A recent complaint filed by the United States Department of Justice against a private equity firms regarding an alleged kickback further illustrates new concerns private equity should be aware of in the healthcare arena and working with counsel to mitigate such concerns. A February 23, 2018 press release from the DOJ regarding 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.), available here, describes how the complaint was made against a pharmacy, several of its executives and the private equity firm, which manages the pharmacy and the private equity fund that owns the pharmacy. The United States Attorney’s Office for the Southern District of Florida stated in the release 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.”
According to the complaint, the private equity defendant manages a private equity fund, which has owned the controlling stake in the pharmacy since 2012, and the private equity firm “managed and controlled” the pharmacy “on behalf of the private equity fund through two [private equity firm] partners…, who served as officers and/or directors of [the pharmacy] and of a holding company with an ownership interest in [the pharmacy].”
The complaint’s emphasis on the private equity firm’s involvement with, knowledge about and control over certain elements of the pharmacy might suggest that the greater the involvement in the portfolio company, the more likely it could be for the private equity firm to face liability under the False Claims Act. This case highlights the need for private equity firms to be cognizant of their level of involvement in the operations of their portfolio companies, especially in the healthcare space and when such involvement might create potential exposure. Examples of areas to consider include, but are not limited to, whether or not to have private equity leadership serve on the portfolio company’s board, what level of control to maintain over the portfolio company’s directions or objectives and what approval rights to retain over spending and contracting.
This case further emphasizes the need to stay abreast of developments in the regulatory landscape and the government’s continuing interest in this area.