Despite the unprecedented challenges of the COVID-19 pandemic, mergers and acquisitions in the health care industry have continued apace and show no signs of slowing. According to a recent PricewaterhouseCoopers report, these types of transactions surged by 56% in the 12-month period ending November 15, 2021, as compared to 2020, with particularly high growth among physician medical groups. Amidst all this activity, the government’s False Claims Act (FCA) enforcement efforts are starting to focus with increasing regularity not only on private equity-owned health care companies, but also on private equity investors themselves. In fact, 2021 saw multiple developments that are likely to give the Department of Justice (DOJ) and whistleblowers the impetus for FCA lawsuits targeting private equity firms.
For example, in July 2021, national electroencephalography (EEG) testing company Alliance Family of Companies LLC (Alliance) agreed to pay $13.5 million and enter into a five-year Corporate Integrity Agreement with the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) to resolve allegations of kickbacks and other misconduct, including the submission of false claims to Medicare, Medicaid, TRICARE and the Federal Employees Health Benefits Program.1 The government claimed that Alliance provided free EEG test interpretation reports to primary care physicians, resulting in those physicians profiting from billing federal health care programs as though they had personally performed the professional component of the service. Alliance also allegedly selected and paid independently contracted neurologists to perform test interpretations on behalf of Alliance in exchange for those neurologists ordering EEG tests for their own patients, all in violation of the federal Anti-Kickback Statute (AKS).
DOJ also asserted that private equity firm Ancor Holdings LP d/b/a Ancor Capital Partners (Ancor) learned of the kickbacks based on due diligence it performed before acquiring a minority interest in Alliance and gaining two seats on its board of directors. The government contended that Ancor failed to take action to stop the misconduct and, in fact, perpetuated the problematic behavior through its ongoing management agreement with Alliance. Ancor paid an additional $1.8 million to resolve its own FCA liability for allegedly causing the submission of false claims to federal health care programs.
As another example, October 2021 saw the largest FCA settlement to date involving a private equity firm, for allegedly causing the submission of fraudulent claims to the Massachusetts Medicaid program, MassHealth.2 The $25 million settlement resolved claims that H.I.G. Growth Partners, LLC, and H.I.G. Capital, LLC (collectively, H.I.G.) and two former executives of South Bay Mental Health Center, Inc. (South Bay) knew that South Bay was using unlicensed, unqualified and unsupervised staff to furnish social work and counseling services in violation of MassHealth requirements, yet failed to adopt recommendations to bring the company into compliance.
Notably, this settlement followed a May 2021 district court decision denying H.I.G.’s and the two executives’ attempts to dismiss the case on summary judgment. As to the private equity firm, the court held that a reasonable jury could conclude that H.I.G. possessed the requisite scienter under the FCA based on evidence that H.I.G.’s members understood Medicaid had terms and conditions of payment and that MassHealth regulations required certain forms of supervision. The court also highlighted that H.I.G.’s members were informed at various points in time about inadequate supervision practices at South Bay, including (i) as part of a third-party clinical expert report commissioned during the preacquisition due diligence process; (ii) by the relator personally; and (iii) following a series of internal working groups’ recommendations to hire more licensed supervisors. In perhaps the most important language of the decision, the court also found that, by virtue of its members’ majority participation on the board of directors, H.I.G. “had the power to fix the regulatory violations which caused the presentation of false claims but failed to do so.”3
The Alliance and South Bay cases highlight important considerations that private equity investors should be mindful of heading into 2022. With the government now having secured multiple settlements involving private equity firms, it is likely that the perceived deep pockets of private equity investors will remain a continued FCA target. As such, private equity investors should consider the following actions to mitigate the level of risk assumed as a result of their initial investment and continued role in the ongoing operations of a health care portfolio company:
- Carefully review and develop a plan to address any negative findings in due diligence reports from clinical or reimbursement consultants, accountants, counsel, or other third parties. Post-closing, it is important that prompt steps be taken to remediate any noncompliance with federal or state laws and/or ensure that timely, appropriate refunds are made to government payors for any identified overpayments. Additionally, retaining consultants through counsel—particularly where the subject of the review may be sensitive—can help ensure that any findings remain confidential and privileged.
- Evaluate and, as necessary, supplement the target’s health care compliance program. Having an effective compliance plan in place that satisfies the essential elements recognized by the OIG and DOJ is key to mitigating the risk of a regulatory violation in the first instance. If a practice is subsequently questioned by the government, being able to demonstrate that the company had robust compliance safeguards in place may also make it more challenging for a regulator to argue that the business—or its private equity investors—acted knowingly for purposes of liability under the FCA.
- Ensure a strong feedback loop between the private equity firm and portfolio company. As illustrated by both the Alliance and South Bay cases, private equity firms that take an active role in managing the operations of their portfolio companies may be at risk for failing to correct known compliance problems. Accordingly, where actual or potential noncompliance is identified, it is important that private equity investors be involved in actively monitoring and tracking remediation efforts through to completion.
1 EEG Testing and Private Investment Companies Pay $15.3 Million to Resolve Kickback and False Billing Allegations, Department of Justice (July 21, 2021), https://www.justice.gov/opa/pr/eeg-testing-and-private-investment-companies-pay-153-million-resolve-kickback-and-false.
2 Private Equity Firm and Former Mental Health Center Executives Pay $25 Million Over Alleged False Claims Submitted for Unlicensed and Unsupervised Patient Care, Massachusetts Office of the Attorney General (Oct. 14, 2021), https://www.mass.gov/news/private-equity-firm-and-former-mental-health-center-executives-pay-25-million-over-alleged-false-claims-submitted-for-unlicensed-and-unsupervised-patient-care.
3 U.S. ex rel. Martino-Fleming v. South Bay Mental Health Centers, 540 F. Supp. 3d 103, 130 (D. Mass. 2021).