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Private equity investors in nursing homes should brace and prepare for an active near-term enforcement environment. Congressional skepticism of private equity involvement in healthcare, developments in False Claims Act cases and Department of Justice priorities all point towards increasing scrutiny of private equity investment in skilled nursing facilities. 

Firms with investments in this area can take immediate proactive steps to mitigate the financial risks of enforcement and the accompanying reputational damage associated with a government investigation.

In what appears to be a snowballing attack, several congressional developments over the last few months highlight the growing risk to private equity investors. First, on March 25, 2021, the House Ways and Means Committee on Oversight held a hearing on private equity involvement in healthcare. Committee Chairman Bill Pascrell declared “Private equity’s expansion to healthcare is troubling because private equity’s main focus on profits is often at odds with what is best for patient care.” 

Witnesses generally hostile to private equity involvement recounted a litany of supposed evils from private equity ownership in skilled nursing facilities, including increased fraud, worse care, understaffing and even preventable deaths. 

In late April, a think tank called on Congress to ban private equity investments in nursing homes citing similar allegations regarding deficient care in such facilities. Following up on his hearings in March, Chairman Pascrell wrote a letter on May 27, 2021, to the Government Accounting Office requesting that it study the effects of private equity across the healthcare system, including skilled nursing. 

Public and congressional attention in this area is likely to generate a more active anti-fraud enforcement environment putting private equity firms at risk for two reasons. First, skilled nursing facilities and private equity investment in healthcare are both priority items for the Department of Justice. Second, whistleblower lawsuits have begun to regularly name private equity investors in search of deep pockets to pay large penalties.

Government enforcement authorities have indicated that both skilled nursing facilities and private equity funds will be a priority of DOJ enforcement under the False Claims Act. On March 3, 2020, then-Attorney General William Barr announced the Department of Justice’s National Nursing Home Initiative, aimed to “bring justice to those owners and operators who have profited at the expense of their residents, and help to ensure residents receive the care to which they are entitled.” 

In December 2020, Michael Granston, deputy assistant attorney general of the Commercial Litigation Branch, which is responsible for FCA enforcement, highlighted nursing home enforcement as a DOJ priority, stating “the Department has reinforced its commitment to protect the health and welfare” of the elderly. Granston cited several FCA investigations into skilled nursing facilities allegedly providing excessive and unnecessary therapy services “that were influenced by financial considerations rather than patient needs.” 

More recently, a panel of DOJ lawyers, including the assistant director of the Commercial Litigation Branch, noted that private equity is playing an increasing role in healthcare and could be responsible for problems in their downstream operating healthcare companies.

DOJ interest, however, is not the only FCA risk for private equity firms in the skilled nursing space. Whistleblowers are increasingly naming private equity investors in suits alleging fraud at healthcare providers. In May, a federal district court in Massachusetts allowed a case to go forward against a private equity firm finding that it could have the requisite scienter to cause false claims to be submitted to the federal government. Cases such as this will certainly embolden whistleblowers and their counsel to proceed against private equity firms in FCA suits.

With the increasingly high profile of private equity in healthcare comes an increased risk of government enforcement. Private equity firms can no longer plan on being insulated from the fraud or alleged misconduct of their portfolio companies. Recent court cases indicate that the following facts could result in liability for private equity firms:

1. Knowledge of compliance red flags at portfolio company;
2. Participation in management of portfolio company;
3. Appointments to board of directors of portfolio company;
4. Hiring or replacement of executive team members at portfolio company; and
5. Knowledge of faulty or inadequate compliance program.
   
   

Firms should take certain risk mitigation measures, including instituting appropriate compliance strategies and plans. Failure to do so may invite enforcement action in this heightened risk environment.

Republished with permission. This article, "Private Equity in the Crosshairs," was published in McKnight's Long-Term Care News on August 20, 2021.