On March 5, the Federal Trade Commission (FTC), Department of Justice Antitrust Division, and Department of Health and Human Services announced a joint public inquiry (opens a new window) into the increasing involvement and control of private equity in healthcare.
According to the announcement, the inquiry’s focus includes:
Private equity firms that have sold off healthcare portfolio companies after poor performance.
Leveraged buyouts, in which healthcare portfolio companies are heavily leveraged to meet the costs of acquisition, stripped of nonessential costs and services and then quickly sold for profit.
Roll-ups, in which one entity’s acquisition proceeds are used to fund more acquisitions (the FTC chair referred to these as “serial acquisitions”).
Potential conflicts of interest where private equity firms take ownership in rival firms competing in the same industry.
Transparency into healthcare portfolio company ownership, sparked by studies asserting that over 40% of emergency rooms are private equity-owned.
Potential violations of the False Claims Act (FCA) surrounding Medicare/Medicaid and other alleged billing fraud.
Many of the above topics have been on the Securities and Exchange Commission’s (SEC) radar for years. However, this marks the first time these three agencies have been brought together to take a deeper look into private equity’s involvement in healthcare. This signals an intense focus around how such transactions have impacted patients, employers, payers and insurers.
One of the most concerning parts of the FTC’s involvement is that, under the Federal Trade Commission Act, a person can be held individually liable not just when the individual has participated directly in deceptive trade practices, but also where the individual had the authority to control such behavior. Recently, the FTC has been pushing the bounds of the latter in pursuing FCA violations, asserting that certain private equity firms have had control over the allegedly deceptive billing practices of their portfolio companies and are therefore responsible.
Past experience has shown that generalized regulatory “inquiries” can quickly turn into investigations and enforcement actions targeting specific individuals. The costs to defend these inquiries, investigations and suits can be significant, often climbing beyond $20 million.
To ensure optimal coverage, it is critical that private equity firms review their management and professional liability policies as well as those of their portfolio companies, and ensure they are coordinated. Specifically, firms should collaborate with their insurance advisors, ensuring policies facilitate prompt reimbursement of defense costs. Moreover, firms and their brokers should meticulously scrutinize terms and conditions, especially those concerning fines and penalties, and conduct a comprehensive analysis of coverage breadth for individual directors and officers.
At the same time, should a claim or inquiry occur, it is best practice to promptly inform your broker without delay. A seasoned private equity broker can offer invaluable guidance on the optimal timing for reporting matters under your insurance program, help you navigate defense counsel issues and serve as your strongest advocate when dealing with insurers.
Lockton’s team of experienced private equity insurance brokers and claims advocates is available to help review your current insurance program and provide recommendations to maximize claims recovery.
