In February 2018, the United States Attorney’s Office for the Southern District of Florida – historically one of the most active districts prosecuting healthcare fraud – intervened in a qui tam suit filed against Diabetic Care RX, LLC d/b/a Patient Care America (“PCA”), a pharmacy organized under Florida law and also named Riordan, Lewis & Haden, Inc. (“RLH”), a private equity firm holding a majority interest in PCA, as defendant. In its Complaint, the United States Department of Justice (“DOJ”) alleges that the defendants defrauded the U.S. of approximately $85 million through a scheme in which PCA provided illegal commissions to independent marketers in exchange for referrals for certain compound drugs that were reimbursed by Tricare, a federal health care program. The complaint further alleges that the pharmacy’s controlling stakeholder, private equity firm RLH, managed and controlled PCA and participated in the charged misconduct. The lawsuit alleges this was all in violation of the False Claims Act (“FCA”) and the Anti-Kickback Statute (“AKS”).
The FCA imposes liability on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(A)-(B). The Anti-Kickback Statute prohibits the knowing and willful solicitation or receipt of any remuneration in exchange for the referral of federal health care business. 42 U.S.C. § 1320a-7b(b)(2). A claim that includes items or services resulting from a violation of the Anti-Kickback Statute “cons
titutes a false or fraudulent claim” under the FCA. 42 U.S.C. § 1320a-7b(g).
The DOJ’s complaint alleges PCA entered into independent contractor agreements with three marketing companies, under which each company would target and refer patients—specifically Tricare beneficiaries—to PCA for compounded drug prescriptions. And thus PCA’s commission payments to the marketing firms were illegal kickbacks under the AKS, and that the claims resulting from these kickbacks were presented to Tricare for payment by PCA in violation of the FCA. Throughout its complaint, the DOJ makes a litany of additional allegations that the pharmacy paid illegal kickbacks to patient recruiters to obtain lucrative referrals.
With regard to the private equity investor, the DOJ focused on the investor’s goal of making a profit. Specifically, the DOJ alleged that RLH had a “controlling stake” in the compound pharmacy and “planned to increase [the pharmacy’s] value and sell it for a profit in five years.” Further, the DOJ went to lengths to explain that the private equity firm’s “primary objective” was to increase the profitability of their investment (the pharmacy). According to the complaint, this was wrong because the private equity group, “[a]s an investor in healthcare companies, knew or should have known … that healthcare providers that bill federal healthcare programs are subject to laws and regulations designed to prevent fraud.”
Considerations for Private Equity Firms in the Health Care Industry
The DOJ’s recent decision to name a private equity firm as a defendant in a False Claims Act complaint against one of the firm’s portfolio companies, while uncommon, shines a spotlight on potential risk areas for private equity firms whose portfolio companies operate in industries with significant False Claims Act exposure like health care. For private equity firms that invest in entities that do business with the federal government, the PCA case is instructive regarding the importance of robust due diligence with respect to potential investments and careful compliance oversight throughout the life of the investment. Accordingly, private equity firms should consider the following practical suggestions for private equity investors seeking to do business with portfolio companies that participate in federal government healthcare programs, including:
Author Bradley Byars
Co-Author Shairoz H. Virani