Quest Diagnostics 2006 Annual Report Download - page 117

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 statutes,
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 NID each received a subpoena from the United States
Attorney’s Office for the Eastern District of New York. The subpoenas request a wide range of business records,
including documents regarding testing and test kits related to parathyroid hormone (“PTH”) testing. The Company
is cooperating with the United States Attorney’s Office. The Company has voluntarily provided information,
witnesses and business records of NID and the Company, including documents related to testing and various test
kits other than PTH tests, which were not requested in the initial subpoenas. During the third quarter of 2006, the
government issued two additional subpoenas, one to NID and one to the Company. The subpoenas cover various
records, including records related to test kits in addition to PTH. The government may issue additional subpoenas
in the course of its investigation. This investigation 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 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 responded 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, fines or penalties, recommendation against
award of governmental contracts and criminal prosecution. On April 19, 2006, the Company decided to
discontinue the operations of NID. See Note 15 for further details.
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.
During the second quarter of 2006, the Company received a subpoena from the California Attorney
General’s Office. The subpoena seeks various documents including documents relating to billings to MediCal, the
California Medicaid program. The subpoena seeks documents from various time frames ranging from three to ten
years. The Company is cooperating with the California Attorney General’s Office.
Several of the proceedings discussed above are in their early stages of development and involve responding
to and cooperating with various government investigations and related subpoenas. While the Company believes
that at least a reasonable possibility exists that losses may have been incurred, based on the nature and status of
the investigations, the losses are either currently not probable or cannot be reasonably estimated.
Management has established reserves in accordance with generally accepted accounting principles for the
matters discussed above. Such reserves totaled less than $5 million as of December 31, 2006. 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.
As a general matter, providers of clinical laboratory testing services may be subject to lawsuits alleging
negligence or other similar legal claims. These suits could involve claims for substantial damages. Any
F-30
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)