Private-Equity Red Flags Signal Potential False Claims Act Liability
Private equity (PE) firms that manage healthcare entities have further reason to take note of the growing record of exposure for False Claims Act (FCA) liability.
In the latest shot across the bow, the PE firm, a majority shareholder of a for-profit mental-health provider, knew about the false claims and played a sufficiently active role in operations potentially to have caused them. Evidence supporting these facts against PE firm H.I.G. Capital was sufficient potentially to establish scienter and causation, defeating the firm’s summary judgment motion in U.S. ex rel. Martino-Fleming v. South Bay Mental Health Center in the U.S. District Court of Massachusetts (Hon. Patti B. Saris). Employees of H.I.G. held most of the seats on the healthcare provider’s board, H.I.G. received information about non-compliant operations during acquisition due-diligence, knew about Medicaid requirements, and had received a report that material terms weren’t being met. The court observed that even if the PE investors didn’t have direct involvement in the claims process, it was enough that its members’ participation on the board of the healthcare company gave it “the power to fix the regulatory violations which caused the presentation of false claims but failed to do so.” A whistleblower originally brought this lawsuit to expose the center’s violation of licensing and supervision requirements, and Massachusetts intervened.
Increasing False Claims Act Exposure for Private Equity Involvement in Fraud
CC’s Whistleblower Insider has previously blogged that private equity ownership, pressure, and influence over healthcare operations raise grave concerns for patient care, for example in nursing homes. To date, private equity firms have paid to settle False Claims Act allegations of medically unnecessary products tainted by kickbacks (Diabetic Care Rx/Patient Care America/Riordan Lewis & Haden), and promotion of unapproved use of drug-device systems on pediatric patients (Therakos/The Gores Group).
PE firms defend accusations of FCA liability by typically claiming they were merely passive investors, didn’t know about a portfolio company’s misconduct or didn’t enable or assist in it. But the very PE model is one of active engagement: promises to investors to aggressively manage, turn around, and generate meaningful profit from acquired companies, including healthcare businesses.
Signs that a PE Firm Might Be Accountable for Fraud
The cases to-date reveal that private equity investors might be liable under the False Claims Act if the following red flags, in some combination, establish a sufficient connection between the company’s misconduct and the PE investors:
- PE firm’s receipt of information about non-compliant or illegal conduct during initial due diligence
- PE is a majority or sole stakeholder of a non-compliant company
- Overlapping leadership (officers, directors, managers) between PE firm individuals and board/leadership of the portfolio company(ies)
- PE firm’s role in hiring the company’s CEO or other leadership
- Foreseeability that false claims to Medicare or Medicaid would result from a business practice known to the PE firm
- PE’s involvement in high-level management of the company, including directing or overseeing executives or other leaders
- Authority to approve important company decisions, including contracts that agree to the misconduct
- PE involvement in day-to-day operations, with a significant degree of control
- Awareness of the fraudulent scheme or facts that in combination constitute a False Claims Act violation
- Knowledge that revenues and profitability depend substantially on reimbursement from government healthcare programs, with their terms and conditions of payment
- Knowledge of Medicare or Medicaid conditions of payment
- Knowledge that key terms weren’t being met (e.g., from reports to the board, or information from auditing or internal fact-finding)
- PE’s financing of the bad conduct
- Rejecting recommendations to fix non-compliant practices
- Directing and incentivizing aggressive financial strategies and goals, including compensation plans to key decision-makers that incentivizing growth and profit over patient care
Lack of Transparency and Poor Patient Care at PE-Managed Healthcare Companies
Particularly for nursing homes, where PE ownership increases daily, studies show that facilities owned by PE and for-profit chains have poorer patient outcomes than non-profit or government-owned facilities. PE firms are also gobbling up home healthcare, behavioral health, and urgent care providers, among others.
Private equity ownership of healthcare and other businesses often lacks transparency. The corporate structures may be complex and indirect. Financial arrangements with multiple related-party entities siphon off profits to sister therapy businesses, staffing agencies, suppliers, or other non-arm’s length enterprises. The PE firm may spin off the real estate assets into tax-friendly REITs, leasing back to the cash-strapped business. From the outside, these activities may create the appearance that the business is not profitable when the opposite is true.
In light of the horrifying number of Covid-19 deaths in nursing homes, Congress has renewed its efforts to investigate and increase private and PE ownership reporting in the healthcare industry. Until these efforts to reduce the opacity of such operations are successful and effective, persons with inside knowledge of a PE firm’s wrongdoing in a healthcare enterprise are one of the few safeguards for those harmed by it. We need such whistleblowers to report the misconduct and hold such firms and companies accountable.
To read more:
- Whistleblowers Are Critical to Exposing Fraud in the Murky World of For-Profit and Private-Equity Nursing Home Operations
- Private Equity Ownership of Nursing Homes Might Have Made Everything Worse
- Florida Pharma Whistleblower Case Results in FCA Settlement by Private Equity Firm
- Therakos Settlement Keeps Private Equity in DOJ’s Crosshairs for FCA Liability
- Healthcare & Pharmaceutical Fraud
- I Might Have a Whistleblower Case
- Whistleblower FAQs