Key Points

  • In an unusual move, the government has decided to pursue a False Claims Act (FCA) suit against a private equity firm based on an alleged commission scheme at its pharmacy portfolio company to promote sales of products subject to federal reimbursement.
  • The inclusion of the private equity firm as a named defendant in the Complaint may indicate an increased willingness by the government to pursue the investment management firms backing health care companies and other entities that receive federal funds.
  • The FCA sets a high bar to establish that company owners or directors knowingly caused the presentment of false claims. The Complaint thereby provides insight into the level of participation in the operations of a portfolio company the government deems sufficient to pursue a private equity firm for the alleged misconduct of its portfolio company. The case also provides insight into steps private equity firms should take to reduce their potential exposure to liability under the FCA.

United States Intervenes in Suit Against Private Equity Firm Based on Health Care Portfolio Company's Alleged False Claims Act Violations

Background

In December 2017, the United States intervened in a qui tam suit relators Marisela Carmen Medrano and Ada Lopez filed against defendants Diabetic Care RX, LLC d/b/a Patient Care America ("Patient Care"), a pharmacy organized under Florida law; Patrick Smith and Matthew Smith, two Patient Care executives; and Riordan, Lewis & Haden, Inc. (RLH), a private equity firm holding a majority interest in Patient Care. In its Complaint in Intervention, filed February 16, 2018, the government alleges that the defendants defrauded the United States of approximately $85 million through a scheme in which Patient Care provided illegal commissions to independent marketers to refer patients for compound drug prescriptions reimbursed by TRICARE in violation of the FCA and the Anti-Kickback Statute.

The FCA imposes liability on any person who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" or who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(A)–(B). The Anti-Kickback Statute prohibits the knowing and willful solicitation or receipt of any remuneration in exchange for the referral of federal health care business. 42 U.S.C. § 1320a-7b(b)(2). A claim that includes items or services resulting from a violation of the Anti-Kickback Statute "constitutes a false or fraudulent claim" under the FCA. 42 U.S.C. § 1320a-7b(g). Violations of the FCA are subject to treble damages and civil penalties of between $10,957 and $21,916 per claim.

Allegations

The government alleges Patient Care (previously operating as Diabetic Care RX, LLC) engaged in a kickback scheme through which it paid illegal commissions to independent marketing companies to refer patients for topical compound drug prescriptions reimbursed by TRICARE.

As part of this purported scheme, Patient Care allegedly manipulated the formulations of prescriptions to ensure the highest possible reimbursements, issued prescriptions without patient consent or a patient- doctor relationship, and coordinated with one of the marketing companies to cover the cost of patient copayments to induce additional prescriptions.

Although the allegations in the Complaint are not particularly unusual for a civil FCA enforcement case, the Patient Care action is notable because the government elected to pursue not only Patient Care and its individual officers, but also RLH, the private equity firm controlling Patient Care.

The government's allegations—to which the defendants have not yet had an opportunity to respond— provide that RLH acquired a controlling interest in Patient Care in 2012 with the intention of increasing Patient Care's value and selling the business for a profit within five years. RLH allegedly installed two of its partners as officers of Patient Care and as officers and board members of the company that then- managed Patient Care. The Complaint alleges that RLH directed Patient Care's entry into the topical compound drug business, required Patient Care's CEO to consult with RLH partners before entering certain contracts, and funded commission payments to marketers when they became due prior to Patient Care's receipt of TRICARE reimbursements. The Complaint does not allege that Patient Care is the alter ego of RLH.

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