CEO SUMMARY: Most clinical lab directors understand the risks that come with running a CLIA-licensed lab. Such risks are at the forefront of the criminal trial of Elizabeth Holmes, founder of now-defunct Theranos. During the trial, federal prosecutors and defense attorneys questioned four of Theranos’ former lab directors about inaccurate test results and failures to comply with CLIA’s requirements. In this second part of our series, an attorney comments on the lab directors’ testimony.
SECOND IN A SERIES
AS THE CRIMINAL FRAUD TRIAL OF ELIZABETH HOLMES UNFOLDS in Silicon Valley, attorneys on both sides have focused on two key elements in particular: the role of the CLIA lab director and the CLIA regulations themselves.
Since the trial began Sept. 8, federal prosecutors and lawyers for the defense asked multiple questions about the responsibilities a laboratory director has under the Clinical Laboratory Improvement Amendments (CLIA) of 1988 and how the lab director can be held responsible for CLIA violations, particularly equipment failures and incorrect lab test results.
The case may be a first in the history of the U.S. criminal justice system in which trial lawyers have focused on the rules involving diagnostic testing and how pathologists could be held responsible for a lab’s failures to comply with CLIA and any patient harm that results.
Since September, lawyers for both sides have questioned four former Theranos lab directors about their role as the person most responsible for ensuring that the lab meets all CLIA requirements at all times.
In many ways, the case offers multiple lessons for clinical pathologists and lab directors about how to properly run a clinical laboratory.
In the case of United States vs. Elizabeth Holmes in the U.S. District Court for the Northern District of California in San Jose, Holmes faces 10 counts of wire fraud and two counts of conspiracy to commit wire fraud. As of Nov. 15, the judge and jury had heard testimony for more than 11 weeks. Balwani faces the same 12 counts and will be tried separately in a case to be heard next year.
The government’s case is based on the assertion that Holmes and Balwani knew that Theranos’ analyzers did not work and should have informed investors about the poor reliability and accuracy of the testing equipment.
What Holmes and Balwani knew and when they knew it became linked to what the lab directors knew and were required to do under CLIA. Lawyers on both sides of the case spent days questioning four former lab directors who worked at Theranos before the lab closed in September 2018, just three months after a federal grand jury indicted Holmes and Balwani.
In that indictment, investigators from the federal Department of Justice (DOJ) alleged that the pair had “engaged in a multi-million-dollar scheme to defraud investors and a separate scheme to defraud doctors and patients.”
Legal Issues in Theranos Case
To cover all these lessons, The Dark Report asked attorney Matthew J. Murer, JD, a partner with the Chicago law firm of Polsinelli, to review the issues that are most important for clinical lab directors.
Murer has more than 27 years of experience advising laboratory directors and managers about CLIA compliance. Often, hospitals, laboratories, and other providers have retained Murer’s services in an effort to defend and maintain their CLIA certificates after the federal Centers for Medicare and Medicaid Services (CMS) has cited those labs for CLIA deficiencies.
In our earlier coverage of this case, The Dark Report showed how DOJ lawyers depicted why the actions of Holmes, other company executives, and clinical laboratory directors did not follow the CLIA rules when they had problems with the company’s proprietary testing equipment.
“Also, those executives did not disclose the problems they had while continuing to promote to investors that their testing and equipment was reliable,” Murer said. (See TDR, “CLIA Lab Director Testimony Shows Risks to Pathologists,” Nov. 8, 2021.)
Compliance with CLIA
In part one of this series, we reported on the failure of the Theranos laboratory staff to conduct proficiency testing properly and the lab director’s responsibilities to ensure that PT testing was done in compliance with CLIA.
Also in part one of this series, Murer answered four questions about the case, mostly addressing the consequences of the actions of Adam Rosendorff, MD, a board-certified clinical pathologist and former Theranos lab director. Rosendorff served as laboratory director from April 2013 through December 2014 and spent hours on the witness stand over several days.
In this second installment, Murer answers the following questions:
- What obligation does a laboratory director have to notify regulators about problems in a lab?
- What problems arose over the CLIA laboratory director of record?
- Is it okay for laboratory directors to send company materials to their private email addresses?
- What possible punitive actions does Holmes face and, when CMS finds deficiencies at a lab, what punitive actions can the agency take against the CLIA laboratory director?
In addition to Rosendorff, three other former laboratory directors at Theranos have testified: Sunil Dhawan, MD, who testified that he was Balwani’s dermatologist and accepted the position as laboratory director after Rosendorff resigned; Lynette Sawyer, PhD, who was added to Theranos’ lab license in late 2014 and resigned six months later; and Kingshuk Das, MD, who was the last of the four laboratory directors.
What Lab Staff Knew
“The DOJ’s attorneys seek to demonstrate that the lab’s employees knew that the testing equipment did not meet CLIA’s standards and that therefore, Holmes and Balwani knew that and did not disclose those failures to investors,” Murer observed.
“Meanwhile, the defense also has used CLIA to shift responsibility away from Holmes,” he said. “The defense asserts that Theranos’ laboratory director is ultimately responsible for the failures to meet CLIA requirements, not Holmes and other Theranos executives. Therefore, the defense argument goes: So long as the clinical laboratory held a valid CLIA certificate, Holmes thought everything was fine. She was relying on the laboratory directors as the experts to make sure everything was compliant.
“As a result, neither the government nor the investors can claim she misled them, as she was just as misled as they were,” Murer observed. “That’s a tough argument to make, but the defense doesn’t have a lot of cards to play in this case.”
What obligation does a lab director have to notify regulators about problems in a lab?
For Murer, the question of what obligation a laboratory director has when there are problems in the lab, and who is ultimately responsible, goes to the heart of the case the DOJ has brought against Holmes. “Also, this question will be one that will interest many CLIA laboratory directors because it leads to other important questions that are closely related,” Murer commented.
“For example, what obligations do lab staff have to report CLIA violations or possible violations to authorities—particularly if they know or fear that the laboratory director has not done that reporting?” he asked.
“Another related question is: Should the lab staff have signed off on test reports that are inaccurate?” he added. “Should lab staff file anonymous complaints to the CLIA lab director, the executive team, or to regulatory authorities? What would happen if the lab staff filed complaints with the lab director appropriately but then the lab director did not respond or did not act on those complaints? Would the lab director face consequences for failing to act on such complaints?”
The answers to these questions provide insights into how attorneys and judges interpret CLIA regulations and how they assert that the lab director should be held responsible for failures to comply. “These questions are among the most interesting from the Holmes trial because some CLIA laboratory directors may face similar problems in their labs,” Murer noted.
“We know from Rosendorff’s testimony that both Holmes and Balwani opposed or overrode Rosendorff’s recommendations about how to address the problems the lab staff encountered,” he explained. “In rebuttal, the defense attorneys tried to show that some witnesses claimed Rosendorff did not fulfill his duties in a compliant manner.
“CMS and judges have asserted again and again that the buck stops with the lab director. CMS states clearly that laboratory directors have the ultimate responsibility.”
“Those assertions should draw the attention of any pathologist serving as a laboratory director,” Murer added. “The case shows how easy it is for a lawyer to argue that the CLIA laboratory director is responsible for that lab’s failure to meet CLIA requirements.”
As for what a lab director should do about problems with a lab, Murer focused on how the prosecution and defense characterized Rosendorff’s responsibility as the lab director when he realized that the lab was reporting inaccurate results.
Inaccurate Lab Test Results
“Defense attorneys claimed that Rosendorff should be held responsible for any inaccurate lab results because inaccurate results put patients at risk of harm,” Murer recalled. “The defense also presented testimony that Rosendorff should be held responsible for the lab’s failure to perform proficiency tests properly and for the failure to follow federal and state lab regulations.
“Those claims from the defense make the case seem complicated by raising the issue of whether Rosendorff’s warnings to management did not go far enough,” he commented. “As a result, lab directors in similar circumstances may want to know what obligations a CLIA laboratory director has in such cases, such as, should Rosendorff have resigned?
“At the end of the day, Rosendorff, as the laboratory director, was responsible for everything that happened in the clinical lab, including the bad test results,” Murer explained. “In these situations, the CLIA regulations make clear that lab directors are responsible for everything in the lab and what they should do in such situations.”
Lab Director’s Responsibility
When laboratory directors have been accused of similar failures to comply with CLIA, defense attorneys for those lab directors have argued against holding those directors responsible, Murer said.
“There have been a number of CLIA cases where laboratory directors have said they shouldn’t be held liable when they’ve been in similar situations,” Murer explained. “Some have said, for example, that they weren’t involved in the day-to-day operations of the lab. Others have said they didn’t have any knowledge of what was going on in the lab.
“But when those cases go before an administrative law judge, the judge almost always rules that the lab director has a responsibility to know everything that happens in the laboratory,” he explained. “CLIA cases sometimes end up in court when a lab files a lawsuit challenging the findings of CLIA inspectors.”
In some situations, lab directors contend that they knew about bad test results and reported those results to management, but then they argue that the lab’s owners disregarded their recommendations. This argument is similar to the arguments defense attorneys have raised in the Theranos trial.
“In those cases, CMS and judges have asserted again and again that the buck stops with the lab director,” Murer added. “CMS states clearly that laboratory directors have the ultimate responsibility. You can delegate and you can work with ownership, but CMS holds the lab director responsible for the quality and accuracy of all lab testing.”
Resign in Some Cases
In its brochure seven, “Lab Director,” CMS explains the clinical laboratory director’s responsibilities.
“In situations when the lab director has tried to correct the issue and lab management or ownership refuses to listen or cooperate, then the lab director should resign,” Murer asserted. “That’s what should happen when lab directors find that any lab is not being run properly and ownership will not take the appropriate action. Under CLIA, laboratory directors cannot shift responsibility to management or to ownership. If they can’t get the lab to a place where it needs to be, then they should walk away.
“In the case of Kingshuk Das, MD, Theranos’ fourth and final laboratory director, that’s what happened. He testified that after reviewing the data on the testing equipment, he concluded that these testing systems were nonperforming from the very beginning,” Murer noted.
Lab Director Disagreed
According to Das’ testimony, Holmes challenged his conclusion and said that it was not an issue of “instrument failure per se, but a failure of quality control and the quality assurance program around it.”
Das testified that he disagreed with this conclusion because the validation data “had no bearing on the quality control or quality assurance program.” He further testified that, “I found these instruments to be unsuitable for clinical use.”
When CMS conducted an inspection of the Theranos laboratory, it issued extensive findings alleging that the laboratory failed to meet the CLIA standards in a variety of ways and that those failures posed immediate jeopardy to patient health and safety. Das drafted the laboratory’s response to CMS and agreed with the agency’s findings that the quality control tests of multiple assays run on the Edison blood testing device violated the “2SD rule” indicating that a test must be rejected if two consecutive control measures fall outside the two standard deviations.
Das also testified that he responded to CMS that the laboratory “had a global and long-term failure of the quality control program” and that, as a result, it would need to void more than 50,000 patient test results.
“But not all laboratory directors understand that CMS will hold them personally responsible for any problems in the lab,” he added. “In some instances when CMS finds a lab failed to comply with CLIA, CMS can prevent that lab director from acting as a lab director for another lab for two years.
“Even in cases involving a hospital lab, CMS considers that all responsibility for that lab falls on the laboratory director,” Murer noted. “When they discuss CLIA compliance, CMS officials don’t talk with the hospital CEO even though that CEO may want to be part of that discussion. Instead, CMS officials will go directly to the laboratory director.
“Of course, many hospitals have quality assurance committees, and the members of those committees may want to meet with CMS officials to discuss CLIA compliance,” he added. “But, again, CMS officials will insist on meeting with the laboratory director. When they do, they will want documentation of the lab’s efforts to ensure high-quality and accurate lab test results, and to ensure that PT testing is done appropriately. Too often, that distinction is lost on people in the lab, including laboratory directors.”
It is possible that Holmes’ defense attorneys raised the issue of Rosendorff’s role in an attempt to shift blame away from Holmes, Murer noted. “Counsel for the defense is trying to distract the jury,” he commented. “They’re trying to get the jury to focus on the bad tests, and that those results were the responsibility of the laboratory director.
“But that’s a distraction from the main question in this case, which is whether Holmes knew that the testing was inaccurate and continued to promote to investors that their tests were reliable,” he added. “While it seems clear that the lab’s owners knew the testing was inaccurate, the defense is raising questions about who caused the inaccurate test results.
“To me, it’s clear that the lab ownership knew about the inaccurate results and lied to their investors about that,” he noted. “That’s a key point in this case.”
What should laboratory directors do if management fails to address problems the lab director raises? “The answer is in the CLIA regulations and it should be in the lab’s operation manual,” Murer advised.
“In my experience with CLIA violation cases, CMS will ask to see that lab’s policies—meaning its manual of standard operating procedures,” he warned. “A good written policy and the CLIA regulations themselves will explain what’s supposed to happen in the day-to-day operations of the laboratory, including what should happen if management fails to address problems the laboratory director raises.
“But not all laboratory directors understand that CMS will hold them personally responsible for any problems in the lab.In some instances when CMS finds a lab failed to comply with CLIA, CMS can prevent that lab director from acting as a lab director for another lab for two years.”
“That means that if the facts in the laboratory don’t match the lab’s written policies, that laboratory director has a problem,” he added. “CLIA regulations make the lab and the laboratory director liable for poor test results and for the failure to follow the lab’s own written procedures.”
Lab personnel need to follow those written policies. “When advising clients, I say: ‘I didn’t write your lab’s policies and the government didn’t write those policies. So, if your lab staff cannot follow what you’ve written as the best practices for your laboratory, a jury will find you liable,’” Murer said.
“All well-run clinical laboratories have good standard operating procedures for handling every situation,” he explained. “These procedures describe what to do when the laboratory has a quality-control issue, when test results are inaccurate, and when the lab has inconsistent results. If the laboratory’s procedures don’t tell staff what do in those situations, then the laboratory director has an entirely different problem.
“In addition, the lab’s operations manual should address what happens if ownership or management repeatedly ignore the laboratory director’s warnings about inconsistent or inaccurate results,” he advised. “At a minimum, a lab should stop conducting testing that it knows to be unreliable or incorrect. A laboratory director should not continue working at such an organization. In such situations, the lab director, and perhaps other lab staff, have an obligation to resign.”
What problems arose over the CLIA lab director of record?
In 2014, Rosendorff resigned from Theranos, and early in 2015 the lab’s management team named Sunil Dhawan, MD, as the new laboratory director.
A dermatologist by training, Dhawan did not have a degree or board certification in pathology or laboratory science, according to The Wall Street Journal. On Oct. 15, Dhawan testified that he got his position as Theranos’ lab director because he was Balwani’s longtime dermatologist.
The online news site Ars Technica reported that, “Dhawan testified that he went to Theranos twice and that he worked a total of five to 10 hours between November 2014 and June 2015.
“During that time, he basically signed whatever Balwani sent him. Theranos agreed to pay him $5,000 per month, though Dhawan says he never cashed any checks and once asked to be paid in stock options instead,” said Ars Technica.
Court testimony indicated that Holmes, Balwani, and the management team at Theranos operated for months without a board-certified clinical pathologist as the laboratory director on the lab’s CLIA license.
Theory of Negligent Hiring
“One issue that lawyers sometimes need to address is the legal theory known as negligent hiring,” Murer noted. “In a clinical lab setting, if someone is hired who doesn’t have the proper qualifications, and that decision leads to injuries or damages, that’s negligent hiring.
“In the regulations, CLIA is very clear on the competencies and qualifications of lab personnel,” he noted. “Laboratory directors should pay attention to this regulation on an ongoing basis. They should audit their personnel files to make sure that everyone’s qualifications are up to date and that the competencies of each staff member are documented, meaning the lab keeps copies of licenses and course transcripts.
“Those documents need to be in every CLIA laboratory’s files, because even well-run labs can run into this problem,” Murer warned. “If a laboratory gets a complaint that leads to an investigation, that lab could lose its accreditation if CMS finds that the lab director’s qualifications are improper or haven’t been verified properly.”
Unaware of Responsibilities
The most common reason why this happens is that the person maintaining the personnel files leaves the company and the position remains unfilled, or the new person is unaware of that responsibility. The hiring of Dhawan as laboratory director is a case in point.
“In my opinion, Dhawan’s hiring could lead to a claim of negligent hiring from those who invested in Theranos because the company hired an unqualified laboratory director and that action led to the loss of the money the investors put into the company,” Murer said.
“The fact that Dhawan had absolutely no involvement in day-to-day operations is, in itself, a CLIA violation,” he noted. “To meet CLIA’s regulatory responsibilities, the laboratory director must demonstrate active involvement in all laboratory operations and must be available to the laboratory staff as needed.
“What’s more, the lab director has a responsibility to review all of the lab’s policies because he or she is fully responsible for ensuring compliance with every policy,” Murer continued.
There is no minimum number of hours that the laboratory director needs to be present at the lab, but it certainly needs to be enough to demonstrate that the director is fully responsible for all operations and that all testing is accurate.
“I do not know if the lab staff has a responsibility to report on a negligent laboratory director,” Murer noted. “I’ve never seen a case where the staff claimed the lab director was not present enough. But certainly, the lab’s management or ownership needs to ensure that the laboratory director was physically in the lab for enough time each week.”
Is it okay for lab directors to send company materials to their private email addresses?
Rosendorff testified that he took some material home and that he sent some material to his private email address. Those materials documented management decisions that overrode his responsibility to fulfill his requirements as the CLIA laboratory director, Murer said.
“There’s never a clear-cut answer of whether taking materials from work to home is a violation of law—or, in this case, CLIA—because the legality of doing so depends on company policies, employment agreements, confidentiality requirements, whether the laboratory director signed a non-disclosure agreement, and other factors,” he commented. “Also, of course, in healthcare the Health Insurance Portability and Accountability Act of 1996 (HIPAA) limits which patient records, called personal health information, can be exposed to the public.
“Rosendorff may have decided, however, that he wanted to complain to the government, in which case there are certain protections for whistleblowers,” Murer advised. “But when a person takes documents or other information, it’s not always clear-cut that the individual will qualify as a whistleblower. That’s why I can’t say that what Rosendorff did was legal or illegal because we don’t know all the facts.”
“The fact that Dhawan had absolutely no involvement in day-to-day operations is, in itself, a CLIA violation. To meet CLIA’s regulatory responsibilities, the laboratory director must demonstrate active involvement in all laboratory operations and must be available to the lab staff as needed.”
When someone becomes a whistleblower by reporting to CMS or other agencies under federal laws, the lab or other healthcare provider cannot retaliate against that person. If the lab did so, it would face increased liability because the whistleblower would have a strong claim for retaliation under the law.
“But if a lab director sends work to a home email address with the intent of sharing that information with a journalist, that’s not whistleblowing,” he warned. “Instead, that employee may have some liability for breaching confidentiality if he or she is sharing that information with a reporter or other non-governmental party.
“In addition, a lab director can’t send material from work to a private email address if he or she is seeking work at another lab and wants to use that information from home,” he added. “Also, under HIPAA, taking any work from a healthcare facility to your home could be a problem.
“Sometimes people think they should send material to a home email or take that information home to protect themselves in case something goes wrong or because they might become a whistleblower,” Murer continued. “If that’s the case, you need to know your company’s policies on confidentiality and what liability you might create for yourself. Unfortunately, the bottom line is that there’s no clear answer to this question unless you know all the facts. Even then, a clear answer might be difficult.”
What punitive actions does Elizabeth Holmes face and, when CMS finds deficiencies at a lab, what punitive actions can the agency take against the CLIA lab director?
CMS does not have a lot of options in how it can respond to CLIA violations because Congress was specific when it wrote the law.
“If CMS determines that a lab has put patients in immediate jeopardy—which was the case at Theranos—and if the lab doesn’t correct those deficiencies and then submits a credible description of compliance—which Theranos allegedly didn’t do—then CMS is required to revoke the lab’s CLIA certificate,” he explained. “Once the CLIA certificate is revoked, it triggers the domino effect, meaning the owners of the lab and the lab director will be barred from owning and operating another lab for two years.
“In addition, that letter resulted in the revocation of the CLIA certificates for all the related labs under common ownership,” Murer added. “Those steps are prescribed in the law, which some people say is Draconian. But it’s not so much that CMS decided to impose those penalties on Balwani, Holmes, and Dhawan. It’s more that those penalties are required under law. There’s very little wiggle room.”
Lessons from Theranos Case
Regardless of the result of the trial, lab directors can learn important lessons from the Theranos saga. “For me, the big takeaway from the Theranos case is that the testimony shows how, all too often, CLIA-laboratory directors do not realize all the responsibilities that come with this job,” Murer noted.
“They are simply not aware of what they need to know. And that failure to understand the law can get them into deep trouble when CLIA comes to inspect their laboratory,” he concluded.
“For me, the big takeaway from the Theranos case is that the testimony shows how, all too often, CLIA-laboratory directors do not realize all the responsibilities that come with this job.”
This two-part series is important for all CLIA laboratory directors because it provides commentary and analysis as to how the actions of the lab directors hired by Theranos were questioned, challenged, or criticized by federal prosecutors and the defense attorneys in a criminal trial.
Pathologists who serve as laboratory directors in CLIA-certified clinical labs may want to use these two intelligence briefings as the basis of conversations about their responsibilities with their lab’s legal advisors. This would be consistent with taking preventive actions ahead of any actual violations.
How Claims of Fraud Resulting from Inaccurate Test Results Can Ensnare CLIA Lab Directors
During an extensive interview about the Theranos trial, attorney Matthew J. Murer, JD, warned lab directors of CLIA laboratories about the potential for criminal liability due to inaccurate test results.
Murer is a partner with the Chicago law firm Polsinelli and has more than 27 years of experience advising lab directors and managers about how to comply with the Clinical Laboratory Improvement Amendments of 1988 (CLIA).
“One lesson that’s come from the Theranos trial is how inaccurate lab test results could trigger charges that a laboratory committed fraud,” Murer noted. “This possibility affects clinical laboratories that do testing for any patients enrolled in government health programs, such as Medicare, Medicaid, TriCare, and others,” he said. “This should also concern laboratory directors at labs that run tests for patients who have coverage from commercial insurers.
Accusations of Fraud
“Lately, we’ve seen a number of private insurers bring fraud cases against clinical labs, including against labs running tests for COVID-19,” he warned. “U.S. attorneys have filed court cases against some labs on behalf of federal health programs. Lawyers have filed cases for commercial health insurers. The plaintiffs in these cases have accused the defendant labs of submitting false claims because the labs billed for tests that they knew were not justified as medically necessary.
“Therefore, under federal law, every unsupported claim submitted was a false claim and the plaintiff federal agencies and commercial health insurers are entitled to actual damages and to triple damages under the False Claims Act,” he added. “That’s a significant cudgel.
“In addition, if I’m a creative government prosecutor or a creative lawyer representing health insurers, I may add a claim of conspiracy because everyone in the clinical lab involved in such a money-making scheme is committing conspiracy because they agreed to commit an illegal act and they agreed to participate in the conspiracy,” Murer warned.
Possible Conspiracy Charge
A conspiracy charge is possible when some or all of the owners, managers, CLIA laboratory director, and staff know that the testing in question is not accurate. When everyone goes along with it and submits those claims knowing that the testing is inaccurate or improper, then they’re arguably part of the conspiracy.
“Recent court actions show such cases are becoming more common,” he noted. “Anyone working as a CLIA lab director, in management, or as a staff member who knows that the lab has submitted false claims for inaccurate tests, should consider resigning from that position.
“By staying, these individuals run the risk of being named in that litigation,” Murer continued. “If they are so named, they would need to pay for a defense attorney and they could be subject to monetary penalties and triple damages.
“Therefore, if you know that your laboratory’s test results are consistently inaccurate or not medically necessary, and that your lab is billing for those tests and you don’t report it, then you could face an allegation that you have participated in a conspiracy to commit fraud with others,” Murer concluded.
Contact Matthew J. Murer at email@example.com or 312-873-3603.
Theranos Trial: Four Questions from Part 1
IN THE FEDERAL FRAUD TRIAL OF ELIZABETH HOLMES taking place in the U.S. District Court for the Northern District of California in San Jose, the prosecution and the defense have raised important questions for all clinical laboratory directors. As the founder of the blood-testing lab Theranos, Holmes faces 10 counts of wire fraud and two counts of conspiracy to commit wire fraud.
For the first part of this series, we interviewed Matt Murer, an attorney with Polsinelli in Chicago, on the first four of eight questions that CLIA lab directors may consider to be the most compelling from the Theranos trial. (See TDR, “CLIA Lab Director Testimony Shows Risks to Pathologists,” Nov. 8, 2021.)
Here are those questions:
- Why is proficiency testing so important in this fraud trial?
- Who is responsible when a lab fails to use analyzers correctly?
- Who is responsible when a lab produces inaccurate test results?
- What obligation did the laboratory director have to issue warnings to management?