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April 29, 2024

More Money, More Problems

Legal Risks Faced by Private Equity Investors in the Healthcare Industry

By Bill Morrison, Taryn McDonald, Neil Issar, and Samara Taper

Private equity investments in the healthcare industry have surged over the past decade. But the inflow of investment funds has brought government scrutiny with it, and several recent government enforcement actions demonstrate that investors are at risk under certain healthcare laws and regulations. Consequently, investors should be aware of conduct that can lead to liability so that they can limit risk effectively. 

Private Equity Investments in the Healthcare Industry

As patient care continues to become more complex, healthcare providers are consolidating and transitioning away from small, fragmented, and provider-owned practices to larger, multi-office practices with greater access to capital and sufficient scale to manage both clinical and financial challenges. This push towards consolidation has facilitated investment from private equity firms in a variety of healthcare and healthcare-related businesses. As a result, we have seen a dramatic rise in healthcare investments in the past decade, which has led to a great deal of discussion of the impact of such investments.

The Numbers

Private equity investors have spent nearly $1 trillion in the past decade on healthcare acquisitions. Although it has been common practice for private equity firms to invest in nursing homes and other long-term-care or post-acute settings, there has been an increased focus on investing in high-margin specialties such as dermatology, urology, gastroenterology, and cardiology. In less than ten years, private equity acquisitions of physician practices across various specialties has risen more than 600%. And it is estimated that private equity firms own more than 30% of physician practices in nearly one-third of all metropolitan areas.

These trends also extend to other sectors of the healthcare industry that are fragmented yet high margin, such as medical aesthetics (a.k.a. “medical spas”), dentistry, and eye care as well as the organizations that provide ancillary services for those sectors. For instance, by 2021, private equity firms owned 27 of the 30 largest dental services organizations, accounting for 84% of those organizations’ practice locations. Likewise, several large private investment firms have recently acquired significant interests in multi-office practices offering aesthetics services like laser hair removal, injectables, and body contouring.

The Strategy

Private equity firms often structure their acquisitions based on a “roll-up model,” meaning the firm will acquire a large healthcare practice, then acquire smaller practices in the same specialty to create a larger and integrated practice network. This allows the firm to become the dominant player in the market and acquire significant power. However, many states have laws that prevent physicians from being employed by a non-physician owner. In those states, private equity firms can instead create or acquire management service companies, which provide the administrative, financial, and back-office support services to physician practices, in exchange for a portion of the practices’ profits. This allows firms to invest in the healthcare industry and not violate the law by shifting the focus to non-clinical assets.

The Impact

Experts debate whether private equity firms’ presence in the healthcare industry is beneficial. Some argue that the capital provided by private equity investors has expanded access to healthcare, created an influx of new jobs and research opportunities, and unlocked new lifesaving treatments, like mRNA vaccinations. Additionally, those in favor of private equity investments argue that consolidation allows for a significant reduction in back-office costs, allowing healthcare practices to invest this money in new technology and better care for their patients.

However, regulators and others have expressed concern that the private equity business model can harm patient outcomes. Some private equity investments are short-term and therefore, some would argue, focused on yielding high short-term revenue. For a private equity firm to profit from its investment, the firm generally must either increase the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) or its valuation. To increase EBITDA, private equity firms may cut a company’s costs, which they may accomplish by decreasing the number of workers, replacing highly paid and highly qualified workers with lower paid and less qualified workers, and/or switching to cheaper supplies. Some commentators are also concerned that investors would pressure providers to perform more profitable and/or medically unnecessary procedures in an attempt to increase revenue. To increase the valuation of a practice, investors could prioritize additional acquisitions through the roll-up model described above. The additional acquisitions allow for future EBITDA growth and for the firm to obtain status as a dominant player in that specific market.

Investors must be cautious, however, that attempts to reduce expenses or increase revenue do not push the limits of health and safety regulations. This is particularly important in the wake of studies showing that certain healthcare acquisitions and consolidations of medical practices increased prices and failed to improve patients’ quality of care. For instance, in February 2022, the Biden Administration published a fact sheet regarding the quality of care in nursing homes. The fact sheet stated that approximately 5% of all nursing homes are owned by private equity firms, and predictably asserted that “[t]oo often, the private equity model has put profits before people”—a familiar refrain from prosecutors and plaintiffs’ counsel. The fact sheet also stated that private-equity owned nursing homes have “significantly worse outcomes for residents” and lead to an “uptick in Medicare costs.” Specifically, the Biden Administration cited a national study that found that private equity ownership increased excess mortality for residents in nursing homes by 10%, decreased the hours of frontline nursing staff by 3%, and increased taxpayer spending by 11%.

Government Guidance and Enforcement

The government’s concern that the private equity model may run contrary to best healthcare practices has coincided with increased government scrutiny of private equity investments in healthcare. However, most government enforcement actions so far have focused on noncompliance with anti-fraud and antitrust statutes and regulations, and not on any negative impacts of investment on costs or quality of care. Accordingly, the remainder of this article discusses anti-fraud and antitrust concerns. That being said, private equity firms must nonetheless be aware that the government is focusing on investments’ impact on cost and quality of care and can also target private equity firms’ compliance in other areas, such as regulations concerning the corporate practice of medicine, licensure requirements, and obligations under state law.


When a private equity firm invests in a heavily regulated area such as healthcare, the firm can expose itself to liability under anti-fraud statutes and regulations. Two of the main anti-fraud laws are the federal Anti-Kickback Statute (AKS) and the False Claims Act (FCA). The FCA was enacted during the Civil War in response to rampant fraud by private contractors that were billing the government for goods that the contractors did not actually deliver. The FCA imposes liability on any individual or entity that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” or “conspires to commit a violation of [the FCA].” “Knowingly” is defined to include actual knowledge, reckless disregard, or deliberate indifference. No proof of specific intent to defraud is required.

 The AKS is a criminal law that arose out of congressional concern that inducements may corrupt patient and professional healthcare decision-making, impose higher costs on federal healthcare programs, and divert federal funds towards goods and services that are medically unnecessary, of poor quality, or even harmful to a vulnerable patient population. The AKS makes it illegal for an individual or entity to knowingly and willfully offer or pay any remuneration—directly or indirectly, overtly or covertly, in cash or in kind—to any person to induce such person to (A) refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a federal healthcare program or (B) purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program. Remuneration includes anything of value, including but not limited to cash, kickbacks, rebates, or bribes in other forms. Similar to the FCA, specific intent is not required to establish a violation of the AKS.

In addition, a claim for reimbursement from a federal healthcare program for items or services resulting from a violation of the AKS also “constitutes a false or fraudulent claim” under the FCA. In other words, claims submitted to federal healthcare programs that result from violations of the AKS are per se false or fraudulent for purposes of FCA liability.

Private equity firms risk liability if they are actively involved in the fraud of their portfolio companies

The Department of Justice (DOJ) and the Federal Trade Commission (FTC) are tasked with enforcing the FCA and the AKS to prevent the exploitation of federal healthcare programs, and they often issue memoranda and statements to clarify their enforcement priorities. As it pertains to private equity investors in healthcare, on June 26, 2020, then Principal Deputy Assistant Attorney General Ethan P. Davis stated at the U.S. Chamber of Commerce’s Institute for Legal Reform that DOJ will indeed hold investors in the healthcare industry liable under the laws and regulations designed to prevent fraud. Specifically, Davis said, “Where a private equity firm takes an active role in illegal conduct by the acquired company, [the private equity firm] can expose itself to False Claims Act liability.” On February 22, 2024, current Principal Deputy Assistant Attorney General Brian M. Boynton made similar remarks at the Federal Bar Association’s Qui Tam Conference by predicting private equity firms’ impact on healthcare billings will continue to grow and by emphasizing DOJ’s commitment to holding accountable private equity firms that cause the submission of false claims. Recent enforcement actions have substantiated those statements.

For example, in 2019, a private equity firm that managed a Florida-based pharmacy agreed to a settlement of $21 million for their active role in a kickback scheme. The government alleged that the pharmacy violated the FCA by allegedly paying kickbacks to outside marketers tasked with targeting military members and families for prescriptions for compounded creams and vitamins. The marketers allegedly paid telemedicine doctors to prescribe creams and vitamins without even seeing the patients. The pharmacy continued to claim reimbursements for the prescriptions referred by the marketers even though the prescriptions were generated without patient consent or a valid patient-prescriber relationship. The private equity firm allegedly played an active role in the kickback scheme because it allegedly knew of and approved the payments to outside marketers to generate the prescriptions and financed the kickback payments. In announcing the settlement, U.S. Attorney Ariana Fajardo Orshan stated that “this case demonstrates the U.S. Attorney’s Office continuing commitment to hold all responsible parties to account for the submission of claims to federal healthcare programs that are tainted by unlawful kickback arrangements.”

In a more recent example, a New York-based private equity firm and two of its pharmacy portfolio companies agreed to pay $9 million to resolve allegations they violated the FCA. The qui tam complaint alleged that the private equity firm was controlling and directing the pharmacy companies to ship and dispense thousands of prescriptions of a fentanyl sublingual spray to Medicare, Medicaid, and TRICARE beneficiaries for illegitimate and medically unnecessary uses of the drug. The relator also alleged that the private equity firm was “key to the large-scale operation to profit” from dispensing the drug. In denying a motion to dismiss filed by the private equity firm, the U.S. District Court for the Central District of California concluded that the relator had sufficiently alleged the firm’s involvement “caused false claims to be presented for payment” and that the firm “acted with the requisite scienter.” These findings, combined with the relator’s counsel’s stated desire to “hold private equity firms and their principals liable when they implement profit schemes that trade patient safety for investor returns,” likely spurred the settlement.

Private equity firms may risk liability if they ignore recommendations regarding noncompliance by their portfolio companies

Other enforcement actions demonstrate that investors may not need to take an active role in fraudulent conduct to face the risk of liability under anti-fraud laws. For example, in 2021, a private equity firm and its investment affiliate agreed to pay $19.9 million for alleged violations of the Massachusetts FCA. The firm had acquired a mental health center in Massachusetts, which allegedly submitted fraudulent claims to MassHealth, Massachusetts’ Medicaid program, for mental health services provided by unlicensed, unqualified, and unsupervised personnel. Unlike the two private equity firms discussed above, the firm in this case neither approved nor caused the submission of false or fraudulent claims. But the firm was included as a defendant nonetheless based on it allegedly having knowledge of the mental health center’s fraudulent acts and allegedly allowing the fraud to continue by failing to adopt recommendations that would have prevented the center’s fraudulent practices.

Indeed, in denying a motion for summary judgment filed by the private equity firm, the U.S. District Court for the District of Massachusetts held that evidence submitted by the plaintiffs that the private equity firm was given notice of unsupervised personnel and informed about recommendations to hire more supervisors satisfied the FCA’s scienter requirement. The court also held that evidence the firm “had the power to fix the regulatory violations which caused the presentation of false claims but failed to do so” satisfied the plaintiffs’ burden to provide sufficient evidence that the firm caused the submission of false claims. The court’s summary judgment decision and resulting settlement suggest private equity firms can face liability risk if they ignore recommendations regarding noncompliance by their portfolio companies.

Private equity firms may also risk liability if they allow fraud by their portfolio companies to continue

Private equity firms can even face liability risk if they learn of fraudulent acts committed by their portfolio companies and simply allow the acts to continue after acquisition. In 2020, a California-based private equity firm that acquired a medical device and drug manufacturer agreed to pay $1.5 million to resolve allegations that it violated the FCA. A relator alleged that the manufacturer was marketing and promoting photopheresis systems to treat pediatric patients for uses that were not approved by the Food and Drug Administration, which in turn improperly influenced physicians’ prescribing decisions and caused the submission of false claims to multiple federal healthcare programs. Even though this improper marketing began prior to the private equity firm’s acquisition of the manufacturer and the firm was not alleged to be itself involved, the firm was named as a defendant simply because the fraud allegedly continued during the firm’s ownership of the manufacturer.

In a similar case, a Texas-based investment company agreed to pay $1.8 million to resolve allegations that it violated the FCA. The qui tam lawsuit against the investment company focused on the allegation that a national electroencephalography (EEG) company that provides ambulatory EEG testing services induced physicians to order costly and medically unnecessary testing by providing kickbacks in the form of free EEG test interpretation results while enabling the physicians to bill the government as if they performed the test interpretations themselves. The investment company allegedly learned of the kickback scheme based on due diligence it performed prior to investing in the EEG company, but because the investment company “nevertheless purchased [the EEG company], provided the company substantial financial support in the process,” and failed to “tak[e] steps to terminate the illegal activity,” the investment company allegedly caused the submission of false claims. This, the relator alleged, meant the investment company “sought to profit off of [the EEG company]’s illegal enterprise.” Correspondingly, in announcing the settlement, the acting U.S. Attorney for the Southern District of Texas warned that the settlement should serve as notice that DOJ “will hold accountable those who seek to profit by pursuing kickbacks and other improper billing schemes.”

These cases and settlements demonstrate that not only can bad actors face liability for their fraudulent acts, but investors may also face liability for the misconduct of their investment targets if they fail to intervene and stop the fraudulent conduct.


In addition to an increased risk of liability under anti-fraud statutes and regulations, investors may also be exposed to liability under federal antitrust laws, such as the Sherman Antitrust Act and the Clayton Act, which prohibit anticompetitive actions, conspiracies, and unfair business practices that restrain trade and, relatedly, deprive consumers, taxpayers, and workers of the benefits of competition.

On July 9, 2021, President Biden issued an executive order to address growing concerns over corporate consolidation, specifically in the healthcare industry. President Biden emphasized that the lack of competition drives up prices for consumers, drives down wages for workers, and holds back economic growth and innovation. Thus, President Biden encouraged the agencies tasked with enforcing the antitrust laws—namely, DOJ and the FTC—to “enforce antitrust laws vigorously,” with a particular focus on healthcare markets.

Following President Biden’s executive order, on June 3, 2022, Deputy Assistant Attorney General Andrew Forman delivered the keynote speech at the ABA’s Antitrust in Healthcare Conference. Forman emphasized the need to aggressively enforce the antitrust laws in the healthcare industry and made it clear that “[p]rotecting competition in healthcare is among the highest priorities of the Antitrust Division [of DOJ].” In addition, Forman highlighted four specific areas of enforcement DOJ was focusing on: (1) private equity roll-up acquisitions that substantially reduce competition or increase the risk of creating a monopoly; (2) private equity investments that “blunt” the incentive of a target company to act as a market disruptor or cause a target company to focus solely on short-term financial gains in lieu of advancing innovation or quality; (3) enforcement of Section 8 of the Clayton Act, 15 U.S.C. § 19 (which generally prohibits directors and officers from serving simultaneously on the boards of competitors); and (4) private equity firms’ compliance with filing obligations under the Hart-Scott-Rodino (HSR) Act.

More recently, FTC Chair Lina Khan spoke at the American Medical Association National Advocacy Conference and stated that the agency’s work in enforcing antitrust laws to prevent coercive concentrations of power was especially critical in healthcare. Khan also criticized the interference in healthcare of “corporate decision-makers” and “severely concentrated, vertically integrated middlemen,” and emphasized the FTC was “squarely focused on tackling illegal business practices” in healthcare as part of a return to the country’s “longstanding anti-monopoly tradition.” Further, Khan identified “unlawful consolidation and roll-ups” as an area of enforcement focus and recognized that the FTC would need to look at “aggregate trends, not just isolated deals” to account for roll-up strategies in which individual transactions seem benign even though the series of acquisitions cumulatively leads to unlawful consolidation.

The areas of enforcement identified by Forman and Khan are not surprising as roll-up strategies typically avoid regulatory scrutiny. Under the HSR Act, parties are required to report to DOJ and FTC transactions that meet a certain minimum threshold. The required reporting threshold for 2023 was $111.4 million at the time of closing. When private equity firms follow a roll-up model and invest in small healthcare practices, firms have been able to complete the transactions under the required reporting threshold. This has allowed the firms to “accrue market power off the commissions radar.” However, the agencies are aware of this loophole and are committed to use other “tools in their toolbox” to identify and challenge deals that harm competition. Additionally, the HSR Act is merely a reporting requirement; it does not actually limit an agency’s ability to challenge a potentially harmful transaction that falls under the reporting threshold.

The FTC recently filed an action in the Southern District of Texas against a Dallas, Texas-based physician-service organization focused on anesthesia and pain management services and a private equity investment firm. The complaint alleges both companies violated various antitrust laws for their roll-up scheme, which entailed purchasing the largest anesthesia practice in Texas along with over a dozen smaller practices in various cities across the state. Even though the investment firm did not make any of those purchases itself, the complaint alleges the firm is liable for allegedly coming up with the strategy to roll up independent anesthesia practices and raise prices as well as initiating this consolidation strategy by creating the defendant anesthesia company at the outset. The FTC alleges this conduct violates Section 5(a) of the FTC Act and Section 7 of the Clayton Act. Accordingly, the FTC has asked the court to issue a permanent injunction against both companies for all similar and related conduct in the future and grant equitable relief.  The defendant companies have moved to dismiss the FTC’s lawsuit. The district court has yet to rule on the motion, but this case has the potential to open an additional avenue for investors to be held liable under the antitrust laws based on the conduct of the company they invest in.

How Private Equity Investors Can Minimize Their Risk of Liability

Even though government oversight and intervention has clearly increased in recent years, the actual impact of private equity investments on the healthcare industry is still unclear. As a result, policy responses to private equity investments have been disorganized and varied. Nonetheless, it is a key issue being discussed by policymakers, and it is therefore imperative that investors are aware of their exposure and informed on how to limit their risk of liability.

Awareness. When an investor is seeking an opportunity in a highly regulated area such as healthcare (and throughout the duration of their investment), investors and operators of private-equity-backed healthcare firms should spend the time and resources to educate themselves about the laws and their risk of exposure. This includes knowing about the trends and factors affecting enforcement of applicable statutes and regulations and being able to identify acts that may draw the government’s attention. The healthcare industry has the potential to be a very profitable investment. However, investors must be aware of their increased risk of liability, especially under the anti-fraud and antitrust statutes and regulations that govern the healthcare industry.

Structure. At the outset of a potential transaction, it is important for investors and their regulatory counsel to focus on structuring the investment in a way that complies with relevant corporate practice of medicine laws, antitrust laws, fraud and abuse regulations, and other obligations that can be legal pitfalls. For example, investors in certain transactions may rely on carve-outs or divestitures to address potential antitrust issues or rely on management services companies or physician advisory committees to address potential conflicts of interest or mitigate the risk of state or federal regulatory violations.

Due Diligence. Investors should perform due diligence at the outset of the deal, especially as healthcare is a highly regulated industry, where both civil and criminal liability are implicated. It is essential that investors learn about the practices of the target company and are able to effectively evaluate whether or not these practices violate applicable laws or are covered by statutory safe harbors. As discussed above, investors can be held liable for practices that began before acquisition. Thus, investors should evaluate the company’s past and present practices with a keen eye toward any potentially violative conduct. Investors may be able to obtain significant protection with respect to risks arising from pre-acquisition operations through the use of representation and warranties insurance, as well as more traditional forms of coverage (e.g., directors and officers liability insurance, cyber insurance, etc.).

Hands-on Management. After investing in a healthcare company, investors should play an active role in monitoring behavior that may lead to a violation of the law, such as through compliance reports to the board and implementation of a robust auditing and monitoring program. The cases above indicate that investors can be investigated or named as a defendant in a lawsuit even without an active role in a fraudulent scheme. Liability can be triggered merely by knowledge of fraud and/or a failure to intervene. Thus, investors should be aware of the practices the company is engaging in and of changes in applicable law and the enforcement landscape and be ready to intervene when concerning conduct is presented.

Implement Robust Policies and Procedures. To mitigate the risk of exposure, investors should implement robust and effective compliance programs, policies, and procedures to ensure that the company complies with all applicable laws, regulations, standards, and contracts. Investors should also use regular and independent audits, monitoring, and reporting to assess and improve the compliance performance of a healthcare portfolio company. Moreover, using appropriate training, education, and incentives can help promote and reinforce compliance awareness to improve the behavior of management, healthcare practitioners, employees, and partners.

Engage Counsel. As the rate of private equity investments in the healthcare industry continues to rise and the legal landscape surrounding this area continues to evolve, it is essential that private equity firms engage counsel that are well-versed in this area of the law. 

    Bill Morrison

    Haynes and Boone LLP, Dallas, TX

    Bill Morrison is a partner at Haynes Boone and co-chair of the firm’s Healthcare and Life Sciences practice group. His practice focuses on representing national healthcare providers in a range of litigation and compliance matters involving government enforcement, internal investigation, False Claims Act cases, and antitrust counseling. He also previously served as the vice president and assistant general counsel of one of the nation’s largest public healthcare companies, where he was responsible for the regulatory group, civil and criminal government investigations and litigation, False Claims Act litigation, complex litigation, cyber incident response, and malpractice litigation. Mr. Morrison can be reached at [email protected]

    Taryn McDonald

    Haynes and Boone LLP, Dallas, TX

    Taryn McDonald is a partner at Haynes Boone. Her practice focuses on government investigations and healthcare litigation, and she has represented clients under criminal or civil investigation by various government agencies, including the U.S. Department of Justice, the Office of Inspector General, the Texas Attorney General’s Office, the Securities and Exchange Commission, and FINRA. She has extensive experience defending clients in qui tam and False Claims Act investigations and lawsuits as well as helping clients investigate and navigate sensitive internal compliance and disclosure issues. She can be reached at [email protected].

    Neil Issar

    Haynes and Boone LLP, Dallas, TX

    Neil Issar is a litigation associate at Haynes Boone. His practice focuses on healthcare litigation, government investigations, and white collar defense, with particular expertise in fraud and abuse laws (including the False Claims Act, the Anti-Kickback Statute, and the Stark Law), navigation of regulatory and compliance issues involving the healthcare industry, and defending and pursuing antitrust claims. He can be reached at [email protected]

    Samara Taper

    Haynes and Boone LLP, Dallas, TX

    Samara Taper is a litigation associate at Haynes Boone. Her practice focuses on government investigations and white collar defense. She can be reached at [email protected]

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