Government Investigations and Related Claims
We are subject to
extensive and frequently changing federal, state and local laws and
regulations. We believe that, based on
our experience with government settlements and public announcements by various
government officials, the federal government continues to strengthen its
position on healthcare fraud. In addition, legislative provisions relating to healthcare fraud and abuse give
federal enforcement personnel substantially increased funding, powers and
remedies to pursue suspected cases of fraud and abuse. 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 billing practices. If we fail to comply with applicable laws
and regulations, we could suffer civil and criminal penalties, including the
loss of licenses or our ability to participate in Medicare, Medicaid and other
federal and state healthcare programs.
During the mid‑1990s,
Quest Diagnostics and SBCL settled government claims that primarily involved
industry-wide billing and marketing practices that both companies
believed to be lawful. The aggregate
amount of the settlements for these claims exceeded $500 million. 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 fines 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 net revenues during 2003.
Although management
believes that established reserves for claims are sufficient, including qui tam
cases, of which management is aware, it is possible that additional information
may become available that may cause the final resolution of these matters to exceed
established reserves by an amount which could be material to our results of
operations and cash flows in the period in which such claims are settled. We do
not believe that these issues will have a material adverse effect on our
overall financial condition. However, 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.
As an integral part of
our compliance program discussed below, we investigate all reported or
suspected failures to comply with federal 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.
Compliance Program
Compliance with all government rules and
regulations has become a significant concern throughout the clinical laboratory
industry because of evolving interpretations of regulations and the national
debate over healthcare. We established a compliance program early in 1993.
We emphasize the development of training
programs intended to ensure the strict implementation and observance of all
applicable laws, regulations and Company policies. Further, we conduct in‑depth
reviews of procedures, personnel and facilities to assure regulatory compliance
throughout our operations. The Quality, Safety and Compliance Committee of the
Board of Directors requires periodic reporting of compliance operations from
management.
We seek to conduct our business in compliance with
all statutes and regulations applicable to our operations. Many of these statutes and regulations have
not been interpreted by the courts. We cannot assure investors that applicable statutes or regulations will not be
interpreted or applied by a prosecutorial, regulatory or judicial authority in
a manner that would adversely affect us. Potential sanctions for violation of
these statutes include significant damages, penalties, and fines, exclusion
from participation in governmental healthcare programs and the loss of various
licenses, certificates and authorization necessary to operate some or all of
our business, which could have a material adverse effect on our business.
Intellectual Property Rights
Other companies or
individuals, including our competitors, may obtain patents or other property
rights that would prevent, limit or interfere with our ability to develop,
perform or sell our tests or operate our business. As a result, we may be involved in intellectual property
litigation and we may be found to infringe on the proprietary rights of others,
which could force us to do one or more of the following:
• cease developing, performing or selling
products or services that incorporate the challenged intellectual property;
• obtain and pay for licenses from the holder
of the infringed intellectual property right;
• redesign or reengineer our tests;
• change our business processes; or
• pay substantial damages, court costs and
attorneys’ fees, including potentially increased damages for any infringement held to be willful.
Patents generally are not issued until several
years after an application is filed. The possibility that, before a patent is issued to a third party, we may
be performing a test or other activity covered by the patent is not a defense
to an infringement claim. Thus, even tests that we develop could become the subject of infringement claims if a
third party obtains a patent covering those tests.
Infringement and other intellectual property
claims, regardless of their merit, can be expensive and time‑consuming to
litigate. In addition, any requirement
to reengineer our tests or change our business processes could substantially
increase our costs, force us to interrupt product sales or delay new test
releases. In the past, we have settled
several disputes regarding our alleged infringement of intellectual property
rights of third parties. We are
currently involved in settling several additional disputes. We do not believe that resolution of these
disputes will have a material adverse effect on our results of operations, cash
flows or financial condition. However,
infringement claims could arise in the future as patents could be issued on
tests or processes that we may be performing, particularly in such emerging
areas as gene-based testing and other specialty testing.
Insurance
As a general matter,
providers of clinical laboratory 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 our client base and reputation. We maintain various liability insurance
programs for claims that could result from providing or failing to provide
clinical laboratory testing services, including inaccurate testing results and
other exposures. Our insurance coverage limits our maximum exposure on individual claims; however, we are
essentially self-insured for a significant portion of these claims. The basis for claims reserves incorporates
actuarially determined losses based upon our 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 our financial
position but may be material to our results of operations and cash flows in the
period in which such claims are resolved. Similarly, although we believe that we will be able to obtain adequate
insurance coverage in the future at acceptable costs, we cannot assure you that
we will be able to do so.
Employees
At December 31, 2003 and
2002, we employed approximately 37,200 and 33,400 people, respectively. These totals exclude employees of the joint
ventures where we do not have a majority interest. We have no collective
bargaining agreements with any unions covering any employees in the United
States, and we believe that our overall relations with our employees are good. |
