In a Press Release issued on October 14 2021 by the Office of Massachusetts Attorney General Maura Healy, a potentially groundbreaking settlement was announced. Below is an excerpt from the release, followed by our takeaways.

“In the largest settlement of its kind, a private equity (PE) firm and former executives of South Bay Mental Health Center, Inc. (SBMHC) have agreed to pay $25 million for allegedly causing fraudulent claims to be submitted to the state’s Medicaid Program, known as MassHealth, for mental health care services provided to patients by unlicensed, unqualified, and improperly supervised staff members at clinics across the state.

This settlement is the largest publicly disclosed government health care fraud settlement in the nation involving private equity oversight of health care providers, as well as the largest amount a private equity company itself has agreed to pay to resolve fraud allegations involving health care portfolio companies. It is also the biggest Massachusetts-only Medicaid Fraud settlement.

“It’s vital that people who need mental health services receive treatment from qualified individuals,” said AG Healey. “We took action against these defendants for leaving thousands of MassHealth patients with unlicensed and unsupervised care, while MassHealth paid millions of dollars for fraudulent services. We will go after bad actors who jeopardize people’s health and well-being to make a profit.”

In January 2018, the AG’s Office intervened in a lawsuit initially filed by a whistleblower and former SBMHC employee against SBMHC, Peter J. Scanlon (who founded, owned, and served as the CEO of the company until April 2012), H.I.G. Growth Partners, LLC and H.I.G. Capital, LLC (collectively, HIG, which created Community Intervention Services (CIS) to acquire SBMHC from Scanlon), and Kevin P. Sheehan (CEO of CIS).

SBMHC has operated mental health facilities across the state, including in Attleboro, Brockton, Cape Cod, Chelsea, Dorchester, Fall River, Lawrence, Leominster, Lowell, Lynn, Malden, Pittsfield, Plymouth, Salem, Springfield, Weymouth, and Worcester.

The AG’s Office alleged that the clinics named in the complaint suffered significant gaps in licensing and supervision of therapists during the relevant time period. The AG’s investigation revealed that SBMHC had a widespread pattern of employing unlicensed, unqualified, and unsupervised staff at its mental health facilities in violation of MassHealth regulations. According to the amended complaint filed by the AG’s Office and the whistleblower, by submitting fraudulent claims to MassHealth for mental health services provided by unlicensed, unqualified, and unsupervised personnel, SBMHC violated the Massachusetts False Claims Act.

MassHealth pays for mental health services provided to MassHealth members by qualified clinicians and counselors who are subject to certain licensure and supervision requirements. Mental health centers that employ those rendering mental health services must comply with certain core supervision requirements set out in applicable regulations.

This settlement resolves allegations that HIG, Scanlon, and Sheehan knew that SBMHC was providing unlicensed, unqualified, and unsupervised services in violation of regulatory requirements and caused fraudulent claims to continue to be submitted to MassHealth by failing to adopt recommendations to bring SMBHC into compliance. HIG held a majority of seats on the company’s board of directors and Scanlon and Sheehan each served as CEO of SBMHC. In May 2021, the Court denied attempts by HIG, Scanlon, and Sheehan to dismiss these allegations at the summary judgment stage. Under the terms of the settlement, HIG will pay $19.95 million, while Scanlon and Sheehan will pay the remaining $5.05 million. 

In February 2018, SBMHC agreed to pay $4 million for its role in the scheme and entered into a five-year compliance program overseen by an independent monitor to ensure that its clinics came into full compliance with MassHealth regulations….”

Takeaways

• Typical PE buyouts involve the sellers rolling some of their equity into the buyer, taking Board seats and/or management positions similar to those occupied before the acquisition by the buyer. This has advantages of continuity for the overall business as to customers, employees and payers; however, the knowledge of the previous owners—both pre-close and post-close—will be imputed to the overall Board if the PE representatives on the Board and prior rollover owners sit side-by-side on the Board. To quote from the Court’s Summary Judgment ruling: “based on knowledge and by virtue of “[HIGs] participation in the [C.I.S.] Board, HIG had the power to fix the regulatory violations…” Memorandum and Order, Civ. Act. No. 15-CV-13065-PBS (May 19, 2021).

• Pre-closing due diligence memos from clinical consultants, counsel, accountants, and others can serve as the basis for doing/not doing a deal, but once a deal is closed, negative findings in those memos can be the basis for findings of scienter, materiality, and causation proof needed to establish liability under the False Claims Act. Post-close, attention must be paid to correcting any practices that may violate law and/or making any appropriate refunds for overpayments identified in such reports as required under the federal 60-day refund rule, 42 U.S.C. § 1320a-7k(d).While this case pre-dated the current surge in virtual behavioral health (BH) services, it highlights the risks of seeking reimbursement for services that require direct supervision and clinician licensure. Many current virtual BH care models utilize unlicensed personnel, such as “health coaches,” and have delivery platforms that make providing adequate clinical supervision a challenge. While perhaps not an immediate issue in pure private pay claims, it is a looming concern as public payers expand into BH coverage.

• Nowhere in the summary judgment opinion or briefs was there a discussion of a corporate compliance plan that would have protected the defendants. Under the landmark case, In re Caremark International Inc. Derivative Litigation, 698 A. 2d 959 (Del. Ch. 1996), an effective corporate compliance plan can be the basis of avoiding director or shareholder liability. Effectiveness requires regular reporting by management and remediation measures by the Board as needed.

• The potential for negative due diligence findings to lead to liability for PE investors should not deter investors from undertaking an appropriate scope of health regulatory due diligence.  Particularly in the area of BH and digital BH, this decision highlights that the licensure status of providers at all levels should be confirmed, the target’s credentialing and clinical supervision policies should be reviewed, and the compliance program should be assessed (including written policies and procedures, compliance committee meeting minutes, and hotline logs). 

In summary, this settlement demonstrates additional risks that PE investors must assess and the responsibilities that, in the view of government regulators, the investors may be assuming as a result of their investments and continuing roles in operations.