Health care takeovers: DOJ, FTC & HHS' takedown of private equity's buying binge

Three federal agencies, including the Biden administration’s two most zealous antitrust regulators, all but declared war Tuesday on private equity firms’ growing ownership and control of health care.

The Justice Department, Federal Trade Commission and Department of Health and Human Services launched an inquiry that seeks public comments on the trend, which they say often puts physician practices and even hospitals in the hands of corporate owners that maximize profits at the expense of patient care.

Officials painted one cynical scenario after another. A private equity firm buys a medical practice, funding the deal largely through money the practice borrows. It then slashes medical staff, jacks up prices, cuts back patient care and sells off the practice—funneling those gains to investors while leaving the practice teetering toward bankruptcy.

The FTC will be scrutinizing private equity rollups—the purchase of many small players within one sector, boosting economies of scale and market share—as well as “strip and flip” tactics more broadly, agency Chair Lina Khan said. She said the financial tactics “can enrich executives but leave the American public worse off.”

“Today we’re discussing just some of the extractive tactics that we’ve seen at the intersection of private equity and health care,” she said an FTC forum Tuesday. ”But firms of all type should be on notice that we’re on the lookout for these strategies and will continue to deploy the full scope of our authority to protect the American public from anticompetitive and unlawful tactics.”

She spoke alongside Jonathan Kanter, chief of the Justice Department’s Antitrust Division, who struck a similar tone. The pair since taking their posts in 2021 have unleashed the most aggressive antitrust enforcement that the country has seen in decades.

“Together, we are taking on the entire health care sector to make sure that we are protecting competition to benefit not just patients but health care workers and … the well-being of our fellow citizens,” he said.

A 2023 report from the Commonwealth Fund found that private equity firms spent more than $200 billion on health care acquisitions in 2021 alone and more than $1 trillion over the past decade.

A separate 2023 study from the American Antitrust Institute found that as a result of the buying spree, in more than a quarter of local markets, a single private equity firm owns more than 30% of practices in a given specialty.

Kanter said health care at almost every level is now dominated by private equity firms that are acting as middlemen between patients and their doctors and are “taking a huge cut” from both sides along the way.

Private equity firms, which weren’t represented at the forum, tell a different story. They say they bring to the table greater financial expertise and more sophisticated business practices, and that by building scale in fragmented sectors they reduce waste and free up capital to fuel innovation and improve care.

Related: Showdown! FTC chief gets tough on private equity’s takeover of health care

But at the forum Khan cited the private equity firm Welsh Carson Anderson & Stowe—which went on a buying spree of anesthesiology practices in Texas to form U.S. Anesthesia Partners—as an example of the damage PE firms can wreak on the industry.

Last September the FTC sued Welsh Carson and USAP in U.S. District Court for the Southern District of Texas, saying it had bought up nearly every large anesthesia practice in the state as part of an illegal scheme to suppress competition and drive up prices.

According to the FTC, the PE firm and USAP used their clout to arrange price-setting agreements with remaining independent practices. In addition, the agency said they sidelined a significant competitor by striking a deal to keep it out of USAP’s territory.

Welsh Carson has blasted the suit as “unprecedented overreach” and has asked the court to dismiss it. The motion to dismiss says the company and its backers are “mere investors” and are being unfairly targeted.

But Khan said many PE firms and their acquisition strategies have not received the scrutiny they warranted because the firms consolidated ownership through a series of smaller deals that fall under the radar of antitrust enforcers.

Khan noted that the revised merger guidelines that the FTC and DOJ rolled out last year “make clear that in order to faithfully enforce the Clayton Act we cannot turn a blind eye to serial acquisitions and just look at each deal in isolation.”

Khan said another practice regulators are wary of is the purchase by private equity firms and other alternative asset investors of significant stakes in rival firms that compete in the same industry.

She said that practice can soften firms’ incentives to compete.

Eileen Appelbaum, co-director of the Center for Economic and Policy Research, who has studied private equity involvement in the health care industry, told forum participants that health care is being transformed from “a social good” into a commodity that can be bought and sold over and over again.

Investors in private equity firms “are promised outsized returns that are going to beat the stock market,” she said.

Often, Appelbaum said, a private equity firm will hold a health care company for just three to five years and as such “it needs to make a tremendous amount of revenue in a short period of time.”