This week, the U.S. Federal Trade Commission sued Welsh Carson Anderson & Stowe and portfolio company U.S. Anesthesia Partners (USAP), accusing the group of purposefully suppressing competition and raising prices.
Welsh Carson launched the USAP platform in 2012 with the acquisition of a large Houston anesthesiology practice, after which it completed twelve add-on acquisitions of smaller Texas-based practices. Berkshire Partners and Singapore sovereign wealth fund GIC are also on the cap table.
The FTC says the roll-up followed a three-part strategy:
Consolidate every provider of scale in Texas
Negotiate price-setting agreements with remaining independent practices
Strike a deal with a publicly-traded competitor to keep them out of USAP’s territory
A Roll-up and Then Some
Less common are market-wide pricing agreements with competitive practices; likely what pushed this case over the edge.
USAP struck deals with independent practices that it couldn’t acquire, such as academic-affiliated groups, in which USAP would bill payors for anesthesia services provided by the independent partner. The arrangements increased partners’ reimbursement rates to match those of USAP — nearly double the median rate of other Texan anesthesia providers, per the FTC.
When billing, USAP used its own provider and tax identification information, appearing to payors as if it was the one providing care.
USAP then passed on payment to the independent practices, pocketing a portion of the incremental revenue for itself. The arrangements were characterized in contracts as “collaboration,” “professional services,” or “independent contractor agreements.”
USAP’s own executives expressed concern with the unusual approach, noting that it appeared “odd from a compliance standpoint” and fearing that the strategy “might possibly compromise” USAP by breaching its payor contracts.
Goodwin’s antitrust team highlighted the points below to clients:
- It appears that the FTC brought this particular action given the very high market share (~70% by revenue) combined with other anticompetitive conduct.
- The lawsuit is not in the context of a proposed acquisition, but rather the result of a conduct investigation. Roll-ups could be scrutinized, but the likelihood of investigation is greater with any price fixing allegations, competitor side agreements, or other non-compete issues which could bring unwanted attention.
- The lawsuit follows highly-publicized 2021 litigation between USAP and United Healthcare over reimbursement rates and anticompetitive behavior.
The Last Word on Regulatory Actions
If there’s one takeaway for private equity, it’s that you should continue to stress the importance of discretion for both investment professionals and portfolio company executives.
Your emails and deal materials will be subpoenaed, and no one wants to be the one responsible for dishing up a headline that regulators (and the media) could only dream of — the FTC’s complaint is riddled with quotes from the Welsh Carson deal team and ran with an internal note from a USAP exec who was unable to contain his excitement over an add-on facilitated rate increase: “Awesome! Cha-ching!”