PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT / ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue New York, NY 10022
MEMORANDUM
February 10, 2024
PRIVILEGE DESIGNATION: This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared in connection with the provision of legal advice and in anticipation of regulatory proceedings before the Federal Trade Commission and/or the Antitrust Division of the United States Department of Justice. This memorandum contains the mental impressions, conclusions, opinions, and legal theories of counsel. It is intended solely for the use of attorneys and authorized personnel at Calderwood & Harkness LLP and at the offices of the client, Ardent Capital Management LLC. Do not distribute, copy, or forward this memorandum or any portion thereof without the express written authorization of the responsible partner, Howard Bellamy.
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I. Executive Summary
This memorandum provides a detailed analysis of the relevant product markets and geographic markets implicated by the proposed acquisition of one hundred percent (100%) of the outstanding equity of Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS") by Ardent Capital Partners III LP ("Ardent Capital" or "Fund III") at an enterprise value of approximately $952 million (the "Transaction"). The analysis set forth herein is intended to support three related submissions: (1) the Hart-Scott-Rodino ("HSR") premerger notification filing, (2) the accompanying request for early termination of the statutory waiting period, and (3) the voluntary submission—commonly referred to as a "white paper"—to be filed with the Federal Trade Commission ("FTC").
The Equity Purchase Agreement governing the Transaction was executed on January 31, 2024. HSR notification forms are targeted for filing on February 16, 2024. Accordingly, this memorandum has been prepared on an expedited basis in order to be finalized and incorporated into the voluntary submission materials in advance of the filing date.
Our analysis leads to the following key conclusions:
Ardent Capital has no existing presence in any of the relevant product markets or geographic markets in which Pinnacle operates. No horizontal overlaps exist between the operations of Pinnacle and the operations of any Ardent Capital portfolio company with respect to either ambulatory surgical center ("ASC") services or physician practice management ("PPM") services. The Transaction will produce zero change in market concentration—as measured by the Herfindahl-Hirschman Index ("HHI")—in any relevant market. The structural presumption set forth in the 2023 DOJ/FTC Merger Guidelines is not triggered under any plausible market definition.
The limited vertical relationship between Ardent Capital's portfolio company, Marlowe Asset Management Rehabilitation Holdings LLC ("Marlowe Asset Management"), and Pinnacle's ASC operations is competitively insignificant. Specifically, twelve (12) of Marlowe Asset Management's seventy-four (74) outpatient physical therapy clinic locations are co-located with or geographically adjacent to Pinnacle ASCs in Texas, Florida, and Georgia. This vertical referral relationship is analyzed in detail in a separate Vertical Relationships Analysis Memorandum prepared by our team and dated February 9, 2024. Clearpath Diagnostics Inc. ("Clearpath"), Ardent Capital's other healthcare portfolio company, operates clinical laboratory services exclusively in Pennsylvania, New Jersey, and New York—states in which Pinnacle has no operations—and therefore presents zero geographic and zero product market overlap with Pinnacle.
Based on the foregoing, we conclude that the Transaction presents no substantive antitrust risk under any applicable theory of competitive harm. We anticipate that early termination of the HSR waiting period will be granted without the issuance of a Second Request for Additional Information.
II. Transaction Overview
This section sets forth the material facts regarding the parties to the Transaction, the transaction structure, and the target's operations that are relevant to the competitive analysis.
A. The Acquirer
Ardent Capital Partners III LP ("Fund III") is a Delaware limited partnership formed for the purpose of making private equity investments. Fund III's general partner is Ardent Capital GP III LLC, a Delaware limited liability company. The investment manager and Ultimate Parent Entity ("UPE") for purposes of the HSR filing is Ardent Capital Management LLC, a Delaware limited liability company registered with the Securities and Exchange Commission under File No. 801-119247 (EIN: 84-5567312).
Ardent Capital Management LLC was co-founded by Julian Desmond and Priya Chandrasekar, who serve as the firm's Managing Partners. The firm's principal office is located at 399 Park Avenue, 41st Floor, New York, NY 10022.
Fund III held its final closing in November 2021 with approximately $4.8 billion in total committed capital from institutional limited partners, including public pension funds, sovereign wealth funds, endowments, foundations, and insurance companies. Fund III's investment strategy focuses on control buyouts and growth equity investments in the healthcare services, technology-enabled services, and business services sectors.
As of the date of this memorandum, Fund III holds two healthcare portfolio companies that are potentially relevant to the competitive analysis of this Transaction:
(1) Marlowe Asset Management Rehabilitation Holdings LLC ("Marlowe Asset Management") — Marlowe Asset Management is a provider of outpatient physical therapy and rehabilitation services operating seventy-four (74) clinic locations across three states: Texas, Florida, and Georgia. Marlowe Asset Management's headquarters is located at 8950 Westheimer Road, Suite 600, Houston, TX 77063. As discussed in detail below, outpatient physical therapy services constitute a distinct product market from ASC services and PPM services, and Marlowe Asset Management accordingly presents no horizontal overlap with Pinnacle.
(2) Clearpath Diagnostics Inc. ("Clearpath") — Clearpath is a provider of independent clinical laboratory services, including reference laboratory testing and anatomic pathology, operating exclusively in Pennsylvania, New Jersey, and New York. Clearpath generated approximately $218 million in revenue in its most recent fiscal year. Clearpath's headquarters is located at 1700 Market Street, Suite 3400, Philadelphia, PA 19103. As discussed below, clinical laboratory services constitute a distinct product market from ASC services and PPM services, and Clearpath's operations are in states where Pinnacle has no presence, resulting in zero geographic overlap.
No other Ardent Capital portfolio company (across any active Ardent fund) operates in the healthcare services sector.
B. The Target
Pinnacle Health Systems, Inc. ("Pinnacle" or "PHS") is a Delaware corporation headquartered at 2200 Lakeshore Boulevard, Suite 500, Charlotte, NC 28202. Pinnacle was founded in 2009 by Dr. Marcus Ellsworth, who serves as CEO and Chairman of the Board. Sandra Trevino serves as Chief Financial Officer. Pinnacle's EIN is 56-4389201.
Pinnacle is a multi-specialty ambulatory surgical center and physician practice management platform. As of the signing date, Pinnacle operates forty-two (42) ambulatory surgical centers and thirty-one (31) affiliated physician practice management entities across nine states: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas. The company employs approximately 4,700 individuals, including administrative personnel, clinical staff, and physicians employed by affiliated practice management entities.
Pinnacle's ASC operations span multiple surgical specialties, including orthopedic surgery, gastroenterology, ophthalmology, pain management, otolaryngology (ENT), and general surgery. The PPM entities provide management, administrative, and operational services to affiliated physician practices in three core specialties: orthopedics, gastroenterology, and ophthalmology.
For purposes of NAICS classification, Pinnacle's operations fall primarily within NAICS code 621493 (Freestanding Ambulatory Surgical and Emergency Centers) for its ASC operations and NAICS code 621111 (Offices of Physicians) for its affiliated physician practice management entities.
Tarvex Financial Summary. Pinnacle reported fiscal year 2023 revenue of $637.4 million per audited financial statements prepared by Harland & Marsh CPAs LLP. Fiscal year 2023 adjusted EBITDA was $98.2 million, as confirmed by the quality of earnings report prepared by Apex Advisory Group LLC in connection with the Transaction. Total assets as of fiscal year-end 2023 were approximately $812 million.
C. The Seller
Veltrano Equity Holdings LLC, acting through Veltrano Equity Partners Fund V LP, holds approximately 62.3% of Pinnacle's pre-transaction equity. Veltrano acquired its controlling interest in Pinnacle in 2017 at an enterprise value of approximately $340 million. During its period of ownership, Veltrano funded nineteen (19) add-on acquisitions to expand Pinnacle's geographic footprint and service capabilities, building the current platform from a smaller, primarily North Carolina-based operation to a nine-state enterprise.
The remaining pre-transaction equity is held by founder/management rollover holders (approximately 23.1%), led by Dr. Ellsworth and members of Pinnacle's senior management team, and by minority physician investors (approximately 14.6%), consisting of physicians who are affiliated with Pinnacle's ASCs and PPM entities.
D. Transaction Structure and Consideration
The Transaction is structured as a 100% stock purchase. Ardent Capital Partners III LP will acquire all of the outstanding equity interests of Pinnacle Health Systems, Inc. through a newly formed acquisition subsidiary.
Key financial terms are as follows:
Dr. Ellsworth will roll over approximately $28.5 million in equity value, representing approximately 3.0% of the post-closing equity of the surviving entity, to continue his role as CEO. All other existing equity holders will receive cash consideration at closing.
III. Analytical Framework — Applicable Merger Guidelines
A. Governing Statutory and Regulatory Framework
The competitive analysis of the Transaction is governed by the following principal statutory and regulatory authorities:
Section 7 of the Clayton Act (15 U.S.C. § 18) prohibits acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly" in "any line of commerce" in "any section of the country." Section 7 applies to both horizontal and vertical transactions and encompasses stock acquisitions, asset acquisitions, and other methods of obtaining control. The statute's prophylactic purpose requires only a showing of probable anticompetitive effect, not actual anticompetitive harm. Nevertheless, where an acquisition produces no change in market structure, as is the case here, Section 7 is not implicated.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. § 18a) and the implementing regulations promulgated by the FTC at 16 C.F.R. Parts 801–803 require premerger notification to the FTC and the Antitrust Division of the Department of Justice ("DOJ") for transactions meeting certain size-of-transaction and size-of-person thresholds. The Transaction meets the applicable thresholds for the 2024 calendar year: the size-of-transaction threshold (as adjusted) of $111.4 million is exceeded by the Transaction's enterprise value of $952 million, and the size-of-person test is satisfied based on the total assets and net sales of the acquiring person and the acquired person. Accordingly, HSR notification is required, and the parties intend to file HSR notification forms on February 16, 2024.
The 2023 DOJ/FTC Merger Guidelines were jointly issued by the Department of Justice and the Federal Trade Commission on December 18, 2023, replacing the prior 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines. The 2023 Guidelines set forth the agencies' current analytical framework for evaluating mergers and acquisitions under Section 7 of the Clayton Act, including principles governing market definition, competitive effects analysis, and structural presumptions. The 2023 Guidelines apply to this Transaction by virtue of their effective date and the timing of the Transaction.
B. Market Definition Principles
The 2023 Merger Guidelines, consistent with prior agency practice and Supreme Court precedent, employ the "hypothetical monopolist" test—also known as the SSNIP (Small but Significant and Non-transitory Increase in Price) test—as the principal tool for defining both relevant product markets and relevant geographic markets.
Relevant Product Market. The relevant product market is defined as the smallest group of products or services such that a hypothetical monopolist controlling all of those products or services could profitably impose a small but significant and non-transitory increase in price (typically five to ten percent) above prevailing levels. The test proceeds iteratively: beginning with the merging firm's own products, the market is expanded to include additional substitutes until the hypothetical monopolist test is satisfied. Products outside the relevant market may nonetheless exert some competitive constraint, but such constraint is insufficient to defeat a SSNIP within the candidate market.
In practice, market definition in healthcare services cases is informed by both quantitative analysis and practical indicia of market boundaries. The Supreme Court in Brown Shoe Co. v. United States, 370 U.S. 294 (1962), identified several factors ("Brown Shoe factors") relevant to market definition, including: (i) industry or public recognition of the market as a separate economic entity; (ii) the product's peculiar characteristics and uses; (iii) unique production facilities; (iv) distinct customers; (v) distinct prices; (vi) sensitivity to price changes; and (vii) specialized vendors. The FTC and DOJ have consistently applied these factors in healthcare merger investigations, and we apply them in the analysis below.
Relevant Geographic Market. The relevant geographic market is defined as the region in which the merging firms compete, and to which customers can practically turn for alternative sources of supply. The hypothetical monopolist test is again the primary tool: a candidate geographic market is the smallest region such that a hypothetical monopolist of the relevant product in that region could profitably impose a SSNIP. In healthcare services markets, the agencies have typically defined geographic markets at the Metropolitan Statistical Area ("MSA") level or narrower, reflecting the localized nature of healthcare services delivery and the limited willingness of patients to travel long distances for routine outpatient procedures.
C. Concentration Thresholds and Structural Presumptions
The 2023 Merger Guidelines establish the following concentration thresholds, measured by the Herfindahl-Hirschman Index:
The HHI is calculated by summing the squares of the market shares (expressed as percentages) of all firms in the relevant market. The change in HHI attributable to a merger (referred to as the "delta" or "increase") is calculated as twice the product of the merging firms' market shares.
Under Guideline 1 of the 2023 Merger Guidelines, a merger is presumptively anticompetitive where (i) the post-merger HHI exceeds 1,800 and (ii) the merger increases the HHI by more than 100 points. This structural presumption reflects the agencies' judgment that mergers producing significant increases in concentration in already concentrated markets are likely to enhance market power.
Critically, where the acquiring party has no existing presence in any relevant market, the transaction produces a delta of zero in the HHI calculation, and the structural presumption is not triggered. This is because the acquiring party's pre-merger market share is zero, and therefore the merger-specific increase in HHI (calculated as 2 × 0 × [target share]) is mathematically zero. The post-merger HHI is identical to the pre-merger HHI.
This principle is directly applicable to the Transaction at hand: because Ardent Capital has no existing operations in any ASC services market or PPM services market in any of the nine MSAs where Pinnacle operates, the Transaction produces zero delta in HHI in every relevant market, and the structural presumption is not implicated under any plausible market definition.
IV. Relevant Product Market Analysis
A. Product Market #1: Multi-Specialty Ambulatory Surgical Center Services
1. Market Description
Ambulatory surgical centers are healthcare facilities where surgical and other procedures are performed on an outpatient basis, meaning that patients are admitted, undergo a procedure, and are discharged on the same day without requiring overnight hospitalization. ASCs are licensed and regulated separately from hospitals and hospital outpatient departments under both federal and state law. Medicare-certified ASCs must comply with the Conditions for Coverage set forth at 42 C.F.R. Part 416 and are reimbursed under the Medicare ASC payment system, which is distinct from the Hospital Outpatient Prospective Payment System ("OPPS") applicable to hospital outpatient departments.
Pinnacle operates forty-two (42) ASCs offering multi-specialty surgical services across nine states. The specialties represented in Pinnacle's ASC network include:
• Orthopedic surgery (including total joint replacement, arthroscopy, spine procedures, and sports medicine surgery)
• Gastroenterology procedures (including colonoscopy, upper endoscopy, and related diagnostic and therapeutic procedures)
• Ophthalmology procedures (including cataract surgery, retinal procedures, and refractive surgery)
• Pain management (including spinal injections, nerve blocks, and other interventional pain procedures)
• Otolaryngology (ENT) (including tonsillectomy, adenoidectomy, sinus surgery, and related procedures)
• General surgery (including hernia repair, cholecystectomy, and other laparoscopic and minimally invasive procedures)
ASC services are distinct from inpatient hospital surgical services on multiple dimensions that support their treatment as a separate product market for antitrust purposes:
Regulatory framework. ASCs are licensed and certified under a separate regulatory regime from hospitals. ASCs are subject to state licensure requirements specific to ambulatory surgical facilities, and Medicare certification is governed by separate Conditions for Coverage. In several states, ASCs are subject to Certificate of Need ("CON") review processes that are distinct from those applicable to hospitals.
Cost structure. ASCs typically operate with significantly lower overhead costs than hospital outpatient departments, reflecting their narrower scope of services, smaller physical footprints, and more specialized staffing models. ASC operating margins and cost structures differ materially from those of hospital-based surgical programs.
Reimbursement rates. ASCs are reimbursed by Medicare at rates that are generally lower than the rates applicable to the same procedures performed in hospital outpatient departments. Commercial payor contracts with ASCs similarly reflect distinct reimbursement schedules and negotiating dynamics.
Patient population. ASC patients are typically lower-acuity patients who do not require overnight hospitalization or access to the full range of hospital services. Patient selection criteria for ASC procedures are governed by clinical guidelines that differ from those applicable to hospital-based surgery.
Competitive dynamics. ASCs compete with one another, and to some extent with hospital outpatient departments, for patients, surgeons, and payor contracts. The competitive dynamics among ASCs—including quality, convenience, surgeon access, and price—are distinct from the competitive dynamics of the broader hospital services market.
The FTC and DOJ have recognized ASC services as a distinct product market in prior healthcare merger investigations and enforcement actions. The agencies' analyses have consistently treated ASC services separately from hospital-based outpatient surgical services, citing differences in the nature of service delivery, licensing and certification requirements, payor contracting dynamics, and patient choice patterns. This approach is consistent with the Brown Shoe practical indicia and with the application of the hypothetical monopolist test to the ASC services market.
2. Demand-Side Substitution
From the perspective of patients requiring outpatient surgical procedures, the principal alternatives to ASC services are: (a) hospital outpatient departments ("HOPDs"), which provide outpatient surgical services within a hospital campus or off-campus hospital outpatient facility; and (b) for certain low-acuity procedures, physician office-based procedure rooms.
For the majority of procedures performed at Pinnacle's ASCs, HOPDs are a less attractive substitute from the patient's perspective due to several factors: higher out-of-pocket costs (reflecting higher facility fees), longer wait times for scheduling, less convenient locations, and a different patient experience characterized by the larger and more complex hospital environment. While HOPDs provide a degree of competitive constraint on ASC pricing and quality—and some patients may switch to HOPDs in response to a significant increase in ASC prices—the weight of evidence suggests that HOPDs are not sufficiently close substitutes to be included within the same relevant product market as ASCs for purposes of the hypothetical monopolist test.
Physician office-based procedures are similarly a limited substitute for ASC services. The scope of procedures that can be safely and effectively performed in a physician office setting is narrower than the scope of ASC-eligible procedures, and physician offices lack the specialized surgical infrastructure, anesthesia services, and post-anesthesia recovery capabilities of ASCs.
Accordingly, for purposes of this analysis, we define the relevant product market as multi-specialty ambulatory surgical center services, with hospital outpatient departments and physician office-based procedures recognized as providing a competitive fringe that exercises some degree of competitive constraint but does not warrant inclusion within the relevant market.
3. Supply-Side Substitution
Entry into the ASC services market requires significant capital investment, typically in the range of $3 million to $8 million per facility depending on specialty mix, geographic location, and facility size. In addition, new ASC entrants must obtain state licensure, Medicare and Medicaid certification (which involves compliance with the Conditions for Coverage and a survey process), and—in states that maintain Certificate of Need programs—CON approval, which can involve a lengthy and uncertain regulatory process.
Supply-side substitution by existing healthcare providers is limited. While a physician practice could, in theory, convert its office-based facilities to ASC-capable facilities, doing so would require compliance with the full range of ASC regulatory requirements, substantial capital investment, and a potentially lengthy certification process. As a practical matter, such supply-side entry is neither timely nor likely in response to a SSNIP, and therefore does not warrant expansion of the product market definition.
B. Product Market #2: Physician Practice Management Services
1. Market Description
Pinnacle operates thirty-one (31) affiliated physician practice management entities focused on three core surgical specialties: orthopedics, gastroenterology, and ophthalmology. These PPM entities provide comprehensive management, administrative, and operational services to affiliated physician practices, enabling physicians to focus on clinical care while the PPM entity handles the business and operational aspects of practice operations.
The services provided by Pinnacle's PPM entities include, but are not limited to:
• Billing, coding, and revenue cycle management
• Human resources management (recruitment, benefits administration, payroll)
• Regulatory compliance and quality assurance
• Procurement and supply chain management
• Facility management and capital planning
• Information technology and electronic health records management
• Payor contracting and managed care negotiations
• Strategic planning and market development
PPM services constitute a distinct product market from the underlying physician services delivered by the affiliated practices. The FTC has recognized that PPM platforms present distinct competitive dynamics: PPM companies compete with one another for management service agreements with physician practices, and the relevant competitive considerations—including operational expertise, specialty-specific capabilities, geographic reach, and economies of scale—differ materially from the competitive considerations applicable to physician-patient clinical services.
The PPM model has become increasingly prevalent in healthcare, particularly in the three specialties in which Pinnacle operates, as physician practices seek to access operational efficiencies, capital investment, and administrative infrastructure that would be difficult to achieve independently. The growth of PPM platforms has been driven by the increasing complexity of healthcare regulation, payor contracting, and technology requirements, all of which create demand for the specialized management services that PPM entities provide.
2. Specialty-Specific Sub-Markets
The competitive conditions and market participants in PPM services vary by medical specialty, and accordingly, it is appropriate to analyze the PPM market both in the aggregate and on a specialty-specific basis. Pinnacle's PPM operations are concentrated in three distinct specialty sub-markets:
Orthopedics PPM. Pinnacle manages orthopedic practices that are closely aligned with its ASC operations, as orthopedic physicians generate surgical cases—including total joint replacements, arthroscopic procedures, and spine surgeries—that are directed to affiliated ASCs. The orthopedics PPM market includes a number of national and regional competitors, including several PE-backed platforms that have pursued consolidation strategies similar to Pinnacle's.
Gastroenterology PPM. Pinnacle manages gastroenterology practices whose physicians perform endoscopy procedures at affiliated ASCs. Gastroenterology PPM is among the most active segments of the PPM market, with multiple well-capitalized platforms competing for management agreements with GI physician practices.
Ophthalmology PPM. Pinnacle manages ophthalmology and optometry practices that generate surgical volume—particularly cataract and refractive surgery—for affiliated ASCs. The ophthalmology PPM market has experienced significant consolidation activity in recent years, with several major platforms competing nationally.
For purposes of this memorandum, we analyze PPM services both in the aggregate and by specialty, as the competitive overlap analysis may differ by sub-market. In all cases, however, the conclusion is the same: Ardent Capital has no existing presence in any PPM market, whether defined broadly or by specialty.
3. Demand-Side and Supply-Side Considerations
From the demand side, physician practices seeking management services evaluate PPM platforms based on several factors: specialty-specific expertise and track record, geographic proximity and local market knowledge, operational infrastructure and technology capabilities, payor contracting leverage and relationships, and financial resources for practice development and capital investment. These considerations tend to favor established PPM platforms with deep specialty expertise and a demonstrated ability to deliver value to affiliated physician practices.
From the supply side, entry into the PPM market requires specialty-specific expertise, existing physician relationships, significant operational infrastructure, and the financial resources to invest in practice acquisitions and development. These factors create meaningful barriers to entry, particularly for new entrants seeking to compete with established, PE-backed PPM platforms. Supply-side substitution is limited: a PPM platform focused on one specialty (e.g., dermatology) would face significant barriers to entering a different specialty PPM market (e.g., orthopedics), as the relevant clinical, operational, and payor knowledge differs substantially across specialties.
C. Products and Services Offered by Ardent Capital Portfolio Companies — Separate Markets
1. Marlowe Asset Management Rehabilitation Holdings LLC — Outpatient Physical Therapy
Marlowe Asset Management Rehabilitation Holdings LLC provides outpatient physical therapy and rehabilitation services through seventy-four (74) clinic locations across Texas, Florida, and Georgia. Marlowe Asset Management's services include physical therapy, occupational therapy, and sports medicine rehabilitation for patients recovering from musculoskeletal injuries, post-surgical rehabilitation, and chronic pain conditions.
Outpatient physical therapy services are a distinct product market from ASC services and PPM services on every relevant dimension:
• Regulatory framework: Outpatient physical therapy clinics are licensed under a separate state regulatory framework from ASCs. Physical therapists are licensed professionals subject to distinct scope-of-practice laws. PT clinics are not subject to ASC Conditions for Coverage or Medicare ASC payment system rules.
• Payor contracts: Outpatient PT services are reimbursed under separate payor fee schedules and contract terms from ASC services. Medicare reimburses outpatient PT under the Physician Fee Schedule, not the ASC payment system.
• Clinical services: The clinical services provided by outpatient PT clinics (therapeutic exercise, manual therapy, modalities, functional training) are fundamentally different from the surgical and procedural services provided at ASCs.
• Licensure requirements: PT clinics require PT facility licensure; ASCs require separate ASC-specific licensure. There is no cross-licensure or interchangeability between the two facility types.
• Customers: PT clinics serve patients who have been referred for rehabilitation services; ASCs serve patients who require surgical or procedural interventions. While there may be some overlap in patient populations (e.g., an orthopedic surgery patient may receive post-surgical PT), the services themselves are distinct and non-substitutable.
There is no demand-side substitutability between PT services and ASC services: a patient requiring surgery cannot substitute physical therapy for that surgery (except in limited circumstances involving conservative treatment decisions, which are clinical decisions rather than market-driven substitution). Similarly, there is no supply-side substitutability: a PT clinic cannot convert to an ASC without a fundamentally different facility, equipment, licensing, and staffing structure.
Conclusion: Outpatient physical therapy services constitute a separate product market from ASC services and PPM services. There is no horizontal overlap between Marlowe Asset Management's operations and Pinnacle's operations in any relevant product market.
2. Clearpath Diagnostics Inc. — Clinical Laboratory Services
Clearpath Diagnostics Inc. provides independent clinical laboratory services, including reference laboratory testing, anatomic pathology, and molecular diagnostics, to referring physicians, hospitals, and other healthcare providers in Pennsylvania, New Jersey, and New York.
Independent clinical laboratory services are a distinct product market from ASC services and PPM services:
• Regulatory framework: Clinical laboratories are regulated under the Clinical Laboratory Improvement Amendments ("CLIA") of 1988 and must obtain CLIA certification. Laboratories are also subject to state laboratory licensure requirements. These regulatory frameworks are entirely separate from ASC licensing and certification requirements.
• Payor dynamics: Clinical laboratory services are reimbursed under the Medicare Clinical Laboratory Fee Schedule, which is distinct from the ASC payment system and the Physician Fee Schedule. Commercial payor contracts for laboratory services involve different negotiating dynamics and fee structures.
• Customers: The primary customers of independent clinical laboratories are referring physicians and hospitals that order laboratory tests on behalf of their patients. This customer base is distinct from the patient population served by ASCs.
• Service delivery: Laboratory services involve specimen collection, processing, analysis, and reporting. These activities are fundamentally different from the surgical and procedural services delivered at ASCs and the management services provided by PPM entities.
Conclusion: Independent clinical laboratory services constitute a separate product market from ASC services and PPM services. There is no horizontal overlap between Clearpath's operations and Pinnacle's operations in any relevant product market. Moreover, as discussed in Section V below, Clearpath operates exclusively in states (PA, NJ, NY) where Pinnacle has no presence, resulting in zero geographic overlap as well.
V. Relevant Geographic Market Analysis
A. Geographic Market Definition Methodology
Consistent with established FTC and DOJ practice in healthcare services merger cases, this analysis defines the relevant geographic markets at the Metropolitan Statistical Area ("MSA") level. MSA-level market definition reflects the localized nature of ASC and PPM services: patients receiving outpatient surgical procedures overwhelmingly choose facilities within their home MSA, and physician practices seeking PPM services similarly engage with platforms that have a local or regional presence within their geographic area.
The FTC has consistently employed MSA-level or narrower geographic market definitions in healthcare merger cases, including in investigations involving ASC platforms, hospital systems, and physician group consolidation. While narrower geographic definitions (e.g., county-level or drive-time-based market areas) may be appropriate in some circumstances, the MSA-level definition is both conservative and practical for the purposes of this analysis. To the extent that narrower market definitions would be appropriate in any particular MSA, the competitive analysis would be unchanged: Ardent Capital has no existing presence in any sub-MSA geographic area where Pinnacle operates.
Pinnacle operates across nine MSAs, and this analysis addresses each in turn below. In all nine MSAs, Ardent Capital has no existing ASC or PPM operations, and the Transaction produces zero change in market concentration.
B. MSA-by-MSA Analysis
1. Charlotte-Concord-Gastonia, NC-SC MSA
The Charlotte MSA is Pinnacle's largest market and headquarters location. The MSA encompasses a broad metropolitan area spanning portions of both North Carolina and South Carolina, with a population of approximately 2.7 million.
Pinnacle's presence: Pinnacle operates fourteen (14) ASCs in the Charlotte MSA, representing approximately 20.9% of the estimated sixty-seven (67) total ASCs operating in the MSA. Pinnacle's estimated share of total ASC net patient revenue in the Charlotte MSA is approximately 18.3%, reflecting the mix of surgical specialties and procedure volumes across Pinnacle's Charlotte-area facilities.
Market concentration: The pre-transaction HHI in the Charlotte MSA ASC market is estimated at approximately 1,280, placing the market in the unconcentrated category (below the 1,500 threshold). The market is served by a diverse group of competitors, including multiple independent ASCs, hospital-affiliated ASC programs (operated by Ridgeway Group, Ridgeway Corporation, and other health systems), and competing PE-backed ASC platforms.
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any other healthcare facility in the Charlotte MSA. Marlowe Asset Management Rehabilitation Holdings LLC does not operate PT clinics in North Carolina or South Carolina. Clearpath Diagnostics Inc. does not operate laboratories in North Carolina or South Carolina.
Post-transaction HHI: Approximately 1,280 — identical to the pre-transaction HHI. The HHI delta is zero.
Conclusion: No competitive concern. The Transaction does not change the competitive landscape in the Charlotte MSA in any respect.
2. Raleigh-Cary, NC MSA
The Raleigh-Cary MSA, with a population of approximately 1.4 million, is a growing healthcare market in central North Carolina. Pinnacle operates ASCs and affiliated PPM entities in this market, competing against a fragmented field of ASC operators that includes both independent physician-owned facilities and hospital-affiliated ASC programs associated with major health systems active in the Triangle region.
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any healthcare facility in the Raleigh-Cary MSA.
Post-transaction HHI delta: Zero. The Transaction produces no change in market concentration.
Conclusion: No competitive concern. Detailed market share and concentration data for this MSA are set forth in the Competitor Identification and Market Participant Chart (spreadsheet dated February 10, 2024).
3. Richmond, VA MSA
The Richmond MSA is a mid-sized healthcare market in central Virginia with a population of approximately 1.3 million. Pinnacle operates ASCs and affiliated PPM entities in this market.
Regulatory note: Virginia maintains a Certificate of Need program applicable to ASCs, which creates a regulatory barrier to new ASC entry in the state. The CON requirement limits the ability of new competitors to enter the market, which may result in higher concentration levels and reduced competitive dynamism relative to non-CON states. However, this regulatory barrier is a pre-existing market condition that is unrelated to the Transaction and is not altered by the Transaction. The CON program is addressed in greater detail in the separate State Regulatory / CON Analysis Memorandum (dated February 7, 2024).
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any healthcare facility in the Richmond MSA.
Post-transaction HHI delta: Zero.
Conclusion: No competitive concern. Detailed market share and concentration data are set forth in the Competitor Identification and Market Participant Chart.
4. Nashville-Davidson-Murfreesboro-Franklin, TN MSA
The Nashville MSA is one of the nation's premier healthcare markets, home to multiple major health systems, healthcare services companies, and a dense ecosystem of healthcare providers. The MSA has a population of approximately 2.0 million and is characterized by a highly competitive and dynamic ASC market with a large number of operators.
Pinnacle operates ASCs and affiliated PPM entities in the Nashville MSA, competing against a substantial number of independent, hospital-affiliated, and PE-backed ASC operators. The depth and breadth of competition in this market contribute to a relatively fragmented competitive landscape.
Regulatory note: Tennessee maintains a Certificate of Need program applicable to ASCs, which creates a barrier to new ASC entry. As with the Virginia CON program, this is a pre-existing market condition unrelated to the Transaction.
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any healthcare facility in the Nashville MSA.
Post-transaction HHI delta: Zero.
Conclusion: No competitive concern.
5. Atlanta-Sandy Springs-Alpharetta, GA MSA
The Atlanta MSA is a large and growing metropolitan area with a population of approximately 6.1 million, making it one of the largest healthcare markets in the Southeast. Pinnacle operates ASCs and affiliated PPM entities in the Atlanta MSA.
Regulatory note: Georgia maintains a Certificate of Need program applicable to ASCs, which limits new entry. The CON program is addressed in the State Regulatory / CON Analysis Memorandum.
Marlowe Asset Management Rehabilitation Holdings LLC presence: Marlowe Asset Management operates outpatient physical therapy clinics in Georgia, and some of those locations are situated within the Atlanta MSA. However, as analyzed in detail in Section IV.C.1 above, outpatient physical therapy services constitute a separate product market from ASC services and PPM services. There is no horizontal overlap between Marlowe Asset Management's PT operations and Pinnacle's ASC/PPM operations.
The vertical referral relationship between Marlowe Asset Management PT clinics and Pinnacle ASCs in the Atlanta MSA—specifically, the potential for Marlowe Asset Management PT clinics to refer post-surgical rehabilitation patients from Pinnacle ASC surgeons, or conversely, for Pinnacle ASC surgeons to refer patients to Marlowe Asset Management PT clinics for post-operative rehabilitation—is addressed in the separate Vertical Relationships Analysis Memorandum (dated February 9, 2024). As a preliminary matter, we note that the referral volume between Marlowe Asset Management and Pinnacle in the Atlanta MSA is de minimis and does not raise competitive concerns.
Ardent Capital presence in ASC or PPM markets: None.
Post-transaction HHI delta in ASC/PPM markets: Zero.
Conclusion: No horizontal competitive concern. The vertical relationship is competitively insignificant and is addressed in the separate vertical analysis memorandum.
6. Tampa-St. Petersburg-Clearwater, FL MSA
The Tampa-St. Petersburg-Clearwater MSA is a major metropolitan area with a population of approximately 3.2 million and a substantial healthcare services market. Pinnacle operates ASCs and affiliated PPM entities in this market.
Regulatory note: Florida does not have a Certificate of Need requirement for ASCs, resulting in lower regulatory barriers to entry relative to CON states. As a consequence, the Tampa MSA ASC market is generally more fragmented and competitive than ASC markets in CON states, with a larger number of ASC operators competing for patients and payor contracts.
Marlowe Asset Management Rehabilitation Holdings LLC presence: Marlowe Asset Management operates outpatient PT clinics in Florida, including locations within the Tampa MSA. The same product market analysis applies: outpatient PT is a separate product market from ASC and PPM services, and there is no horizontal overlap. The vertical referral relationship is addressed in the separate vertical analysis memorandum.
Ardent Capital presence in ASC or PPM markets: None.
Post-transaction HHI delta in ASC/PPM markets: Zero.
Conclusion: No horizontal competitive concern.
7. Birmingham-Hoover, AL MSA
The Birmingham-Hoover MSA, with a population of approximately 1.1 million, is the principal metropolitan area in Alabama and a regional healthcare center. Pinnacle operates ASCs and affiliated PPM entities in this market.
Regulatory note: Alabama maintains a Certificate of Need program applicable to ASCs, creating a regulatory barrier to new entry. The CON program is addressed in the State Regulatory / CON Analysis Memorandum.
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any healthcare facility in the Birmingham-Hoover MSA.
Post-transaction HHI delta: Zero.
Conclusion: No competitive concern.
8. Columbus, OH MSA
The Columbus MSA, with a population of approximately 2.1 million, is a growing healthcare market in central Ohio. Pinnacle operates ASCs and affiliated PPM entities in this market.
Regulatory note: Ohio maintains a CON-like regulatory process for certain healthcare facilities, though the regulatory environment applicable to ASCs is generally less restrictive than the traditional CON programs maintained by states such as Virginia, Tennessee, Georgia, and Alabama. The specific requirements and their implications for competitive dynamics in the Columbus ASC market are addressed in the State Regulatory / CON Analysis Memorandum.
Ardent Capital presence: None. No Ardent Capital portfolio company operates ASCs, PPM entities, or any healthcare facility in the Columbus MSA.
Post-transaction HHI delta: Zero.
Conclusion: No competitive concern.
9. Dallas-Fort Worth-Arlington, TX MSA
The Dallas-Fort Worth-Arlington MSA is one of the largest metropolitan areas in the United States, with a population of approximately 7.6 million, and one of the most competitive healthcare markets in the country. The market is home to a large number of ASC operators, including multiple national and regional PE-backed ASC platforms, hospital-affiliated ASC programs, and numerous independent physician-owned ASCs.
Pinnacle operates ASCs and affiliated PPM entities in the Dallas-Fort Worth MSA. Given the size and competitive depth of this market, Pinnacle's share of the ASC market in this MSA is modest.
Regulatory note: Texas does not have a Certificate of Need requirement for ASCs, contributing to the market's competitive dynamism and the presence of a large number of ASC operators.
Marlowe Asset Management Rehabilitation Holdings LLC presence: Marlowe Asset Management operates outpatient PT clinics in Texas, including a subset of its seventy-four (74) total locations that are situated within the Dallas-Fort Worth MSA. Some of these Marlowe Asset Management locations are among the twelve (12) total Marlowe Asset Management locations across Texas, Florida, and Georgia that are co-located with or geographically adjacent to Pinnacle ASCs. As discussed above, outpatient PT services constitute a separate product market from ASC and PPM services, and the vertical referral relationship is addressed in the separate Vertical Relationships Analysis Memorandum.
Ardent Capital presence in ASC or PPM markets: None.
Post-transaction HHI delta in ASC/PPM markets: Zero.
Conclusion: No horizontal competitive concern.
VI. Summary of Overlap and Concentration Analysis
A. Horizontal Overlap Assessment — Summary Table
The following table summarizes the horizontal overlap analysis across all nine MSAs in which Pinnacle operates. In every market, Ardent Capital has no existing ASC or PPM presence, and the Transaction produces zero change in HHI.
\* Detailed market share and concentration data for these MSAs are set forth in the Competitor Identification and Market Participant Chart (spreadsheet dated February 10, 2024) and the HHI Concentration Analysis Workpaper (dated February 10, 2024). The Charlotte MSA data is presented in full as the illustrative market because it is Pinnacle's largest market and the most detailed data set was available. For all MSAs, the critical finding is the same: Ardent Capital has zero existing ASC/PPM presence, and the HHI delta is zero.
The Charlotte MSA — Pinnacle's largest market — serves as the illustrative case. With fourteen (14) of approximately sixty-seven (67) ASCs, Pinnacle holds an estimated facility share of approximately 20.9% and an estimated net patient revenue share of approximately 18.3%. The pre-transaction HHI of approximately 1,280 places the Charlotte MSA in the unconcentrated category. Because Ardent Capital has zero existing ASC or PPM operations in the Charlotte MSA (or in any other MSA), the post-transaction HHI is identical to the pre-transaction HHI, and the delta is zero.
The same analysis applies uniformly across all nine MSAs. Regardless of the specific concentration levels, market shares, and competitive conditions in each individual MSA, the fundamental fact that Ardent Capital has no existing presence in any ASC or PPM market means that the Transaction produces zero change in concentration in every market. This is a dispositive finding for purposes of the horizontal merger analysis.
B. Vertical Relationship Summary
As noted throughout this memorandum, the Transaction gives rise to a limited vertical relationship between Marlowe Asset Management Rehabilitation Holdings LLC (an Ardent Capital portfolio company providing outpatient physical therapy services) and Pinnacle's ASC operations. Specifically, twelve (12) of Marlowe Asset Management's seventy-four (74) PT clinic locations are co-located with or geographically adjacent to Pinnacle ASCs in Texas, Florida, and Georgia.
This vertical relationship is analyzed in detail in the separate Vertical Relationships Analysis Memorandum (dated February 9, 2024), which examines: (a) the nature and volume of referral flows between Marlowe Asset Management PT clinics and Pinnacle ASC surgeons; (b) whether the combined entity would have the ability and incentive to foreclose rival PT providers from receiving post-surgical rehabilitation referrals from Pinnacle-affiliated surgeons; (c) whether the combined entity would have the ability and incentive to foreclose rival ASCs from receiving surgical referrals from Marlowe Asset Management-affiliated PT patients; and (d) the competitive significance of the referral relationship in the context of the overall ASC and PT markets.
The preliminary conclusion set forth in that memorandum is that the vertical referral relationship is competitively insignificant. The volume of referrals flowing between Marlowe Asset Management PT clinics and Pinnacle ASC surgeons is de minimis relative to the total referral volumes in the relevant markets. The combined entity would not have the ability or incentive to foreclose rival providers in either the PT or ASC markets. Accordingly, the vertical relationship does not raise concerns under the 2023 Merger Guidelines' framework for vertical theories of harm (Guideline 6).
C. Clearpath Diagnostics — No Geographic Overlap
Clearpath Diagnostics Inc. operates independent clinical laboratory services exclusively in Pennsylvania, New Jersey, and New York. Pinnacle Health Systems operates exclusively in North Carolina, South Carolina, Virginia, Tennessee, Georgia, Florida, Alabama, Ohio, and Texas.
There is zero geographic overlap between Clearpath and Pinnacle. The two companies operate in entirely different states with no contiguous or overlapping service areas. Furthermore, as discussed in Section IV.C.2, clinical laboratory services constitute a separate product market from ASC services and PPM services, resulting in zero product market overlap as well.