Health Diagnostic Laboratory files for Chapter 11 bankruptcy

Two months after settling an investigation with the federal government that looked into Health Diagnostic Laboratory’s reimbursement practices, the blood testing lab filed for Chapter 11 bankruptcy on Sunday, listing the $49.5 million settlement with U.S. Department of Justice as it’s biggest debt.

Overall, the company said it has more than 200 creditors, with assets and liabilities both listed in the range of $100 to $500 million.  Among its list of 30 largest debtors are two laboratories, owed more than $7 million, HDL co-founder and former CEO Tonya Mallory,  $2.4 million; the city of Richmond, $454,809; and the Washington Redskins (a wellness partner), $250,000.

The attempt to restructure through bankruptcy what once had been one of Richmond’s fastest-growing companies came after the company had been working with consultants at New York-based Alvarez and Marsal (A&M). According to the filing, Martin McGahan, HDL’s recently appointed chief restructuring officer, and others have been advising HDL since the company was retained in November.  McGahan, a managing director and co-head of A&M’s Healthcare Industry Group, said in the filing that he has been involved in major corporate restructuring projects throughout the U.S.

According to a source, Mallory’s former office – she resigned last September after the federal investigation became public — was turned into a “war room” for the advisors.

“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,” HDL President and CEO Joseph McConnell said in a statement.

McConnell said the fundamentals of HDL’s business model remain solid “and we are confident these actions will enable us to quickly restructure and emerge better positioned for continued growth and success. HDL Inc.’s operations are strong and demand for our high-quality diagnostic test products and services will continue to grow.”

HDL said in its petition filed in the U.S. Bankruptcy Court for the Eastern District of Virginia that revenues have fallen sharply since it came under scrutiny for its practice of paying doctors a $20 process and handling fee for each blood sample sent to the company.  HDL discontinued the payments, which it called an industry-wide practice, after the government issued an alert in June 2014 that the fees could violate the federal anti-kickback laws. The controversy prompted a front-page story in the Wall Street Journal. HDL admitted no wrongdoing in agreeing to the settlement.

The impact of the events, however, is weighed in the court filing. The company notes that the special fraud alert, the DOJ investigation and the settlement occurred over a relatively short period of time. “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 court document shows that HDL had net revenue of $375 million and EBITDA (earnings before interest taxes depreciation and amortization) in fiscal year 2013. The company processed an average of 3,600 samples a day during that year.

During 2014, net revenue declined to $320 million and EBITDA fell to $15.3 million. The average number of samples processed each day decreased to 3,120.

The company says it currently runs about 2,000 tests a day through two facilities – its headquarters building in Richmond’s Biotechnology Park and a smaller facility in De Soto, Kan.  At these locations, it serves about 10,000 physicians in 45 states plus the District of Columbia.

HDL said in its filing that the lower revenue caused to it to fail to comply with the covenants of loan facilities with North Carolina-based BB&T. The Richmond company said it has had difficulty making payments to suppliers and conducting its operations since BB&T in late May discontinued its ability to borrow under a loan facility and froze HDL accounts at the bank.

In addition to negotiating with federal regulators on a settlement, the company also has faced mounting legal fees in fighting lawsuits filed by insurance companies Aetna and Cigna and a former contractor, Alabama-based Blue Healthcare Consultants.

HDL, which began processing blood samples in 2009, says it currently employs 645 people in full- and part-time positions. It once employed nearly 800 people, but the company has laid off staff as it streamlines its workforce and eliminates non-core businesses.

Tyler P. Brown along with a team of three other lawyers from Hunton & Williams in Richmond is representing HDL in the case.