Quest Diagnostics 2005 Annual Report Download - page 62

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The underlying fundamentals of the diagnostic testing industry have improved since the early to mid-1990s.
Since that time there has been significant industry consolidation, particularly among commercial laboratories,
resulting in fewer but larger commercial laboratories with greater economies of scale, better equipped to service
the members of large healthcare plans, and more disciplined in their approach to operating their business.
Orders for laboratory testing are generated from physician offices, hospitals and employers. As such, factors
including changes in the United States economy which can affect the number of unemployed and uninsured,
and design changes in healthcare plans which impact the number of physician office and hospital visits, can
impact the utilization of laboratory testing.
While the diagnostic testing industry in the United States may be impacted by a number of factors, we
believe it will continue to grow over the long term as a result of the following:
•the growing and aging population;
•continuing research and development in the area of genomics (the study of DNA, genes and
chromosomes) and proteomics (the analysis of individual proteins and collections of proteins), which is
expected to yield new, more sophisticated and specialized diagnostic tests;
•increasing recognition by consumers and payers of the value of laboratory testing as a means to improve
health and reduce the overall cost of healthcare through early detection and prevention; and
•increasing affordability of, and access to, tests due to advances in technology and cost efficiencies.
Quest Diagnostics, as the largest clinical laboratory testing company with a leading position in most of its
domestic geographic markets and service offerings, is well positioned to benefit from the growth expected in the
industry.
Payments for clinical laboratory testing services are made by the government, healthcare insurers,
physicians, hospitals, employers and patients. Physicians, hospitals and employers are typically billed on a fee-
for-service basis based on negotiated fee schedules. Fees billed to patients and healthcare insurers are based on
the laboratory’s patient fee schedule, subject to any limitations on fees negotiated with the healthcare insurers or
with physicians on behalf of their patients. Medicare and Medicaid reimbursements are based on fee schedules
set by governmental authorities.
We incur additional costs as a result of our participation in Medicare and Medicaid programs, as billing
and reimbursement for clinical laboratory testing is subject to considerable and complex federal and state
regulations. Compliance with applicable laws and regulations, as well as internal compliance policies and
procedures, adds further complexity and costs to our operations. While the total cost to comply with Medicare
administrative requirements is disproportionate to our cost to bill other payers, average Medicare reimbursement
rates are not materially different than our overall average reimbursement rate from all payers, making this
business generally less profitable. Government payers, such as Medicare and Medicaid, as well as healthcare
insurers and larger employers have taken steps and may continue to take steps to control the cost, utilization
and delivery of healthcare services, including clinical laboratory services. Despite the added cost and complexity
of participating in the Medicare and Medicaid programs, we continue to participate in such programs because
we believe that our other business may depend, in part, on continued participation in these programs, since
certain customers may want a single laboratory capable of performing all of their clinical laboratory testing
services, regardless of who pays for such services.
Healthcare insurers, including managed care organizations and other healthcare insurance providers, which
typically negotiate directly or indirectly with a number of clinical laboratories on behalf of their members,
represent approximately one-half of our total testing volumes and one-half of our net revenues. Larger
healthcare insurers typically prefer to use large commercial clinical laboratories because they can provide
services to their members on a national or regional basis. In addition, larger laboratories are better able to
achieve the low-cost structures necessary to profitably service the members of large healthcare plans and can
provide test utilization data across various products in a consistent format. In certain markets, such as
California, healthcare insurers may delegate their covered members to independent physician associations, or
IPAs, which in turn negotiate with laboratories for clinical laboratory services on behalf of their members.
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