The healthcare sector is witnessing a trend towards consolidation, but it's not just big hospital mergers making headlines. Private equity is playing a pivotal role in driving smaller consolidations within healthcare provider services.

In this episode of The Corner Series, McGuireWoods’ partner, Geoff Cockrell is joined by his colleague Holden Brooks, a partner in the antitrust department at McGuireWoods, to discuss the the role of private equity in the evolving landscape of antitrust enforcement.

Tune in as Geoff and Holden discuss the intensifying scrutiny of PE-backed healthcare transactions by antitrust regulators, the challenges for investors in this evolving landscape, and the expected changes in antitrust enforcement in 2024, including new regulations and guidelines.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods' partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at The Corner Series, we bring together deal makers and thought leaders at the intersection of healthcare and private equity. In our Corner Series, we have different corners. Some of them focus on bankers, some of them focus on private equity investors themselves.

Today, we're going to have a professor's corner, which we delve into some of the more technical aspects, and I'm thrilled to be joined by my partner Holden Brooks, partner in our antitrust department. And Holden and I work together on lots of healthcare private equity transactions, and she lives in the evolving landscape of antitrust enforcement, which has been a hot topic in healthcare provider services recently.

Holden, if you could introduce yourself and then we can jump into some very timely discussions of how to think about antitrust risk, how to mitigate antitrust risk, and just generally how to think about it.

Sure. Well, it's great to be with you, Geoff. I really love having these conversations right now. It's just a super interesting time in history, and I don't know about you, but as an antitrust partner in our Chicago office, I have just been so heartened by the really sincere interests that our clients and other stakeholders in this area have shown in understanding what's going on and being really thoughtful about how to approach these developments.

I've been spending a lot of time talking to people in all corners, including the financing space, et cetera, who really do recognize how interesting and really different the developments are that we've been experiencing just in the past year or so. And it's a really good time to have a nice conversation about where we are and where we think we're heading in 2024. So I'm very happy to be here.

So Holden, antitrust concerns have always been present in the M&A and consolidation environment. What's different now for PE more broadly and then healthcare provider services in particular?

All right, I think we have to back up. I'm going to say let's back up 15 years or so, maybe 20 years. There's always been a recognition at the state enforcer level, on the federal enforcer level that antitrust is a tool, an law enforcement tool, that you can use to drive real change in society. That it's a high value place to direct your enforcement resources. That's been the consistent perception over time.

And you see that there have been periods of time where the enforcers have really been focused on big hospital mergers and maybe health insurance company consolidation, et cetera, has been the hot thing at various times. But I would say that in the last year, year and a half, we have really seen the spotlight focus on what the regulators call consolidation, a lower level of the market, at this physician practice or clinic level of the market. And also, I will just say vertical consolidation. It's consolidation not just of those providers within one organization at that level, but also vertical consolidation where health systems are acquiring practices and clinics as well.

So I think the concern has been that where we historically had a lot of diffuse competition coming from independent physician groups and clinics and physician owned hospitals, et cetera, that that environment is really changing, that those providers are coming together, that those providers are joining the health systems, and that there is a concern about what's happening to the benefit that used to flow, again, this is a perception, that used to flow from the competition among all of those providers.

And what we've seen for going on two years now are some very express statements from the federal and state regulators saying, "We recognize that one of the forces that is facilitating and accelerating the consolidation is private equity. And private equity, we have our eyes on you. We are skeptical of your motivations. We are tracking very carefully through empirical analysis, et cetera, what is happening to access and what's happening to quality as a result of this consolidation. And we're putting you on notice that we will be taking a hard look at the transactions that are resulting in this kind of consolidation and the strategies that are driving that consolidation."

Now, Geoff, you know that the other really important place to focus on now is not just at the federal enforcement level for big deals that are HSR reportable, et cetera, but the other really important place to be focused on is the state level, because more and more state legislators are heeding the call of people who are consumer advocates or nonprofit health policy institutions, et cetera, who have really raised an alarm about this consolidation and have suggested that state legislatures enact laws that empower either their health authority or their attorney general to track and investigate and ultimately approve or approve with conditions or block transactions that are perceived as hurting competition and also quality and also cost and access, et cetera.

So we have seen, as you know, a really major proliferation of states that are looking at these smaller transactions that would never before have been subject to regulatory review. And what's really motivating them, again, this is in statement by the people who have enacted these laws, they're really concerned and focused on what's going on in the PE space.

One of the areas where when I'm talking with clients that I try to focus them on is the idea that you mentioned access and quality and cost. I've never heard a private equity fund say that their thesis for making an investment is to have deteriorating access, to have deteriorating quality and increasing costs. In fact, it's quite the opposite.

That for an investment to be perceived as one that is interesting to them, it needs to be improving the experience of stakeholders across, whether that is providers, whether that is patients, whether that is payers, and any good private equity investment is looking to improve all of those. There can be some lift in cost as you get some scale. But one of the things that I've encouraged private equity folks to do is to be more thoughtful on the front end of a transaction of both understanding clearly how your investment thesis connects to these ideas.

And then, and I don't mean this in a cynical way, making sure that the way that you talk about it on your emails and how you present it to providers is consistent with the idea that it's a more holistic investment thesis, because the day's going to come where those emails are going to be produced to a regulator and you want it to tell a correct story and not a glib one.

100%. And I think that one thing that we're dealing with right now is some asymmetry of knowledge in a way on both sides. I mean, sometimes I wish that our... And I think we're trying to make it our mission to make people aware of how they need to be thinking from the pipeline stage, but certainly through the stages of a deal where you're producing documents about the deal rationale.

I mean, even in the preambles of your LOI and your agreements and your investment committee presentations, et cetera, really need to be thinking about the importance of frontloading, exactly what you're saying, frontloading, what I think people have always just perceived as maybe understood or not central to the hardcore business case, but really still very important aspects of the deal. How is this going to improve quality? And I really want to encourage people to think about going another level just beyond saying that. I think that we know our clients can articulate the mechanism that actually improves the quality, right?

They can articulate this process of once you are a practice that comes into a scaled platform and you have the benefit of more shared resources, best practices, visibility into what other high quality practices are doing, some administrative guidance, et cetera, that lifts quality, going one level deeper other than just saying that once people join our platform, they're able to focus on patient care and quality goes up, I would encourage people to really drill down a little bit more and describe in their documents for the benefit, again, of a regulator who, as you say, may eventually be reviewing this for exactly how that works.

What is the recipe for improving care delivery? And step-by-step how does that work? There's an asymmetry where I feel like sometimes folks who are on the M&A side are not aware of the framework within which the regulators are going to be reviewing these deals and reviewing their business models. But there's also a tremendous asymmetry on the regulator side. I don't think all the time that they have the knowledge that not all PE backed platforms are pursuing the same type of strategy or engaged in the same conduct.

And I think they also need to have an open mind looking at each transaction, looking at each organization independently to understand what motivates them. As we've discussed, there are some really amazing examples of people doing things to address care deserts in rural areas, in urban areas where the public system is not coming to the rescue and the private sector has identified a need and is filling the need.

I think there's a story to be told by these platforms about how they are shifting care away from high cost ER care environments into closer to home, lower cost, higher quality sites of care. So I think you're absolutely correct. Think hard about who's going to be reading your documents and what is the true, credible, pro-competitive, pro-patient story that you have to tell.

There are some dynamics that to deliver those benefits to either the patient experience or even cost, it requires scale. An area that comes to mind immediately is if a platform is intending to do value-based contracting, either with commercial payers or participating in federal programs, there's a certain amount of scale that is required for that to be even conceivable. It requires investments in technology. It requires a certain scale so that the risk of risk-based contracting can be spread out over a large enough number.

So there's numerous dynamics where scale is a necessary component to some of the directions that we're wanting to go and how care is delivered and how it's paid for. So there's a lot of aspects of this, to your point, that I think the advice to a private equity fund is to think more expansively, think more about who the audience for some of these things are.

And again, I don't mean that in a cynical sense, but just recognize that somebody's going to be reading these things with an eye towards particular aspects, and you're going to want the more full picture of how you think that a particular investment is going to benefit those areas. You need to be more mindful of that. Turning it a little bit, Holden, another area where I think that private equity funds and platforms should be more mindful is in the construct of, well, what do you do with market power when you have it?

It's always been a feature of larger organizations that do have market power that they need to be mindful that that power is not deployed in a non-competitive way. And so as platforms get scale, another thing that they need to be thinking about is if you've acquired market power, you can't pull that all together and then wield it like a cudgel against either health systems or payers because wielding market power like a cudgel is going to get you in trouble in any industry.

And some of the leading examples of enforcement have some of that flavor of people being abusive with market power once they have it. How do you think about that topic?

I mean, I think that it is always smart for any provider, whether you're the massive health system, whether you're a independent multi-specialty group, whether you're part of a PE backed platform, everyone needs to educate their managed care teams about how to read the room with payers, right?

I feel like there is a huge return on investment in making sure that the folks who are going to the table to negotiate with payers and coming up with payer negotiating strategies and general revenue cycle strategies understand what your footprint is in the market, what your role is in the market, and how your tactics and your proposals are going to be received by the payers. Just generally understanding how to read the room.

Because it is true that as consolidation has occurred in various areas and levels of the market, et cetera, the perception that, oh, the insurance companies are so huge, they have revenues that are many, many, many times greater than ours. We're the little guy, even if we're a fairly sizable practice. How in the world can people be complaining about what we are doing at the negotiating table? That becomes a little less credible, at least from an antitrust enforcers perspective, when you do have a 30%, 40% or greater share of the market within a particular service line.

And so there may be organizations that always thought of themselves as the David against the Goliath, who now need to really reassess what their market position is. And as you say, it's not wrong to have a big market position. The key is to not use that market position in a way that harms competition. So we have seen a resurgence in interest at the Federal Trade Commission and the Department of Justice to focus on monopolization as a cause of action and potentially something that can give rise to criminal enforcement.

And it's not only that market position, it's are you doing something that will exclude other competitors in the environment? Are you doing something that is going to hamper them to such a degree that they will exit the market or be a greatly diminished competitor to you, et cetera? It's the strategies that harm competition that are all enabled by the big market position or the perceived significant market position that are problematic.

So I do think that there is a little bit of a blind spot sometimes on the provider side, particularly where it's a community-based practice organization or a platform or something that the insurers are so huge and so powerful that no one's going to scrutinize what you're doing, and that's just not the case.

One last topic for us before we break I think is another aspect that folks should think about is that antitrust enforcement is kind of like a volume knob that gets turned up and turned down, and it has ebbs and flows with some of the cues coming from the administration at a conservative administration tends to dial the enforcement down. A more progressive administration tends to dial that up.

And right now it's probably dialed up pretty high. It's also something that changes over time. How do you think about the volume moving from administration to administration and how much of that is political swings versus a title direction?

I think that even under the Trump administration, there was a great deal of vigorous antitrust enforcement. I don't think that people saw that there was a huge backing off of antitrust enforcement, particularly in healthcare. There were certainly a number of transactions that were abandoned because there was a challenge that was brought, et cetera, et cetera. So it's not like they backed off entirely, but it is true that we are in a really unique moment in antitrust enforcement history.

In 2021, President Biden issued an executive order which basically said, hey, we need a whole government approach to antitrust. Antitrust is a very vital tool to accomplish what we want to accomplish, to ensure that there is fairness in our markets and vigorous competition, et cetera. And he appointed people who took that mandate very seriously and who have really shaken things up in a number of ways. And I'll just list a few of the top very important concrete ways that the leadership at the FTC and the DOJ have really changed the direction of antitrust enforcement.

Number one, we see them unearthing laws that we have not seen them use for a couple of generations. They are pursuing board interlocks, for instance, where there was no real enforcement of those board interlocks for a very long time. We are seeing them pursue monopolization as a criminal offense, as I mentioned. Again, a law that's always been on the books, it could have been used by that, but it's been revived in that way.

Looking at the Robinson-Patman Act, price discrimination, something that was frankly a law that was almost wiped off the books within the last 10 or 15 years that is now seeing a resurgence in enforcement. And on the transactional side, I think there are really two big developments or three big developments that I think people should watch in 2024. There are some massive changes that are set up for 2024. One of them is the non-compete ban, as it's called, that the FTC proposed last year.

Now, we understand that this got a lot of attention, because non-competes are really core terms in a lot of transactional agreements, et cetera. That we understand is going to be finalized sometime probably in the first half of 2024. That was a fairly radical idea to come up with this broad proposed rule that was going to affect all employer contracts everywhere. So watch for that. Second development is the merger guidelines that were proposed over the summer. Those are intended to give a picture of what federal antitrust enforcement looks like today.

It's not changing the law. It's not really putting people on notice of what is going to happen in the future. It's basically the FTC and DOJ saying, hey, we want to let you know how we look at mergers today. And one of the things that those merger guidelines say, they have not been finalized yet, is that they will take a look at serial acquisitions. This is a really novel concept to appear in the merger guidelines.

We have not seen it before, but it's of particular interest to private equity obviously, because it shows that a roll up strategy, a strategy of serial acquisitions in the same service line, same area, et cetera, is going to get special attention and is getting special attention. And then the third thing is the new Hart-Scott-Rodino rules that are being finalized, again, sometime probably in the first half of 2024.

These are going to radically change the amount of information and the type of information that anyone filing Hart-Scott-Rodino with the Federal Trade Commission and DOJ is going to have to disclose upfront. There's going to be, again, a huge focus on information that reveals a serial acquisition strategy and deals that have happened in the past, not just the deal that is on the table, but they want to understand how the deal that's on the table and under review fits into a broader strategy.

That's going to be of particular importance. And then the one that I think is really going to, if again it's finalized and adopted, that's really going to create a shift in how we think about document creation and how deal rationale is reflected in our deal documents is the fact that in the HSR form itself, you'll have to articulate why you're doing the deal.

And if you are going to say, "We are doing this to improve quality, improve the care delivery environment, expand access," et cetera, you're going to have to tie all those statements back to real-time normal course documents, and you're going to have to certify the whole thing under penalty of perjury. So again, this is why it's a great time to be having these conversations with people so that they understand this lens and this framework that the regulators are using now and certainly going to be using in 2024 and beyond when they're looking at healthcare transactions.

And then just one little footnote, big footnote, is that Illinois and California in 2024 are also going to be added to the list of these states that are going to require a pre-close filing and review period for healthcare transactions. So I think that's going to be another big sea change in terms of how we think about our preparing for a regulatory process in healthcare transactions.

So Holden, I think we'll call it a wrap there. Three big takeaways for private equity investors is have a more fulsome thesis and then take care about how you talk about that thesis. Number two, take care of what you do with market power when you have it. And the third is this area is evolving and you're going to have to keep paying attention.

One last little bit is Holden and I do take this show on the road. So if anyone would like to chat with us a little bit more about this topic or have a more in-depth presentation with different constituencies on a platform or at a private equity fund, we're always happy to do that. But Holden, thanks for joining me. It's always a ton of fun to chat with you.

Thank you so much, Geoff.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment.

The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.