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Lina Khan, chair of the FTC
Federal Trade Commission Chair Lina Khan talked about anticompetitive concerns in the veterinary industry during a livestreamed keynote speech Tuesday at the American Veterinary Medical Association 2023 Veterinary Business and Economic Forum.
One of America's most powerful public servants has appealed directly to veterinarians to report anti-competitive behavior, in a sign that regulators remain wary of the fast rise of big corporations and big money in the profession.
Lina Khan, chair of the U.S. Federal Trade Commission, delivered remarks in a keynote address to a virtual economics forum organized by the American Veterinary Medical Association.
"We shouldn't have markets where larger businesses are muscling out smaller businesses, or independent businesses are feeling coerced to sell to a private equity firm even if they don't want to," Khan said. "If you see that ... please be sure to report them to us."
The tone of Khan's speech Tuesday was not out of character. Since being appointed chair of the FTC in 2021, the former Columbia University law school professor has taken an assertive approach to antitrust enforcement, rejecting what she described as a prevailing hands-off philosophy dating to the 1970s.
The FTC has targeted technology titans such as Meta, the owner of Facebook, Microsoft and, most recently, Amazon in a landmark case that, if successful, could seriously diminish the e-commerce giant's market power. Khan's decision to address the AVMA forum sends a message that veterinary medicine, too, is very much in the FTC's sights.
"Time after time, we've been hearing from vets about how various trends in the industry — consolidation, financialization and the proliferation of noncompetes — may be undermining the business of veterinary medicine and making it more difficult to provide quality service," Khan said.
The veterinary profession, once comprised chiefly of small, independent businesses, has undergone breakneck consolidation in the past decade or so. Large corporations, such as Mars Inc. and National Veterinary Associates, have acquired thousands of practices in the United States, often locking practitioners into noncompete agreements that prevent them from working elsewhere for lengthy, predetermined periods.
Since 2017, the FTC has intervened four times in acquisition deals in the veterinary profession, each instance involving specialty and emergency hospitals. Last year, for example, it ordered NVA, which operates more than 1,400 practices globally and is owned by German private investor JAB, to offload 11 such hospitals in the U.S. NVA agreed to the sales to win approval for its acquisitions of Sage Veterinary Centers and Ethos Veterinary Health.
"We're bringing cases to address unlawful monopolistic tactics and unfair methods of competition," Khan told the forum. "This includes focusing on rollup schemes that have allowed private equity firms to consolidate power and jack up prices."
The FTC also last year imposed strict limits on NVA, requiring it to notify the FTC in writing 30 days before acquiring a specialty or emergency veterinary clinic within 25 miles of a JAB-owned clinic anywhere in the U.S. Moreover, in several jurisdictions including California and Texas, NVA must receive regulatory approval before acquiring any specialty or emergency veterinary clinic within 25 miles of a JAB-owned clinic.
Concerns about corporate consolidation in the veterinary profession extend beyond the U.S. The United Kingdom's Competition and Markets Authority has intervened in several acquisition deals involving general practices and last month launched an industrywide pricing probe.
Whether the FTC will intervene in proposed mergers of general practices in the U.S. — not just emergency and specialty hospitals — remains to be seen. The FTC and Department of Justice jointly propose an overhaul of U.S. merger guidelines, which, among other things, state that a deal that gives a company a market share of more than 30% will be considered problematic.
"That doesn't mean it's the end of the legal analysis," Khan told the AVMA forum. "It's really just a starting point. The companies have an opportunity to say, 'Yes, we realize that this is presumptively anticompetitive, but this is why we think the merger ultimately is legal.' "
A draft of the new merger guidelines was released in July. A public workshop to discuss the guidelines is scheduled for Nov. 3. (Similar workshops were held in September and October.)
Veterinary mergers, large and small, may face scrutiny
Precisely how the veterinary profession is distributed among independent practices and various consolidators in the U.S. isn't entirely clear. In December 2021, Brakke Consulting, an animal health consultancy, estimated that corporate consolidators owned around 25% of all companion animal practices in the United States. However, Brakke noted that consolidators received at least 40%, and potentially closer to 50%, of client visits, as they often own larger practices. More than a dozen consolidators in the U.S. are backed by private equity firms, including Thrive Pet Healthcare, MedVet, PetVet, VetCor and American Veterinary Group.
How the FTC defines a market will play a critical role in its determination of whether a company controls more than 30%.
"The short of it is, it's a case-by-case, very fact-specific inquiry," Khan said. "We oftentimes look at the geographic market when we're trying to assess the competitive effects, and those can sometimes be local, sometimes they can be national, sometimes they can be regional."
Conducting an assessment, Khan added, involves consulting a host of stakeholders, including customers and suppliers seeking better terms or services. "And so we can look at things like the actual travel patterns of users of those services," she said. "Whether two veterinary clinics are five miles apart is going to look different and mean something different in LA [Los Angeles] than it will in a suburban setting."
The FTC is concerned particularly about the practices of some private equity firms — namely, the use of high levels of debt to acquire assets, then cutting costs to improve financial metrics before selling, or "flipping," them for a profit.
"Private equity or any other investor can provide enormous value and service, so our view is definitely agnostic in terms of the type of business model that firms may be pursuing," Khan said. "That said, we have heard a lot of concern from market participants about instances where you can see what's known as the 'strip and flip' model."
Applying that strategy, Khan maintains, can leave assets such as veterinary hospitals "in a much weaker position" from a competitive standpoint.
Offering an example in human medicine, Khan pointed to a recent FTC action against U.S. Anesthesiology Partners and the private equity firm Welsh, Carson, Anderson & Stowe. The agency alleges the two engaged in a "scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients, and boost their own profits."
A reduction in competition also can lead to diminished services, Khan told the forum. "After private equity has entered nursing homes, for example, there's been a higher degree of mortality ..." Khan said. "So we're talking about impact not just on price, but quality. Especially when you're talking about health care, be it for humans or animals, you want to make sure that quality is staying top-notch."
The FTC will scrutinize more than multibillion mega-mergers. Khan said the agency is also paying attention to "serial acquisitions," in which investors make repeated small purchases that by themselves do not raise antitrust concerns but in aggregate "roll up a market in ways that we believe can be quite harmful to competition."
Noncompete clauses draw spotlight
Another initiative championed by Khan is a proposed rule that largely would ban employers from imposing noncompete clauses on workers. The rule, proposed in January, is expected to be voted on by the FTC board next year.
The agency has five commission seats, of which three are occupied. Two Republican commissioners have resigned in the past 13 months. The first, Noah Joshua Phillips stepped down last October. The second, Christine Wilson, demonstrated on her way out that not everyone supports Khan's reform agenda. "Much ink has been spilled about Lina Khan's attempts to remake federal antitrust law as chairman of the FTC," she said in an opinion piece published Feb. 14 in the Wall Street Journal. "Less has been said about her disregard for the rule of law and due process and the way senior FTC officials enable her." Wilson resigned in March.
The remaining three commissioners are Democrats. They will take on board the nearly 27,000 comments that were submitted about the planned noncompete rule change before casting their vote. Many of those comments came from the health care sector, including from veterinarians, Khan told the AVMA forum.
"They shared stories of how noncompete clauses have upended their lives, keeping them stuck in jobs, forcing them to forgo better job opportunities or otherwise uproot their families because the noncompetes have locked them out of local jobs," she said. "Others shared the fear of being buried in litigation by an employer even when the noncompete in place was void or nonenforceable."
She said veterinarians told of staying in jobs in which they were "quite miserable" or commuting for hours to work outside a region made off-limits by a noncompete — stressors that some suggested may be contributing to mental health issues in the profession. "We really got a pretty stark portrait of how these clauses could be hurting people in their day-to-day lives," she said.
Khan said the agency also received comments maintaining that noncompetes are essential to protect trade secrets or incentivize investment in and training of employees.
"We've seen that the best ways to retain talent is to provide workers competitive wages, benefits, and competitive working conditions," she said. "Many of the most successful companies tend to make these investments in their workers, so offering these competitive dimensions, we believe, is better than trying to lock people in through coercive noncompetes."
The proposed ban on noncompetes would not apply to veterinarians selling practices. Khan posited that noncompete clauses in sale agreements do not have "the same harm on competition and workers as a whole" as in employment contracts.
Do practice names matter?
Asked whether the FTC studies the effects of new owners maintaining the brand names or practice names of the previous owner, Khan replied: "As a general matter, antitrust enforcers tend to focus on the underlying ownership structure — what entity owns a particular company — rather than the brand they have. We focus on the ownership since we think that determines the competition implications and ultimately determines the incentive structure created by the ownerships."
But she invited those who believe the practice may negatively affect competition to speak up. "Certainly, we would be keen to hear from folks" about that, she said.