Massachusetts Law Imposes FCA Liability on Healthcare Investors For Failures to Disclose

Massachusetts recently signed into law House Bill 5159, which includes a strict new rule for investors in Massachusetts health care companies, requiring them to timely disclose FCA violations of their investment entities or face FCA liability themselves.  This law imposes FCA liability for a broader range of conduct by investors as compared to the federal False Claims Act, and affected investors should consider whether any operational changes should be made to address the new law.

House Bill 5159 amended the Massachusetts False Claims Act to hold liable anyone with an “ownership or investment interest” that  “knows about” their investment entity’s violation of the state’s FCA but fails to disclose the violation “within 60 days of identifying the violation.”  The law defines “ownership or investment interest” broadly: “(1) direct or indirect possession of equity in the capital, stock or profits totaling more than 10 per cent of an entity; (2) interest held by an investor or group of investors who engages in the raising or returning of capital and who invests, develops or disposes of specified assets; or (3) interest held by a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds.”

The amendment does not include a definition of “knows about” or “identifying,” and assessing when an investor has acquired the requisite knowledge, particularly as an internal investigation into potential concerns crystallizes, will likely require complex judgment calls.  For example, the Affordable Care Act similarly amended the federal FCA to impose liability on healthcare companies that “identified” an overpayment they received but failed to return it within sixty days.  Many providers struggled to understand when a potential overpayment became sufficiently certain, such that it was “identified.”  CMS has issued evolving guidance on the subject, against the backdrop of legal challenges. Massachusetts may face similar pressure to better define its expectations around the timing of disclosures.

Massachusetts’ effort to target healthcare investors is consistent with DOJ’s recent interest in pursuing private equity firms and others who invest in healthcare companies through the federal False Claims Act (as discussed here).  DOJ has settled with around a half dozen private equity firms and their portfolio companies over the past half decade. In all but one of those settlements, the private equity firm allegedly knew of the misconduct and could have stopped it through its operational involvement with the portfolio company but failed to do so, according to DOJ’s recount of the events.  Yet Massachusetts seemingly goes farther with this amendment, by imposing liability on investors simply for being aware of misconduct by another company and failing to initiate a self-disclosure to the state.

A copy of House Bill 5159 can be found here.

 

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