On March 18, 2019, the Department of Justice (DOJ) filed an amended complaint-in-intervention in the False Claims Act (FCA) case against Diabetic Care Rx, LLC d/b/a Patient Care America (PCA); two of PCA’s executives; and the company’s private equity owner, Riordan, Lewis & Haden, Inc. (RLH).  This filing comes on the heels of a March 5 decision by the U.S. District Court for the Southern District of Florida that dismissed for insufficient pleading DOJ’s FCA claim that the defendants submitted or caused the submission of false claims to TRICARE for compound prescriptions obtained through the payment of unlawful kickbacks to marketers, physicians and patients.  This case is significant and has been closely watched by the industry because it represents the first time DOJ has intervened in an FCA suit against a private equity firm alongside a healthcare portfolio company accused of submitting false claims.

Government Accused Private Equity Owner of Being Involved in Kickback Activity

This matter involves allegations that PCA paid kickbacks to marketers to target TRICARE beneficiaries for compound pain creams, scar creams and vitamins, regardless of medical necessity.  The marketers allegedly paid telemedicine physicians who prescribed the products without ever physically examining the patients, and colluded with PCA to pay many patients’ copayments to induce their acceptance of the lucrative compound drugs.  As support for its claim against RLH, as the private equity firm, the government has repeatedly cited to evidence purporting to show RLH’s material day-to-day involvement in the operations of PCA and its awareness of the facts surrounding the alleged kickback conduct.  The government has alleged that at all relevant times, RLH managed and controlled PCA through two RLH partners who also served as officers and/or directors of PCA and of two holding companies with an interest in PCA.

In granting the defendants’ motion to dismiss the government’s FCA claim on March 5, the District Court found that DOJ had not sufficiently pleaded the compound drug claims submitted to TRICARE by PCA were legally false.  Specifically, the District Court concluded that the government’s original complaint-in-intervention, which was filed in February 2018, failed to allege the defendants falsely certified compliance with an applicable law or regulation at the time a claim was submitted to TRICARE, or that PCA’s agreement to abide by the terms of its Provider Agreement with Express Scripts, Inc. was false at the time it was made.  Further, the District Court held that the original complaint-in-intervention contained no allegations regarding the specific representations PCA made to TRICARE when submitting a claim that were rendered misleading in light of the failure to disclose the defendants’ alleged violations of the Anti-Kickback Statute.

The defendants had urged the District Court to dismiss the government’s FCA claim without an opportunity to refile its complaint-in-intervention on grounds that the companies had “borne a significant discovery burden, that the Court granted five extensions of time for the Government to intervene, and that the interests of justice require dismissal with prejudice.”  Nonetheless, the District Court granted the government leave to amend the deficiencies described above because the defendants had not shown bad faith, dilatory motive, undue prejudice, or other grounds for denying DOJ an opportunity to amend.

Compliance Must Be Top Priority for Private Equity Firms in Healthcare Space

With the government having filed its amended complaint-in-intervention, private equity firms engaged in the healthcare space should continue to monitor this case as it represents a bellwether for how the government might pursue fraud actions involving such entities in the future.  The developments in this case reinforce the importance of private equity firms consistently and proactively prioritizing compliance for their healthcare portfolio companies, which includes taking steps to appropriately assess the role and risk profile of the private equity fund in the portfolio company’s organizational structure.

For further information on the questions every healthcare private equity firm should ask, please see our Healthcare Private Equity Compliance Checklist.