Late last week, Judge Patti Saris (D. Mass.) issued an opinion on cross-motions for summary judgment filed by a qui tam relator and Massachusetts and a group of defendants that includes South Bay Mental Health Center (“South Bay”) and its private equity fund owner, permitting the vast majority of plaintiffs’ claims to proceed to the jury. The opinion addresses important questions of law as to each of the elements of the FCA related to claims to Medicaid for services allegedly provided in violation of various state regulatory requirements. However, the opinion is most notable for being the first to hold at the dispositive motion stage that a private equity fund and its principals can act with the requisite scienter and cause the submission of false claims, and thus be exposed directly to the treble damages and statutory penalties of the FCA as a result of conduct by a healthcare provider portfolio company. As such, we may expect it to add momentum to DOJ’s stated intent to pursue FCA claims against PE investors in the industry, as we previously reported here.
A recent settlement reinforces the potential liability facing private equity investors in the life sciences industry. As we previously reported, late last year The Gores Group (“Gores”) entered into a $1.5 million settlement agreement with the United States to resolve claims that the alleged off-label promotion by its portfolio company of combination drug-medical device systems for pediatric patients resulted in the submission of false claims to federal healthcare programs. Last month, Gores entered into a separate $1.5 million settlement agreement with certain states to resolve claims that the same alleged conduct resulted in the submission of false claims to state Medicaid programs. See U.S. ex rel. Johnson v. Therakos, Inc., Case No. 12-cv-1454 (E.D. Pa., filed Mar. 22, 2012). The participating states in the more recent settlement have sixty days to agree to the terms of that agreement; thus far at least California has joined. The claims resolved in these settlements arose from a qui tam suit.
In line with an emerging trend of False Claims Act enforcement against private equity funds for the activities of their portfolio companies, the government and a private equity fund that formerly owned a medical device and pharmaceutical manufacturer recently settled a qui tam suit alleging violations of the False Claims Act. U.S. ex rel. Johnson v. Therakos, Inc., Case No. 12-cv-1454, E.D. Pa. The suit resolves allegations that from 2006 to 2015 the manufacturer promoted a cancer treatment for use in pediatric patients—a use that had not been approved by the Food and Drug Administration. As a result, the government contended, the private equity fund former owner caused the manufacturer to submit false claims to Medicaid, the Federal Employee Health Benefits Program, and Tricare. The case remains under seal; as a result, it is not yet apparent whether the government has alleged that the private equity fund took an active role in the management of the portfolio company or other facts that would support FCA liability attaching to the investor. In settlement of the claims, but without admitting liability, the private equity fund agreed to pay the United States and participating states $1.5 million. The settlement agreements are available here.
We will continue to monitor the docket for this case and for further action by DOJ against private equity investors in the healthcare and life sciences industries.
According to the statistics published by the Department of Justice (“DOJ”) in December of 2018, fraud recoveries, including under the False Claims Act, declined in 2018 for the third straight year. While the majority of the dollars recovered by the government in these actions continues to come from the providers of healthcare services, technologies that enable those services, the manufacturers of the drugs, devices, and the private insurers who pay for healthcare, recoveries from the healthcare sector have also declined. While we await the official 2019 statistics from DOJ, we know that this year has continued this Administration’s trend of decreasing enforcement recoveries. That said, recoveries from the industry continue to be counted in the billions of dollars and outstrip levels seen a decade ago. While this Administration’s enforcement priorities have shifted from those of the last, and while DOJ is taking steps to exercise discretion and preserve its enforcement resources in some matters, both DOJ and the U.S. Department of Health and Human Services (“HHS”) continue to devote substantial resources aggressively to pursuing high priority enforcement issues, particularly those that potentially impact patient safety and substantially increase costs to the federal healthcare programs.