Revisions to the Health Over Wealth Act, a bill aimed at increasing transparency for private equity (PE) firms, introduced July 25, 2024, have removed assisted living facilities from its list of covered entities. However, the updated legislation still presents challenges for the assisted living sector due to tax code changes related to real estate investment trusts (REITs).

The bill aims to provide greater transparency for private equity firms and for-profit owners of healthcare entities such as nursing homes, hospitals and mental health facilities. The initial draft included assisted living communities, prompting backlash from the senior living industry, which argued that inclusion would deter investment and limit access to assisted living.

While the latest version of the bill excludes assisted living facilities, concerns remain due to the tax implications for REITs, as highlighted by the American Seniors Housing Association. These changes could complicate REIT investments in assisted living communities by reclassifying rent payments from healthcare facilities as nonqualifying REIT income, a definition that includes assisted living under IRS rules.

As this bill plays out in Congress, there are key enforcement and compliance developments that impact private equity funds in healthcare. McGuireWoods partners Mindy Sauter, Mike Elliott, Brett Barnett and Michael Podberesky recently conducted a solution-oriented webinar that highlighted relevant cases regarding the government’s increased interest in compliance diligence in the PE space.

Below are eight key takeaways from the discussion.

1. Recent government actions demonstrate heightened scrutiny of PE firms investing in healthcare. For example, Patient Care America, two of its executives and a PE firm agreed to pay $21 million to resolve a lawsuit alleging violations of the False Claims Act (FCA) through their involvement in a kickback scheme to generate referrals of prescriptions; a PE firm paid $11.5 million to resolve FCA allegations of promotion of drug-device system for unapproved uses to pediatric patients despite having any involvement in the original problematic business practices; and a PE firm and healthcare executives paid $25 million over alleged FCA claims submitted for unlicensed and unsupervised patient care.
2. The government looks for strong facts and direct involvement in problematic conduct when pursuing PE participants. A PE firm may be held liable under the FCA for its portfolio company’s conduct even if the PE firm did not directly control or participate in the conduct.
3. Liability can be based just on knowledge of the business practice, not necessarily on knowledge of the illegality of the practice.
4. The government is increasingly aware of the role PE firms play in the decision-making processes of the healthcare entities in which they invest. It is therefore increasingly willing to proceed with cases despite culpability of the relators and other facts that previously would have presented obstacles for FCA cases.
5. Due diligence is a common way to mitigate risk. While not all potential problems leave a paper trail, documented relationships give access points to identify potential compliance issues, and it is critical to include individuals with in-depth healthcare experience who understand the regulatory issues that surround these relationships on the diligence team.
6. Sales force activities are the No. 1 source of liability. Training, oversight and documentation of marketing activities is key.
7. Companies that fail to put into place strong compliance officers who identify and address potential compliance issues and that fail to control their marketing staff and monitor utilization leave themselves open to enforcement action.
8. In October 2023, Deputy Attorney General Lisa Monaco announced a new safe harbor policy stating that it “is intended to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.”