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Specialty Labs May Lose License

Health care: Firm denies problems with quality and proficiency and says it will appeal revocation.


Specialty Laboratories Inc., one of the nation's largest providers of specialized medical testing, said Monday that the federal government is seeking to revoke its laboratory license and has ceased payments under Medicare and Medicaid.

The sanctions, stemming from the Santa Monica-based firm's alleged use of improperly licensed lab personnel and quality control problems, sent Specialty's stock plunging nearly 22% to close at an all-time low of $9 on the New York Stock Exchange. The stock, which traded as high as $47 in June, declined 35% on Thursday after the company announced an unexpected shortfall in first-quarter earnings.

Permanent revocation of the license, scheduled to take effect Monday, could jeopardize the company's survival. Specialty said it will appeal the revocation, which would not take effect until the appeal is completed.

Some Wall Street analysts said they expected Specialty to survive and to come into compliance, but added that it is vital for the company to keep its license.

"There is a risk that they might get shut down," said Tom Gallucci, an analyst for Merrill Lynch.

"They have to correct this, but the real question is what cost, and whether customers will defect in the interim," said US Bancorp/Piper Jaffray analyst Bill Bonello.

In a statement, the firm said it "believes that it has at all times provided the highest quality clinical diagnostic testing services ... and believes it is now in compliance with all applicable regulations."

Specialty Labs said the affected Medicare and Medicaid testing represents less than 6% of its revenue.

The sanctions come at a difficult time for Specialty, which performs specialized tests for other labs as well as for hospitals and doctors. The company already was reeling from sudden consolidations in the medical lab-testing industry that eventually will take away three of its top customers for lab work.

Quest Diagnostics Inc. has acquired two of those companies and has a pending acquisition of a major Specialty customer, Tarzana-based Unilab Corp. The Quest-Unilab deal would remove $800,000 a month in referral testing from Specialty, and may give Quest the ability to do its own in-house testing.

Based on state and federal findings, Specialty allowed employees without proper licenses to perform and supervise highly complex clinical tests, according to the federal Centers for Medicare and Medicaid Services and the California Department of Health Services. Federal officials also said Specialty had problems with quality control.

Federal officials announced a $3,000 fine for every day of noncompliance with federal and state regulations concerning the licensing of Specialty's employees. Specialty said it would appeal the fine.

The California Department of Health Services has imposed a $224,000 fine on Specialty and will conduct random on-site monitoring of the company for three years at the company's expense.

In its first-quarter earnings conference last week, the company had denied any proficiency or test quality issues.

Analysts said there are some reasons for optimism if the company can keep its license.

The company has virtually no debt, $75 million in cash and was moving to strengthen its role in performing tests for hospitals instead of labs.



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