This term, the Supreme Court will interpret the False Claims Act’s knowledge requirement. And where the Court goes, legal and practical consequences may follow, necessitating a critical look at who (or what) are likely to exploit defendant-friendly case law.
In Supervalu, the Supreme Court will decide whether defendants can invoke another defense in an effort to escape False Claims Act liability when they subjectively believed or understood they were defrauding the government at the time they were doing it. In the caseitself, drug retailers Supervalu and Safeway are the names on the docket, standing to gain or lose directly from the outcome of the case.
But those companies are not the only stakeholders; private equity also has its hands in Supervalu. As the respondents acknowledge in their Supreme Court merits brief, private equity firm Cerberus Capital Management, L.P. has beneficial ownership of at least 10% of stock in Albertsons Companies, Inc., Safeway’s parent company.
This financial arrangement is nothing new in the healthcare space. Private equity investment in the provision of essential goods and services to the public has skyrocketed in recent years. In 2021 alone, private equity investment in healthcare totaled $206 billion to acquire more than 1,400 physician practices, eye care clinics, dental management chains, hospices, and other healthcare providers. The influx of money into healthcare approaches a whopping $1 trillion over the past decade and has seen steady and significant growth over that time. The same pattern holds true for drugs, with global private equity spending on pharmaceutical research and development projected to reach $254 billion by 2026.
This trend alone should trigger alarm bells. As the saying goes, follow the money. Or at least be wary of it.
By design, private equity is focused on short-term revenue gains. For this reason, a May 2021 study by the University of California-Berkeley and the American Antitrust Institute concluded that “[t]he private equity business model is fundamentally incompatible with sound healthcare that serves patients.” (original emphasis)
Private equity investment has been found to correlate with worse health outcomes (including death) and higher prices. A February 2021 study by the University of Chicago found that private equity ownership of nursing homes increased the short-term mortality of elderly Medicare patients by 10%. Emergency rooms staffed by private equity firms tend to hire fewer doctors to cut costs, replacing physicians with nurse practitioners and physician assistants. In turn, this staffing arrangement has been found to increase cost of care, length of stay, and likelihood that an emergency room patient is readmitted for a preventable reason. For pharmaceuticals specifically, private equity has been found to increase market consolidation—without innovation or efficiencies—which in turn leads to higher drug prices.
Private equity investment in healthcare means that those making decisions increasingly do so with a view toward maximizing returns on investment. And while some point to the benefits of private equity, this inherent conflict also renders healthcare and drug manufacturing especially susceptible to fraudulent practices.
UC Berkeley researchers warned the “explosion” of private equity in healthcare “is a threat to both the structure and the goals of our healthcare system.” That warning is compounded by the possibility that the Supreme Court may soon remove the very guardrails keeping profit-hungry fraudsters in line.
The Seventh Circuit’s holdings create an irresistible lure for companies—and the private equity firms holding the purse strings—to further exploit government programs to maximize short-term gains, knowing that defense lawyers can identify ambiguity and manufacture a plausible interpretation after-the-fact to escape liability. With private equity increasingly running the show, profit motives intersect with opportunities for fraud at the expense of patients, taxpayers, honest businesses, and the viability of government programs.
The False Claims Act is a necessary enforcement tool, accountability mechanism, and deterrent to keep private equity and the companies they own and operate from running amuck with government funds and jeopardizing patient lives. The Supreme Court should clarify the proper interpretation of the False Claims Act as urged by the relators and amici Republican Senator Chuck Grassley, 33 State Attorneys General, the United States, and whistleblower advocacy organizations like Taxpayers Against Fraud Education Fund.
Jaclyn Tayabji is a Fellow at Tycko & Zavareei LLP