On February 16, 2018, the U.S. Department of Justice (“DOJ”) filed a complaint in intervention against a compounding pharmacy, Patient Care America (“PCA”), alleging that the pharmacy violated the False Claims Act (“FCA”) by, among other things, paying illegal kickbacks to induce prescriptions for drugs reimbursed by TRICARE, the federal health care program for active duty military personnel, retirees, and their families. What is notable about this particular case, however, is that DOJ is also pursuing claims against a private equity firm that had a substantial ownership stake in the pharmacy, based on allegations that principals in the fund were actively involved in the management of the pharmacy and helped implement the purportedly illegal strategy at issue in the complaint.

The government alleges that the defendants: (1) paid kickbacks to independent marketers to target military members and their families for prescriptions of compounded pain creams, scar creams, and vitamins, regardless of need; (2) paid kickbacks to patients to accept the prescriptions, including paying patients’ copayments through a sham charity organization and giving cash to patients; (3) manipulated and improperly influenced compounding formulations and ingredients to maximize TRICARE reimbursement; (4) paid telemedicine physicians to “consult” patients who had agreed to accept the pain creams, scar creams, and/or vitamins; and (5) filled and submitted claims for prescriptions that were ordered by telemedicine physicians without physically examining patients, meaning the prescriptions did not arise from a valid prescriber-patient relationship under Florida law.

The government’s complaint points to the private equity firm’s financial interest in the pharmacy (by virtue of its investment) as a backdrop for the alleged scheme, asserting that the private equity firm was motivated by its anticipated exit strategy, which called for selling the pharmacy five years after acquisition. According to DOJ, shortly after the acquisition, PCA’s revenue dropped due to Medicare reimbursement changes for renal nutritional therapy, which was the pharmacy’s primary business area. Needing to increase the pharmacy’s profitability for the planned sale, DOJ alleged, the private equity firm decided to initiate PCA’s entry into the topical compounding market, which the private equity firm understood to be very profitable, at least in the short term. In fact, the government alleges that the defendants acted aggressively for a time period of only eight months to capitalize on high reimbursement rates by generating a “very fast payback” and, in the alleged words of the private equity group, “make hay while the sun shines.” At the end of the eight months, which corresponds with the period during which the alleged misconduct purportedly took place, TRICARE implemented new reimbursement rules that resulted in payment of far fewer claims for compounded drugs.

The allegations emphasize the role of principals of the private equity fund in the operation of the pharmacy. Specifically, the government alleges that two of the private equity firm’s partners served as officers and board members of the pharmacy and the holding company that managed PCA. In this capacity, the partners allegedly engaged in the scheme by, among other things, analyzing potential profitability for the topical compounding initiative, contemplating that PCA would bill the federal government for compounded creams, discussing that high profit margins for topical compounding may be short-lived, selecting and supporting the hiring of the defendant executives, approving the plan to pay independent marketers, and receiving regular board updates with information related to the alleged scheme.

Given how common it is for principals of private equity funds to be involved in strategic decision-making, hold board seats, and participate in certain operational aspects of their portfolio companies, DOJ’s recent actions serve as an important reminder of the FCA’s broad liability provisions, which extend not just to entities that submit claims for payment, but to any person or entity alleged to have “caused” a false claim to be submitted. DOJ’s lawsuit serves as a shot across the bow for private equity firms, with DOJ noting in the press release accompanying its complaint that “We will hold pharmacies, and those companies that manage them, responsible for using kickbacks to line their pockets at the expense of taxpayers and federal health care beneficiaries.”[1]

The case is U.S. ex rel. Medrano v. Diabetic Care Rx, LLC, No. 15-cv-62617 in the Southern District of Florida. A copy of the government’s complaint is available here.