The Department of Justice (DOJ) recently intervened in a False Claims Act (FCA) case that raises a variety of interesting allegations, including payment of kickbacks by a compounding pharmacy to contracted marketing companies in the form of percentage-based compensation, to TRICARE beneficiaries in the form of copayment waivers, and to physicians who submitted prescriptions without seeing patients.  According to the complaint, Patient Care America (PCA), a Florida compounding pharmacy, implemented a scheme to manipulate the compounding formula for pain and scar creams that resulted in the submission of false claims to TRICARE.  The complaint also names two of PCA’s senior executives (one of which has since left the company) as well as the private equity firm that owns a controlling interest in PCA.

The alleged wrongdoing began in 2012, shortly after the private equity firm, Riordan Lewis & Haden, Inc. (RLH), made its investment in PCA, which at that time provided intravenous nutritional therapy to dialysis patients.  Soon thereafter it installed two of its partners as officers and/or directors of PCA, and then directed PCA to aggressively pursue an entirely new line of business – topical compounding – to increase the company’s value in anticipation of selling PCA in five years.  Under RLH’s direction, PCA hired a new CEO (despite the fact that a talent consultant cautioned PCA that the candidate would require “careful management”), and the CEO then hired a licensed pharmacist to lead the new business line because of his ability to “generate immediate referrals.”  The CEO and the pharmacist are the individuals named in the complaint.

DOJ claims that PCA engaged marketing companies as independent contractors to generate prescriptions for its topical compounds, and these companies were compensated through a 50 percent commission on profits generated from the prescriptions they submitted to PCA, despite legal advice from multiple attorneys cautioning against such compensation arrangements.  PCA exercised little or no oversight over the marketing companies, essentially giving them the freedom to generate prescriptions as they pleased.

The complaint asserts that the marketers misled TRICARE beneficiaries to induce them to obtain the prescriptions, paid kickbacks to physicians who submitted prescriptions without seeing the patients, and set up a sham charitable organization with the help of PCA to pay for beneficiary copayments.  Further, to exploit the fact that TRICARE at the time reimbursed pharmacies for all ingredients in a compounded drug, PCA repeatedly modified its compounding formulas to increase reimbursement for its pain management products.  PCA received more than $68 million during the period of the alleged fraud, and that amount constituted nearly all of PCA’s revenue by March 2015.

This case is notable for a variety of reasons.

• A private equity firm is a named party, which is unusual.  A private equity firm would not typically find itself subject to a FCA action merely because it invested in and managed a health care company, but investors in the health care sector should nevertheless consider this case to be a cautionary tale even though it involves an usual set of alleged facts.

• The government continued its trend of pursuing individuals.  As discussed in a previous post, DOJ’s pursuit of individuals has increased since issuance of the Yates memo, which established internal oversight mechanisms at DOJ for ensuring that potentially culpable individuals are held responsible for alleged wrongdoing.  This case demonstrates that DOJ is continuing to bring FCA cases against individuals who it believes contributed to a health care company’s alleged wrongdoing.  DOJ also brought criminal actions against multiple individuals who owned the marketing companies with which PCA’s had relationships, including Monty Grow, a former NFL player.

• Independent contractor relationships and copayment waivers are the subject of scrutiny.  In addition to allegations involving kickbacks to TRICARE beneficiaries and prescribing physicians, the complaint also took issue with PCA’s commission-based arrangements with marketing companies.  As demonstrated by the recent prosecution of BlueWave Healthcare Consultants, an independent sales organization, and its principals as well as the CEO of Health Diagnostic Laboratory (HDL) with which BlueWave had a contract, DOJ frowns upon what it believes to be lucrative commission-based arrangements for the sale of items or services covered by government health care programs.  Here, DOJ has questioned PCA’s payment of a 50 percent commission on profits to contracted marketing companies and PCA’s alleged lack of oversight of their activities.   With respect to copayment waivers, DOJ and other enforcement agencies have expressed concern about this practice as far back as the OIG’s 1994 Special Fraud Alert.  But given the amount of attention paid to kickbacks offered or given to ordering clinicians, it is easy to forget that offering or giving something of value to government health care program beneficiaries can also trigger scrutiny under a variety of federal laws, including the FCA, the AKS, and the Civil Monetary Penalties Law.

While this case involves somewhat sensational facts, it is nevertheless an important reminder that the government could potentially seek to include a private equity firm as a defendant in a FCA case along with its portfolio company if it believes that it engaged in conduct that caused the submission of false claims to government health care programs.