Outcome Health to pay $70M to resolve federal fraud investigation

Outcome Health, a digital healthcare advertising company, has agreed to pay $70 million to resolve a criminal fraud investigation in Illinois.

The Chicago-based company admitted that from 2012 to 2017 former executives and employees of the company fraudulently sold ads to clients, the Department of Justice (DOJ) said Wednesday. According to the DOJ, the fraud scheme targeted the company's clients, lenders and investors.

Federal investigators said Outcome overbilled clients by more than $6 million in 2015, and by more than $25 million in 2016, according to the non-prosecution agreement (PDF).

Outcome, formerly called ContextMedia, was one of Chicago’s high-flying startups, pulling in $500 million during its first round of funding in May 2017 and attracting high-profile investors like Goldman Sachs and Google’s parent company, Alphabet. The company was valued at $5.5 billion at the time.

The company installs TVs and tablets in physicians' offices and sells targeted ads to pharmaceutical companies.

Outcome's headcount once topped 600, according to Crain's Chicago Business, and the company had plans at one point to add 2,000 new jobs by 2022. Outcome's troubles, which started in 2017, led to nearly 200 employees, or a third of the company, taking voluntary buyouts.

RELATED: Investors sue Outcome Health for fraud, breach of contract months after $487M investment

What happened

In October 2017, The Wall Street Journal reported that the company inflated data to pharmaceutical companies to boost ad sales. Things continued to unravel when the company was sued by investors who wanted to get their nearly $500 million investment back, claiming the company provided investors with fraudulent data and financial reports.

The investors ultimately dropped the suit and reached an agreement with the founders—CEO Rishi Shah and President Shradha Agarwal—in which they reinvested money in the company. Shah and Agarwal stepped down from their positions and day-to-day management.

While the company has settled with the DOJ, the federal investigation is ongoing. Outcome agreed to cooperate with the federal government's ongoing investigation of individuals. The FBI and the Federal Deposit Insurance Corp.'s Office of Inspector General are investigating the case.

In a statement, Outcome said the settlement with the DOJ resolves "past misconduct of the company’s founders and select former employees, all of whom are no longer affiliated with the company."

"Over the past two years, Outcome Health implemented a comprehensive overhaul of our compliance and campaign-reporting policies," Matt McNally, CEO at Outcome, said in a statement. "These actions included engaging third-party auditors to ensure reporting accuracy, investing in partnerships with organizations like BPA Worldwide to validate key performance indicators, overhauling internal controls to improve the reliability of reporting, and forming an all-new leadership team, myself included.”

As part of the resolution with the DOJ, Outcome will compensate the pharmaceutical client victims in the amount of $70 million, approximately $65.5 million of which has already been made through a combination of cash payments and in-kind services, according to the DOJ press release.

The company also will set aside an additional $4.5 million to compensate any additional pharmaceutical clients who have not yet been compensated.

The non-prosecution agreement does not require the company to provide compensation to lenders and investors who were victims of Outcome’s scheme, however, because many of those lenders and investors are now the companies’ new owners, the DOJ said.

"Outcome’s payment of $70 million is an appropriate resolution for the corporate entity given the misconduct of executives and employees acting on its behalf,” Assistant U.S. Attorney Brian Hayes, chief of the criminal division for the Northern District of Illinois, said in a statement. "This resolution demonstrates that there are significant consequences for businesses whose executives and employees engage in fraud.” 

RELATED: Health technology startup Outcome Health reportedly misled advertisers with inflated data

As part of the resolution with the government, Outcome admitted that as a result of its practice of selling clients inventory it did not have, it under-delivered on its advertising campaigns. To conceal the under-deliveries, Outcome employees at the time falsified affidavits and proofs of performance to make it appear the company was delivering advertising content to the number of screens in its clients’ contracts, according to the DOJ.

Outcome executives and employees also inflated patient engagement metrics regarding how frequently patients engaged with its devices and altered studies presented to clients to make it appear that the campaigns were more effective than they actually were, Outcome admitted.

Outcome not only overcharged clients, it also overstated its revenue for 2015 and 2016. "The company’s outside auditor signed off on the 2015 and 2016 revenue numbers because executives and employees at the time fabricated data to conceal the under-deliveries from the auditor," according to the DOJ.

Outcome's fraud enabled it to borrow $485 million and raise $487.5 million in equity, the company admitted.

RELATED: Outcome Health valued at $5.5B with first financing round of $500M

The DOJ's press release does not mention Shah or Agarwal, but the non-prosecution agreement between the government and the company does mention an Executive A who founded the company.

"Executive B started working at Outcome in 2008, and was later branded as Outcome’s co-founder, along with Executive A. Executive A was the CEO of Outcome from 2006 until he stepped down in January 2018," the DOJ agreement says.

"Executive B served in various roles, including Chief Strategy Officer and, more recently, President until she stepped down in January 2018," according to the document.

The DOJ alleges that the fraud committed at Outcome between 2012 and 2017 was under the direction of Executives A and B and two other unnamed executives, including the under-delivery of advertising to its clients and concealing the fraud from auditors.