A recent Federal Trade Commission civil lawsuit accusing one of the nation鈥檚 largest anesthesiology groups of monopolistic practices that sharply drove up prices is a warning to private equity investors that could temper their big push to snap up physician groups.
Over the past three years, have signaled they would apply more scrutiny to private equity acquisitions in health care, including roll-up deals in which larger provider groups buy smaller groups in a local market.
Nothing happened until September, when the U.S. Anesthesia Partners and the private equity firm Welsh, Carson, Anderson & Stowe in federal court in Houston, alleging they had rolled up nearly all large anesthesiology practices in Texas. In the first FTC legal challenge against a private equity purchase of medical practices, the federal agency targeted one of the most aggressive private equity firms involved in building large, market-dominating medical groups.
In an interview, FTC Chair Lina Khan confirmed that her agency wants to send a message with this suit. Welsh Carson and USAP 鈥渂ought up the largest anesthesiology practices, then jacked up prices and entered into price-setting and market-allocation schemes,鈥 said Khan, who was appointed by President Joe Biden in 2021 to head the antitrust enforcement agency, with a mandate to combat health care consolidation. 鈥淭his action puts the market on notice that we will scrutinize roll-up schemes.鈥
The large and growing volume of private equity in recent years has raised mounting concerns about the impact on health costs, quality of care, and providers鈥 clinical autonomy. A published last year found that prices charged by anesthesiology groups increased 26% after they were acquired by private equity firms.
鈥淣ow we鈥檙e seeing that scrutiny with this suit,鈥 said Ambar La Forgia, an assistant professor of business management at the University of California-Berkeley, who co-authored the JAMA article. 鈥淭his suit will cause companies to be more careful not to create too much local market power.鈥
The FTC鈥檚 lawsuit alleges that USAP and Welsh Carson engaged in an anti-competitive scheme to gain market power and drive up prices for hospital anesthesiology services. The FTC also accuses USAP and Welsh Carson 鈥 which established the medical group in 2012 and has expanded it to eight states 鈥 of cutting deals with competing anesthesiology groups to raise prices and stay out of one another鈥檚 markets.
USAP now controls 60% of Texas鈥 hospital anesthesia market, and its prices are double the median rates of other anesthesia providers in the state, according to the lawsuit. Learning that USAP would boost rates following one acquisition, a USAP executive wrote, 鈥淎wesome! Cha-ching,鈥 the said.
In a written statement, Welsh Carson, which in radiology, orthopedic, and primary care groups, called the FTC lawsuit 鈥渨ithout merit in fact or law.鈥 It said USAP鈥檚 commercial rates 鈥渉ave not exceeded the rate of medical cost inflation for close to 10 years.鈥
The New York firm also said its investment in USAP 鈥渉as allowed independent anesthesiologists to deliver superior clinical outcomes to underserved populations鈥 and that the FTC鈥檚 action will harm clinicians and patients. Welsh Carson declined a request for interviews with its executives.
鈥淭his is a pretty common roll-up strategy, and some of the big private equity companies must be wondering if more FTC complaints are coming,鈥 said Loren Adler, associate director of the Brookings Schaeffer Initiative on Health Policy. 鈥淚f the FTC is successful in court, it will have a chilling effect.鈥
Since the FTC filed the USAP lawsuit, Khan said, the agency has received information from people in other health fields about roll-ups it should scrutinize. 鈥淲e have limited resources, but it鈥檚 an area we are interested in,鈥 she said. 鈥淲e want to focus on where we see the most significant harm.鈥
In physician acquisition deals, PE firms to acquire a controlling interest in a large medical group, pay the physician owners a substantial upfront sum in exchange for sharply cutting their future compensation, and install a management team. Then they seek to acquire smaller groups in the same geographic market and bolt them onto the original medical group for more bargaining clout and operating efficiencies.
The PE firm鈥檚 goal is to garner at least 20% dividends a year and then sell the group to another investor for at least three times the purchase price in three to seven years. Critics say this short-term investment model spurs the investors and medical groups to boost prices and cut staffing to generate large profits as fast as possible.
鈥淧rivate equity is trying to extract value quickly and sell the company for a profit, so there鈥檚 a lot more incentive to increase prices quickly and extract higher revenue,鈥 La Forgia said.
In the two years after a sale, PE-owned practices in dermatology, gastroenterology, and ophthalmology charged insurers 20% more per claim on average than did practices not owned by private equity, according to published last year.
There are similar concerns about hospital systems acquiring physician practices, which also have . 鈥淭he evidence shows that both private equity and hospital acquisitions of physician practices are bad for consumers, and scrutiny should be applied to all acquirers,鈥 Adler said.
Critics warn that private equity roll-ups of medical groups can jeopardize quality of care, too. Chris Strouse, a Denver anesthesiologist who served on USAP鈥檚 national board of directors but left the company鈥檚 Colorado group out of disapproval in 2020, cited patient safety issues arising from short staffing and mismanagement. He said USAP would schedule shifts so that three or four providers would hand off to each other a single surgical procedure, which he said is risky. In addition, USAP frequently asked anesthesiologists to work the day after working a 24-hour on-call shift, he said. 鈥淭he literature shows that鈥檚 outside the safety range,鈥 he said. As a result, many providers have left USAP, he added.
The FTC has long been lax in monitoring roll-ups of physician groups, in part because federal law does not require public reporting of these deals unless they exceed , a threshold adjusted over time. Lowering the threshold would require congressional action. As a result, regulators may be unaware of many deals that lead to gradual market concentration, which allows providers to demand higher prices from insurers and employer health plans.
Recognizing that problem, the FTC proposed in June to for companies planning mergers, in hopes of spotting previous acquisitions of smaller groups that could lead to excessive market power and higher prices. In addition, in a draft of their , issued in July, the FTC and the Department of Justice said they would consider the cumulative effect of a series of smaller acquisitions.
鈥淭he ways PE firms are making serial acquisitions, each individual acquisition is under the radar, but in aggregate they roll up the whole market,鈥 Khan said. 鈥淏etween the merger reporting form and the new merger guidelines, we want to be able to better catch unlawful roll-up schemes. 鈥 This would enable us to stop roll-ups earlier.鈥
But Brian Concklin, a lawyer with the law firm Clifford Chance, whose clients include private equity firms, said the FTC鈥檚 proposed reporting requirements would hamper many legitimate mergers. 鈥淭he notion that they need all that information to catch deals that lessen competition seems overblown and false, given that the vast majority of these deals do not lessen competition,鈥 he said. 鈥淚t will be a substantial burden on most if not all clients to comply.鈥
Researchers and employer groups, however, were encouraged by the FTC鈥檚 action, though they fear it鈥檚 too little, too late, because consolidation already has reduced competition sharply. Some even say the market has failed and price regulation is needed.
鈥淧roviders have been able to extort higher prices on services with no improvement in quality or value or access,鈥 said Mike Thompson, CEO of the National Alliance of Healthcare Purchaser Coalitions. 鈥淭he FTC stepping up its game is a good thing. But this horse is out of the barn. If we don鈥檛 have better enforcement, we won鈥檛 have a marketplace.鈥
