Health Diagnostic Laboratory files bankruptcy following DOJ settlement

By Caroline Salls

Pittsburgh, June 8 – Health Diagnostic Laboratory, Inc. filed Chapter 11 bankruptcy on June 7 in the U.S. Bankruptcy Court for the Eastern District of Virginia.

Chief restructuring officer Martin McGahan said in a statement filed with the court that the company announced a settlement on April 9 with the Department of Justice (DOJ) that resolved all outstanding allegations made in connection with the DOJ’s industry-wide investigation into historical practices involving the payment of physician processing and handling fees.

McGahan said a special fraud alert and the investigation and settlement, as well as payer issues and changes in billing practices in some states that affected the fees earned by the company from each sample test, caused significant disruption to its business and negatively impacted its recent financial performance.

In addition, as a result of those events, McGahan said Health Diagnostic fell out of compliance with financial covenants in its BB&T loan facilities, resulting in the occurrence of an event of default and a reduction of the facilities.

Following the start of the DOJ investigation and the issuance of the special fraud alert, the CRO said several lawsuits seeking large damages against the company were filed. McGahan said the defense of these lawsuits and the filing of certain counterclaims have significantly increased non-recurring costs for Health Diagnostic and exacerbated the liquidity crisis brought on by the decline in revenue.

McGahan said the company filed bankruptcy to access cash receipts, preserve liquidity for a sufficient period of time to finalize and close a debtor-in-possession facility, and then explore alternative strategies available in bankruptcy to maximize value for stakeholders.

The CRO said “all options are still under consideration at this point.”

In connection with the bankruptcy filing, the company is seeking court approval to use the cash collateral of BB&T Equipment Finance Corp. to fund its operations while in bankruptcy.

According to court documents, Health Diagnostic had $100 million to $500 million in both assets and debt.

The company’s largest unsecured creditors are:

• The U.S. Department of Justice, with a $49.51 million contract claim;

• Randox Laboratories of Kearneysville, W.Va., with a $4.52 million contract/trade debt claim;

• Metabolon of Research Triangle Park, N.C., with a $3.07 million contract claim;

• LaTonya S. Mallory of Manakin-Sabot, Va., with a $2.42 million contract claim;

• Roche Diagnostics Corp. of Atlanta, with a $1.71 million trade debt claim;

• Kansas Bioscience Authority, based in Olathe, Kan., with a $1.59 million contract claim;

• diaDexus of South San Francisco, Calif., with a $1.5 million trade debt claim; and

• Ropes & Gray LLP of Boston, with a $1.49 million legal fees claim.

The company is represented by Hunton & Williams LLP and Hirschler Fleischer, PC.

Health Diagnostic is a Richmond, Va.-based blood testing company. The Chapter 11 case number is 15-32919.

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