Lina Khan Is Sending a Message to the Private Equity Industry

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1:26Hello, and welcome to another episode of the All Thoughts Podcast. I'm Traci Allaway. And I'm Joe Weisenthal. Joe, I think it's fair to say that antitrust is having a moment. It's been having a moment for a while. It feels like, especially under this administration, there is this sort of renewed energy and interest. Of course, I think last month or two months ago, we interviewed a confidant. Jonathan Cantor. Jonathan Cantor from the DOJ about it, but it whet our appetite and we want to do more. That's right. We do want to do more. And a lot of this renewed interest in antitrust and even controversy is down to Lina Kahn, the chair of the Federal Trade Commission, the FTC, who's been going after everything from big tech to private equity investments in the healthcare industry.

2:11And I'm very happy to say that today we do, in fact, have the perfect guest because we're going to be speaking to Lina Kahn. I'm very excited. Me too. I'm psyched. I've been looking forward to this episode for a long time. I'm thrilled that it's finally here. Well, without further ado, Lina, thank you so much for coming on All Thoughts. Thanks so much for having me. So I wanted to sort of dive in immediately into some of the most recent stuff you at the FTC have been doing. And you recently filed this monopolization claim against a PE-backed company that's been buying anesthesiology businesses in Texas.

2:47And I have to say, reading the suit, there's some unsettling stuff in there, particularly the bit where there's a guy from the company, which is called U.S. Anesthesia Partners, where they're buying another business and he's talking about how they can now raise their prices. And this executive goes, cha-ching, which, you know, I'm guessing you don't want to have written down in a lawsuit about raising prices and roll-up strategies. But when you're filing a suit, you must love seeing stuff like that. But OK, here's my question. Why go after roll-ups in health care specifically? And could you theoretically go after private equity roll-ups anywhere.

3:24So just to zoom out, the FTC oversees markets across the economy, but that includes health care. And health care markets are some of the most important ones that we oversee precisely because this is not a matter of buying toasters or vacuum cleaners, right? This is essential health care. And in the United States, you know, we pay more for health care than any other country in the OECD. Close to twice is average. We pay around a fifth of our GDP and health outcomes are worse off, right? We see higher rates of infant and maternal mortality. We see greater incidence of death from avoidable diseases.

4:02And so overall, we see a whole set of problems that are stemming from a whole set of factors. The factor that's in our wheelhouse is looking at consolidation and a lack of competition. And so we enforce the nation's antitrust laws in hospital markets, in pharma markets. And we've been wanting to make sure that our enforcement efforts are really matching the realities of what we're seeing in today's markets. One of the trends that we've seen over the last decade is greater expansion of private equity in health care markets. At the FTC, we're business model agnostic, but we have been hearing from a whole lot of market participants, including healthcare workers, about the ways in which private equity's incursion can result in detrimental outcomes.

4:46There was a study that found that, for example, when private equity bought out nursing homes, that you saw higher mortality rates, right? So this is not even just about pricing, but it can really be life or death. So that's really overall what has stemmed our interest in taking a closer look at private equity and what ultimately led to the suit and the investigation. But what about in other industries? Is that something that you could theoretically also look at? Yeah, so we can look at, you know, businesses across the U.S. economy and how they're structured and what their particular business model is can vary.

5:19We've been particularly focused on health care markets, but especially after we filed this lawsuit, we've been hearing from market participants across sectors about additional areas where they believe that, you know, we should be scrutinizing, be it in health care or elsewhere. So it's not against the law to raise prices generally, and it might be ill-advised and it might make lawyers cringe, but it's also not against the law to write cha-ching in an email. oh, you know, the game is to make money. What is it about this case that makes it, to your mind, anti-competitive beyond just profitable raising money?

5:57Yeah, it's a good question. So this case is about a roll-up scheme that was architected by the private equity firm Walsh Carson. And our lawsuit both names USAP as well as Walsh Carson because they were ultimately the core mastermind. And what happened was Walsh Carson recognized that the anesthesiology markets in Texas were quite fragmented and that that created an opportunity for them to go in, do a whole set of acquisitions. They ended up buying out some of the largest anesthesiology practices in Texas in ways that eliminated competition, right? So you had a market that previously was fragmented where different anesthesiology providers were competing against one another, but ultimately when they were a whole bunch of them put under the same ownership, that competition was eliminated.

6:46And we saw the effects of that pretty clearly because these entities were able to ultimately jack up prices. And so they did that in a whole set of cities across Texas. For the anesthesiology practices that they weren't able to buy outright, they ended up entering into all sorts of agreements, either not to enter each other's markets or to coordinate and ultimately hike prices nevertheless. So there's a whole set of of anti-competitive conduct that we allege was going on here. And that's reflected in the whole set of antitrust claims that we bring, both illegal acquisitions, but monopolization, as well as illegal market allocation schemes.

7:27One of the things I'm interested in, and we spoke a little bit to Jonathan Cantor about this, but how do you actually go about examining an industry? And how did these things actually land on your radar? Because when we're doing oddlots, One of the things I think we've learned over the years is that, you know, even after we dive into a particular business for an hour, we often come away with more questions. And this leads to, you know, five more hour long episodes about a single business. So what is your research process actually like? And then also, I know you said you were going to be reaching out to doctors to try to get more stories about the impact of PE on the health care industry.

8:06But what are the types of things that you're hearing? Right. So we have phenomenal staff at the FTC who are deep, deep experts. I mean, these are the people who are really drilling into the intricate mechanics of how various markets work. What are the contracting practices like? If you're looking at pharma, you know, drilling down into what is the active ingredient? What are like the drugs in the pipeline? I mean, really just incredible mastery over just the nuts and bolts of all sorts of markets across the U.S. And so we really rely on their expertise. Beyond that, you know, we solicit information from a range of sources.

8:44One thing that I've been really focused on is making sure we're regularly engaging the broader public. And so we do these regular commission meetings where anybody can sign up and come talk to us. we've opened up a whole set of public dockets asking for information about certain types of contracting practices. We're doing an inquiry right now into pharmacy benefit managers, the PBMs, which are these middlemen in the pharmaceutical supply chain. We've been getting a whole set of comments from independent pharmacies to patient advocates. And so we really want to make sure that we are sourcing broadly and making sure those information gathering channels are open and really to make sure that our understanding of markets is really reflecting the reality.

9:28And, you know, this is actually how I got my start in antitrust as a business journalist and researcher. And one of my jobs was to really drill down and understand how various markets were faring, especially after decades of consolidation. And it was really that work and talking to market participants and understanding the reality and mechanics of their day-to-day and actually seeing how that departed from what some of the models and theories and antitrust were predicting that really gave me a renewed appreciation for actually talking to the people in these markets to understand what's going on rather than just relying on our models and theories.

10:04One thing I really like about when reading through the complaint against U.S. anesthesia partners, there's a really long conversation in there just essentially about how the business model of anesthesia works and the relationship that the clinics have with the hospitals and how those arrangements are set. You know, something though I'm curious about reading this is no one knows what the outcome is. It seems straightforward. It seems like what we all think of as sort of classical anti-competitive behavior. And the way you describe it is, yeah, they bought a bunch of regional clinics, got a big chunk of the market and raise prices, which I think if you ask people what anti-competitive behavior looks like, it's something like that, garnering a big...

10:46And then saying cha-ching. And then saying cha-ching. But the reason why I ask is that, you know, obviously, I think a lot of people associate your work with a sort of broader theory of antitrust related to corporate power and other ways that powerful corporate entities can affect employees or consumer or smaller businesses. Is it fair to say, though, that this is sort of retro old school antitrust or sort of a retro example of antitrust enforcement? I mean, everything we do is old school antitrust in the sense that we're never acknowledged there's some new thing. But it just it does not feel like some exotic or some sort of trendy legal theory.

11:27Yeah. So, look, the interesting thing about antitrust is that our foundational statutes are over 100 years old. Right. The Sherman Antitrust Act was passed in 1890. You then had the Clayton Act, the FTC Act, which created the Federal Trade Commission in 1914. And these laws set out terms like unfair methods of competition or restraints of trade. And at various points, lawmakers had debates. They said, should we define more specifically what that means? And they decided against it because they realized that as markets change, as technologies change, as business models change, firms are going to be endlessly innovative in how they monopolize, right, the tactics that they use.

12:07And so they left it open-ended for enforcers to use their expertise to do deep investigations and make sure that those principles were being vindicated, no matter whether you're in a smokestack industry or in the context of private equity or in the context of some of these newer digital markets. And so those are really the principles that we're animated by and that we look to vindicate throughout our work. Well, let me just ask as a follow-up, I mean, presumably, as you said, you're collecting more comments, you're looking at more areas, et cetera. Is there anything in this particular case that was anti-competitive, but not in the sort of straightforward garnering market share and raising prices?

12:50In other words, are there other types of roll-ups, perhaps in healthcare, perhaps other parts of other things that private equity might engage in, where this case could serve as a warning, even if the strategy isn't about, oh, let's get 70 percent of the market and raise prices. So this is the first roll up case that the FTC has brought in several decades. And what I mean by that is that this case was about not just looking at each acquisition in a silo, but really looking at them in the aggregate. Right. And that's really what we see with some of these roll-up and serial acquisition strategies is that they may be composed of a whole set of individual transactions and acquisitions.

13:32Each one, when considered in a silo, may not seem problematic from a competition perspective, right? Some of them may not even be reportable because they may be, you know, just a few tens of millions of dollars and not even trigger the Hartz-Gott Rodino filing. And so you may have a series, each one of which is small and may seem benign, But when you zoom out and look in the aggregate, what you may have seen is a roll up of a market. And so this case should really put market participants on notice that the FTC is going to be looking at these deals in the aggregate. We're reserving that right for ourselves rather than just looking at each one in a silo.

14:11Well, on that note, when I think of roll up strategies, I think of them as kind of a foundational aspect of private equity. And I think it's fair to say that there are a lot of, you know, P.E. decks that go around where they talk about multiple acquisitions and the ability that gives them in pricing power. So I guess it's unsurprising that you have seen some pushback and some lobbying recently. I think Politico just this week or last week ran a story calling you Wall Street's enemy number one, something to that effect. And we have seen businesses trying to use political partisanship to persuade some politicians to maybe repeal some of these laws or kind of push back against them.

14:53How does that impact what you do? And I guess how vulnerable are some of the directional shifts or changes that you've made at the FTC to this type of political pressure? Look, embedded in the DNA of the FTC is when, as an agency, we're being faithful to the statutes, right, the anti-monopoly statutes, we're going to be pitted up against monopolies and very well-heeled interests, right? And these entities have power, they have resources, and they have a lot to lose if the antitrust laws are faithfully enforced. And so, you know, that type of pushback is probably baked in if we're doing our job and being effective.

15:33The important thing, though, to recall is that the business community is not a monolith, right? And we've been hearing equally from businesses, from entrepreneurs, from startups about the ways in which consolidation and anti-competitive practices are locking them out of markets, are muscling them, are squeezing them. We heard a lot from independent pharmacies, for example, about the ways in which vertical integration by PBMs may be leading to practices that is squeezing them and especially in rural areas where you have some of these independent pharmacies shutter, that's essential health care that's no longer being provided to communities.

16:13The other week, I spoke to a conference of ER doctors who shared the way in which private equity expansion into emergency medicine, they believe, is really harming not just the doctors, but ultimately the quality of patient care. And so these are real problems with real material effects on people. And so that's where making sure that we're hearing broadly and not just from, you know, well-heeled companies that can afford lobbyists in D.C. is really critical and make sure that we're keeping our eye on the prize and faithfully doing our jobs.

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18:42I'm glad you brought up the potential harm to doctors and obviously the quality of care. There was an interesting article I read, I guess it was just yesterday, in the American Prospect about the AMA considering a resolution for a federal ban on the corporate practice of medicine. And I guess, you know, I want to go back to what you said about, I think it was in the first question about listening to more people and opening up comments. Are you hearing the same thing, the sort of frustration from doctors? And could the FTC, in theory, take action at some point in the future against an entity that wasn't necessarily aggressively raising prices, but by dint of their having rolled up multiple clinics are mistreating workers or mistreating patients?

19:23Like, could that be enough? So the antitrust laws protect everybody. They protect patients and consumers, but they're also supposed to protect workers. And we've seen over the last decade, in particular, significant empirical research from labor economists finding that labor markets in the U.S. are much more concentrated on average than previously believed, and that you have what's called monopsony power that can give employers outsized power over their workers when they're not checked adequately by competition. So that's a dimension of competition, labor markets that we are very much looking at.

19:59The revised merger guidelines that we put out a draft of this past summer includes a particular guideline laying out how we will assess whether mergers may unlawfully lessen competition in labor markets. And one of the hospital mergers that we sued to block last year in Rhode Island included analysis about how the merger would be bad, not just for patients, but also for registered nurses. So it's becoming more and more a key part of our analysis. Earlier this year in January, the FTC also brought a series of enforcement actions relating to the use of non-compete clauses. So we brought one lawsuit against this company called Prudential Security.

20:39It had been employing security guards that were making close to minimum wage, and it had imposed on them these non-compete clauses that we alleged were coercive and unfair methods of competition. We also brought a set of cases in the glass manufacturing industry This is a part of the market that's quite concentrated. You basically have three big players. And we allege that their use of non-competes had not even just been bad for workers, but it actually harmed competition. Because if you had an upstart who wanted to enter the market, they believed there was, you know, excess demand that they could come in and fill.

21:14They wouldn't be able to scale ultimately because the relevant talent pool was all locked up through these non-competes. So that's becoming a greater part of our work. In January, we also proposed a rule that would eliminate non-compete clauses in employment contracts for the vast majority of workers, with a couple of exceptions. And that, again, was stemming from a whole set of empirical research that found that non-competes may be depressing workers' wages to the tune of$300 billion a year annually. One thing that was very interesting to me was that, you know, you can imagine how the non-compete may be bad for the worker that's directly covered by the non-compete.

21:52But interestingly, they also have a negative effect even on workers who are not directly covered, which kind of makes sense, right? If there's less churn in the economy because workers are locked in by a non-compete, that means there are fewer opportunities even for workers that are not covered by non-compete. So we found harm to workers. We also found harm to competition and to innovation. And so this is another area of our work where we're looking at product markets, but we're also looking at labor markets. Tracy, that's interesting about the non-competes. It's almost like the corollary or flip side to what we've talked about recently, workers getting wages, even if they're not in the union, from wage gains.

22:31So what may affect just sort of one subset of workers has a broader impact on that. Oh, totally. Also, can I just say, ever since the 2018 Jackson Hole, I get really excited whenever anyone says monopsony. We need an air horn to go off whenever a guest says monopsony for Tracy. But I mean, just on this labor issue point, I mean, this is where we're sort of getting into the heart of the idea of hipster antitrust or sort of moving away from more traditional or classical interpretations of it. And, you know, you're obviously the expert and correct me if I'm wrong, but my impression is that a lot of this is untested in courts.

23:10And as you just pointed out on the non-compete clauses, that, you know, you could maybe fix some of this through new rulemaking, but otherwise you're going to have to pursue it through legal channels. So what exactly is the argument there? Like, how do you get the courts to incorporate this idea into existing law? So the idea that antitrust laws protect everybody, including workers, including competition in labor markets, is entirely accepted by the courts. There was a few years ago a Supreme Court decision, NCAA v. Alston, relating to student athletes, where the court reaffirmed the idea that antitrust laws protect competition on the whole set of sides of the market.

23:52And just recently, the Justice Department prevailed in a case that they brought against publishers that were seeking to merge. And one of the arguments they advanced there was that that merger would have depressed the payments that are made to authors. And so they, again, were looking at sides of the market other than end consumers. And there, again, that idea also prevailed. So I believe we're returning to faithful interpretations of the law, which are accepted by courts. And on the non-compete side, for example, a lot of the comments that we've gotten are also from healthcare workers. And so something that we heard, for for example, was that the use of non-competes during the pandemic really impeded the ability of physicians to move.

24:36And this was a moment in time where, you know, you had outbreaks at different cities and different regions. And so doctors and health care workers wanted to be mobile, right? They wanted to be able to go where COVID was really breaking out. And they found that they weren't able to move easily, and in some instances at all, because of these non-competes. And so you see, again, in a very real material way how this is not just about abstract debates with various labels tacked on, but really just, you know, real life impact. I have what is kind of a philosophical question that I've been thinking about a lot since we interviewed your sort of counterpart over at the DOJ.

25:15You know, when I think about the broader economic agenda of the Biden administration, you know, and many commenters have talked about this, this sort of turn away against sort of neoliberalism, turn away against the sort of assumption that the market is best. And so we have these big subsidies that are going towards big domestic agendas. And some could even say we're picking winners and picking losers in a way. And yet thinking about your antitrust work, you know, competition always seems like a good thing. it is like mom, apple pie, the American flag in competition, like no one's against competition.

25:48But I wonder how it fits in this sort of economic moment in which policy seems to be moving in other realms away from the market knows best. And so you're sort of pursuing this idea that competition is this sort of per se good or sort of a North Star to pursue at a time when a lot of the economic policymaking seems to be skeptical, a lot of traditional ideas of what makes a good market. So antitrust and competition policy is really about setting the rules of the market, right? Antitrust and the FTC Act are really about distinguishing between fair and unfair methods of competition, right? So are you able to compete by burning down your competitor's storefront, right?

26:34Are you able to compete by engaging in certain types of exploitative or predatory practices or just buying out all of your rivals? No, I mean, those are unlawful means of competing. There are other means of competing that are entirely lawful, right? Investing in your facilities, investing in your workers, developing real operational efficiencies. I mean, these are all mechanisms of competing that are fair game. And so that's really where antitrust fits in. I think one area where you do see some analogs between some of the, you know, rethinking that's happening is where we are revisiting some of the core assumptions that started to be baked in, say, the late 70s and 80s.