Last Thursday, blood testing company Theranos announced the worst possible outcome of its difficult dealings with federal regulators: The Centers for Medicare & Medicaid Services (CMS) had issued sanctions that would, among other things, revoke the company’s license to operate its laboratory in Newark, California and prohibiting its high-profile CEO and founder Elizabeth Holmes from owning, operating, or directing a laboratory for at least two years.
The CMS’ massive blow shouldn’t come as a surprise to Theranos; For months, the company was dogged by reports that its decency testing device — which reportedly runs hundreds of tests using just drops rather than vials of blood — was malfunctioning. Theranos was forced to invalidate or correct years of test results, and its valuation fell from $9 billion to $800 million. In the CMS’s 33-page letter to the company notifying it of the sanctions, the agency outlined extensive problems in the California lab and the company’s inexplicable failure to resolve them. And the company also faces criminal investigations from the Department of Justice and the Securities and Exchange Commission over whether it misled investors and regulators, plus at least eight lawsuits from former clients, each seeking class action status for fake tests.
Still, last week’s news raises the question of what will happen to the company’s other clinical lab in Scottsdale, Arizona, where 90 percent of the company’s tests are processed. So far, that lab has passed regulatory requirements, and the company said it will remain open for now. But if Theranos intends to keep it going, it needs to split from Holmes before sanctions take effect on September 5.
In updated statements and information on its website, Theranos seemed to offer a clear, if not bold, answer: Holmes will stay with Theranos, even if it means leaving his lab in Arizona and focusing on his machines instead. “The clinical laboratory is just one of Theranos’ many capabilities to provide access to highly reliable, affordable and actionable healthcare information, and the company will continue to fulfill its mission under the leadership of its founder and CEO, Elizabeth Holmes,” the company said.
But for now, closing the Arizona lab may just be the back-up plan; Theranos left open the question of whether it would appeal the CMS sanctions. If that is the case, the sanctions will be suspended until the administrative court issues a ruling. That process could take months, during which the lab in Arizona could remain open under Holmes’s direction. However, if The Wall Street Journal notes, appeals almost never succeed.
In its updated statement, Theranos said it is “engaging with CMS to better understand the findings” and “will work non-stop to resolve the identified issues.” In a rare instance of transparency, Theranos posted a copy of the CMS Sanctions Letter (PDF) on its website. In the past, the company has repeatedly rejected calls for data and open discussions about its technology and testing. But the letter offers a deeper insight into the biotech’s troubled operation, plus its strained relationship with the CMS.
The 33-page letter is the latest in a months-long back-and-forth between the two. In March, the CMS wrote to Theranos that it planned to impose sanctions after extensive problems it documented during an investigation last year. Those issues include issues with quality control, employee training, testing protocols, and correct patient reporting. But the CMS gave Theranos a chance to defend itself, saying it could argue point by point why it didn’t deserve the punishment. The deadline for that defense was March 28.
Theranos responded with a letter dated March 28, then a revised letter dated April 1, and then three addenda dated April 7, 18 and 26, the CMS noted. And according to the agency’s responses, those responses were a jumble of incomplete answers and conflicting information.
In the sanction letter, the CMS listed rebuttals to Theranos’ arguments, noting over and over that for each “[t]The lab’s claim of compliance is not credible and proof of correction is not acceptable.” In one case, the agency noted that corrected patient report files were sloppy, with many missing documents, such as receipts from reports that blood test results had been corrected. In another proficiency testing (PT) — which compared the lab’s results to those of other CMS-approved labs — Theranos answered only one of six questions.
In several other cases, the CMS noted that Theranos said it stopped using certain tests and machines on September 17, 2015, but other documents and information the company provided suggested they used them after that date. “These contradictory statements in the submissions raise doubts about the reliability of the information contained in the submissions,” the agency noted on several occasions.
In one case, Theranos apparently attempted to argue that an employee was competent to perform tests after she was “informally trained” because “when asked if she [TP31] thought this training was enough, she said it was. Further, because this employee and others were considered competent without proper training documentation, Theranos argued that “there is no potential impact to the patient.” The CMS noted that the laboratory director is supposed to assess competence and concluded: “The laboratory has again failed to adequately address this deficiency and provide acceptable evidence of correction…”
All in all, the agency concluded it would impose the sanctions because the lab failed to resolve issues and continued to put patients in “immediate danger”.
“It is important to note that the CMS review covered the operations of the company’s Newark lab, not the technologies,” Theranos said in its statement. The company also noted that Holmes will still present data on its own blood testing equipment at the American Association for Clinical Chemistry conference in Philadelphia on Aug. 1.