Quest Diagnostics Buys Assets From Bankrupt True Health

Quest Diagnostics Buys Assets From Bankrupt True Health

Quest Diagnostics Buys Assets From Bankrupt True Health

True Health and its parent company THG Holdings have finalized a bankruptcy court-approved sale of their assets to Cleveland HeartLab, a subsidiary of Quest Diagnostics, for $8.5 million.

The deal did not include True Health’s 100,000-square-foot lab in Richmond or its hundreds of employees. True Health acquired the Richmond lab when it purchased the assets of bankrupt Health Diagnostic Laboratory (HDL) for $37 million in late 2015.

HDL went bankrupt in 2015 after agreeing to pay $47 million to settle allegations that it defrauded Medicare and Medicaid by paying kickbacks to doctors in exchange for ordering its lipid test panels.

True Health filed for bankruptcy in July (see LE, August 2019) after CMS suspended all Medicare payments to the company based on “credible allegations of fraud.” According to an ongoing investigation by the OIG, True Health had set up labs inside rural hospitals that receive higher rates of
reimbursement from Medicare. From there, OIG investigators claim that True Health engaged in a kickback scheme by enlisting doctors into Management Service Organizations (MSOs) that incentivized them to send patient samples to the rural hospital labs. The OIG investigators say that
these physicians never had privileges with or visited the rural hospitals, and never provided their patients with a choice as to where to send their lab tests.

A Quest spokesman says that Quest chose not to acquire True Health’s facilities, staff, or accounts receivable “nor will we adopt its policies and business practices.” Essentially, Quest has purchased True Health’s client list and some instruments and supplies.

In the seven-month period January 1 through July 31, 2018, True Health recorded revenue of $38.5 million, equal to an annual rate of $66 million, according to its bankruptcy filings. If Quest’s Cleveland HeartLab can retain a fraction of True Health’s clients and revenue, then the $8.5 million purchase price will be a huge bargain, observes Laboratory Economics.

True Health is majority-owned by the private-equity firm The Riverside Company (New York City), while Founder and CEO Chris Grottenthaler has a 6% stake. True Health has $173 million in total liabilities. Its largest secured creditors are Monroe Capital Management (owed $123 million) and Riverside Strategic Capital (owed $34 million). True Health had initially filed for Chapter 11 bankruptcy reorganization in July, and is now likely headed for Chapter 7 liquidation.

True Health Files For Chapter 11 Bankruptcy

True Health Files For Chapter 11 Bankruptcy

True Health Diagnostics (Frisco, TX) filed for Chapter 11 bankruptcy protection on July 30, blaming CMS’s suspension of its Medicare payments since May 2017.

In its bankruptcy filing, True Health said it had less than $50,000 of assets, and more than $100 million in liabilities. The company’s largest unsecured creditors include the investment bank Houlihan Lokey Capital (owed $2 million), Roche Diagnostics ($1.8 million) and the law firm Perkins
Coie ($1.3 million).

True Health, which markets advanced lipid test panels, was founded in 2014 by its CEO Chris Grottenthaler. The company jumped in size when it purchased Health Diagnostics Laboratory (HDL-Richmond, VA) for $37 million from a bankruptcy court auction in late 2015. HDL went bankrupt in June 2015 soon after agreeing to pay the federal government $47 million to settle claims it paid kickbacks to physicians in the form of a $20 per specimen process and handling fee.

True Health operates a small lab and administrative office in the Dallas area and a 100,000-squarefoot lab in Richmond. Prior to its Medicare suspension of payments, the company had a total of 400 employees and estimated annual revenue of approximately $80-$100 million, including more
than $25 million from Medicare.

True Health’s problems began in May 2017 when CMS suspended its Medicare payments on the basis of “credible allegations of fraud.” As part of this suspension, CMS imposed a 100% hold of all Medicare payments to True Health for services rendered to Medicare beneficiaries. At the time, this
amounted to approximately $2 million per month, or about 30% of True Health’s total revenue.

In June 2017, CMS reduced the suspension to 35% of Medicare payments, withholding roughly $800,000 per month from True Health. But this June, CMS raised the suspension back up to 100% once again based on “credible allegations of fraud.”

True Health filed a lawsuit against CMS in early July seeking an emergency motion for a temporary restraining order. The company contends that it never received an adequate opportunity to challenge the merits of the suspension. “This Kafka-esque system, under which CMS can withhold over $20 million without an explanation or an opportunity to challenge the suspension, and continually extend and complicate the suspension…has left True Health in financial ruin,” according to the lawsuit.

A federal court dismissed True Health’s lawsuit on July 22, enabling CMS to continue withholding payments. True Health laid off 80 employees on July 29, and says that unless additional funding is found or a “white knight” appears, it may need to shut down by the end of September.

Prior to its problems with CMS, True Health had quickly risen to the top of advanced lipid testing labs. True Health served 66,890 Medicare beneficiaries in 2016 and received $41.2 million in Medicare Part B payments, according to data from CMS.