https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-and-department-health-and-human-services-issue.
[3] Transcript, OPP/BE Private Equity Healthcare Workshop, available at https://www.ftc.gov/system/files/ftc_gov/pdf/final-trancsript-ftc-opp-be-private-equity-healthcare-workshop-3-5-24.pdf.
[4] Biden Administration Issues Sweeping Executive Order on Promoting Competition in the American Economy, Fried Frank Antitrust and Competition Law Alert (July 15, 2021), available at https://www.friedfrank.com/news-and-insights/biden-administration-issues-sweeping-executive-order-on-promoting-competition-in-the-american-economy-9885.
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