Quest Diagnostics 2005 Annual Report Download - page 106

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)
Company believes that the leasehold improvements on the leased properties are significantly more valuable than
the related lease obligations. Based on the circumstances above, no liability has been recorded for any potential
contingent obligations related to the land leases. The Company has certain noncancelable commitments to
purchase products or services from various suppliers, mainly for telecommunications and standing orders to
purchase reagents and other laboratory supplies. At December 31, 2005, the approximate total future purchase
commitments are $55 million, of which $28 million are expected to be incurred in 2006.
In support of its risk management program, the Company has standby letters of credit issued under its
letter of credit lines to ensure its performance or payment to third parties, which amounted to $69 million at
December 31, 2005. The letters of credit, which are renewed annually, primarily represent collateral for current
and future automobile liability and workers’ compensation loss payments.
The Company has entered into several settlement agreements with various government and private payers
during recent years relating to industry-wide billing and marketing practices that had been substantially
discontinued by the mid-1990s. The federal or state governments may bring additional claims based on new
theories as to the Company’s practices which management believes to be in compliance with law. In addition,
certain federal and state statues, including the qui tam provisions of the federal False Claims Act, allow private
individuals to bring lawsuits against healthcare companies on behalf of government or private payers alleging
inappropriate billing practices. The Company is aware of certain pending lawsuits related to billing practices
filed under the qui tam provisions of the False Claims Act and other federal and state statutes. These lawsuits
include class action and individual claims by patients arising out of the Company’s billing practices. In addition,
the Company is involved in various legal proceedings arising in the ordinary course of business. Some of the
proceedings against the Company involve claims that are substantial in amount.
During the fourth quarter of 2004, the Company and its test kit manufacturing subsidiary, NID, each
received a subpoena from the United States Attorney’s Office for the Eastern District of New York. The
Company and NID have been cooperating with the United States Attorney’s Office. In connection with such
cooperation, the Company has been providing information and producing various business records of NID and
the Company, including documents related to testing and test kits manufactured by NID. This investigation by
the United States Attorney’s Office could lead to civil and criminal damages, fines and penalties and additional
liabilities from third party claims. In the second and third quarters of 2005, the U.S. Food and Drug
Administration (“FDA’’) conducted an inspection of NID and issued a Form 483 listing the observations made
by the FDA during the course of the inspection. NID is cooperating with the FDA and has filed its responses
to the Form 483. Noncompliance with the FDA regulatory requirements or failure to take adequate and timely
corrective action could lead to regulatory or enforcement action against NID and/or the Company, including, but
not limited to, a warning letter, injunction, suspension of production and/or distribution, seizure or recall of
products, fines or penalties, denial of pre-market clearance for new or changed products, recommendation
against award of government contracts and criminal prosecution.
During the second quarter of 2005, the Company received a subpoena from the United States Attorney’s
Office for the District of New Jersey. The subpoena seeks the production of business and financial records
regarding capitation and risk sharing arrangements with government and private payers for the years 1993
through 1999. Also, during the third quarter of 2005, the Company received a subpoena from the U.S.
Department of Health and Human Services, Office of the Inspector General. The subpoena seeks the production
of various business records including records regarding our relationship with health maintenance organizations,
independent physician associations, group purchasing organizations, and preferred provider organizations from
1995 to the present. The Company is cooperating with the United States Attorney’s Office and the Office of the
Inspector General.
Management has established reserves in accordance with generally accepted accounting principles for the
matters discussed above. Although management cannot predict the outcome of such matters, management does
not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company’s
financial condition but may be material to the Company’s results of operations or cash flows in the period in
which the impact of such matters is determined or paid. However, the Company understands that there may be
pending qui tam claims brought by former employees or other “whistle blowers’’, or other pending claims as to
which the Company has not been provided with a copy of the complaint and accordingly cannot determine the
extent of any potential liability.
F-29