| LABORATORY CORP OF AMERICA HOLDINGS Item 1A Risk Factors 21 Item 1A Risk Factors Risks Associated with our Business Changes in federal, state, local and third-party payer regulations or policies (or in the interpretation of current regulations or policies) may adversely affect governmental and third-party reimbursement for clinical laboratory testing |
| Government payers, such as Medicare and Medicaid, as well as insurers, including managed care organizations, have increased their efforts to control the cost, utilization and delivery of health care services |
| From time to time, Congress has considered and implemented changes in the Medicare fee schedules in conjunction with budgetary legislation |
| Further reductions of reimbursement for Medicare services may be implemented from time to time |
| Reimbursement for the pathology services component of our business is also subject to statutory and regulatory reduction |
| Reductions in the reimbursement rates of other third-party payers may occur as well |
| Such changes in the past have resulted in reduced prices as well as added costs and have decreased test utilization for the clinical laboratory industry by adding often more complex new regulatory and administrative requirements |
| Further changes in federal, state, local and third-party payer regulations or policies may have a material adverse impact on our business |
| We could face significant monetary damages and penalties and/or exclusion from the Medicare and Medicaid programs if we violate health care anti-fraud and abuse laws |
| We are subject to extensive government regulation at the federal, state and local levels |
| Our failure to meet governmental requirements under these regulations, including those relating to billing practices and relationships with physicians and hospitals, could lead to civil and criminal penalties, exclusion from participation in Medicare and Medicaid and possible prohibitions or restrictions on the use of our laboratories |
| While we believe we have structured our operations and relationships with care in an effort to meet all statutory and regulatory requirements, there is a risk that government authorities might take a contrary position |
| Such occurrences, regardless of their outcome, could damage our reputation and adversely affect important business relationships we have with third parties |
| Our business would be harmed from the loss or suspension of a license or imposition of a fine or penalties under, or future changes in, the law or regulations of the Clinical Laboratory Improvement Amendments of 1988 or those of Medicare, Medicaid or other federal, state or local agencies |
| The clinical laboratory testing industry is subject to extensive regulation, and many of these statutes and regulations have not been interpreted by the courts |
| The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) extend federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency |
| The sanction for failure to comply with CLIA requirements may be suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, as well as significant fines and/or criminal penalties |
| State laws may require that laboratories and/or laboratory personnel meet certain qualifications, specify certain quality controls or require maintenance of certain records |
| We cannot assure you that applicable statutes and regulations will not be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that would adversely affect our business |
| Potential sanctions for violation of these statutes and regulations include significant fines and the suspension or loss of various licenses, certificates and authorizations, which could have a material adverse effect on our business |
| In addition, compliance with future legislation could impose additional requirements on us which may be costly |
| Failure to comply with environmental, health and safety laws and regulations, including the federal Occupational Safety and Health Administration Act and the Needlestick Safety and Prevention Act, which may result in fines and penalties and loss of licensure, and have a material adverse effect upon our business |
| We are subject to licensing and regulation under federal, state and local laws and regulations relating (21) _________________________________________________________________ to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials as well as to the safety and health of laboratory employees |
| All of our laboratories are subject to applicable federal and state laws and regulations relating to biohazard disposal of all laboratory specimens, and we utilize outside vendors for disposal of such specimens |
| In addition, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus |
| These requirements, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens |
| In addition, the Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and use of engineering controls such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace |
| Failure to comply with federal, state and local laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other enforcement actions which would have a material adverse effect on our business |
| In addition, compliance with future legislation could impose additional requirements on us which may be costly |
| Regulations requiring the use of “standard transactions” for health care services issued under HIPAA may negatively impact our profitability and cash flows |
| Pursuant to HIPAA, the Secretary of the Department of Health and Human Services, or HHS, has issued final regulations designed to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions while protecting the privacy and security of the information exchanged |
| HHS issued guidance on July 24, 2003 stating that it will not penalize a covered entity for post-implementation date transactions that are not fully compliant with the transactions standards, if the covered entity can demonstrate its good faith efforts to comply with the standards |
| HHS’ stated purpose for this flexible enforcement position was to “permit health plans to mitigate unintended adverse effects on covered entities’ cash flow and business operations during the transition to the standards, as well as on the availability and quality of patient care |
| ” However, beginning October 1, 2005, the Center for Medicare and Medicaid Services no longer processes incoming non-HIPAA-compliant electronic Medicare claims |
| The HIPAA transaction standards are complex, and subject to differences in interpretation by payers |
| For instance, some payers may interpret the standards to require us to provide certain types of information, including demographic information not usually provided to us by physicians |
| As a result of inconsistent application of transaction standards by payers or our inability to obtain certain billing information not usually provided to us by physicians, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues |
| In addition, new requirements for additional standard transactions, such as claims attachments or use of a national provider identifier, could prove technically difficult, time-consuming or expensive to implement |
| We are working closely with our payers to establish acceptable protocols for claims submissions and with our trade association and an industry coalition to present issues and problems as they arise to the appropriate regulators and standards setting organizations |
| Compliance with the HIPAA security regulations and privacy regulations may increase our costs |
| The HIPAA privacy and security regulations, which became fully effective in April 2003 and April 2005 respectively, establish comprehensive federal standards with respect to the uses and disclosures of protected health information by health plans, healthcare providers and healthcare clearinghouses, in addition to setting standards to protect the confidentiality, integrity and availability of protected health information |
| The regulations establish a complex regulatory framework on a variety of subjects, including: • the circumstances under which uses and disclosures of protected health information are permitted or required without a specific authorization by the patient, including but not limited to treatment (22) _________________________________________________________________ purposes, activities to obtain payments for our services, and our healthcare operations activities; • a patientapstas rights to access, amend and receive an accounting of certain disclosures of protected health information; • the content of notices of privacy practices for protected health information; and • administrative, technical and physical safeguards required of entities that use or receive protected health information |
| We have implemented policies and procedures related to compliance with the HIPAA privacy and security regulations, as required by law |
| The privacy regulations establish a “floor” and do not supersede state laws that are more stringent |
| Therefore, we are required to comply with both federal privacy regulations and varying state privacy laws |
| In addition, for healthcare data transfers from other countries relating to citizens of those countries, we must comply with the laws of those other countries |
| The federal privacy regulations restrict our ability to use or disclose patient identifiable laboratory data, without patient authorization, for purposes other than payment, treatment or healthcare operations (as defined by HIPAA), except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations |
| The privacy and security regulations provide for significant fines and other penalties for wrongful use or disclosure of protected health information, including potential civil and criminal fines and penalties |
| Although the HIPAA statute and regulations do not expressly provide for a private right of damages, we also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information |
| Increased competition, including price competition, could have a material adverse impact on our net revenues and profitability |
| The clinical laboratory business is intensely competitive both in terms of price and service |
| Pricing of laboratory testing services is one of the significant factors often used by health care providers and third-party payers in selecting a laboratory |
| As a result of the clinical laboratory industry undergoing significant consolidation, larger clinical laboratory providers are able to increase cost efficiencies afforded by large-scale automated testing |
| This consolidation results in greater price competition |
| We may be unable to increase cost efficiencies sufficiently, if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition |
| Additional competition, including price competition, could have a material adverse impact on our net revenues and profitability |
| Failure to develop, or acquire, licenses for new or improved testing technologies, or our customers using new technologies to perform their own tests, may limit our ability to successfully achieve our business strategy |
| The clinical laboratory testing industry is subject to changing technology and new product introductions |
| Our success in maintaining a leadership position in genomic and other advanced testing technologies will depend, in part, on our ability to license new and improved technologies for early diagnosis on favorable terms |
| We may not be able to negotiate acceptable licensing arrangements and we cannot be certain that such arrangements will yield commercially successful diagnostic tests |
| If we are unable to license these testing methods at competitive rates, our research and development costs may increase as a result |
| In addition, if we are unable to license new or improved technologies to expand our esoteric testing businesses, our testing methods may become outdated when compared with our competition and our testing volume and revenue may be materially and adversely affected |
| In addition, advances in technology may lead to the development of more cost-effective point-of-care testing equipment that can be operated by physicians or other healthcare providers in their offices or by patients themselves without requiring the services of freestanding clinical laboratories |
| Development of such technology and its use by our customers would reduce the demand for our laboratory testing services and negatively impact our revenues |
| Currently, most clinical laboratory testing is categorized as “high” or “moderate” complexity, and (23) _________________________________________________________________ thereby is subject to extensive and costly regulation under CLIA The cost of compliance with CLIA reduces the cost effectiveness for most physicians to operate clinical laboratories in their offices, and other laws limit the ability of physicians to have ownership in a laboratory and to refer tests to such a laboratory |
| However, manufacturers of laboratory equipment and test kits could seek to increase their sales by marketing point-of-care laboratory equipment to physicians and by selling test kits approved for home or physician office use to both physicians and patients |
| Diagnostic tests approved for home use are automatically deemed to be “waived” tests under CLIA, which may then be performed in physician office laboratories as well as by patients in their homes with minimal regulatory oversight |
| Other tests meeting certain FDA criteria also may be classified as “waived” for CLIA purposes |
| The FDA has regulatory responsibility over instruments, test kits, reagents and other devices used by clinical laboratories and has taken responsibility from the Centers for Disease Control for classifying the complexity of tests for CLIA purposes |
| Increased approval of “waived” test kits could lead to increased testing by physicians in their offices, which could affect our market for laboratory testing services and negatively impact our revenues |
| Changes in payer mix, including an increase in capitated managed-cost health care or new national or networking managed care purchasing models, could have a material adverse impact on our net revenues and profitability |
| In addition, tests ordered by a single physician may be billed to different payers depending on the medical benefits of a particular patient |
| Increases in the percentage of services billed to government and managed care payers could have an adverse impact on our net revenues |
| For the year ended December 31, 2005, the percentage of accessions by payer was: • private patients - 2dtta4prca, • Medicare, Medicaid and other — 21dtta3prca, • commercial clients - 34dtta8prca and • managed care — 41dtta5prca |
| Managed care providers typically contract with a limited number of clinical laboratories and then designate the laboratory or laboratories to be used for tests ordered by participating physicians |
| The majority of our managed care testing is negotiated on a fee-for-service basis at a discount from our patient prices |
| Such discounts have historically resulted in price erosion and have negatively impacted our operating margins |
| In addition, managed care organizations have used capitated payment contracts in an attempt to fix the cost of laboratory testing services for their enrollees |
| Under a capitated payment contract, the clinical laboratory and managed care organization agree to a per member, per month payment to cover all laboratory tests during the month, regardless of the number or cost of the tests actually performed |
| Such contracts shift the risk of additional testing beyond that covered by the capitated payment to the clinical laboratory |
| Pursuant to legislation passed in late 2003, the percentage of Medicare beneficiaries enrolled in Medicare managed care plans is expected to increase |
| For the year ended December 31, 2005, capitated contracts accounted for approximately dlra136dtta5 million, or 4dtta1prca, of our net sales |
| Recently, managed care companies have announced their intention to adopt new national or networking managed care laboratory services purchasing models |
| If we are unable to participate in these new models, it would have a material adverse impact on our net revenues and profitability |
| In addition, Medicare and Medicaid and private insurers have increased their efforts to control the cost, utilization and delivery of health care services, including clinical laboratory services |
| Measures to regulate health care delivery in general, and clinical laboratories in particular, have resulted in reduced prices, added costs and decreased test utilization for the clinical laboratory industry by increasing complexity and adding new regulatory and administrative requirements |
| We expect efforts to impose reduced reimbursements and more stringent cost controls by government and other payers to continue |
| If we cannot offset additional reductions in the payments we receive for our services by reducing costs, increasing test volume and/or introducing new procedures, it would have a (24) _________________________________________________________________ material adverse impact on our net revenues and profitability |
| A failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers, could impact our ability to successfully grow our business |
| To offset efforts by payers to reduce the cost and utilization of clinical laboratory services, we need to obtain and retain new customers and alliance partners |
| In addition, a reduction in tests ordered or specimens submitted by existing customers, without offsetting growth in our customer base, could impact our ability to successfully grow our business and could have a material adverse impact on our net revenues and profitability |
| We compete primarily on the basis of the quality of our testing, reporting and information systems, our reputation in the medical community, the pricing of our services and our ability to employ qualified personnel |
| Our failure to successfully compete on any of these factors could result in the loss of customers and a reduction in our ability to expand our customer base |
| In addition, we rely on developing alliances with hospitals to expand our business through traditional and non-traditional business models |
| Reference agreements, or the traditional business model, provide a means for hospitals to outsource patient laboratory testing services that are esoteric or complex, or that are not time critical |
| A non-traditional business model is where we provide technical support services in a variety of health care settings |
| Our ability to expand the number of alliances with hospitals and maintain current alliances, many of which are terminable on short notice, could impact our ability to successfully grow our business |
| A failure to integrate newly acquired businesses and the costs related to such integration could have a material adverse impact on our net revenues and profitability |
| The successful integration of any business we may acquire in the future entails numerous risks, including, among others: • loss of key customers or employees; • difficulty in consolidating redundant facilities and infrastructure and in standardizing information and other systems; • failure to maintain the quality of services that such companies have historically provided; • coordination of geographically-separated facilities and workforces; and • diversion of management’s attention from the day-to-day business of our company |
| We cannot assure you that current or future acquisitions, if any, or any related integration efforts will be successful, or that our business will not be adversely affected by any future acquisitions |
| Even if we are able to successfully integrate the operations of companies or businesses we may acquire in the future, we may not be able to realize the benefits that we expect to result from such integration, including projected cost savings within the projected time frame or at all |
| Adverse results in material litigation matters could have a material adverse effect upon our business |
| Although we are not currently involved in any material legal actions, we may become subject in the ordinary course of business to material legal action related to, among other things, intellectual property disputes, professional liability and employee-related matters, as well as inquiries from governmental agencies and Medicare or Medicaid carriers requesting comment on allegations of billing irregularities that are brought to their attention through billing audits or third parties |
| Legal actions could result in substantial monetary damages as well as damage to our reputation with customers, which could have a material adverse effect upon our business |
| (25) _________________________________________________________________ An inability to attract and retain experienced and qualified personnel could adversely affect our business |
| The loss of key management personnel or our inability to attract and retain experienced and qualified skilled employees at our clinical laboratories and research centers could adversely affect the business |
| Our success is dependent in part on the efforts of key members of our management team |
| Our success in maintaining our leadership position in genomic and other advanced testing technologies will depend in part on our ability to attract and retain skilled research professionals |
| In addition, the success of our clinical laboratories also depends on employing and retaining qualified and experienced laboratory professionals, including specialists, who perform our clinical laboratory testing services |
| In the future, if competition for the services of these professionals increases, we may not be able to continue to attract and retain individuals in our markets |
| Our revenues and earnings could be adversely affected if a significant number of professionals terminate their relationship with us or become unable or unwilling to continue their employment |
| Billing for laboratory services is a complex process |
| Laboratories bill many different payers such as doctors, patients, hundreds of different insurance companies, Medicare, Medicaid and employer groups, all of which have different billing requirements |
| We believe that our bad debt expense, which was 5dtta3prca of our net revenues at December 31, 2005, is the result of non-credit related issues which slow the billing process and patients who are unable or unwilling to pay |
| If we are unable to maintain our days sales outstanding level (“DSO”), which as of December 31, 2005 was approximately 54 days, our bad debt expense and DSO could increase, which would have an adverse effect on our business |
| Failure in our information technology systems could significantly increase testing turn-around time or billing processes and otherwise disrupt our operations |
| Our laboratory operations depend, in part, on the continued and uninterrupted performance of our information technology systems |
| Despite network security measures and other precautions we have taken, our information technology systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems |
| In addition, we are in the process of integrating the information technology systems of our recently acquired subsidiaries, and we may experience system failures or interruptions as a result of this process |
| Sustained system failures or interruption of our systems in one or more of our laboratory operations could disrupt our ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party |
| Failure of our information technology systems could adversely affect our business, profitability and financial condition |
| Operations may be disrupted and adversely impacted by the effects of natural disasters such as hurricanes and earthquakes, or acts of terrorism or other criminal activities |
| Our operations may be adversely impacted by the effects of natural disasters such as hurricanes and earthquakes, or acts of terrorism or other criminal activities |
| Such events may result in a temporary decline in the number of patients who seek laboratory testing services |
| In addition, such events may temporarily interrupt our ability to transport specimens, our ability to utilize certain laboratories or to receive material from our suppliers |
| Failure to comply with the Sarbanes-Oxley Act of 2002, including Section 404 of that Act which requires management to report on, and our independent registered public accounting firm to attest to and report on, our internal controls, could cause sanctions and investigations by regulatory authorities, such as the SEC If we are not able to continue to comply with the requirements of Section 404 in a timely manner, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements |
| In addition, we may be required to incur costs in connection with continued testing and strengthening of our internal control system |