By: Christopher Parrella, Esq., CPC, CHC, CPCO
Parrella Health Law, Boston, Ma.
A Health Care Provider Defense and Compliance Firm

Massachusetts has taken a groundbreaking step in healthcare compliance by enacting House Bill 5159. This legislation amends the Massachusetts False Claims Act (FCA), introducing a significant new disclosure obligation for investors in healthcare entities. Investors who knowingly fail to disclose FCA violations by their investment entities within 60 days risk being held personally liable. Here’s what this means for healthcare investors and what steps they should take to comply with this novel legal requirement.

What Does House Bill 5159 Require?

The amendment imposes liability on any investor with a defined “ownership or investment interest” exceeding 10% in a healthcare entity if they are aware of the entity’s FCA violations and fail to disclose the violation within 60 days of identification. Unlike the federal FCA, which primarily targets direct actors in fraudulent activities, this law extends liability to investors who might not be directly involved in the entity’s operations.

The definition of “ownership or investment interest” is broad, encompassing:

1. Direct or indirect equity ownership exceeding 10%.
2. Investments by groups raising or returning capital to develop or dispose of specified assets.
3. Interests in pooled funds managed by partnerships that employ investment strategies for returns.

While this reflects the state’s intent to hold all stakeholders accountable for fraudulent behavior, it creates a gray area for defining the knowledge threshold, particularly the phrases “knows about” and “identifying.”

Key Challenges for Investors

This amendment raises several challenges for healthcare investors:

• Defining Knowledge: Determining when knowledge of a violation becomes actionable is complex. As seen with the Affordable Care Act’s similar requirement regarding overpayments, questions linger about what constitutes “identification” of a violation.
• Operational Involvement: Investors, especially private equity firms, may face liability even if their operational involvement is limited, provided they are deemed to “know” about a violation.
• Compliance Programs: Unlike healthcare providers who often have robust compliance frameworks, many investors may lack mechanisms to monitor FCA compliance actively.

How This Aligns with Federal Trends

This move by Massachusetts aligns with federal efforts to hold private equity firms accountable for healthcare fraud. The Department of Justice (DOJ) has resolved multiple FCA cases involving private equity firms, often alleging that these firms knew of and failed to address misconduct within their portfolio companies. However, Massachusetts’ approach is more aggressive, requiring proactive disclosure of violations even in the absence of direct operational involvement.

Recommendations for Healthcare Investors

Investors in Massachusetts healthcare companies should act swiftly to mitigate potential liability:

1. Enhance Oversight: Implement or strengthen compliance programs to identify and address FCA violations early.
2. Establish Disclosure Protocols: Develop clear procedures for investigating potential violations and ensuring timely disclosure.
3. Educate Leadership: Train investment managers and leadership teams on FCA obligations under Massachusetts law.
4. Consult Legal Counsel: Work closely with compliance and legal advisors to interpret and meet the disclosure requirements.
5. Monitor Regulatory Guidance: Stay informed about potential clarifications or updates from Massachusetts regarding the interpretation of “knows about” and “identifying.”

What This Means for the Industry

Massachusetts’ amendments to its FCA represent a significant shift in the regulatory landscape, holding investors accountable for the integrity of their healthcare investments. While the law’s broader scope introduces new compliance challenges, it also signals the state’s commitment to combating fraud in its healthcare system. Investors should view this as an opportunity to reinforce compliance programs, ensuring alignment with both state and federal expectations.

If you have any questions or need assistance navigating the implications of this legislation, Parrella Health Law can help. Contact us at 857.328.0382 or reach out to Chris directly at cparrella@parrellahealthlaw.com.