By L.PAHL ZINN & PATRICK MASTERSON
Dickinson Wright

It has been a rapid-fire start to 2024 with antitrust enforcers within the Biden administration ramping up regulatory scrutiny across the U.S.—and healthcare is at the center of it.

These efforts started in December 2023 when the Federal Trade Commission (the “FTC” or “Commission”) and Antitrust Division of the Department of Justice (the “DOJ”) released the final 2023 Merger Guidelines, which drastically restructured the framework used to evaluate mergers. Notably, several new guidelines are aimed squarely at healthcare. The new Merger Guidelines significantly lowered thresholds applied to assess whether a merger is presumptively anticompetitive and introduced novel guidelines, including a special interest in “roll-up” acquisitions and unique theories of competitive harm. Soon to follow was the FTC and DOJ embarking on broader enforcement efforts; some of which directly target the healthcare sector. Such trends and developments warrant continued assessment from healthcare organizations and participants.

Enforcement Agencies Show Signs of Increased Scrutiny on Private Equity’s Growing Presence in Healthcare

On February 29, 2024—less than two months after releasing the new Merger guidelines—the FTC, DOJ, and the U.S. Department of Health and Human Services jointly launched a cross-government public inquiry into private equity and other corporations’ increasing control over healthcare. The cross-government inquiry states it is seeking “to understand how certain health care market transactions may increase consolidation and generate profits for firms while threatening patients’ health, workers’ safety, quality of care, and affordable health care for patients and taxpayers.” The cross-government inquiry is, in turn, consistent with a broader focus on private equity firms’ use of “roll up” acquisition strategies. On May 23, 2024, the FTC and Antitrust Division of the DOJ jointly announced a request for members of the public to provide information that the agencies can use “to identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition.” The comment period is continuing right now and closes on July 22, 2024. The comments received will be publicly posted.

FTC Bans Noncompete Agreements and Clarifies Jurisdictional Applications in the Healthcare Sector

The regulatory ramp-up continued on May 7, 2024, when the FTC published its final Noncompete Clause Rule (the “Final Rule”) in the Federal Register, which makes it unlawful (with limited exceptions) to enter into noncompete agreements with workers. Although subject to legal challenges, the Final Rule is currently set to become effective September 4, 2024.

One area of particular concern for the healthcare sector is the FTC’s expansive view of its jurisdictional reach. The FTC clarified the applications of the Final Rule to healthcare participants claiming tax-exempt status as a nonprofit. It stated the clarification was warranted because “[m]any of the comments [received] about nonprofits erroneously assume that the FTC’s jurisdiction does not capture any entity claiming tax-exempt status as a nonprofit.” Final Rule, at p. 51. That misconception appears to derive from the FTC’s jurisdictional reach excluding any entity that is not “organized to carry on business for its own profit or that of its members.” 15 U.S.C. 44. Notwithstanding that jurisdictional exclusion, the FTC clarified that healthcare organizations registered under section 501(c) of the Internal Revenue Code claiming tax-exempt status as nonprofits “are not categorically beyond the Commission’s jurisdiction” and “[m]erely claiming tax-exempt status in tax filings is not dispositive.” Final Rule, at pp. 50, 53 (emphasis original).

Rather than applying a categorical exclusion of healthcare organizations claiming tax-exempt status as nonprofits, the FTC applies a two-part test to determine whether a corporation is organized for profit and thus within the FTC’s jurisdiction:

  • First, the FTC requires that “there be an adequate nexus between an organization’s activities and its alleged public ” Final Rule, p. 52.
  • Second, the FTC requires that the entity’s “net proceeds be properly devoted to recognized public, rather than private, ” Id. .

Put differently, the FTC looks to “the source of the income, i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income, i.e., to whether either the corporation or its members derive a profit.” Id. (emphasis added). Healthcare organizations that satisfy this two-part test are not subject to the Final Rule. As the Final Rule points out, “[w]hether an entity falls under the Commission’s jurisdiction can be a fact-specific determination.” Id. 48. Healthcare organizations claiming tax-exempt status as nonprofits should seek legal advice on the applicability of the Final Rule to its operations. Dickinson Wright’s Healthcare Group stands ready to assist.

DOJ Antitrust Division Announces Task Force on Health Care Monopolies and Collusion

Days later on May 9, 2024, Jonathan Kanter, Assistant Attorney General for the DOJ’s Antitrust Division announced the establishment of the Task Force on Health Care Monopolies and Collusion (the “HCMC”). The announcement stated the “HCMC will guide the division’s enforcement strategy and policy approach in health care, including by facilitating policy advocacy, investigations and, where warranted, civil and criminal enforcement in health care markets.” The HCMC will be directed by Katrina Rouse, described in the announcement as “a long-serving antitrust prosecutor who joined the Antitrust Division in 2011.” Moreover, according to the announcement, the HCMC will “bring together civil and criminal prosecutors, economists, health care industry experts, technologists, data scientists, investigators and policy advisors from across the division’s Civil, Criminal, Litigation and Policy Programs, and the Expert Analysis Group, to identify and address pressing antitrust problems in health care markets.”  While the direction and focus of the HCMC remain to be seen, they represent another step up in federal agencies’ enforcement efforts.

Dickinson Wright will continue to monitor all developments and ramp-up trends of antitrust enforcement in healthcare. Participants in the healthcare sector should be keenly aware of these developments, including the increased scrutiny on acquisitions by private equity. Dickinson Wright attorneys can assist in determining how such developments apply to a specific participant’s operations.