Wall Street Journal obtained copy of letter sent by CMS to Theranos, dated March 18, 2016, that notified its executives of sanctions that include revocation of Theranos’ CLIA license and a process by which the medical lab company can appeal

Theranos, the high-profile clinical laboratory company, had a day of reckoning yesterday. That’s when The Wall Street Journal (WSJ) published a story revealing that Theranos was sent a letter by the federal Centers for Medicare & Medicaid Services (CMS) providing notice of sanctions.

In a letter to Theranos executives, CMS said it is prepared to:

• revoke the company’s CLIA certificate;

• impose a fine of $10,000 per day;

• suspend and cancel the lab’s approval to receive Medicare payments; and

• impose a two-year ban on the owner, operator, and laboratory director for owning or operating a clinical laboratory.

Dated March 18, the letter is addressed to Sunil Dhawan, MD, Director; Elizabeth Holmes, Owner; and Ramesh Balwani, Owner.

Ramesh “Sunny” Balwani, President/COO/Owner (left); Elizabeth Holmes, CEO/Owner (center); and, Sunil Dhawan, MD

Ramesh “Sunny” Balwani, President/COO/Owner (left); Elizabeth Holmes, CEO/Owner (center); and, Sunil Dhawan, MD (right), Medical Director at the time of the CLIA recertification and complaint survey completed in December, 2015, at Theranos’ CLIA lab facility in Newark, California. (Photo copyrights in order of above: ABCNews.com; USA Today; Center for Dermatology Clinical Research Inc.)

Lab Sanctions Are Most Severe That CMS Can Apply Under CLIA Law

Pathologists and medical laboratory professionals will recognize that these are among the most severe sanctions that CMS can impose on a laboratory under the Clinical Laboratory Improvement Amendments (CLIA). Further, clinical pathologists who currently serve as medical directors of CLIA laboratories will find it useful to read the entire letter sent to Theranos on March 18, as it describes how CMS viewed the responses that Theranos provided following a January 25, 2016, letter from CMS describing deficiencies identified during an inspection of the Theranos CLIA lab facility in Newark, California.

In an article on the proposed sanctions, The Wall Street Journal reported that the ban on the owners and operators would affect Holmes and Balwani. Journal reporters John Carreyrou and Christopher Weaver reported that the letter has not been released to the public and that they reviewed a copy. Theranos had 10 days to respond to CMS by providing evidence of why the sanctions should not be imposed, they reported. “The company has responded, and CMS is reviewing the response, according to a person familiar with the matter,” the WSJ reported.

Theranos Will Work with CMS to Address Federal Agency’s Concerns

Brooke Buchanan, Vice President and spokeswoman for Theranos, told Carreyrou and Weaver that CMS had not yet imposed sanctions on the company’s Newark lab. The company hopes that CMS will not impose the sanctions, she added. “But if they do, we will work with CMS to address all of their concerns,” she told Carreyrou and Weaver.

The March 18 letter states that CMS is aware that Dhawan was the medical director when CMS inspected the laboratory last fall and found the deficiencies in question. CMS knows that Dhawan has since left the company, the letter said. “However, because Dr. Dhawan was the laboratory director at the time of CLIA recertification and complaint survey concluded on Dec. 23, 2015, we will continue to hold Dr. Dhawan responsible for all CLIA deficiencies cited,” the six-page CMS letter said.

One fact of interest to pathologists is that Dhawan, who was the medical director of the Theranos medical laboratory in Newark, is a dermatologist. Public information about him indicates that he is board-certified in internal medicine and in dermatology.

CLIA Inspection of Theranos Medical Laboratory in Newark, California

CMS conducted a CLIA recertification and complaint survey at Theranos, Inc., in November. “The onsite portion of the survey was completed on November 20, 2015; however, the survey concluded with the receipt of critical information received from the laboratory on December 23, 2015,” the March 18 letter said. “Based on this survey, Theranos was found to be out of compliance with the following five CLIA Condition-level requirements:

• D5024: 42 C.F.R. section 493.1215 Condition: Hematology;

• D5400: 42 C.F.R. section 493.1250 Condition: Analytic systems;

• D6076: 42 C.F.R. section 493.1441 Condition: Laboratories performing high complexity testing; laboratory director;

• D6108: 42 C.F.R. section 493.1447 Condition: Laboratories performing high complexity testing; technical supervisor; and

• D6168: 42 C.F.R. section 493.1487 Condition: Laboratories performing high complexity testing; testing personnel.

CMS gave Theranos 10 calendar days to respond to the January 25 letter with “a credible allegation of compliance and acceptable evidence of correction for the cited deficiencies,” the March 18 letter said. “On February 4, 2016, a Theranos representative requested an extension until February 12, 2016, to provide a submission, which CMS granted.” CMS received the response on February 12, the letter said. That response was inadequate, CMS said.

Here is how CMS explained in the March 18 letter that the response from Theranos on Feb 12 was inadequate:

“After careful review, we have determined that the laboratory’s submission does not constitute a credible allegation of compliance and acceptable evidence of correction for the deficiencies cited during the CLIA recertification and complaint survey completed December 23, 2015, and does not demonstrate that the laboratory has come into Condition-level compliance and abated immediate jeopardy. In general, we find that the statements made in the allegation of compliance and evidence of correction: 1) failed to adequately address the deficient practice cited; 2) are incomplete and failed to meet the criteria of acceptable evidence of correction; 3) do not ensure sustained compliance; and 4) show a lack of understanding of the CLIA requirements.”

‘Immediate Jeopardy’ to Patients Was Mentioned in CMS Letter to Theranos

One serious issue in the CMS letter that was mentioned by WSJ reporters Carreyrou and Weaver, but which did not get full coverage in other press accounts, was about the potential for patient harm from the specific deficiencies identified during the CMS inspection of the Theranos lab facility in Newark.

In the March 18 letter, CMS wrote to Theranos that: “After careful review, we have determined that the laboratory’s submission does not constitute a credible allegation of compliance and acceptable evidence of correction for the deficiencies cited during the CLIA recertification and complaint survey completed on December 23, 2016, and does not demonstrate that the laboratory has come into Condition-level compliance and abated immediate jeopardy.” [Italics by Dark Daily.]

The concern about patient jeopardy was identified by CMS in the January 25 letter and referred to hematology testing, including prothrombin time tests used by physicians to determine the proper level of the blood thinner warfarin to prescribe to patients.

Theranos has said publicly that it does not believe any patients were affected by the issues identified during the CMS inspection of the Newark laboratory.

Theranos Continues to Operate Its CLIA Medical Laboratory in Scottsdale

Also, Theranos continues to operate its CLIA laboratory in Scottsdale, Arizona. It is believed that this medical laboratory facility is primarily using venous blood specimens, conventional lab instruments, and conventional test methodologies.

One angle to this story that the media has yet to address is how the deficiencies identified during the CMS inspection of the Theranos CLIA lab in Newark might be addressing issues with how Theranos used capillary-blood specimens and its proprietary analyzers to perform laboratory-developed tests (LDTs) where the results were reported to physicians and patients. During the past two years, Theranos has regularly stated publicly that it was submitting data to the Food and Drug Administration (FDA) on the performance of its LDTs in order to have the agency review the performance of these assays. Theranos did get FDA clearance for its Herpes Simplex 1 test in the summer of 2015.

FDA Oversight of In Vitro Diagnostics Involves Similar Lab Operational Issues

Thus, the FDA could be another ticking time bomb for the executives at Theranos. That is pure speculation at this moment. However, pathologists and executives at in vitro (IVD) companies know that many of the deficiencies identified by CMS during its inspection of the Theranos lab facility in Newark have comparable elements in FDA regulations governing IVD technologies and assays. Thus, a parallel story could be unfolding between the FDA and Theranos and this story has yet to become public knowledge.

What the clinical laboratory industry will be watching is how Theranos handles the appeals process with CMS. There are not many examples of a prominent clinical laboratory company that was issued an “intent to impose sanctions” letter by CMS. As noted in the WSJ story, the appeals process in a matter like this can take months.

CMS Suspended Medicare License of Specialty Laboratories in 2002

Probably the closest episode involving the Medicare license of a prominent laboratory company happened in 2002. That was when federal laboratory regulators suspended the Medicare and Medicaid license of Specialty Laboratories following a series of inspections that uncovered various deficiencies in the operation of the laboratory. At that time, our sister publication, The Dark Report, reported that CMS had rejected the Plan of Correction submitted by Specialty Laboratories. It took six months for Specialty Laboratories to regain its Medicare License. (See The Dark Report, “State, Federal Regulators Target Specialty Labs,” April 22, 2002.)

If there is one fact that is certain, it is that medical laboratory professionals will be closely watching how Theranos responds to these regulatory challenges. After all, this is the company that emerged as a media darling in the fall of 2013 and its founder and CEO, Elizabeth Holmes, enjoyed cover girl status by major media outlets as they trumpeted the message that Theranos fully intended to disrupt the clinical laboratory industry with its innovative business plan and diagnostic technologies.

—Joseph Burns

Related Information:

January 25, 2016, CMS Letter to Sunil Dhawan, MD, Director Theranos CLIA Laboratory, Newark, California

March 18, 2016, CMS Letter to Sunil Dhawan, MD; Elizabeth Holmes; and, Ramesh Balwani

Regulators Propose Banning Theranos Founder Elizabeth Holmes for at Least Two Years

Theranos Under Fire as U.S. Threatens Crippling Sanctions

Theranos Founder Elizabeth Holmes Is Facing a Ban by Regulators

Theranos’ Future Looks Bloody Grim as Feds Threaten a Shutdown

US Government Wants to Ban Theranos’ Elizabeth Holmes from Operating a Lab for Two Years

Theranos CEO Elizabeth Holmes Faces Possible Two-Year Ban from Blood-Testing Industry

State, Federal Regulators Target Specialty Labs: Specialty Laboratories’ CLIA-88 License “Yanked” by CMS Laboratory Enforcers

For Embattled Medical Laboratory Company Theranos, Bad News Keeps on Coming After Two Federal Inspections Show Problems in Certain Lab Practices

The Dark Report Theranos coverage