DOJ Complaint Names Private Equity Firm as Defendant in False Claims Act Case Targeting Health Care Portfolio Company

by Ropes & Gray LLP

Ropes & Gray LLP

The U.S. Department of Justice’s recent decision to name a private equity firm as a defendant in a False Claims Act complaint against one of the firm’s portfolio companies, while uncommon, shines a spotlight on potential risk areas for private equity firms whose portfolio companies operate in industries with significant False Claims Act exposure like health care. In its complaint in intervention in United States ex rel. Medrano v. Diabetic Care Rx, LLC d/b/a Patient Care America et al. (S.D. Fla. No. 15-62617-civ), filed on February 16, 2018, DOJ alleges that compounding pharmacy Patient Care America (“PCA”) paid illegal kickbacks to several marketing firms in exchange for referrals for certain compound drugs that were reimbursed by Tricare, a federal health care program that provides health insurance for current military personnel, military retirees, and their dependents. The complaint further alleges that the pharmacy’s controlling stakeholder, private equity firm Riordan, Lewis & Haden, Inc. (“RLH”), managed and controlled PCA and participated in the charged misconduct. The government’s intervention to target both PCA and its private equity shareholder reflects a potential sea change in its approach to such cases. 

The Scheme Alleged in the Complaint in Intervention and RLH’s Involvement 

The DOJ’s complaint against PCA arises from an alleged marketing scheme involving compound topical pain creams. PCA, a compounding pharmacy previously focused on providing intravenous nutrition to patients with end-stage kidney disease, changed course in early 2014 and entered the compound pain cream business. Allegedly, Tricare reimbursement rates for pain cream products were known to be unusually high at the time. 

In service of PCA’s compounding pain cream initiative, the complaint alleges, PCA entered into independent contractor agreements with three marketing companies, under which each company would target and refer patients—specifically Tricare beneficiaries—to PCA for compounded drug prescriptions. PCA compensated the marketing companies exclusively via commissions: the marketers received 50% of PCA’s profits from each referred prescription. Over time, referrals from the marketing companies accounted for the vast majority of PCA’s total compounding revenue. And because these referrals were generally concentrated among Tricare beneficiaries, reimbursements from Tricare for the pain creams also came to make up a substantial proportion of PCA’s profits. 

The complaint alleges that PCA’s commission payments to the marketing firms were illegal kickbacks under the Federal Anti-Kickback Statute (“AKS”), and that the claims resulting from these kickbacks were presented to Tricare for payment by PCA in violation of the FCA. Specifically, the complaint alleges that the marketers provided services and were paid commissions by PCA as independent contractors, which did not qualify for employment safe harbor protection under the AKS. The complaint also alleges additional misconduct, including that marketers paid kickbacks to patients by covering copayments regardless of financial need, in order to secure and fill additional prescriptions. Finally, the complaint alleges that the marketers also paid telemedicine physicians to write prescriptions without patient consent and without establishing legitimate physician-patient relationships. The complaint alleges that, as a result of the marketing scheme and related misconduct, PCA ultimately received more than $68 million in reimbursement for compound pain and other topical creams. 

The complaint alleges that private equity firm RLH was not only deeply involved in the strategy and management of PCA, but also that it exerted considerable influence over a number of the bad acts described in the complaint. The allegations focus on two RLH partners, Michel Glouchevitch and Kenneth Hubbs, who also served as officers of the co-defendant pharmacy. 

Per the complaint, RLH invested in PCA in July 2012, and planned to increase the company’s value so that PCA could be sold at a profit after five years. Shortly after RLH’s initial investment, however, Medicare reimbursement rates for PCA’s core business at the time dropped considerably, and PCA’s revenue fell accordingly. The complaint alleges that RLH, led by Glouchevitch and Hubbs, initiated and championed PCA’s entry into the pain cream business in order to make use of “the extraordinarily high profitability of this therapy” and generate a “quick and dramatic payback” on its investment. The complaint quotes RLH documents that recognized that overcharging for products in the pain management business risked “cross[ing] the line from an ethics standpoint.” In service of the pain cream venture, RLH is alleged to have played a significant role in the staffing and oversight of PCA. For example, after initiating PCA’s entry into the pain cream market, Glouchevitch then recommended that PCA hire Patrick Smith as CEO against the advice of RLH’s own consultant. 

With respect to the specific violations alleged, the complaint makes both general and specific claims of knowledge on the part of RLH. It alleges that RLH, based on its extensive experience investing in the health care industry, was well-versed in the Anti-Kickback Statute and related laws and regulations, including the obligation of PCA to make a good faith attempt to determine patients’ financial condition before waiving copayments. The complaint goes further, however, alleging that at a relatively early point, RLH and PCA were specifically advised by outside counsel that PCA should not be submitting claims to Tricare for prescriptions referred by marketers because of potential anti-kickback concerns. 

Finally, the complaint alleges that RLH participated in the scheme by periodically funding the commission payments to the marketing firms when those payments were due before PCA had received the corresponding Tricare reimbursements. The complaint alleges that RLH was aware that this money was used to pay marketing commissions. 

Medrano is pending in the District Court for the Southern District of Florida.

Considerations for Private Equity Firms in the Health Care Industry

While much remains to be seen regarding how this case will play out in litigation, and it may prove to be an outlier on its facts, Medrano potentially signals a new frontier for DOJ in pursuing FCA cases and provides some clues as to the type of conduct that DOJ may consider in deciding issues of authority and control when assessing FCA liability. Accordingly, private equity firms should consider the following when investing in and operating portfolio companies in the Health Care industry: 

  • Level of Involvement: It is common for private equity firms to have representatives serving on the boards of directors of portfolio companies. Where a private equity firm is the majority or sole stakeholder in a portfolio company, it is important to take into account the extent to which the firm is involved in shaping operations and decisions at the portfolio company level. The DOJ’s approach in the Medrano case suggests that a private equity firm’s risk of an allegation of False Claims Act liability may increase with the degree of involvement in the portfolio company’s day-to-day operations. Accordingly, private equity firms may wish to consider drawing clear lines of demarcation in corporate policies and agreements relating to actions taken by individuals in their capacities as directors, officers, and stockholder representatives of portfolio companies. Also, to the extent that private equity firms provide services to portfolio companies, they may wish to consider providing such services through separate organizations that are distinct from the firm’s investment funds.
  • Monitoring and Compliance of Portfolio Company Activity: Particularly in industries where False Claims Act liability is significant, private equity firms should consider development of robust monitoring and compliance programs at the portfolio company level. This type of initiative establishes the “tone from the top” and evidences the intent of the investors and board leadership to ensure that the portfolio company has appropriate internal legal support and compliance staffing, including training for the portfolio managers with primary responsibility for overseeing and supporting the company’s operations.
  • Board and Committee Participation: Specific to board-level oversight, firms should consider forming a compliance-focused subcommittee on a portfolio company’s board of directors. The subcommittee can be tasked with ensuring compliance with internal policies and implementation of the compliance program consistent with industry guidance and standards.
  • Advice of Counsel and Advisors: Medrano underscores the importance of obtaining and following the advice of counsel and consultants on matters involving potential False Claims Act liability. A robust portfolio company compliance program with the type of committee reporting structure described above would provide a forum for consideration of advice from counsel and other advisors on risks material to the business.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ropes & Gray LLP | Attorney Advertising

Written by:

Ropes & Gray LLP

Ropes & Gray LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.