THG Holdings LLC – Leading Diagnostic Laboratory Files Chapter 11, Claiming It Has Been Hounded into Bankruptcy by Overzealous Regulators

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July 30, 2019− THG Holdings LLC and six affiliated Debtors (“THG” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11689. The Debtors, one of the largest independent providers of laboratory management and diagnostic services in the United States, are represented by Derek C. Abbot of Morris, Nichols, Arsht & Tunnell LLP. Further board-authorized engagements include (i) Perkins Coie LLP as bankruptcy counsel, (ii) SSG Capital Advisors as investment banker and (iii) Epiq Corporate Restructuring as claims agent. 

The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $0 and $50k; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) US Department of Health & Human Services ("HHS") (unliquidated/disputed insurance claim), (ii) US Healthtek Inc. (unliquidated/disputed lab supplies claim), (iii) Houlihan Lokey ($2.0mn contingent/disputed fees claim), (iv) Roche Diagnostics ($1.8mn lab supplies claim) and (v) Perkins Coie LLP ($1.3mn fees claim). The Debtors' list of top 30 unsecured creditors includes numerous further claims for unpaid professional fees including Mintz Levin ($404k), King & Spalding ($350k), Proskauer Rose ($228k), McDermott Will & Emery ($164k), Grant Thornton ($155k), DLA Piper ($152k), Consilio LLC ($144k), Epstein Becker Green ($130k), BDO USA ($124k) and Kirkland & Ellis ($100k). 

Objectives of the Chapter 11 Filings

The Debtors intend to pursue the sale of the Debtors as a going concern in a section 363 sale process. In a bidding procedures motion [Docket No. 16, which we cover separately], the Debtors state, “The Debtors are running an extensive marketing process. With the Debtors’ retention of SSG, whose marketing strategy will include reengaging parties who previously showed interest in the Purchased Assets in addition to new potential buyers, the Debtors are hopeful that such efforts will result in securing a purchaser of the Debtors’ assets and possible stalking horse bidder. Given the Debtors’ marketing efforts, the proposed timeline [Auction on September 17th and sale hearing on September 20th] is sufficient to complete a fair and open sale process that will maximize the value received for the Purchased Assets. Due to the specialization of and regulatory requirements governing the Debtors’ industry, the most likely bidders are a focused group of specialized providers of healthcare services."

Debtors’ Pre-Petition Capital Structure 

As of the Petition Date, the Debtors’ debt obligations totaled over $174 8.mn including long-term debt of $150.0mn, a revolving line of credit of $2.5mn and an accounts payable balance of approximately $14.0mn. 

  • Funded Debt Obligations:
    • January 2017 Prepetition First Lien Credit Agreement between the Debtors and Monroe Capital Management Advisors, LLC, as administrative agent, comprised of (a) a revolving loan facility in an aggregate amount not to exceed $15.0mn (the “Revolver”) and (b) a term loan facility in an aggregate principal amount not to exceed $110.0mn (the “Term Loan” and, with the Revolver, the “Prepetition Credit Facilities”). As of the Petition date, the principal amounts outstanding under the Revolver and Term Loan are $2.8mn and $118.8mn, respectively. In addition, there is approximately $24.5k and $1.0mn in accrued and unpaid interest under the Revolver and Term Loan, respectively.
    • November 2018 Prepetition Second Lien Promissory Note amongst the Debtors, the lenders party thereto (the “Prepetition Second Lien Lenders”), and Riverside Strategic Capital Funds I, L.P., as agent comprised of a loan in an original principal amount of $18.8mn. In May 2018, the Prepetition Secured Parties agreed to subordinate $34.1mn of the debt under the Prepetition Credit Facilities to be pari passu with Prepetition Second Lien Debt. Between May 18, 2018 and the Petition date, affiliates of the Prepetition Second Lien Administrative Agent funded an additional $15.5mn to support the Debtors’ operations.
  • Unsecured Debt: The Debtors estimate that as of the Petition date claims of other trade and miscellaneous unsecured creditors total approximately $14.0mn.

Corporate Structure and Equity Ownership

All of the Debtors are Delaware limited liability companies. THG Holdings LLC serves as the ultimate parent entity of the Debtors through its 100 percent equity ownership of True Health Group LLC (“Holdings”). Holdings, in turn, owns 100 percent of True Health Diagnostics LLC (“THD”), Outreach Management Solutions, LLC (“OMS”), True Health Clinical LLC (“THC”), Health Core Financial LLC (“HCF”) and True Health IP LLC (“TH-IP”). THD and OMS are the only operating entities. 

Equity ownership of Holdings consists of:

  • Class A Shares held by Riverside Strategic Capital Fund I L.P., together with its affiliated funds, Monroe Capital Management Advisors, LLC, as administrative agent, and two of the Debtors’ founding investors
  • Class B Shares held by approximately 40 private investors

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Zucker Declaration”) [Docket No. 5], Clifford Zucker, the Debtors' Chief Restructuring Officer (seconded from FTI Consulting, Inc. where he is a Senior Managing Director) detailed the events leading to the Debtors' Chapter 11 filing. Further detail is provided in an additional declaration (the "Richards Declaration") submitted by the Debtors' Chief Financial Officer, Christian Richards [Docket No. 18]. 

It is the Richards Declaration that provides granular detail of a history of allegedly capricious actions by the HHS's Centers for Medicare and Medicaid Services (“CMS”) and the DOJ which have forced the Debtors into Chapter 11. The Richards Declaration recounts CMS decisions to withhold $21.0mn in payments for laboratory services rendered by the Debtors based on alleged discrepancies in just eight claims. These claims, Richards points out, represent a scant 0.008% of all claims (and just $3k) submitted by Debtor True Health to Medicare during the relevant time period (November 19, 2015 through November 4, 2016). In rebuttals, the Debtors argued that each of these claims "were not the fault of True Health, but in fact paperwork errors of the ordering provider." Richards notes that "CMS has not disputed these facts." NB: Concurrently with the filing of their chapter 11 Petitions, the Debtors have commenced an adversary proceeding against HHS and CMS regarding the decision of HHS and CMS to withhold payments.

The [over?] zealous regulation and enforcement are likely to be connected to earlier investigations into illegal kickbacks made by Health Diagnostic Laboratory Inc. (“HDL”) to physicians who chose HDL's blood testing services. In September 2015, Debtor True Health Diagnostic purchased HDL's assets out of bankruptcy for $37.1mn; HDL having landed in Chapter 11 after agreeing a nearly $50.0mn settlement with regulators over the alleged kickbacks. 

Every bankruptcy has a tale of woe and many declarations are self-serving, revisionist narratives; but the Richards Declaration stands out, both in its detail and in its apparent credibility. The excerpt below is lengthy, but the story is exceptional in large part due to the lengthy/extended nature of the Debtors' interaction with healthcare regulators and the seeming indifference/incompetence of those regulators as the Debtors continued to offer their needed diagnostic services to HHS/CMS/Medicare on a basis that was known to the U.S. government to be loss-making. The Richards Declaration states: 

"On November 25, 2014, True Health executed a form CMS-460 application to participate in Medicare Part B as a provider (the ‘Application’). Following approval of the Application and agreement to follow appropriate CMS rules and regulations, True Health began accepting Medicare patients and seeking reimbursement through Medicare for the services provided to such Medicare patients. Subsequently, True Health acquired the assets of Health Diagnostics Laboratories (‘HDL’) out of their bankruptcy on or about September 30, 2015 without any objection by the government. In connection with that acquisition, True Health voluntarily assumed the obligations under HDL’s corporate integrity agreement with the government on October 13, 2015. Since then, all government audits of True Health’s compliance with that agreement have resulted in compliance ratings of 99% or better.

Ultimately, Medicare patients and the reimbursements for the services provided to those patients grew to become approximately 30% of True Health’s business and, importantly, revenue. Without any prior notice, on or around May 25, 2017, CMS instituted a 100 percent hold on all Medicare payments to True Health. Given the current extremely low margins on which diagnostic labs operate, the loss of 30% of the business’s revenue dramatically affected the viability and financial stability of True Health. The May 25, 2017 notice cited only eight specific claims submitted over a one-year period that allegedly did not comply with Medicare guidelines, which represents 0.008% of all claims submitted by True Health to Medicare during that time period (November 19, 2015 through November 4, 2016). The claims at issue represented less than $3,000 of Medicare funds paid to True Health. True Health immediately provided a rebuttal statement to CMS on or around June 5, 2017, detailing the reasons why the suspension was not warranted and damaging to True Health’s business. That rebuttal statement provided documentary evidence that established that all the claimed discrepancies were not the fault of True Health, but in fact paperwork errors of the ordering provider….CMS has not disputed these facts.

Approximately one month later, on or around June 23, 2017, CMS reduced its holdback from 100 percent to 35 percent of all Medicare payments. Even with the reduced suspension, however, True Health and the other Debtors were unable to adequately fund their business. They were forced to seek outside funding to sustain their operations. Approximately $21 million in receivables have been held back by Medicare since May 2017. The company continually attempted to follow up with CMS on their findings but was directed to contact the United States Department of Justice (‘DOJ’) in late 2017. True Health was thereby led to believe that DOJ was responsible for the suspension. Accordingly, True Health engaged expert legal and regulatory counsel, Mintz Levin and McDermott, Will and Emery, respectively. The company also engaged Navigant Consulting, one of the most reputable healthcare advisory firms in the country. Together, these legal and financial advisory firms worked tirelessly to investigate and resolve the CMS suspension. True Health spent countless man hours and millions of dollars trying to resolve any CMS and DOJ issues. 

On December 21, 2018, the company and the DOJ had negotiated a comprehensive settlement agreement, including the terms of a new corporate integrity agreement, in what the company believed would finally and completely resolve all open issues with CMS and the DOJ. Both agencies led the company to believe that these agreements would be signed imminently. However, on February 1, 2019 and thereafter, Debtors received notice from the DOJ that changes were being made to material terms of the settlement agreement. Nevertheless, the Debtors agreed to the material changes by the government and a final settlement agreement was again reached on or about June 6, 2019. True Health received authority from its Board of Directors to sign the settlement agreement and the matter appeared finally resolved for a second time. Instead, on or about June 13, 2019, CMS (which had taken a backseat during the negotiations with DOJ since late 2017) reasserted itself in the process and imposed a new 100 percent suspension of all Medicare payments to True Health. Although the June 13 suspension notice claimed to be predicated on new allegations of fraud, in truth, the five (5) claims identified by CMS were based on the same facts and circumstances, and were part of the very same investigation that supported the 2017 suspension. To the best of my knowledge, all of the claims and conduct complained of by CMS and DOJ date back to time periods from 2018 or before. 

This second suspension by CMS was devastating to the company, particularly in light of the fact that True Health has continued to participate in the Medicare program and has continued to serve Medicare patients — without full compensation — for more than two years while it worked feverishly to secure a settlement with the government. Having been stretched to the breaking point financially over the preceding two years of suspension and fruitless negotiation with DOJ and CMS, True Health was unable to absorb further losses. Accordingly, on July 2, 2019, True Health sought emergency injunctive relief against CMS in the United States District Court for the Eastern District of Texas. True Health initially was successful in obtaining a temporary restraining order against CMS to preclude CMS from imposing the 100 percent holdback. On July 10, 2019—two days after the TRO was entered but more than two years after CMS initiated its first 2017 suspension of Medicare payments against True Health—True Health received two separate letters from Qlarant [a contractor hired by CMS to investigate Medicare fraud, waste and abuse, "FWD"), each dated July 5, 2019, notifying True Health that Qlarant had completed its review of services performed by True Health and determined that True Health had received Medicare overpayments. The first notice stated that True Health had ‘received Medicare payment in error, which has resulted in an extrapolated overpayment of $19,759,699.00 for the universe of claims with process dates 10/01/2015 through 01/20/2017.’ The second notice stated that True Health had ‘received Medicare  payment in error, which has resulted in an extrapolated overpayment of $7,707,443.32 for the universe of claims with process dates 05/25/2017 through 10/06/2017.”

The overpayment determinations each included a ‘Sampling Methodology’ report that described how the statistically valid random sample of claims was selected and how the estimated overpayment determinations were calculated. Importantly, these reports reveal that Qlarant had completed its review and calculation of overpayments well over a year before they were sent to True Health. The report calculating the $19,759,699.00 overpayment amount was dated September 26, 2017 and the report calculating the $7,707,443.32 overpayment amount was dated January 23, 2018. CMS withheld these final overpayment determinations effectively depriving True Health of an opportunity to pursue an administrative appeal under the Medicare Act and allow CMS to continue to escrow millions of dollars in Medicare payments owed to True Health. On July 22, 2019 the District Court denied True Health a preliminary injunction and dismissed the action for lack of subject matter jurisdiction. The continued suspension of all Medicare payments to True Health has resulted in irreparable damage to the Debtors’ liquidity and their businesses. Consequently, the Debtors were forced to file for Chapter 11 bankruptcy protection before this Court.

About the Debtors

Founded in 2014, the Debtors are one of the largest independent providers of laboratory management and diagnostic services in the United States. The Debtors operate accredited, full-service clinical laboratories that offer comprehensive testing for biomarkers that can indicate risk for cardiovascular disease, diabetes, autoimmune disorders, cancer, and other diseases and health testing services. The Debtors offer more than 400+ tests and have handled over 1,525,000 patient samples. 

The Debtors’ primary operations are located in Richmond, Virginia, which includes a 109,000 square foot facility built in 2013 consisting of 52,000 square feet for testing plus offices for billing, research and development, and other administrative functions. The Debtors also maintain a second laboratory in Frisco, Texas, which is a 7,000 square foot facility and includes 5,000 square feet for testing. From these two facilities, the Debtors serve approximately 1,250 physician offices located in 46 states plus the District of Columbia. The Debtors employ approximately 319 people in full-time and part-time positions. 

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