Introduction

On February 16 2018 the US Department of Justice (DOJ) filed a complaint in intervention against a compounding pharmacy, Patient Care America (PCA), alleging that the pharmacy had violated the False Claims Act by, among other things, paying illegal kickbacks to induce prescriptions for drugs reimbursed by TRICARE, the federal healthcare programme for active duty military personnel, retirees and their families.(1) Notably, the DOJ was 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 had helped to implement the purportedly illegal strategy at issue in the complaint.

Government allegations

The government alleged that the defendants had:

  • 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;
  • paid kickbacks to patients to accept the prescriptions, including paying patients' co-payments through a sham charity organisation and giving cash to patients;
  • manipulated and improperly influenced compounding formulations and ingredients to maximise TRICARE reimbursement;
  • paid telemedicine physicians to 'consult' patients who had agreed to accept the pain creams, scar creams or vitamins; and
  • filled and submitted claims for prescriptions that had been ordered by telemedicine physicians without physically examining patients, meaning that the prescriptions had not arisen from a valid prescriber-patient relationship under Florida law.

The government's complaint pointed 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 had been motivated by its anticipated exit strategy, which called for the sale of the pharmacy five years after acquisition. According to the DOJ, shortly after the acquisition, PCA's revenue had dropped due to Medicare reimbursement changes for renal nutritional therapy, which was the pharmacy's primary business area. The DOJ alleged that the private equity firm, needing to increase the pharmacy's profitability for the planned sale, had 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. The government alleged that the defendants had acted aggressively for a period of only eight months in order to capitalise 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". After eight months – which corresponds to the period during which the misconduct is alleged to have taken place – TRICARE had implemented new reimbursement rules that resulted in the payment of far fewer claims for compounded drugs.

The allegations emphasised the role of the private equity fund's principals in the operation of the pharmacy. Specifically, the government alleged that two of the private equity firm's partners had served as officers and board members of the pharmacy and the holding company that managed PCA. In this capacity, the partners had allegedly engaged in the scheme by, among other things:

  • analysing 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 relating to the alleged scheme.

Comment

Given how common it is for the principals of private equity funds to be involved in strategic decision making, sit on boards and participate in certain operational aspects of their portfolio companies, the DOJ's recent actions serve as an important reminder of the False Claims Act'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. The suit serves as a shot across the bow for private equity firms, with the DOJ noting in the press release accompanying its complaint that it would "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" (emphasis added).(2)

For further information on this topic, please contact Scott D Stein, Catherine Y Starks or Kat Makielski at Sidley Austin LLP by telephone (+1 312 853 7000) or email (sstein@sidley.com, cstarks@sidley.com or kmakielski@sidley.com). The Sidley Austin website can be accessed at www.sidley.com.

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Endnotes

(1) The case is US 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.

(2) See DOJ press release, "United States Files False Claims Act Complaint Against Compounding Pharmacy, Private Equity Firm, and Two Pharmacy Executives Alleging Payment of Kickbacks" (February 23 2018), available here.