Quest Diagnostics 2010 Annual Report Download - page 98

clinical laboratories, including the Company and several of its subsidiaries. The complaint was originally filed by
a competitor laboratory in California under the whistleblower provisions of the California False Claims Act. The
complaint was unsealed on March 20, 2009.
The complaint alleges that, among other things, the Company overcharged MediCal for testing services and
violated the California False Claims Act. Violations of this statute and related regulations could lead to an
injunction, fines or penalties, and exclusion from MediCal, as well as claims by third parties.
In the third quarter of 2010, the California Department of Health Care Services (the “Department”)
conducted an audit of the Company’s billing to MediCal. The Department contends that the Company’s billings
are not consistent with applicable California regulations, as currently interpreted by the Department. While the
Company believes it is in compliance in all material respects with California requirements applicable to billing
for clinical laboratory testing, the Company entered into an interim agreement under which it has agreed to
temporarily suspend billing MediCal for a period of up to six months through March 1, 2011, during which it
continues to provide services. If the California Lawsuit is not resolved by March 1, 2011, the Company and the
Department have agreed to negotiate in good faith the terms of a further agreement. The Company has continued
to recognize revenue from MediCal for services provided in accordance with its interpretation of California
regulations related to billing for clinical laboratory testing. An unfavorable outcome of the California Lawsuit
could, among other consequences noted above, result in reduced reimbursement from the MediCal program.
Revenue from the MediCal program in 2010 was approximately $66 million. At December 31, 2010, amounts
due from MediCal totaled approximately $25 million, including those amounts related to services performed
during the temporary suspension of billing under the interim agreement described above.
The Company has been engaged in discussions in an attempt to resolve the matters described above. During
the fourth quarter of 2010, the Company reached an understanding, which was highly conditioned, to settle these
matters pursuant to which the Company would pay $241 million. Conditions included, but were not limited to,
reaching an agreement regarding the manner in which the Company’s future billings would be treated by the
Department. However, as of this date, the Company has been unable to reach an agreement to settle these
matters, and no assurance can be given that an agreement will be reached. If the Company cannot resolve these
matters through these discussions, it will continue to vigorously defend itself, and will pursue any available
collateral actions to enforce its rights, if necessary. Based on the current facts and circumstances, a liability, if
any, is not determinable at this time. Although management does not anticipate that the ultimate outcome of such
matters will have a material adverse effect on the Company’s financial condition, the outcome 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.
In 2005, the Company received a subpoena from the U.S. Department of Health and Human Services, Office
of Inspector General, seeking business records including records regarding the Company’s relationship with health
maintenance organizations, independent physician associations, group purchasing organizations, and preferred
provider organizations relating back to 1995. The Company has cooperated with the investigation. Subsequently,
in November 2009, the U.S. District Court for the Southern District of New York partially unsealed a civil
complaint, U.S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated, filed against the
Company under the whistleblower provisions of the federal False Claims Act. The complaint alleges, among
other things, violations of the federal Anti-Kickback Statute and the federal False Claims Act in connection with
the Company’s pricing of laboratory services. The complaint seeks damages for alleged false claims associated
with laboratory tests reimbursed by government payors, treble damages and civil penalties.
In June 2009, a shareholder plaintiff filed a purported derivative action in the Superior Court of New Jersey,
Morris County, on behalf of the Company against certain present and former directors and officers of the
Company based on, among other things, their alleged breaches of fiduciary duties in connection with the
manufacture, marketing, sale and billing related to certain test kits manufactured by NID. The complaint includes
claims for, among other things, breach of fiduciary duty and waste of corporate assets and seeks, among other
things, damages and remission of compensation received by the individual defendants. The Company filed a
motion to dismiss the complaint on June 30, 2010. The motion was granted, and the time for an appeal has
expired.
In April 2010, a putative class action was filed against the Company and NID in the U.S. District Court for
the Eastern District of New York on behalf of entities that allegedly purchased or paid for certain of NID’s test
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)