Would Theranos have been caught earlier by healthcare experts?

The company's pivot to retail spared Holmes a lot of scrutiny

Things that feel wrong happen all the time in healthcare. A baby born in January costs the parents more than a baby born just a few days earlier in December. Insulin, a lifesaving drug, costs hundreds or thousands of dollars a month. Hospitals sometimes sue their own employees over medical debt.

But all of these things are the result of misaligned incentives;1 very rarely are there healthcare people who seem deliberately evil or fraudulent.

I think that’s why the Elizabeth Holmes story is so appealing to me. She appears to have been intentionally defrauding people. It’s almost refreshing because you can look at her and say, without too much nuance, that it was spectacularly wrong.

Some in the tech industry have tried to distance themselves from Elizabeth Holmes and Theranos. According to them, the company was always on the sidelines in Silicon Valley; they point to the fact that most well-known venture capital firms passed on investing. But as The Information founder Jessica Lessin argues in a recent op-ed, Theranos was an extreme version of what was happening in Silicon Valley in 2009.

It was also an extreme version of what can happen when a company tries to go around the traditional healthcare gatekeepers. In lieu of a national healthcare system, patients in the U.S. rely on a tangled network of insurers, hospitals, federal agencies, and individual healthcare professionals to ensure their care is high-quality, standardized, and safe. As I’ve written about extensively in this newsletter, this tangled network also dramatically slows down the rate of innovation and adoption of new technologies. But one of the conclusions of the Theranos saga has to be that, sometimes, this slowdown can be good.

Rather than selling to traditional healthcare entities like pharmaceutical partners or hospitals, Theranos followed a retail strategy that removed any potential oversight from any healthcare professional. Then, Holmes marketed this strategy as a way to empower patients over their own care.

This is a stunningly successful pitch. While it’s one that many digital health companies still use, Theranos went so far as to remove any oversight or input from healthcare experts: In its final retail iteration, Theranos machines were barely overseen by phlebotomists. At the end, it was just the patient and the (barely functioning) machine.

Clinical trial partner

In 2009, Theranos was struggling. The financial crisis was impacting economies across the world, and Theranos had already spent a large portion of the millions it had raised. To keep the company afloat, Sunny Balwani, Elizabeth’s then-partner who was independently wealthy from the sale of a software company, offered a $13 million interest-free personal loan. Balwani then came on as a member of the executive team.

Around this time, Theranos also made a pivot to retail. 

Originally, Theranos had intended to partner with pharmaceutical companies running clinical trials. Patients in the clinical trial would get a Theranos reader in their homes, and they would run tests on their own blood several times a day, with results sent back to the pharmaceutical company running the trial. If the patient started to experience a bad reaction to the drug, the pharmaceutical company could theoretically lower the dosage, allowing the pharmaceutical company to reduce costs by as much as 30%, according to John Carreyrou’s reporting on the Theranos pharmaceutical pitch deck.

Unfortunately, Theranos’s machines didn’t actually work. According to Bad Blood, Carreyrou’s book about Theranos, the company used fake readings during demonstrations with pharmaceutical companies. 

Pivot to retail

I haven’t been able to find details about why Theranos pivoted to retail—although prosecutors alleged in opening remarks that it was at least in part because Holmes had run out of money to pay employees—but it seems obvious. Pharmaceutical companies’ clinical trials are so heavily regulated, and patients’ blood is tested so many times, that it would have been impossible for Theranos to have kept up its alleged scam. There are too many independent checks that would’ve inevitably caught the fake results.

In 2009 and 2010, Theranos began pitching the significantly less regulated retail companies Walgreens and Safeway.

Theranos won committed backers at Walgreens and Safeway quickly. These internal champions of Theranos—Jay Rosan of Walgreens’s Innovation Team, and Safeway CEO Steve Burd—initially brushed aside the signs that Theranos technology had been far overstated. When Theranos brought a machine to Walgreens headquarters and tested the blood of senior executives, the company refused to return results, even after repeated requests. Despite this opacity, Walgreens was committed to competing against CVS, Holmes had won key allies on the Walgreens team, and the company proceeded with the partnership.

Once Holmes had slid past Walgreens scrutiny, there were no more barriers before the machines were available for patient use. Theranos readers were placed in Walgreens retail stores, to be used for patients with a prescription for a number of blood tests.

A few years later, Holmes tried to take another step away from the traditional healthcare system. In 2014 and 2015, when many in the U.S. were panicking about Ebola, Holmes started talking about putting Theranos readers in major airports for travelers from abroad to prick their fingers and get an instant Ebola test result.

The airport idea failed. But the concept was dangerous. Entrusting standalone Theranos readers with determining Ebola infection meant removing Theranos results from even the passing scrutiny that a Walgreens phlebotomist might be able to provide. The test process would be entirely devolved to the patient, who had no reason not to trust tests that were purportedly FDA-approved.

“Empower[ing] individuals”

Theranos wouldn’t have existed without Elizabeth Holmes and her power to create a vision, and this extended into how she marketed the pivot to retail. After all, you don’t really get to go on Mad Money by selling lab equipment to Pfizer. You go on Mad Money because you’re circumventing the traditional system altogether, in a way that seems too good to be true.

In his introduction of Holmes in an appearance in April 2015, Jim Cramer referred to Theranos in these terms:

[Theranos is] a revolutionary diagnostics company that empowers individuals to take better control of their own bodies while at the same time upending the traditional power dynamics [that are] costly, inefficient, painful for the client. This is a revolutionary company that threatens to change healthcare the same way Amazon changed retail.

Besides being wildly cringe in retrospect, this descriptor is telling. The way Amazon changed retail! Just as Amazon cut out the middle-man of retail to bring cheap goods directly to consumers, Theranos was devolving power to individual patients, rather than the traditional healthcare system.

This is appealing because it’s necessary—patients do need more control over their healthcare. But the problem is that Theranos got there by removing healthcare experts from the equation altogether.


In writing this, I kept trying to come up with a different conclusion than “healthcare bureaucracy can be good, actually.” But that conclusion seems necessary. Holmes and Balwani ultimately made the pivot to retail because their technology couldn’t hold up to the scrutiny and regulation inherent to a bureaucracy like Pfizer or Novartis. Their plan to sell directly to Walgreens and Safeway went around almost every form of built-in healthcare oversight, including physicians, pharmacists, independent lab technicians, and nurses. By pivoting to retail, they ensured that their machines would get about as much scrutiny as the free blood pressure cuffs in the Walmart pharmacy section.

Interestingly, Holmes’ lawyers are using this very point in her defense. Yesterday, during opening remarks, her team alleged that Walgreens and Safeway were “more daring, or maybe more desperate” to decide to take a chance on Theranos. In other words, Holmes’s lawyers blamed the retail companies for failing to scrutinize Theranos as thoroughly as other, traditional healthcare companies may have done. 

Working with insurers, hospitals, and pharmaceutical companies can be grinding, and many promising companies have failed simply because they can’t get their technology adopted by a bureaucracy that could stand to benefit from something a little more up-to-date than fax machines. But at the same time, the tangled network of traditional healthcare can stop alleged frauds like Theranos from harming even more patients. Traditional healthcare, the anti-hero?

This information shouldn’t be taken as investment advice (obviously), and the opinions expressed are entirely my own, not representative of my employer or anyone else.


And sometimes greed