But even though the College of American Pathologists (CAP) and nine other organizations signed a December 12 stakeholder letter to leaders of key House and Senate committees urging passage of legislation that would enable some regulation of LDTs, the VALID Act was ultimately omitted from the year-end omnibus spending bill (H.R. 2617).
That may be due to pressure from organizations representing clinical laboratories and pathologists which lobbied hard against the bill.
Responding to criticism of its stance on FDA oversight of LDTs, in a May 2022 open letter posted on the organization’s website, anatomic pathologist and CAP president Emily Volk, MD, said “we at the CAP have an honest difference of opinion with some other respected laboratory organizations. … We believe the VALID Act is the only viable piece of legislation addressing the LDT issue. … the VALID Act contains many provisions that are similar to policy the CAP has advocated for regarding the regulation of laboratory tests since 2009. Importantly, the current version includes explicit protections for pathologists and our ability to practice medicine without infringement from the Food and Drug Administration (FDA).” (Photo copyright: College of American Pathologists.)
Organizations on Both Sides Brought Pressure to Bear on Legislators
The AAMC and AMP were especially influential, Bucshon told ProPublica. In addition to spending hefty sums on lobbying, AMP urged its members to contact legislators directly and provided talking points, ProPublica reported.
“The academic medical centers and big medical centers are in every state,” Bucshon said. As major employers in many locales, they have “a pretty big voice,” he added.
Discussing CAP’s reasoning behind its support of the VALID Act in a May 26 open letter and podcast, CAP president Emily Volk, MD, said the Valid Act “creates a risk-based system of oversight utilizing three tiers—low, moderate and high risk—in order to target the attention of the FDA oversight.”
While acknowledging that it had room for improvement, she lauded the bill’s three-tier risk-based system, in which tests deemed to have the greatest risks would receive the highest level of scrutiny.
She also noted that the bill exempts existing LDTs from an FDA premarket review “unless there is a safety concern for patients.” It would also exempt “low-volume tests, modified tests, manual interpretation tests, and humanitarian tests,” she wrote.
In addition, the bill would “direct the FDA not to create regulations that are duplicative of regulation under CLIA,” she noted, and “would require the FDA to conduct public hearings on LDT oversight.”
Pros and Cons of the VALID Act
One concern raised by opponents relates to how the VALID Act addressed user fees paid by clinical laboratories to fund FDA compliance activities. But Volk wrote that any specific fees “would need to be approved by Congress in a future FDA user fee authorization bill after years of public input.”
During the May 2022 podcast, Volk also cast CAP’s support as a matter of recognizing political realities.
“We understand that support for FDA oversight of laboratory-developed tests or IVCTs is present on both sides of the aisle and in both houses of Congress,” she said. “In fact, it enjoys wide support among very influential patient advocacy groups.” These groups “are very sophisticated in their understanding of the issues with laboratory-developed tests, and they do have the ear of Congress. There are many in the laboratory community that believe the VALID Act goes too far, but I can tell you that many of these patient groups don’t believe it goes far enough and are actively pushing for even more restrictive paradigms.”
Also urging passage of the bill were former FDA commissioners Scott Gottlieb, MD, and Mark B. McClellan, MD, PhD. In a Dec. 5 opinion piece for STAT, they noted that “diagnostic technologies have undergone considerable advances in recent decades, owing to innovation in fields like genomics, proteomics, and data science.” However, they wrote, laws governing FDA oversight “have not kept pace,” placing the agency in a position of regulating tests based on where they are made—in a medical laboratory or by a manufacturer—instead of their “distinctive complexity or potential risks.”
In their May 22 letter, opponents of the legislation outlined broad areas of concern. They contended that it would create “an onerous and complex system that would radically alter the way that laboratory testing is regulated to the detriment of patient care.” And even though existing tests would be largely exempted from oversight, “the utility of these tests would diminish over time as the VALID Act puts overly restrictive constraints on how they can be modified.”
CLIA Regulation of LDTs also Under Scrutiny
The provision to avoid duplication with the Clinical Laboratory Improvement Amendments (CLIA) program—which currently has some regulatory oversight of LDTs and IVCTs—is “insufficient,” opponents added, “especially when other aspects of the legislation call for requirements and activities that lead to duplicative and unnecessary regulatory burden.”
Opponents to the VALID Act also argued that the definitions of high-, medium-, and low-risk test categories lacked clarity, stating that “the newly created definition of moderate risk appears to overlap with the definition of high risk.”
The opponents also took issue with the degree of discretion that the bill grants to the US Secretary of Health and Human Services. This will create “an unpredictable regulatory process and ambiguities in the significance of the policy,” they wrote, while urging the Senate committee to “narrow the discretion so that stakeholders may better evaluate and understand the implications of this legislation.”
Decades ago, clinical laboratory researchers were allowed to develop assays in tandem with clinicians that were intended to provide accurate diagnoses, earlier detection of disease, and help guide selection of therapies. Since the 1990s, however, an industry of investor-funded laboratory companies have brought proprietary LDTs to the national market. Many recognize that this falls outside the government’s original intent for encouragement of laboratory-developed tests to begin with.
Healthcare attorneys advise medical laboratory leaders to ensure staff understand difference between EKRA and other federal fraud laws, such as the Anti-kickback Statute
More than four years have passed since Congress passed the law and yet the Eliminating Kickbacks in Recovery Act of 2018 (EKRA) continues to cause anxiety and confusion. In particular are the differences in the safe harbors between the federal Anti-Kickback Statute (AKS) and Stark Law versus EKRA. This creates uncertainty among clinical laboratory leaders as they try to understand how these disparate federal laws affect business referrals for medical testing.
According to a news alert from Tampa Bay, Florida-based law firm, Holland and Knight, “EKRA was enacted as part of comprehensive legislation designed to address the opioid crisis and fraudulent practices occurring in the sober home industry.” However, “In the four years since EKRA’s enactment, US Department of Justice (DOJ) enforcement actions have broadened EKRA’s scope beyond reducing fraud in the addiction treatment industry to include all clinical laboratory activities, including COVID-19 testing.”
It is important that medical laboratory leaders understand this law. New cases are showing up and it would be wise for clinical laboratory managers to review their EKRA/AKS/Stark Law compliance with their legal counsels.
“Keeping in mind that [EKRA is] a criminal statute, clinical laboratories need to take steps to demonstrate that they’re not intending to break the law,” said attorney David Gee, a partner at Davis Wright Tremaine, in an exclusive interview with The Dark Report. “[Lab leaders should] think about what they can do to make their sales compensation program avoid the things the government has had such a problem with, even if they’re not sure exactly how to compensate under the language of EKRA or how they’re supposed to develop a useful incentive compensation plan when they can’t pay commissions.” David Gee will be speaking about laboratory regulations and compliance at the upcoming Executive War College in New Orleans on April 25-26, 2023. (Photo copyright: Davis Wright Tremaine.)
How Does EKRA Affect Clinical Laboratories?
The federal EKRA statute—originally enacted to address healthcare fraud in addiction treatment facilities—was “expansively drafted to also apply to clinical laboratories,” according to New York-based law firm, Epstein Becker and Green. As such, EKRA “applies to improper referrals for any ‘service,’ regardless of the payor. … public as well as private insurance plans, and even self-pay patients, fall within the reach of the statute.”
In “Revised Stark Law, Anti-Kickback Statute Rules Are Good News for Labs,” Dark Daily’s sister publication The Dark Report noted that EKRA creates criminal penalties for any individual who solicits or receives any remuneration for referring a patient to a recovery home, clinical treatment facility, or clinical laboratory, or who pays or offers any remuneration to induce a referral.
According to Epstein Becker and Green, EKRA:
Applies to clinical laboratories, not just toxicology labs.
Has relevance to all payers: Medicare, Medicaid, private insurance plans, and self-pay.
Is a criminal statute with “extreme penalties” such as 10 years in prison and $200,000 fine per occurrence.
Exceptions are not concurrent with AKS.
Areas being scrutinized include COVID-19 testing, toxicology, allergy, cardiac, and genetic tests.
“For many clinical laboratories, a single enforcement action could have a disastrous effect on their business. And unlike other healthcare fraud and abuse statutes, such as the AKA, exceptions are very limited,” Epstein Becker and Green legal experts noted.
“Therefore, a lab could potentially find itself protected under an AKS safe harbor and still potentially be in violation of EKRA,” they continued. “The US Department of Health and Human Services (HHS) and the DOJ have not provided any clarity regarding this statute (EKRA). Without this much needed guidance clinical laboratories have been left wondering what they need to do to avoid liability.”
EKRA versus AKS and Stark Law
HHS compared AKS and the Stark Law (but not EKRA) by noting on its website prohibition, penalties, exceptions, and applicable federal healthcare programs for each federal law:
AKS has criminal fines of up to $25,000 per violation and up to a five-year prison term, as well as civil penalties.
The Stark Law has civil penalties only.
AKS prohibits anyone from “offering, paying, soliciting, or receiving anything of value to induce or reward referrals or generate federal healthcare program business.”
The Stark Law addresses referrals from physicians and prohibits the doctors “from referring Medicare patients for designated health services to an entity with which the physician has a financial relationship.”
EKRA is more restrictive than AKS, as it prohibits some compensation that AKS allows, healthcare attorney Emily Johnson of McDonald Hopkins in Chicago told The Dark Report.
Recent enforcement actions may help lab leaders better understand EKRA’s reach. According to Holland and Knight:
Malena Lepetich of Belle Isle, Louisiana, owner and CEO of MedLogic LLC in Baton Rouge, was indicted in a $15 million healthcare fraud scheme for “allegedly offering to pay kickbacks for COVID-19 specimens and respiratory pathogen testing.”
In S-G Labs Hawaii, LLC v. Graves, a federal court concluded the laboratory recruiter’s contract “did not violate EKRA because the recruiter was not referring individual patients but rather marketing to doctors. According to the court, EKRA only prohibits percentage-based compensation to marketers based on direct patient referrals.”
In another federal case, United States v. Mark Schena, the court’s rule on prohibition of direct and indirect referrals of patients to clinical labs sent a strong signal “that EKRA most likely prohibits clinical laboratories from paying their marketers percentage-based compensation, regardless of whether the marketer targets doctors or prospective patients.”
What can medical laboratory leaders do to ensure compliance with the EKRA law?
In EKRA Compliance, Law and Regulations for 2023, Dallas law firm Oberheiden P.C., advised clinical laboratories (as well as recovery homes and clinical treatment facilities) to have EKRA policies and procedure in place, and to reach out to staff (employed and contracted) to build awareness of statute prohibitions and risks of non-compliance.
One other useful resource for clinical laboratory executives and pathologists with management oversight of their labs’ marketing and sales programs is the upcoming Executive War College on Diagnostics, Clinical Laboratory, and Pathology Management. The conference takes place on April 25-26, 2023, at the Hyatt Regency in New Orleans. A panel of attorneys with deep experience in lab law and compliance will discuss issues associated with EKRA, the Anti-Kickback Statutes, and the Stark self-referral law.
Either way, if Medicare is allowed to run dry, millions of patients (most among the elderly) may be unable to receive critical care, including clinical laboratory testing and pathology.
“The Hospital Insurance (HI) Trust Fund, or Medicare Part A, which helps pay for services such as inpatient hospital care, will be able to pay scheduled benefits until 2028, two years later than reported last year. At that time, the fund’s reserves will become depleted,” the 2022 Medicare Trustees Report states, which draws its data from a US Treasury Department fact sheet.
“The progressively worse imbalance of expenditures versus revenues will exhaust the trust funds in 2028,” Weems wrote, adding that one of two payment scenarios will likely happen:
Medicare may pay bills on a “discounted basis,” which means if expected revenues are 85% of expenditures, then Medicare would pay bills at 85% of the amount, or
Medicare may put bills aside until it has the money from tax dollars.
“And then (Medicare would) pay them on a first-in-first-out basis,” Weems wrote, adding, “At the time of insolvency, that current Administration would have to pick its poison.”
For hospital clinical laboratory leaders and pathologists who provide care to Medicare beneficiaries, neither approach would be satisfactory. And a solution for funding Medicare Part A beyond 2028 needs to be crafted to ensure hospitals are paid on a timely basis.
But what should it be?
“Medicare’s two-part insurance and trust fund design may have made sense in the mid-1960s, but it no longer does. Modern coverage is not bifurcated in this way and imposing stricter financial control over facility spending than clinician and outpatient services can distort the policy-making process, and thus also patient care,” wrote James Capretta (above), Senior Fellow at the American Enterprise Institute, in his analysis of the 2022 Medicare trustees report, published in Health Affairs. If Medicare truly does run out of money, millions of elderly people may lose access to critical healthcare services, including clinical laboratory testing. (Photo copyright: American Enterprise Institute.)
Medicare Funding Scheme is ‘Flawed’
According to the Kaiser Family Foundation (KFF), the amount of money Medicare needs to cover the deficit between 2028 through 2031 (the period studied in the trustees’ projections), is estimated at $247.4 billion.
Medicare is supported by employers and employees, who each pay a 1.45% tax on earnings, KFF explained. Balancing the fund supporting Medicare Part A requires either an increase of .70% of taxable payroll or a 15% reduction in benefits, KFF estimated.
“Medicare will not cease to operate if assets are fully depleted, because revenue will continue flowing into the fund from payroll taxes and other sources,” KFF noted.
However, the current set-up of Medicare trust funds (one for Part A and another funded differently for Medicare Part B, which includes outpatient coverage such as medical laboratory tests), is “flawed” and needs updating to enable reform.
Furthermore, Medicare faces challenges brought on by an aging population and increasing enrollees.
Baby Boomers (born between 1946 and 1964) will qualify for Medicare by 2030 and potentially leave the workforce, depleting their payroll tax contributions to the program, KFF pointed out.
Also, Medicare reform needs to reflect the impact of the COVID-19 pandemic. An analysis of 114,000 COVID-19-associated deaths from May to August 2020 showed 78% of the people were age 65 and older, according to the federal Centers for Disease Control and Prevention (CDC).
“Medicare beneficiaries whose deaths were identified as related to COVID-19 had costs that were much higher than the average Medicare beneficiary prior to the onset of the pandemic,” the 2022 Medicare Trustees report noted.
“The surviving Medicare population had lower morbidity, on average, reducing costs by an estimated 1.5% in 2020 and 2.9% in 2021. This morbidity effect is expected to continue over the next few years but is assumed to decrease over time before ending in 2028.”
In his 4Sight Health article, Weems suggested that the Medicare reform deadline was bumped to 2028 from 2026 due to fewer people living and able to access Medicare in coming years.
“Let’s honor those seniors by using the time for real Medicare reform,” Weems wrote.
Hospital laboratory managers and pathologists will want to keep a watchful eye on Congress’ handling of the 2022 Medicare Trustees Report. Though it is unlikely the nation’s decision-makers will act on the report during an election year, pressure to develop a solution to meet the funding needs of Medicare Part A hospital care beyond 2028 will start to build in 2023.
Balwani’s lawyers opted not to have their client testify in his own defense and called only two witnesses, while Holmes’ defense team offered jurors the opportunity to hear her testimony
Elizabeth Holmes and Ramesh “Sunny” Balwani dreamed of revolutionizing the clinical laboratory blood-testing industry with their now defunct Theranos Edison device, which they claimed could perform multiple tests with a single finger prick of blood. Instead, they became the rare Silicon Valley executives to be convicted of fraud.
On July 7, ex-COO/President Balwani was convicted on all 12 counts of wire fraud and conspiracy charges in his federal fraud trial. Holmes, Theranos’ founder/CEO and former romantic partner to Balwani, avoided convictions six months ago in January on seven of the 11 counts she faced for her role in exaggerating the accuracy and reliability of the company’s Edison blood-testing device and providing false financial claims to investors.
“Once again, a jury has determined that the fraud at Theranos reached the level of criminal conspiracy,” said FBI Special Agent in Charge Sean Ragan in a press release posted on Twitter following the verdict. “The FBI has spent years investigating this investment fraud scheme with our partners at USPIS and the FDA Office of Criminal Investigations. Lies, deceit, and criminal actions cannot replace innovation and success.”
Ramesh “Sunny” Balwani (above center), former COO/President of Theranos, is shown leaving the federal courthouse in San Jose, Calif., on July 7 after he was found guilty on all 12 counts of fraud, a verdict more severe than ex-CEO and Theranos founder Elizabeth Holmes received in January for similar charges. Clinical laboratory directors and medical laboratory scientists have been closely monitoring both trails. (Photo copyright: Jim Wilson/The New York Times.)
Balwani’s Age and Experience May Have Worked Against Him
Michael Weinstein, JD, a former Justice Department prosecutor who is the Chair of White-collar Litigation at Cole Schotz, told The New York Times that Balwani’s age and his trial date—three months after Holmes’ conviction—worked against him. Balwani, 57, could not present himself as a young and inexperienced tech executive easily manipulated by those around him, as Holmes, 38, had attempted to do.
“Holmes could come off as a bit naïve, and [her defense team] tried to sell that,” Weinstein said of the former Stanford University dropout who founded Theranos in 2003 when she was 19.
In Holmes’ case the verdict was mixed, with jurors acquitting her of the patient fraud counts but unable to reach a decision on some of the investor fraud counts, Bloomberg reported.
Mr. Balwani, however, “came off as more of an experienced technology executive,” Weinstein added.
Weinstein pointed out that because the government’s case against Balwani mirrored its case against Holmes, prosecutors had time to refine their strategy before making a second appearance inside US District Court Judge Edward Davila’s San Jose courtroom.
“The streamlined presentation, the streamlined evidence, the streamlined narrative—all was beneficial for the government in the end,” he said.
Ever since opening arguments in March, Balwani’s legal team portrayed him to the jurors as a loyal partner who believed in Theranos’ technology and “put his money where his mouth is,” the Guardian noted.
Prosecutors, however, made the case that Balwani had a hands-on role in running the lab and was the source of Theranos’ overinflated financial projections.
Balwani invested about $15 million in the startup between 2009 and 2011 and never cashed in when his stake grew to $500 million. That money evaporated when Theranos collapsed.
In all, 24 witnesses testified against Balwani. He was ultimately convicted of all 12 counts he faced:
Two counts of conspiring with Holmes,
Six counts of defrauding investors, and
Four counts of patient fraud.
Major Differences in Trial Testimony
The Balwani trial made headlines due to COVID-19 pandemic related delays, but otherwise did not produce the news-generating moments that punctuated Holmes’ nearly four-month-long court appearance. Thirty-two witnesses appeared at the Holmes trial, including Secretary of Defense James Mattis, according to CNN.
Another significant difference in the two trials was that Holmes testified in her own defense. Holmes spent nearly 24 hours on the stand, CNN Business noted at that time, during which she cast the blame for Theranos’ failings on those around her, including Balwani.
ABC NewsRebecca Jarvis, host and creator of the podcast “The Dropout,” believes Balwani’s decision not to testify worked against him.
“[The abuse claims] did not come up at his trial, but during [Holmes’] seven days of testimony, they were a big portion of what she talked about,” Jarvis said in an ABC News “Start Here” podcast. “The biggest difference is that he didn’t take the stand to say, ‘I didn’t do this,’ or … raise his own objections to the claims against him.
“You think about a jury who is supposed to know nothing about any of [the defendant’s] backstory, and they’re shown these things like … case pictures of [Holmes] so much younger than [Balwani], supposedly having to rely on him for his expertise,” Jarvis added.
“You can imagine where the jury may have found that presentation more sympathetic than Sunny Balwani who had experience,” she said.
Text May Have Been Balwani’s Undoing
Balwani’s defense team called only two witnesses:
A naturopathic physician who used Theranos’ blood-testing lab, and
A technical consultant who Balwani’s legal team hired to assess the accessibility of patient data in Theranos’ Laboratory Information System (LIS), which the defense argued could have provided evidence of the accuracy of Theranos’ test results.
“This verdict also signals the jurors did not buy Balwani’s highly speculative argument that the database Theranos lost in 2018 would have proven his innocence,” Park said.
“We are obviously disappointed with the verdicts,” he said. “We plan to study and consider all of Mr. Balwani’s options including an appeal.”
Following the verdicts, Judge Davila raised Balwani’s bail to $750,000 and set a Nov. 15 sentencing date. Holmes is scheduled to be sentenced Sept. 26.
Balwani’s own words may have been his final undoing. During closing arguments, prosecutors again showed jurors a text message Balwani sent to Holmes in 2015, The New York Times reported.
“I am responsible for everything at Theranos,” he wrote. “All have been my decisions too.”
Clinical laboratory directors and medical laboratory scientists will no doubt continue to monitor the fallout from these two extraordinary federal fraud trials. There’s still much to learn about CLIA-laboratory director responsibility and how the government plans to prevent future lab testing fraud from taking place.
Theranos ex-COO and President Balwani will be sentenced on Nov. 15, while former CEO Elizabeth Holmes has her sentencing on Sept. 26
Observers within the clinical laboratory industry likely were not surprised to hear that Ramesh “Sunny” Balwani was convicted on Thursday of 12 counts of fraud related to his work at disgraced medical laboratory testing startup Theranos.
After all, Balwani’s conviction comes six months after a similar verdict for Elizabeth Holmes, the former founder and CEO of Theranos. The two were romantically involved during their time at the company.
A jury in San Jose deliberated for several days before reaching the guilty verdict against Balwani, 57, on a dozen counts of wire fraud and conspiracy to commit wire fraud. He is the former chief operating officer and president at the Theranos. Holmes was convicted of four counts in January.
“The jury concluded that Balwani perpetrated frauds on unsuspecting patients,” Stephanie Hinds, US Attorney for the Northern District of California, told the press after the verdict.
Balwani didn’t provide any comments to the two dozen or so reporters and photographers who followed him as he left the courthouse.
Ramesh “Sunny” Balwani leaves the courthouse after being convicted on 12 counts of fraud during his Theranos trial.
Balwani, Like Holmes, Faces 20 Years Behind Bars
Balwani will be sentenced on Nov. 15, reported NBC Bay Area. Holmes is scheduled to be sentenced on Sept. 26. She and Balwani each face up to 20 years in prison on each count, although a judge could allow those terms to run concurrently for each individual.
At the core of Balwani’s trial was whether he knew that Theranos allegedly defrauded patients and investors about its proprietary Edison blood-testing machine. The government argued that Balwani realized the Edison analyzer did not work and that he should have informed investors about the poor accuracy of the equipment.
In the end, the jury did not believe Balwani’s contention that he was merely an investor who let Holmes steer business matters at Theranos. Jurors saw text messages between Balwani and Holmes that defied that defense strategy.
For example, in one text to Holmes, Balwani wrote, “I am responsible for everything at Theranos,” NBC Bay Area reported during the trial.
A profile on Balwani published in March 2022 by The Cut, a website affiliated with New York magazine, also pushed the idea he had influence. “While many questions remain about Balwani’s role in the Theranos scheme, he definitely wielded a lot of power at the company,” The Cut reported.
Balwani and Holmes were indicted by federal prosecutors in June 2018. The indictments followed a three-year investigation by the government, which occurred after a blockbuster series of articles by the Wall Street Journal that detailed complaints from whistleblowers who formerly worked at Theranos.
Balwani never took the stand in his own defense. However, during closing arguments, his attorney, Jeffrey Coopersmith, JD, said Holmes’ charm influenced Balwani, much like it did Theranos investors.
“There’s no reason why he wouldn’t have seen the exact same thing: the charisma, the drive, the vision, the goal to change diagnostic testing. And he bought into that vision,” Coopersmith told the jury, as reported by Bloomberg. “He bought into that vision not only with his time but also with his own money,” investing $4.6 million in Theranos.
Compared to Holmes’ trial, which attracted huge media attention from around the world, Balwani’s proceedings occurred to much less hype and fanfare, given he was not as well known as Holmes to the general public and press.
—Scott Wallask
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