Locke Lord QuickStudy: Recent Case Emphasizes that Private Equity Firms May Face Federal Prosecution in Actions Targeting Portfolio Health Care Companies

Private equity firms with portfolio health care entities should stay informed of federal regulations regarding Anti-Kickback Statute and False Claims Act violations in connection with their platform and portfolio companies. Recently, 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.), the United States filed a complaint against a pharmacy, its executives, and the private equity firm that owns a majority of the pharmacy entity regarding alleged payments of illegal kickbacks. With specific respect to the private equity company, the complaint alleges that through two of its principals, the private equity company managed the pharmacy and approved and bankrolled the specific plan to provide the kickbacks at issue. The complaint notes that the private equity principals served on the board of the pharmacy, met in person and were very involved with the operations of the pharmacy and the specific alleged practices via email and telephone.

In the complaint, the Department of Justice alleges that the defendants paid kickbacks between 40% and 50% of the prescriptions’ reimbursement to marketing companies securing prescriptions for compounded drugs reimbursed by TRICARE. The complaint further alleges that in an attempt to cover-up the scheme, the defendants made the marketing agencies “employees” of the pharmacy. Pursuant to the complaint, the DOJ alleges that although the marketers were W2 employees, they did not have indicia of employment and thus, were employees in name only. The defendants also allegedly waived the required co-payments for all TRICARE beneficiaries. By doing so, the United States contends the defendants defrauded the U.S. Treasury of approximately $87.75 million and seeks three times the amount of damages sustained, plus a civil penalty of $5,500 to $11,000 for each and every false claim that was presented for reimbursement.

The Anti-Kickback Statute (“AKS”) was enacted by Congress to prevent improper financial considerations from influencing the amount, type, costs, or selection of health care services financed to any extent by the U.S. Treasury. The AKS establishes both civil and criminal penalties for offering or paying any remuneration to induce someone to refer patients to or for, or to purchase, lease, or order any item, service or facility for which payment may be made by a federally funded health care program. In 2010, Congress amended the AKS to clarify that claims influenced in any way by kickbacks are, by definition, also false claims under the federal False Claims Act.

Notably, this case is very fact specific and the private equity company may have good defenses to the government’s allegations. Notwithstanding, the complaint raises concern and risk for private equity companies given that the board service and involvement in company strategy is not atypical. Private equity companies may consider assessing its level of involvement with a target health care company’s business affairs as Diabetic Care Rx, LLC suggests that the more intertwined a private equity company is with the business affairs of the target company, the more likely it could be named as a defendant in the event that these types of violations are alleged. In addition, careful attention to compliance with applicable laws and regulations in implementing any new business strategies is most important in reducing risk of government action. Given the complaint, this case bears close monitoring by advisors to private equity companies.