Antitrust Efforts Slow Down Private-Equity Healthcare Mergers

Data from PitchBook reveals a stark decline in the number of private-equity add-on deals in the U.S. healthcare sector, with only 180 transactions recorded through May 28 this year. This figure represents a mere 23% of the total deals completed in the previous year, indicating a significant downturn in activity. This reduction in healthcare roll-ups is more pronounced than the overall decrease in private-equity investments, which stands at 34% of last year’s total for the same period.

The Federal Trade Commission (FTC) and the Justice Department have been at the forefront of this regulatory push, launching a formal inquiry on May 23 to investigate the adverse effects of roll-ups across the U.S. economy. Their efforts have included initiating probes into healthcare profiteering, revising merger guidelines to encompass more buyout roll-up deals, and taking legal action against firms accused of attempting to monopolize markets and fix prices through healthcare roll-ups.

Tim Cornell, an antitrust partner at law firm Debevoise & Plimpton, noted that while these regulatory measures have made completing deals more challenging and costly, they have not entirely deterred firms from pursuing them. “I am not sure it has created the uncrossable ravine in the marketplace that the government hopes to create,” he commented, highlighting the ongoing adaptability of private-equity firms in the face of increased scrutiny.

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Historically, roll-ups have been a cornerstone strategy for private-equity firms, with add-on transactions constituting 76% of total U.S. buyouts by the end of 2022. The rationale behind these deals is straightforward: merging several smaller companies into a larger entity can yield higher profit margins through economies of scale and subsequently attract higher valuations in the merger market.

For many years, antitrust regulators paid little attention to roll-ups, focusing instead on larger transactions. However, under the leadership of Lina Khan, who has chaired the FTC since 2021, there has been a paradigm shift. The FTC has grown increasingly concerned about the cumulative impact of these acquisitions, particularly in the healthcare sector, where they can significantly affect competition and consumer welfare, reported the WSJ. 

“By consolidating power gradually and incrementally, through a series of smaller deals, firms have sometimes sidestepped antitrust review,” Khan stated in March. She emphasized the potential of these strategies to “eliminate meaningful competition and allow new owners to jack up prices, degrade quality, and neutralize rivals without competitive checks.”

In response to these concerns, antitrust authorities revised merger guidelines in December to facilitate the review of smaller roll-up transactions. Additionally, in March, a federal probe into private-equity conduct in the medical sector was announced, focusing on the implications of roll-ups.

Despite facing increased regulatory hurdles, the private-equity industry and its lobbyists continue to advocate for their buy-and-build strategies, arguing for their efficiency and economic benefits.

Source: WSJ