Clifford Chance

LO

Welcome to the Clifford Chance Podcast, where we discuss pressing issues and trends faced by the business world today. This is Clifford Chance's spring meeting roundup where we share the top sector takeaways from the annual ABA spring meeting in Washington, DC today. We're going to focus on the healthcare and life sciences sector. My name is Leigh Oliver and I'm a partner in the firm's global and antitrust practice based in Washington.

SH

And I'm Sue Hinchliffe, a partner in the antitrust practice group based out of London. So, Leigh, what are the biggest takeaways from the spring meeting that you'd want clients active in the healthcare sector to know about?

LO

Well, so I think there are a number of things, but I'm going to start with companies in the healthcare space should know that the agencies are hyper focused on the role that private equity plays in the healthcare world and this was discussed on a number of different panels, so it really sort of highlighted how important it is to the agencies today. While the enforcers vowed to scrutinize many kinds of behaviors in the modern economy, the most concerning to them seems to be the roll up strategies in private equity, particularly as it affects healthcare, the provision of healthcare. And the FTC touted its pursuit of Welsh Carson and the US anesthesia partners as an example of what's to come, and more of that in terms of enforcement in the space.

SH

OK, so I heard Henry Liu, the FTC Bureau director, stating on a panel that the agency isn't categorically opposed to a PE role in healthcare, but that the agency had taken notice of PE operated provider facilities that have, he said, higher costs and lower quality of care. And he also confirmed that the FTC was currently investigating other PE acquisitions in the healthcare space. And I don't know, Leigh, what's your reaction to the news of those additional investigations?

LO

Yeah, so I think two things there. I think what Henry Liu is saying sort of resonates with my understanding of what's going on, and it's not to say that not all private equity moves in the healthcare space are going to be deemed problematic or result in enforcement actions, but I do think that there's a particular focus on private equity in and their role in direct provider or clinical care companies within, I mean, I'm focused here on the US, right where this action is taking place. And so, for example, there's lots of private equity investment as well in pharmaceuticals or medical device spaces, and I think that that is generally less problematic in the FTC's eyes and the DOJ eyes, but rather I think their focus is on acquiring doctor's practices or other types of clinical care practices that have that direct clinical interaction with patients, because they're concerned about how might that influence the types and quality of clinical care that's provided. So kind of curious, Sue, looking at this from outside the US, is there a similar focus on private equity in that business model in healthcare?

SH

Yes, I feel like we aren't really seeing the same intensity of focus that we're seeing in the US, in Europe and the UK yet, but that doesn't mean that the agencies in Europe and the UK aren't thinking about it and haven't said that they are aware of the issue, particularly of roll up transactions by private equity and the CMA and the UK is looking closely at roll up transactions by private equity and relation to veterinary services, which is obviously very close to health services, although for animals, not for people. So I feel like it's definitely something that they're looking at, they just haven't sort of been fist banging the table quite so strongly about it, as I feel they have done in the US. Because I think this is more of a focus for the time being in the US, how are you currently advising private equity clients who are involved in healthcare transactions? I think on your panel on Wednesday, DOJ and FTC enforcers talked about this, so I just wanted to see if you could elaborate on the kind of things they were talking about and what you're advising clients.

LO

Sure, yeah, so on my panel I had Katrina Rouse, who is the Deputy Director of Civil Enforcement and Counsel on Healthcare at the Department of Justice, and I also had Jordan Andrew, Assistant Deputy Director of Mergers, one at the FTC and both kind of weighed in on this topic as well. Katrina advised to make sure in the context of private equity transactions and obviously all transactions, that parties are highlighting the procompetitive benefits or effects in their documents in ordinary course documents. So let's translate that into business advice. That means I think there needs to be representation in documents and rationales for the deals of things like the amount that's going to be spent on R&D or innovation, or investment in capital, when making a transaction, particularly in the healthcare space.
So they want to see that in those documents in the ordinary course planning for a transaction that it's not just going to be roll up and strategy to get bigger and bigger market share, but rather there's going to be investment putting into these companies which is really one of the benefits we see in private equity, right.
Undercapitalized businesses who all of a sudden get an injection in capital and are able to innovate and grow.
And then from Jordan Andrew, I think we heard that he, as the agencies would love to see, is if there's a good story to tell about the history of perhaps a private equity firm's role in healthcare or particular line of business, then come to the agencies and show them how quality has improved, how prices have gone down, how maybe good efficiencies have occurred in terms of that private equity business model in the industry. So obviously both are saying point us to prior evidence or a prior history of that particular firm doing something positive in the space and how that's going to be carried out through this transaction that's in front of them.
So Sue, how about for you? What's your biggest takeaway on this point from the from the spring meeting?

SH

Well, of course, the buzzword of the spring meeting was AI, artificial intelligence, and clearly AI and its role in healthcare, of course, is getting a closer look from all enforcement. In particular, there was a bit of focus on the use of AI in pricing algorithms, and that obviously applies to lots of industries, whether it's real estate, commodities, etc., but of course can be really important in relation to drug pricing and the use of PBM formulas. They can also implicate of course drug development and other areas that involve lots of data.

LO

So it seems like AI can really benefit the healthcare space. I'm curious to know if you can provide more color on how AI's problematic in healthcare and what companies in this sector should know.

SH

Yes, so this was the sort of topic that did get some discussion during the spring meeting. Healthcare companies do need to be aware that the use of third-party algorithms to price their products could be investigated by agencies for potential collusive effects. I think that was clear from some of the commentary coming out of the agencies during the panels. The theory of harm is that of course, in the context of traditional collusion, you have an agreement between two or more parties.
And what we were hearing during the spring meeting, was that with the use of AI where you have two or more parties relying on the same third party algorithm to determine prices, even if all the parties are operating at an arm's length basis, vis-a-vis the algorithm provider and each other that that could be considered collusion, which I think is taking the notion of collusive conduct in a meeting of minds maybe a little bit further than we've seen in traditional theories of harm, but it's important for healthcare companies to know that that's what regulators are thinking about. The other, one of the other common threads in the conference, was references to enforcers toolboxes, which a bit like Hermione's bag in Harry Potter seemed to be completely bottomless. They're just going to keep pulling new things out of the bottom of the bag when they think that they need to. And I think we're all clear that on both sides of the Atlantic, the agencies are pushing new theories of harm and really talking about using all the tools available to them in the toolbox to bring the sorts of actions that they think are important to bring.
So you know, bearing that in mind, what sort of tools do you anticipate we're going to see them using in the coming year?

LO

I think the agencies are certainly looking at new and creative theories of harm when it comes to merger enforcement in particular, and I think this was flagged on my panel by the FTC representative. So I think we'll see more investigations around things like entrenchment theory. So strong player in a market making another acquisition to bolster that position, and make it more difficult for others to enter or compete. I think that was a theory we saw exercised in Amgen Horizon. I think we'll see, and this was a warning given, that Section 2 is a live theory to be brought in merger investigations, and the example of that recently is the Sanofi Maze case.
And then I think we'll continue to see things like bundling claims and an innovation claims and potential competition claims. We heard Jordan Andrew at the FTC point out that under the new merger guidelines, even a merger of two companies who don't have a product on the market today, just pipelines and products in their portfolios, can be investigated and potentially challenged if there is that competition between those two pipeline products, even pretty deep into that pipeline.

SH

It's really interesting, I think, because there's this notion that the US agencies are sort of picking up on some of the theories of harm or the tools that are being used a bit more in Europe in the past, so obviously several years ago there was a big excitement around the AT&T Time Warner transaction, which obviously wasn't a healthcare transaction, where the US agencies were bringing a vertical theory of harm very aggressively where of course we had had vertical theories of harm being a feature of a merger control enforcement in Europe for a long time. I think, interestingly, one of the things I heard about during the spring meeting was the recent, the fact that President Biden had recently assigned a strike force for the DOJ and FTC to go after excessive pricing. And of course, in Europe we've had the theory of excessive pricing for some time. It's not an easy theory of harm to bring and to evidence, and the agencies in Europe have had difficulty with that, but there is no doubt thinking about the healthcare environment that those cases that have been brought in Europe, a lot of them, I would say the vast majority of them, have been brought in the healthcare sector. So it's something that our healthcare clients should really be aware of that seems to be a bit of a focus for the future in the US. I mean, I guess that that that suggests that that we may see some of those cases brought in the US in the future or the near future. But I don't know, Leigh, are there other types of cases that you think that US enforcers might be looking at, maybe in healthcare in particular?

LO

I would probably call out just two more quickly. One would be Section 8 cases. So this continues the actions that DOJ and FTC have been pursuing for interlocking directorates within companies. The DOJ representative Katrina Rouse said that they at DOJ had secured a resignation from the board of directors of one company in the healthcare space. So I don't think Healthcare is immune from being looked up under Section 8.  Separately, I would really flag labor cases and I would particularly flag it in the context of merger enforcement. There have been conduct labor cases brought also obviously in the US and most of them I would say have been in the healthcare space, but I think that the US enforcers are turning their attention to labor in the merger context and the impact of consolidation on the labor, the workforce.
I think that is particularly acute in healthcare, where they're focused on specialized healthcare workers, like nurses and physicians and other types of specialized healthcare workers who may have limited opportunities. This is their theory at the agencies, limited opportunities for other employment sources where there's consolidation in a healthcare market. I would be on the lookout for that.
So, Sue, what do you anticipate to be the biggest developments maybe coming out of the spring meeting that we should focus on for the coming year?

SH

Well, it's interesting that you talk about labor market issues because we talked earlier on about this notion that the US agents was were sort of adopting tools or theories of harm that have come from Europe, but Labor is one of those areas where it's definitely going the other way round. I think historically there hasn't really been any enforcement or even really interest of the agencies in Europe and the UK in relation to agreements round labor. But that has really changed, so we've definitely seen a stated interest by both agencies to look at labor agreements and I think the CMA has two current no poach investigations ongoing and there is at least one in Brussels.
So that may not be a major theme, but it's certainly, in terms of the issues that you were picking up, something that's relevant.
We've talked about AI, of course, which obviously is possibly the biggest theme coming from the spring meeting, but just more generally, I think we are going to see more creative enforcement, more inverted commas, novel theories of harm, maybe.
And definitely, I think we're going to see more and more coordination between different jurisdictions. You know, merger control is getting more complex and obviously in large global transactions, agencies are already talking to each other a lot, and I just think that we're going to see that trend continue.
What do you think, Leigh, about the biggest developments in the US, for example?

LO

So I think that they signposted a couple of things. One was the coordination between the federal enforcers and state enforcers when it comes to antitrust and particularly in healthcare, right, healthcare being super local in some ways, and obviously something also that is where the government is a big customer including state governments. I think we'll see that coordination continue between states and the federal enforcers. Although it's interesting because I think some people have been reading into the fact that in certain cases, the state enforcers, local state and enforcer, has not joined the federal enforcers in a particular action. An example is in North Carolina. We see a case being brought by the FTC against two hospitals where the North Carolina Attorney general hasn't joined that case. The state enforcers at the spring meeting said don't read too much into that, sometimes it's just a matter of resources or something along those lines. I think we'll continue to see the states and the Fed coordinating, if not always joining each other. There's certainly that coordination still going on.
And then I would say the other thing that was sort of signposted by Chair Khan was, I think we'll see another enforcement action soon in the private equity space, in healthcare, she indicated it may be coming with respect to the provision of emergency medicine services. So it looks like that's something that's very ripe and likely to happen in the near term.
I think that kind of wraps things up in terms of what I think we should look for in the very near term from the spring meeting. Sue, let's pivot to the fun side of the meeting, because there's certainly a lot of that that goes on! What was your favorite spring meeting moment, outside of the substance?

SH

Yes. Well, obviously at Clifford Chance we hosted two events at the spring meeting this year. We had an antitrust litigation event on Tuesday and then on Wednesday we had our main event, which we always host together with the Centre for Competition Policy at Norwich University in the UK. This year I was lucky enough to be the moderator on the panel and we had a really fantastic lineup of panelists, so we had two in-house speakers, Eve Damms from Cisco and John Dubensky from Dolby, as well as Karina Label from the DOJ, who was really brilliant and of course Bill Kovacich and Kyova Coom were on the panel. So that was really great fun. How about you, Leigh?

LO

Well, I would have to give the award for best part of this spring meeting to the weather and Mother Nature. She really cooperated this year, which is not always the case, but we had a really nice week of great weather in DC, which always goes well with all the cocktail parties, including the Clifford Chance Cocktail Party on the rooftop, that was probably the highlight of my week at the spring meeting.

SH

No, I agree. So I think that wraps our podcast up. Thank you, Leigh for providing your insights and thanks to the audience for listening. For additional insights from the spring meeting, please check out our other Spring Meeting podcast segments on the Clifford Chance Channel. You've been listening to the Clifford Chance Podcast. Please subscribe to our podcast and follow us on LinkedIn. Thank you.