President Biden’s recent executive order called for increased antitrust enforcement, with a “focus” on healthcare as one of four key industries. While the potential implications for merger and acquisition activity are obvious, there may also be secondary ramifications for physicians and other healthcare providers on multiple fronts. These consequences may be significant -- and often unintended.
All stakeholders in healthcare services -- from employed healthcare providers to independent physician groups to entrepreneurs to private equity investors -- should prepare for the potentially unpredictable and adverse consequences to provider compensation, talent retention and existing contract interpretation in the event that non-compete restrictions are prohibited by future federal regulations.
Non-competes historically have been addressed at the state level. Over two dozen states currently have statutes regulating non-compete agreements, and all states have at least some common law limitations on enforcement. Most states that prohibit or restrict non-compete agreements -- or that do so for physicians specifically -- recognize special circumstances that merit enforcement, such as in connection with the sale of the practice or in an employment context for a limited geographic area for a limited period of time. For years, labor groups, including the AFL-CIO, SEIU and others, have pushed for broader restrictions, or even outright bans, on non-competes.
Notably, earlier in 2021, the influential Uniform Law Commission (“ULC”) considered the creation of a Uniform Covenant Not to Compete Act that would have eliminated the non-competition clauses as applied to healthcare providers, even in connection with the sale of a business. When faced with pushback from physician and hospital associations, however, the ULC walked back the aggressive position.
Biden’s executive order encourages the FTC to use its regulatory authority under the FTC Act to curtail the unfair use of non-compete clauses. By issuing a blanket instruction to encourage antitrust enforcement without an exception for the sale of a business, the order marks a stark departure both as a matter of federal jurisdiction and in the substance of applicable state law across the United States.
Before Biden’s order, the FTC had already embarked on a path of aggressive enforcement. Recent rulemaking and litigation from the FTC already go well beyond M&A activity, though that is certainly a significant part. In rescinding the 2015 Statement of Enforcement Principles Regarding Unfair Methods of Competition Under Section 5 of the FTC Act last month, the FTC has taken the position that it is unconstrained by conventional antitrust precepts like the rule of reason and the consumer welfare principle. Many observers believe that the FTC is likely to seek to expand its Section 5 authority to investigate practices that have been commonly accepted under other federal and state antitrust statutes and case law and are likely to seek to outlaw such practices through regulation, litigation, or both.
Now, with the empowerment and mandate from Biden’s order, the FTC will take a deep look at what it can do to restrict non-compete enforcement. If the FTC continues to follow the path of expanding its power and assertiveness, the fight over non-compete enforcement could ultimately trigger a Supreme Court challenge over who has jurisdiction, the FTC or individual states?
Beyond attempting a complete ban, the FTC could still decide to get more aggressive in rulemaking and enforcement around non-competes or certain types of non-competes or certain industries. As this is uncharted territory, the potential new direction of the FTC represents an area of particular uncertainty.
Although states have for years considered, and in some cases passed, legislation to restrict non-competes, in most cases the states have chosen not to adopt an outright ban without exception.
With Biden’s order, however, lobbyists and advocacy groups may be emboldened and refuse to compromise, knowing they have the backing of the President. The interplay with issues of federalism and freedom of contract makes the issue especially unpredictable -- other than the fact that those who take the position that non-competes should be banned now have a powerful ally in the oval office.
Some states, including Florida and California, have recently considered or passed legislation calling for increased antitrust scrutiny of healthcare transactions. In most cases, the details and impacts of such legislation are unclear -- whether the types of transactions that are subject to those laws, or how the government should determine whether the transactions should be approved. Even if Biden’s order does not directly result in new legislation at the state level, it can be expected to influence how state attorneys general and regulatory agencies think about enforcement of new laws on the books.
To be sure, current demand for M&A deals in healthcare is so strong that state and federal enforcement agencies will be hard-pressed to slow it down in the near term. What remains to be seen, however, is whether the change in the regulatory landscape could affect the elasticity of the price curve once markets cool down. If antitrust enforcement becomes successful in slowing down healthcare deals, it will undoubtedly have a deflationary effect on healthcare deals -- but that effect may be the riptide hidden underneath the current surge and impossible to see for now.
The most obvious effect of increased antitrust scrutiny of health care deals is, as discussed above, on price and timing of closing, and ability to close larger deals. But we believe there will be secondary effects, too. Examples could include:
(1) Hospitals and ASCs — Antitrust regulators could focus on hospital and health system consolidation, and encourage increased use of ASCs by providers as a low-cost alternative. This could have a dramatic positive effect for PE-backed consolidators and entrepreneurial physicians. We expect areas such as cardiovascular treatment that traditionally have been the domain of hospitals to surge in interest from independent groups and private equity. Added antitrust protection could help to deter health systems from denying hospital privileges to physicians who form their own ASCs or OBLs.
(2) Third-party payors may face increased scrutiny of their actions to achieve vertical integration, and to reduce reimbursement rates. As an example, one need only look at the recent $2.7 billion antitrust settlement against BlueCross BlueShield of Alabama in late 2020. If the FTC decides to go after other payors more aggressively, the impact in the long run for providers could be positive -- particularly in areas such as optometry, which is experiencing unprecedented vertical consolidation among payors, labs, optical goods and even practice management software.
(3) Private equity could be lumped in as a target for scrutiny -- whether merited or not. Federal and state legislators have increased their calls for the supposed impact of private equity investment on bankruptcies and distress within the healthcare industry, in some cases seeking to align their commentary with the focus on antitrust enforcement.
(4) Physicians may not be able to sell their practices for its current value. If the buyer is unable to ensure that the practice they are purchasing won’t have to compete with the selling practitioner (who has already grown a successful practice and who has local contacts and reputation), the buyer will be unwilling to pay as much for that practice.
The nature of these potential effects makes them unpredictable, and as such, all industry participants should think ahead to create deal structures and incentives that are flexible, and will not break in face of potential regulatory change.
At this time, though, we are not seeing an immediate impact on dealmaking in healthcare. That is in part due to the expected timeframe for any FTC rulemaking or legislative change. Many observers feel that the FTC will eventually move forward with the rulemaking process, although it is unclear what the FTC will ultimately propose and rulemaking typically takes quite some time -- and is often followed by legal challenges. Federal legislation is also possible, as there are stakeholders on both sides of the aisle who support at least some restrictions in this area.
Nonetheless, dealmakers should not lose sight of the fact that change could occur within the horizon of the typical five (5) year non-compete in most purchase agreements. Rather than ignore the prospect of change, the prudent course of action would be to include creative “Plan B” provisions, from liquidated damages to equity vesting, so as not to be caught flatfooted halfway through an investment cycle when change does occur.
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