The Lone Star Standoff: FTC Takes on Anesthesia Monopoly in Texas

Under the leadership of Chair Lina Khan, the Federal Trade Commission (“FTC”) has taken an “aggressive” approach on challenging monopolies, especially in the healthcare industry. (Caitlin McCabe et al., WSJ). Echoing the FTC's recent approach to antitrust enforcement, the agency launched a civil suit on September 21, 2023, against U.S. Anesthesia Partners, Inc. (“USAP”) and private equity (“PE”) firm Welsh, Carson, Anderson & Stowe (“Welsh Carson”). (Megan McArdle, Washington Post; FTC). The FTC alleges that USAP and Welsh Carson engaged in an “anticompetitive scheme to consolidate anesthesiology practices in Texas.” Id. This lawsuit has ignited a firestorm of controversy, raising questions about fair competition and the future of the healthcare industry.

The FTC’s complaint alleges USAP and Welsh Carson have monopolized the anesthesiology market in Texas by strategically acquiring smaller providers and driving up the price of anesthesia services. (Dave Michaels, WSJ). This commonly used PE strategy, referred to as a “roll-up” scheme, involves PE firms, backed by large industry competitors, buying out smaller businesses in a fragmented industry to obtain a dominant market share. (Andrew Lacy et al., Goodwin Law). From an antitrust standpoint, this strategy raises huge concern because PE backed companies are retaining significant market control, especially in local markets. (Dave Michaels, WSJ). Roll-up schemes have effectively created monopolies across a variety of industries, resulting in higher costs and negative consequences for “consumers, workers, and communities.” (Lina Khan, Financial Times).

The FTC further alleges that USAP and Welsh Carson led a three-pronged consolidation strategy to establish a monopoly in Texas. (FTC). The first prong is the company’s roll-up scheme, which resulted in USAP becoming Texas’s most dominant anesthesia provider. (Mike Scarcella, Reuters). The second prong involves USAP’s continued increase of anesthesia prices through price-setting agreements with providers that were not acquired by USAP. (FTC). These agreements allegedly raised the reimbursement rate for non-USAP providers so that their rates were similar to those of USAP. Id. The final prong alleges a market allocation agreement between USAP and a significant competitor, which prevented the competitor from conducting business in USAP’s territory. Id. Through negotiations by a Welsh Carson partner, this deal arguably neutralized the competition by “sidelining” a significant competitor and further ensured USAP’s domination in the Texas anesthesiology market. Id.

The FTC oversees mergers to ensure that they do not create harmful monopolies and disrupt fair competition in the marketplace. (Gretchen Morgenson, NBC News). The FTC’s complaint alleges that USAP and Welsh Carson’s conduct violated the FTC Act, the Sherman Act, and the Clayton Act, which relate to unfair trade practices, monopolization, and unlawful reduction of competition, respectively. (FTC). In summation, the FTC’s complaint alleges that USAP and Welsh Carson engaged in “unlawful monopolization, unlawful acquisitions, a conspiracy to monopolize, unfair methods of competition, and unlawful restraints of trade.” Id.

The New York-based PE firm, Welsh Carson, is implicated in this suit because the firm founded USAP in 2012. (Dave Michaels, WSJ). Although Welsh Carson’s ownership in USAP has decreased over the years, the FTC is alleging that the firm continues to play an active role in USAP’s corporate decision making in acquiring smaller practices (FTC). The decision to take on this healthcare specialty was likely influenced by the market's fragmentation and the prevalence of smaller anesthesia providers. (Gretchen Morgenson, NBC News). With approximately $31 billion in assets, Welsh Carson had the capacity to execute the roll-up. (Leah Nylen, Dallas Morning News). As a result, USAP became the biggest provider of anesthesia services in Texas, enabling the company to charge double the state’s median reimbursement rate. (Dave Michaels, WSJ; FTC). 

USAP’s and Welsh Carson’s corporate strategy and conduct over the years has resulted in “egregious price increases for patients.” (Gretchen Morgenson, NBC News). The FTC estimates that USAP's monopoly has cost Texans an additional “tens of millions” each year. Id. A recent study found that acquired medical specialty practices (including dermatology, gastroenterology, and ophthalmology) charge an average of 20% more per patient claim than similar independent practices. (Yashaswini Singh et al., JAMA Network). With acquired anesthesiology practices, patient costs rose more than 26%. (Peter Whoriskey, Washington Post).

In response to the FTC’s lawsuit, USAP and Welsh Carson representatives have shared brief comments on the matter. (Peter Whoriskey, Washington Post). Derek Schoppa, a USAP physician and board member, has stated that the lawsuit is “based on flawed legal theories and a lack of medical understanding about anesthesia.” (Leah Nylen, Bloomberg News). Further, Dr. Schoppa claimed that the lawsuit “threaten[ed] to disrupt” quality anesthesia care in Texas. Id. In a statement by Amy Stevens, a spokesperson for Welsh Carson, she commented that this lawsuit is no surprise. Id. Stevens stated that the FTC has had a recent trend of utilizing “litigation to pursue radical policy theories” – the FTC’s hyperfocus on healthcare being no exception. (Reed Abelson et al., New York Times).

With this lawsuit in its early stages, it is difficult to predict how the court will rule. However, the FTC's complaint may signal the agency’s next target in antitrust regulation – roll-up schemes. This is one of the first times this PE tactic has been legally challenged by the FTC. (Leah Nylen, Dallas Morning News). Many of these acquisitions fall below the threshold of antitrust review, leaving many PE firms unchecked by the FTC. Id. This is pertinent to the growing role of PE in the healthcare industry. In the world of PE, acquiring medical specialties has been a particular favorite “because of the many loopholes and cost-cutting strategies that exist within” the healthcare industry. (Grace Niewijk, UChicago Medicine).

This lawsuit has significant implications for the future of antitrust laws. The FTC's attempt to target roll-up schemes in healthcare signals a step in the right direction towards addressing the realities of the current market. As stated by Professor Fiona Morton, this lawsuit highlights the importance of targeting roll-ups because it illustrates that “many small mergers could have the same effect as a large one.”  (Reed Abelson et al., New York Times). The argument that this healthcare merger is a “patient-oriented business model” seemingly serves as a guise for profit-driven PE firms’ to capitalize on the lucrative, yet vulnerable, healthcare industry. Id.