Florida Pharma Whistleblower Case Results in FCA Settlement by Private Equity Firm
Last week, the government announced that compounding pharmacy Diabetic Care Rx LLC, known as Patient Care America (“PCA”), its executives, and the private equity firm managing the pharmacy Riordan, Lewis & Haden Inc., had agreed to pay over $21 million to settle allegations they violated the False Claims Act (“FCA”) by executing a kickback scheme to generate referrals of TRICARE patients. The allegations originated in a lawsuit brought by two whistleblowers under the qui tam provisions of the FCA; the government had announced its decision to intervene in the whistleblowers’ qui tam case in 2018.
This settlement demonstrates that private equity firms managing healthcare organizations can face liability for fraudulent activities. While corporate owners and investors do not typically face liability for corporate actions, private equity investors that take an active role in company management should be considered as possible defendants in False Claims Actions if their actions have caused the submission of false claims.
The Alleged Kickback Scheme
According to the government’s press release, PCA allegedly paid kickbacks to marketers who would target military members and their families to prescribe medically unnecessary compounded creams or vitamins that PCA had formulated to gain the highest reimbursement possible from TRICARE.
The marketers allegedly worked with doctors claiming to provide telehealth services who would write prescriptions for patients without ever evaluating them in person and in some instances without ever speaking to the patient. In addition, PCA or the marketers would sometimes pay the copays owed by patients regardless of the patient’s financial needs, disguising those payments as coming through a fraudulent charitable organization. Even after PCA received patient complaints that demonstrated a lack of patient consent and a lack of a valid patient-physician relationship with the prescribers, PCA continued to claim reimbursement for these referred prescriptions.
Potential Liability for Private Equity Firms Managing Healthcare Providers
RLH was the private equity firm that held a controlling stake in PCA and managed PCA on behalf of its investors. The government’s press release states that RLH allegedly knew of and agreed with the plan to pay kickbacks to the marketers to create prescription referrals to PCA, and that RLH provided the funds used to finance the kickbacks. RLH partners were controlling officers of PCA, and, according to pleadings in the case, RLH hired the CEO and required that CEO to run all major decisions past RLH.
The settlement demonstrates a significant potential issue for private equity firms that manage healthcare providers and others who contract with or submit claims to the government. According to a report from PricewaterhouseCoopers, in the first half of 2018 alone private equity companies invested more than $10 billion in healthcare deals.
While private equity firms bring significant capital resources to healthcare entities, they may lack practical subject matter expertise in the healthcare industry and healthcare compliance, including Anti-Kickback Statute and Stark Law issues. In addition, when private equity firms manage healthcare providers, their focus on short-term financial results may eclipse the needs of proper patient care.
The PCA settlement does not, however, suggest broad investor liability. RLH was no mere passive investor, but also played an active management role, including in day-to-day operations. The government’s complaint alleges that RLH was deeply involved in the strategy and management of PCA, and, in particular, exerted considerable influence over a number of the alleged bad acts, including, for example, providing cash to pay the unlawful kickbacks.
At least one other court has permitted claims against a private equity investor to proceed. In U.S. ex rel. Martino-Fleming v. South Bay Mental Health Center, an FCA action in which Massachusetts intervened to pursue claims that a mental health center submitted false claims to Medicaid, the court denied a motion to dismiss by the defendant private equity investors in the clinic. The court held that the private equity defendants could face liability where the provider’s false claims were the “foreseeable result” of business practices implemented by the private equity firm. Moreover, the court found the complaint adequately alleged that the private equity defendants had caused the submission of the false claims, based on the fund’s principals who were directly involved in clinic operations.
While private equity investors may seem to make attractive defendants – they cannot easily don the mantle of patient care, and they are unlikely to claim an inability to pay – it remains the law that investors are generally shielded from liability for corporate actions. However, as PCA and Martino-Fleming demonstrate, investors can face liability where they take an active management role. Private equity investors often do take such a role, and in highly regulated fields like healthcare, with substantial compliance risks, they may make themselves attractive defendants through their own actions.
- Healthcare & Pharmaceutical Fraud
- The Anti-Kickback Statute
- The False Claims Act
- The Constantine Cannon Whistleblower Team
- Contact a whistleblower attorney