We contributed an article addressing the mounting risks faced by private equity (PE) firms investing in the healthcare industry in the July/August 2023 issue of Mergers & Acquisitions Magazine. In the article, we delved into the complexities of this highly-regulated sector and the heightened attention it receives from government enforcement bodies.
Alongside identifying these challenges, we were pleased to outline some essential best practices aimed at helping PE firms minimize their enforcement risk.
The landscape of private equity investments in the healthcare sector has undergone remarkable growth over the past decade. Unsurprisingly, government enforcement efforts have adapted in response, making it imperative for investors to carefully consider the evolving scenario.
One significant point of concern within the healthcare sector is the stringent penalties imposed by the False Claims Act (FCA) for fraudulent claims submitted to the government. The potential liabilities can be significant: damages amounting to triple the government’s actual loss, monetary penalties ranging from approximately $12,000 to $25,000 for each false claim submitted, and the additional burden of paying for the relator’s reasonable attorneys’ fees. Even more noteworthy, PE firms and their executives increasingly find themselves embroiled in FCA enforcement actions, compelled to contribute to settlement funds. An October 2021 settlement set a milestone with a PE firm paying $19.95 million, marking the largest FCA settlement involving a PE firm to date.
Given this substantial and evolving risk landscape, we felt it was essential to offer some proactive best practices to help PE firms navigate these treacherous waters. These recommendations include conducting comprehensive due diligence when considering a portfolio company, taking a thoughtful approach to the level of involvement the PE investor assumes in managing the company, and fostering collaboration to ensure the maintenance of effective compliance mechanisms.
In recent years, a striking 80–90% of the government’s total monetary recoveries from FCA enforcement actions have originated from the healthcare industry. And enforcement actions against healthcare companies and providers show no signs of slowing down. While healthcare investments may provide opportunities for innovation and growth for PE investors, PE firms must make well-informed and deliberate decisions about their investment structures and how their portfolio companies will operate moving forward. Staying current with healthcare fraud and abuse enforcement efforts, both generally and specific to their investments, is paramount.
For those interested in a more detailed exploration of these topics, we invite you to read the full article titled “3 Ways Private Equity Investors Can Protect Themselves in Healthcare,” published in the July/August 2023 issue of Mergers & Acquisitions Magazine.