Atherotech's Bankruptcy: A Case Study in Regulation's Chilling Effect

Last week, Birmingham-based Atherotech filed Chapter 7 bankruptcy, laying off hundreds of employees with little notice and no severance. The company's demise is an unfortunate result of an industry that can no longer succeed in the face of stifling regulation.

The Facts

Atherotech Diagnostic Labs was a 20-year old company that specialized in cardiometabolic testing and disease management solutions. On March 10, 2016, the company filed for liquidation in bankruptcy. In mid-2015, the company employed over 300 people, and now every one of those employees is out of a job.

Unfortunately for Atherotech and its hundreds of employees, it got caught between regulators that were so concerned about protecting one group of fictional people, it forgot about another group of actual people.

In 2014, the Department of Health and Human Services received a tip, possibly even from Atherotech, that Health Diagnostic Laboratories was fraudulently billing. Once bitten, the now shy DHHS decided to take a "better safe than sorry" approach and started hammering other industry players with increased scrutiny, despite there being no evidence of fraud outside of HDL. This increased scrutiny increased compliance costs for companies like Atherotech to the tune of millions of dollars.

As insurers were decreasing payments to get into compliance with the newly implemented Affordable Care Act, Atherotech's profits dried up, leaving the company begging for more money to fill the gap. Two of Atherotech's primary backers interpreted this as a short-term situation that would still yield a long-term benefit, and doubled-down on their investment. However, Regions Bank was unwilling to invest further due to pressure from its regulators to avoid debt-to-equity swaps that would be necessary to make the investment profitable. Twice Regions was approached for a capital call, and twice Regions declined.

With no money in the bank, Atherotech shut its doors the first week of March, despite increasing revenues. Employees received almost no notice. The company doesn't even own its primary asset, so none of its 1,800 creditors will receive compensation for their trouble.

Bottom Line

A-TeamThis is a situation of regulators protecting a fictional group of people while actually hurting real people. No one has alleged that Atherotech was fraudulently billing. No one has suggested that Regions would hurt its investors by taking an equity stake in Atherotech. However, those two concerns were the major concerns by each of the two companies' regulating bodies. Despite no proof, the regulators were more interested in "being safe than sorry." Now 300 people are out of a job, and neither the DHHS or federal banking regulators can point to a single person that was protected by their chilling actions.

Don't you love it when a plan comes together?