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"Cha-Ching!" Lina Khan Attacks Private Equity in Health Care
FTC Chair Lina Khan is getting more aggressive, targeting individual Amazon executives, and seeking to stop a brazen scheme to monopolize health care in Texas. Private equity is big mad.
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Today I’m writing about how Lina Khan just filed a monopolization claim against a private equity firm for taking over the anesthesiology industry. This case is not a one-off and indicates that finally, someone in the Federal government - and not just outgunned state attorneys general - is pushing back against predatory finance in health care. And the industry knows it. “Well this is terrifying” and “this will cause shockwaves” were two of the more fun comments I saw on Twitter from private equity types.
First, I want to give you a preview of some coming writing. There’s a lot of exciting stuff going on in the Google case, including the attempt to keep the trial hidden. The ability of BIG to put someone in the courtroom is surprisingly meaningful; Wired magazine just gave our Big Tech on Trial project a wonderful profile. There’s also bureaucratic knife-fighting around the Antitrust Division, as well as new FTC nominees indicating that Republicans are getting increasingly serious about antitrust. I’ll have a summary of those stories in the next few days.
But this story on health care and private equity is so good.
That’s the phrase that an executive at private equity-owned financial firm U.S. Anesthesia Partners (USAP) used after acquiring yet another Texas anesthesiology practice, with the intent of hiking prices on Texas patients. And “Cha-ching!” was the right way to put it, since the excess profits amounted to tens, or even hundreds of millions of dollars, in just one medical specialty, in just one state.
But the new quote should be ‘uh oh.’ Because today, the Federal Trade Commission, led by Chair Lina Khan, filed suit against USAP for monopolization, as well as its owner, New York City-based private equity firm Welsh Carson, which from its offices on Park Avenue engineered the entire strategy of gouging patients in Texas. It’s an important suit, for reasons I’ll go into, and it also reflects a more aggressive antitrust enforcement regime, and skepticism of private equity in health care.
It’s the Prices, Stupid
America spends at least twice as much on health care per capita as nearly every other wealthy country, and gets much less for it in terms of doctor visits, hospital capacity, and life expectancy. Why? Where is all the money going?
As one medical journal article put it years ago, “it’s the prices, stupid.” In every area of health care - hospitals, pharmaceutical distribution, ambulances, emergency physician services, insurance - there has been massive consolidation, which increases prices and lowers the amount of care delivered. Private equity, a financial model focused on ruthless extraction, came into health care in a big way after the financial crisis of 2008, and it super-sized this trend. PE funds look specifically for areas where they can acquire pricing power, and then they squeeze.
As the New York Times noted:
A recent study from researchers at the Petris Center at the University of California, Berkeley, and the Washington Center for Equitable Growth, a progressive think tank in Washington, found that private equity-funded consolidation had led to price increases in gastroenterology, dermatology and other medical specialties.
What Welsh Carson did is ripped from that playbook. And the FTC’s suit against it, similarly, calls out that playbook as wholly illegal. The complaint is good reading, chock full of incriminating emails.
The story starts in 2012, when an anesthesiologist executive named John Rizzo emailed a Welsh Carson partner, D. Scott Mackesy, observing that the market for such services in Texas was fragmented, with firms competing against each other for hospital and insurance business based on lower prices and better quality.
A competitive and healthy market, to Rizzo, was bad. And so he proposed a monopolization strategy where the PE firm would buy up a whole bunch of clinics in specific cities, like Dallas and Houston. The idea was, as Welsh Carson partner Brian Regan put it, to “consolidate practices with high market share in a few key markets,” and then use “leverage with commercial payors” to raise prices for anesthesia care.
“Spoil the Entire Market.”
And that’s what they did, hiring Dean and Company, a consulting firm, to identify anesthesia practices throughout the state they could purchase. Rizzo and Regan brought in the CEO of an existing Welsh Carson roll-up, Kirsten Bratberg of Pediatrix, to run the new venture. Bratburg had spent eight years at Pediatrix rolling up over 100 neonatology practices, which was similar to anesthesiology, because it’s a medical practice that sells to hospitals. Though Rizzo and Bratburg would likely argue otherwise, they are specialists, not in medicine, but in the financialization of medicine.
The FTC noted what happened next.
Since its creation, USAP has acquired more than a dozen anesthesiology practices in Texas. As it bought each one, the FTC says, USAP raised the acquired group’s rates to USAP’s higher rates—resulting in a substantial mark-up for the same doctors as before. This roll-up strategy has made it the dominant provider of anesthesia services in Texas and in many of the state’s metropolitan areas, including Houston and Dallas. USAP’s size and prices now dwarf those of its rivals.
Their scheme began buying up practices in Houston, where Welsh Carson acquired Greater Houston Anesthesiology, which billed itself as “20 times the size of the second largest local competitor.” The doctors weren’t innocent here, as Welsh Carson explicitly pitched them on the roll-up strategy. After securing the purchase, the private equity firm renamed the company U.S. Anesthesia Partners, and crafted a strategic plan in 2013 explaining that USAP would “Roll Up Houston” through a series of “tuck-in acquisitions.” For the next four years, USAP bought several practices, and raised prices after each purchase.
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In 2017, USAP bought MetroWest, a significant rival with relationships at Memorial Hermann Katy Hospital and Memorial City Hospital. The two practices had been in competition, but that changed after the acquisition, and reimbursement rates went significantly higher. Blue Cross noted that the the firm “[a]ccounted for . . . 69% of cases and 83% of cost in Houston” and that it “leverag[ed] market share” into getting double what others Houston anesthesiologists got.
But this acquisition was about more than just price hikes, as a potential competitor was thinking about buying MetroWest and entering the industry in Houston. A USAP executive told the CEO that large player entering into Houston would “spoil the entire market,” so USAP encouraged MetroWest to sell out and “preserve the protected market” both enjoyed.
Welsh Carson and USAP engaged in the same monopolization scheme throughout Texas, but they tacked on two additional tactics, both of which are variants of price-fixing. First, they cut deals with independent anesthesia groups at key hospitals in Houston and Dallas to work together to charge higher prices. Second, according to the FTC, they “secured a promise from another large anesthesia services provider to stay out of USAP’s territory,” which is illegal market allocation.
The scheme cost Texans tens of millions of dollars, if not much more. Welsh Carson got $350 million of dividends between 2012 and 2020, and physicians who sold their practices likely reaped significant profits as well. Indeed, one insurance executive noted the goal of USAP’s acquisition strategy was to take its massively inflated prices - far higher than anyone else in the industry - “and then peanut butter spread that across the entire state of Texas.”
Consolidation is Contagious
So that’s the story. USAP violated every single antitrust law out there - monopolization, conspiracy to monopolize, lessening competition, tend to create a monopoly, agreements in restraints of trade, unfair methods of competition. The emails are pretty damning, and the complaint is persuasive. But what I found most interesting, and important, is that the consolidation of health care, even within a single PE firm, is contagious.
As I mentioned above, to run the scheme, Welsh Carson hired the CEO of Pediatrix, who had experience consolidating neonatology practices. And then, in the middle of this roll-up, Welsh Carson “entered the emergency medicine market and engaged in a similar roll-up strategy to the one it deployed with USAP.” In 2017, it entered yet another market in radiology, noting that “[G]iven our success to date with USAP and [in emergency medicine], we would like to . . . deploy a similar strategy to consolidate the market . . . .”
As the FTC continued, “U.S. Radiology Specialists, which describes itself as ‘founded jointly’ by Welsh Carson and ‘one of the nation’s largest’ radiology groups, covers over 80 hospitals in more than a dozen states. Two of its directors are affiliated with Welsh Carson, and one of them is Brian Regan—the same partner who led Welsh Carson’s investment and involvement in USAP.”
The importance of this suit is not lost on anyone in private equity, or in the enforcement world. The language used by Welsh Carson is used in every single McKinsey deck, every single investment bank pitch deck, in every private equity roll-up from 2012-2021, as enforcers looked the other way, or even blessed the deals overtly.
Indeed, to underline the point, Khan wrote an oped in the Financial Times explaining the importance of the case, writing that “what happened in Texas is happening across the US. In recent years, private equity firms have made serial acquisitions across markets — from nursing homes and apartment buildings to emergency medicine clinics and opioid treatment centres.” She noted a three-fold strategy to address these kinds of predatory actions. Everything she described should be familiar to BIG readers.
First, there’s a new filing form, which I wrote about last month in my piece “Government Stupidity is By Design.” This change allows enforcers to see serial acquisitions, including roll-ups where some of the acquisitions are so small they fall under the reportable threshold. Second, Khan cited the new merger guidelines, which help explain how the enforcers see illegal conduct, including private equity roll-ups designed to hike prices. And finally, Khan is fully enforcing the mandate to block unfair methods of competition, which has been limited by FTC discretion for far too long.
Losers and Radicals
Of course, there’s another side to the story, that of the firms themselves. Their response is as you’d expect.
“The F.T.C.’s civil complaint is based on flawed legal theories and a lack of medical understanding about anesthesia, our patient-oriented business model and our level of care for patients in Texas,” said Dr. Derek Schoppa, a Texas physician and board member of U.S. Anesthesia Partners, in a statement.
Amy Stevens, a spokeswoman for Welsh Carson, said the private equity firm was “disappointed” by the suit. “Unfortunately, this is consistent with the series of recent lawsuits that the F.T.C. has filed using litigation to pursue radical policy theories,” she said in a statement. “We are confident we will prevail.”
At this point, despite her rational approach to policy, or rather because of it, Khan is absolutely loathed on Wall Street. And actions like this - systemic work to change market-shaping incentives instead of performative talk tough but act weak bullshit - are why. For instance, earlier this week, the FTC unveiled charges against specific Amazon executives - Neil Lindsay, Russell Grandinetti, and Jamil Ghani - who orchestrated deceptive practices surrounding Amazon Prime. The penalties against individuals can be significant; these men can be fined, or thrown out of the industry, if they are found guilty of willfully making decisions to deceive customers.
Going after large firms is unusual, but going after the actual decision-makers is, well, simply not done. The FTC has, or I should say had, an unwritten rule not to enforce laws against individuals unless they are powerless diet supplement scammers. Big powerful Amazon executives, they must be treated with respect, especially since they are often represented by former FTC officials now in private practice. Khan broke the unwritten rule, in which enforcers are not supposed to go after the powerful by name for breaking the law.
The same dynamic is at work in this private equity case. If this suit is successful, it means the party is over for doing roll-ups and raising prices, which is easy money for a lot of Yale graduates like Brian Regan. And so the response - the FTC are a bunch of losers and radicals - isn’t a surprise. Indeed, given the whole ecosystem of deal-makers that thrive on these kinds of deals, it would be weird if Khan were anything but despised.
But this rage is the price of lowering health care costs and restoring some sense of sanity to health care, and frankly, business, in America. Because another way of asking the question, “Why is health care so expensive in America?” is to ask Brian Regan how many Teslas he truly needs.
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