Over the course of the past year, elected officials, regulators, and other stakeholders have expressed heightened interest and focus on private equity investment in healthcare. With such increased awareness in the media, coupled with primarily negative opinions from elected officials, investors can expect that downstream regulators, including enforcement agencies and prosecutors, will more closely scrutinize the activities of private equity firms and their portfolio of healthcare companies.
For example, earlier this year, a Congressional subcommittee held a hearing concerning the role of private equity in healthcare, primarily in the context of investment in nursing homes. The witnesses who spoke, none of whom represented the interests of investors, were almost universally negative in their treatment of the matter. The speakers claimed that private equity investments in healthcare, as a result of the desire to increase profits, result in increased costs and poorer patient outcomes.
In addition to congressional scrutiny, prosecutors have focused their attention on private equity firms. Last month, the Department of Justice announced that it reached a $15 million dollar civil settlement to resolve allegations that an EEG testing company submitted false claims to Medicare by paying kickbacks and inflating bills. The Department alleged that the company paid physicians kickbacks to order EEG tests for federal beneficiaries, and that the EEG company billed for work that was not actually performed or otherwise impermissibly upcoded claims for payment. Of note, the $15 million settlement included a $1.8 million contribution from a Texas-based private equity firm. The private equity firm, which also managed the EEG company through a management agreement with the entity, was alleged to have turned a blind eye to the misconduct. The Department claimed that the private equity firm learned of the kickbacks based on due diligence it performed prior to investing in the EEG company. Thereafter, the Department alleged that the private equity firm caused false claims to be submitted by allowing that conduct to continue once it entered into an agreement to manage the EEG company. This settlement is significant in that the Department of Justice attempted to impute impropriety regarding claims submission to the EEG company’s manager, a private equity firm, despite the corporate separation between the entities. Importantly, the Department alleged that the private equity firm had knowledge of the wrongdoing, given that the conduct was discovered by the firm when it conducted due diligence on the EEG company, prior to the firm’s investment in the company.
The Department of Justice also recently announced that a private equity owned management services organization entered a $5.1 million non-prosecution agreement to settle criminal claims alleging that the management services organization engaged in a kickback scheme. The Department alleged that the company, through its affiliated provider network, solicited and received kickbacks from a genetic testing company in exchange for ordering that company’s tests. The kickbacks were disguised as clinical research payments paid to physicians. According to the indictment filed against certain co-conspirators earlier this year, the Department alleged that some physicians received $100-$150 per genetic test ordered through the “clinical research” scheme.
Key Takeaways
As demonstrated above, being an investor in a healthcare company that renders services through licensees in a separate corporate form does not shield investors from the reach of prosecutors. Increasingly, the Department of Justice has pursued claims against private equity investors for the conduct of their portfolio companies; the Department has previously announced distinct settlement involving private equity firms in both 2019 and 2020.
How Frier Levitt Can Help
Private equity investors often seek to improve efficiency and achieve economies of scale in a fragmented healthcare market. Nevertheless, such business goals often require the investor, directly or through a management entity, to be intimately involved in the activities of their healthcare portfolio companies. Such close involvement, however, raises the risk that any misconduct on behalf of the healthcare company will be imputed upon the manager.
Frier Levitt has extensive experience advising a myriad of stakeholders on performing due diligence prior to a transaction, developing or restructuring appropriate arrangements in the healthcare and life sciences industries, and addressing existing compliance concerns. Contact us for both proactive and reactive assistance to mitigate applicable risk and exposure in your business model, or in the business models of your portfolio companies.
