Private equity funds and assets management firms are a growing part of overseas investment acquisitions in Aotearoa NZ, including some of the privately owned bits of our health care system. One of the largest, BlackRock, is lined up to invest in and profit from the new green infrastructure we need. I keep half an eye on global finance headlines in a jargon-ridden industry newsletter called Pitchbook. It alerted me to a US Federal Court ruling¹ that allows the US Federal Trade Commission (FTC) to proceed with prosecuting a corporation for anti-trust practices, but lets the private equity management firm that created and profits from that corporation completely off the hook.

In 2012 New York-based private equity firm Welsh Carson created US Anesthesia Partners (USAP) to buy up anaesthesiology practices in Houston, Texas, targeting those that already held exclusive contracts with hospitals. After each acquisition, USAP raised the new company's rates to match its own higher prices. It then bought up more than a dozen practices in Tyler, Austin, Amarillo and San Antonio, and entered into price-setting agreements with several competitors "in an effort to consolidate the anaesthesiology market in the state and suppress competition", the FTC alleged. It paid one competitor (Envision) $US9 million to stay out of the Dallas market for five years.

The FTC prosecuted both USAP and Welsh Carson after a two year investigation. Welsh Carson's Website says that since 1979 it has raised $US31 billion in capital, and currently has 100 investments in healthcare companies. Welsh Carson doesn't just sit on its investments: "Our strategy is to buy growth businesses, partner with outstanding management teams, and build value through a combination of operational improvements, internal growth initiatives and strategic acquisitions".

The FTC alleges that "Welsh Carson operates through various corporation entities... to hatch and carry out USAP's monopolisation scheme" - technically, the FTC prosecuted seven of them. Welsh Carson put up $US100 million for USAP's first purchase, Greater Houston Anesthesiology, the largest practice in Houston, getting the rest from "third-party lenders". Welsh Carson identified and actively participated in USAP's further acquisitions and in the deal with Envision. It sold off half its stake in USAP in 2017, but its Fund XII continues to hold 23%.

A Roll-Up Strategy

"Private equity firm Welsh Carson spearheaded a roll-up strategy and created USAP to buy out nearly every large anaesthesiology practice in Texas," FTC Chair Lina Khan said in a media release announcing the lawsuit. "Along with a set of unlawful agreements to set prices and allocate markets, these tactics enabled USAP and Welsh Carson to raise prices for anaesthesia services - raking in tens of millions of extra dollars for these executives at the expense of Texas patients and businesses.... defendants' scheme was so successful that Welsh Carson has already begun 'deploying a similar strategy to consolidate' multiple other physician practice specialties".

However, Judge Hoyt dismissed the case against Welsh Carson, saying the FTC didn't "cite any authority for the proposition that receiving profits from an entity that may be violating antitrust laws is itself a violation of antitrust laws". The judge cited a 2014 court ruling that "profits, sales, and other benefits accrued as the result of an initial wrongful act are not treated as independent acts". He therefore held that the private equity firm couldn't be held legally responsible merely because it profited from a minority shareholding. The FTC, in his view, had not shown an "ongoing violation" of anti-trust laws from Welsh Carson's own "ongoing conduct".

Healthcare news Website Fierce Healthcare (14/5/24) reported that, meanwhile, separately from the Texas case, USAP's Colorado branch came to a voluntary agreement with that state's Attorney General to cut its contracts with five Colorado hospitals and modify its non-compete agreements with clinicians. USAP's business also extends into Florida, Nevada, Washington, Kansas, Indiana, Tennessee, Maryland and the District of Columbia. Nationwide, it includes more than 4,500 clinicians.

"A Win For The PE Industry"

Pitchbook (14/5/24) described the ruling on Welsh Carson as "a win for the PE industry against antitrust regulators". The Wall Street Journal's editorial of 15/5/24, headed dismissively "Another Lina Khan Theory Loses In Court", describes the FTC Chair as "a heroine to the media, but not to federal judges, who keep ruling against her antitrust cases".

Fierce Healthcare sees the ruling as a "roadblock for the FTC and the Biden Administration". In 2023 the FTC issued merger guidelines, which cover private equity and corporate acquisitions. In December 2023 the Biden Administration announced a "cross-Government public inquiry into corporate greed in healthcare". In March 2024, antitrust regulators at the FTC, the Justice Department and the Department of Health and Human Services, held public workshops on the effects of private equity and other corporations' mounting control in healthcare, and the potential effects on the quality of care for patients.

For example, currently the Massachusetts State government is trying to contain the fallout for patients from the bankruptcy of the PE-backed Stewart Health hospital chain, reports the Boston Globe (5/5/24). Stewart Health bought the hospitals in 2020 from Cerberus Capital Management, which had grown the chain over ten years into the largest private for-profit hospital group in the US by loading it with "a mountain of liabilities".

Pitchbook thinks anti-trust concerns are the least of private equity's worries. Well, they certainly are after this ruling. Of more concern, says Pitchbook, is what it calls "a stubborn pricing gap" between sellers and buyers. What they mean is - private equity "closed end" funds typically "exit" their investments after 7-10 years of profits, returning monies to initial investors by selling the acquisitions on to other investors, with a capital gain.

Post-2008 and post-covid (especially in 2021), low interest rates allowed private equity investors and corporations to borrow cheaply to invest in acquisitions and mergers, but low rates are no longer available for the next round of PE funds. With expectations ". Market recovery for private equity is slow, it says. There's been only an estimated 158 private equity deals to acquire healthcare services globally in the first quarter of 2024.

Endnotes

1. Hoyt, J. Memorandum Opinion and Order, 13.5.2024. FTC v. USAP, Civil Action No.4:23-CV-03560, US District Court, Houston, Texas.

Watchdog - 166 August 2024