Private equity watching Welsh Carson's defense strategy vs. FTC

As Welsh, Carson, Anderson & Stowe prepares its response to the FTC's suit filed Thursday, expect a two-pronged defense.

Why it matters: The FT op-ed from Lina Khan that immediately followed the disclosure indicates if this suit is successful, private equity needs to be prepared to defend rollups of every kind.

Catch up quick: The FTC alleges WCAS and its portfolio company U.S. Anesthesia Partners were involved in a "multi-year anticompetitive scheme" that hurt patient pocketbooks for the sake of profits.

• Specifically, it claims that WCAS and USAP bought up "nearly every large anesthesia practice in Texas" to form a dominant provider and then forged price-setting agreements with providers that had remained independent.
• The FTC also accuses the defendants of "striking a deal" to keep a major competitor out of Texas.
• WCAS said in an emailed statement that the case is "unwarranted" and that the complaint will "harm clinicians and patients."

What's next: Regulators will argue that WCAS is a valid defendant because it exerted significant control over USAP despite its minority equity position, including devising the very rollup "scheme" to which it objects.

• The FTC also believes that the Clayton Act allows it to challenge transactions in the aggregate.

The other side: Expect WCAS, which has retained separate counsel from USAP, to argue that FTC has no right to sue WCAS, given the firm has long been a minority equity owner since 2014.

• If WCAS loses on standing, it will argue that FTC hasn't pointed to a specific transaction that tipped USAP into monopoly territory — and that USAP's prices haven't increased faster than broader rates of medical services inflation.

Reality check: WCAS will have a tough time eschewing responsibility, given how private equity has proudly — and publicly — touted roll-ups as a primary driver of growth for physician business investments.

Of note: The FTC doesn't allege wrongdoing by WCAS or USAP in markets outside Texas.

Yes, but: USAP's other strongholds include Colorado — where an investigation from the Washington Post found USAP continued to raise prices for its services.

Context: WCAS announced the formation of U.S. Anesthesia Partners in 2012.

• Today, after acquiring at least 21 groups, USAP-Texas (Gulf Coast) reports that its providers perform more than 200,000 anesthetics annually in more than 30 medical facilities in the greater Houston area.

Between the lines: Under the No Surprises Act, which went into effect last year, anesthesiologists can't bill patients the difference between the insurer and the provider's rate.

• "So much of the industry's profitability was coming from these out-of-network balance bills that they submit to patients," one industry banker tells Axios.
• Investors have been increasingly disinterested in the sector as a result, with just four anesthesiology deals completed last year — which only buoys the power of providers like USAP.

The big picture: Pre-COVID, physician practice management investments — across specialties like dermatology, gastroenterology, and others — dominated health care dealmaking.

• Investors focused their rollup strategy on strengthening geographical concentration, having learned hard lessons from the physician investment boom-bust of the 1990s.
• That period was characterized by sponsors buying practices across the country and growing them at breakneck speed to take them public — only to see their valuations sink as integration proved challenging.

💭 Our thought bubble: Despite increased writing on the wall that both the Biden administration and regulators have private equity in their crosshairs, investors have remained largely untroubled.

The bottom line: If sponsors aren't rethinking their roll-up strategies, they may want to start.