[co-author:Ellie Webb (Summer Associate)]

Key Points

• Imposes felony criminal penalties, civil penalties and compensation clawbacks that extend to investors and executives in certain cases where patient injury occurs.
• Excludes participation in federal health care programs for entities that sell assets to or use assets as collateral for a loan made to a real estate investment trust.
• Revokes favorable tax treatment for REITs for all investors in health care properties, as well as current provisions allowing influence on facility operations.
• Creates new disclosure and transparency requirements.

Senators Ed Markey (D-MA.) and Elizabeth Warren (D-MA.) unveiled “The Corporate Crimes Against Health Care Act of 2024” on June 11, 2024, which seeks to create new civil and criminal penalties for health care investors who are responsible for “triggering events” that result in patient injuries at health care facilities.¹ Senators Markey and Warren have been outspoken with their concerns that private equity investment and ownership are incompatible with quality patient care. A hearing on private equity ownership of health care entities was held in April of 2024 at the Massachusetts State House, where Senators Warren and Markey emphasized that their aim was to hold private equity firms and executives accountable for adverse patient outcomes and to prevent the exploitation of such investments for pecuniary gain at the expense of patient care.

The Senators’ proposed legislation, which has the purported purpose of preventing “exploitive private equity practices”, garnered attention for proposing new criminal and civil penalties to punish executives (including executives of financial investors) that “contribute to a triggering event.” Specifically, the criminal provision would impose a prison sentence of one to six years if an executive contributes to an event that results in the death or injury of a patient under the target facility’s care. Because the proposed prison sentence exceeds one year, the crime would be classified as a felony, which can lead to many practical consequences lasting long after the sentence is completed.²

The civil provisions in the bill would empower the Department of Justice (DOJ) and—building on a growing trend of expanding their enforcement role—state attorneys general to claw back “unjust enrichment” under certain circumstances. The clawback would cover compensation in the 10-year period preceding the triggering event paid to private equity firms and their executives as well as from portfolio company executives in the wake of a triggering event. This clawback provision would cover salaries, bonuses, options, profit interests, advisory or management fees, profits from the sale of assets, severance pay and golden parachute payments. The legislation would also authorize civil monetary penalties up to five times (5x) the amount clawed back.

The Corporate Crimes Against Health Care Act enumerates five specific actions by a health care corporation that has previously undergone a change in control transaction that would be categorized as “triggering events”:

• Failure to pay salaries and wages of 25% or more of the workforce for 90 days.
• Closure.
• Failure to pay rent for more than 90 days.
• Default on a loan payment for more than 90 days.
• Bankruptcy.

The enumeration of these specific “triggering events” appear to remove other activities from purview of this bill, even if one could argue that such activities led to patient injury. The legislation would apply to any director, officer or control person of a private equity firm or target firm, past or present. It would also extend to shareholders or joint venture partners, or to a private fund of any kind, meaning that it would apply as a blanket across the whole private equity industry.

Clawbacks are limited to triggering events where one of the following four “aggravating circumstances” occurs in the 10-year period before or after the event:

• Compensation is obtained through a dividend recapitalization, a sale-leaseback of real estate or equipment or a related person transaction.
• An executive of the investment firm or the health care portfolio company is implicated in a white-collar crime during the course of employment (whether past or present) with the investment firm or health care portfolio company.
• The investment firm charges the target firm accelerated monitoring fees or fees for services not rendered.
• The health care portfolio company’s expenses (without regard to taxes or interest) exceed its revenue at the time of, or as a result of, the compensation being paid.

Thus, the legislation would impact common business transactions, such as dividend recapitalization, sale-leasebacks, monitoring fees and others in certain circumstances, if the government can show that somehow these transactions resulted in patient injury.³

Under the bill, a party challenging a penalty may assert an affirmative defense by presenting “clear and convincing evidence” that the firm could not have prevented the relevant triggering event. The legislation neither describes how such a defense would need to be proven, nor how to prove in the negative that such an event was not preventable. That said, based on the bill’s phrasing, it appears that the government first must establish that the party has done something to “contribute to” an enumerated triggering event, and then that the triggering event caused the injury. It is also not clear how much the action must have “contributed to” the “triggering event.” For instance, is 1% causation enough in light of intervening and confounding factors leading to a patient injury? The legislation also does not describe what extent of proof would be required to demonstrate that the “triggering event” in fact or proximately caused the injury, particularly when such events and such injuries often have a number of underlying causes independent of the enumerated “triggering events,” such as physician malpractice, the patient’s own health condition, among others.

Given that the triggering events include major occurrences like a firm filing for bankruptcy, the legislation as phrased seems to attempt to cast a wide net to create liability for any party in ownership or executive involved in that decision, but the limits of this liability are unclear as the bill does not resolve, for example, whether a firm’s executive merely signing off on a bankruptcy filing or an executive entrusting decisions to others within a firm, would be liable.

Impact on REITs and Federal Health Care Program Exclusion

In addition, the legislation would amend the Social Security Act to block any new payments from federal health care programs to entities that sell assets to or use assets as collateral for a loan made to a real estate investment trust (REIT). It is unclear whether this provision would prohibit such entities from submitting and receiving reimbursement from the Medicare or Medicaid program altogether.⁴ Finally, the legislation would repeal a provision of the federal tax code permitting taxable REIT subsidiaries to influence the operations of health care facilities, along with disposing of the 20% pass through deduction for all REIT investors.

Transparency and Disclosure Requirements

The Corporate Crimes Against Health Care Act would introduce new public disclosure requirements for any health care facilities that receive federal funding. Providers would have to report any mergers and acquisitions, changes in control or ownership (including investments by private equity firms) and financial data, which includes debt and debt-to-earnings ratios.

Finally, the legislation would mandate that the Department of Health and Human Services (HHS) Office of the Inspector General research and issue a report on the “harms of corporatization in healthcare.” This report would include a study of profit-driven and revenue-maximizing practices in health care, including overbilling, up-coding, inflated patient risk or patient severity scores, executive compensation structures that are designed to bolster revenue or profits, evidence of staff reductions or tech-driven patient care, alterations of services to maximize revenue, efforts by insurers to restrict, delay, deny or discourage access to services, or efforts by insurers or firms to skirt state laws prohibiting the corporate practice of medicine. The report is also required to include an analysis of how these types of behaviors have impacted patients, providers, Medicare and Medicaid programs and beneficiaries, and insurance policies and plans. Finally, the report would be required to include an estimate of any amount of money garnered from such activities by investors “and other entities,” and an evaluation of the adequacy of federal policies designed to prevent and penalize health care fraud and abuse, including the transparency of health care entities’ financial practices, the enforcement resources of federal agencies and the adequacy of financial and other penalties as deterrents.

Other Efforts to Legislate and Regulate

Senators Warren and Markey’s legislation is not the first time we have seen Congress engage on the issues related to private equity investment in health care, but it is certainly the latest Washington pressure tactic. Earlier this year, Senator Markey solicited feedback on a proposed draft of the Health Over Wealth Act, which also seeks to limit and regulate private investment in health care entities.

The Biden-Harris administration has also been active on related issues. Earlier this year, the DOJ, Federal Trade Commission (FTC) and HHS announced a tri-agency plan to solicit public input on the role of private equity in health care and collaborate across the agencies to locate anticompetitive transactions. To assist patients in making decisions about their care, HHS announced that it would take action to display publicly information about the ownership of hospitals, nursing homes, hospice providers and home health agencies. The agencies also intend to create oversight and guidelines for health care mergers. Also of note, the Centers for Medicare & Medicaid Services issued a final rule, which became effective in January 2024, requiring the disclosure of ownership information on Medicare skilled nursing facilities and Medicaid nursing facilities.

What’s Next

The Corporate Crimes Against Health Care Act faces a long road to enactment, especially against the ongoing backdrop of a divided Congress in which relatively few bills have cleared both the House and Senate. Yet, Congressional and Administration interest in the issue of transparency in health care, including with respect to private equity, will continue to be an area of focus. As further evidence of this dynamic, just this month, at a Senate Aging Committee hearing on price transparency, Senator Warren used the hearing as an opportunity to highlight the Corporate Crimes Against Health Care Act and ongoing concerns about private equity in health care. The ultimate fate of the proposed legislation may also depend in part on the ongoing tri-agency investigation and other proposed reforms. Nonetheless, private equity and health care stakeholders must continue to watch closely to see how Congress and the Executive Branch study, review and react to private equity investment in health care and seek to employ their respective tools to further shape this evolving landscape.

_{^{1 The Act is a proposed amendment to 18 U.S. Code § 31—the general federal statute on crimes and criminal procedure. It is worth noting that the Act is not an amendment to any regulations related to the United States Department of Health and Human Services but is instead placed in the context of federal criminal fraud and embezzlement.}}

_{^{2 See 18 U.S. Code § 3156(3).}}

_{^{3 Of note, the “aggravating factor” of having been “implicated” in any alleged white-collar crime (not even related to the “triggering event”) would appear to be subject to significant legal challenge and scrutiny. Among other things, “implicated” is not defined in the bill and would potentially trigger a clawback for an executive who was merely alleged to have engaged in wrongdoing in wholly unrelated matters.}}

_{^{4 This proposal would amend 42 U.S. Code § 1320a-7(a), which mandates the exclusion of entities and individuals from participation in any “Federal health care program.” This provision currently applies to individuals convicted of patient abuse, health program-related crimes, and controlled substances. 42 U.S.C. § 1320a–7b(f) defines “Federal health care programs” as “(1) any plan or program that provides health benefits, whether directly, through insurance, or otherwise, which is funded directly, in whole or in part, by the United States Government (other than the health insurance program under chapter 89 of title 5); or (2) any State health care program.” The Corporate Crimes Against Health Care Act itself does not enumerate what sources of funding it is targeting to exclude.}}