By Christopher Hewitt and Jayne Juvan

The United States government recently sent shock waves through the private equity industry by charging a private equity firm for its portfolio company’s alleged health care fraud. The case, United States ex rel. Medrano v. Diabetic Care RX LLC d/b/a Patient Care America, involves alleged illegal conduct involved with pharmacy compounding, or the practice of creating customized medicines for individual patients, by the portfolio company. In a startling twist, the government also sued the private equity sponsor that owned a controlling interest in the portfolio company.

While the government’s allegations are egregious, private equity firms that invest in health care companies should take note of the government’s interest in pursuing not only enrolled health care providers, but also their owners, for perceived misconduct. Even though the litigation is in the early stages, private equity firms can glean several lessons from the complaint.

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