Recently Unsealed Complaint Reinforces Potential Liability of Private Equity Investors in the Healthcare Industry

Recently, a court in the Central District of California unsealed a qui tam complaint against several specialty pharmacies and their private equity fund owners. See United States ex rel. Webster v. BioMatrix Holdings, LLC, 2:18-cv-09333-PSG-PLA (C.D. Cal. Oct. 31, 2018). Relator, a former Vice President for Managed Care at BioMatrix Specialty Pharmacy, alleged that the specialty pharmacy defendants (collectively “BioMatrix”), with the knowledge of their private equity owners, employed a kickback scheme to increase the number and value of prescriptions for hemophilia medications filled through their pharmacies.

Relator alleged that BioMatrix, through a related entity, Pacific Health Group (“PHG”), hired individuals with hemophilia as Regional Care Coordinators (“RCCs”).  PHG supposedly created the RCC position to recruit patients with hemophilia to use BioMatrix’s specialty pharmacy services. PHG paid RCCs $150,000 to $300,000 annually, with compensation allegedly tied to the number of patients each RCC referred back to BioMatrix and the amount of hemophilia factor each referred patient filled through BioMatrix. BioMatrix also paid RCCs to attend meetings of hemophilia patient organizations as a way to solicit new patients to switch to BioMatrix pharmacies. In addition, RCCs received commercial health insurance with coverage for hemophilia medications that could be filled through BioMatrix pharmacies. Finally, relator alleged that RCCs were terminated if they did not generate sufficient referrals.

With regard to the private equity fund defendants, relator alleged that BioMatrix’s two private equity owners had knowledge of the unlawful referral scheme. While relator’s allegations related to the private equity fund defendants are brief, relator noted that the private equity funds purchased BioMatrix in late 2016 and regularly participated in BioMatrix’s monthly board meetings thereafter. In one December 2016 board meeting that the relator and representatives from the private equity funds attended, the relator alleged that BioMatrix and its investors discussed potential pharmacy acquisitions. A slide in the presentation from that meeting allegedly mentioned “Referral Source Relationships” as a way to achieve success, which according to relator, all participants understood to refer to RCCs who were recruiting hemophilia patients. Relator also claimed that the meeting participants knew that the purpose of acquiring more pharmacies was to expand the unlawful BioMatrix/PHG referral scheme.

Although DOJ declined to intervene in this case, it did so only after three and a half years of investigation, suggesting that the government took the allegations seriously. Relator’s complaint reinforces the AKS risks for manufacturers and pharmacies around patient relationships. As discussed in prior posts (here and here), this case also demonstrates continued interest by the government and the whistleblower’s bar in holding private equity investors in the healthcare and life sciences industries liable under the FCA when their portfolio companies engage in fraudulent conduct. However, the fact that the private equity owners in this case were not alleged to have actively managed the work of the defendant portfolio companies may have diminished DOJ’s interest.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.