Transactions and other investments in the healthcare industry by private equity firms are a hot enforcement topic at both the US Federal Trade Commission (“FTC”) and the Antitrust Division of the US Department of Justice (“DOJ”). The terms of two recent FTC proposed merger consent orders in the veterinary services industry reflect the concern of the agency’s leadership that serial acquisitions by private equity firms enable those firms to accumulate market power and reduce incentives to compete. Current leadership at the DOJ has expressed similar concerns about the involvement of private equity firms in the healthcare industry.
FTC Merger Enforcement: JABCP/SAGE
On June 13, 2022, the FTC announced a proposed consent agreement in connection with JAB Consumer Partners SCA SICAR’s (“JABCP’s”) proposed $1.1 billion acquisition of SAGE Veterinary Partners, LLC (“SAGE”). Under the proposed consent, the FTC required JABCP to divest six veterinary facilitates to United Veterinary Care, LLC (“UVC”) to resolve concerns that the transaction may substantially lessen competition or tend to create a monopoly in the markets for certain veterinary services in and around Austin, TX, San Francisco, CA, as well as in and between Oakland, Berkeley, and Concord, CA.
In addition to the divestitures, the consent agreement also included a provision requiring that for 10 years, JABCP must seek the FTC’s prior approval for any acquisition of a specialty or emergency veterinary clinic that is within 25 miles of a JABCP specialty or emergency clinic in California or Texas. Under a prior notice provision, JABCP must also provide the FTC with at least 30 days’ prior notice for any acquisition of a specialty or emergency clinic that is within 25 miles of a JABCP specialty or emergency clinic anywhere in the United States.
In a statement, Chair Lina Khan, joined by Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, asserts that this prior notice provision is “the first of its kind in a Commission order.” The scope of the FTC’s prior approval and prior notice provisions in this case extend beyond the bounds of the relevant markets defined by the FTC in its complaint. From a service perspective, both provisions apply to any veterinary specialty service—in addition to those specialty veterinary services defined in the complaint—as well as to emergency services. Furthermore, from a geographic perspective, both the prior approval provision and the prior notice provision extend beyond the three local areas defined in the complaint: the prior approval provision extends to the entirety of California and Texas while the prior notice provision extends to the entire country.
The broad scope of the prior approval provision and prior notice provision were the subject of a heated debate between the Democratic Commissioners—Chair Khan and Commissioners Slaughter and Bedoya—and the Republican Commissioners—Commissioners Noah Phillips and Christine Wilson—over the circumstances in which imposing out-of-market remedies (i.e., imposing these prior approval and prior notice provisions even in markets in which the FTC did not identify anticompetitive effects) may be appropriate. Underlying that debate is a heated disagreement between the Commissioners over whether transactions involving private equity firms pose unique competitive concerns that warrant imposing broader remedial requirements as a condition to allowing those deals to close.
The Position of the Democratic Commissioners: The Khan Statement
According to the Democratic Commissioners, the “extra protections” of the broad prior approval provision and the prior notice provision are justified in this case because JABCP was previously subject to an FTC consent order, and due to “the rapid pace of JAB[CP]/NVA’s ongoing acquisitions of veterinary clinics throughout the country, and the ongoing consolidation in the industry.” Describing the rationale for the inclusions of the provisions more generally, the Democratic Commissioners explained that these types of provisions serve at least two purposes: (1) they allow the FTC to “more closely monitor the potentially unlawful dealmaking activities of companies . . . that have repeatedly attempted acquisitions the Commission alleged were unlawful”; and (2) they enable the FTC “to better address stealth roll-ups by private equity firms like JAB[CP]/NVA and serial acquisitions by other corporations.”
The Democratic Commissioners also raised more fundamental concerns about private equity firms, cautioning that “[a]ntitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition.” According to the Democratic Commissioners, this is particularly the case in the healthcare context, where private equity’s “focus on short-term profits . . . can incentivize practices that may reduce quality of care, increase costs for patients and payors, and generate appalling patient outcomes.”
The Position of the Republican Commissioners: The Concurring Statement of Commissioners Phillips and Wilson
Commissioners Phillips and Wilson issued a Concurring Statement, challenging the broad prior approval and prior notice provisions in this case. Phillips and Wilson argued that, along with the “majority’s obvious distaste for private equity as a business model,” “the allegation of the purported trend in nationwide consolidation appears to form the sole basis in the Complaint for imposing out-of-market prior approval and prior notice requirements.” While Phillips and Wilson accepted that there may be cases in which these “more onerous remedies” may be appropriate, they argued that this is not such a case for a number of reasons, including because competition in veterinary markets occurs locally and not on a national basis, and because “there are no discernible anticompetitive effects” from any trend towards consolidation at a national level (to the extent such a trend is taking place).
Phillips and Wilson criticized the Democratic Commissioners for imposing broad prior approval and prior notice provisions in this case merely or largely because JABCP is a private equity firm: “Imposing heightened legal obligations on disfavored groups – including private equity – because of who they are rather than what they have done raises rule of law concerns.”
An FTC Encore: The FTC’s Merger Enforcement in JABCP/VIPW & Ethos
Just 16 days after the FTC announced a consent agreement in JABCP/SAGE, the FTC announced a second proposed consent agreement in connection with JABCP’s proposed acquisition of another provider of specialty and emergency veterinary clinics: the $1.65 billion acquisition of VIPW, LLC, including its subsidiary Ethos Veterinary Health LLC. Although the Commissioners did not issue statements on the JABCP/VIPW & Ethos consent, the FTC’s complaint in this case echoes both the complaint and the Democratic Commissioners’ statement in JABCP/SAGE, alleging “a growing trend towards consolidation in the emergency and specialty veterinary services markets across the United States by large chains including Respondent Compassion-First/NVA.” The complaint also states that the FTC has imposed prior approval and/or prior notice provisions in previous Compassion-First/NVA acquisitions “[i]n order to protect robust future competition in markets trending towards increased consolidation.”
Under the proposed consent, the FTC requires JABCP to divest four clinics to UVC and two clinics to Veritas Veterinary Partners (“Veritas”) to resolve concerns that the transaction may substantially lessen competition or tend to create a monopoly in the markets for medical oncology veterinary specialty services in and around Richmond, Virginia and Washington, DC, and for emergency services and certain veterinary specialty services in and around Denver, Colorado and San Francisco, California. In addition, the FTC imposes prior approval and prior notice requirements in the consent agreement that are nearly identical to those in the JABCP/SAGE consent. The consent in this case provides that for 10 years, JABCP must seek the FTC’s prior approval for any acquisition of a specialty or emergency veterinary clinic that is within 25 miles of a JABCP specialty or emergency veterinary clinic in California, Colorado, DC, Maryland, or Virginia. In addition, for 10 years, JABCP must provide the FTC with at least 30 days’ prior notice for any acquisition of a specialty or emergency veterinary clinic that is within 25 miles of a JABCP specialty or emergency veterinary clinic anywhere in the United States.
Like the JABCP/SAGE consent, the scope of the FTC’s prior approval and prior notice provisions in this case also extend beyond the bounds of the relevant markets defined by the FTC in its complaint. From a service perspective, both provisions extend to any veterinary specialty service—not just to those specialty veterinary services defined in the complaint—as well as to emergency services. Furthermore, while the complaint defines four local relevant geographic areas, the prior approval provision extends to the entirety of California, Colorado, the District of Columbia, Maryland, and Virginia, and the prior notice provision extends to the entire country—not just to the four local areas defined in the complaint.
FTC Democratic Commissioners’ Skepticism of Private Equity in Healthcare is Not Absolute
Interestingly, despite the Democratic Commissioners’ statement in JABCP/SAGE expressing concern about private equity’s involvement in healthcare, both of the divestiture buyers in the JABCP consents are portfolio companies of private equity firms: UVC, the divestiture buyer in both JABCP consents, is a portfolio company of Nordic Capital while Veritas, a divestiture buyer in the second JABCP consent, is a portfolio company of Percheron Capital.
The fact that the FTC approved private equity-owned divestiture buyers in these two consents suggests that the agency’s Democratic Commissioners may have at least some tolerance for private equity involvement in healthcare. Where the line is between acceptable involvement of private equity in healthcare and the type of involvement that raises concerns remains to be seen, as does whether the FTC’s Democratic Commissioners would take the same approach in cases involving human healthcare markets.
DOJ Concerns About Private Equity and Healthcare
DOJ is also focused on potential antitrust concerns arising from private equity’s involvement in the healthcare industry. For example, in a June 3, 2022, speech before the American Bar Association’s Antitrust in Healthcare Conference, Deputy Assistant Attorney General Andrew Forman stated that “there is a lot going on in the division’s thinking about the intersection between antitrust, health care, and private equity.” Echoing the concerns raised by the FTC’s Democratic Commissioners in JABCP/SAGE, Forman also expressed concerns about the role of private equity in the healthcare industry more broadly: “To the extent that private equity transactions and conduct are focused on short-term gains and aggressive cost-cutting in the health care space, they can lead to disastrous patient outcomes and, depending on the facts, may create competition concerns.”
In his speech, Forman identified a number of specific areas of potential enforcement that the DOJ is considering with respect to private equity, such as:
- Private equity roll-ups and “investments creating or enhancing power across a ‘stack’ of technology or other products/services;”
- Whether private equity investments may “chill fierce competition on the merits” by dampening a target company’s incentive to disrupt healthcare markets or by causing a target company to focus only on short-term financial gains and not on innovation or quality;
- Potential board interlocks, in violation of Section 8 of the Clayton Act (which prohibits a person from serving as an officer or a director of two competing corporations); and
- “HSR filing deficiencies in the private equity space,” presumably a reference to a concern that private equity firms are failing to comply with the merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The US antitrust agencies are likely to continue to scrutinize private equity firms’ involvement in the healthcare industry, particularly in the transaction context. Companies considering deals in the healthcare industry that involve private equity funding should take into account the agencies’ skepticism toward private equity firms in assessing the antitrust risk of the transaction. Although the FTC approved two private equity-owned divestiture buyers in the JABCP veterinary services consents, it remains to be seen whether the agency would take the same approach in future transactions, including in transactions involving human healthcare assets. Therefore, where divestitures may be required to resolve a competitive overlap between the merging parties, the parties should make sure that their search for a divestiture buyer is not limited to financial buyers and includes strategic buyers as well. In addition, when divestitures may be required, it is important to consider the potential for the agency to impose broad prior approval and prior notice provisions that may extend beyond the relevant markets at issue in a given deal and affect the antitrust risk profile of future transactions.
Lauren Battaglia, partner at Hogan Lovells, develops pragmatic approaches to complex antitrust issues. Based out of Washington, D.C., Lauren brings extensive antitrust experience in merger clearance, non-merger investigations, litigation, and counseling. With a career that includes academic and professional experience in antitrust and competition issues on both sides of the Atlantic, Lauren understands the legal needs of large, multi-national companies navigating cross-border antitrust issues and investigations. She can be reached at +1 202 637 5761 or by email: [email protected].
Logan Breed, partner at Hogan Lovells, has handled many of the most cutting-edge antitrust reviews of mergers and acquisitions over the past 20 years, as well as numerous non-merger conduct investigations and antitrust litigation matters. He has particular experience with issues at the intersection of antitrust and intellectual property law. Logan’s broad industry experience includes computer software and hardware, e-commerce, telecommunications, media and entertainment, consumer products and defense. He can be contacted on +1 (202) 637 6407 or by email: [email protected].
As counsel on the antitrust, competition and economic regulation team at Hogan Lovells, Ilana Kattan advises companies on the antitrust risks of their transactions and shepherds them through complex and in-depth merger control processes in the US and abroad. She also represents companies before the antitrust enforcement agencies, including the US Department of Justice and the Federal Trade Commission, on conduct investigations, and advises companies on a range of antitrust issues, including licensing agreements, joint ventures and other collaborations, and behavioral issues. Ilana can be contacted at +1 202 637 5626 or by email: [email protected].