Private Equity Healthcare Portfolio Enforcement Trends Provide Important Compliance Reminder

Over the past decade, private equity firms have been acquiring healthcare companies, hospitals, and clinics at an increasingly rapid pace. In fact, private equity firms spent about $1 trillion on about 8,000 healthcare deals during that decade. This trend is only expected to continue through 2024. However, as private equity’s presence in healthcare grows, investors should expect increased scrutiny from the Department of Justice (DOJ) and other agencies.

2023 was a record year for False Claims Act enforcement, with the government recovering more than $1.8 billion from the health care industry alone. Earlier this year, Deputy Attorney General Brian Boynton announced that health care fraud would continue to be a focus of FCA enforcement, with the department focusing in particular on private equity takeovers. Boynton warned that investors who “knowingly engage in conduct that causes false claims to be submitted… (will) be subject to liability.” Indeed, FCA enforcement to pursue private equity has increased in recent years, illustrating the challenges of investing in such a heavily regulated area.

The growing interest in investigating private equity acquisitions in the healthcare sector underscores the importance of due diligence to avoid inheriting or creating FCA liability. If a provider is acquired with existing or ongoing violations, investors can be found guilty of making false claims to the government by failing to identify and correct misconduct that began before the acquisition. In addition to assets, private equity firms can acquire the liability of their portfolio companies without exercising due diligence. For example, in a record-breaking qui tam recovery, private equity firm HIG settled an FCA case in 2021 for a whopping $19.95 million, with two of its former executives paying an additional $5.05 million. South Bay Medical Center in Massachusetts, a HIG portfolio company, allegedly used unlicensed staff to provide psychiatric care to its patients. The Justice Department declined to intervene in the case, but after the Commonwealth of Massachusetts intervened, the District Court for the District of Massachusetts ruled that there was sufficient evidence that HIG knew about the fraud to skip the summary judgment phase and proceed to trial, resulting in a massive settlement.

In addition, private equity firms must avoid prohibited affiliations among health care companies in their portfolios. Federal health care regulations strictly limit the circumstances in which providers can refer patients to each other. The Physician Self-Referral Act (STARK) prohibits physicians from referring patients to providers in whom they have a financial interest. The Anti-Kickback Act prohibits providing anything of value in exchange for making, arranging, or recommending a referral for services. The Eliminating Kickbacks in Recovery Act prohibits certain payment arrangements in which the marketing or arranging for the provision of laboratory services is prohibited. Each of these laws, and potentially others, can be implicated in situations in which providers share corporate ownership and patients. Therefore, before any private equity firm makes a new acquisition, it is crucial to analyze any affiliations the new acquisition may have with other providers in the company’s portfolio.

Government scrutiny of private equity acquisitions in the healthcare sector is only expected to increase, at least as long as the pace of acquisitions continues. As such, companies should expect government review and prepare to defend their due diligence processes. Both companies and investors can take key steps before acquisitions to eliminate or reduce potential liability and the costs of responding to government inquiries.

If questionable conduct is uncovered during due diligence, investors should discuss with their attorneys the merits of self-disclosure or including indemnification provisions in investment agreements. The Department of Justice’s M&A Safe Harbor policy, which was implemented in October 2023, allows investment companies that discover criminal conduct in a merger or acquisition to presumptively dismiss the allegations by disclosing the conduct within six months of closing, cooperating with the DOJ investigation, and participating in prompt remediation. It is important to note, however, that the safe harbor provision applies only to criminal conduct and not civil liability under the FCA. For more information about the Safe Harbor Policy, click here.

Given the high risks and potential FCA liability stakes, investors interested in acquiring healthcare companies should work with counsel to take a comprehensive approach to due diligence. Planning ahead for inevitable government investigations will pay huge dividends when those investigations arrive or a compliance issue is identified.