Private equity firms swallowed nearly 1,100 medical practices from 2012 to 2022, in transactions so frequent and frenzied it appeared as though Wall Street had found some sort of “cheat code” that promised unlimited profits. Now, in a first for antitrust regulators, the Federal Trade Commission has sued a private equity firm for a conspiracy to roll up a medical specialty. The 106-page complaint filed Thursday in Texas lays out in granular detail just how one firm’s serial acquisition strategy nearly doubled the cost of anesthesia services in the state over the course of a few years.
Meanwhile, a thousand miles away, Delaware bankruptcy attorneys discussed the wreckage of a separate private equity medical rollup gone wrong. Unlike the rollup in the FTC case, which was conceived by the Godfather of Wall Street physician practice consolidation, New York buyout shop Welsh, Carson, Anderson & Stowe, this one was sponsored by the smaller and lower-profile Brown Brothers Harriman (BBH). Over the course of its eight-year history, BBH’s rollup acquired nine rivals and grew to comprise 150 hospital and freestanding emergency room contracts, but management was incompetent and profits were elusive.
“It seems that the more the debtor expanded, the greater its operating losses became,” mused bankruptcy Judge Brendan Linehan Shannon during the proceeding, referring to the now-defunct American Physician Partners (APP), whose chaotic collapse starting in July underscores the fact that unsuccessful private equity rollups are often just as disastrous to doctors and patients as successful ones—if not more so.
THE “SUCCESS STORY” SUED YESTERDAY BY THE FTC is a mega-rollup of hospital anesthesiology practices called U.S. Anesthesia Partners (USAP), which Welsh Carson founded in 2012 with John Rizzo and Kristen Bratberg, two executives from Florida who had worked for one of the firm’s other portfolio companies. By that point, Welsh Carson had consolidated roughly a dozen physician specialties, starting with the much-loathed emergency medicine staffing agency and surprise billing trailblazer EmCare in 1992 and moving on to rollups of primary care physicians, orthopedic surgeons, oncologists, and cardiologists. Rizzo and Bratberg had run one of the firm’s most successful rollups, a conglomeration of more than 100 pediatric practices called Pediatrix that prided itself on staffing 1 in 4 neonatal intensive care units in the country.
Together with a junior partner named Brian Regan (who was still in his early thirties at the time) and a host of specialized consulting firms, the team mapped out a strategy to conquer the businesses of epidurals, spinal blocks, and intubations in hospitals with busy operating rooms, starting in Houston. There, they were blessed to happen upon a pitch deck from Greater Houston Anesthesiology, which boasted in its sales materials that it was “20 times the size of its second largest local competitor.” With backing from Welsh Carson and a consortium of lenders, the team pounced, explaining in an investor presentation their plan to “build a platform with national scale by consolidating practices with high market share in a few key markets,” as a means of “[n]egotiating leverage with” payors like UnitedHealthcare and Cigna.
This strategy differed in an important way from the textbook monopoly playbook. By the prevailing antitrust orthodoxies of the past 40 years, regulators have assessed the potential anti-competitiveness of most health care acquisitions primarily on the basis of whether the merged entity increases the concentration of a market for services in a given metropolitan region on a scale known as the Herfindahl-Hirschman index (HHI). Under this concept, a hospital merger is unlikely to result in price increases if the “catchment areas” of the merging hospital systems do not overlap significantly.
The hole in this logic, of course, is that it is not patients who comparison-shop for the most competitive hospital prices, but multibillion-dollar national insurance companies like UnitedHealthcare.
As USAP would quickly prove, extracting higher reimbursement rates from the likes of UHC and Cigna had very little to do with increasing the HHI in a given area. In early 2018, USAP bought the largest practice in Austin, which had an estimated 50 percent share of the hospital anesthesiology market, and instantly hiked its reimbursement rates by an apparently substantial percentage (the lawsuit annoyingly redacts the specific number, but earlier it says that the increase was “well above the median” in the Austin metro). Later that year, the company repeated the feat with its purchase of an Amarillo practice with a mouth-watering 85 percent market share in the region, instantly securing a dramatic increase in its reimbursement rate from Blue Cross “even though the acquisition did not increase market concentration in Amarillo.”
As the complaint explains, USAP was able to pull off these rate hikes because it had stealthily slipped something it called “tuck-in” provisions into its contracts with payors, which entitled the company to immediately bill insurers for the services of acquired practices at the rates it charged in Houston—and apply the annual escalators it had negotiated across the state. Having learned about this practice, a vice president of operations at the acquired practice in Austin responded, “Awesome! Cha-ching!” in an email quoted in the agency’s complaint.
Welsh Carson’s schemes did not raise prices for the services of USAP anesthesiologists alone: Despite the reservations of its own compliance department, it used “price setting arrangements” to charge premium prices for non-USAP anesthesiologists who practiced in hospitals USAP staffed—typically sharing “some portion” of the profits with the physicians in question, according to the lawsuit. It also brokered an anti-competitive “market allocation” agreement with an unnamed competing anesthesiology practice to steer clear of one another’s turf. As an insurance company executive quoted in the complaint characterized the strategy, USAP and Welsh Carson had used serial acquisitions and savvy contract negotiations to “take the highest rate of all … and then peanut butter spread that across the entire state of Texas.”
In a first for antitrust regulators, the Federal Trade Commission has sued a private equity firm for a conspiracy to roll up a medical specialty.
Ultimately, Welsh Carson’s conquests yielded 43 percent of the market for hospital anesthesia services across the entire state of Texas, and nearly 60 percent of the hospital-only revenues. UnitedHealthcare told FTC investigators it reimburses USAP physicians and midlevels at rates 95 percent higher than its median in-network anesthesiologists in Texas.
Though the complaint says USAP generated 65 percent of its profits in Texas in 2021, it also operates in eight other states, and has successfully replicated its strategy in some of them. A June Washington Post investigation aided by two former USAP physicians explored the company’s cornering of the market in Colorado, where the company has employed as many as 330 anesthesiologists (and where another Welsh Carson creation, the emergency medicine rollup US Acute Care Solutions, notoriously dominates the emergency room business).
Notably, both USAP and USACS currently describe themselves as “physician-owned”; in perhaps its most unusual feature, the FTC’s lawsuit convincingly argues that Welsh Carson effectively controlled USAP well after it relinquished its majority stake in the company—and that there is “reasonable likelihood that Welsh Carson will engage in similar and related conduct in the future” if it is not legally barred from doing so.
A few years ago, when it was trying to break into the Chicago market, USAP approached the anesthesiologist Marco Fernandez, who runs an advocacy organization called the Association for Independent Medicine, with an offer to buy the anesthesia practice he has worked at for 16 years and co-owns. But USAP wanted some major changes that made the doctors uncomfortable. “They basically said you guys are not going to survive because you’re a physician-only practice, and you have to hire more nurses,” Fernandez told the Prospect. He says he has no practical qualms about working with nurse anesthetists, but the doctors had repeatedly run the numbers and concluded that the practice could operate more efficiently if it exclusively employed physicians who could easily fill in for one another and did not require supervision.
Mega-practices like USAP, however, invariably aim to replace a large portion of physicians with nurse anesthetists and other “midlevels,” supposedly in the name of cost-cutting. “It’s really about control,” said Fernandez. “Hospital administrations like to replace physicians with ‘physician extenders’ because they think they can control them, and pressure them to cut corners.”
That pressure can easily backfire in catastrophic ways. Last year, a Texas jury awarded $21 million to the family of a 27-year-old man whose USAP-employed nurse anesthetist botched the anesthesia during a routine knee surgery, while the supervising physician was busy monitoring three other nurses. The man, Carlos David Castro Rojas, suffered permanent and debilitating brain damage that requires 24-hour care. “The things that can happen when you cut corners in anesthesia are so horrible you don’t even talk about them,” says Fernandez, who stood his ground and refused to “sell out” to USAP. But his practice lost an important contract to another private equity rollup, which then struggled to retain anesthesiologists, a chronic problem in private equity–controlled mega-practices. (Turnover at USAP was 11 percent last year and 17 percent in 2022, according to The Washington Post.) Now, Fernandez’s practice generates an increasing proportion of its earnings sending doctors to fill scheduling holes at hospitals whose anesthesiology departments have been gutted by private equity firms. “It’s a vicious cycle,” he said.
For some USAP insiders, it’s been a lucrative one. The Washington Post says USAP has distributed $1.3 billion in dividends to Welsh Carson and other shareholders over the course of its brief history, during which it has floated close to $2 billion in debt, battering the company’s balance sheet and jeopardizing its credit rating. Earlier this year, S&P revised its outlook on USAP’s debt from stable to negative, noting that despite “softer patient volume, tighter labor markets, higher interest rates, and elevated working capital outflows,” the rating agency “expect[s] the company’s financial sponsor to prioritize shareholder returns over debt reduction.”
AT DOZENS OF COPYCAT PRIVATE EQUITY physician practice consolidators that lacked USAP’s success at raising prices for insurers, the fallout for doctors and patients has in some cases been even more wrenching. APP, a rollup of ten emergency room practices founded in 2015 that filed for bankruptcy protection this week after experiencing a chaotic collapse when its lenders pulled the plug over the summer, disclosed in a bankruptcy filing that a dispute with its former malpractice insurer MagMutual had left as many as 10 percent of the more than 2,500 physicians it once employed without malpractice coverage for a period during which they worked for APP.
As APP chief restructuring officer John DiDonato explained, MagMutual had written to the company at the beginning of August retroactively canceling the company’s insurance policy as of June 30, despite possessing what APP maintains were “no contractual, legal or factual basis for such cancellation.” An attorney familiar with the conflict said that MagMutual, an Atlanta-based insurer that says it provides coverage to more than 40,000 physicians and health care providers, was arguing that APP’s insolvency had violated its policy with the insurer. (Neither a spokesperson for MagMutual nor its chief claims officer Peter Rogers responded to emailed or telephone requests for comment.)
The gap covers more than services provided in July, a time in which APP physicians were still working. So-called “tail” coverage protects physicians for any case filed over prior treatment, within applicable statutes of limitations. So physicians and midlevels who quit the company more than a year ago are likely unaware that they may be uninsured for a malpractice case filed against them from their time at APP. That may be a significant number, since turnover in emergency medicine is high and APP relied heavily on travel physicians at many hospitals.
Many private equity–controlled ER mega-practices, like TeamHealth and USACS, self-insure their physicians (often charging handsomely for the service), and having to buy one’s own policy is an extremely rare—and expensive—proposition. Christopher Kang, an emergency physician and president of the American College of Emergency Physicians, told the Prospect that independent malpractice coverage can “run tens of thousands of dollars and may not also cover prior acts.” A Tennessee physician who asked his carrier for a quote on a one-off tail policy for a friend who used to work for APP says the estimate was $60,000, nearly quadruple what he pays per year for his own coverage. The expense is manageable for many doctors, the physician said, but “for a PA [physician assistant] who doesn’t have a rich spouse, it could be ruinous.” Already, two other physicians told the Prospect, clinicians formerly employed by APP have been sued in cases where they lack the resources to litigate.
“Hospital administrations like to replace physicians with ‘physician extenders’ because they think they can control them, and pressure them to cut corners.”
In a filing known as a reservation of rights (ROR), an attorney representing “approximately 165” former APP physicians and midlevels accused the company’s lenders of hoarding the remaining assets for themselves and failing to come clean about the nature of the dispute with MagMutual until “shortly before” the bankruptcy filing, six weeks after APP received word of the policy rescission. “To add further insult to injury, the Debtors now seek court approval to cause the individuals who were the lifeline of the Debtors’ operations to bear the full burden of the Debtors’ failure by not allocating funds to ensure that proper insurance coverage is in place,” the filing states, adding that the company’s lenders, namely Goldman Sachs Specialty Lending Group, have been pushing a proposal that would award themselves “all but $250,000 of the value of the estates from all sources.”
During yesterday’s hearing, a bearded attorney representing Goldman Sachs whom the judge playfully addressed by the nickname “counsel to Duck Dynasty” depicted the multitrillion-dollar investment bank as the real victim of APP’s downfall. “We were a little disappointed in the tone of the doctors’ ROR,” the attorney, W. Austin Jowers, told the judge, arguing that the filing “buried the lede a little bit” by failing to give his client the credit “they deserve for being extraordinary corporate citizens.”
Goldman was “dealing with a company that had over $100 million net losses in back-to-back years,” Jowers reasoned. The bank’s “recovery on this will be minimal, maybe pennies on the dollar.” The attorney went on to describe APP’s unusual decision to delay filing for bankruptcy protection for two months after shutting down operations as having “inured a huge benefit to doctors” by enabling APP’s remaining skeleton crew to focus on collecting outstanding medical bills and using the proceeds to “pay out providers”—a characterization one former APP physician likened to “me saying I took a hundred-dollar bill and spent it on a pack of gum.”
The spectacle was, in Kang’s words, “a demoralizing and distressing example of business interests superseding the practice of medicine.” But it also marked something of a reversal for Kang’s organization ACEP, a once decidedly private equity–friendly professional society that has become starkly adversarial to Wall Street corporatization in recent months under pressure from members, as well as physician gadflies like Bob McNamara of the American Academy of Emergency Medicine and Mitch Li of Take Medicine Back, and surging interest rates that have forced huge employers like APP and Envision into bankruptcy. While ACEP’s board of directors is still helmed by an executive of USACS—a massive ER rollup launched in 2015 by the very same Welsh Carson partner, Brian Regan, who co-founded USAP—the group has more recently proven one of the FTC’s most visible allies in its bid to rein in private equity abuses. Yesterday, ACEP even announced a “late breaking addition” to the lineup of speakers at its annual convention in Philadelphia next month: FTC chair Lina Khan herself.
“Here in anesthesia the senior physicians sold out to enrich themselves at the cost of patients,” McNamara wrote in a Facebook post lauding Khan’s USAP lawsuit. “EM is no different. I am hearing from younger docs working for USACS in [Colorado] that they are completely disillusioned. EM is eating its young.” But, he added:
“The tide is turning.”