As it continues to grapple with the COVID-19 pandemic, the healthcare sector will face increased antitrust scrutiny from the Biden administration, with the Federal Trade Commission (the “FTC”) and Department of Justice, Antitrust Division (the “DOJ”) (together the “Agencies”) as the Agencies ramp up their reviews not just of “horizontal” transactions (i.e., deals between competitors), but also of “vertical” transactions (i.e., deals that combine market participants at different levels of the healthcare industry, such as payors, hospitals, and physician practices).

Based upon our experience in the marketplace, we expect that private equity firms investing and operating in the healthcare space will encounter more antitrust scrutiny not just of roll-ups that combine physician groups or facilities operating in the same line of business into larger organizations, but also deals that combine payors, physicians, facilities, healthcare tech platforms, and other healthcare companies.

In anticipation of such scrutiny from the Agencies, private equity firms should keep in mind the following three key takeaways as they navigate an increasingly challenging antitrust enforcement landscape:

Takeaway 1: More Scrutiny, Less Certainty

  • Government reviews of vertical deals involving private equity firms (and other players) will be more common, and such reviews will take longer and be more involved than in recent years as the Agencies grapple with how to identify and block anticompetitive vertical transactions.
  • The Agencies’ focus on vertical transactions in the healthcare industry has been intense in recent years, and is increasing under the Biden Administration. President Biden has named Commissioner Rebecca Slaughter, a progressive and outspoken proponent of robust enforcement against vertical transactions as acting Chairperson of the FTC.
  • In addition, influential progressive and left-of-center antitrust scholars, some of whom likely will be in leadership positions at the Agencies, have argued that consolidation of providers and payors has led to increased prices and that there is little support for concluding that such vertical combinations reduce prices for healthcare services or improve outcomes.
  • Unfortunately, the Agencies have not issued robust guidance regarding vertical deals. For instance, the Vertical Merger Guidelines issued by the Agencies in 2020 offer little certainty for healthcare companies and investors, and are potentially significant for assessing risk, as the final version of the Guidelines removed the “safe harbor” provision in an earlier, draft version of the Guidelines that stated that the Agencies would be unlikely to challenge a vertical deal where the combined firm’s share is under 20 percent.

Takeaway 2: No HSR Does not Mean No Problem

  • Private equity firms typically encounter the FTC or DOJ when a transaction requires a Hart-Scott-Rodino (“HSR”) Act filing. Vertical deals that are not HSR Act reportable due to their size or structure may nevertheless be reviewed by the Agencies.
  • In fact, the Agencies may take a closer look at private equity firms’ HSR filings, even if the reported transaction raises no competitive concerns, to track firms’ investments in segments and markets for use in future possible investigations of non-HSR reportable transactions.
  • Recent changes to the HSR Act rules bring an increasing number of private equity investments under the HSR Act reporting requirements.
  • Private equity firms and their portfolio companies may be increasingly targets of requests for information from the DOJ or FTC as part of the Agencies’ reviews of other transactions or as part of larger investigations of the healthcare industry.

Takeaway 3: PE Firms can and Should Assess and Minimize Antitrust Risk

  • Notwithstanding the unfortunate combination of increased likelihood and scope of antitrust reviews of vertical deals by the Agencies and reduced visibility into how the Agencies will assess such deals, there are still ways for private equity firms and their portfolio companies to work with antitrust counsel to identity and mitigate antitrust risks.
  • The principal way to assess the antitrust risks is to evaluate whether the deal could harm competitors by foreclosing access to services or goods to them, which involves examining the market shares of the companies and the plans and incentives of the combined company, as well as assessing the likely reactions to the deal by others players in the market.
  • Private equity firms should therefore take care to document the procompetitive rationales for vertical deals, such as improving efficiencies and achieving cost-savings, which are explicitly recognized in the most recent Vertical Merger Guidelines. And they should avoid self-inflicted wounds in the form of poorly drafted documents that may give the Agencies a misimpression that the purpose or effect of a deal is to harm competition.