The Power of Private Equity Versus Enforcement: Whistleblowers Can Bridge the Gap
Over the past decade, private equity (PE) firms have dramatically increased their presence in the U.S. economy, including in critical sectors like healthcare and government procurement that involve millions of dollars in taxpayer funds. This expansion, driven by the pursuit of new revenue streams and operational efficiencies, has reshaped these industries. However, alongside this growth, questions have arisen regarding accountability for fraud. The sheer volume of private capital flowing into these sectors creates a perfect storm that incentivizes “efficiency” and profit through skirting the key requirements for receiving public funds. The False Claims Act (FCA) and whistleblowers can play a role in exposing and mitigating the risks of such illegal conduct.
The Surge of Private Equity in Healthcare
Taxpayer funded health insurance programs, such as Medicare, Medicare Advantage, and Medicaid, are perhaps the most exposed to the risks posed by PE expansion. In the last decade, PE firms have invested over $1 trillion in the U.S. healthcare sector, with more than $200 billion in acquisitions in 2021 alone. This substantial investment spans various segments, including life sciences, medical device companies, and direct patient care providers. For instance, over the decade ending in 2022, PE poured $280 billion into over 1,800 life sciences and medical device companies in the U.S. The total PE investment across all segments of the U.S. health sector has surpassed $750 billion in the past ten years. This aggressive expansion is often characterized by rapid consolidation, cost-cutting measures, and a focus on maximizing returns for investors, sometimes leading to violations of requirements relating to quality of care, patient access, and appropriate billing.
Private Equity’s Growing Influence in Government Procurement
Beyond healthcare, PE has also made significant inroads into government procurement and contracting. The past five to six years have seen a notable increase in PE investment in government services companies, leading to the creation or acquisition of approximately 125 new platform companies in the federal sector. Private equity has emerged as a major player in the mergers and acquisitions landscape for government contractors, attracted by the stable revenue streams and long-term contracts government work offers. This trend is further underscored by an 18-fold growth in venture capital deals within the defense industry over the last decade, highlighting a broader strategic interest in the public sector and its lucrative contracts.
The False Claims Act: A Counterbalance
FCA claims, including those brought by whistleblowers, have recently been used to hold private equity firms accountable for the fraudulent actions of their portfolio companies. Two notable cases highlight this trend:
United States ex rel. Martino-Fleming v. South Bay Medical Health Centers: In this qui tam case, a private equity firm, HIG Capital, and former executives of its portfolio company, South Bay Mental Health Center, agreed to pay $25 million to resolve allegations of submitting false claims for unlicensed and unsupervised patient care. The lawsuit, brought by a whistleblower, alleged that South Bay knowingly billed Massachusetts Medicaid for services provided by unlicensed and unsupervised staff. This case underscored the potential liability of PE firms in FCA cases, especially when there’s evidence of their knowledge of or deliberate indifference to the fraudulent activities.
DOJ’s Settlement Against Alliance Family of Companies LLC: In another settlement, the DOJ announced a $15.3 million resolution with Alliance Family of Companies LLC, a national electroencephalography (EEG) testing company, and its private equity owner, Ancor Capital Partners. The settlement resolved allegations that Alliance engaged in an illegal kickback scheme and submitted fraudulent claims to Medicare, Medicaid, and other federal healthcare programs. Ancor Capital Partners paid an additional $1.8 million to resolve its own FCA liability for allegedly causing the submission of these false claims. This case demonstrates that PE firms may be held directly liable under the FCA for the actions of their portfolio companies, particularly when they exert significant control or influence over the operations that lead to fraudulent billing.
While these two cases demonstrate the potential of the FCA to mitigate the risks posed by PE firms’ takeover of economic sectors that receive millions from taxpayers, they are still outliers. Trillions of dollars have flowed into healthcare and billions into government contracting via PE; FCA recoveries, though substantial, are in the billions annually across all industries, not solely from PE firms. The ongoing challenge lies in ensuring that the pursuit of profit does not compromise patient care or the integrity of government contracts, and that accountability keeps pace with investment. And what better tool is there than whistleblowers to meet this challenge?
This piece was written by Clay Wire, Partner at Ogborn Mihm.
