It’s no secret that private equity (PE) firms are increasingly acquiring healthcare and life science
businesses. And it is also no secret that when they do, these firms employ typical investment
strategies and practices that may make sense in some industries, but not those involving
patient treatment and care. After all, private equity (PE) firms usually seek to increase the debt
held by their portfolio companies, while trying to ramp up revenues and drastically cut costs.
In the healthcare and life science arenas this can lead to debt-laden balance sheets and
bankruptcies, unethical or unlawful sales and marketing schemes to boost revenues (including
by paying kickbacks) and massive cuts in essential staff and service levels. All of which can result
in underserving and improperly treating the patient population, many of whom are Medicare,
Medicaid and TRICARE beneficiaries. It can also lead to falsely billing government insurance
programs, resulting in False Claims Act violations and substantial rewards for whistleblowers.
Due to increasing fraud and abuse in the healthcare and life science fields, the U.S. Department
of Justice is taking a closer look at charging private equity (PE) firms with False Claims Act
“upstream” liability for the misconduct of their portfolio companies. This has resulted in a
number of large settlements in recent years.
Successfully pursuing False Claims Act cases against private equity (PE) firms requires two
things above and beyond the normal elements of proof in FCA cases. First, you need to show
that one or more members of the private equity (PE) firm had some role in causing the portfolio
company to submit false claims to a government program. This is usually done by showing their
control over, and involvement in, the day to day management and operation of the business.
For example, by controlling the board and through consulting and management service
contracts and the receipt of payments for such services. The second vital fact you need to
establish is that one or more members of the private equity (PE) firm knew about the
fraudulent and improper billing practices of the portfolio business. Often this can be proved by
showing that these investors turned a deliberate blind eye to such misconduct in their quest for
profits and/or that they failed to set up and monitor effective compliance programs.
If you believe a Private Equity (PE) firm might have upstream False Claims Act liability for the
misconduct of one or more of its portfolio companies (whether in the healthcare field or
otherwise), you should immediately contact an experienced qui tam whistleblower attorney.
Time is often of the essence, especially in larger organizations where many people know about the fraud and some may rush to preserve their rights since there is a first-to-file rule that generally bars subsequent whistleblowers from receiving a reward.
