Quest Diagnostics 2006 Annual Report Download - page 43

overhead) and below the amounts reimbursed by Medicare. Advisory opinions are not binding but may be
indicative of the position that prosecutors may take in enforcement actions. The OIG’s opinion, if enforced, could
result in fines and possible exclusion and could require us to eliminate offering discounts to clients below the
rates reimbursed by Medicare. The OIG subsequently issued a letter clarifying that it did not intend to imply that
discounts are a per se violation of the federal anti-kickback statute, but may merit further investigation depending
on the facts and circumstances presented.
In addition, since 1992, a federal anti-“self-referral” law, commonly known as the “Stark” law, prohibits,
with certain exceptions, Medicare payments for laboratory tests referred by physicians who personally, or through
a family member, have an investment interest in, or a compensation arrangement with, the testing laboratory.
Since January 1995, these restrictions have also applied to Medicaid-covered services. Many states have similar
anti-“self-referral” and other laws that are not limited to Medicare and Medicaid referrals and could also affect
investment and compensation arrangements with physicians. We cannot predict if some of the state laws will be
interpreted contrary to our practices.
In April 2003, the OIG issued a Special Advisory Bulletin addressing what it described as “questionable
contractual arrangements” in contractual joint ventures. The OIG Bulletin focused on arrangements where a
healthcare provider, or Owner, expands into a related healthcare business by contracting with a healthcare
provider, or Manager, that already is engaged in that line of business for the Manager to provide related
healthcare items or services to the patients of the Owner in return for a share of the profits of the new line of
business. While we believe that the Bulletin is directed at “sham” arrangements intended to induce referrals, we
cannot predict whether the OIG might choose to investigate all contractual joint ventures, including our joint
ventures with various hospitals or hospital systems.
In August 2006, the OIG published a final rule providing safe harbors to the federal anti-kickback statute
and CMS published a final rule providing exceptions to the Stark self-referral prohibition law with respect to e-
prescribing items and services and electronic health records (EHR) items and services. See “Healthcare
Information Technology.”
Government Investigations and Related Claims
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 cases of fraud and abuse. While we seek to conduct
our business in 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. Such occurrences, regardless of their outcome, could
damage our reputation and adversely affect important business relationships with third parties. If we fail to
comply with applicable laws and regulations, we could suffer civil and criminal damages, fines and penalties,
exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and
authorizations necessary to operate our business, as well as incur additional liabilities from third party claims, all
of which could have a material adverse effect on our business. Certain federal and state statues, regulations and
other laws, including the qui tam provisions of the federal False Claim Act, allow private individuals to bring
lawsuits against healthcare companies on behalf of government payers, private payers and/or patients alleging
inappropriate billing practices.
During the mid-1990s, Quest Diagnostics and SBCL settled significant government claims that primarily
involved industry-wide billing and marketing practices that both companies believed to be lawful. 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 17% of our net revenues during 2006.
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, regulations
and/or other laws. These lawsuits include class action and individual claims by patients arising out of the
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