Quest Diagnostics 2011 Annual Report Download - page 57

sufficient to cover currently estimated exposures, it is possible that we may incur liabilities in excess of our
recorded reserves or insurance coverage.
Reserves for other legal proceedings
Our businesses are subject to or impacted by extensive and frequently changing laws and regulations,
including inspections and audits by governmental agencies, in the United States (at both the federal and state
levels), and the other jurisdictions in which we conduct business. Although we believe that we are in compliance,
in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency
would not reach a different conclusion. Any noncompliance by us with applicable laws and regulations could
have a material adverse effect on our results of operations. In addition, these laws and regulations 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. We have, in the past, entered into
several settlement agreements with various government and private payers relating to industry-wide billing and
marketing practices that had been substantially discontinued. The federal or state governments may bring
additional claims based on new theories as to our practices which management believes to be in compliance with
law. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims
Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private
payers alleging inappropriate billing practices. We are aware of certain pending lawsuits including class action
lawsuits, and have received several subpoenas related to billing practices. See Note 16 to the Consolidated
Financial Statements for a discussion of the various legal proceedings that involve the Company.
We have a comprehensive compliance program that is intended to ensure the strict implementation and
observance of all applicable laws, regulations and Company policies. Management regularly reports to the
Quality, Safety & Compliance Committee of our Board of Directors regarding compliance operations. 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. Upon becoming aware of potential overpayments, we consider
all available facts and circumstances to estimate and record the amounts to be reimbursed. While we have
reimbursed these overpayments and have taken corrective action where appropriate, the government may not in
each instance accept these actions as sufficient.
The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves
a high degree of judgment. Management has established reserves for legal proceedings in accordance with
generally accepted accounting principles. Changes in facts and circumstances related to such proceedings could
lead to significant revisions to reserve estimates for such matters and could have a material impact on our results
of operations, cash flows and financial condition in the period that reserve estimates are revised or paid.
Accounting for and recoverability of goodwill
We evaluate the recoverability and measure the potential impairment of our goodwill annually, or more
frequently, in the case of other events that indicate a potential impairment. The annual impairment test is a two-
step process that begins with the estimation of the fair value of the reporting unit. The first step screens for
potential impairment and the second step measures the amount of the impairment, if any. Our estimate of fair
value considers publicly available information regarding the market capitalization of our Company, as well as (i)
the financial projections and future prospects of our business, including its growth opportunities and likely
operational improvements, and (ii) comparable sales prices, if available. As part of the first step to assess
potential impairment, we compare our estimate of fair value for the reporting unit to the book value of the
reporting unit. We determine the fair value of the reporting units based on the income approach. Under the
income approach, we calculate the fair value of a reporting unit based on the present value of estimated future
cash flows. If the book value is greater than our estimate of fair value, we would then proceed to the second step
to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying
value. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets
and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value
of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the
carrying amount of the reporting unit’s goodwill is greater than its implied fair value, an impairment loss will be
recognized in the amount of the excess. We believe our estimation methods are reasonable and reflect common
valuation practices.
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