For the past decade, private equity (PE) firms have been steadily increasing their investments in U.S. health care ventures. According to the American Hospital Association, PE firms accounted for 65 percent of physician practice acquisitions as of 2019. Entities that provide care to Medicare and Medicaid beneficiaries are an attractive investment because growth in the delivery of health care services to those populations is steady and predictable, and the investment is considered safe in otherwise turbulent economic conditions.

At the same time, these investments come with risks. As PE firms have ramped up their health care-related investments, government enforcement agencies have likewise increased their scrutiny of PE firms and their association with health care providers. Legislators, regulators, and enforcement agencies have voiced concern that the focus of PE firms on maximizing short-term profits creates incentives to increase costs for payers while reducing the quality of care.

Much of the enforcement activity in this area has, not surprisingly, involved the use of Federal and state False Claims Acts (FCAs). The United States Department of Justice (DOJ), state attorneys general, and private citizens (known as relators) who invoke the qui tam provisions of Federal and state FCAs, have been pursuing PE-backed companies alleged to have submitted false claims to federal payers, including Medicare and Medicaid, and have more recently been testing the waters of extending liability beyond the portfolio company to the investors or owners of the PE firms. This is made possible, in part, because the Federal FCA and most state analogs extend liability not only to those who knowingly present false claims to the United States, but also to those who knowingly “cause” false claims to be presented to the government for payment.[1]

The enforcement and litigation risks for PE firms come in several forms, but some common themes emerge from a review of recent cases in this area:

  • Insufficient due diligence or investigation of a portfolio company business and attendant regulatory risks prior to investment;
  • Lack of knowledge or training in the health care laws and regulations that apply to the portfolio company;
  • Imposition of revenue targets or other PE investment goals that are in tension with compliance with legal and regulatory requirements; and
  • Sales and marketing strategies that run afoul of fraud and abuse statutes and regulations.

In short, PE investors in companies operating in a highly-regulated space – such as health care and life sciences – must take care to become thoroughly familiar with the laws and regulations applicable to their acquisition targets, because non-compliance can lead to potentially crippling FCA liability and a once attractive investment could quickly turn into a loss.

Overview of recent published FCA opinions involving PE firms

Although FCA qui tam suits are certainly not unfamiliar to participants in Federal health care programs, investigations reaching past the portfolio companies to PE owners and investors are a relatively recent development. Relators’ counsel, DOJ, and state attorneys general have been pursuing more and more investigations in this area, particularly where the provider entity is thinly capitalized, the PE investor has greater financial resources to pay a settlement or judgment, or the facts otherwise justify extending liability to the PE firm.

A few cases have generated opinions that offer some insight into the strategy and direction of FCA enforcement against PE firms. One theory for extending liability to PE firms seeks to characterize the relationship between the PE firm and its portfolio company as a joint business venture in which the two entities are carrying out “a common goal.”[2] In United States ex rel. Ebu-Isaac v. INSYS Therapeutics, Inc., the District Court for the Central District of California denied a PE firm’s motion to dismiss a complaint advancing just such a theory. There, the court opined that “where an entity uses its ability to control or influence another to submit false claims, that entity is not shielded from liability based on its mere status as a separate entity.”[3] The plaintiff alleged sufficient control and influence by the PE firm over the portfolio company – and thus set forth a plausible claim for relief under the FCA – by alleging the PE firm provided management, oversight, and strategic guidance for the operations of the portfolio company. The plaintiff also pointed to email communications that did not distinguish between the entities when conducting business; the use of the collective pronoun “we” to refer to the two entities; and the overlap of officers and board members for the entities.[4]

In other cases, the government has alleged that the financial targets and business practices “initiated” by a PE entity can cause the presentation of false claims under the FCA. In United States ex rel. Medrano, v. Diabetic Care RX, LLC,[5] DOJ intervened in a qui tam case filed against Diabetic Care Rx, LLC d/b/a Patient Care America (PCA), a compounding pharmacy that provided intravenous nutritional therapy to dialysis patients. The government named as a defendant Riordan, Lewis & Haden, Inc. (RLH), a PE firm that made a controlling investment in the pharmacy, along with two individual defendants hired by the PE firm to operate a new line of business planned for the pharmacy.

The government alleged that RLH planned to “increase PCA’s value and sell it for a profit in five years,” and to that end, “initiated PCA’s entry into the business of non-sterile compounding of topical creams” that were then billed to TRICARE, the federal program that provides health insurance for military personnel and their families.[6] The complaint alleged that these claims were fraudulent because: (1) they were tainted by kickbacks paid by PCA to marketers, in violation of the Anti-Kickback Statute (AKS), 42 U.S.C. § 1320a-7b(b); (2) PCA and a marketing company improperly paid patients’ copayments to induce the patients to accept compounded medications; and (3) in violation of Florida law, some claims did not arise from a valid prescriber-patient relationship.[7]

The defendants moved to dismiss the government’s complaint-in-intervention on a number of grounds, including its failure to state a claim for relief under either the express or implied certification theories of the FCA and failure to allege fraud with particularity under Fed. R. Evid. 9(b). A magistrate judge sitting in the U.S. District Court for the Southern District of Florida issued a report and recommendation agreeing that the complaint failed to contain sufficient allegations of specific false representations to support FCA liability under either an express or implied certification theory, but recommended the U.S. District Court grant leave to allow the government to cure the complaint’s factual deficiencies.

Notwithstanding the finding and recommendation, the magistrate judge took the liberty to address arguments regarding other deficiencies in the complaint, including challenges advanced by RLH. For its part, RLH had argued that the complaint-in-intervention failed to allege that the PE firm knew of or caused PCA’s submission of false claims to TRICARE. The magistrate judge disagreed, finding that the complaint sufficiently alleged that RLH knowingly caused the submission of false claims to TRICARE under the alleged marketing kickback scheme based on allegations in the complaint that (i) RLH received advice from counsel that paying commissions to marketers could violate the AKS and compliance with the AKS was a material requirement for reimbursement from TRICARE, and (ii) armed with this knowledge, RLH still approved the use of marketers to generate referrals, funded commissions for the marketers, and received documentation showing significant revenue generated through that process.

The U.S. District Court adopted the recommendation and dismissed the FCA claim on the grounds set forth by the magistrate judge, but also agreed that the government should be permitted to amend its complaint.[8] Approximately six months later, DOJ announced a US$21.36 million settlement with PCA, RLH, and the two individuals.[9]

While the opinion of the magistrate judge in Medrano is not a comprehensive guide on the contours of FCA risk in the context of PE investments in health care companies, it does suggest that when a PE firm goes beyond a passive investment and takes steps to initiate and advance a marketing strategy for the acquired company that potentially runs afoul of the AKS, the firm puts itself at risk for a possible FCA enforcement action.

In United States ex rel. Martino-Fleming v. South Bay Mental Health Ctrs.,[10] the U.S. District Court for the District of Massachusetts denied summary judgment for a PE firm that invested in mental health centers that received reimbursement by the state Medicaid program for services provided by unlicensed and improperly supervised social workers and counselors. The PE firm contended that its members and principals were not aware of the centers’ noncompliance with state supervision and licensing requirements as required to satisfy the “knowledge” requirement of the FCA. In opposition, relators offered evidence showing that leadership at the PE firm understood that the centers’ revenues resulted from Medicaid reimbursement; that Medicaid had terms and conditions for payment; that state regulations required supervision over unlicensed clinicians; and that members of the PE firm were informed that social workers and counselors at the centers received inadequate supervision. Taken together, the court found the evidence gave rise to a genuine issue of material fact whether the PE firm had “knowledge” of noncompliance with state requirements.

The PE firm also claimed it was not involved in the decision-making process with respect to claims submission and therefore could not have “caused” the submission of false claims to Medicaid as required under the FCA. The court opined that the PE firm could be liable for causing false claims to be submitted if the firm “had direct involvement in the claims process” and evidence that the PE firm was apprised of but failed to fix the regulatory noncompliance issues presented a genuine issue of material fact with respect to the PE firm’s role in “causing” the submission of false claims. The  PE firm subsequently agreed to pay US$19.95 million to settle the government’s claims.[11]

Similar to Martino-Fleming, settlements in two additional cases suggest learning about allegedly non-compliant conduct through pre-acquisition due diligence or failing to stop allegedly improper marketing activity post-acquisition suffices to “cause” the false claim. In November 2020, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced a US$10 million settlement with Therakos, Inc., a former Johnson & Johnson subsidiary, which included a US$1.5 million payment by PE investor, The Gores Group, to resolve allegations that Therakos continued off-label marketing of a drug/device system after The Gores Group acquired Therakos from J&J in 2012.[12] In July 2021, DOJ announced a settlement with the Alliance Family of Companies LLC, an medical testing company, under which Alliance agreed to pay US$13.5 million to resolve allegations that it caused claims to be submitted from an alleged kickback scheme. As part of that settlement, PE investor Ancor Holdings LP agreed to pay roughly US$1.8 million to resolve allegations that Ancor learned of the kickback scheme during due diligence but allowed the conduct to continue after entering an agreement to manage Alliance.[13]

Looking ahead

PE firms should be clear-eyed about the risks of investing in a company that operates in the highly-regulated health care industry in which taxpayer-funded programs often provide a significant share of a company’s revenue. The risk of government investigations, qui tam lawsuits, and liability under the FCA is real. The costs of internal and government investigations and the potential reputational damage that accompanies such investigations can manifest as long-term challenges, even apart from the prospect of litigation and FCA damages. PE firms should incorporate these considerations into their due diligence, including careful assessment of any target company in the health care industry for potential risks.

Special attention at the due diligence stage should be given to: current and historical regulatory and compliance infrastructure and training; marketing and sales strategies; financial arrangements with referral sources; recoupment of overpayments by payers; and audits or investigations by government agencies. PE firms should also consider any health care company’s AKS and FCA training and controls carefully, bearing in mind that an FCA action can be brought within six years – and potentially up to ten years – after an alleged violation.

Finally, PE firms should be mindful that even comprehensive and thorough due diligence won’t eliminate all FCA risk. Post-acquisition, their investments in marketing and growth to meet specific financial targets should be matched with commensurate investments in legal and regulatory compliance, training, claims reviews, and audits.


[1] See 31 U.S.C. § 3729(a)(1); see also N.Y. State Fin. Law § 187 et seq.; Cal. Gov't Code § 12650 et seq.

[2] United States ex rel. Ebu-Isaac v. INSYS Therapeutics, Inc., No. 216CV07937JLSAJW, 2021 WL 3619958, at *6 (C.D. Cal. June 9, 2021).

[3] Id. at *5.

[4] Id. at *7.

[5] No. 15-CV-62617, 2018 WL 6978633 (S.D. Fla. Nov. 30, 2018), report and recommendation adopted in part, No. 15-CV-62617, 2019 WL 1054125 (S.D. Fla. Mar. 6, 2019).

[6] 2018 WL 6978633 at *1-*2.

[7] Id. at *3.

[8] Medrano, 2019 WL 1054125 at *6-*7.


[10] 540 F. Supp. 3d 103 (D. Mass. 2021).