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The health care industry continues to hold great potential for private equity (PE) firms, but it also carries with it significant risks and potential exposure to liability. Last year alone, firms invested $83 billion in health care related business. As the pressure to find opportunities has increased, there appears to be a greater appetite for riskier investments including into portfolio companies that experienced or are experiencing compliance challenges.
Historically, the health care industry has been a prime target for FCA claims, in large part because of the ubiquitous nature of government payments through Medicare and Medicaid. In 2016, for example, over half of all federal recoveries in FCA cases came from entities and individuals in health care. Traditionally, the risk presented by compliance-challenged portfolio companies was contained at the portfolio company level. Those risks include the risk of civil claims or criminal charges brought by the government under the False Claims Act (FCA), 31 U.S.C. §3729 et seq. DOJ policy changes have expanded FCA enforcement against individuals — not just entities — and recent investigative activity suggests an increased focus on investment firms and individuals working for those PE firms.
Thus, as prosecutors and relators increasingly try to blur the distinction between investors and operating companies, comprehensive pre-acquisition diligence regarding possible FCA exposure must be even more of a priority when considering health care investments. In addition, any private equity firms, and their partners and employees who become involved with the actual operation of the portfolio company (such as serving on the boards or taking temporary management positions) are at increased risk and must be mindful of ways to limit potential liability.
The FCA imposes liability on persons and entities who knowingly present, or cause to be presented, a false or fraudulent claim for payment by the government. Most health care FCA cases start with whistleblowers — known as “relators” — who file actions on the government's behalf. The government then has the option to intervene in a suit filed by a relator. Most states and some municipalities have analogous statutes which similarly prohibit false claims from being submitted to state government agencies and reward whistleblowers who bring claims.
Until recently, most FCA actions were brought solely against the entities that allegedly submitted the false claims. But now there is increased focus on individual officers and employees who allegedly participated in filing claims. And, in the past few years, relators and prosecutors have pursued FCA investigations and claims not just against the entity and its officers and employees, but also against the entity's owners and investors — including private equity firms, and the employees and partners of those firms who serve on the boards of, or are otherwise involved with, the portfolio company that allegedly submitted false claims.
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