FTC Sues Welsh Carson Over Anesthesia Roll-Up

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.

FTC sues private equity firm Welsh Carson

The Background

It’s an unusual move from the FTC, which has historically shied away from targeting private equity owners in favor of focusing on their portfolio companies.

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:

  1. Consolidate every provider of scale in Texas

  2. Negotiate price-setting agreements with remaining independent practices

  3. Strike a deal with a publicly-traded competitor to keep them out of USAP’s territory

A Roll-up and Then Some

Roll-ups are a classic private equity strategy, particularly for healthcare providers. It’s a common sense approach that seeks to consolidate back office administrative functions while strengthening negotiating power against payors and suppliers.

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.

Industry Implications

The FTC’s action coincides with its increasingly aggressive public stance toward private equity, but shouldn’t scare investors too much.

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.

Basically, Welsh Carson managed to write the playbook on what not to do if you’re at all worried about antitrust intervention.

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!”

Sam Hillier

Sam Hillier is a reporter at Transacted, covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.

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