Quest Diagnostics 2005 Annual Report Download - page 40

If we fail to comply with extensive laws and regulations, we could suffer fines and penalties or be
required to make significant changes to our operations.
We are subject to extensive and frequently changing federal, state and local laws and regulations. We
believe that, based on our experience with government settlements and public announcements by various
government officials, the federal government continues to strengthen its position on healthcare fraud. In addition,
legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel substantially
increased funding, powers and remedies to pursue suspected fraud and abuse. While we believe that we are in
material compliance with all applicable laws, many of the regulations applicable to us, including those relating
to billing and reimbursement of tests and those relating to relationships with physicians and hospitals, are vague
or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that could require us to make changes in our operations, including
our pricing and/or billing practices. If we fail to comply with applicable laws and regulations, we could suffer
civil and criminal damages, fines and penalties, including the loss of licenses or our ability to participate in
Medicare, Medicaid and other federal and state healthcare programs and additional liabilities from third-party
claims.
During the mid-1990s, Quest Diagnostics and SBCL settled government claims that primarily involved
industry-wide billing and marketing practices that both companies believed to be lawful. The aggregate amount
of the settlements for these claims exceeded $500 million. The federal or state governments may bring
additional claims based on new theories as to our practices that we believe to be in compliance with law. The
federal government has substantial leverage in negotiating settlements since the amount of potential damages far
exceeds the rates at which we are reimbursed, and the government has the remedy of excluding a
non-compliant provider from participation in the Medicare and Medicaid programs, which represented
approximately 18% of our consolidated net revenues for the year ended December 31, 2005.
We understand that there may be pending qui tam claims brought by former employees or other “whistle
blowers’’ as to which we have not been provided with a copy of the complaint and accordingly cannot
determine the extent of any potential liability. We are also aware of certain pending lawsuits related to billing
practices filed under the qui tam provisions of the civil 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, we are involved in various legal proceedings arising in the ordinary course of business.
Some of the proceedings against us involve claims that are substantial in amount.
During the fourth quarter of 2004, Quest Diagnostics Incorporated and Nichols Institute Diagnostics (NID),
our test kit manufacturing subsidiary, each received a subpoena from the United States Attorney’s Office for the
Eastern District of New York. Quest Diagnostics and NID have been cooperating with the United States
Attorney’s Office. In connection with such cooperation, we have been providing information and producing
various business records of NID and Quest Diagnostics, 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 Quest Diagnostics, 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, we 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, we 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. We
are cooperating with the United States Attorney’s Office and the Office of the Inspector General.
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 our financial condition, but may be
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