Health Diagnostic Laboratory Files for Bankruptcy Protection

It seemed just a brief time ago Health Diagnostic Laboratory (HDL) was a company on a swift and seemingly stratospheric rise. It fell back to earth even more rapidly than it had ascended.

Facing lawsuits from both private payers and the federal government, its revenue dropping precipitously, in default of lending covenants and even the ability to pay its employees in question, HDL filed for bankruptcy protection earlier this month.

The Virginia-based HDL entered into the Chapter 11 filing on June 7 in the Eastern Virginia district of U.S. Bankruptcy Court.

"While we regret the necessity of seeking protection under Chapter 11, it is the right path for us to take, and we see it as an opportunity to better position our company for continued growth and success while strengthening our finances—ensuring our viability as a company for decades to come," said Chief Executive Officer Joseph McConnell in a statement. "As we have seen in any number of industries—the airlines, automakers and retailers—Chapter 11 can lead to bright, self-sustaining and competitive futures.

"Through this process, we will secure a better future for HDL, Inc. by better aligning our balance sheet obligations with our operations while ensuring that business will continue as usual," he added.

The bankruptcy filing said HDL would obtain debtor-in-possession financing and negotiate with its creditors. It owes $18.3 million to several lenders, and at least one called in the outstanding balance and did not honor checks to vendors written on the line of credit.

Just a year ago, HDL appeared to have had that bright future without seeking protection from creditors. But the storm clouds gathered quickly.

On June 25, 2014, the U.S. Department of Health and Human Services' Office of the Inspector General issued a fraud warning regarding the payments by laboratories to physicians to process samples, warning those payments could constitute an illegal kickback. It seemed to address directly HDL's business model of paying physicians a $20 processing fee for drawing blood and sending in samples for lab testing.

Less than three months later, the Wall Street Journal published a front page story highlighting the fraud alert and putting HDL in the spotlight. Not long after that, HDL co-founder and CEO Tonya Mallory resigned. In April of this year, the company entered into a $47 million settlement with the U.S. Department of Justice regarding how it would process samples.

"The confluence of these events and associated media coverage, as well as certain payer issues and changes in billing practices in certain states that affected the fees earned by HDL from each sample test, caused significant disruption to the Company's business and negatively impacted HDL's recent financial performance," the company said in its bankruptcy filing.

Last year's revenue of $320 million was 15 percent below 2013's $375 million, and net income declined by two-thirds, from $45.2 million to $15.3 million. By the first quarter of this year, the average daily sample test volume dropped to half of what it was in 2013. The eroding numbers broke a covenant with at least one of HDL's lenders, causing a credit squeeze and necessitating the filing.

In addition to the issues with its creditors, HDL is also fighting lawsuits from Cigna, Aetna, its former sales/marketing arm, as well as a whistleblower suit filed by Chris Riedel, a California-based lab owner who now specializes in qui tam lawsuits against competitors, claiming they are gaming how contracts are negotiated with private and public payers.

Takeaway: Health Diagnostic Laboratory will attempt to remake itself and restore sliding sales after filing for bankruptcy protection.