Quest Diagnostics 2007 Annual Report Download - page 32

Our business could be negatively affected if we are unable successfully to continue to improve our
efficiency.
As noted above, government payers and healthcare insurers have taken steps to control the utilization and
pricing of healthcare services, including clinical testing services, and such steps may continue. If we are unable
to continue to improve our efficiency to enable us to mitigate these activities, our business could be negatively
affected.
Adverse resolution of the investigation related to NID may cause us material losses and have an adverse
impact on our client base and reputation.
NID and the Company each received a subpoena from the United States Attorney’s Office for the Eastern
District of New York during the fourth quarter of 2004. The subpoenas requested a wide range of business
records, including documents regarding parathyroid hormone (“PTH”) test kits manufactured by NID and PTH
testing performed by the Company. The Company has voluntarily and actively cooperated with the investigation,
providing information, witnesses and business records of NID and the Company, including documents related to
PTH tests and test kits, as well as other tests and test kits. 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.
During the third quarter of 2007, the government and the Company began settlement discussions. In the
course of those discussions, the government has disclosed to the Company certain of the government’s legal
theories regarding the amount of damages allegedly incurred by the government, which include alleged violations
of civil and criminal statutes including the False Claims Act and the Food, Drug and Cosmetics Act. Violations
of these statutes and related regulations could lead to a warning letter, injunction, fines or penalties, exclusion
from federal healthcare programs and/or criminal prosecution, as well as claims by third parties. The Company
has analyzed the government’s position and presented its own analysis which argued against many of the
government’s claims. In light of that analysis and based on the status of settlement discussions, the Company has
established a reserve, in accordance with generally accepted accounting principles, reflected in discontinued
operations, of $241 million in connection with these claims. Of the total reserve, $51 million and $190 million
was recorded in the third and fourth quarters, respectively, of 2007. The Company estimates that the amount
reserved represents the minimum expected probable loss with respect to this matter. The Company does not
believe that a reasonable estimate for these losses in excess of the established reserve can be made at this time.
The Company has recorded a deferred tax benefit associated with that portion of the reserve that it expects will
be tax deductible. Eventual losses related to these matters may substantially exceed the reserve, and the impact
could be material to the Company’s results of operations, cash flows and financial condition in the period that
such matters are determined or paid.
The Company continues to engage in discussions with the United States Attorney’s Office and those
discussions potentially could lead to an agreement in principle to resolve some or all of the matters in the near
future. There can be no assurance, however, when or whether a settlement may be reached, or as to its terms. If
the Company cannot reach an acceptable settlement agreement with the United States Attorney’s Office, the
Company would defend itself and NID and could incur significant costs in doing so.
We are subject to numerous legal and regulatory requirements governing our activities, and we may face
substantial fines and penalties, and our business activities may be impacted, if we fail to comply.
The Company’s business is subject to or impacted by extensive and frequently changing laws and regulations
in the United States (including at both the federal and state levels), and the other jurisdictions in which the
Company engages in business. While we seek to conduct our business in compliance with all applicable laws,
many of the laws and regulations applicable to us are vague or indefinite and have not been interpreted by the
courts, including those relating to:
•billing and reimbursement of clinical tests;
•certification of clinical laboratories;
•the anti-self-referral and anti-kickback laws and regulations;
•the laws and regulations administered by the U.S. Food and Drug Administration;
•the corporate practice of medicine;
•operational, personnel and quality requirements intended to ensure that clinical testing services are
accurate, reliable and timely;
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