Antitrust Scrutiny Intensifies Around Private Equity Healthcare Transactions

Introduction

On June 3, 2022, Andrew Forman, Deputy Assistant Attorney General of the United States Department of Justice Antitrust Division (DOJ) publicly stated that the DOJ is considering “enhancing antitrust enforcement around a variety of issues surrounding private equity.”[1] Citing “recent competition studies” and “firsthand [evidence]” of the “negative impact” of PE-driven consolidation in healthcare, Forman pointed to four areas of enforcement focus: (1) the cumulative competitive impact of roll-ups over time; (2) market distortions stemming from PE’s focus on “short-term gains and aggressive cost-cutting”; (3) illegal interlocking directorates in violation of Section 8 of the Clayton Act; and (4) HSR filing deficiencies. Forman’s remarks represent the latest – and most salient – antitrust challenge to private equity (PE) dealmaking by current agency leadership, as the storm clouds of competition enforcement in this area continue to gather.

The DOJ’s Concerns

In prepared remarks presented at the ABA Antitrust Healthcare Conference in Washington, D.C., Forman set the stage by pointing to the broader volume of PE dealmaking in 2021, citing “a record 14,730 deals globally worth $1.2 trillion … that is trillion with a T,” adding that healthcare was the second leading sector for PE investments. While acknowledging that “[p]rivate equity can play an important role in our economy,” he suggested that “certain private equity transactions and conduct suggest an undue focus on short-term profits and aggressive cost-cutting” that in the healthcare space “can lead to disastrous patient outcomes and, depending on the facts, may create competition concerns.”

Forman referred to testimony from industry stakeholders at healthcare “listening forums” hosted by the Federal Trade Commission and DOJ, describing “firsthand experiences about the effect of consolidation and acquisitions by private equity groups … [such as] fewer caregivers, degradation of care, commoditization of health care services, and increased prices.” He also remarked that the DOJ is analyzing recent competition studies, which he said illustrate the negative impact of certain PE acquisitions in healthcare products and services, including home health care, inpatient services, outpatient services, and pharmaceuticals.[2]

Key Areas of Enforcement Focus

Against this backdrop, Forman highlighted four specific areas of enforcement focus:

1. Roll-Ups: Increased scrutiny of PE “roll-ups” consisting of smaller, often sub-HSR-reportable transactions that may cumulatively reduce competition or create a monopoly over time. Along similar lines, the DOJ is analyzing whether PE acquisitions may violate the antitrust laws by creating or enhancing market power across a stack of technology or other products or services.
2. Incentives: The DOJ is focused on whether PE transactions may chill competition by dampening firms’ incentives to act as disruptors or mavericks, and/or causing them to focus on short-term financial gain, rather than innovation or quality.
3. Interlocking Directorates: The DOJ is committed to taking “aggressive action” to enforce Section 8 of the Clayton Act, which prohibits interlocking directorates. Subject to certain exceptions, a prohibited interlock can occur when the same person – or different individuals appointed by the same firm – serves as an officer or director of one or more competing portfolio companies.
4. HSR Deficiencies: Forman also indicated that the DOJ has recently become aware of unspecified “HSR filing deficiencies” relating to PE transactions causing the agencies to “ask themselves whether private equity companies may not be taking seriously enough their obligations under the HSR Act.” The agency is considering next steps in this area.

Existing Regulatory Framework

Under the HSR Act, parties to transactions that meet certain monetary thresholds are required to submit premerger notification filings with the Federal Trade Commission (FTC) and DOJ, unless an exemption applies. The submission of HSR filings triggers a 30-calendar-day waiting period during which the agencies review the transaction to determine whether it may harm competition. HSR filings contain a range of documents and information to aid the agencies’ preliminary review, including a transaction description, audited financials, “Item 4 documents” analyzing the transaction with respect to competition issues, revenue data, information regarding prior acquisitions, and information regarding subsidiaries, shareholders, minority holdings, and “associates.”[4]

In addition to anticompetitive mergers, the Clayton Act also prohibits so-called interlocking directorates in which the same “person” (interpreted broadly to include appointees by the same firm) serves simultaneously as an officer or director of two or more competing corporations, subject to certain exceptions.[5] This prohibition is designed to prevent coordination of decision-making between competitors through common officers or board members and “nip in the bud incipient violations of the antitrust laws by removing the opportunity … or temptation to [commit] such violations through interlocking directorates.”[6] 

Recent Enforcement Trends

These and other long-standing frameworks impacting M&A are undergoing renewal and, in some cases, upheaval. DOJ Antitrust Division head Jonathan Kanter recently declared that “the era of lax enforcement is over, and the new era of vigorous and effective antitrust law enforcement has begun.” Consistent with this ethos, the Biden administration, Congress, and the antitrust agencies have been undertaking significant changes to merger review.

These changes – recently characterized by FTC Commissioner Christine Wilson as “death by a thousand cuts” to the HSR regime – include (1) President Biden’s Executive Order calling for a whole-of-government approach to antitrust enforcement; (2) indefinite suspension of early termination for deals that are competitively benign; (3) legislation that would increase HSR filing fees for large transactions; (4) expansion of the scope of Second Requests to cover areas such as impact on labor markets; (5) issuance of “warning letters” cautioning merging parties that agency investigations remain open indefinitely, and they close at their own risk; (5) adoption of a “prior approval” policy requiring parties that enter into settlements to resolve competition concerns to give the FTC veto power over future deals; and (6) a comprehensive reassessment of the Merger Guidelines. The DOJ’s recent targeting of PE transactions in the healthcare sector continues this trend, with more changes to merger review likely on the horizon.

Key Takeaways

• Private equity dealmaking is increasingly a focus of the U.S. antitrust enforcers. The DOJ’s recent statements illustrate that the agencies’ escalating rhetoric and skepticism towards private equity is culminating in action, with potential consequences for M&A in this space.
• Private equity funds considering M&A in any segment of the healthcare sector should anticipate greater scrutiny, particularly for deals that may create portfolio overlaps, entail vertical relationships with portfolio companies, target market disruptors, or involve companies that operate in areas that are adjacent to existing holdings.
• Private equity managers and analysts should pay close attention to the language they use in their deal analyses and investment memoranda and assume they will be examined by antitrust enforcers. In addition, funds should work with sophisticated antitrust counsel to conduct thorough filing analyses, ensure that HSR filings are complete and accurate, and assess the risk of any potential interlocks stemming from transactions.
• Private equity firms should proactively pressure-test governance structures between and within funds to prevent, detect, and/or resolve interlocking directorates in compliance with Section 8 of the Clayton Act, and assume that agencies will increasingly probe these issues.

[1] Andrew Forman, “The Importance of Vigorous Antitrust Enforcement in Health Care,” Remarks as Prepared for Delivery, available at https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-andrew-forman-delivers-keynote-abas-antitrust.

[2] See, e.g.,Laura Alexander and Richard Scheffler, “Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk” (May 18, 2021), available at https://publichealth.berkeley.edu/wp-content/uploads/2021/06/AAI-Petris-Private-Equity-Healthcare-Report.pdf.

[3] Michael E. Blaisdell, “Interlocking Mindfulness,” Competition Matters (FTC Blog) (June 26, 2019), available at https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness.

[4] The associate concept typically applies in the fund context and is mainly intended to identify entities, and minority holdings of entities, under common investment management authority in areas that overlap with the target. An “associate” is any entity that is not directly or indirectly controlled by the filing person but: (1) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a managing entity); (2) has its operations or investment decisions, directly or indirectly, managed by the filing person; (3) directly or indirectly controls, is controlled by, or is under common control with a managing entity; or (4) directly or indirectly manages, is managed by, or is under common operational or investment management with a managing entity.

[5] 15 U.S.C. § 19.

[6] United States v. Sears, Roebuck & Co., 111 F. Supp. 614 (S.D.N.Y. 1953). Specifically, Section 8 of the Clayton Act provides that “[n]o person shall, at the same time, serve as a director or officer in any two corporations … (A) engaged . . . in commerce; and (B) [that are] by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws,” if the aggregate capital, surplus, and undivided profits of each corporation exceeds $10 million (as adjusted to $41,034,000 for 2022). Section 8 provides de minimis exceptions to the prohibition on interlocks where (1) the competitive sales of either corporation are less than $1 million (as adjusted to $4,103,400 for 2022); (2) the competitive sales of either corporation are less than 2% of that company’s total sales; or (3) the competitive sales of each corporation are less than 4% of that company’s total sales. Statutory thresholds are adjusted annually by the FTC according to changes in GNP.