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False Claims Act Litigation Is Targeting Private Equity Investment in Health Care

March 21, 2023 | Purdue Global Law School

Private equity investment in physician practices, dental chains, eye care clinics, nursing homes, and other health care companies has increased significantly in recent years. This provides an infusion of capital to finance growth along with active management to improve operations. The objective is to maximize efficiency and profitability — but this may come at the expense of patient safety and quality care. As a result, private equity firms are sometimes at odds with health care regulations and best practices.

The Department of Justice (DOJ) has increased regulatory scrutiny of private equity companies and investors, and whistleblowers are filing qui tam suits alleging violations of the False Claims Act (FCA). Many claims involve health care fraud, such as overbilling for services, billing for services not provided, or paying kickbacks to doctors. Increasingly, however, FCA lawsuits are alleging under- and over-treatment of patients, resulting in serious harm or even death.

Increasing Private Equity Investment

The year 2021 set records for private equity investment in health care. Private equity firms invested $206 billion in health care companies in 2021, according to the health care arm of Kaiser Group HoldingsBain & Company estimates 400 private equity health care deals closed in 2022, down about 25% from the 515 deals in 2021. The consulting firm says that the tight credit market, rather than any cooling of interest in health care investment, led to the drop-off. 

University of California Berkeley study finds that private equity firms invested approximately $750 billion in health care from 2010 to 2020, and expects spending to increase 5.5% annually through 2027. From a public policy perspective, this creates anticompetitive concerns. Private equity investment tends to drive consolidation and seeks to dominate local markets and even regions. Although 90% of private equity transactions in health care fall below the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act, the Federal Trade Commission has called for greater scrutiny of these transactions.

More concerning is the impact on patient care. Multiple studies have indicated that private equity investment results in reduced staffing, lower patient satisfaction, and financial conflicts of interest that create incentives for under- and over-treatment.

How FCA Claims Work

The FCA provides a mechanism for injured individuals and whistleblowers to seek redress for harms caused by misconduct and fraudulent activities. Under the FCA, the DOJ and private individuals can sue companies for defrauding the federal government. If the lawsuit is successful, the violator is held liable for per-claim penalties and treble damages. 

When a private individual, known as a “relator,” files suit, it’s called a “qui tam” suit. The suit is filed under seal, and the DOJ is required to investigate the allegations. The DOJ may choose to intervene in the litigation and assume responsibility for prosecuting the case, but in two-thirds of cases they decline to do so. In such cases, the relator proceeds on behalf of the federal government and is entitled to a larger portion of the recovery. In fiscal year 2021, 598 qui tam cases were filed, resulting in $1.6 billion in settlements and judgments, with relators receiving $237 million.

Targeting Private Equity Firms

FCA suits in the health care industry are nothing new, but they have primarily targeted physicians, hospitals, labs, pharmacies, device manufacturers, and durable medical equipment providers. A KHN investigation found that private equity portfolio companies have settled at least 34 FCA lawsuits since 2014 and agreed to pay more than $500 million in fines.

Most FCA cases involve 31 U.S.C. §§ 3729(a)(1)(A) and (B), which set forth liability for knowingly presenting “a false or fraudulent claim for payment or approval” or making “a false record or statement material to a false or fraudulent claim.” Section (C) involves a conspiracy to commit such a violation. “Knowingly” means with actual knowledge, deliberate ignorance, or reckless disregard of the truth. Plaintiffs do not have to prove specific intent to defraud.

Until recently, private equity firms have largely escaped scrutiny. However, recent cases have alleged that private equity firms and their principals are responsible for their portfolio companies’ misconduct or failed to prevent it. Some cases have focused on information the private equity firm received during due diligence or later communications.

Risks for Private Equity Firms

Particularly problematic is the degree of influence or control the private equity firm has over its portfolio companies. Cases have alleged that pressure to increase revenue and profitability compels portfolio companies to engage in fraudulent practices. Other cases hinged on sales and marketing programs that resulted in illegal kickbacks or medically unnecessary treatment.

FCA lawsuits are costly for private equity firms in terms of litigation expenses, distraction from business, reputational damage, and potential fines and settlements. These firms should scrutinize the regulatory compliance of acquisition targets, particularly those that bill Medicare or Medicaid. They should take steps to remedy any compliance violations and ensure robust compliance processes are in place after the deal closes. New business models and strategies should be carefully evaluated, particularly those involving sales and promotion.

Increased private equity investment in health care has raised alarms among industry analysts and regulators who are concerned that it undermines competition, increases costs, and reduces the quality of care. Private equity firms looking to enter or expand their presence in the health care market should ensure that their portfolio companies follow best practices and implement rigorous compliance processes.

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Purdue Global Law School

Established in 1998, Purdue Global Law School (formerly Concord Law School) is Purdue University's fully online law school for working adults.