Not legal advice; educational only. This is a general diligence framework, not transaction or legal advice for any specific deal.
If your target bills Medicare, Medicaid, a federal contract, or a federal grant, the False Claims Act (FCA) is a diligence category of its own, because treble damages plus per-claim penalties can turn a billing problem into an exposure that exceeds the purchase price, and because the worst version of it can be sitting under seal where you cannot see it. This is the working checklist. It composes with the rest of the section: the screen does the data work, and Don’t Inherit the Fraud explains the successor-liability stakes.
1. Screen the target’s billing yourself
| Step | What you are looking for |
|---|---|
| Run the peer-relative outlier screen on the target’s Medicare/Medicaid billing | The same intensity anomalies a data-miner relator would flag |
| Join the target’s providers to the LEIE (List of Excluded Individuals/Entities, providers barred from billing federal health programs) and SAM (System for Award Management, the federal contractor registration and exclusion system) exclusion lists | Billing tied to excluded or debarred individuals/entities |
| Map ownership, controllers, and reassignment-of-benefits chains | Shell structures, undisclosed affiliations, foreign ownership |
| Check growth and concentration | Revenue ramping off near-zero, or over-concentration in one lucrative code |
Do not read a clean screen as exoneration or a noisy screen as guilt, every flag has an innocent explanation that records can confirm or kill. The screen tells you where to spend the next, more expensive hours.
2. Probe for an investigation a litigation search won’t show
- Has the target received a Civil Investigative Demand, grand-jury subpoena, or OIG (the HHS, or Department of Health and Human Services, Office of Inspector General)/agency audit?
- Are there unresolved internal whistleblower or compliance complaints, hotline reports, or related employee departures?
- Has the target made any voluntary self-disclosure to CMS (the Centers for Medicare & Medicaid Services), an OIG, or a contracting agency?
- How mature is the compliance program, real controls and corrective-action history, or a binder on a shelf? The ACFE (Association of Certified Fraud Examiners) data is blunt here: tips, not audits, surface most fraud, so the presence (or suppression) of an internal reporting culture is itself a signal.
3. Structure the deal for the risk you cannot eliminate
- FCA-specific representations and warranties, compliance with program rules, no pending or threatened government investigations, no known qui tam matters.
- Escrow / holdback sized to a realistic exposure (treble damages + per-claim penalties), not just to ordinary indemnities.
- Survival period long enough to outlast a typical multi-year seal, with indemnification that reaches pre-closing conduct.
- Representation-and-warranty insurance, reading the government-investigation and known-issue exclusions carefully, they often carve out exactly this risk.
- Deal structure itself: an asset purchase with careful liability exclusion is generally better-positioned than a stock or merger deal, though courts can still apply successor theories, counsel should drive this.
4. Do not buy fresh liability after closing
The most avoidable mistake is operational, not contractual. If diligence surfaces a billing practice that may be non-compliant, stop it at or before closing. Continuing to bill the suspect conduct after you have learned of it can give the acquirer its own “knowing” exposure under the False Claims Act, converting an inherited problem into one you created. When in doubt, a timely voluntary self-disclosure is usually far cheaper than a relator and the government finding it first.
The bottom line
A government-payment target is underwritable, but only if False Claims Act exposure is a named workstream rather than an afterthought. Screen the data, probe for the hidden investigation, structure for the inherited risk, and never keep billing a problem you have already found. The buyer who runs this checklist before signing is the one who does not learn about the relator from a press release. The same skill that lets an outsider find the fraud is the one that keeps a buyer from inheriting it.
The math that makes this a named workstream
The reason False Claims Act exposure earns its own diligence category, rather than folding into general litigation risk, is the arithmetic. Liability is not the government’s loss; it is three times the loss, plus a per-claim penalty that stacks across every invoice, which means a billing problem measured in the hundreds of thousands can resolve in the tens of millions. On a government-payment target, that math can exceed the equity you are paying.
| The math behind the risk | Figure |
|---|---|
| Damages multiplier | Treble, 3× the government’s loss |
| Civil penalty, per false claim | \$14,308, \$28,619 (2025 adjustment) |
| Relator’s share (how motivated whistleblowers are) | 15 to 30% of the recovery |
| FY2025 FCA recoveries (record) | >\$6.8 billion |
| FY2025 health-care share | >\$5.7 billion |
Sources: Sidley, FCA penalty figures; 31 U.S.C. § 3730(d); DOJ FY2025 recoveries.
Those last two rows are the demand signal: a record \$6.8 billion recovered in a single year, most of it from health care, with whistleblowers behind the overwhelming majority. The people who build the outlier screens are getting better and more numerous, and they are pointing those screens at exactly the kind of target you are underwriting. Pricing the risk in is no longer optional.
By Noah Green CPA CFE, for Sheepdog Prosperity Partners. Educational only; not legal advice and not a substitute for transaction counsel.
Primary sources: 31 U.S.C. § 3729 · 31 U.S.C. § 3730 · DOJ, The False Claims Act · HHS-OIG Exclusions (LEIE) · ACFE, Report to the Nations