In March 2018, White and Williams issued an alert covering the Department of Justice’s (DOJ) intervention in the False Claims Act (FCA) case United States ex rel. Medrano v. Diabetic Care RX, LLC, No. 15 Civ. 62617 (S.D. Fla.). We noted at the time that this case “should put private equity firms and their partners on notice of possible expansion of regulatory scrutiny in FCA complaints,” because, in an unprecedented move, the DOJ for the first time named a private equity (PE) owner in an FCA complaint-in-intervention alongside the portfolio company accused of making false claims.
On September 18, 2019, the DOJ reached a $21.36 million settlement with Diabetic Care Rx LLC, d/b/a Patient Care America (PCA), two of PCA’s executives and the PE firm Riordan, Lewis & Haden Inc. (RLH). The settlement indicates that the DOJ’s allegations and legal theories against the defendants, including those against the defendant PE firm, may have been viable, and that the DOJ may continue naming PE investors in FCA actions going forward.
As discussed in our previous alert, this case centered on the payment of kickbacks in the form of commissions to outside marketing companies that resulted in prescriptions for topical pain and scar treatment creams and vitamins filled by PCA – a compounding pharmacy. The payments were then submitted for reimbursement to TRICARE, where PCA manipulated the pain cream ingredients to optimize reimbursement rates paid by TRICARE. The government also alleged that marketers paid telemedicine doctors, who prescribed the creams and vitamins without seeing patients first; and that PCA and a marketer routinely paid copayments owed by patients referred by the marketer, without any verification of the patients’ financial needs, and then disguised the payments as coming from a sham charitable organization affiliated with the marketer.
In an amended complaint, the DOJ alleged that RLH, the PE firm that managed PCA on behalf of its investors, knew of and agreed to PCA’s plan to pay outside marketers to generate the prescriptions and financed the kickback payments to the marketers. Two of RLH’s partners, in their capacities as board members of PCA, led the pain management initiative that resulted in the alleged kickbacks. Despite knowing that the money it was providing was going to be used to pay kickbacks, RLH transferred funds to the PCA for payments as part of this plan.
In settling its claims against the defendants, the government stated that, “[t]he prosecution and resolution of this case demonstrates the U.S. Attorney’s Office continuing commitment to hold all responsible parties to account for the submission of claims to federal health care programs that are tainted by unlawful kickback arrangements.” (Emphasis added). This appears to indicate an intent on the part of the government to continue holding PE firms responsible for false claims submitted by their portfolio companies, at least in cases where such PE firms are actively involved in the management of the company.
Implications for Investors
Because the claims were settled with no determination of liability, the precedential value of this case is limited. But the multi-million dollar settlement should be a warning to PE firms that the government intends to leverage the customary control, oversight and management typical of PE investments as a tool against PE firms, at least when FCA allegations are in play. This, combined with recent letters sent by Congress to PE firms that own physician staffing companies launching an investigation into the role that PE firms may play in surprise medical billing definitely shows an increased focus on the responsibility of PE firms for the activities of their portfolio companies. Some practical tips for investors include:
- PE firms should conduct adequate due diligence on the payment and reimbursement practices and other regulatory controls and policies of target companies before investing;
- once an investment is made, PE firms should make sure that they periodically evaluate and monitor the practices, policies, internal controls and responsibilities of their portfolio companies and the strength of their existing compliance programs to prevent, detect and correct any FCA or other regulatory risks or violations; and
- PE firms should be aware of red flags, such as legal advice regarding alleged illegal kickbacks, and should carefully consider and document the reason behind any response to such legal advice.
This advice is also applicable to investments in other industries subject to significant government oversight.
 Note that Congress also sent letters in recent weeks to PE firms seeking information relating to their investments in prison services companies and for-profit colleges, expressing concern about their role in driving up costs and delivering subpar products and services.