The United States Department of Justice (“DOJ”) has intervened in a False Claims Act (“FCA”) case against a Florida compounding pharmacy, Diabetic Care Rx, LLC d/b/a Patient Care America (“PCA”), and, in an unexpected move, named PCA’s private equity sponsor and controlling shareholder, Riordan, Lewis & Haden, Inc. (“RLH”), as a co-defendant. The DOJ complaint accuses PCA, RLH and two PCA officers/directors (who were also RLH partners) of overseeing a kickback scheme which DOJ alleges induced referrals that resulted in TRICARE paying over $68 million for medically unnecessary compound drug prescriptions. DOJ alleges the illegal scheme was designed by RLH.

The addition of RLH as a co-defendant is unique in that it demonstrates DOJ’s willingness to ascribe FCA liability to financial sponsors.

The Case in a Nutshell

The initial whistleblower lawsuit was brought by two former employees of PCA who alleged that PCA paid illegal kickbacks to marketing companies to induce prescriptions for compounded pain creams, scar creams and vitamins reimbursed by TRICARE. DOJ intervened in the case on February 16, 2018, naming not only PCA as a defendant, but also RLH, Patrick Smith and Matthew Smith, PCA’s CEO and pharmacist, respectively.

According to DOJ, PCA’s business model sought to quickly increase short-term revenues through new referrals and kickbacks to marketers that “solicit[ed] orders for” and “market[ed]” its topical compounds to TRICARE beneficiaries. In particular, the DOJ claims PCA hired marketing companies who had illegal relationships with telemedicine providers which encouraged them to write prescriptions for PCA’s compounded creams and vitamins. These marketing companies allegedly received a 50% “commission” of profits from prescriptions they sent to PCA, and together with PCA, allegedly paid telemedicine providers to prescribe the creams and vitamins without seeing patients. The DOJ also alleges PCA provided direct kickback to beneficiaries by covering their copayments for prescriptions with funds from PCA’s related charitable organization.

From September 2014 through August 2015, the alleged kickback scheme generated more than $68 million in reimbursements from TRICARE.

PE Involvement

According to DOJ, RLH acquired its interest in PCA in July 2012 and maintained a significant level of involvement in the business and operations of PCA. Following the closing of the initial transaction, RLH assumed active control over the pharmacy and appointed two of its partners as PCA officers/directors, who were tasked with guiding the strategic direction of PCA. Thereafter, through these appointees, RLH oversaw PCA’s expansion into the lucrative business of topical compounding which ultimately was the basis for the underlying whistleblower action and DOJ’s intervention.

Notably, the government’s complaint accuses RLH of exercising a level of control over PCA affairs more extensive than is typical for a PE healthcare sponsor. For example, the DOJ claims that RLH recommended Patrick Smith, an RLH partner, to serve as PCA’s CEO despite warnings from a talent consultant retained by RLH to evaluate his success as CEO, that while possessing the requisite skills and experience to drive growth, he would “require more careful management than [RLH] may wish to provide.”

Ultimately, DOJ believes RLH’s oversight and control is evidence that RLH “knew of and approved” the allegedly illegal marketing arrangements underlying the complaint. And as an investor in health care companies, RLH “knew or should have known … that health care providers [like PCA] that bill health care programs [like TRICARE] are subject to laws and regulations designed to prevent fraud.”

Important Takeaways

  • FCA Liability of Financial Sponsors: The standard for FCA liability is knowing or intentional fraud, not mere negligence. The easiest way for the government to demonstrate these elements is to show that the financial sponsor exercised a degree of control over the portfolio company. Accordingly, while financial sponsors are often actively involved in a portfolio company’s business post-acquisition, they must be aware of the regulatory climate in the healthcare industry and make efforts to grow the business in a compliant manner. The DOJ’s inclusion of RLH in this case certainly signals a willingness to expand FCA liability to financial sponsors investing in the health care industry.
  • Understanding Regulatory and Compliance Requirements: Financial sponsors with investments in health care should be aware of the complex regulatory requirements to which their portfolio companies are subject. This is best accomplished through the performance of a thorough diligence review of the target, a robust compliance/monitoring program at the portfolio company level and the implementation of a compliance training program targeted at the financial sponsor’s management level employees.

If you would like more information, please contact an attorney in Husch Blackwell’s Healthcare, Life Sciences & Education team.