Private equity firm H.I.G. Capital has agreed to pay $20 million to settle allegations of Medicaid fraud brought by the US Department of Justice (DOJ) and the Massachusetts Attorney General. Attorney General Maura Healy said it was the largest of its kind with a private equity firm.[i] While H.I.G. has owned multiple healthcare companies that have paid multimillion dollar Medicare/Medicaid fraud settlements in the last three years, the private equity firm and its executives have not themselves been parties. The settlement represents a landmark case in enforcing liability for private equity firms whose portfolio companies engage in Medicare and Medicaid fraud.
In 2018, H.I.G.’s Massachusetts-based South Bay Mental Health Center (SBMHC) paid $4 million in 2018 to settle allegations that it fraudulently billed the Massachusetts’ Medicaid Program for mental health care services provided to patients by unlicensed, unqualified, and unsupervised staff members at 17 clinics across the state.
The Attorney General also named H.I.G. Capital as a defendant, alleging that H.I.G. “knew that SBMHC was providing services in violation of regulatory requirements and did not bring SMBHC operations into compliance or make any attempts to repay the money owed to MassHealth, as required by law.” HIG allegedly cited the large profit margins as a reason to acquire the company.[ii]
While SBMHC settled, H.I.G. tried multiple times to have the case against the firm and its executives dismissed. However, the U.S. District Court for the District of Massachusetts held that H.I.G. could be liable (and the case against it could proceed) because its “members and principals formed a majority of the C.I.S. and South Bay Boards, and were directly involved in the operations of South Bay.”[iii]
In the midst of the litigation against H.I.G., the firm began winding down operations at SBMHC and its parent company, Community Intervention Services (CIS). H.I.G had created CIS as a mental health platform company to acquire and consolidate regional mental health providers, including SBMHC. On January 5, 2021, CIS filed for bankruptcy and sold its remaining mental health providers, SBMHC and Futures Behavioral Health, to a different private equity-owned mental health company.
Other H.I.G Portfolio Company Engaged in Medicare and Medicaid Fraud
In April 2020, subsidiaries of H.I.G.’s portfolio company Surgery Partners Inc. paid $41 million to settle allegations of defrauding federal health programs through claims for medically unnecessary urine drug testing services.[iv]
Surgery Partners is surgical services provider, primarily operating facilities that provide non-emergency surgeries. Its subsidiaries in Tampa, Logan Laboratories and Tampa Pain Relief Centers, allegedly used “indiscriminate and unnecessary testing” that “increased medical costs to the government without serving patients’ real medical needs,” according to U.S. Attorney William McSwain.[v]
The alleged fraud took place between 2010 and 2017 – a time during which H.I.G.’s owned Surgery Partners.[vi] H.I.G. acquired Surgery Partners in December 2009, took it through an IPO in 2015 and sold its majority equity stake in 2017.[vii]
In announcing the settlement, the U.S. Attorney wrote: “A laboratory that promotes and knowingly conducts medically unnecessary drug testing – prioritizing profits over objective medical decision-making – operates unlawfully and wastes limited federal health care resources.”[viii]
Three H.I.G. employees served on Surgery Partners’ board of directors: Christopher Laitala, Matthew Lozow, and Fraser Preston. Laitala, a Managing Partner at H.I.G., became Chairman for the company in 2015 and was appointed president of Surgery Center Holdings, Inc., Surgery Partners’ parent company.[ix] H.I.G. also executed a management agreement with Surgery Partners whereby H.I.G. became expressly involved in “any and all aspects of the operations, planning, financing and budgeting of [Surgery Center Holdings, Inc.] and its subsidiaries…” Under the agreement, Surgery Partners paid H.I.G. at least $38.7 million.[x]
The whistleblowers who filed suit against Surgery Partners subsidiaries later filed an amended complaint alleging H.I.G.’s liability for the fraud by its company. The case against H.I.G. was dismissed on procedural grounds, though the plaintiffs have appealed the decision. The appeal is currently being heard in the US Court of Appeals, 11th Circuit.[xi]
Private Equity and the False Claims Act
There is substantial overlap between the risks associated with private equity ownership of healthcare companies and the activities targeted by the False Claims Act, the federal law that establishes liability for companies that defraud governmental programs such as Medicare and Medicaid.
For example, in an effort to dramatically increase revenue to meet return targets, private equity owned healthcare companies may reduce staffing or fill beds without adequate staffing ratios; rely on under-licensed or unlicensed staff to reduce labor costs; and pressure or incentivize physicians to provide unnecessary and potentially costly services.[xii]
Until recently, the DOJ rarely intervened in Medicare and Medicaid fraud cases against private equity firms for actions allegedly committed by their portfolio companies. Instead, private-equity-owned companies have typically assumed full liability for settlements related to alleged fraudulent behavior, regardless of the level of involvement in operations by the company’s private equity owners.[xiii] The DOJ’s litigation against H.I.G. for its role in the alleged fraud may signal a shift the way regulators view private equity firms’ liability for illegal actions by companies they control.
Private Equity Stakeholder Project has found that since 2013, at least 25 private equity-owned health care companies have paid a total of over $570 million to settle False Claims Act suits related to alleged billing fraud that took place under private equity ownership. Altogether, the private equity firms that owned those companies currently own nearly 200 other healthcare companies, many of which also bill Medicare, Medicaid, and other government health programs.
[ii] Office of Attorney General Maura Healey, “AG Healey Sues Mental Health Center for Illegally Billing MassHealth for Unlicensed and Unsupervised Patient Care,” Press release, January 9, 2018. https://www.mass.gov/news/ag-healey-sues-mental-health-center-for-illegally-billing-masshealth-for-unlicensed-and
[iii] Massachusetts ex rel. Martino-Fleming v. S. Bay Mental Health Ctr., Inc., Civil Action No. 15-13065-PBS. https://www.bclplaw.com/images/content/1/6/v2/162247/Martino-Fleming-US-Decision-2018-09-21-PACER-version.pdf
[x] Sheldon Cho, et al., Relators-Appellants/Cross-Appellees, v. H.I.G. Capital, LLC, et al., Defendants-Appellees/Cross-Appellants. On Appeal from the United States District Court for the Middle District of Florida, Tampa Division. No. 8:17-cv-983-T-33AEP. Pg. 22.
[xi] Sheldon Cho, et al., Relators-Appellants/Cross-Appellees, v. H.I.G. Capital, LLC, et al., Defendants-Appellees/Cross-Appellants. On Appeal from the United States District Court for the Middle District of Florida, Tampa Division. No. 8:17-cv-983-T-33AEP.