While government enforcement has traditionally been an indirect concern for private equity (“PE”) investors, such as looking at whether a target entity has been sanctioned or could be sanctioned in the future, the current trend in government enforcement has been to target PE firms directly.

A few questions that PE firms should think about with respect to healthcare and life science investments:

• Does the firm distinguish itself from acquired companies, or does it use communal language like “we” when discussing the activity of the acquired company (including in internal communications)?

• Is there overlap in personnel between the PE firm and the acquired company, such as officers and board members?

• Is the PE firm using the same strategies to turn around healthcare companies that it uses to turn around other types of companies?

• Has the PE firm evaluated the operational and financial practices of its portfolio companies to ensure compliance with unique healthcare requirements?

These questions are based on recent enforcement scenarios that PE firms have grappled with concerning their healthcare and life science investments. These concerns come about as part of an evolving emphasis by the government on preventing fraud and abuse in health care.

On March 25, 2021, the U.S. House of Representatives’ Ways and Means Oversight Subcommittee held a hearing on “Examining Private Equity’s Expanded Role in the U.S. Health Care System.” During this hearing multiple speakers suggested that a number of reforms were needed with respect to PE involvement in health care, including greater transparency in terms of investors. Participants also discussed the use of the False Claims Act (“FCA”) as a tool for healthcare fraud enforcement. Under the FCA, a private party, known as a relator or whistleblower, is able to bring claims against a person or entity for allegedly defrauding the government. Successful whistleblowers are able to share in any monetary recovery.

In a recent enforcement action the DOJ pursued charges against, inter alia, a former PE owner of an entity accused of engaging in improper off-label marketing of its drugs. While DOJ enforcement of improper off-label marketing is common, it was noteworthy that the DOJ settlement announcement did not contain any specific allegations of misconduct by the PE firm, but rather indirect responsibility for allowing the alleged improper sales and promotion practices to continue after the PE firm acquired the entity. In other words, the conduct began prior to the PE firm’s investment in the company, but the PE firm failed to put a stop to it. The case ultimately settled, with the PE firm paying $1.5 million to the U.S. government and the other primary defendant paying out $10 million.

Private equity investors should take note to not only carefully review any company acquisitions during their due diligence process prior to taking ownership, but to also delineate the PE firm’s actions as an investor from the portfolio company’s actions as a separate operational entity. Blurring the lines between the PE firm and portfolio company can result in heightened enforcement risk.