In a presentation in February 2024, Brian Boynton, head of the U.S. Department of Justice’s Civil Division, made clear that the government is prioritizing its focus on private equity deals in its search to ferret out healthcare fraud.
Boynton remarked that PE and venture capital investors “influence patient care by providing express direction for how a provider should conduct their business, or more indirectly by providing revenue targets or other indirect benchmarks intended to prioritize reimbursement.” Boynton stated that “if an investor knowingly engages in conduct that causes the submission of false claims, they may subject themselves to liability.”
For example, in 2021, the Massachusetts Attorney General announced a $25 million settlement by private equity group H.I.G. Capital and its acquired South Bay Mental Health Center, Inc. in connection with allegations that they caused fraudulent claims to be submitted to MassHealth, the state’s Medicaid program. Underlying the civil settlement were allegations that H.I.G., among others, knew that South Bay was providing unlicensed, unqualified, and unsupervised services in violation of regulatory requirements and caused fraudulent claims to be submitted.
Another example is the 2019 settlement announced by the DOJ in the amount of $21.36 million against a compounding pharmacy, Patient Care America, as well as its chief executive, its VP of operations, and private equity firm Riordan, Lewis & Haden. The case centered on allegations of kickbacks to outside “marketers” to target military members and their families for prescriptions for compounded creams and vitamins, which were formulated to ensure the highest possible reimbursement from TRICARE. In particular, it was alleged that the PE firm knew of and agreed to the plan to pay outside marketers to generate the prescriptions and financed the kickback payments to the marketers.
Certainly, the ability of healthcare ventures to raise capital and to permit existing owners to realize a profit on their investment is good for business in general.
However, the root of the problem is that, as opposed to long-term investors with true skin in the game in terms of investing in well run healthcare ventures, private equity, with its short term outlook, often not only overlooks existing healthcare fraud during the due diligence process, but is likely to stimulate it in its focus on short term profits.
The point for those looking to sell, especially for those looking to sell in part, selling to an investor class which is under special scrutiny comes with obvious danger: additional scrutiny.
As I’ve said many times, a seller has to consider two purchase prices: The first purchase price is the one that the seller receives. The second purchase price is the one that the seller pays by having sold to the wrong buyer.
You’re undoubtedly familiar with the concept of caveat emptor, “let the buyer beware”.
Physicians and other owners of healthcare ventures of all sorts should be equally aware of caveat venditor, “let the seller beware”.
