In an unusual and potentially significant move, the U.S. Department of Justice has named as one of the defendants in a False Claims Act lawsuit a private equity firm whose portfolio company the DOJ alleges engaged in an illegal health care-related kickback scheme. As the Jones Day law firm noted in a February 27, 2018 client memo about the DOJ’s action, the inclusion of a PE firm as a defendant in this lawsuit “may indicate a sea change in terms of who the DOJ is willing to pursue in False Claims Act changes” and “could signal the DOJ’s willingness to seek to pierce the corporate veil and hold private equity sponsors accountable for the noncompliance of their portfolio companies in the health care industry.” The DOJ’s February 23, 2018 press release about the lawsuit can be found here. The DOJ’s complaint in intervention in the lawsuit can be found here.
Diabetic Care Rx LLC d/b/a Patient Care America (PCA) is a compounding pharmacy located in Pompano Beach, Florida. In 2012, a private equity fund managed by Riordan, Lewis, & Harden (RLH), a private equity firm based in Los Angeles, California, purchased PCA’s predecessor company. PCA was originally sued in 2015 by two former PCA employees who alleged that the company was paying illegal kickbacks in induce prescriptions for compounded drugs reimbursed by TRICARE, a federally-funded health care program for military personnel and their families. The original plaintiffs’ complaint alleged that these actions violated the False Claims Act. The False Claims Act allows the federal government the right to intervene in False Claims Act claims. In February 2018, the DOJ filed a complaint in intervention in the False Claims Act claim.
The complaint alleges that PCA paid kickbacks to marketing companies to target TRICARE beneficiaries for prescription topical treatments and vitamins. The complaint alleges that PCA manipulated the compound formulas to ensure the highest possible TRICARE reimbursements. The complaint alleges that PCA and the marketers paid telemedicine doctors to prescribe the products without seeing the patients. The alleged scheme allegedly generated millions of dollars in reimbursements from TRICARE in a matter of months.
With respect to the PE firm, the complaint alleges an arrangement between the firm and PCA that, as the Jones Day memo noted, “can be quite typical for private equity firms.” The PE firm made a controlling investment in PCA, and two partners from the PE firm became officers of PCA. The DOJ’s complaint alleges that the PE firm acquired PCA with the intent of growing it quickly and selling it in five years. The PE firm partners hired a new CEO for PCA, who was compensated to quickly grow the company. The complaint alleges that the two PE firm partners guided PCA’s strategic direction and “knew and approved of” the marketing arrangements. The complaint alleges further that the PE firm “knew or should have known … that health care providers that bill federal health care programs are subject to laws and regulations designed to prevent fraud, including the federal anti-kickback statute.”
The DOJ’s complaint in intervention has only just been filed and the allegations in the complaint are at this point unproven. Nevertheless, it is, as the Jones Day law firm’s memo put it, “significant that the DOJ has taken the position that the PE Firm’s level of involvement in the portfolio company, PCA, is sufficient, in the government’s view, to make the PE Firm complicit in the alleged misconduct of its portfolio complaint.”
The law firm memo says that the inclusion of the PE Firm as a defendant in this lawsuit “may be viewed as a ‘shot across the bow’ for private equity sponsors whose portfolio companies are alleged to have engaged in violations of health care laws.” The filing of the lawsuit against the PE Firm defendant “could signal a shift in DOJ’s focus by also targeting financial sponsors in the health care industry.” The lawsuit could, the law firm memo suggests, “signal the DOJ’s willingness to pierce the corporate veil and hold private equity sponsors accountable for the noncompliance of their portfolio companies in the health care industry.
As alarming as the DOJ’s action in this case may be to private equity firms generally, it may be that the concerns are particular to firms focused on the health care industry. In that regard, the law firm memo notes that PE firms involved in the health care industry “must understand the complex regulatory requirements governing the industry and ensure that appropriate attention and resources are focused on regulatory compliance, not just at the time of acquisition but throughout the life cycle of their investments.”