DGX » Topics » Contract with United Healthcare

This excerpt taken from the DGX 10-Q filed Oct 27, 2006.

          Contract with United Healthcare

          In October 2006, we announced that the Company would not be a national contracted provider of laboratory services to UnitedHealthcare Group Inc., or UNH, beginning January 1, 2007. UNH accounts for approximately 7% of our consolidated net revenues.

          We expect to continue to service UNH’s members in certain markets as a contracted provider and in other markets as a non-contracted, or out-of-network provider. We are in the process of developing plans to retain as much of the UNH business as possible as an out-of-network provider. We are also developing plans to reduce costs to the extent that we do not retain UNH business. As part of our plans we are evaluating our rights as an out-of-network provider and preparing to defend those rights. In addition, we are educating patients, their physicians and employers that there are important differences between laboratory testing providers, and that they do have choice in selecting their testing provider. We cannot estimate at this time the financial impact of being an out-of-network provider on a national basis, and plan to provide additional information on our change in status with UNH in January 2007.

          Acquisition and Integration of LabOne, Inc.

          On November 1, 2005, we completed the acquisition of LabOne, Inc., or LabOne, in an all-cash transaction with a combined value of approximately $947 million, including approximately $138 million of assumed debt. See Note 3 to the Consolidated Financial Statements contained in our 2005 Annual Report on Form 10-K and Note 3 to the interim consolidated financial statements for a discussion of the LabOne acquisition.

          Through the acquisition, Quest Diagnostics acquired all of LabOne’s operations, including its health screening and risk assessment services to life insurance companies, as well as its clinical diagnostic testing services to healthcare providers and drugs-of-abuse testing to employers. LabOne had 3,100 employees and principal laboratories in Lenexa, Kansas, as well as in Cincinnati, Ohio. We financed the acquisition and related transaction costs and the repayment of substantially all of LabOne’s outstanding debt with proceeds from a $900 million private placement of senior notes, as described in Note 10 to the Consolidated Financial Statements contained in our 2005 Annual Report on Form 10-K, and from cash on hand.

          During the first quarter of 2006, we finalized our plan related to the integration of LabOne and recorded $23 million of costs, primarily comprised of employee severance benefits. Employee groups affected as a result of this plan include those involved in the testing of specimens, as well as administrative and other support functions. Of the total costs indicated above, $21 million related to actions that impact Quest Diagnostics’ employees and its operations and are comprised principally of employee severance benefits for approximately 600 employees. These costs were accounted for as a charge to earnings and included in “other operating (income) expense, net” within the consolidated statements of operations.

          In addition, $2.6 million of integration costs, related to actions that impact the employees and operations of LabOne, were accounted for as a cost of the LabOne acquisition and included in goodwill. Of the $2.6 million, $1.2 million related to asset write-offs with the remainder primarily associated with employee severance benefits for approximately 95 employees.

          As of September 30, 2006, accruals related to the LabOne integration plan totaled $22 million. While the majority of the accrued integration costs are expected to be paid in 2006 and 2007, there are certain severance costs that have payment terms extending into 2008. Upon completion of the LabOne integration, we expect to realize approximately $40 million of annual synergies and we expect to achieve this annual rate of synergies by the end of 2007.

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