The Department of Justice’s new approach to combat medical fraud: prosecuting private equity


Before global private equity firm HIG Capital acquired a large Massachusetts mental health service provider through an affiliate, its due diligence revealed some suspicious signs. There are “document problems” and “poor quality of supervision”.

This did not stop HIG, which was managing approximately $21 billion in capital at the time. After the transaction was completed in 2012, three of its senior members joined the board of directors of their newly acquired South Bay Mental Health Center.However, according to the lawsuits of HIG and its affiliates and executives, the leaders of HIG did not prevent South Bay from using unauthorized clinicians in its 17 facilities. This practice will eventually lead to more than $100 million in Medicaid fraud. Claim Paid 25 million US dollars to settle In October.

“Some people come to this company and they need help with mental health issues,” said Jeffrey Newman, a Boston lawyer representing the former South Bay employee who became the whistleblower. “There are people behind all this, and they are ultimately victims. In such cases, this is missed.”

Private equity—a form of private equity financing in which funds and investors directly purchase private companies—has shown an insatiable appetite for healthcare in recent years. Private equity transactions in the U.S. healthcare industry exceeded US$100 billion in 2018, while in 2000 it was less than US$5 billion. Not only is it a nearly 4 trillion dollar industry that is strongly supported by the federal government, but American healthcare has proven to be a reliable profit driver.

Proponents of this trend say that private equity is an important player in the healthcare field because it has the funds needed to accelerate technological progress and other innovations, which traditional operators cannot afford. Others believe that the business model of private equity—acquiring a company, improving profitability and reselling it for handsome returns—is incompatible with the mission of healthcare.

The U.S. Department of Justice and state attorneys general are closely monitoring these transactions. Medical care has always accounted for a large part of the department’s False Declaration Act settlement gains-80% between 2017 and 2020–But only recently – around 2016 – have private equity firms been listed 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 in at least five such cases, and officials have indicated that more cases are expected in the future.

After billions of dollars in federal stimulus funds were used to support healthcare providers during the COVID-19 pandemic, the US Department of Justice has pledged to strengthen law enforcement. The then Chief Deputy Assistant Attorney General Ethan Davis stated in a speech in June 2020 that the Department of Justice will hold private equity firms accountable for the actions of their portfolio companies, especially actions related to pandemic assistance.

Court records and interviews show that government regulators want private equity firms to prevent any fraudulent practices in their portfolio companies. They also showed that fraud by target companies—even ongoing lawsuits—is not always deal-breakers for private equity buyers, and in the worst cases, they even stepped up their plans after taking over.

“There are many ways to consider building a structure around (false declaration law) risks,” said John Bueker, a partner at Ropes & Gray, who represents private equity clients. “But as an investor, this requires you to be more careful and deliberate.”

More investment, more investigation

No single policy or case pointed out by federal prosecutors can explain the department’s relatively new approach to prosecuting private equity firms.

Instead, they stated that the naming of the private equity firm as the defendant was only to track its increasing influence in the industry.

“As long as private equity firms are incentivized to take risks to create short-term, substantial profits in the healthcare industry, we will continue to see such cases,” said Charlene Fullmer, deputy director of the department’s civil department. U.S. Attorney’s Office for the Eastern District of Pennsylvania.

The head of Bass, Brian Roark, said that the False Declaration Act relies on whistleblowers (also known as related parties) to file suits against their employers, so the increase in private equity defendants reflects more whistleblowers against them in their initial lawsuits. The DOJ later intervened, the Berry & Sims Health Care Fraud Task Force.

“Under normal circumstances, the people involved will take a dollar out of any pocket they can find,” Rock said. “The driving factor is a deeper resource that can make judgments.”

According to data collected by Lex Machina, a legal analysis company, an estimated 82% of public health care whistleblowers’ cases ended in possible settlements. Ellen Chen, a legal data expert at Lex Machina, said that this figure includes required settlements and voluntary dismissal of the plaintiff, which may indicate a settlement or the plaintiff dismissed the case for other reasons.

The then Deputy Attorney General Sally Yates promised September 2015 Memorandum Her department will focus on holding individuals accountable for company misconduct. She wrote that this accountability is important because it prevents future illegal activities and inspires changes in company behavior.

Fulmer said the directives issued during the Obama administration have refocused the department’s work.

“If corporate executives and individuals deliberately cause fraud, we should hold them accountable,” she said.

Eight months after the Yates memo, the Department of Justice landed One of its first settlements Fulmer said the private equity firm Fortress Investment Group conducted an investigation into false health claims. In this case, the whistleblower, the former manager of the retirement property, accused a number of fraudulent schemes, including helping veterans or their surviving spouses file false claims for veteran benefits related to assistance and attendance. The defendant paid nearly 9 million U.S. dollars to resolve the case.

The following year, the U.S. Department of Justice intervened in a case involving the private-equity-owned compound pharmacy Patient Care America, which was accused of using illegal kickbacks to file a painkiller claim against the veterans health care plan. Allegedly, the reimbursement for each prescription ranges from US$1,000 to US$8,000, with a gross profit margin of 90%.

“This is ridiculous,” said Steven Grover, a lawyer in Fort Lauderdale, Florida, who represented the whistleblower in the case. “You can go to a nearby pharmacy to buy an analgesic ointment for $30.”



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