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EXHIBIT 99.4
LEGAL AND REGULATORY PROCEEDINGS
As discussed in greater detail below, NMC is the subject of investigations
by several federal agencies and authorities, the outcome of which cannot be
predicted. If the government were successfully to pursue claims arising from any
of these investigations, NMC or one or more of its subsidiaries could be subject
to civil or criminal penalties, including substantial fines, suspension of
payments or exclusion from the Medicare program. Any such result could have a
material adverse effect on NMC's business, financial condition and results of
operation. In addition, as discussed below, NMC has become aware that it is the
subject of a qui tam or "whistleblower" action with respect to some or all of
the issues raised by the government investigations; and NMC may be the subject
of other "whistleblower" actions.
OIG INVESTIGATION
On October 17, 1995, NMC received five investigative subpoenas from the
OIG. The subpoenas were issued in connection with an investigation being
conducted by the OIG, the U.S. Attorney for the District of Massachusetts and
others concerning possible violations of federal laws, including the
anti-kickback statute and the False Claims Act. The subpoenas call for extensive
document production relating to various aspects of NMC's business.
The five subpoenas cover the following areas: (a) NMC's corporate
management, personnel and employees, organizational structure, financial
information and internal communications; (b) NMC's dialysis services business,
principally relating to its Medical Director contracts and compensation; (c)
NMC's treatment of credit balances resulting from overpayments received under
the Medicare ESRD program, its billing for home dialysis services, and its
payment of supplemental medical insurance premiums on behalf of indigent
patients; (d) LifeChem's laboratory business, including documents relating to
testing procedures, marketing, customers, competition and certain over-payments
totaling approximately $4.9 million that were received by LifeChem from the
Medicare program with respect to laboratory services rendered between 1989 and
1993; and (e) NMC Homecare and, in particular, information concerning IDPN
billing practices related to various services, equipment and supplies and
payments made to third parties as compensation for administering IDPN therapy.
NMC is cooperating with the OIG investigation and has made, and is expected
to continue to make, extensive document production in response to the subpoenas.
Because of the breadth of the subpoenas, the government has identified and is
continuing to identify specific categories of documents that it is requiring NMC
to produce and has deferred compliance with substantial portions of the
subpoenas at this time. NMC has received another OIG subpoena requiring the
production of limited categories of additional documents relating to subject
matters covered by the original subpoenas and may receive additional such
subpoenas from time to time.
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The government has identified a number of particular areas of its inquiry.
The government has indicated that the areas identified are not exclusive, and
that it may pursue additional areas. As noted, the penalties applicable under
the anti-kickback statute, the False Claims Act and other federal and state
statutes and regulations applicable to NMC's business can be substantial. See
"-- Anti-Kickback Statute, False Claims Act, Stark Law and Fraud and Abuse
Laws." While NMC asserts that it is able to offer legal and/or factual defenses
with respect to the areas the government has identified, there can be no
assurance that the federal government and/or one or more state agencies will not
claim that NMC has violated statutory or regulatory provisions. Additionally, it
is possible that one or more qui tam actions alleging that NMC submitted false
claims to the government may have been filed under seal by former or current NMC
employees or other individuals who may have familiarity with one or more of the
issues under investigation. As noted, under the False Claims Act, any such
private plaintiff could pursue an action against NMC in the name of the U.S. at
his or her own expense if the government declines to do so. It is also possible
that one or more private payors will claim that NMC received excess payments and
will seek reimbursement and other damages from NMC.
An adverse determination with respect to any of the issues addressed by the
subpoenas, or any of the other issues that have been or may be identified by the
government, could have a material adverse impact on NMC and could result in the
payment of substantial fines, penalties and reimbursements or the suspension of
payments or exclusion of NMC or one or more of its subsidiaries from the
Medicare program. Under the terms of the Reorganization, any potential resulting
liability will be retained by NMC, and New Grace will be indemnified by FNMC
against all potential liability arising from or relating to the OIG
Investigation. See "THE REORGANIZATION -- The Distribution Agreement." The
particular areas identified by the government to date are as follows.
Medical Director Compensation
The government is investigating whether DSD's compensation arrangements
with its Medical Directors constitute payments to induce referrals, which would
be illegal under the anti-kickback statute, rather than payment for services
rendered. DSD compensated the substantial majority of its Medical Directors on
the basis of a percentage of the earnings of the dialysis center for which the
Medical Director was responsible from the inception of NMC's predecessor in 1972
until January 1, 1995, the effective date of Stark II. Under the arrangements in
effect prior to January 1, 1995, the compensation paid to Medical Directors was
adjusted to include "add backs," which represented a portion of the profit
earned by MPG on products purchased by the Medical Director's facility from MPG
and (until January 1, 1992) a portion of the profit earned by LifeChem on
laboratory services provided to patients at the Medical Director's facility.
These adjustments were designed to allocate a profit factor to each dialysis
center relating to the profits that could have been realized by the center if it
had provided the items and services directly rather than through a subsidiary of
NMC. The percentage of profits paid to any specific Medical Director was reached
through negotiation, and was typically a provision of a multi-year consulting
agreement.
Since January 1, 1995, DSD has compensated its Medical Directors on a fixed
fee arrangement to comply with the requirements of Stark II. As part of the
arrangement, approximately 25% of the Medical Director's compensation is held
back and earned by the Medical Director on the basis of the Medical Director's
achievement of quality and cost containment goals. In renegotiating its Medical
Director compensation arrangements in connection with Stark II, DSD took account
of the compensation levels paid to its Medical Directors in prior years.
Certain government representatives have expressed the view in meetings with
counsel for NMC that arrangements where the Medical Director was or is paid
amounts in excess of the "fair market value" of the services rendered may
evidence illegal payments to induce referrals, and that hourly compensation is a
relevant measure for evaluating the "fair market value" of the services. DSD
does not compensate its Medical Directors on an hourly basis and has asserted to
the government that hourly compensation and "fair market value" are not relevant
factors in determining whether the anti-kickback statute has been violated.
Because of the wide variation in the profitability of its facilities, and the
variation in the profit percentage contractually negotiated between DSD and its
Medical Directors, there is a wide variation in the amounts that have been
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paid to Medical Directors. The Medical Director contracts negotiated in
connection with the requirements of Stark II also have a wide variation in
Medical Director compensation.
The compensation that DSD has paid and is continuing to pay to a material
number of its Medical Directors could be viewed as being in excess of "fair
market value," both in absolute terms and in terms of hourly compensation. NMC
has asserted to the government that its compensation arrangements do not
constitute illegal payments to induce referrals. NMC has also asserted to the
government that OIG auditors repeatedly reviewed NMC's compensation arrangements
with its Medical Directors in connection with their audits of the costs claimed
by DSD; that the OIG stated in its audit reports that, with the exception of
certain technical issues, NMC had complied with applicable Medicare laws and
regulations pertaining to the ESRD program; and that NMC reasonably relied on
these audit reports in concluding that its program for compensating Medical
Directors was lawful. There has been no indication that the government will
accept NMC's assertions concerning the legality of its arrangements generally or
NMC's assertion that it reasonably relied on OIG audits, or that the government
will not focus on specific arrangements that DSD has made with one or more
Medical Directors and claim that those specific arrangements were or are
unlawful.
The government is also investigating whether DSD's profit sharing
arrangements with its Medical Directors influenced them to order unnecessary
ancillary services and items. NMC has asserted to the government that the rate
of utilization of ancillary services and items by its Medical Directors is
reasonable and that it did not provide illegal inducements to Medical Directors
to order ancillary services and items.
Credit Balances
In the ordinary course of business, Medicare providers like DSD receive
overpayments from Medicare intermediaries for services that they provide to
Medicare patients. Medicare intermediaries commonly direct such providers to
notify them of the overpayment and not remit such amounts to the intermediary by
check or otherwise unless specifically requested to do so. In 1992, HCFA adopted
a regulation requiring certain Medicare providers, including dialysis centers,
to file a quarterly form listing unrecouped overpayments with the Medicare
intermediary responsible for reimbursing the provider. The first such filing was
required to be made as of June 30, 1992 for the period beginning with the
initial date that the provider participated in the Medicare program and ending
on June 30, 1992.
The government is investigating whether DSD intentionally understated the
Medicare credit balance reflected on its books and records for the period ending
June 30, 1992 by reversing entries out of its credit balance account and taking
overpayments into income in anticipation of the institution of the new filing
requirement. DSD's policy was to notify Medicare intermediaries in writing of
overpayments upon receipt and to maintain unrecouped Medicare overpayments as
credit balances on the books and records of DSD for four years; overpayments not
recouped by Medicare within four years would be reversed from the credit balance
account and would be available to be taken into income. NMC asserts that
Medicare overpayments that have not been recouped by Medicare within four years
are not subject to recovery under applicable regulations. NMC also asserts that
its initial filing with the intermediaries disclosed the credit balance on the
books and records of DSD as shown in accordance with its policy.
The government is also investigating whether DSD failed to disclose
Medicare overpayments that resulted from DSD's obligation to rebill commercial
payors for amounts originally billed to Medicare under HCFA's initial
implementation of the OBRA 93 amendments to the secondary payor provisions of
the Medicare Act. See "-- OBRA 93." DSD experienced delays in reporting a
material amount of overpayments after the implementation of the OBRA 93
amendments. NMC asserts that most of these delays were the result of the
substantial administrative burdens placed on DSD as a consequence of the
changing and inconsistent instructions issued by HCFA with respect to the OBRA
93 amendments and were not intentional. Substantially all overpayments resulting
from the rebilling effort associated with the OBRA 93 amendments have now been
reported. Procedures are in place that are designed to ensure that subsequent
overpayments resulting from the OBRA 93 amendments will be reported on a timely
basis.
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Supplemental Medical Insurance
DSD provides grants or loans for the payment of premiums for supplemental
medical insurance (under which Medicare Part B coverage is provided) on behalf
of a small percentage of its patients who are financially needy. The government
is investigating this practice. NMC asserts that the practice is lawful.
Overpayments for Home Dialysis Services
NMC acquired HIC, an in-center and home dialysis service provider, in 1993.
At the time of the acquisition, HIC was the subject of a claim by HCFA that HIC
had received payments for home dialysis services in excess of the Medicare
reasonable charge for services rendered prior to February 1, 1990. NMC settled
the HCFA claim against HIC in 1994. The government is investigating whether the
settlement concerning the alleged overpayments made to HIC resolved all issues
relating to such alleged overpayments. The government is also investigating
whether an NMC subsidiary, Home Dialysis Services, Inc. ("HDS"), received
payments similar to the payments that HIC received, and whether HDS improperly
billed for home dialysis services in excess of the monthly cost cap for services
rendered on or after February 1, 1990. The government is investigating whether
NMC was overpaid for services rendered. NMC asserts that the billings by HDS
were proper.
LifeChem
Overpayments. On September 22, 1995, LifeChem voluntarily disclosed
certain billing problems to the government that had resulted in LifeChem's
receipt of approximately $4.9 million in overpayments from the Medicare program
for laboratory services rendered between 1989 and 1993. LifeChem asserts that
most of these overpayments relate to errors caused by a change in LifeChem's
computer systems and that the remainder of the overpayments were the result of
the incorrect practice of billing for a complete blood count with differential
when only a complete blood count was ordered and performed, and of the incorrect
practice of billing for a complete blood count when only a hemoglobin or
hematocrit test was ordered. LifeChem asserts that the overpayments it received
were not caused by fraudulent activity.
LifeChem made these disclosures to the government as part of an application
to be admitted to a voluntary disclosure program begun by the government in
mid-1995. At the time of the disclosures, LifeChem tendered repayment to the
government of the $4.9 million in overpayments. After the OIG investigation was
announced, the government indicated that LifeChem had not been accepted into its
voluntary disclosure program. The government has deposited the $4.9 million
check with NMC's approval. The matters disclosed in LifeChem's September 22,
1995 voluntary disclosure are a subject of the OIG Investigation.
On June 7, 1996, LifeChem voluntarily disclosed an additional billing
problem to the government that had resulted in LifeChem's receipt of between
$40,000 and $160,000 in overpayments for laboratory services rendered in 1991.
LifeChem advised the government that this overpayment resulted from the
submission for payment of a computer billing tape that had not been subjected to
a "billing rules" program designed to eliminate requests for payments for
laboratory tests that are included in the composite rate and that were not
eligible for separate reimbursement. LifeChem also advised the government that
there may have been additional instances during the period from 1990 to 1992
when other overpayments were received as a result of the submission of computer
billing tapes containing similar errors and that it was in the process of
determining whether such additional overpayments were received. On June 21,
1996, LifeChem advised the government that the 1991 billing problem disclosed on
June 7, 1996 resulted in an overpayment of approximately $112,000. LifeChem also
advised the government that certain records suggest instances in July 1990 and
August 31 through September 11, 1990, when billing tapes may have been processed
without rules processing. LifeChem is continuing its effort to determine whether
any other overpayments occurred.
Capitation for routine tests and panel design. In October 1994, the OIG
issued a special fraud alert in which it stated its view that the industry
practice of offering to perform or performing the routine tests covered by the
Composite Rate at a price below fair market value, coupled with an agreement by
a dialysis center to refer all or most of its non-Composite Rate tests to the
laboratory, violates the anti-kickback statute. See "-- Reimbursement." In
response to this alert, LifeChem changed its practices with respect to testing
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by the Composite Rate to increase the amount charged to both DSD and third-party
dialysis centers and reduce the number of tests provided for the fixed rate. The
government is investigating LifeChem's practices with respect to these tests.
Benefits provided to dialysis centers and persons associated with dialysis
centers. The government is investigating whether any DSD or third-party
dialysis center or any person associated with any such center was provided with
benefits in order to induce them to use LifeChem services. Such benefits could
include, for example, discounts on RPD supplies, the provision of computer
equipment, the provision of money for the purchase of computer equipment, and
the provision of research grants. NMC has identified certain instances in which
benefits were provided to MPG customers who purchased medical products from RPD
and used LifeChem's laboratory services. The government may claim that the
provision of such benefits violates, among other things, the anti-kickback
statute.
Business and testing practices. As noted above, the government has
identified a number of specific categories of documents that it is requiring NMC
to produce at this time. In addition to documents relating to the areas
discussed above, the government has also required LifeChem to produce at this
time documents relating to the equipment and systems used by LifeChem in
performing and billing for clinical laboratory blood tests, the design of the
test panels offered and requisition forms used by LifeChem, the utilization rate
for certain tests performed by LifeChem, recommendations concerning diagnostic
codes to be used in ordering tests for patients with given illnesses or
conditions, and internal and external audits and investigations relating to
LifeChem's billing and testing. These areas of inquiry are similar to inquiries
that the OIG has made to other Medicare and Medicaid providers in the clinical
laboratory industry within the past several years.
IDPN
Administration kits. As discussed above, one of the principal activities
of NMC Homecare is to provide IDPN therapy to dialysis patients at both
NMC-owned facilities and at facilities owned by other providers. See
"-- Business of NMC -- NMC Homecare." IDPN therapy is typically provided to the
patient 12-13 times per month during dialysis treatment. Bills are submitted to
Medicare on a monthly basis and include separate claims for reimbursement for
supplies, including, among other things, nutritional solutions, administration
kits and infusion pumps. In February 1991, the Medicare carrier responsible for
processing NMC Homecare's IDPN claims issued a Medicare advisory to all
parenteral and enteral nutrition suppliers announcing a coding change for
reimbursement of administration kits provided in connection with IDPN therapy
for claims filed for items provided on or after April 1, 1991. The Medicare
allowance for administration kits during this period was approximately $625 per
month per patient. The advisory stated that IDPN providers were to indicate the
"total number of actual days" when administration kits were "used," instead of
indicating that a one-month supply of administration kits had been provided. In
response, NMC Homecare billed for administration kits on the basis of the number
of days that the patient was on an IDPN treatment program during the billing
period, which typically represented the entire month, as opposed to the number
of days the treatment was actually administered. During the period from April
1991 to June 1992, NMC Homecare had an average of approximately 1,200 IDPN
patients on service.
In May 1992, the carrier issued another Medicare advisory to all PEN
suppliers in which it stated that it had come to the carrier's attention that
some IDPN suppliers had not been prorating their billing for administration kits
used by IDPN patients and that providers should not bill for administration kits
on the basis of the number of days that the patient was on an IDPN treatment
program during the billing period. The advisory stated further that the carrier
would be conducting "a special study to determine whether or not overpayments
have occurred as a result of incorrect billing" and that "[i]f overpayments have
resulted, providers that have incorrectly billed" would "be contacted so that
refunds can be recovered." NMC Homecare revised its billing practices in
response to this advisory for claims filed for items provided on or after July
1, 1992. NMC Homecare was not asked to refund any amounts relating to its
billings for administration kits following the issuance of the second advisory.
The government is investigating whether NMC submitted false claims for
administration kits during the period from April 1, 1991 to June 30, 1992. NMC
asserts that the claims submitted in connection with billing
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for administration kits were proper. The government may claim that NMC
Homecare's billing for administration kits during this period violates, among
other things, the False Claims Act.
Infusion Pumps and IV Poles. During the time period covered by the
subpoenas, Medicare regulations permitted IDPN providers to bill Medicare for
the infusion pumps and, until 1992, for IV poles provided to IDPN patients in
connection with the administration of IDPN treatments. These regulations do not
expressly specify that a particular pump and IV pole be dedicated to a specific
patient, and NMC asserts that these regulations permitted NMC Homecare to bill
Medicare for an infusion pump and IV pole so long as the patient was infused
using a pump and IV pole. Despite the absence of an express regulatory
specification, NMC Homecare developed a policy to deliver to a dialysis center a
dedicated infusion pump and IV pole for each patient, although NMC cannot
represent that it followed this policy in every instance. The government is
investigating the propriety of NMC Homecare's billings for infusion pumps and IV
poles.
As noted above, under the new policies published by HCFA with respect to
IDPN therapy, NMC will not be able to bill for infusion pumps after July 1,
1996. The government discontinued reimbursement for IV poles in 1992.
"Hang fees" and other payments. IDPN therapy is typically provided to the
patient during dialysis by personnel employed by the dialysis center treating
the patient with supplies provided and billed to Medicare by NMC Homecare in
accordance with the Medicare parenteral nutrition supplier rules. In order to
compensate dialysis centers for the costs incurred in administering IDPN therapy
and monitoring the patient during therapy, NMC Homecare followed the
industry-wide practice of paying a "hang fee" to the center. Dialysis centers
are responsible for reporting such fees to HCFA on their cost reports. For DSD
dialysis centers, the fee was $30 per administration, based upon internal DSD
cost calculations. For third-party dialysis centers, the fee was negotiated with
each center, typically pursuant to a written contract, and ranged from $15 to
$65 per administration. NMC has identified instances in which other payments and
amounts beyond that reflected in a contract were paid to these third-party
centers.
In July 1993, the OIG issued a management advisory alert to HCFA in which
it stated that "hang fees" and other payments made by suppliers of IDPN to
dialysis centers "appear to be illegal as well as unreasonably high." The
government is investigating the nature and extent of the "hang fees" and other
payments made by NMC Homecare as well as payments by NMC Homecare to physicians
whose patients have received IDPN therapy. The government may claim that the
payments by NMC Homecare to dialysis centers violate, among other things, the
anti-kickback statute.
Utilization of IDPN. Since 1984, when HCFA determined that Medicare should
cover IDPN and other parenteral nutrition therapies, NMC has been an industry
leader in identifying situations in which IDPN therapy is beneficial to ESRD
patients. It is the policy of NMC Homecare to seek Medicare reimbursement for
IDPN therapy only when it is prescribed by a patient's treating physician and
when it believes that the circumstances satisfy the requirements published by
HCFA and its carrier agents. Prior to 1994, HCFA and its carriers approved for
payment more than 90% of the IDPN claims submitted by NMC Homecare. Since 1994,
the rate of approval for Medicare reimbursement for IDPN claims submitted by NMC
Homecare for new patients, and by the infusion industry in general, has fallen
to approximately 9%. NMC contends that the reduction in rates of approval has
occurred because HCFA and its carriers have implemented an unauthorized change
in coverage policy without giving notice to providers. See "-- IDPN Coverage
Issues." While NMC Homecare has continued to offer IDPN to patients pursuant to
the prescription of the patients' treating physicians and to submit claims for
Medicare reimbursement when it believes the requirements stated in HCFA's
published regulations are satisfied, other providers have responded to the drop
in the approval rate for new Medicare IDPN patients by abandoning the Medicare
IDPN business, cutting back on the number of Medicare patients to whom they
provide IDPN, or declining to add new Medicare patients. The number of patients
to whom NMC Homecare provides IDPN has thus increased.
The government is investigating the utilization rate of IDPN therapy among
NMC patients and whether NMC submitted IDPN claims to Medicare for patients who
were not eligible for coverage or with inadequate documentation of eligibility.
NMC asserts that the utilization rate of IDPN therapy among its dialysis
patients, which, in 1995, averaged less than 3.5%, is the result of the factors
discussed above and that it is the policy of NMC Homecare to seek Medicare
reimbursement for IDPN therapy prescribed by the patient's
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treating physician in accordance with the requirements published by HCFA and its
carrier agents. There can be no assurance that the government will accept NMC's
view or that the government will not claim that NMC Homecare submitted IDPN
claims for individuals who were not eligible for coverage or with inadequate
documentation of eligibility.
QUI TAM ACTION
Grace and NMC have recently become aware that a qui tam action has been
filed in the United States District Court for the Southern District of Florida,
Southern Division (the "Florida Action"). The original complaint in the Florida
Action was filed under seal in 1994. The Relator filed an Amended Complaint
under seal on July 8, 1996. The seal with respect to the Amended Complaint was
partially lifted pursuant to court order to permit the government to provide
Grace and NMC with a copy of the Amended Complaint. Grace and NMC received
copies of the Amended Complaint on July 10, 1996. Pursuant to a court order
dated July 26, 1996, the seal was further modified to permit Grace to provide
copies of the Amended Complaint to Fresenius AG, lenders involved in the NMC
credit facility and their respective counsel and to permit Grace and NMC to
describe the allegations of the Amended Complaint in its securities filings with
respect to the Reorganization.
The Amended Complaint alleges, among other things, that Grace, Grace
Chemicals and NMC violated the False Claims Act in connection with certain
billing practices regarding IDPN and the administration of EPO. The Amended
Complaint alleges that as a result of this allegedly wrongful conduct, the
United States suffered actual damages in excess of $200 million and alleges that
the defendants are liable to the United States for three times the amount of the
alleged damages plus fines of up to $10,000 per false claim. The Amended
Complaint also seeks the imposition of a constructive trust on the proceeds of
the NMC dividend to Grace Chemicals for the benefit of the United States on the
ground that the Reorganization constitutes a fraudulent conveyance that will
render NMC unable to satisfy the claims asserted in the Amended Complaint. As
noted under "-- OIG Agreements," the United States has agreed to release any
such claim.
OIG AGREEMENTS
As a result of discussions with representatives of the United States in
connection with the OIG investigation, certain agreements (the "OIG Agreements")
have been entered into to guarantee the payment of any obligations of NMC to the
United States relating to or arising out of the OIG investigation and the
Florida Action (the "Government Claims"). For the purposes of the OIG
Agreements, an Obligation is (a) a liability or obligation of NMC to the United
States in respect of a Government Claim pursuant to a court order (i) which is
final and nonappealable or (ii) the enforcement of which has not been stayed
pending appeal or (b) a liability or obligation agreed to be an Obligation in a
settlement agreement executed by Fresenius Medical Care, Grace or NMC, on the
one hand, and the United States, on the other hand. As stated elsewhere herein,
the outcome of the OIG investigation cannot be predicted. The entering into of
the OIG Agreements is not an admission of liability by any party with respect to
the OIG investigation, nor does it indicate the liability, if any, which may
result therefrom.
Under the OIG Agreements, effective upon consummation of the
Reorganization, the United States will be provided by Fresenius Medical Care and
Grace with a joint and several guarantee of payment when due of all Obligations
(the "Primary Guarantee"). As credit support for this guarantee, NMC will
deliver, on or prior to the Effective Date, an irrevocable standby letter of
credit in the amount of $150 million. The United States will return such letter
of credit (or any renewal or replacement) for cancellation when all Obligations
have been paid in full or it is determined that NMC has no liability in respect
of the Government Claims. In addition, under the OIG Agreements, effective upon
consummation of the Reorganization, the United States will be provided with a
guarantee by Grace Chemicals of the obligations of Fresenius Medical Care under
the Primary Guarantee in respect of Government Claims for acts and transactions
that took place at any time up to the consummation of the Reorganization (the
"Secondary Guarantee"). Under the Secondary Guarantee, payment will be required
only if, and to the extent that, Obligations have become due and payable and
remain uncollected for 120 days. Grace Chemicals is a third party beneficiary of
the Primary Guarantee and may institute suit to enforce its terms.
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Under the OIG Agreements, the United States has agreed, solely in its
capacity as holder of the Government Claims: (a) to not take any action
whatsoever to impede, prohibit, enjoin, delay or otherwise interfere with
consummation of the Reorganization on grounds that the Reorganization
constitutes a fraudulent conveyance or other similarly avoidable transfer as to
the United States; (b) to represent to the court in the Florida Action or any
other court presented with an attempt by a relator in any qui tam action
relating in substantial part to matters that are the subject of the Florida
Action or the OIG investigation to impede, prohibit, enjoin, delay or otherwise
interfere with consummation of the Reorganization that the OIG Agreements
satisfy the concerns of the United States with respect to the Reorganization
and; (c) effective upon consummation of the Reorganization, to release and
discharge Grace Chemicals, Grace, NMC, Fresenius Medical Care, and certain other
parties (collectively, the "Releasees") from claims to the effect that the
Reorganization (or any transaction comprising a part thereof) constitutes a
fraudulent conveyance or other similarly avoidable transfer as to the United
States.
Fresenius Medical Care and the United States state in the OIG Agreements
that they will negotiate in good faith to attempt to arrive at a consensual
resolution of the Government Claims and, in the context of such negotiations,
will negotiate in good faith as to the need for any restructuring of the payment
of any obligations arising under such resolution, taking into account the
ability of Fresenius Medical Care to pay the Obligations. The OIG Agreements
state that the foregoing statements shall not be construed to obligate any
person to enter into any settlement of the Government Claims or to agree to a
structured settlement. Moreover, the OIG Agreements state that the statements
described in the first sentence of this paragraph are precatory and statements
of intent only and that (a) compliance by the United States with such
provisions is not a condition or defense to the obligations of Fresenius
Medical Care, Grace or Grace Chemicals under the OIG Agreements and (b) breach
of such provisions by the United States cannot and will not be raised by
Fresenius Medical Care, Grace New York or Grace Chemicals to excuse performance
of their respective obligations under the OIG Agreements.
If the Reorganization in not consummated on or before October 1, 1996, the
OIG Agreements will terminate and be of no further force and effect unless all
parties thereto agree otherwise in writing. If the Reorganization Agreement is
amended, modified or supplemented after the date of this Joint Proxy
Statement-Prospectus, Fresenius Medical Care will provide the United States with
written notice describing the nature of such amendment, modification or
supplement. If the United States determines that such amendment, modification or
supplement is adverse to its interests, the United States will have the right to
terminate the OIG Agreements by delivering written notice of such termination
within 10 business days of its actual receipt of notice of such amendment,
modification or supplement.
The foregoing describes the material terms of the OIG Agreements, copies of
which have been filed as exhibits to the Registration Statements. The foregoing
description does not purport to be complete and is qualified in its entirety by
reference to such exhibits.
EASTERN DISTRICT OF VIRGINIA
In December 1994, a subsidiary of NMC received a subpoena from a federal
grand jury in the Eastern District of Virginia investigating the contractual
relationships between subsidiaries of NMC that provide dialysis services and
third parties that provide medical directorship and related services to those
subsidiaries. NMC cooperated with the grand jury and produced documents in
response to the subpoena, and there has been no further communication from the
government.
DISTRICT OF NEW JERSEY INVESTIGATION
NMC has received multiple subpoenas from a federal grand jury in the
District of New Jersey investigating, among other things, whether NMC sold
defective products, the manner in which NMC handled customer complaints and
certain matters relating to the development of a new dialyzer product line. NMC
is cooperating with this investigation and has provided the grand jury with
extensive documents. On February 12, 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that it is the target of a
federal grand jury investigation into possible violations of criminal law in
connection with its efforts to persuade the FDA to lift a January 1991 import
hold issued with respect to NMC's Dublin, Ireland
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manufacturing facility. In June 1996, NMC received a letter from the U.S.
Attorney for the District of New Jersey indicating that the U.S. Attorney had
declined to prosecute NMC with respect to a submission related to NMC's effort
to lift the import hold. The letter added that NMC remains a subject of a
federal grand jury's investigation into other matters. NMC also received a
subpoena in June 1996 from the federal grand jury requesting certain documents
in connection with NMC's imports of the FOCUS(R) dialyzer from January 1991 to
November 1995. The outcome of this investigation and its impact, if any, on
NMC's business or results of operations cannot be predicted at this time.
FDA MATTERS
Since 1993, NMC has engaged in a number of voluntary recalls of products
that it manufactured or that were manufactured by third parties and distributed
by NMC. None of these product recalls has resulted in fines or penalties for
NMC. In 1995, Fresenius USA completed a voluntary action with respect to the
Optum(R) exchange device that Fresenius USA acquired from Abbott, which was
classified by the FDA as a recall. The FDA reviewed Fresenius USA's actions with
respect to this device and determined that they were adequate.
During the period from 1991 through 1993, the FDA issued warning letters
concerning four of the six RPD facilities in the U.S., as well as import alerts
concerning hemodialysis bloodlines manufactured at NMC's Reynosa, Mexico
facility and Focus(R) brand hemodialyzers manufactured at NMC's Dublin, Ireland
facility. As a result of the import alerts, NMC was prohibited from importing
the products covered by the alerts into the U.S. until the FDA confirmed
compliance with GMP requirements at the facilities where such products were
manufactured.
In January 1994, NMC and certain members of its senior management entered
into the Consent Decree providing that the importation of bloodlines and
hemodialyzers could resume upon certification by NMC that the relevant
manufacturing facility complied with GMP requirements and successful completion
of an FDA inspection at the relevant facility to confirm compliance. The Consent
Decree also required NMC to certify, and be inspected for, GMP compliance at all
of RPD's manufacturing facilities in the U.S. Under the Consent Decree, RPD
committed to maintaining ongoing compliance with GMP and related requirements at
both U.S. and non-U.S. manufacturing facilities. As a result of the Consent
Decree, NMC's U.S. facilities were required to undertake significant GMP
improvements.
NMC submitted all required certifications for its U.S. and non-U.S.
facilities in accordance with timetables specified in the Consent Decree, and
the bloodline import alert was lifted in March 1994. During the course of 1994
and 1995, NMC also worked with the FDA and demonstrated that its other
manufacturing facilities in the U.S. were in compliance with GMP requirements.
The hemodialyzer manufacturing facility in Dublin, Ireland was inspected by the
FDA in April and December 1994 but did not pass inspection. NMC completed all
remaining corrective actions, and in December 1995 the FDA determined that the
Dublin facility was in compliance with GMP requirements and lifted the import
alert. No fines or penalties have been imposed on NMC as a result of the FDA's
actions or in connection with the Consent Decree. By policy, however, the FDA
generally will undertake more frequent and more rigorous inspections of
facilities that have been subject to consent decrees. For a discussion of the
effects of the warning letters and import alerts issued by the FDA on NMC's
business, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- NMC."
On January 24, 1995, the FDA issued a warning letter and import alert
relating to NMC's manufacture of Diafilter(R) products at its Limerick, Ireland
facility. That facility was not expressly named in the Consent Decree described
above. Because NMC voluntarily ceased importing Diafilters(R) into the U.S. in
December 1994, and, for business reasons, decided to shut down the Diafilter(R)
business at the Limerick facility on January 23, 1995, no subsequent compliance
review was deemed necessary by the FDA. NMC was not restricted from importing
into the U.S. the other products manufactured at the Limerick facility.
In 1994 and 1995, the FDA inspected Fresenius USA's manufacturing
facilities in Maumee, Ohio, Ogden, Utah and Walnut Creek, California. At each
location, violations of certain GMP were found. At the Walnut Creek facility,
violations of pre-market notification filing requirements were also found,
although these findings were subsequently reversed when the devices in question
were determined to be covered by
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appropriate filings. The FDA issued warning letters with respect to each
facility, as a result of which the issuance of new 510(k) notices and new export
clearances was placed on administrative hold. Fresenius USA responded to the
inspection findings at Maumee in a manner it believes addresses the FDA's
findings. Fresenius USA subsequently closed the Maumee facility in connection
with the relocation of production from that facility to a facility in
Lewisberry, Pennsylvania. Fresenius USA undertook an exhaustive review of the
FDA's findings relating to Walnut Creek and submitted a detailed response to
those findings. The Ogden plant was reinspected in 1995 and the administrative
holds have been lifted from both Ogden and Walnut Creek. The Walnut Creek
facility was inspected again in January and February of 1996 and Fresenius USA
was advised that all GMP issues raised by the FDA have been resolved. Fresenius
USA believes that its facilities are currently in compliance in all material
respects with applicable state, local and federal requirements.
In addition, the FDA may inspect facilities in the ordinary course of
business to ensure compliance with GMP and other applicable regulations.
INTERNATIONAL REGULATORY CLAIMS
As discussed above, as a general matter, licenses and certifications are
required in connection with the operation of dialysis clinics outside the United
States, and NMC is dependent upon its ability to obtain and maintain such
licenses and certifications. NMC lacks certain licenses and certifications
technically required to operate its facilities in Portugal. However, based on
discussions with regulatory officials in Portugal, NMC management does not
believe that the absence of such licenses will have a material adverse effect on
NMC or materially affect its ability to operate such facilities.
MEDICARE CERTIFICATION ISSUES
As discussed above, licenses and certification for participation in the
Medicare and Medicaid programs are regulated at the federal, state and local
levels. The Medicare carriers serving Florida, New Jersey and Pennsylvania have
implemented coverage policies that may restrict the ability of nuclear-imaging
providers, such as DSI, to qualify as a provider for this service. If DSI is not
permitted to bill for these services as a Medicare provider, it may be able to
bill physicians for the services DSI provides.
DSI participates as a provider under the Medicare Part B program in all
states where applicable, primarily as an independent physiological laboratory.
DSI's Medicare provider number is currently administratively suspended or
temporarily revoked in Rhode Island, Connecticut, and Colorado, due largely to
transitional issues related to the timely completion of applications in
connection with recent acquisitions. The Medicare carrier in Connecticut has
verbally advised DSI that the provider number will be reinstated and
applications are pending in Rhode Island and Colorado. If the provider numbers
are not reinstated retroactively, DSI may not be able to bill for services
rendered during the periods in which the numbers were administratively suspended
or temporarily revoked.
IDPN
In November 1995, NMC filed a complaint in the United States District Court
for the Middle District of Pennsylvania (NMC Homecare, Inc. v. Shalala) seeking
declaratory judgment and injunctive relief to prevent application of a 1993
interpretation of Medicare's coverage guidelines that results in a sharp
reduction in the reimbursement rate for IDPN services provided by NMC. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing. See "-- Reimbursement -- U.S. -- IDPN."
NMC Homecare's unpaid IDPN claims represent substantial accounts receivable of
NMC Homecare (approximately $103 million as of March 31, 1996, currently
increasing at a rate of approximately $6 million per month). NMC believes that
the reduction in IDPN coverage by Medicare is an unauthorized policy coverage
change. The outcome of this proceeding cannot be predicted. If NMC is not
successful in its effort to obtain payment for its IDPN accounts receivable,
NMC's business, financial position and results of operations could be adversely
affected.
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OBRA 93
OBRA 93 affected the payment of benefits under Medicare and employer health
plans for certain eligible ESRD patients. In July 1994, HCFA issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by OBRA 93 would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than that provided under Medicare.
In April 1995, HCFA issued a new instruction, reversing its original
instruction in a manner that would substantially diminish the positive effect of
the original instruction on NMC's dialysis business. Under the new instruction,
no 18-month coordination of benefits period would arise, and Medicare would
remain the primary payor. HCFA further proposed that its new instruction be
effective retroactive to August 1993, the effective date of OBRA 93.
If HCFA's reversal of its original implementation of the provisions of OBRA
93 that relate to ESRD patients for whom Medicare is the secondary payor (see
"-- Reimbursement -- U.S. -- Coordination of Benefits") is upheld, NMC may be
required to refund the payments received from employer health plans for services
provided after August 10, 1993 under HCFA's original implementation, and to
re-bill Medicare for the same services, which would result in a net loss to DSD
of approximately $120 million as of June 30, 1995. NMC ceased to recognize the
incremental revenue realized under the original Program Memorandum as of July 1,
1995, but it continued to bill employer health plans as primary payors for
patients affected by OBRA 93 through December 31, 1995. As of January 1, 1996,
NMC commenced billing Medicare as primary payor for dual eligible ESRD patients
effected by OBRA 93, and has recently begun to rebill in compliance with the
revised policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A. No.
95-0860 (WBB)) seeking to preclude HCFA from retroactively enforcing its April
24, 1995 implementation of the OBRA 93 provisions relating to the coordination
of benefits for dual eligible ESRD patients. See "-- Reimbursement -- U.S. --
Coordination of Benefits." On May 9, 1995, NMC moved for a preliminary
injunction to preclude HCFA from enforcing its new policy retroactively, that
is, to billings for services provided between August 10, 1993 and April 23,
1995. On June 6, 1995, the court granted NMC's request for a preliminary
injunction. The litigation is continuing with respect to NMC's request to enjoin
HCFA's new policy, both retroactively and prospectively, on a permanent basis.
While there can be no assurance that a permanent injunction will be issued, NMC
believes that it will ultimately prevail in its claim that the retroactive
reversal by HCFA of its original implementation of OBRA 93 was impermissible
under applicable law. Pending the outcome of the litigation, HCFA's new policy
remains effective for services provided after April 23, 1995. If HCFA's revised
interpretation is upheld, NMC's business, financial position and results of
operations would be materially adversely affected, particularly if the revised
interpretation is applied retroactively. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- NMC."
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In April 1996, Grace received a formal order of investigation issued by the
Commission directing an investigation into, among other things, whether Grace
violated the federal securities laws by filing periodic reports with the
Commission that contained false and misleading financial information. Pursuant
to this formal order of investigation, Grace received a subpoena from the
Southeast Regional Office of the Commission requiring Grace to produce documents
relating to reserves (net of applicable taxes) established by Grace and NMC
during the period from January 1, 1990 to the date of the subpoena (the "Covered
Period"). Grace believes that all financial statements filed by Grace with the
Commission during the Covered Period, including the financial statements of NMC
included in the NMC Form 10 filed with the Commission on September 25, 1995, and
the consolidated financial statements of Grace filed in Grace's Annual Report on
Form 10-K for the year ended December 31, 1995 (all of which financial
statements, other than unaudited quarterly financial statements, were covered by
unqualified opinions issued by Price Waterhouse LLP,
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independent certified public accountants), have been fairly stated, in all
material respects, in conformity with US GAAP. Grace is cooperating with the
Commission. The outcome of this investigation and its impact, if any, on Grace
or NMC cannot be predicted at this time.
IDPN COVERAGE ISSUES
NMC Homecare administers IDPN therapy to chronic dialysis patients who
suffer from severe gastrointestinal malfunctions. Since late 1993, Medicare
claims processors have sharply reduced the number of IDPN claims approved for
payment as compared to prior periods. NMC believes that the reduction in IDPN
claims currently being paid by Medicare represents an unauthorized policy
coverage change. Accordingly, NMC and other IDPN providers are pursuing various
administrative and legal remedies, including administrative appeals, to address
this reduction.
In November 1995, NMC filed a complaint in the U.S. District Court for the
Middle District of Pennsylvania seeking a declaratory judgment and injunctive
relief to prevent the implementation of this policy coverage change. (National
Medical Care, Inc. v. Shalala, 3:CV-95-1922 (RPC)). The government has filed a
motion to dismiss on grounds of failure to exhaust administrative remedies. NMC
has filed a cross-motion for summary judgment. The motions are pending. On May
17, 1996, the Magistrate Judge assigned to the case issued a Report to the
District Court Judge recommending grant of the government's motion and dismissal
of the action. NMC has filed objections to the Report, and the government is
expected to respond to those objections in July 1996. The District Court Judge
will issue an order granting or denying the government's motion to dismiss
following completion of the briefing.
NMC management believes that its IDPN claims are consistent with published
Medicare coverage guidelines and ultimately will be approved for payment. Such
claims represent substantial accounts receivable of NMC, amounting to
approximately $103 million as of March 31, 1996, respectively, and currently
increasing at the rate of approximately $6 million per month. If NMC is unable
to collect its IDPN receivable or if IDPN coverage is reduced or eliminated,
depending on the amount of the receivable that is not collected and/or the
nature of the coverage change, NMC's business, financial position and results of
operations could be materially adversely affected.
SHAREHOLDER LITIGATION
In 1995, nine purported class action lawsuits were brought against Grace
and certain of its officers and directors in various federal courts. These
lawsuits have been consolidated in a case entitled Murphy, et al. v. W. R. Grace
& Co., et al. No. 95-CV-9003(JFK) (the "Murphy Action"), which is pending in the
U.S. District Court for the Southern District of New York. The first amended
class action complaint in this lawsuit, which purports to be a class action on
behalf of all persons and entities who purchased publicly traded securities of
Grace during the period from March 13, 1995 through October 17, 1995, generally
alleges that the defendants violated federal securities laws by concealing
information and issuing misleading public statements and reports concerning
NMC's financial position and business prospects, a proposed spin-off of NMC, and
the matters that are the subject of the OIG Investigation and the investigation
by the federal grand jury in the District of New Jersey. See "-- OIG
Investigation" and "-- District of New Jersey Investigation." The Murphy Action
seeks unspecified damages, attorneys' and experts' fees and costs and such other
relief as the court deems proper.
In October 1995, a purported derivative lawsuit was filed in the U.S.
District Court for the Southern District of Florida, Northern Division against
Grace, certain of its directors and its former President and Chief Executive
Officer, alleging that such individuals breached their fiduciary duties by
failing to properly supervise the activities of NMC in the conduct of its
business (Bennett v. Bolduc, et al. 95-8638-CIV-MORENO). In December 1995, the
plaintiff in this action filed a new action, based on similar allegations, in
the U.S. District Court for the Southern District of New York (Bennett v.
Bolduc, et al. 95-CV-10737 (AGS)) (the "Bennett Action"). The action in Florida
has been dismissed in favor of the Bennett Action. A second action making
similar allegations was filed in October 1995 in New York State Supreme Court,
New York County (Bauer v. Bolduc, et al. 95-125751). This action has been stayed
in favor of the Bennett Action, which has been
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consolidated, for discovery purposes only, with the Murphy Action described
above. The complaint in the Bennett Action seeks unspecified damages, attorneys'
and experts' fees and costs and such other relief as the court deems proper.
These actions are at early stages and their outcomes cannot be predicted,
although Grace, NMC and the individual defendants believe that they have
substantial defenses to the claims asserted.
In February 1996, a purported class action was filed in New York State
Supreme Court, New York County, against Grace and certain of its current and
former directors, alleging that the defendants breached their fiduciary duties,
principally by failing to provide internal financial data concerning NMC to
Vivra and by failing to negotiate with Baxter in connection with a business
combination involving NMC (Rosman v. W. R. Grace, et al. 96-102347). The lawsuit
seeks injunctive relief ordering defendants to carry out their fiduciary duties
and preventing or rescinding the Reorganization or any related transactions with
Fresenius AG, unspecified monetary damages, an award of plaintiff's attorneys'
and experts' fees and costs, and such other relief as the court may deem just
and proper. The plaintiff has not taken any steps to prosecute the action since
it was filed. The defendants believe this lawsuit is without merit.
OTHER LITIGATION AND EXPOSURES
In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
professional negligence, malpractice, product liability, workers' compensation
or related claims, many of which involve large claims and significant defense
costs. Fresenius USA and NMC have been, and can be expected to continue from
time to time to be, subject to such suits due to the nature of their business.
Additionally, NMC, in connection with its diagnostics business, has been the
subject of a "wrongful life" lawsuit. Although Fresenius USA and NMC maintain
insurance at a level which they believe to be prudent, there can be no assurance
that the coverage limits will be adequate or that all asserted claims will be
covered by insurance. In addition, there can be no assurance that liability
insurance will continue to be available at acceptable costs. A successful claim
against Fresenius USA or NMC in excess of insurance coverage could have a
material adverse effect upon Fresenius Medical Care, Fresenius USA or NMC and
the results of their operations. Any claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on the reputation and
business of Fresenius Medical Care, Fresenius USA or NMC. NMC has identified two
instances in which a low level employee and/or an agent engaged in illegal
billing practices. In such instances, NMC has terminated its affiliation with
such persons and advised the appropriate law enforcement authority. The illegal
actions of such persons may subject NMC to liability under the False Claims Act,
among other laws. In addition, Fresenius USA and NMC assert claims and suits
arising in the ordinary course of business, the ultimate resolution of which
would not, in the opinion of Fresenius Medical Care and NMC, have a material
adverse effect on their financial condition.
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