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DOJ Intervenes in False Claims Act Case Against a Compounding Pharmacy and a Private Equity Firm

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.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume VIII, Number 65


About this Author

Xavier Hardy Health Care Lawyer Mintz

Xavier focuses his practice on a variety of health care regulatory and fraud and abuse matters as well as Medicare and Medicaid reimbursement issues in health care transactions and business arrangements. He represents clients in the health care and life sciences industries.

Prior to joining Mintz, Xavier was an associate in the Washington, DC office of a national law firm. In that role, he advised clients on legal and regulatory issues around health care reimbursements involving Medicare, Medicaid, and other third-party payors. He also counseled...

Karen Lovitch Mintz DC Health Care Compliance, Fraud & Abuse, and Regulatory Counseling Medicare, Medicaid & Commercial Coverage & Reimbursement Health Care Transactions Health Care Transactional Due Diligence Health Care Enforcement & Investigations

Karen focuses her practice on representing health care companies in regulatory, transactional, and operational matters. She has a substantial health care regulatory background and advises clients on matters pertaining to the federal anti-kickback statute, the Stark law, state statutes prohibiting kickbacks and self-referrals, the Clinical Laboratory Improvement Amendments of 1988, and the federal Physician Payments Sunshine Act. Karen often applies her strategic insight on these matters to counsel companies on regulatory issues arising in connection with mergers and acquisitions and other transactions. She also defends companies in high-stakes state and federal investigations. Karen regularly speaks and writes on challenges facing laboratories, diagnostic companies, and other health care companies.

Karen is the Practice Leader of the firm’s Health Law Practice. She counsels health care clients on regulatory, transactional, and operational issues, including Medicare coverage and reimbursement, the development and implementation of health care compliance programs, and licensure and certification matters. In addition, Karen advises clients on the legal, practical, and fraud and abuse implications of business arrangements and sales and marketing practices. Her experience includes matters related to the anti-kickback statute, the Stark law, state statutes prohibiting kickbacks and self-referrals, and the federal Physician Payments Sunshine Act.

Karen applies her compliance and regulatory experience in transactional as well as litigation contexts. In addition to counseling health care entities on regulatory matters arising in connection with mergers and acquisitions, she has successfully defended clients subject to state and federal surveys, Medicare and Medicaid overpayment and reimbursement appeals, and state licensure proceedings. Karen also represents clients subject to state and federal investigations alleging violation of the anti-kickback statute, the federal False Claims Act, and other state and federal laws.

Karen also specializes in the representation of laboratories and diagnostics companies. She regularly counsels on compliance with CLIA and state laboratory licensure laws, federal and state limitations on billing for diagnostic services, and legal restrictions on sales and marketing activities. Karen has served as regulatory counsel in a number of mergers and acquisitions involving laboratories and diagnostics companies and has represented numerous laboratories and diagnostics companies in state and federal government investigations.