Quest Diagnostics 2006 Annual Report Download - page 47

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 liabilities from third party claims, all of which could have a material
adverse effect on our business.
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 consolidated net revenues for the year ended December 31, 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. 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.
A pending investigation by the United States Attorney’s Office for the Eastern District of New York
regarding the operations of NID could lead to civil and criminal damages, fines and penalties and additional
liabilities from third party claims against us. We have also received other subpoenas seeking production of
business and financial records regarding arrangements with government and private payers. For additional details
regarding these matters, please see “Business – Government Investigations and Related Claims”.
Several of these 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.
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
material to our results of operations and cash flows in the period in which the impact of such matters is
determined or paid.
As an integral part of our compliance program, we investigate all reported or suspected failures to comply
with federal and state healthcare reimbursement requirements. Any non-compliance that results in Medicare or
Medicaid overpayments is reported to the government and reimbursed by us. As a result of these efforts, we have
periodically identified and reported overpayments. While we have reimbursed these overpayments and have taken
corrective action where appropriate, we cannot assure investors that in each instance the government will
necessarily accept these actions as sufficient.
Failure to timely or accurately bill for our services could have a material adverse effect on our net
revenues and bad debt expense.
Billing for laboratory services is extremely complicated. See “Business – Billing”. Depending on the billing
arrangement and applicable law, we must bill various payers, such as patients, insurance companies, Medicare,
Medicaid, physicians, hospitals and employer groups, all of which have different billing requirements.
Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies
and procedures adds further complexity to the billing process. See “Business – Regulation of Reimbursement for
Clinical Laboratory Services”. Changes in laws and regulations could negatively impact our ability to bill our
clients or increase our costs. CMS establishes procedures and continuously evaluates and implements changes to
the reimbursement process.
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