Blog April 9, 2018
DOJ Targeting False Claims Act Cases Against Private Equity Investments in Healthcare Companies



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:

  • Level of Involvement: It is common for private equity firms to have representatives serving on the boards of directors of portfolio companies. Where a private equity firm is the majority or sole stakeholder in a portfolio company, it is important to take into account the extent to which the firm is involved in shaping operations and decisions at the portfolio company level. The DOJ’s approach in the DOJ’s case suggests that a private equity firm’s risk of an allegation of FCA liability may increase with the degree of involvement in the portfolio company’s day-to-day operations. Also, to the extent that private equity firms provide services to portfolio companies, they may wish to consider providing such services through separate organizations that are distinct from the firm’s investment funds.


  • Monitoring and Compliance of Portfolio Company Activity: Particularly in industries where FCA liability is significant, private equity firms should consider development of robust monitoring and compliance programs at the portfolio company level. This type of initiative establishes the “tone from the top” and evidences the intent of the investors and board leadership to ensure that the portfolio company has appropriate internal legal support and compliance staffing, including training for the portfolio managers with primary responsibility for overseeing and supporting the company’s operations.


  • Board and Committee Participation: Specific to board-level oversight, firms should consider forming a compliance-focused subcommittee on a portfolio company’s board of directors. The subcommittee can be tasked with ensuring compliance with internal policies and implementation of the compliance program consistent with industry guidance and standards.


  • Avoid Colorful Language: Whenever possible, private equity investors should not explicitly ascribe profitability motives – particularly statements like receiving a “very fast payback” – to investments in federal healthcare providers. To that end, investors should remember that the DOJ often will look for any evidence (including pitch materials and promotional packets) that might suggest improper motivations or influences.
  • Perform Appropriate Due Diligence: As always, investors ought to exercise appropriate diligence in researching their potential investment targets, including whether the potential equity target is compliant with all rules and has a compliance department that proactively addresses any legal or regulatory concerns. Additionally, private equity investors must be wary of unrealistic returns in healthcare investments. Given rising federal healthcare expenditures, the DOJ is closely watching lucrative, high-reimbursement healthcare providers. And when the DOJ suspects wrongdoing, it ordinarily pursues all involved – either directly or, in RLH’s case, indirectly.


  • Advice of Counsel and Advisors: The DOJ’s case underscores the importance of obtaining and following the advice of counsel and consultants on matters involving potential FCA liability. A forum for consideration of advice from counsel and other advisors on risks material to the business, including becoming familiar with applicable healthcare fraud and abuse regulations, including the Stark Law, the Anti-Kickback Statute and the False Claims Act.



Related Articles:

DOJ Complaint Names Private Equity Firm as Defendant in False Claims Act Case Targeting Health Care Portfolio Company;

Investor, Beware: New Prosecutorial Scrutiny of Private Equity Investment in Healthcare Companies;

United States Intervenes in Suit Against Private Equity Firm Based On Health Care Portfolio Company’s Alleged False Claims Act Violations



Author Bradley Byars

Co-Author Shairoz H. Virani