Judge will decide the restitution Holmes must pay to defrauded Theranos investors at future court date; Ex-COO Ramesh “Sunny” Balwani to be sentenced next month
Clinical laboratory leaders and anatomic pathologists who closely followed the fraud trial of Elizabeth Holmes may have wondered how the Theranos founder and ex-CEO would be punished for her crimes. Now we know.
Late into the four-hour sentencing hearing, Holmes tearfully spoke, according to a twitter post by NBC reporter Scott Budman, who was in the courtroom. “I am devastated by my failings,” Holmes said. “I have felt deep pain for what people went through because I have failed them … To investors, patients, I am sorry.”
Davila ordered Holmes to surrender to authorities on April 27 to begin her time behind bars. She is free until that time. Her upcoming prison term caps off one of the biggest downfalls ever of an American entrepreneur.
Elizabeth Holmes (above), founder and former CEO of Theranos, the now defunct clinical laboratory company, as she enters the federal courthouse in San Jose, Calif., prior to her sentencing on Friday. In January, Holmes was convicted on three counts of wire fraud and one count of conspiracy. Last summer, Theranos’ former CLIA laboratory director, pathologist Adam Rosendorff, MD, expressed remorse over his testimony which led to Holmes’ defense team requesting a new trial. The judge denied that request and allowed the sentencing of Holmes to proceed as scheduled. (Photo copyright: Jim Wilson/The New York Times.)
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Defense Lawyers Plan to Appeal
Dean Johnson, JD, a California criminal defense lawyer, told NBC Bay Area News during live coverage of the hearing on Friday that Holmes’ defense team will appeal her conviction.
“I have no doubt there will be an appeal in this case,” Johnson said.
Judge Edward Davila, who oversaw Holmes’ trial and sentencing hearing in US District Court in San Jose, Calif., estimated that the total loss for Theranos investors was $121 million. Investors had committed funds to support the company’s flawed Edison blood testing technology. A separate restitution hearing for Holmes will be scheduled for a later date.
Beyond the sentencing, Holmes, 38, will be saddled by infamy for the rest of her life, with her past reputation as a charismatic innovator ruined.
“The judge [said] evidence shows Elizabeth Holmes was leader of the company, but not necessarily the leader of the criminal acts,” Budman tweeted. Those words clearly pointed to Balwani, who Holmes’ defense team had painted as exerting control over her and the company.
Prosecutors Sought a Stiffer Sentence for Holmes
Prosecutors had asked Davila to sentence Holmes to 15 years in prison, arguing that her conviction represented “one of the most substantial white collar offenses Silicon Valley or any other district has seen,” according to NBC Bay Area News, which cited court documents. The government also wanted her to pay $803 million in restitution.
Holmes’ defense team, however, wished for no prison time at all, instead asking that Holmes serve time under house arrest. “If a period of confinement is necessary, the defense suggests that a term of 18 months or less, with a subsequent supervised release period that requires community service, will amply meet that charge,” her lawyers wrote in a court filing.
Prior to the sentencing, Davila received 130 letters supporting Holmes and asking for leniency, NPR reported. Among them was a note from William “Billy” Evans, Holmes’ partner.
“If you are to know Liz, it is to know that she is honest, humble, selfless, and kind beyond what most people have ever experienced,” Evans wrote, NPR reported. “Please let her be free.”
Holmes and Evans have a 16-month-old son together, and she is pregnant with the couple’s second child. Her first pregnancy caused her trial to be rescheduled. Prior to last week’s sentencing, some reporters covering the trial speculated that because Holmes was the mother of an infant—and now pregnant again—the judge might be more lenient in sentencing. The 11-year, four-month sentence indicates that the judge was not much influenced by that factor.
Last Minute Pitch for New Trial Failed
Holmes’ legal wranglings continued until the very end.
However, Rosendorff later told the court that he stood by his testimony about problems with Theranos’ blood testing technology.
In denying the request for a new trial, Davila wrote, “The court finds Dr. Rosendorff’s statements under oath to be credible,” according to The Washington Post.
From Teen Founder to Disgraced Entrepreneur
Holmes founded Theranos in 2003 at age 19 while she was attending Stanford University as a chemical engineering major. She dropped out of Stanford as a sophomore to focus on her new company.
Theranos claimed its technology—known as Edison—could perform diagnostics tests using a finger prick and a micro-specimen vial instead of a needle and several Vacutainers of blood. The company said it could return results to patients and clinicians in four hours for about half of the cost of typical lab test fees.
However, the promise of this technology began to unravel in 2015 following an investigative article by The Wall Street Journal that revealed the company ran only a handful of tests using its technology, instead relying on traditional testing for most of its specimen work.
Following The Journal’s exposé, the Centers for Medicare and Medicaid Services (CMS) sanctioned Theranos and Holmes in 2016. Meanwhile, the US Securities and Exchange Commission (SEC) investigated Holmes for raising hundreds of millions from investors by exaggerating or making false statements about the company’s technology and financial performance.
In 2018, the US Department of Justice (DOJ) indicted Holmes and Balwani, and Theranos closed shortly after.
Fortunately, the Theranos saga has not stunted investment in healthcare technology startups. Spending was in the tens of billions in 2021, although that number has dropped this year as the COVID-19 pandemic has waned, according to TechCrunch. Nevertheless, it is safe to assume that healthcare tech investors are scrutinizing scientific data from startups more thoroughly because of the Theranos fraud case.
Meanwhile, the saga of Theranos continues to leave a bad taste in the mouths of many clinical laboratory managers and pathologists. That’s because, during the peak period of adulation and spectacular news coverage about Elizabeth Holmes and her plans to totally disrupt the clinical laboratory industry, hospital and health system CEOs believed that they would be able to downsize their in-house medical laboratories and obtain lab tests from Theranos at savings of 50% or more. Consequently, during the years 2013 through the end of 2015, some hospital lab leaders saw requests for capital investment in their labs denied or delayed.
One example of how hospital CEOs embraced news of Theranos’ blood testing technology took place at the Cleveland Clinic. Elizabeth Holmes did such a good job selling the benefits of the Edison technology, then-CEO, Toby Cosgrove, MD, placed Theranos at number three on its list of top ten medical innovations for 2015.
In later years, Cosgrove admitted that no one at Cleveland Clinic or its pathologists were allowed to examine the analyzers and evaluate the technology.
It was for these reasons that the demise of Theranos was welcomed by many hospital lab administrators and pathologists. The fact that two of Theranos’ senior executives have been convicted of fraud validates many of the serious concerns that medical laboratory professionals had at that time, but which most major news reporters and media ignored and failed to report to the public.
As the number of Hospital at Home programs increase, clinical laboratories will want to develop programs for collecting samples from patients where they live
Shortages of nurses and hospital staff, combined with pressure to lower the cost of care, are encouraging more institutions to implement hospital-in-the-home programs. One such project involves Oregon Health and Science University (OHSU), which last November began a Hospital at Home (HaH) program that enables certain patients to receive hospital-level care in the comfort of their own homes. Clinical laboratories servicing these programs will need to develop specimen collection and testing services in support of these patients.
The OHSU program can provide healthcare for eight patients simultaneously, and it has treated more than 100 patients at home since its inception. Although this number is only a small segment of OHSU’s 576 bed capacity, it does affect the overall healthcare provided by the hospital.
Under the program, basic services, such as the monitoring of vital signs—as well as some clinical laboratory work and routine imaging studies—are performed in the patient’s home. Individuals are transported to OHSU for more complex imaging or other procedures.
“Every patient we have in Hospital at Home is one who is not waiting in the emergency room or a hallway for a bed to become available in the hospital,” said Matthias Merkel, MD, PhD (above), Senior Associate Chief Medical Officer, Capacity Management and Patient Flow at OHSU, in a press release. In the same way clinical laboratories support telehealth programs, medical laboratories will need procedures for collecting specimens and testing patients participating in Hospital at Home programs as well. (Photo copyright: Oregon Health and Science University.)
OHSU’s HaH program utilizes advances in technology to connect at-home patients with physicians and nurses around the clock via a smart tablet. In addition, participating patients receive real-time monitoring and at least two daily in-person visits from nurses and paramedics that have been contracted by OHSU.
“It’s a better experience for patients, plus it increases our system’s capacity to provide care for all the people who need it,” said Darren Malinoski, MD, Chief Clinical Transformation Officer and Professor of Surgery at OHSU in the press release. “It allows us to make good on our promise to take care of the state as best we can.”
The current eligibility criteria to participate in OHSU’s Hospital at Home program include:
Patient must be over the age of 18.
Patient’s primary residence must be within a 25-mile radius of the OHSU hospital.
Inpatient hospitalization is initially required.
Patient must have a diagnosis that can be managed remotely, such as COVID-19, pneumonia, cellulitis, congestive heart failure, urinary tract infections, or pyelonephritis.
Malinoski feels that OHSU’s HaH program is ready to expand. In fact, he is so confident in it he enrolled his own 83-year-old mother as one of its first patients. While undergoing treatment for lung cancer, a routine clinical checkup exposed evidence of toxicity in her blood. Typically, she would have been directly admitted to the hospital for monitoring, but instead she was entered into the HaH program.
“It was unbelievable,” stated Lesley Malinoski in the press release. “I had the feeling of being well taken care of. I was in my own home. I could cook, I could rest—anything I wanted and still have all this care.”
“They didn’t just come in and run out,” she continued. “I felt like a celebrity.”
HaH programs around the country were made possible through a federal waiver granted by the federal Centers for Medicare and Medicaid Services (CMS) in November 2020 in response to the COVID-19 pandemic.
According to the American Hospital Association (AHA), “this care delivery model has been shown to reduce costs, improve outcomes, and enhance the patient experience.”
Prior to the waiver, there were only about two dozen hospitals across the US that had HaH programs. However, as of May 20, 2022, 227 hospitals in 35 states had received a HaH waiver from CMS. This number represents nearly 4% of all hospitals in the country, according to Health Affairs.
In “Two US Studies Show Home-based Hospital Care Lowers Costs while Improving Outcomes and Patient Satisfaction,” we reported on a hospital-based home care program that involved 323 patients at Presbyterian Healthcare Services in Albuquerque, N.M. We surmised that significant growth in the number of patients treated in home-based hospital care programs would directly affect hospital-based clinical laboratories and pathology groups. Among other things, it would reduce the volume of inpatient testing while increasing the number of outpatient/outreach specimens.
And in “Australia’s ‘Hospital in the Home’ Care Model Demonstrates Major Cost Savings and Comparable Patient Outcomes,” Dark Daily saw that wider adoption of that country’s Hospital in the Home (HITH) model of patient care would directly affect pathologists and clinical laboratory managers who worked in Australia’s hospital laboratories. We reported that more HITH patients would increase the need to collect specimens in patient’s homes and transport them to a local clinical laboratory for testing, and that because they are central to the communities they serve, hospital-based medical laboratories would be well-positioned to provide this diagnostic testing.
OHSU’s overall experience with their Hospital at Home program demonstrates that such a model can be a highly successful and cost-effective method of providing patient care. It is probable that in the future, more medical institutions will create similar programs in an effort to effectively serve as many patients as possible while ensuring shorter hospital stays and rendering better healthcare outcomes. As this happens, it will give hospital-based medical laboratories an opportunity to deliver value in home-based patient care.
Organizations representing clinical laboratories and other critical healthcare providers urged Congress to pass the Saving Access to Laboratory Services Act by January 1, 2023, to prevent deep cuts in reimbursements
Lessons about the essential role of clinical laboratories during a pandemic was the central theme in a significant publication released recently. The authors were the presidents of two of the nation’s largest healthcare companies and their goal was to connect the value clinical labs delivered during the COVID-19 pandemic to the financial threat labs face should the Protecting Access to Medicare Act of 2014 (PAMA) fee cuts coming to the Medicare Part B Clinical Laboratory Fee Schedule (CLFS) be implemented.
In an article for RealClearPolicy, healthcare executives William G. Morice II, MD, PhD (left), CEO/President, Mayo Clinic Laboratories, and Matt Sause (right), President of Roche Diagnostics North America wrote, “Without PAMA reform, labs could face drastically reduced reimbursement for commonly performed lab tests for a host of diseases.” (Photo copyrights: Mayo Clinic Laboratories/Roche Diagnostics.)
IVD Companies and Clinical Laboratories Sound Alarm
Morice and Sause warn that—without PAMA reform—the nation’s vital medical laboratories will face “drastically reduced reimbursement” for commonly performed lab tests for diseases, including diabetes, heart disease, and cancer. Reimbursement cuts may cause clinical labs serving “the most vulnerable and homebound” to reduce services or close, they noted.
“To emerge from nearly three years of a pandemic by sending the signal that austerity is our nation’s health policy when it comes to testing and diagnostics would be a significant mistake,” they wrote.
“If the proposed cuts to reimbursements for diagnostic tests are allowed to take effect, disparities caused by challenges with accessing diagnostic tests will likely grow even further,” the authors continued.
However, they added, “The Saving Access to Laboratory Services Act [SALSA] would reform PAMA to require accurate and representative data from all laboratory segments that serve Medicare beneficiaries to be collected to support a commonsense Medicare fee schedule that truly represents the market.”
How PAMA Affects Clinical Laboratory Reimbursements
PAMA, which became law in 2014, was aimed at marrying Medicare Part B Clinical Laboratory Fee Schedule (CLFS) reimbursement rates to rates medical laboratories receive from private payers, the National Independent Laboratory Association (NILA) explained in a news release.
But from the start, in its implementation of the PAMA statute, the methods used by the federal Centers for Medicare and Medicaid Services (CMS) to collect data on lab test prices paid by private payers—which were the basis for calculating new lab test prices for the Medicare program—were criticized by many laboratory professionals and other health experts.
Critics frequently pointed out that several types of clinical laboratories were excluded from reporting their private payer lab test prices. Thus, the data collected and used by CMS did not accurately represent the true range of prices paid for clinical lab tests by private health insurance plans, said lab industry groups.
CMS regulations “exclude most hospital outreach laboratories and physician office laboratories from data collection. This approach depresses median prices and has led to deep cuts to lab reimbursement. Many tests were cut up to 30% in 2018 when the new system went into effect,” the America Association for Clinical Chemistry (AACC) noted in a statement.
On September 8, just weeks after publication of the article authored by Morice and Sause, 26 organizations representing clinical laboratories and diagnostics manufacturers sent a letter to Congressional leaders. In it they described the financial impact on labs due to the current law’s omission of some outreach and physician office lab testing, and they urged the passage of the SALSA legislation.
“The significant under-sampling led to nearly $4 billion in cuts to those labs providing the most commonly ordered test services for Medicare beneficiaries,” the organizations wrote in their letter. “For context, the total CLFS spend for 2020 was only $8 billion.”
Reimbursement Cuts to Lab Tests are Coming if SASLA Not Passed
“Without Congressional action, beginning on Jan. 1, 2023, laboratories will face additional cuts of as much as 15% to some of the most commonly ordered laboratory tests,” the NILA said.
“Enactment of the Saving Access to Laboratory Services Act (SALSA/H.R. 8188/S.4449) is urgently needed this year, to allow laboratories to focus on providing timely, high quality clinical laboratory services for patients, continuing to innovate, and building the infrastructure necessary to protect the public health,” NILA added.
In an editorial she wrote for Clinical Lab Products, titled, “Be a Labvocate: Help Pass SALSA Legislation,” Kristina Martin, Clinical Pathology Operations Director, Department of Pathology, University of Michigan Medicine said, “The SALSA legislation provides a permanent, pragmatic approach to evaluating the CLFS, eliminating huge swings, either positive or negative as it pertains to Medicare reimbursement. It also allows for a more comprehensive evaluation of data to be collected from a broader sampling of laboratory sectors.”
Uses statistical sampling for widely available tests performed by a “representative pool of all clinical laboratory market segments.”
Introduces annual “guardrails” aimed at creating limits for reductions as well as increases in CLFS rates.
Excludes Medicaid managed care rates since they are not true “market rates.”
Gives labs the option to exclude mailed remittances from reporting if less than 10% of claims.
Eases clinical labs’ reporting requirements by changing data collection from three years to four.
Make Your Views Known
Proponents urge Congress to act on SALSA before the end of the year. Clinical laboratory leaders and pathologists who want to express their views on SALSA, test reimbursement, and the importance of access to medical laboratory testing can do so through Stop Lab Cuts.org. The website is sponsored by the ACLA.
Regulators and lawmakers are considering proposed changes to CLIA and PAMA involving medical laboratory services
Clinical laboratories and pathology groups should monitor a series of federal regulatory developments underway this fall. The proposals and documents will potentially affect how lab managers and staff do their jobs and how much Medicare reimbursement medical laboratories receive for certain diagnostic tests next year.
Among the initiatives under consideration are the following:
Below are details about these laboratory-related federal bills and regulatory documents that observant laboratory managers will want to track in the coming months.
“Clinical laboratories need to make sure that they have proper requisitions and documentation for genetic testing that involves telemedicine.” Danielle Tangorre, JD (above), a partner at law firm Robinson and Cole LLP in Albany, NY, told Dark Daily. (Photo copyright: Robinson and Cole LLP.)
CLIA Fee Increases and Testing Personnel Changes
The federal Centers for Medicare and Medicaid Services (CMS) is examining fee and personnel changes for CLIA. Officials from CMS are reviewing public comments on the proposal ahead of publishing a final rule.
Among other changes, the proposal would:
Institute a 20% across-the-board increase on existing fees.
Establish a biennial increase of CLIA fees for follow-up surveys, substantiated complaint surveys, and revised certificates.
Add doctoral, master’s, and bachelor’s degrees in nursing to qualify testing personnel for high and moderate complexity testing.
“The Practitioner does not have sufficient contact with or information from the purported patient to meaningfully assess the medical necessity of the items or services ordered or prescribed.
“The Telemedicine Company compensates the Practitioner based on the volume of items or services ordered or prescribed, which may be characterized to the Practitioner as compensation based on the number of purported medical records that the Practitioner reviewed.
“The Telemedicine Company only furnishes items and services to Federal health care program beneficiaries and does not accept insurance from any other payor.
“The Telemedicine Company does not expect Practitioners (or another Practitioner) to follow up with purported patients nor does it provide Practitioners with the information required to follow up with purported patients (e.g., the Telemedicine Company does not require Practitioners to discuss genetic testing results with each purported patient).”
And more.
“In the telehealth space, the issue the OIG has flagged is that genetic tests are being ordered without patient interaction or with only brief telephonic conversations,” Danielle Tangorre, JD, a partner at law firm Robinson & Cole LLP in Albany, N.Y., told Dark Daily.
New Bill May Eliminate 2023 Medical Laboratory Payment Cuts Under PAMA
Medical labs and pathology groups face payment cuts of up to 15% for 800 lab tests on the Medicare Clinical Lab Fee Schedule (CLFS) on Jan. 1, 2023, as part of PAMA.
The bill proposes to move regulatory oversight of LDTs from CLIA to the federal Food and Drug Administration (FDA). Champions of the bill argue that FDA regulation is needed for in vitro clinical tests (IVCTs) because they are similar to medical devices and bring with them patient safety concerns.
The bill seemed ready for a Senate vote over the summer but stalled. On Sept. 30, Congress passed a short-term resolution to keep the federal government funded. During negotiation, the VALID Act was removed from the larger spending package, according to Boston law firm Ropes and Gray.
Expect discussion to renew in Congress about the VALID Act after the mid-term elections.
Clinical laboratory leaders and pathology group managers will want to closely monitor the progress of these four federal legislative and regulatory developments. Each of the possible actions described above would significantly change the status quo in the compliance requirements and reimbursement arrangements for both clinical laboratory testing and anatomic pathology services.
Healthcare industry watchdog Group Leapfrog says that if CMS suppresses the data “all of us will be in the dark on which hospitals put us most at risk”
For some time, hospitals and clinical laboratories have struggled with transparency regulation when it comes to patient outcomes, test prices, and costs. So, it is perplexing that while that Centers for Medicare and Medicaid Services (CMS) pushes for more transparency in the cost of hospital care and quality, the federal agency also sought to limit public knowledge of 10 types of medical and surgical harm that occurred in hospitals during the COVID-19 pandemic.
And even though the CMS announced in its August 1 final rule (CMS-1771-F) that it was “pausing” its plans to suppress data relating to 10 measures that make up the Patient Safety and Adverse Events Composite (PSI 90), a part of the Hospital-Acquired Condition (HAC) Reduction Program, it is valuable for hospital and medical laboratory leaders to understand what the federal agency was seeking to accomplish.
According to USA Today, medical complications at hospitals such as pressure ulcers and falls leading to fractures would be suppressed in reports starting next year. Additionally, CMS “also would halt a program to dock the pay of the worst performers on a list of safety measures, pausing a years-long effort that links hospitals’ skill in preventing such complications to reimbursement,” Kaiser Health News reported.
The proposed rule’s executive summary reads in part, “Due to the impact of the COVID-19 PHE on measure data used in our value-based purchasing (VBP) programs, we are proposing to suppress several measures in the Hospital VBP Program and HAC Reduction Program … If finalized as proposed, for the FY 2023 program year, hospitals participating in the HAC Reduction Program will not be given a measure score, a Total HAC score, nor will hospitals receive a payment penalty.”
In a fact sheet, CMS noted that its intent in proposing the rule was neither to reward nor penalize providers at a time when they were dealing with the SARS-CoV-2 outbreak, new safety protocols for staff and patients, and an unprecedented rise in inpatient cases.
“We want the public to have complete trust in the data and will only be providing data we have determined has a high confidence of credibility and accuracy,” said CMS Chief Medical Officer Lee Fleisher, MD (above), Director of the CMS Center for Clinical Standards and Quality in a statement, Axios reported. Clinical laboratory leaders would find it more difficult to compare the performance of their hospitals against peer hospitals, should this proposed rule take effect as written. (Photo copyright: Lee Fleisher.)
Groups Opposed to the CMS Proposal
Like healthcare costs, quality data need to be accessible to the public, according to a health insurance industry representative. “Cost data, in the absence of quality data, are at best meaningless, and at worst, harmful. We see this limitation on collection and publication of data about these very serious safety issues as a step backward,” Robert Andrews, JD, CEO, Health Transformation Alliance, told Fortune.
The Leapfrog Group, a Washington, DC-based non-profit watchdog organization focused on healthcare quality and safety, urged CMS to reverse the proposal. The organization said on its website that it had collected 270 signatures on letters to CMS.
“Dangerous complications, such as sepsis, kidney harm, deep bedsores, and lung collapse, are largely preventable yet kill 25,000 people a year and harm 94,000,” wrote the Leapfrog Group in a statement. “Data on these complications is not available to the public from any other source. If CMS suppresses this data, all of us will be in the dark on which hospitals put us most at risk.”
Leah Binder, Leapfrog President/CEO, told MedPage Today she is concerned the suppression of public reporting of safety data may continue “indefinitely” because CMS does not want “to make hospitals unhappy with them.”
AHA Voices Support
Meanwhile, the American Hospital Association noted that the CMS “has made this proposal to forgo calculating certain hospital bonuses and penalties due to the impact of the pandemic,” Healthcare Dive reported.
“We agree with CMS that it would be unfair to base hospital incentives and penalties on data that have been skewed by the unprecedented impacts of the pandemic,” said Akin Demehin, AHA Senior Director, Quality and Safety Policy, in a statement to Healthcare Dive.
Though CMS’ plans to limit public knowledge of medical and surgical complications have been put on hold, medical laboratory leaders will want to stay abreast of CMS’ next steps with this final rule. Suppression of hospital harm during a period of increased demand for hospital transparency could trigger a backlash with healthcare consumers.
