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A red cross-shaped target on private equity's back

Illustration of a health plus with darts all around it, as if they've missed the target.

Illustration: Aïda Amer/Axios

The federal government is sharpening its ax when it comes to private equity ownership in health care.

Why it matters: Critics have been beating the drum for years, but this feels more real, experts say.

What they're saying: "I think private equity really has to recognize that there's a target on their back," says Austin Ownbey, competition counsel for Foley Hoag.

  • "Maybe two years ago, I would have said there's a lot of rhetoric and there's not a lot of action," he says.

Driving the news: In December 2023, the Biden administration announced initiatives designed to "promote competition" in health care, pointedly calling out "profiteering" by PE and big business.

  • That followed a bipartisan Senate Budget Committee investigation into private equity ownership of hospital systems.
  • Meanwhile, the FTC filed a lawsuit last September against Welsh Carson Anderson & Stowe (WCAS) for anticompetitive practices in Texas via portfolio company U.S. Anesthesia Partners.

Zoom in: For Jake Siewert, head of public policy and political risk at Warburg Pincus, today's regulatory environment is prompting two main questions.

  • "Who has an ability to buy this without an extraordinarily complicated regulatory review?" Siewert asks. "And do they have the ability to stay the course on a longer regulatory review process?"

Be smart: The added administrative burden of a merger review could translate to upwards of 1,000 hours of billable attorney time — on top of existing post-merger work, says Barnes & Thornburg partner Paul Olszowka.

  • To mitigate this, PE is trying to do more up-front work on antitrust risk, hiring economic consultants for diligence before pursuing a transaction, he says.

Yes, but: The sponsor world is still trying to navigate tension between size thresholds for HSR reviews (deals worth $111 million-plus) and the potential for smaller roll-ups to eventually create an anticompetitive force in a specific region.

  • While the FTC's complaint with USAP is rooted in allegations of illegal misconduct, chair Lina Khan focused some critiques on the company's stronghold in Texas. She also promised to take a critical eye to "serial acquisitions, roll-ups and other stealth consolidation schemes" that could undermine competition.
  • "Let's say you're doing a small position, a $30 million transaction — do you start bringing in lawyers early on because it might get challenged down the road?" says Olszowka.

Between the lines: "I would say, do not assume because it's a smaller transaction that it would never get attention from government enforcers," says Foley & Lardner partner Diane Hazel. "That's no longer the world we live in."

  • Private equity-driven deals with the thesis of rolling up a concentrated geography may be more difficult to complete, Siewert says.
  • "The question just is, are you going to take a situation to where you're rolling up all of the competitors at a particular market, and then you're exposing yourself to a merger review where it's just going to get frustrated?" Hazel says.

Meanwhile, sponsors should be assessing compliance and best practices around their portfolios, says Hazel.

  • "You really shouldn't have a director ... of one portfolio company sitting on another one that's potentially a competitor," she says.

What's next: Antitrust regulators will continue to be emboldened, no matter who wins in November's federal election, much to the chagrin of dealmakers.

  • Investors may stay away from health businesses with headline risk — think home health, autism and other providers that care for vulnerable populations — says PitchBook analyst Rebecca Springer.
  • In the meantime, the risk "may change the pricing, and it may change the universe of buyers, but the big strategics have made the decision that they're going to get into this business," Siewert says.

The intrigue: A vague footnote in the 2023 merger guidelines seems to connect LBOs with anti-competition.

  • "Typically, a merger eliminates a competitor by bringing two market participants under common control. Similar concerns arise if the merger threatens to cause the exit of a current market participant, such as a leveraged buyout that puts the target firm at significant risk of failure," it reads.
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