Coverage: Feds threaten to ban Theranos CEO for 2 years

For Theranos, things just seem to get worse with a new report Wednesday revealing federal regulators’ threats for sanctions against the Silicon Valley startup.

These sanctions include: closing its flagship laboratory and banning its founder Elizabeth Holmes from owning or operating its labs for two years.

Reed Abelson and Andrew Pollack of The New York Times had the day’s news:

Federal regulators have threatened a series of stiff sanctions against Theranos, the embattled blood-testing company, including closing down its flagship laboratory and potentially barring its chief executive from owning or operating its labs for two years.

The sanctions, which have not been made final, were included in a strongly worded letter from officials from the Centers for Medicare and Medicaid Services. It is the latest blow to the credibility of Theranos and Elizabeth Holmes, its chief executive, who seemingly became a self-made billionaire by promising to upend the clinical testing industry.

The government officials proposed a series of sanctions against the company, including the revocation of the company’s certification for its California laboratory, its primary operation, and suspension of its eligibility to receive payments under the Medicare insurance program.

If the laboratory’s certification were to be revoked, Ms. Holmes and Theranos’s chief operating officer, Ramesh Balwani, would be barred from owning or operating any laboratory for at least two years, the letter said.

Theranos confirmed that it received and responded to the letter, which has not been made public and was reported earlier by The Wall Street Journal. The company was given 10 days from the date of the letter, March 18, to respond to regulators’ concerns.

John Carreyrou and Christopher Weaver of The Wall Street Journal, which originally broke the news, went into detail about the letter:

Under federal law, Theranos had 10 days to give CMS evidence of why the sanctions shouldn’t be imposed. The company has responded, and CMS is reviewing the response, according to a person familiar with the matter.

If the company doesn’t respond to the satisfaction of the regulators, CMS said in the letter that it will proceed to impose the sanctions.

If the sanctions are imposed, some would take effect within eight days. Others would take longer, including revoking the California lab’s license, which could occur in 60 days.

Theranos could appeal to an administrative law judge and then a departmental appeals board, which could delay the effective date of some of the sanctions. If Theranos were to appeal, the lab would keep its license pending the outcome of the appeals process. The proposed ban on Ms. Holmes and Mr. Balwani would take effect at the same time as the lab’s license revocation and would be subject to the same appeals process.

The appeals process could take months, and such appeals have rarely succeeded in the past. A list of appeals decisions on the agency’s website shows that the agency didn’t lose a single such case from 2001 to the end of 2010.

In response to questions from the Journal about the letter, Theranos spokeswoman Brooke Buchanan said the government hasn’t yet imposed sanctions on the company’s lab in Newark, Calif.

“Due to the comprehensive nature of the corrective measures we’ve taken over the past several months, which has been affirmed by several experts, we are hopeful that CMS won’t impose sanctions,” she added. “But if they do, we will work with CMS to address all of their concerns.”

Last week, Theranos announced the recruitment of “nationally respected laboratory and medical experts” to its scientific and medical advisory board. The company said the eight-member panel would “work alongside Theranos’ leadership and internal teams in various areas, including advising Theranos regarding the full integration of its technology into routine clinical practice, and publication and presentation in scientific journals and at scientific meetings.”

Caroline Chen and Zachary Tracer of Bloomberg explained why Theranos is in its current position, at least partly:

Lauren Shaham, a CMS spokeswoman, declined to comment or confirm the authenticity of the letter.

“The whole thing is hypothetical; if sanctions are imposed, we could appeal and the process could take months,” Brooke Buchanan, a Theranos spokeswoman, said by phone. “The fact is we have not received sanctions.” She said that Theranos had responded to the agency and was in discussions with it.

The letter posted by the Journal contains a list of proposed sanctions, including fines, revocation of Theranos’s ability to take payments, and a threat to ban company executives from the industry for two years.

Lab Shortcomings

A redacted inspection report of Theranos released in March by CMS detailed a long list of shortcomings at the company’s Newark, California, laboratory, including failures to meet quality-control standards, such as not keeping freezers at the temperatures required by manufacturers; lack of proper documentation and missing signatures on paperwork; and unqualified personnel. CMS said in late January that faults at the lab were so severe that they jeopardized patients’ health.

The company’s Arizona lab wasn’t part of the CMS report and has continued to operate, with the majority of patients coming through its outlets at Walgreens Boots Alliance Inc. stores.

Walgreens spokesman Jim Cohn declined to comment.