Whistleblower Lawyers Use False Claims Act To Target Private Equity Firms Invested In Healthcare And Life Sciences

• Published date: 01 July 2022
• Subject Matter: Corporate/Commercial Law, Food, Drugs, Healthcare, Life Sciences, M&A/Private Equity, Compliance, Corporate and Company Law, Biotechnology & Nanotechnology
• Law Firm: Goodwin Procter LLP
• Author: Mr Kirk Ogrosky, Annie E. Railton, Chris Wilson and John LeClaire

I. INTRODUCTION

Recent developments demonstrate that sponsor-backed companies in the healthcare and life sciences sectors, and in some instances private equity firms and professionals, have entered a new era of heightened regulatory scrutiny and enforcement risk. This article addresses the U.S. Department of Justice ("DOJ") use of the False Claims Act ("FCA") to pursue private equity investors and their portfolio companies.¹ While DOJ has been actively investigating private equity portfolio companies, the driver behind the majority of DOJ's investigations are whistleblower plaintiff lawyers who file qui tam suits alleging FCA violations. These lawyers have found a receptive audience in both legislative and executive branches of the federal government and are bringing pressure on DOJ to ramp up its focus on the private equity industry, a perceived deep-pocket in FCA cases.

President Biden's recent State of the Union address on March 1, 2022 offers a prominent example of this new era. President Biden said "[A]s Wall Street firms take over more nursing homes, quality in those homes has gone down and costs have gone up."² The day prior to the address, the White House released a fact sheet containing allegations that private equity-owned nursing facilities caused cost increases for government payers coupled with a deterioration in the quality of care.³ Citing an analysis by a progressive think tank, the White House asserted that private equity investment in nursing facilities grew from $5 billion in 2000 to over $100 billion in 2018.⁴ That release asserted that "[t]oo often, the private equity model has put profits before people ' a particularly dangerous model when it comes to the health and safety of vulnerable seniors and people with disabilities."⁵ To combat perceived failures, the administration announced a set of reforms intended to improve care by focusing on staffing levels, expanded government inspections, and transparency of ownership by creating a database to track and identify nursing home owners.⁶ While focused on nursing homes, the White House pronouncements serve as an admonition to the private equity industry that it will be the subject of heightened governmental scrutiny.

II. THE BROADER POLITICAL CONTEXT

President Biden's recent call to arms is not the first governmental effort to focus on private equity investment. On March 25, 2021, the U.S. House of Representatives' Ways and Means Oversight Subcommittee called a hearing to examine private equity's role in healthcare.⁷ The subcommittee's Chairman, U.S. Representative Bill Pascrell, Jr. (D-NJ), asserted in a post-hearing editorial that "[t]he time has come to shine a bright beam on how private equity ownership in our healthcare system affects patients. Private equity firms have grown too large and too far-reaching. They must face stricter accounting in their growth."⁸ At the hearing, Rep. Pascrell delineated committee Democrats' worries about how private equity "affects patient safety, cost, and jobs," while Republican Ranking Member Mike Kelly (R-PA) made clear that his committee members do not believe that the issue deserves governmental attention.9

Much like President Biden's address, the Oversight Subcommittee focused on private equity-owned nursing homes during the COVID-19 pandemic. The hearing featured the testimony of Sabrina Howell, an Assistant Professor from the Stern School of Business at New York University.¹⁰ Professor Howell testified that she estimated that being a patient in a private equity-owned nursing home increased the short-term probability of death by approximately 10%, and increased the amount billed to governmental payers by approximately 11%.¹¹ In contrast, utilizing data from the pandemic, Rep. Kelly insisted that Congress should be focused on state and local government actions that required COVID-19 positive patients to return to nursing facilities.¹² The hearing did not include insight from investors in nursing homes, and there was limited discussion of the role that private equity has played in the innovation, expansion, and growth of the nursing home industry. The discussion of investor profit at the expense of quality of care leaves much to be desired, including that many new technologies, discoveries, and time sensitive expansions during the COVID-19 pandemic, including telehealth¹³ and vaccine development,¹⁴ were made possible with private equity backing.¹⁵

During the subcommittee hearing, participants also addressed legislative proposals to increase transparency of private equity ownership across healthcare sectors.¹⁶ Chairman Pascrell cited the FCA as a tool being used to root out and punish fraud in private equity owned-companies. Relying on a progressive think tank analysis, Pascrell referred to 25 healthcare companies with some degree of private equity ownership that have resolved FCA cases since 2013 for an aggregate of over $570 million.¹⁷

The FCA permits DOJ, and certain whistleblowers, to pursue fraud when materially false claims are knowingly submitted to government payers.¹⁸ On February 1, 2022, DOJ announced that it recovered over $5.6 billion in settlements and judgments involving the FCA in fiscal year 2021, $5 billion of which came from companies accused of defrauding Medicare and Medicaid.¹⁹ In its press release, the acting assistant attorney general touted that annual FCA recoveries are "one of the most important tools available to the department to deter and to hold accountable those who seek to misuse public funds."²⁰ The FCA creates liability, including treble damages and significant per claim penalties for anyone that knowingly presents, or causes to be presented, a false claim for payment to the government, or that knowingly makes or uses, or causes to be made or used, a false record or statement in connection with a claim.²¹ The FCA requires that DOJ or the whistleblower establish that a defendant acted with either (a) actual knowledge, (b) deliberate ignorance, or (c) reckless disregard. These seemingly simple standards have led to conflicting circuit court decisions because, among other things, FCA cases often involve an assessment of whether a defendant's interpretation of a rule or regulation was "objectively reasonable" and whether the government has provided notice that the defendant's interpretation was incorrect.²³

Examples abound showing how executive and legislative branch pressure on DOJ have led to a focus on private equity investment in healthcare and life sciences. In June 2020, the former acting assistant attorney general said that DOJ would pursue FCA cases against private equity firms, especially where firms take an "active role" in illegal conduct by a portfolio company.²⁴ But the warning extends well beyond those taking an "active role," DOJ has been pursuing FCA liability against private equity investors even where allegations that the companies took an "active role" are absent. In these cases, it is not clear what theory of liability exists.

Against this background, private equity firms can expect whistleblower lawyers to increase the number of FCA qui tams across healthcare sectors. This article provides an overview of how the FCA is being used by the whistleblower bar and DOJ to investigate and penalize private equity firms for portfolio company conduct. The article then discusses recent FCA settlements that involve private equity firms, and provides recommendations for firms and their portfolio companies to mitigate the risk of potential FCA liability.

III. FALSE CLAIMS ACT

The FCA allows DOJ or whistleblowers, known as relators, to file lawsuits to recover treble damages, per claim penalties, as well as legal fees and costs from companies that defraud the government.²⁵ When FCA suits are filed by relators, the cases are filed under seal and called qui tam suits. Any time a qui tam suit is filed, DOJ is required to investigate the allegations.²⁶ Thereafter, DOJ has the option of intervening in the qui tam suit and assuming responsibility for the litigation.²⁷ In over two-thirds of qui tams, DOJ declines to intervene; in these cases, the relator maintains responsibility for prosecuting the case.²⁸ When DOJ declines to intervene, the United States remains the real party in interest and receives at least 70% of any recovery...