Investment in the healthcare industry requires careful consideration, as it involves numerous distinct areas of the law. Venable's Private Equity Investment in Healthcare webinar series explores the unique issues and timely developments that shape deals within the industry.
In the third webinar in this series, partner John Roberts moderated a conversation between partner Valerie Cohen and associates Morenike Oyebade and Sophia Porotsky in a discussion of the major federal fraud and abuse laws, and the risks involved in private equity investments in the healthcare sector.
The False Claims Act
The False Claims Act (FCA) is a powerful tool for regulators and whistleblowers seeking to punish fraud against the government, particularly in the healthcare sector. In fiscal year 2023, the U.S. Department of Justice (DOJ) reported that nearly 67% ($1.8 billion) of the $2.68 billion in FCA settlements and judgments involved healthcare organizations. In fiscal year 2022, healthcare was involved in nearly 80% ($1.7 billion) of the more than $2.2 billion in FCA settlements and judgments.
Under the FCA, any person who knowingly submits, or causes to be submitted, false claims to the government (or makes a statement material to a false claim) is liable for three times the government's damages plus civil monetary penalties of up to $27,000 for each false claim. The FCA also allows individuals a private right to file qui tam lawsuits on behalf of the government against those who have defrauded the government. Whistleblowers, known as "relators," who bring these cases and succeed may receive 15% to 30% of the amount recovered.
In addition to the federal FCA, more than 30 states have enacted their own FCA statutes. These state-level laws are of particular concern to healthcare organizations that deal with Medicaid payments. In November 2023, the U.S. Department of Health and Human Services Office of Inspector General released non-binding General Compliance Program Guidance (GCPG) to help healthcare entities understand fraud and abuse laws, strengthen compliance programs, and mitigate risks associated with fraud and abuse.
Private equity (PE) firms need to pay attention. Since at least 2019, many PE firms have settled FCA enforcement actions and litigations for government claims that those firms failed to adequately address practices of their portfolio companies that, according to the government, may have run afoul of healthcare laws.
The Anti-Kickback Statute
The federal Anti-Kickback Statute (AKS) is a criminal statute that bars requesting, receiving, offering, or paying "remuneration," such as kickbacks, bribes, or rebates, directly or indirectly, in exchange for referrals or payments for the provision of (or for arranging the provision of) a drug or medical service for which any portion is paid by a federal healthcare program. For purposes of the AKS, "remuneration" includes anything of value, whether in cash, in kind, or other form. The AKS goes hand in hand with the FCA: a civil FCA claim can be predicated on a violation of the AKS, and, conversely, a claim for payment resulting from an AKS violation is per se false.
When looking at PE firm investments through the lens of the AKS, government scrutiny and enforcement have often focused on the corporate structure and economic incentives of the PE firm model. While, traditionally, the PE firm structure has shielded fund managers and investors from liability related to their portfolio companies, the DOJ has recently been targeting both the portfolio company and the PE firm. For example, in 2019, a company reached a $21 million dollar settlement with the DOJ, on behalf of both the portfolio company and the PE firm, to resolve DOJ accusations that the PE firm aided the portfolio company in orchestrating a kickback scheme to prescribe compound creams and vitamins reimbursed by TRICARE, a federal healthcare program.
The Stark Law
The Physician Self-Referral Law, commonly known as the Stark Law, broadly prohibits physicians from profiting from self-referrals for "designated health services" (DHS), payable by Medicare or Medicaid, to entities with which they have or their immediate family member has a financial relationship, through either ownership or compensation arrangements. The Centers for Medicare and Medicaid Services (CMS) publishes an annual updated list of all DHS, so providers are aware of what falls under the Stark Law.
The Stark Law imposes strict liability on defendants without requiring proof of intent to violate the law. However, there are dozens of statutory and regulatory exceptions that allow otherwise prohibited referrals. To qualify for any one of those exceptions, all elements of that exception must be satisfied. Common exceptions include renting office spaces, bona fide employment relationships, personal services arrangements, and in-office auxiliary services.
Recently, there has been an upward trend in using Stark Law violations as a predicate for civil FCA claims. For example, in June 2022, Steward Health Care System (a for-profit hospital system owned by a private equity firm) and several of their related corporate entities agreed to pay $4.7 million to resolve allegations that they had relationships with several physicians and physician practice groups that violated the Stark Law, the FCA, and the AKS. Since then, Steward Health Care has struggled—filing for bankruptcy, defending against litigations, and addressing congressional concerns. Penalties for violating the Stark Law can include both fines and exclusion from participating in Medicare and Medicaid.
Mitigating These Risks
There are many steps private equity firms can take to mitigate risk.
- Prior to acquisition, buying PE firms should perform a compliance assessment of the target entity's billing, compensation, and referral practices, and of its vendor relationships to identify potential risks under the Stark Law, the AKS, and the FCA. In turn, target entities should perform their own pre-acquisition compliance check-ups to be ready to address questions that may arise during diligence
- When identifying an arrangement that may implicate the Stark Law, the AKS, or both, it is generally best to start with a Stark assessment, as it is a strict liability statute. If the arrangement complies with the Stark Law, it must then be evaluated for compliance with the AKS
- Structure employment agreements to align compensation arrangements with fair market value and evaluate whether arrangements are commercially reasonable and independent of referral volume or value. Avoid incentive structures that link clinical decisions with financial gain
- Assess the applicability of safe harbors and exceptions under the Stark Law and the AKS
- Keep records of compensation decisions and compliance efforts, including analyses of transactions, fair market value assessments, and documentation supporting decisions. This can provide critical evidence in regulatory audits, investigations, or litigations
- Perform routine internal reviews to evaluate controls for compliance with Stark, the AKS, and the FCA
- Establish mechanisms for reporting compliance concerns. Implement protections against retaliation for whistleblowers to comply with FCA whistleblower provisions
For additional information on how these laws are enforced and how PE firms can protect themselves from litigation, watch the full "Major Fraud and Abuse Laws: Anti-Kickback and Self-Referral Prohibitions and False Claims" webinar here.
Before entering any kind of deal, talk to one of our experienced attorneys. We invite you to learn more about Venable's Healthcare Group and Private Equity teams.