Considerations for Private Equity and Venture Capital Groups Interested in the Health Care Industry

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Health care spending in the United States reached $3.6 trillion in 2018 and is projected to reach $6.2 trillion by 2028. With such a large amount of money concentrated in the health care industry, it is no wonder why private equity firms and venture capitalists continue to enter this space. For any groups looking to jump into the fray, there are several health care-specific considerations of which to be aware.

1. Health Care Entities are Highly Regulated

All levels of government regulate health care entities. Such laws inform all of a health care entity’s relationships, such as whom the health care entity can employ or who can even own the health care entity. Health care laws are complex. It is therefore vitally important that private equity firms and venture capitalists, to help lower their direct exposure to compliance and regulatory risk, seek guidance from counsel well versed in the local, state, and federal laws relevant to the particular health care entity of interest.

2. Direct Legal Risks

It is important to understand that some health care laws may expose private equity firms and venture capitalists to criminal and civil legal risks. Seemingly prudent business decisions may very well be unwise due to a conflicting health care law; the decision to compensate independent contractor sales people on a commission basis may appear to be a viable option from a business standpoint, but some health care laws may prohibit such a common-sense compensation plan. It is therefore imperative that private equity firms and venture capitalists seek to understand the health care laws affecting the particular health care entity of interest.

3. Health Care Laws

Although there are many federal, state, and local laws that apply to health care entities, the following list contains some federal health care laws of which private equity firms and venture capitalists must be aware:

• Anti-Kickback Statute (AKS) (42 U.S.C. § 1320a-7b(b)): The AKS imposes criminal and civil penalties on any person who knowingly and willfully offers, pays, solicits, or receives anything of value to reward or induce referrals or to generate business from Federal health care programs, including, but not limited to, Medicare, Medicaid, and TRICARE.

• Stark Law (42 U.S.C. § 1395nn): The Stark Law imposes civil penalties on physicians (MD, DO, DDS, DMD, DPM, OD, and DC) who refer patients for designated health services to an entity with which the physician, or immediate family member, has a financial relationship and for which the physician submits the claim to Medicare.

• Eliminating Kickbacks in Recovery Act of 2018 (EKRA): Unlike the AKS and Stark Law, which apply to activity related to Federal health care programs, EKRA’s prohibitions also include inducing referrals or generating business from private insurers. EKRA applies specifically to referrals to recovery homes, clinical treatment facilities, and laboratories.

• False Claims Act (FCA) (31 U.S.C. §§ 3729 - 3733): The FCA is a fraud statute that imposes large civil penalties on any person who, among other things, conspires to or knowingly submits false claims or knowingly and improperly avoids returning money to the government. The FCA permits individuals to file suit on behalf of the government under the whistleblower (or “qui tam”) provisions of the FCA.

It is important to understand that compliance with federal laws will not absolve a private equity firm or venture capitalist from complying with local or state laws. State laws generally address scope of practice, corporate practice of medicine doctrine, and fee-splitting prohibitions. In many instances, a failure to comply with state laws violates federal law. Therefore, it is imperative to understand the interconnectedness of the various federal, state, and local laws that affect the particular health care entity of interest.

4. The Bottom Line

Business acumen alone is insufficient to safely enter and remain in the health care industry. When private equity firms and venture capitalists are assessing the business side of a health care transaction, they must likewise analyze each segment of the transaction for compliance with applicable local, state, and federal health care laws, including each relationship connected to each segment of the transaction. Failure to properly analyze such laws and relationships may result in the private equity firm’s or venture capitalist’s health care entity becoming forced to return to the health insurer all the revenue it received from that health insurer over the course of several years.

A recent case illustrates the risks of subordinating health care law compliance to business decisions. In that particular case, a compounding pharmacy, two of its executives, and a private equity firm agreed to pay a more than $20 million settlement to resolve an FCA suit that began as a qui tam lawsuit. The private equity firm that managed the compounding pharmacy on behalf of its investors allegedly knew of and agreed to participate in providing kickback payments to marketers. While the alleged scheme was undoubtedly good for their bottom line, it conflicted with health care laws. The bottom line is that private equity firms and venture capitalists must prioritize compliance or risk diminishing their bottom line.