Recent Lawsuit by Department Of Defense Reflects Possible Legal Risk for Private Equity Firms Involved In the Health Sector

A recent lawsuit filed by the U. S. Department of Defense highlights potential legal risk for private equity firms based on health care regulatory violations committed by firm portfolio companies. The complaint (United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America, et al., No. 15-CV-62617 (S.D. Fla.)) involves Diabetic Care Rx, LLC dba Patient Care America (“PCA”), a compounding pharmacy in which private equity firm Riordan, Lewis & Haden, Inc. (“RLH”) was the controlling investor.

The government alleges that PCA knowingly engaged third-party marketers to promote certain topical drugs and provided those marketers financial incentives, in the form of commission-only compensation, to steer prescriptions of such drugs. The complaint claims that by submitting claims to the federal TRICARE program for prescriptions written because of illegal kickbacks, PCA knowingly violated the federal False Claims Act. The complaint also asserts improper financial incentives to patients in the form of waived co-payments regardless of financial need, as well as wrongful use of telemedicine physicians to write prescriptions in the absence of a legitimate physician-patient relationship.

In an unusual step, the complaint names as Defendant not only portfolio company PCA but also controlling investor RLH. The government alleges that:

  1. the private equity firm knew and approved of PCA’s payment of kickbacks;
  2. RLH “controlled and directed” the conduct of PCA on behalf of RLH’s investors;  and
  3. two RLH partners who served as officers, board members, and directors of PCA selected a candidate for PCA Chief Executive Officer who played a key role in connecting PCA with marketing companies in the pharmaceutical space.

The complaint also alleges that RLH’s desire to maximize profits was a primary motivation for perpetuating the kickback scheme.

Although the federal government remains active in investigating false claims and kickback schemes associated with Medicare, Medicaid, and TRICARE, the PCA complaint is noteworthy for its inclusion of a private equity investor as a named defendant. It remains to be seen whether the PCA case is the start of a trend in the arena of False Claims Act enforcement. Representatives of private equity companies should evaluate means for assessing and managing this form of legal risk, particularly where the firm plays an active role in governance and/or operational decisions of a health sector portfolio company.

Any private equity firm considering an investment in or owning a health care portfolio company should consult with counsel regarding potential liability and exposure for violations under relevant federal regulations such as the False Claims Act, the Anti-kickback Statute, and the “Stark” law.  Hinckley Allen’s Health Care, Corporate, and Government Enforcement & White Collar Defense practice groups have experience counseling private equity firms on regulatory matters and advising on strategies to avoid or mitigate government enforcement action.

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[1] United States ex rel. Medrano and Lopez v. Diabetic Care Rx, LLC dba Patient Care America, et al., No. 15-CV-62617 (S.D. Fla.) p. 9.

[2] Id. at p 10.