Theranos Settles With Medicare, Arizona in Bid to Stanch Bleeding

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By Dana A. Elfin

Blood-testing company Theranos Inc. will exit the clinical laboratory business for two years and pay Arizona consumers $4.65 million for faulty blood tests in settlements with the Centers for Medicare & Medicaid Services (CMS) and the state of Arizona.

The settlements, which resolve all outstanding legal and regulatory proceedings between Theranos, the CMS and the Arizona attorney general’s office, represent an end to just two of the multiple battles the company has been fighting in recent years.

Federal prosecutors and the Securities and Exchange Commission have been investigating whether Theranos misled consumers about the validity of its blood tests, and the company is also facing suits by patients, investors and former business partner Walgreens Boots Alliance Inc.

Medicare Reduces Penalty

The settlement with the CMS also reduces the government’s civil monetary penalty against the company to $30,000 and withdraws the CMS’s earlier revocation of the company’s certificates under the Clinical Laboratory Improvement Amendments (CLIA).

The CMS had told Theranos in a February 2016 letter about possible sanctions for the blood test problems that the company could face a civil penalty of $10,000 for each day of noncompliance accruing starting five days from the date sanctions were imposed and continuing until the lab gets into compliance. The agency didn’t specify a penalty amount when it imposed sanctions in July 2016.

The $30,000 civil monetary penalty CMS assessed against Theranos isn’t the whole picture, Andrew B. Wachler with Wachler & Associates, P.C. in Royal Oak, Mich., told Bloomberg BNA April 19.

Wachler & Associates is a health-care law firm with experience in all areas of laboratory regulation and compliance.

Ability to Pay May Be Factor

“While I don’t have any independent knowledge of Theranos’s financial situation, it could be that there’s an ability to pay issue that was taken into consideration by CMS in settling the case,” Wachler said.

Under the separate settlement with Arizona, in addition to paying millions of dollars in consumer restitution, Theranos agreed to pay the Arizona attorney general’s office $200,000 in civil penalties and $25,000 in attorneys’ fees and other legal costs.

The approximately $4.9 million amount of the Arizona settlement, the other litigation pending against the company and the number of Theranos’s potential creditors likely “all went into the mix” in the CMS settlement, Wachler said.

With the two-year clinical laboratory participation ban against Theranos in place, the CMS “likely felt they accomplished what they wanted to accomplish through the settlement,” Wachler said.

Quality Problems Cited in 2015

The accuracy of Theranos’s blood testing was called into question after tens of thousands of patient results had to be corrected or voided entirely. Theranos had claimed it could run multiple blood tests on just drops of blood at a fraction of the usual price, but regulators found the company repeatedly failed to meet quality standards.

In 2015, CMS staff inspecting Theranos’s lab in Newark, Calif., found multiple failures to meet quality-control standards, including not keeping freezers at the temperatures required by manufacturers; lack of proper documentation and missing signatures on paperwork; and unqualified personnel.

Conditions at the facility posed “immediate jeopardy to patient health and safety,” the CMS said in a letter to the company.

Theranos now plans to focus on obtaining regulatory approval for miniaturized, automated blood testing platforms, the Palo Alto, Calif.-based company said in an April 17 statement announcing the CMS settlement.

Bloomberg BNA contacted the CMS for a copy of the settlement. But the records aren’t releasable and would have to be obtained through a Freedom of Information Act request, Venus Uttchin, lieutenant commander for the Public Health Service at the CMS’s Division of Survey and Certification in San Francisco, said in an email.

Deal With Arizona

Arizona Attorney General Mark Brnovich (R) alleged Theranos’s advertisements misrepresented the method, accuracy and reliability of its blood testing in violation of the Arizona Consumer Fraud Act. The state also alleged the company was out of compliance with CLIA.

Under the settlement with the Arizona attorney general’s office, Theranos will reimburse Arizona residents for all amounts they paid for Theranos blood testing services from 2013 to 2016.

“Everyone who paid for a test will receive a full refund, period,” Brnovich said in an April 18 statement. “This is a great result and a clear message that Arizona’s consumer protection laws will be vigorously enforced.”

Theranos also confirmed it wouldn’t own or operate a CLIA-licensed laboratory in Arizona for two years. The company will also be subject to civil penalties of up to $25,000 per violation of the consent judgment in the future.

Including all consumers who had tests over that time period demonstrates the company’s commitment to resolving the issue amicably on behalf of Arizonans and its collaboration with state officials, Theranos said in an April 18 statement.

To contact the reporter on this story: Dana A. Elfin in Washington at delfin@bna.com

To contact the editor responsible for this story: Randy Kubetin at RKubetin@bna.com

For More Information

Arizona's final complaint against Theranos is at http://src.bna.com/n43.

The state's final consent decree with Theranos is at http://src.bna.com/n42.

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