Quest Diagnostics 2007 Annual Report Download - page 104

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 relating back to as
early as 1995. The Company is cooperating with the United States Attorney’s Office and the Office of the
Inspector General.
During the second quarter of 2006, each of the Company and its subsidiary, Specialty Laboratories, Inc.
(“Specialty”), received a subpoena from the California Attorney General’s Office. The subpoenas seek various
documents including documents relating to billings to MediCal, the California Medicaid program. The subpoenas
seek documents from various time frames ranging from three to ten years. The Company and Specialty are
cooperating with the California Attorney General’s Office. The Company understands that there may be pending
qui tam claims brought by former employees or other “whistle blowers” as to which the Company cannot
determine the extent of any potential liability. The Company also is aware of certain pending individual or class
action lawsuits related to billing practices filed under the qui tam provisions of the civil False Claims Act and/or
other federal and state statutes, regulations or other laws.
Several of these other matters 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
other matters discussed above. Such reserves totaled less than $5 million as of December 31, 2007. 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, 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 testing services may be subject to lawsuits alleging negligence or
other similar legal claims. These suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on the Company’s client base and reputation. The Company
maintains various liability insurance coverage for claims that could result from providing or failing to provide
clinical testing services, including inaccurate testing results and other exposures. The Company’s insurance
coverage limits its maximum exposure on individual claims; however, the Company is essentially self-insured for
a significant portion of these claims. Reserves for such matters are established by considering actuarially
determined losses based upon the Company’s historical and projected loss experience. Management believes that
present insurance coverage and reserves are sufficient to cover currently estimated exposures. Although
management cannot predict the outcome of any claims made against the Company, management does not
anticipate that the ultimate outcome of any such proceedings or claims 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 claims is determined or paid.
16. DISCONTINUED OPERATIONS
During the fourth quarter of 2005, NID instituted its second voluntary product hold within a six-month
period due to quality issues, which adversely impacted the operating performance of NID. As a result, the
Company evaluated a number of strategic options for NID. On April 19, 2006, the Company decided to
discontinue NID’s operations. During the third quarter of 2006, the Company completed its wind down of NID
and classified the operations of NID as discontinued operations. Results of operations for NID have been reported
as discontinued operations in the accompanying consolidated statements of operations and related disclosures for
all periods presented.
F-34
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)