The July/August 2023 issue of Mergers & Acquisitions Magazine featured an article from Bass, Berry & Sims attorneys Angela Humphreys and Taylor Chenery discussing the increased risk for private equity (PE) firms investing in the healthcare industry as government enforcement bodies target the highly-regulated sector. The authors also outline best practices to minimize enforcement risk.
“As private equity firms’ investment in the healthcare industry has grown exponentially over the last decade, government enforcement efforts targeting private equity investors have responded accordingly in recent years,” the attorneys said. “While that response is not unique to private equity—history indicates that enforcement efforts adapt to and follow private investment and government reimbursement dollars—it is nonetheless one that investors must consider carefully moving forward.”
Specifically, investors in the healthcare sector must be cognizant of the almost draconian penalties imposed by the False Claims Act (FCA) for submitting fraudulent claims for payment to the government. Liability can be extreme: damages up to triple the amount of the government’s actual loss, monetary penalties of approximately $12,000-$25,000 for each false claim submitted and the recovery of the relator’s attorneys’ fees. Private equity firms, and even the firms’ executives have increasingly been named as defendants in FCA enforcement actions and forced to contribute to settlement funds. An October 2021 settlement led to a PE firm to paying $19.95 million – the largest FCA settlement to date by a PE firm.
With such substantial risk, Angela and Taylor offered some best practices to minimize enforcement risk, including comprehensive diligence about any portfolio company they target, careful deliberation about the private equity firm’s level of involvement in managing the company, and collaboration to maintain effective compliance functions.
“In recent years, approximately 80–90% of the government’s total monetary recovery through FCA enforcement actions has been obtained from the healthcare industry, and enforcement against healthcare companies and providers shows no signs of slowing,” the authors concluded. “While healthcare investments can offer promising and innovative opportunities for private equity investors, firms must make deliberate and informed decisions about how their investments are structured and how the portfolio companies will operate moving forward in order to minimize potential FCA exposure. To do so, private equity firms must stay up to date on healthcare fraud and abuse enforcement efforts generally and on enforcement efforts specific to their investments.”
The full article, “3 Ways Private Equity Investors Can Protect Themselves in Healthcare,” was published in the July/August 2023 issue of Mergers & Acquisitions Magazine and is available online (subscription required). The full article was published online on August 14 and is available here.