January 27, 2015 News & Features » Cover Story


Inside the Lab 

Can Richmond business darling Health Diagnostic Laboratory fight its way back after its leader's departure, a round of layoffs and multimillion-dollar lawsuits?

click to enlarge feat04_hdl_test_tubes.jpg

On routine workdays, Tonya Mallory leaves her home on 8 acres in rural Goochland County and heads south on U.S. Route 522. It’s an hour-long drive to her new job in Crewe, a town with a population of 2,326.

There, she serves as president and chief executive of ITS Manufacturing, a tiny company founded by her brother in April that makes highly precise parts for the automotive and defense industries.

“We’ve had a better year than we expected,” Mallory says.

It’s a new line of work for the veteran disease sleuth. Until September, Mallory held a much higher-profile job as president and chief executive of Health Diagnostic Laboratory, a Richmond-based health-testing company with a once-glowing reputation.

The 49-year-old wasn’t just an executive. She co-founded the company in 2008 and helped mastermind its remarkable success. Within five years, HDL had more than $383 million in annual revenues and nearly 800 employees. It built a flashy, $100 million headquarters in a downtown biotech park and gained scores of local accolades.

Badly wanting a homegrown technology champion, Richmond’s business community boasted of Mallory, HDL and how they were shining examples of entrepreneurial spirit taking root in Richmond. The company became a major and generous player on the local philanthropic scene.

click to enlarge In her former position as president and chief executive of HDL, Tonya Mallory was regarded as a highly focused driver of the company’s remarkable growth. - SCOTT ELMQUIST
  • Scott Elmquist
  • In her former position as president and chief executive of HDL, Tonya Mallory was regarded as a highly focused driver of the company’s remarkable growth.

But the dream deflated with incredible speed. On Sept. 23, Mallory abruptly resigned from HDL after news broke of an investigation into her company by the inspector general’s office of the U.S. Department of Health and Human Services and the Justice Department.

Two weeks before her departure, The Wall Street Journal reported on its front page that “HDL has collected hundreds of millions of dollars from Medicare while using a strategy that is under scrutiny: It paid doctors who sent it patients’ blood for testing.”

Such testing typically involves finding evidence of diabetes, heart and liver disease and cancer, says Mallory, who tells Style that she left HDL on her own volition. What makes HDL’s testing products special, she says, is that they can identify conditions that can be problems years later.

A patient may have had heart disease for 20 years, she says, “but not one person, not one physician, did anything about it.” She says that HDL’s predictive testing presages fundamental change for the $1.6 trillion health care industry.

But the road to that future has taken a turn. Today, the company’s sights are set lower while it faces the government investigation, several new lawsuits and a leadership transition. Since last summer, the privately held company has been scrambling to modify negative national publicity and is fending off accusations that go to the heart of how HDL, under the leadership of Mallory, handled sales and marketing.

Leading the reform effort is Joe McConnell, who took Mallory’s place as the new chief executive of HDL. He co-founded the company with Mallory, who says McConnell is a close friend she met in the mid-1990s.

McConnell’s packed résumé includes 12 years as head of cardiovascular laboratory medicine at the famed Mayo Clinic in Rochester, Minnesota. The 49-year-old has written 160 research articles and is considered an expert in advanced bio-markers that can identify patients prone to such problems as heart disease and diabetes.

Declining an in-person interview with Style, McConnell says in a written response to questions that HDL’s purpose has consistently been to provide “High quality testing and valuable state-of-the-art disease prevention information that helps physicians improve the health outcomes of their patients.”


click to enlarge Health Diagnostic Laboratory’s new headquarters at 737 N. Fifth Street cost $100 million. - SCOTT ELMQUIST
  • Scott Elmquist
  • Health Diagnostic Laboratory’s new headquarters at 737 N. Fifth Street cost $100 million.

Mallory’s up-and-coming story is familiar locally. No stranger to publicity, she has repeated her saga of a hard-working woman from a modest background on YouTube, in local publications and a stream of pep talks to business officials and students.

On the day after she resigned, Sept. 24, she was scheduled to be the featured speaker at a forum held by the Robins School of Business at the University of Richmond. Organizers scrambled to keep up with the fast-moving news that day, telling callers that Mallory would speak until realizing she wouldn’t be attending after all.

Mallory was named by Virginia Business as its 2013 businessperson of the year, and landed in a Style Weekly supplement, Executive Women in Business. In such profiles, she is described as being focused and tenacious in achieving her goals of being a business success, a public servant and a scientific visionary.

She grew up in Doswell in Hanover County. The daughter of a welder and an accounting clerk, she forged a document at age 13 so she could work at Kings Dominion. Later she paid her way through Virginia Commonwealth University while serving 12 hours a week with a rescue squad.

A good student, she thought of medicine as a career but balked at the expense. She got the idea to get a master’s degree in forensic science from her fascination with best-selling mystery writer Patricia Cornwell, whose stories center on Richmond’s medical examiner’s office. While getting that degree, she started working for Wako Diagnostics, a Japanese company that made chemicals used in laboratories.

She stayed with it for 17 years until she was recruited to work at San Francisco-based Berkeley HeartLab. She worked mostly in Richmond, she says, commuting on occasion to the West Coast. The promise of her heading a Richmond-based lab for the company beckoned, but dissolved after a corporate takeover.

According to news accounts, Mallory wanted Berkeley to start a second laboratory in Richmond that she would run. She says she was given the impression that the plan would go forward, but it was dropped when Celera Group, a diagnostic company, announced plans to buy Berkeley for $195 million in 2007.

Mallory promptly left the company, setting up HDL in Richmond the next year.

“My husband and I bet the farm,” she says. “We cashed out our children’s tuition accounts, our savings, the house and the whole thing that entrepreneurs do to start out HDL.”

Berkeley HeartLab saw things a different way. In its account, as given in 2010 legal filings for its lawsuit against HDL, Mallory and others stole their success. The testing company accused HDL, Mallory and two of her former coworkers of stealing intellectual property and market share.

One offshoot of the alleged scheme was the creation of BlueWave Health Consultants, an independent marketing corporation that managed most of HDL’s sales for the past four years.

Alabama-based BlueWave has close ties to HDL. It was set up in 2010 with help from Mallory, she says. Two of its executives, Calhoun Dent III and Robert Bradford Johnson, also previously worked for Berkeley HeartLab. They each own 1.5 percent of HDL’s stock. It’s unclear how much that’s worth because the company is privately held.

The defendants eventually settled the 2010 lawsuit for a reported $7 million. While declining to comment on that lawsuit, Mallory says that Berkeley salespeople were unhappy after the takeover by Celera and approached her about working for HDL.

Asked if she knew them when she worked at Berkeley, she says: “No, I actually didn’t know the salespeople. They found me in 2010.”

That was just after Celera’s buyout of Berkeley, she says, which “was a textbook 101 case of what not to do with an acquisition.” She declines to get into details, saying, “No, I don’t think I feel comfortable doing that.”


click to enlarge HDL has close ties with VCU, from which Mallory graduated. Although HDL is adjusting its charitable giving for 2015, a spokesman for VCU told Style in December that “the company is current on its gift, and we have a good working partnership.” - SCOTT ELMQUIST
  • Scott Elmquist
  • HDL has close ties with VCU, from which Mallory graduated. Although HDL is adjusting its charitable giving for 2015, a spokesman for VCU told Style in December that “the company is current on its gift, and we have a good working partnership.”

Mallory’s strategies seemed to work well for HDL. Within a few years, it was hiring at the rate of one employee a day — an achievement especially notable after the 2008 recession. The company thrust ahead with its eye-popping sales growth and drew attention for its easy-to-use, color-coded testing panels intended to simplify results for patients.

High-flying HDL spent $100 million on a new headquarters and research center at 737 N. Fifth St. in Richmond’s much-promoted Virginia BioTechnology Research Park. The downtown complex, completed last year, features floor-to-floor slides, which people can use to have more fun zipping downstairs.

The company also quickly became a prominent donor on the city’s philanthropic scene. In 2012, it gave $2.2 million to the Science Museum of Virginia. It also became the official wellness partner with the Washington Redskins, who built their summer training camp in the city. The company also donated $4 million to Virginia Commonwealth University, where Mallory studied and remains a strong basketball fan.

Local, marquee-name institutions such as Markel Corp. and Bon Secours Richmond Health System hired HDL for its executive early disease detection and health coaching services. In 2012, the global accounting firm Ernst & Young named Mallory a winner of the national entrepreneur of the year award.

The questions surrounding HDL and the tension leading into Mallory’s departure hit the company’s work force hard. In November, the corporation cut 132 positions — 15 percent of its employees — including 112 in Richmond. Gifts to local philanthropy were scaled back.

“For 2015, we have adjusted our community giving as we transition our business back to our core mission of preventing and beating heart disease and diabetes,” a company spokesman told Style in December. “It is important that we strengthen our company for future success.”

On Jan. 9 the company’s new chief, McConnell, ended HDL’s relationship with BlueWave. It was a dramatic move to dump HDL’s 10-year sales contract with BlueWave, which immediately sued HDL for $205 million. HDL has countersued.

With those ties cut, HDL has gone on a hiring spree for 52 salespeople.

The message is clear: HDL now sees the core of its problems as having to do with its lack of control over how its products were sold by BlueWave. McConnell says in a written response to Style that reforming sales is an important step for HDL’s future.

“We are going to be much more hands-on when it comes to sales,” McConnell says, adding that HDL will recruit and train its new sales force. Doing so will let the corporation monitor its performance rather than relying upon the “limited control inherent in using independent sales reps,” he says.

Mallory has no comment on the BlueWave matter.

click to enlarge Joe McDonnell, HDL’s new leader, says the company is revamping sales and cooperating with federal investigators. - HEALTH DIAGNOSTIC LABORATORY
  • Health Diagnostic Laboratory
  • Joe McDonnell, HDL’s new leader, says the company is revamping sales and cooperating with federal investigators.

In what could be another reform, McConnell is working behind the scenes to reach a deal with federal regulators, the Journal reports. The issues involve possible fraud with how HDL billed tests for patients covered by Medicare, which makes up about 40 percent of its revenues. A company spokesman says it “has been fully cooperating” with the Department of Justice in its investigation.

Any settlement is likely to focus on charges that HDL was paying doctors an extra $17 for each of the company’s tests they ordered for Medicare patients. Medicare had authorized a payment to doctors of only $3 for tests ordered, suggesting that HDL’s extra payments may have influenced doctors to choose HDL for testing — and that doing so may have driven HDL’s strong revenue growth.

HDL says that when it received “guidance” regarding the practice from the inspector general’s office of the Department of Health and Human Services on June 25, HDL “responded immediately and ended the practice.” It was one of several testing companies involved in the government probe.

Mallory tells Style that the federal review dates to January 2013, much earlier than previously reported. At the time, she says, the government had provided no guidance about how testing should be done or paid for. “When the government made certain guidance,” she says, “HDL certainly followed it.”

One reason why HDL chose to offer extra fees to doctors for testing was because large, competing labs such as Quest Diagnostics of Madison, New Jersey, and Laboratory Corporation of America of Burlington, North Carolina, have extensive networks of satellite clinics where patients can go for testing.

“HDL never had draw sites like LabCorp or Quest currently do,” Mallory says. “So we had to compensate for those services, and I don’t see it as any different from what LabCorp and Quest were doing.”

There are more challenges with HDL’s handling of sales, marketing and billing. In a lawsuit filed Oct. 15, Cigna Corp., a major Connecticut insurer, alleges that HDL conducted “an on-going, fraudulent fee-forgiving scheme” designed to lure Cigna’s patients to use HDL health tests.

Cigna says in its lawsuit that HDL told patients it would pick up their copays if they used HDL testing services, and then billed the charges to Cigna. This could contravene the system of copays in which patients have a chance to check their bills and complain about overcharges. Cigna seeks $84 million in damages.

Mallory declines to comment on the Cigna accusations, and HDL has denied the claims and seeks to have the lawsuit dismissed. HDL says Cigna is trying to hold down its own costs and has filed the suit in the wrong jurisdiction.


click to enlarge SCOTT ELMQUIST
  • Scott Elmquist

The questions raised by the federal government’s investigation hit while there was a broad conversation in the public consciousness about ethics. While the troubles at HDL were playing out last summer, the first-ever trial of a Virginia governor for corruption was drawing big headlines. For weeks, former Gov. Bob McDonnell and his wife, Maureen, sparked international interest. They were convicted.

HDL’s situation has drawn attention from national news media and medical circles. Larry Husten, a New York-based medical journalist who blogs at Forbes.com, has written several toughly worded posts asking whether the firm rakes in money by arranging unneeded tests and wonders if HDL is a true high-technology firm.

“Why did their revenues race up so fast?” Husten tells Style. “They call themselves a high-tech company, but they only had sales and marketing techniques that were illegal and immoral.”

Asked about Husten’s comment, Mallory says that HDL has registered many patents, and an HDL spokesman says that the company has “invested millions of dollars in our state-of-the art laboratory facilities in Richmond.”

Husten also is critical of what he says is possible “stacking” by HDL. That involves making extra money by having doctors add unproven, predictive tests that may be unneeded. “All of these tests get ordered at once,” Husten says. “It raises a lot of issues for physicians.”

In response, HDL says in a written statement that doctors can pick and choose which HDL tests they want to administer.

There are plenty of ethical issues confronting the health care industry, says Janine Wedel, an anthropology professor at George Mason University who often writes about ethics issues. She is unfamiliar with the HDL matter, but says one industry issue is “structured unaccountability among elite power brokers” who make critical decisions “that we, the public, don’t quite know about.”

Mallory says she remains proud of the company she helped create. “HDL is cutting-edge, probably five or 10 years ahead of its time,” she says. “It’s very challenging in every aspect to have insurance companies and outsiders see what’s going on and not doubt or criticize the actions of HDL.”

Her successor has his hands full trying to deal with the fallout and the company’s next steps. McConnell tells Style in a written statement that “change has been a constant at our company,” and that it is “forging a future” in which it “will do more to help end cardiovascular disease and diabetes than any of us could have imagined just a few years ago.” S



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