The Department of Justice’s recent decision to intervene in a False Claims Act case against not only a compounding pharmacy but also the private equity firm that owns a controlling stake in it, underscores the potential risks private equity firms face when operating in the highly regulated healthcare space.  On February 16, 2018, the United States filed a complaint in intervention in Medrano v. Diabetic Care Rx, LLC, Case No. 15-62617-CIV-BLOOM, alleging the compounding pharmacy, Patient Care America (“PCA”), paid illegal kickbacks to marketing firms who targeted military members and their families for prescriptions for compounded drugs the pharmacy then created not to meet individual patient needs, but rather to maximize reimbursement from Tricare, the federal military health care program.  In a somewhat unique move, the government also named as a defendant the private equity company Riordan, Lewis & Haden Inc. (“RLH”), which manages and controls PCA through a general partner.

RLH Accused of Knowingly Manipulating Kickbacks

It was not a passive investment that brought RLH into the lawsuit.  Rather, the government alleges that RLH bought a controlling stake in PCA with an eye toward increasing the pharmacy’s value and selling it for a profit in five years.  It then controlled and directed PCA’s operations on behalf of the members of its fund, steering the pharmacy into the business of compounding topical creams for pain management to capitalize on the “extraordinarily high profitability of this therapy.”  PCA soon entered into agreements with three marketing companies, who contacted and solicited pharmacy orders from military members and their families and were paid commissions by PCA as independent contractors, outside of the protection of the Anti-Kickback Statute employment safe harbor. The complaint further alleges the marketers illegally covered patient copayments as a way to fill additional prescriptions, which were written by telemedicine physicians without establishing legitimate doctor-patient relationships.

The complaint alleges that RLH knowingly participated in the scheme, which led to PCA receiving more than $68 million in reimbursement from Tricare.  The government points out that RLH, which had significant healthcare investing experience, was specifically warned by counsel that the scheme raised anti-kickback concerns, yet it proceeded nonetheless.  RLH even went so far as to periodically make commission payments to the marketing firms when PCA had not yet received the corresponding Tricare reimbursements.  RLH’s actions showed a level of engagement and knowledge sufficient to bring it into the fold as a defendant.

Private Equity Firms Must Be Diligent When Managing Healthcare Company Investments

This case, which is currently pending in the Southern District of Florida, should serve as a wake-up call to private equity firms who are actively engaged in the management and control of healthcare companies in which they invest.  In the absence of vigilant compliance efforts, and depending on their level of engagement and knowledge, these entities are not beyond the reach of the government’s False Claims Act enforcement efforts.

For more information on this lawsuit and the potential risks faced by private equity firms in False Claims Act litigation, contact Jeff Gibson at