In two prior posts [Government Files Amended FCA Complaint Against Private Equity Firm and its Portfolio Company and DOJ Intervention in Healthcare Fraud Case Highlights Potential Risks for Private Equity Firms], we wrote about the Department of Justice’s (DOJ) decision to intervene in a False Claims Act (FCA) case against a compounding pharmacy and its private equity backer.
The case, Medrano v. Diabetic Care Rx, LLC, was the first time we had seen the DOJ name a private equity firm in a FCA case involving allegations of wrongdoing by one of its portfolio companies, and we noted that this should be a wake-up call to private equity firms who are actively engaged in the management and control of healthcare companies in which they invest.
The alarm rang once again in September 2019, as the DOJ announced that it reached a $21.36 million settlement with Patient Care America (PCA), the compounding pharmacy at issue in the case, two of the company’s executives and, most notably, the private equity firm Riordan, Lewis & Haden Inc. (RLH) that managed PCA on behalf of its investors. The settlement was reached on ability to pay grounds.
In its amended complaint, the DOJ alleged, among other things, that PCA paid illegal kickbacks to marketing firms who targeted military members and their families for compounded drug prescriptions. The marketers allegedly paid telemedicine doctors who prescribed creams and vitamins without seeing the patients or, in some cases, even speaking to them. PCA then formulated the prescriptions so as to maximize reimbursement from Tricare. As for RLH, the DOJ alleged it knew of and agreed to PCA’s scheme to pay outside marketers to generate the prescriptions and financed the kickback payments to the marketers. It was this active participation in the alleged fraudulent scheme that brought RLH into the fold.
The DOJ noted in its press release announcing the settlement that “The 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.”
While the settlement of course creates no binding precedent, the message is clear—private equity firms that know about or participate in fraudulent schemes of their portfolio companies may well find themselves in the crosshairs as well.