Public concern over antitrust often revolves around huge mergers of well-known companies. Microsoft’s purchase of video game publisher Activision Blizzard, finalized in October over the protests of some antitrust authorities, is the latest example. However, smaller deals are often the most problematic. One recent piece of antitrust enforcement underscores why.

In September, the US Federal Trade Commission sued a large private-equity firm and one of its portfolio companies for consolidating and monopolizing anesthesia services in Texas. The suit charges Welsh, Carson, Anderson & Stowe and US Anesthesia Partners with 10 counts of violating US antitrust law, alleging the firms’ actions significantly reduced competition and raised prices.

At the center of the case is Welsh Carson’s acquisitions of anesthesiology groups in and around Houston, Dallas, and Austin. According to the complaint, the firm formed USAP in 2012 as a “platform” into which competing practices could be absorbed. Fast-forward nine years and USAP had acquired “nearly every large anesthesia group in Texas.”

One executive is alleged to have colorfully responded “Cha-ching!” to details of the strategy. FTC chair Lina Khan took a less charitable view. In relation to the case, she said, “The FTC will continue to scrutinize and challenge . . . stealth consolidation schemes that unlawfully undermine fair competition and harm the American public.”

Welsh Carson and USAP have attempted to rebut the FTC’s claims, with one USAP board member arguing in a statement that the suit “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.” In a statement to Axios, Welsh Carson noted, “The FTC is ignoring that USAP’s commercial rates have not exceeded the rate of medical cost inflation for close to 10 years.”

The suit has generated numerous headlines, as well as comment from some in the Senate. However, most coverage glosses over the most interesting question: How did the alleged anticompetitive acquisitions avoid antitrust scrutiny in the first place?

Flying below the radar

The answer lies in the fact that only large mergers must be reported to US antitrust authorities. At the present moment, transactions valued below $110 million don’t require any notification, and in many cases even much higher thresholds apply. This isn’t a problem if moderately sized mergers are relatively harmless. However, many economically important industries are highly segmented, meaning each consumer is served by a small number of producers. In these cases, even minor mergers can produce major changes in market structure, competition, price, and quality.

To see this, consider an area of the country where just two healthcare service providers compete for patients. This is quite common—many areas have just two dialysis facilities, dentist practices, or physician groups to choose from. A merger in any of these markets might only be valued at a few million dollars, so it would fall far short of the thresholds described above. Yet, it would create a monopoly, severely reducing incentives to offer low prices or high quality care.

In short, anticompetitive mergers that would otherwise be blocked or deterred by the federal government may instead escape antitrust scrutiny by simply falling below reporting thresholds.

In a 2019 study, I introduced the term stealth consolidation to describe this possibility. Using economy-wide data for 1994–2011, I find that, holding other factors fixed, nonreportable mergers were about 90 percent less likely to be investigated by the FTC.

Recommended Reading

A more recent paper, which focuses on the dialysis industry and permits more precise market definitions, confirms the initial results. It also reveals that stealth acquisitions of competing facilities in concentrated markets harmed competition, resulting in higher rates of hospitalization and lower rates of survival among patients. Using data from the pharmaceutical industry, other economists have demonstrated that stealth consolidation tends to “kill” innovation and raise prices.

The suit charging Welsh Carson and USAP consists almost entirely of stealth acquisitions, consistent with Khan’s characterization. In Dallas, for example, the firm is alleged to have tucked Pinnacle Anesthesia Consultants, Anesthesia Consultants of Dallas, Excel Anesthesia Consultants, Southwest Anesthesia Associates, BMW Anesthesiology, Medical City Physicians, and Sundance Anesthesia into its platform. With the exception of their first Dallas-area acquisition, Pinnacle, none of these deals were likely to have been reported to the FTC in their incipiency.

Private acquirers may fly even lower

Complicating matters, investments backed by private acquirers may face less strict reporting requirements.

Acquisitions by publicly traded companies are easy to characterize. Investors buy shares in these companies, which in turn acquire assets of or stakes in other businesses. Exceptions exist, but most money flows this way. As a result, the spirit and the letter of the law—the Hart-Scott-Rodino Act, which established the US premerger notification program—are relatively easy to align.

In contrast, acquisitions by private-equity sponsors typically involve arrays of intermediate entities tailored to the sources of funds. Some investors, for example, refrain from passing funds through a corporation, as profit would be taxed twice. Tax-exempt organizations, however, often require that a corporation sits between them and the source of profit, blocking income that would otherwise create additional filing obligations with tax authorities. Foreign investors often require offshore arrangements.

Aslihan Asil at Yale, John M. Barrios of Washington University in St. Louis, and I demonstrate that when the HSR Act and Rules are applied to the sorts of investment structures commonly employed by PE sponsors, many mergers that would otherwise be reportable are exempt. Our research identifies a host of ways that this disparate treatment may arise.

Let me illustrate one. Suppose that a PE fund acquires a company for $120 million, with 75 percent of the capital coming from one vehicle and the remainder coming from another. In substance, the management of the PE fund has gained control of a company valued at $120 million, which exceeds the current size-of-transaction test threshold of $110 million. One would expect this deal needs to be reported. However, investments by the two vehicles are typically counted separately under the HSR Act and Rules. Even the larger stake, worth $90 million (75 percent of $120 million), falls short of the transaction value threshold. Nothing is reported.

It is hard to tell whether this particular issue exempted any transactions named in the suit against Welsh Carson and USAP. Most anesthesiology group acquisitions are relatively small, meaning they do not require notification even if a single entity acquires them. However, the alleged structure that the firms employed is consistent with our claims that PE investors hold interests in portfolio companies through a host of intermediate entities. For example, according to the FTC complaint, one of the Welsh Carson funds that held shares in USAP spread its ownership over four separate entities.

How widespread is this behavior?

If the allegations are true, a few other important questions arise. One is how many similar rollups have yet to be discovered. This figure is often hard to gauge—there’s no clearinghouse for acquisitions, so data sets are incomplete. Fortunately, federal antitrust authorities have tools for discovery. Another question is how to remedy the alleged behavior. Yet another is precisely what events prompted the FTC to make claims of market division and price fixing. (These claims are especially serious, but the details are heavily redacted in the published version of the complaint.)

One question has an easy answer. Was the FTC right to file the suit? In my view, it was. Assuming the facts are accurately reported, even lawyers and economists with an especially laissez-faire perspective on competitive conduct will, in my opinion, agree that the FTC has identified several antitrust violations. The complaint plainly states that USAP repeatedly acquired direct rivals and raised prices, defying federal law—most obviously, Section 7 of the Clayton Act, which bars transactions that reduce competition and foster monopoly.

Moreover, the suit may deter future harm. Executives may be less likely to even attempt mergers that could plausibly be considered anticompetitive if they know there’s a chance they will be scrutinized, litigated, and possibly penalized. The FTC has done the market a significant favor by demonstrating its interest in and concern about the competitive effects of all mergers, even the relatively small ones.

Thomas Wollmann is associate professor of economics and a William Ladany Faculty Scholar at Chicago Booth.

More from Chicago Booth Review

More from Chicago Booth

Your Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.