Private equity firms and investors in the healthcare space may think they are simply investing in a healthcare entity and are otherwise insulated from certain liabilities arising from the healthcare entity’s clinical operations and billing practices. However, such investors, including management service organizations, have now become targets for government scrutiny under the False Claims Act (“FCA”), as the government has signaled it is seeking to bring claims not only against the healthcare entity submitting false claims, but also investors in the healthcare entity who have knowledge of its improper practices. In February 2024, the Department of Justice (“DOJ”) specifically identified investors in healthcare as a direct and indirect source of influence on patient care and provider conduct, noting that if an investor “knowingly engages in conduct that causes the submission of false claims, they may subject themselves to liability.”[1]
Over the past couple of years, we have seen an increase in FCA actions which involve private equity firms/investors. In 2019, for example, a compounding pharmacy and its private equity-backed investor agreed to pay $21,000,000 to settle FCA allegations.[2] Later, in 2021, mental health center executives and its private equity-backed investor agreed to pay $25,000,000 to settle FCA allegations related to unlicensed and unsupervised patient care.[3]
Thus far, the DOJ’s FCA settlements involving healthcare investors showcase that the level of control and influence of the investor over the company can lead to FCA liability if the portfolio company knowingly engages in conduct which “causes” the entity to submit false claims to federal payors. Therefore, the more actively engaged an investor is in the day-to-day operations of a healthcare entity – both clinical- and billing-related – the more exposure such investors have to liability under the FCA, if the healthcare entity submits false claims. Indeed, the Principal Deputy Assistant Attorney General recently stated that the DOJ wished to “emphasize” its “commitment to holding accountable third parties that cause the submission of false claims . . . include[ing] private equity firms . . .” See FN1.
This growing trend, coupled with the fact that healthcare is already a highly regulated industry, underscores the need for investors to retain knowledgeable regulatory and transactional healthcare counsel. Knowledgeable healthcare counsel can assist the investor with due diligence to identify historic legal and billing compliance issues that expose the investor to risk, as well as structuring the go-forward relationship between the parties to comply with applicable laws, including the relevant state’s Corporate Practice of Medicine Doctrine and fee splitting prohibitions. Additionally, if necessary, during the course of the relationship, investors should retain healthcare counsel in defending against any civil or criminal FCA action that may arise as a result of the investor’s relationship with the healthcare entity alleged to have submitted false claims to a government payor. Contact Frier Levitt today to discuss any compliance concerns and potential risk exposure for your company.
[1] https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-brian-m-boynton-delivers-remarks-2024
[2] https://natlawreview.com/article/compounding-pharmacy-and-private-equity-firm-owner-agree-to-21-million-settlement-to
[3] https://www.mass.gov/news/private-equity-firm-and-former-mental-health-center-executives-pay-25-million-over-alleged-false-claims-submitted-for-unlicensed-and-unsupervised-patient-care
