Before global private equity firm H.I.G. Capital bought a large Massachusetts mental health provider through an affiliate, its due diligence turned up warning signs that something fishy was going on. There were “documentation issues” and “poor quality of supervision.”
That didn’t deter H.I.G., which had about $21 billion in capital under management at the time. After the deal closed in 2012, three of its senior members joined the board of their new acquisition, South Bay Mental Health Center. But H.I.G.’s leaders didn’t stop South Bay from using unlicensed clinicians across its 17 facilities, a practice that would culminate in more than $100 million in fraudulent Medicaid claims, according to a lawsuit H.I.G., its affiliates and executives paid $25 million to settle in October.
“There are individuals who came to this company who badly needed help with mental health issues,” said Jeffrey Newman, the Boston attorney who represented the former South Bay employee who became a whistleblower. “There are people behind all this who are the victims in the end. That’s missed in a case like this.”
Private equity—a form of private financing where funds and investors buy directly into private companies—has shown an insatiable appetite for healthcare in recent years. Private equity deals in the U.S. healthcare sector surpassed $100 billion in 2018, compared with less than $5 billion in 2000. Not only is it a nearly $4 trillion industry with significant federal government support, U.S. healthcare has proven to be a reliable profit driver.
Proponents of the trend say private equity is an important player in healthcare because it has the capital needed to speed up technological advances and other innovations from what traditional operators can afford. Others argue private equity’s business model—buy a company, boost profitability and resell for a hefty return—is incompatible with healthcare’s mission.
The U.S. Department of Justice and state attorneys general are keeping a close eye on these deals. Healthcare has always represented an outsized share of the department’s False Claims Act settlement proceeds—80% between 2017 and 2020—but it only recently—around 2016—began naming private equity firms as defendants in such cases against healthcare companies.
Since then, the federal government has won more than $43 million in settlement proceeds from private equity defendants across at least five such cases, and officials say to expect more cases in the future.
The DOJ has pledged to ramp up enforcement after billions of dollars in federal stimulus funding went toward supporting healthcare providers during the COVID-19 pandemic. Then-Principal Deputy Assistant Attorney General Ethan Davis said in a June 2020 speech that the DOJ will hold private equity firms accountable for their portfolio companies’ actions, especially related to pandemic aid.
Court records and interviews show government watchdogs expect private equity firms to stop any fraud happening at their portfolio companies. They also show fraud at target companies—even ongoing lawsuits—aren’t always a dealbreaker for private equity buyers, who in the most egregious cases even ramp up the schemes after taking over.
“There are ways to think about structuring around the (False Claims Act) risk,” said John Bueker, a partner with Ropes & Gray who represents private equity clients. “But as an investor, it requires you to be more deliberate and thoughtful about it.”
More investments, more investigations
There’s no single policy or case federal prosecutors point to that explains the department’s relatively new practice of suing private equity firms.
Rather, they say naming the private equity firm as defendants simply tracks with its increased presence in the sector.
“As long as private equity firms are incentivized to assume risk to create short-term, substantial profits in the healthcare sector, we’re going to continue to see cases like this,” said Charlene Fullmer, deputy chief of the civil division in the U.S. Attorney’s Office for the Eastern District of Pennsylvania.
The False Claims Act relies on whistleblowers—also known as relators—bringing lawsuits against their employers, so the uptick in private equity defendants reflects more whistleblowers targeting them in their initial lawsuits that the DOJ later intervenes in, said Brian Roark, head of Bass, Berry & Sims’ Healthcare Fraud Task Force.
“Generally relators will take a dollar from any pocket they can find,” Roark said. “The driver is deeper resources to be able to pay judgments.”
Among publicly available healthcare whistleblower cases, an estimated 82% of cases terminated with a likely settlement, according to data gathered by legal analytics firm Lex Machina. That figure includes stipulated settlements as well as voluntary dismissals by plaintiffs, which may indicate settlements, or the plaintiff dismissing the case for other reasons, said Ellen Chen, a legal data expert with Lex Machina.
Then-Deputy Attorney General Sally Yates pledged in a September 2015 memo that her department would focus on holding individuals accountable for corporate wrongdoing. She wrote that such accountability is important because it deters future illegal activity and incentivizes changes in corporate behavior.
Fullmer said the directive—issued during the Obama administration—refocused the department’s efforts.
“If there are corporate officers and individuals who knowingly caused the fraud, we should be holding them accountable,” she said.
Eight months after the Yates memo, the DOJ landed one of its first settlements with private equity firm Fortress Investment Group over healthcare false claims, Fullmer said. In that case, the whistleblowers, former managers of a retirement property, alleged a number of fraud schemes, including helping veterans or their surviving spouses submit false claims for veteran’s benefits relating to aid and attendance. The defendants paid almost $9 million to settle the case.
The following year, the DOJ intervened in a case involving a private equity-owned compounding pharmacy, Patient Care America, which was accused of submitting claims to a veteran’s healthcare program for pain creams using illegal kickbacks. Reimbursements allegedly ranged from $1,000 to $8,000 per prescription, with a gross profit margin of 90%.
“That’s outrageous,” said Steven Grover, the Fort Lauderdale, Florida, attorney who represented the whistleblowers in that case. “You can go to your neighborhood drug store and get a pain cream for $30.”