Health Care Antitrust Update Part II: Recent Federal and State Enforcement Initiatives and Litigation Involving the FTC’s Constitutional Authority
Over the past several months, antitrust enforcement activity in the health care provider sector has continued to steadily increase.
In Part I of this two-part update, we discussed recent lawsuits involving private equity firms, lawsuits filed by the Federal Trade Commission (“FTC”) and those filed by health care system competitors and purchasers of health care services.
In this Part II, we discuss the launch by the FTC, along with the U.S. Department of Justice (“DOJ”) and the Department of Health and Human Services (the “Agencies”), of a major public inquiry into merger and acquisition transactions involving private equity firms, health systems and private payers. We also discuss some initiatives at the state level, along with activity at the federal level relating to the ongoing challenges to the constitutional authority of the FTC (which were discussed in prior posts).
FTC, DOJ and HHS Launch Public Inquiry into Transactions Involving Private Equity Firms, Heath Systems and Private Payers
As reported in our March 11, 2024 post, on March 6, the Agencies announced that they were launching a cross-government public inquiry into private equity and other corporations’ increasing control over health care.
In making the announcement, the Agencies said that “[p]rivate equity firms and other corporate owners are increasingly involved in health care system transactions, and, at times, those transactions may lead to a maximizing of profits at the expense of quality care.”
They went on to explain that their inquiry seeks to understand “how certain health care market transactions may increase consolidation and generate profits for firms while threatening patients’ health, workers’ safety, quality of care and affordable health care for patients and taxpayers.”
In announcing the inquiry, FTC Chair Lina M. Khan stated: “When private equity firms buy out health care facilities only to slash staffing and cut quality, patients lose out. … Through this inquiry the FTC will continue scrutinizing private equity roll-ups, strip-and-flip tactics and other financial plays that can enrich executives but leave the American public worse off.”
Request for Information
On the same day as the announcement, the Agencies issued a Request for Information (RFI) requesting public comment on deals conducted by health systems, private payers, private equity funds and other alternative asset managers that involve health care providers, facilities or ancillary products or services.
The RFI focuses on three categories of transactions.
Transactions conducted by private equity funds or other alternative asset managers
The Agencies are particularly interested in information on transactions in the health care market conducted by private equity funds or other alternative asset managers, health systems and private payers, especially those transactions that would not be noticed to by DOJ and the FTC under the Hart-Scott-Rodino Act.
The examples of private equity transactions include a private equity fund’s acquisition of a health care provider such as a hospital, nursing home or specialty service provider. The Agencies state that they are interested in transactions where private equity funds make direct acquisitions, as well as transactions structured to facilitate private equity investment, circumventing applicable corporate practice of medicine restrictions.
They are also interested in transactions involving other alternative asset classes, i.e., investments in assets other than stock and bonds, such as private credit funds and real estate investment trusts.
Transactions conducted by health systems
The Agencies explain that they are interested in learning more about the impact of mergers and other transactions involving health care providers, facilities, or ancillary products or services conducted by health systems.
The Agencies give as examples of health system transactions vertical integrations such as when a health system acquires an independent physician practice, an ambulatory surgery facility or a nursing home, or horizontal integrations such as when a health system partially acquires a hospital, resulting in the ability to influence the decisions and financial interests of a competing hospital, despite having a passive or minority ownership interest.
The Agencies explain that there are concerns that the involved facilities and providers may have less of an incentive to compete for patients, payers and health care workers, and that the acquiring health system may have the ability and incentive to weaken rival providers and facilities by changing their referral patterns away from rival providers and facilities and towards their own providers and facilities.
Transactions conducted by private payers
Finally, the Agencies explain that they are interested in learning more about the impact of transactions conducted by private payers that involve health care providers, pharmacies, facilities or ancillary products or services. Private payers can be insurers and/or administrative service organizations. Examples of this type of transaction include when insurers purchase primary care practices outright or when they become partial owners of these practices.
The Agencies note concerns that the acquiring payer may have the ability and incentive to weaken rival payers by charging higher prices for the rival’s members to use the acquired practice, removing the acquired practice from rival payers’ networks or otherwise worsening contracting terms.
There is also a concern that these types of transactions may result in vertical integration between certain types of entities such as insurers, pharmacy benefit managers and pharmacies, which may affect pricing and access to prescription drugs for patients and costs to the government as a payer.
In addition to public comments generally, the Agencies are also interested in hearing directly from patients and health care workers about how their experiences in the health care system changed after a facility or other provider where they work or receive treatment or services was acquired or underwent a merger.
The public has 60 days to submit comments at Regulations.gov, (i.e., no later than May 6, 2024).
Some Background
The Agencies’ announcement and issuance of the RFI come against the backdrop of recent enforcement activity by the FTC and state attorney generals in the areas highlighted in the RFI.
Most notably, and as reported in our September 22, 2023 post and in Part 1 of this two-part series, the FTC last September filed suit against U.S. Anesthesia Partners (“USAP”) and the private equity firm Welsh, Carson, Anderson & Stowe alleging antitrust violations in connection with USAP’s purchase and operation of anesthesia practices in Texas. More recently, the Colorado Attorney General sued USAP-Colorado, a wholly-owned subsidiary of USAP under Colorado’s antitrust law making allegations similar to those made by the FTC in Texas, which resulted in a settlement under which USAP agreed to relinquish certain facility agreements it had put in place.
Even before this most recent enforcement activity and the Agencies’ issuance of the RFI, the FTC had repeatedly expressed its concern about private equity and its involvement in the consolidation of health care practices.
As an example, the FTC in August 2022 entered into a consent decree with the private equity firm, JAB Consumer Partners, pursuant to which the FTC imposed strict prior approval and prior notice requirements on JAB’s future acquisitions of specialty and emergency veterinary clinics as a condition of JAB’s proposed acquisition of a specialty and emergency veterinary services provider.
Recent State Enforcement Activities/Initiatives
There have been some recent antitrust enforcement activities and initiatives at the state level.
California Announces Restart of Enforcement of the Cartwright Act
The California Department of Justice recently announced its intention to reinvigorate criminal enforcement of the state’s Cartwright Act.
The announcement came from California Assistant Attorney General Paula Blizzard, chief of the state’s antitrust division, speaking on current criminal enforcement initiatives at the ABA’s annual National Institute on White Collar Crime.
The Cartwright Act is California’s antitrust law. It makes it illegal to restrict commerce, prevent competition or enter into agreements to lessen competition. The California Attorney General has not brought a criminal enforcement case under the Act in 25 years.
Violating the Cartwright Act can result in significant fines for corporations and individuals and jail time for individuals.
During her talk, Blizzard also noted the recently enacted California laws codifying existing prohibitions on noncompete provisions in employment agreements and on “no-poach” agreements between and among employers.
A Possible Antitrust Law for Pennsylvania
While most antitrust enforcement occurs at the federal level involving questions of federal antitrust law, all states other than Pennsylvania have their own state antitrust statutes enabling state regulators to pursue state causes of action in addition to federal ones.
On February 5, 2024, House Bill No. 2012, Session of 2024, The Pennsylvania Open Markets Act (“Act”), was introduced by 15 members of the General Assembly and referred to the House Judiciary Committee.
If enacted, the Act would make unlawful specified prohibited acts which include in summary:
- Contracts, combinations or conspiracies in restraint of trade;
- Monopolization or monopsonization, including attempting or conspiring to do the same;
- Specified acquisitions, whether direct or indirect, of the whole or any part of the equity interest or assets of a person if the effect of the acquisition is to substantially lessen competition or create a monopoly or monopsony; and
- Abusing market power in the conduct of any business or in a labor market or in the furnishing of services in Pennsylvania.
With regard to enforcement, the Act would grant the Pennsylvania Attorney General (“PA AG”) broad investigatory authority and empower the PA AG, among other things, to: obtain a declaratory judgment where the PA AG believes that a person has engaged in or is about to engage in a prohibited act; obtain an injunction; recover a civil penalty; obtain an order requiring divestiture of assets or otherwise restoring competition; and recover actual damages on behalf of the Commonwealth and its agencies that are injured on account of the violation.
In any action brought under the Act, the prevailing party would be entitled to recover treble damages sustained along with reasonable attorney’s fees and associated costs. Damages could be proven and assessed using a broad range of methodologies.
Further, any person, including any agent or officer of the person, who knowingly commits a prohibited act involving a restraint of trade or monopolization or monopsonization would be guilty of a felony in the third degree.
Very significantly, where a party is required to make a pre-merger notification and filing with the FTC and DOJ under the Hart-Scott- Rodino Act, the party would be required to provide the same notice and documentation to the PA AG at the time it is submitted to the FTC and DOJ.
In addition, where there is a material health care transaction that results in a “material change,” the parties to the transaction would be required to give the PA AG notice and provide certain information and materials to the PA AG not less than 120 days prior to the effective date even if the transaction is not reportable under the Hart-Scott-Rodino Act.
A material change would include a merger, acquisition or contracting affiliation between two or more health care facilities, health care facility systems or provider organizations (provided they did not previously have common ownership or a contracting affiliation).
Finally, the Act would seek to eliminate the standing issues that indirect purchasers of services have encountered when attempting to directly sue a service provider in cases in which there was an intermediary separating the service recipient from the service provider. See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (denying standing to an indirect purchaser under federal law); California v. ARC America Corp., 490 U.S. 93 (1989) (states are free to enact statutes that permit recovery by indirect purchasers for violations of state antitrust laws).
The Act provides that a person injured in the person’s business or property may bring suit regardless of whether the person dealt directly or indirectly with the defendant.
In the health care context, this might involve a patient seeking to directly sue a health system in which the patient received care on account of monetary damages suffered due the health system’s alleged antitrust violations. Absent the standing provision included in the Act, if the patient were an indirect purchaser of the health system’s services because the patient had purchased health insurance from a health plan which then directly contracted with the hospital, the patient might be denied standing to sue on account of being an indirect purchaser (i.e., only the health plan would have standing to sue).
A note: Notwithstanding the absence of an antitrust statute, the PA AG under federal antitrust laws has the ability to bring an action as parens patriae to protect the general economy and, exercising this authority, has reviewed hospital transactions and actively investigated conduct that might be anticompetitive under federal antitrust laws.
As explained by Chief Deputy Attorney General Tracey Wertz testifying at a public hearing before the House Health Committee last October, the PA AG has investigated dozens of hospital mergers over the years, in some cases concluding that the transaction posed no competitive risk or that one of the institutions was in such poor financial shape it had no choice other than to merge; in some cases advising hospitals it would sue to block their transactions, sometimes resulting in a suit; and in still other cases entering into consent decrees.
Constitutional Challenges to the FTC’s Administrative Structure, Process and Authority
As discussed in our prior posts dated April 17, 2023, and October 16, 2023, there have been and continue to be cases involving challenges to the constitutionality of the FTC’s administrative process and authority.
Among those cases is the U.S. Supreme Court’s decision in Axon Enterprise, Inc. v. Federal Trade Commission, Nos. 2186 and 211239, 598 U.S. ___ (2023) in which the Court held unanimously that Axon Enterprise, which had acquired a smaller competitor and as a result was a party to an FTC enforcement action, could challenge the constitutional authority of the FTC to proceed with that enforcement action by bringing its constitutional challenge directly in federal district court thereby bypassing the FTC’s ordinary administrative review process. (The Court did not consider the constitutional question, presumably deferring that to consideration in a future case.)
Most recently, in the case involving the FTC’s issuance of an administrative complaint and request in U.S. District Court for a preliminary injunction to block Novant Health’s acquisition of the two North Carolina hospitals from Community Health Systems (discussed in Part 1 of this series), Novant and Community Health have asserted, among their affirmative defenses, challenges to the constitutionality of the underlying administrative proceedings and, accordingly, their right to have those challenges adjudicated in federal court in accordance with Axon.
In response, the FTC filed a motion to strike that affirmative defense and Novant and Community Health made a filing requesting that the court deny the FTC’s motion to strike.
On April 4, the District Court denied the FTC’s motion, but at the same time instructed the parties that at the hearing on the FTC’s request for a preliminary injunction the court will not permit the parties to introduce evidence relating to the constitutional affirmative defense.
In the meantime, we await the Supreme Court’s decision in Jarkesy v. SEC, a case that was argued to the Court in November 2023 and raises in the context of the structure and operations of the SEC, among other issues, the type of constitutional questions raised in the Axon case.[1]
[1] FYI: SEC v. Cochran, No. 21-1239 (2023) was a companion case to Axon and involved a challenge to the fundamental structure of the SEC for constitutional purposes.
