Lab Compliance Update

CMS CLIA Sanction Letter Sent To Theranos Raises Questions

What options are available to lab company given imposition of severe CLIA sections?

CITING PRACTICES THAT JEOPARDIZE PATIENT SAFETY, the federal Centers for Medicare & Medicaid Services decided earlier this month to revoke the CLIA certificate that it granted to Theranos Inc. to operate a clinical laboratory in Newark, Calif., and to ban the lab company’s founder and CEO Elizabeth Holmes from the operating a clinical laboratory for at least two years.

In its letter to Theranos and three individuals on July 7, CMS said it would fine the company $10,000 per day until Theranos corrects all deficiencies. That fine was scheduled to begin on July 12. The ban on Holmes would not be effective until September. Under that ban, Holmes would not be allowed to own equity in or operate any clinical laboratory for at least two years.

If the sanctions against Theranos are imposed, then the company would need to close or divest both CLIA labs it runs, meaning the one in Newark and a second one it operates in Scottsdale, Ariz.

On July 8, The Wall Street Journal reported, “If it fails to reach a settlement with the government, Theranos’ options are limited.” That was confirmed in a statement published the same day by The New York Times, which wrote that “Ms. [Jane Pine] Wood, a partner at the firm McDonald Hopkins, said that in cases in which there was no settlement and the appeal went to a hearing before an administrative judge, labs ‘almost never win.’ ”

Meanwhile, the CMS letter imposing the sanctions on Theranos has some ambiguities that puzzle those lab professionals who are familiar with the CLIA sanction process. A careful reading of the sanction letter generates at least two questions, as follows:

  1. What does the CMS letter say and not say?
  2. What options does Theranos have?

Seeking answers to these questions, THE DARK REPORT interviewed Jane Pine Wood and Rick Cooper, lawyers with McDonald Hopkins who have represented a number of laboratories that faced CLIA sanctions.

EDITOR: While Theranos is appealing the decision, does CMS have the option to hold off on imposing the sanctions?

WOOD: Yes, and, during this period, the company said it would cease running tests in its Newark lab and would rebuild the lab ‘from the ground up,’ according to some news coverage.

EDITOR: I saw that in US News and World Report, Holmes issued a statement, saying, “We accept full responsibility for the issues at our laboratory in Newark, Calif., and have already worked to undertake comprehensive remedial actions.”

WOOD: One factor that works against Theranos is that CMS may have found the quality of its response to the deficiencies CMS cited following its CLIA inspection was inadequate. The result was the imposition of sanctions.

EDITOR: What level of discretion does CMS have in CLIA enforcement?

WOOD: Under the TEST Act, which Congress passed in 2012, CMS has some discretion on how to apply sanctions under the CLIA statute. The number of sanctions imposed on Theranos is much greater than we typically see, however.

EDITOR: Please explain.

WOOD: With most of our clients who have received similar letters, a negotiation process with CMS begins after an appeal is filed on behalf of the client. It is not unusual for the negotiated settlement to include the submission of an acceptable corrective action plan, perhaps retraining over a period of time, and the payment of penalties. These are usually situations where CMS knows that the laboratory operations are fundamentally sound. While there may have been errors, such errors were inadvertent and not reflective of systemic quality issues.

EDITOR: So does CMS recognize that, in some cases, the lab’s fundamental operation does not place patients at true risk?

WOOD: Yes, although CMS will almost always refer to an immediate threat to patient care. In these technical violation situations, while CMS uses the terminology of risk to patients, the course of the negotiations makes clear that CMS recognizes that the errors were isolated and inadvertent. These laboratories received very similar letters from CMS that would ban the owner-operator as Holmes would be banned. The sanctions were similar, but everyone knew once we filed the appeal, we would immediately start negotiating the settlement because the lab could fix (or already had fixed) the deficiencies. When we filed a corrective action plan, CMS accepted our response, essentially agreeing that the lab had addressed the errors successfully.

COOPER: The fact that, in this type of case, the laboratories’ outcomes were positive may not be a good sign for Theranos. If CMS views the Theranos response to date to be lacking in some way or to be largely nonresponsive, that would put Theranos at a significant disadvantage. That could mean that CMS would be much less likely to settle with Theranos because, in effect, the lab has basically antagonized the agency. On the other hand, the letter said that if Theranos chose to file an appeal within 60 days, then CMS would stay the sanctions.

WOOD: CMS would not have to stay the sanctions but according to the letter from CMS to Theranos, it could stay the sanctions. We’ve had a small number of clients who have received letters from CMS in which the agency said it would not stay the sanctions. In one of those situations, a lab closed its doors when CMS didn’t offer to stay the sanctions.

EDITOR: Would CMS stay the fines?

WOOD: The other issue Theranos faces is the fine of $10,000 per day. I’m not sure that CMS would stay that fine because, again, the wording in the letter from CMS to Theranos is unclear. In addition, there’s the issue of the threatened ban on the owner-operator. We’ve had clients where CMS imposed the ban on the owner-operators. However, we were able to negotiate so that selected individuals could run the lab but not the entity itself or any of the entity’s owners.

EDITOR: Would that be an option for Theranos, given the CMS sanction letter?

WOOD: From the letter to Theranos, it’s unclear if CMS would negotiate with Theranos on this issue. The letter does not entirely make clear if CMS is considering banning Theranos the company or considering banning Holmes and perhaps other executives. Or, is CMS looking at all the individual shareholders of Theranos? The letter does not specify. Another point of distinction is that usually these letters are addressed to the entity and to the lab director only. It’s unusual to have a CMS sanction letter addressed to individuals other than the lab director.

EDITOR: Could it be that CMS is seeking to punish the individuals involved, perhaps in part because Holmes has been the face of the company and has insisted time and again that Theranos’ lab operations were fine? At the same time, she has argued that the problems reported in the press were the result of its competitors criticizing its operations. Does that make sense?

WOOD: Yes, it does, because CMS has discretion under the TEST Act of 2012, which gave CMS more discretion in terms of penalties. Plus, CMS could take into account the fact that certain individuals have culpability.

EDITOR: So, now, assume the sanctions as written in this letter are imposed, then what options do Holmes and Theranos have relative to their ownership of the Newark CLIA lab, which was inspected and found to be deficient, and the Scottsdale CLIA lab which was not found to be deficient?

COOPER: Holmes would need to divest her ownership and she would need to remove herself from management of the company since the ban imposed by CMS relates to all laboratories owned by Theranos.

WOOD: I agree. Holmes could not be an officer or a director.

EDITOR: Does that mean Theranos could continue with its research activities but it would need to divest both CLIA labs?

WOOD: That depends on how CMS applies the penalties. Will CMS apply the penalties to Theranos, Inc., just to Holmes, or both? That’s unclear from the letter.

COOPER: The letter is unclear to me on these points as well. If the penalties are against Holmes, then she would have to divest her ownership interests and she could not serve in any management role or board position. But the entity itself— Theranos, Inc.—could continue to operate the Arizona lab where the CLIA certificate wasn’t revoked. That’s assuming that the sanctions are not against the entity, meaning Theranos, Inc., but are against only the individuals.

WOOD: That’s my reading of it as well. If the sanctions are against the entity, then Theranos as an entity would have to divest itself from the laboratories.

EDITOR: In the letter, CMS said, “We are writing to notify you of the determination by CMS that Theranos Inc., located at the above address,” meaning the address for the Newark laboratory, “is not in compliance, has not removed the finding and of the consequent imposition of the following sanctions…” In that part of the letter, Theranos as the corporate entity appears to be the subject of the sanctions. But later in the letter, CMS explains that the three individuals also are named and they would not be able to own a clinical laboratory. So, what does that mean?

WOOD:I find that part of the letter to be inconsistent. I’ve looked at it very specifically for this issue. It’s unclear. In fact, as we said earlier, this CMS sanction letter is different from other letters we’ve seen, and Rick and I have dealt with more than a dozen of these letters. Every single time, CMS addresses the letter to the laboratory itself or to the hospital system that runs the laboratory, along with the medical director of the laboratory.

COOPER:That’s why these negotiations with CMS are so important. If CMS doesn’t ban the entity—meaning Theranos—then how will the laboratory community react? If you look up other cases that CMS has had involving the two-year ban on the owner-operator, CMS has gone after the entity. Do you think lab people will ask, “Why is this case different? Why is CMS enforcing CLIA in a way that appears to be inconsistent? Why would CMS go after the entity when it’s a not-for-profit health system and not go after the entity when it’s a for-profit company, such as Theranos?” I don’t have any answers for those questions.

Contact Jane Pine Wood at 508-385-5227 or; Rick Cooper at or 216-348-5438.

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