FTC sues private equity firm Welsh Carson, U.S. Anesthesia Partners for allegedly creating a monopoly

The Federal Trade Commission has sued U.S. Anesthesia Partners and its private equity owner, Welsh, Carson, Anderson & Stowe, alleging in federal court the two partners formed a monopoly in order to drive up prices and boost their profits.

Normally, the FTC sues the company that it believes has violated antitrust law. But this lawsuit is novel by also going after a private equity sponsor that it believes hatched the entire alleged scheme — and could serve as a warning to other private equity deals, which have flooded the health care industry.

“This indicates the FTC is not fooling around,” said Yashaswini Singh, a health economist at Brown University who studies private equity. “Maybe USAP is a convenient first one to go after because anesthesia is one of the first specialties that attracted private equity.”

Federal antitrust regulators announced they were investigating USAP last fall. STAT reported in October how U.S. Anesthesia Partners bought competing doctor groups in its markets to gain leverage over commercial health insurers and paid shareholders large sums by saddling the company with billions of dollars in debt. The Washington Post reported in July that the company has used its growing market power to command higher prices.

Welsh Carson created USAP in 2012. The lawsuit says the New York-based private equity firm envisioned a roll-up strategy whereby it would consolidate Texas’ small, competing anesthesiology practices in large metropolitan areas. In doing so, Welsh Carson was able to eliminate competition in each market and raise prices with each acquisition.

The FTC further alleged in the lawsuit that Welsh Carson “masterminded” the plan to buy several competing anesthesiology practices throughout Texas and “remained deeply involved in crafting and executing that plan.” The agency also cited internal communications where Welsh Carson “bragged that it is USAP’s ‘primary architect.’”

“The fact that Texans pay considerably more for hospital-only anesthesia services is the direct result of Welsh Carson’s conduct,” the FTC’s complaint said.

The anesthesia market has seen a tidal wave of acquisitions over the past decade. Private equity has especially been attracted to anesthesia because the services are necessary at every hospital.

Welsh Carson’s deals to create an ever-bigger USAP exemplify how private equity firms look to scoop up more physician practices and “glom them onto your higher rates,” said Loren Adler, the associate director of the Brookings Schaeffer Initiative on Health Policy who has studied consolidation in anesthesia markets. “The more roll-up acquisitions you do, the higher that price becomes to the point where you become a pretty dominant player.”

The FTC also accused USAP of entering agreements that allowed it to charge market-leading prices for services provided at key hospitals in Houston and Dallas. The lawsuit said USAP and Welsh Carson further secured a promise from another large anesthesia provider to stay out of USAP’s territory.

Since its formation, USAP has acquired more than a dozen practices in Texas.
The government says no rival comes close to matching its size. As of 2021, USAP was at least four times bigger than the second-largest group in Houston; six times bigger than the second-largest group in Dallas; and nearly seven times larger than the second-largest group in all of Texas.

Texas is USAP’s largest market, but it also operates in Colorado, Florida, Indiana, Maryland, Nevada, Tennessee, and Washington.

As the company got bigger, so did its prices, which “now dwarf those of its rivals,” according to the FTC.

The lawsuit quotes an insurance executive who said USAP and Welsh Carson used acquisitions to “take the highest rate of all…and then peanut butter spread that across the entire state of Texas.” A USAP executive put it more bluntly following one acquisition, according to the government: “Cha-ching!”

“These tactics enabled USAP and Welsh Carson to raise prices for anesthesia services — raking in tens of millions of extra dollars for these executives at the expense of Texas patients and businesses,” FTC Chair Lina Khan said in a statement.

Welsh Carson and USAP told STAT in separate statements they are “confident we will prevail in this misguided litigation.”

“Welsh Carson is profoundly disappointed that the FTC has chosen to bring this unwarranted case,” the private equity firm said in its statement. “The FTC is ignoring that USAP’s commercial rates have not exceeded the rate of medical cost inflation for close to ten years. The FTC’s decision to pursue a civil action against a minority investor of a physician-owned company is unprecedented and disregards well-settled principles of law. Unfortunately, this is consistent with the series of recent lawsuits that the FTC has filed using litigation to pursue radical policy theories.”

USAP board member and anesthesiologist Derek Schoppa said “the FTC’s intended outcome threatens to disrupt and restrict patients’ equitable access to quality anesthesia care in Texas and will negatively impact the Texas hospitals and health systems that provide care in underserved communities,” adding that the complaint “is based on flawed legal theories and a lack of medical understanding about anesthesia, our patient-oriented business model, and our level of care for patients in Texas.”

The government’s lawsuit says Welsh Carson wasn’t just aware of the alleged schemes, but “actively directed” USAP’s strategy. The firm has always had at least two seats on the company’s board. At one point, even though the firm’s ownership stake dipped below 50%, it still held control, in its own words, “in all practical respects.”

In particular, the government’s findings center on Welsh Carson general partner Brian Regan. The lawsuit accuses Regan of “formulating and directing” USAP’s unlawful conduct. Regan served on USAP’s board for a decade ending in 2022, during which time he allegedly facilitated its roll-up scheme by finding acquisition targets, securing funding, and negotiating with insurers.

With respect to the allegations about keeping a competitor out of a market, the lawsuit quotes a Welsh Carson partner as saying the agreement to keep a competitor out of the market was “what we want,” and said that partner served as USAP’s chief negotiator.

The government’s complaint includes a detailed account of how the whole thing allegedly started in early 2012. John Rizzo emailed Welsh Carson seeking investors for his practice, “New Day Anesthesia,” which he planned to take nationwide through an “aggressive ‘buy and build’ consolidation strategy.” Regan liked the idea and presented the plan to his colleagues. They liked it, too. Their first add-on was Greater Houston Anesthesiology that December. From there, it was off to the races.

The tricky thing about anesthesiology is that hospitals typically grant exclusivity to just one practice. To get around this, Welsh Carson and USAP allegedly bought practices with existing exclusivity contracts, ideally with hospitals that insurers needed in their networks. The leaders also agreed to spread Greater Houston Anesthesiology’s prices — some of the highest in Texas — to all of the practices they acquired.

The government’s lawsuit cites insurers’ contracted rates for anesthesiology before and after USAP acquisitions, although the actual numbers are redacted from the public complaint. As of early 2020, UnitedHealthcare reported that it reimbursed USAP at rates 95% higher than its in-network median for Texas and 65% higher than the Houston average.

The FTC has made it clear under new proposed merger guidelines that antitrust regulators will scrutinize and challenge these types of roll-up acquisitions by private equity firms if they create an overly concentrated market. Consequently, USAP started hiring lobbyists this past summer to oppose the guidelines.

Experts said there are many other examples of highly consolidated physician markets, spurred by private equity firms, that now could catch the FTC’s attention. The agency could even find other targets in anesthesia.

For example, three years ago, North American Partners in Anesthesia bought American Anesthesiology, creating one of the biggest anesthesia groups in the country. Research from Adler and his colleagues indicates NAPA controls almost three-quarters of anesthesia services in some markets, similar to USAP in its most concentrated markets.

“That [deal] just went completely unchecked by FTC,” Adler said. “There’s definitely other markets across the country where very substantial market power has been amassed here.”