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Private equity firm hit with record healthcare fraud settlement

On October 14, 2021, the Massachusetts Attorney General’s Office announced a $25 million healthcare fraud settlement against a private equity firm and former executives of the firm’s portfolio company. The settlement is significant because it is the largest healthcare fraud settlement in the country to date against a private equity firm based on the firm’s oversight of its healthcare portfolio company.

The settlement stemmed from a whistleblower lawsuit filed under Massachusetts’ False Claims Act by a former employee of South Bay Mental Health Center, Inc. (“South Bay”), which operates mental health facilities across Massachusetts.

The whistleblower alleged that South Bay, its private equity backer, H.I.G. Growth Partners, LLC and H.I.G. Capital, LLC (“HIG”), as well as the former and current CEOs of South Bay, caused false claims to be submitted to Massachusetts Medicaid for mental health services provided by unlicensed and unsupervised therapists and counselors. The Massachusetts Attorney General’s Office intervened in the case, and in February 2018, entered into a $4 million settlement with South Bay, including a 5-year compliance program requirement including oversight by an independent monitor to ensure South Bay’s future compliance with Massachusetts Medicaid regulations.

After the South Bay settlement, the Massachusetts Attorney General’s Office continued its case against HIG and the South Bay executives, alleging that HIG and the executives knew that South Bay was employing unlicensed therapists and counselors, and that these unlicensed therapists and counselors were providing mental health services without supervision as required by Massachusetts Medicaid regulations.

According to the AG, HIG knew that these violations were widespread and longstanding. The AG’s case against HIG and certain executives in their individual capacity focused on the fact that HIG held the majority of seats on South Bay’s board of directors, that the board was aware of violations involving unlicensed therapists and counselors providing services in an unsupervised manner in violation of applicable law, but failed to adopt recommendations to bring South Bay into compliance with Massachusetts Medicaid regulations. Because of HIG’s control of the board, the AG claimed that HIG caused South Bay to submit false claims for payment to Massachusetts Medicaid.

HIG moved to dismiss the case, arguing that it was not responsible for the alleged regulatory violations committed by its portfolio company. The court denied HIG’s motion in May of 2021, clearing the way for the groundbreaking settlement where HIG agreed to pay $19.95 million and the executives agreed to pay the remaining $5.05 million to finally resolve the case.

This settlement and the government action against HIG is significant in light of government actions and continued interest in private equity investors in regulated industries, in particular health care, and should serve as a warning that the government’s reach may not stop at the portfolio company or even its executives.  Private equity firms and the boards of their portfolio companies should work with qualified regulatory counsel to review operations and internal compliance programs and respond quickly when issues are identified.

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