Dialysis Lab Inquiry.

SAN MATEO, Calif.--(BUSINESS WIRE)--Dec. 26, 1996--Vivra Inc. ("Vivra"), has received from the United States Attorney for the District of Massachusetts a grand jury subpoena which calls for records pertaining to the operations of Vivra Renal Care.

The subpoena appears to focus on Vivra's previous relationship with Damon Clinical Laboratories and other affiliated entities (Damon), as well as utilization patterns and procedures pertaining to clinical laboratory blood tests billed to the Medicare and/or Medicaid programs.

In connection with the receipt of this subpoena, Vivra has been advised that Vivra Renal Care is now a subject of the United States Attorney's investigation. Vivra will cooperate fully with the United States Attorney in this investigation.

The government is seeking documents for the time period January 1, 1987 through July 1, 1996 that pertain to every kidney dialysis facility owned, managed or operated by Vivra and affiliated entities, as well as all agreements and communications with Damon.

Subsequent to Vivra's spin-off from Community Psychiatric Centers in late 1989, total lab receipts from Damon represented less than one percent of VRC's total revenues.

In an effort to anticipate possible questions, Vivra has prepared the attached summary of questions and answers which summarize Vivra's knowledge at this time.

Vivra is a specialty care company. The company provides services through Vivra Renal Care (VRC) and Vivra Specialty Partners (VSP). VRC is the second largest provider of dialysis services in the United States. VSP provides physician network and disease management services to managed care and provider organizations. -0-

Vivra's questions and answers concerning clinical laboratory issues

Most of the information being requested is from the period when Community Dialysis Centers (CDC) was Vivra's dialysis business unit. CDC was subsequently renamed Vivra Renal Care (VRC). We will use both names, depending on the issue and its timing.

1. What was CDC's relationship to Damon Labs?

CDC formed a 50-50 joint venture with Damon in June 1992. Damon was the general manager. CDC contributed at-risk capital. The lab was intended to, and did, take on other customers. CDC was not obligated to do business with the lab.

Prior to this 1992 joint venture, CDC had a contractual relationship with Damon and Community Psychiatric Centers, CDC's former parent.

2. What happened to the Damon relationship?

Vivra decided to dissolve the joint venture. A verbal dissolution agreement was reached in Nov. 1995. This agreement, documented in a Feb. 1996 written dissolution agreement, changed the ownership stakes to 60 percent Corning, 40 percent VRC, and was made retroactive to Feb. 1, 1995. The dissolution was completed in May 1996.

3. Where is VRC's lab work done now?

VRC's lab work is done in three places: Corning; an independent lab named Spectra; and a VRC-owned lab which was opened in June 1996.

4. Who orders lab tests?

The physicians who treat patients in VRC's facilities.

5. Do you now have standardized clinical presciption protocols? Who wrote them?

Yes. Some of the medical directors.

6. What is the nature of VRC's agreements with the physicians who order the lab tests?

There are two types of physicians who can order lab tests: Physicians who serve as medical directors of VRC and non-medical director physicians who see patients at our facilities.

The simple fact is that we have been conservative in this area. For medical directors who are paid by VRC, we are not aware of any direct linkage between compensation and lab usage. We periodically review medical director agreements, including use of outside counsel to assist us.

Non-medical director physicians have privileges to see patients at our facilities but are not compensated by VRC. We are not aware of any financial arrangements between these physicians and VRC.

7. What was and is your approach to local centers' administrators financial incentives, particularly with regard to lab tests?

Until 1995, most of our center administrators did not even have much information regarding what their center's revenue was, much less profit.

They would have known their test volume levels but we know of no systematic tie between lab testing volume and compensation. This analysis is complicated because some of our high test volume centers were also our highest quality performance centers.

8. How have your testing levels compared to the dialysis industry average?

We do not have complete industry data. Most of the information we have, however, indicates that our aggregate lab testing has been below industry averages.

Ironically, some of the dramatic and publicly documented patient care quality improvements we have accomplished over the past few years are directly attributed to our extensive caregiver education programs which have resulted in increased utilization of certain pharmaceuticals and tests.

9. How much cash did CDC/VRC receive from the joint venture?

We do not have complete information from before the 1989 spin-off of Vivra from its predecessor company. From Dec. 1, 1990 through May 31, 1996 the total lab receipts that CDC/VRC received from Damon were $8.5 million, or less than one percent of VRC's $1.2 billion in total revenues. During this same period, VRC reported $262 million in operating profit.

Obviously, inappropriate or poorly documented utilization, if any, would only be a fraction of the total number of laboratory claims made.

10. Why did the U.S. Attorney's office subpoena Vivra?

The U.S. Attorney's office that prepared the subpoena served on Vivra is the same office that has been investigating Damon directly. Our understanding is that this is the work that led the U.S. Attorney's Office to review our contract with Damon. We had no other business relationships with Damon.

11. How long will this process with the U.S. Attorney's Office take?

While it is difficult to predict how long the government may need to complete its investigation, it is unlikely that this matter will be concluded within the next three months. It will take us at least a month to collect and submit the thousands of pages required.

Those documents must then be analyzed and subsequent investigation conducted. The fact that current management was not involved for much of the nine year period under review might also delay the fact finding. -0-

In order to reassure shareholders regarding a continuation of open communication we have asked our Board of Directors to create a special committee to monitor this process. This committee will have direct access to our attorneys (and vice versa).

In conclusion, we believe VRC:

-- is a conservative, clinically driven lab test utilizer.

-- is one of the industry's most conservative operators with respect to medical directors' and facility managers' compensation. We simply do not know of any systemic linkage between compensation and testing levels or lab selection.

Dialysis is unique from a regulatory point of view, because of the intensity, location, and frequency of therapy required from this chronically ill population. Physicians are allowed to refer to centers they own.

Companies are allowed (in fact required) to hire physicians as medical directors. These same medical directors virtually always refer patients to dialysis centers the company owns.

Lab services and dialysis center care must be closely integrated. One example of this is that dialysis centers have received special exemptions from CLIA regulations. A second example of this is that in the early 1990s both of VRC's primary competitors owned 100 percent of their labs.

A third example of this is that currently, four of the five largest dialysis chains own 100 percent of their own labs. Given these facts, we are hopeful that the government's interest in a dialysis chain which owned a partial stake in a clinical laboratory will be quickly resolved.

CONTACT: Vivra Inc.

LeAnne Zumwalt, 415/577-5525