FTC’s ‘Wrath of Kahn’ lawsuit worries healthcare bankers and private equity firms

News Analysis 17 October

FTC’s ‘Wrath of Kahn’ lawsuit worries healthcare bankers and private equity firms

The US Federal Trade Commission’s decision to sue a private equity-backed doctor group last month over its rollup strategy is causing angst among industry executives, some said at a forum last week in New York.  

The FTC on 21 September sued Texas-based US Anesthesia Partners and its private equity backer, Welsh Carson Anderson & Stowe for what it said was a “decade-long anticompetitive acquisition spree to suppress competition and unfairly drive up prices for anesthesiology services,” the antitrust agency said in a press release. Both groups denied the charges and said they would vigorously contest them.  

The FTC’s unprecedented move, dubbed by one industry executive as “The Wrath of Kahn” after FTC Chair Lina Kahn, could challenge a key buy-and-build strategy that has been common among doctor groups of all kinds in recent years, bankers and private equity executives said at McDermott Will & Emery’s annual Healthcare Private Equity gathering on 13 October.  

“It’s going to put a chill on activity,” said one private equity executive panelist whose firm has backed doctor group rollup deals. “The premise of the platform may be illegal.”   

While the lawsuit plays out in the Federal District Court in Southern Texas, industry executives are worried that new regulatory scrutiny of rollups over claims that they are anticompetitive represents a new frontier for the FTC, along with newly enacted rules by state regulators.   

Around a dozen states now require varying degrees of disclosure prior to the completion of deals, one executive pointed out. New York State, for instance, enacted a law on 3 May requiring certain healthcare entities to disclose “material transactions” within 30 days of closing and open them to public comment and assessment under a “health equity rubric,” according to legal experts.

“What is really keeping me up at night is this state (merger disclosure) activity,” said one private equity executive who, like many of the panelists, does deals on a national scale. Federal M&A regulations typically take months or years to be enacted under federal rule transparency requirements, but “state regulations can happen overnight.”  

“We’re living in a much more fraught regulatory environment,” agreed a third private equity executive on a panel discussion about “heightened state and federal scrutiny” for healthcare transactions. Under conference rules, none of the executives on any panel could be publicly named.  

New state and federal regulations are but one potential impediment to deal activity among private equity executives. Others are financing challenges due to higher interest rates, a lackluster exit market for IPOs, ongoing economic and geopolitical uncertainties and a valuation “mismatch” among buyers and sellers, industry executives said in the forum.  

However, some panelists expressed optimism that the sluggish deal market of the past two years will make a comeback in 2024, due to pent-up limited partner demands for liquidity and a desire by sellers to get deals done, despite financing and other impediments.  

“There is a real backlog of deals and valuations are starting to moderate,” said one investment banker. “I think (deal activity) will come roaring back because everyone is waiting for the skies to open.” The banker, who represents a leading middle-market bank, said it is seeing “rising offers” to participate in bake-offs, where advisory mandates are assigned.  

“Financing is improving and there is quite a bit of momentum,” added another healthcare banker on “The Investment Banker’s Perspective” panel. The cost of financing deals, a leading impediment to deal execution, “is still high, but it is headed in the right direction.”   

Top areas of healthcare deal activity in the coming year are expected to be in pharma services, behavioral health, physician practice management, value-based care models, home health and cash-pay businesses, such as medical aesthetics and fertility services, which aren’t subject to government and private insurance reimbursement, panelists said.

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