Past laboratory investigations offer clues in ongoing Theranos saga

In 2008, a new clinical laboratory had its sights set on changing the healthcare landscape. Equipped with a state-of-the art blood test and an up-and-coming CEO, the laboratory quickly grabbed the attention of the medical community, adding $383 million in annual revenues by 2013 and hiring more than 800 employees.

The lab's decline may have been even faster than its ascent. The Department of Justice soon discovered the lab was paying physicians approximately $20 for each test they ordered. By 2015, the company had paid $50 million to settle the charges against it and later filed for bankruptcy.

The name of that laboratory was Health Diagnostic Laboratory, and its precipitous downfall coincided with the government's increased focus on the inner workings of laboratories, particularly new start-ups like HDL that came roaring into the market.

So far, the first half of that story has certain parallels to Theranos, another prominent blood-testing startup that is now facing its own set of federal investigations.

Like HDL, Theranos rose to prominence quickly and powerfully. As of this year it was valued at $9 billion thanks to financial backing from two former senators and three former cabinet secretaries, according to the Wall Street Journal. The company's founder, Elizabeth Holmes, was universally applauded for her innovative blood-testing technology that could save Medicare and Medicaid more than $200 billion over the next decade, according to Wired.

Over the last six months, the tides have turned dramatically. After a WSJ investigation questioned the accuracy of Edison, the company's landmark technology, a Centers for Medicare & Medicaid Services investigation revealed deficient practices posed an "immediate jeopardy to patient health and safety."

Now Theranos is facing an investigation by the Securities and Exchange Commission as to whether the company deceived investors, the Food and Drug Administration has criticized its quality control, plus the DOJ has launched its own criminal investigation looking into how Theranos described its technology and whether it misled government officials.

That last one is particularly notable. In past years, concerns within the laboratory industry have revolved almost exclusively around kickbacks. In 2014, the Office of Inspector General (OIG) found that spending for clinical laboratory services rose 29 percent between 2005 and 2010, and 80 percent of labs were linked to questionable billing metrics. In a coinciding special fraud alert, the OIG warned that providing payments to physicians to collect, process and package specimens in excess of fair market value would be a violation of federal laws, which was quickly followed by an advisory opinion urging labs not to enter into exclusive agreements with physicians. 

Since then, a steady stream of doctors have been charged in connection to a massive scheme engineered by Biodiagnostic Laboratory Services that disguised payments as lease or consulting agreements. Last year, Millennium Laboratories paid $256 million to settle federal fraud charges it billed for unnecessary drug screens.

At this point, we know very little about the ongoing Theranos investigations, but the DOJ's involvement raises a slew of interesting questions. Although kickbacks don't appear to be an issue, the notion that Theranos misled government officials leads to the obvious false claims implications. If investigators find that the company knew its technology was ineffective and inaccurate, or the company falsely marketed a worthless product, could there be a False Claims Act case in the making?

It's all speculation at this point, but these are the unspoken implications of what has become a tangled knot of compliance questions and criminal investigations. At the same time, it shouldn't be a huge surprise that the DOJ took an interest in the prominent laboratory. Although the case is noticeably absent of the usual kickback-infused schemes that have inundated the industry over the last several years, it's easy to see how those cases have paved the way, allowing federal investigators to become more attuned to industry practices.

Maybe Theranos will weather the storm and adequately address the deficiencies addressed by CMS. Maybe the DOJ will come back empty-handed, with no evidence of criminal wrongdoing. Maybe these are just the growing pains of an innovative company attempting to "disrupt" the status quo.

On the other hand, maybe not. On Monday, the WSJ obtained the lightly redacted letter sent by CMS to Holmes in January outlining several proposed sanctions, including suspending Medicare payments to Theranos and a two-year ban for Holmes.

If you've followed the recent plotlines of other prominent new laboratories, you might be tempted to guess what happens next. For now, all we can do is wait and see.  - Evan (@HealthPayer)

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