A recent complaint by the US Department of Justice against private equity firm Riordan, Lewis & Haden signals that such firms could be a new class of defendants in False Claims Act cases. Private equity firms are thus well-advised to be vigilant and take steps to limit the risk of enforcement litigation.
The False Claims Act (FCA) has long been a powerful tool for the federal government to generate large recoveries from government contractors, including companies in the healthcare industry. In fiscal year 2017 alone, the US Department of Justice (DOJ) recovered more than $3.7 billion in settlements and judgments in civil cases brought under the FCA. The government’s focus on continued aggressive FCA enforcement is not expected to go away anytime soon. Indeed, based on its recent complaint in intervention in United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America et al., No. 15-CV-62617 (S.D. Fla.), DOJ may be setting its sights on a new class of potential defendants in FCA cases: private equity firms.
DOJ’s decision to pursue private equity firm Riordan, Lewis & Haden Inc. (RLH) as a defendant in an FCA case against one of the firm’s portfolio companies (a compounding pharmacy) should be a warning bell for private equity firms whose portfolio companies contract with and/or are reimbursed by the government such that they are exposed to potential FCA liability. Private equity firms are now on notice that they should take steps to limit the risk that the government would target them in an FCA case against a portfolio company.
In its complaint, DOJ alleges that in 2012, RLH invested in Diabetic Care Rx, LLC dba Patient Care America (PCA) with a plan to increase the company’s value in advance of a planned exit five years later. At that time, PCA generated revenue primarily by providing nutritional therapy to end-stage renal disease patients covered by Medicare. Soon after RLH invested, Medicare’s reimbursement rates for that therapy dropped, and so too did PCA’s revenues. In an attempt to restore PCA’s revenues, RLH and two RLH partners serving as officers and/or directors of PCA allegedly exerted control over PCA and directed its entry into the business of non-sterile compounding of topical creams for “pain management.” According to DOJ, RLH recognized that was an extremely profitable therapy because of favorable reimbursement rates then offered by TRICARE, the federal healthcare program for active duty military personnel, retirees, and their families. DOJ alleges that RLH was actively involved in developing and implementing the company’s business strategy around maximizing TRICARE reimbursement through illegal kickbacks and beneficiary inducements. RLH allegedly approved of and helped direct PCA’s business model notwithstanding warnings from counsel that its referral practices could be illegal.
In its press release announcing the government’s complaint, DOJ indicated that it was seeking to hold liable all entities that paid kickbacks to maximize government reimbursement at the expense of taxpayers and federal healthcare beneficiaries, including the compounding pharmacies and the companies that manage them. Based on our knowledge of other investigations, DOJ has for years been exploring the role of private equity firms and other investors in driving the business and medical decisions that trigger government reimbursement in the federal healthcare system. In Medrano, the government apparently found sufficient involvement by the private equity firm and two of its partners in the operation of the pharmacy to allege that the private equity firm caused its portfolio company to submit false claims to the government for reimbursement in violation of the FCA by allegedly (1) investing in the portfolio company with the goal of increasing its value and selling it for a profit within five years; (2) initiating and directing the portfolio company’s entry into the business of selling compounded pain creams to patients covered by TRICARE; (3) actively managing the pharmacy’s CEO by offering him an incentive-laden compensation package that would reward a rapid increase in the value of the pharmacy in advance of its planned sale and requiring the CEO to consult with the private equity firm before entering into any contract that would require the portfolio company to make annual payments in excess of $50,000 or total payments over $150,000; (4) approving of the hiring of and commission payments made to “independent contractors” to generate prescriptions; and (5) disregarding legal advice counseling against billing government programs for prescriptions referred by the independent contracting marketers.
While private equity firms should continue to monitor how the Medrano case will play out in litigation, the critical takeaways at this time for private equity firms with portfolio companies in the healthcare space or otherwise doing business with or receiving reimbursements from the federal government are to be vigilant both before and after investing and to pay close attention to the following:
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Carl A. Valenstein
Nathan J. Hochman
Sheila A. Armstrong
Rebecca L. Kelly