Proposed CMS Sanctions Threaten Theranos’ Future

By Katherine Kwong

The news for blood testing company Theranos has gotten even worse since this blog’s last discussion of the company’s woes. Despite the company’s statements at the end of March that it would correct all of the issues CMS had found, new reports have emerged that Theranos’ California lab may see its federal license revoked. Additionally, Theranos’ founder, Elizabeth Holmes, and Theranos’ president, Sunny Balwani, may be banned from owning or operating any testing laboratories for two years. These potential sanctions have been proposed after regulators concluded Theranos has failed to adequately address concerns raised about its tests by the Centers for Medicare and Medicaid Services (CMS).

How did Theranos get to this point? After months of troubles, it seemed that Theranos might be able to reclaim the public narrative with its April 7 announcement that six new experts would be joining its Scientific and Medical Advisory Board. However, the company’s enthusiastic announcement was met with some caution and skepticism. Commentators pointed out that the Advisory Board was made up of paid consultants and had no formal power within the company. And despite months of promises that the company would publish its studies and data, reiterated again in February, Theranos has still failed to submit its data to peer review.

Then on April 13, the Wall Street Journal (WSJ) published an article revealing new, even more serious problems for Theranos. The article discussed a letter sent to Theranos on March 18 by CMS. (The letter is not yet publicly available, reportedly because Theranos requested redactions to protect trade secrets, but the WSJ has posted excerpts.) CMS found that after its January 25 letter listing deficiencies found at Theranos’ California lab, Theranos had failed to provide adequate evidence that the deficiencies had been corrected. Although Theranos submitted a response to CMS’s January 25 letter, CMS’s March 18 letter stated the submission’s claim the lab complied with CLIA was “not credible” and the evidence that deficiencies had been addressed was “not acceptable.”  Theranos’ submission was also described as “incomplete” and “show[ing] a lack of understanding of the CLIA requirements.”

Because CMS found Theranos’ lab failed to meet CLIA requirements in ways that would create immediate jeopardy, a number of sanctions were proposed in the letter. These sanctions include revoking the California lab’s license, which would bar Elizabeth Holmes and Sunny Balwani, respectively Theranos’ CEO and President, from owning or operating any lab for two years or more. Such a ban would likely impact Theranos’ only other lab, in Arizona, which currently handles approximately 90% of the company’s tests. Other proposed sanctions include $10,000 per day civil fines and required disclosure to CMS of all potentially affected customers.

The proposed penalties have been described as “among the most severe in CMS’s power” and “incredibly rare” for a company of Theranos’ size. But Theranos described the prospect of sanctions as a “worst case scenario” and said it is discussing the matter with CMS. The company stated it is “hopeful that CMS won’t impose sanctions.”

Despite the company’s expressed optimism, many are discussing the potential demise of Theranos. A Harvard Business School professor described the potential for sanctions as “very, very serious,” warning that such sanctions could mean the end of Theranos as a company. Other commentators pointed out that even if Theranos escapes sanctions, its reputation may be so damaged that it cannot sustain itself as a business. License revocation is a serious penalty reserved for only the worst cases – out of the thousands of labs supervised by CLIA, in 2015 fewer than 30 saw their CLIA certificate revoked. Revocation is typically reserved for cases of serious, repeated problems that remain unfixed. That Theranos is threatened with such a rare and serious sanction is a sign of just how much the company misstepped in its quest to change the way blood testing works.

Theranos’ saga serves as a pointed example of why innovators need more than just pioneering ideas. The health care market is complex, with multiple levels of regulations designed to protect patients. Theranos’ troubles should serve as an abject lesson to other aspiring health care startups about the importance of working out the bugs in systems and products before bringing them to market. Patient safety is too important for health care regulators to allow the types of mistakes Theranos has made.

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