Quest Diagnostics 2005 Annual Report Download - page 84

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise indicated)
1. DESCRIPTION OF BUSINESS
Quest Diagnostics Incorporated and its subsidiaries (“Quest Diagnostics’’ or the “Company’’) is the largest
clinical laboratory testing business in the United States. Prior to January 1, 1997, Quest Diagnostics was a
wholly owned subsidiary of Corning Incorporated (“Corning’’). On December 31, 1996, Corning distributed all
of the outstanding shares of common stock of the Company to the stockholders of Corning as part of the
“Spin-Off Distribution’’.
As the nation’s leading provider of diagnostic testing and services for the healthcare industry, Quest
Diagnostics offers a broad range of clinical laboratory testing services to patients, physicians, hospitals,
healthcare insurers, employers, governmental institutions and other commercial clinical laboratories. Quest
Diagnostics is the leading provider of esoteric testing, including gene-based testing. The Company is also the
leading provider of testing for drugs-of-abuse. Through the Company’s national network of laboratories and
patient service centers, and its esoteric testing laboratory and development facilities, Quest Diagnostics offers
comprehensive and innovative diagnostic testing, information and services used by physicians and other
healthcare professionals to make decisions to improve health. The Company is also a leading provider of
anatomic pathology services, testing to support clinical trials of new pharmaceuticals worldwide, and risk
assessment services for the life insurance industry.
During 2005, Quest Diagnostics processed approximately 144 million requisitions through its extensive
network of laboratories and patient service centers in virtually every major metropolitan area throughout the
United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of all entities controlled by the Company
through its direct or indirect ownership of a majority voting interest. While the Company does not have any
relationships with variable interest entities, as defined in Financial Accounting Standards Board (“FASB’’)
Interpretation No. 46 “Consolidation of Variable Interest Entities’’, as revised (“FIN 46’’), the existence of any
such entity would require consolidation if the Company were subject to a majority of the risk of loss from the
variable interest entity’s activities, or entitled to receive a majority of the entity’s residual returns or both.
Investments in entities which the Company does not control, but in which it has a substantial ownership interest
(generally between 20% and 49%) and can exercise significant influence, are accounted for using the equity
method of accounting. As of December 31, 2005 and 2004, the Company’s investments in affiliates accounted
for under the equity method of accounting totaled $36.5 million and $35.8 million, respectively. The Company’s
share of equity earnings from investments in affiliates, accounted for under the equity method, totaled $26.2
million, $21.0 million and $17.4 million, respectively, for 2005, 2004 and 2003. All significant intercompany
accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
The Company primarily recognizes revenue for services rendered upon completion of the testing process.
Billings for services reimbursed by third-party payers, including Medicare and Medicaid, are recorded as
revenues net of allowances for differences between amounts billed and the estimated receipts from such payers.
Adjustments to the estimated receipts, based on final settlement with the third-party payers, are recorded upon
settlement. In 2005, 2004 and 2003, approximately 18%, 17% and 17%, respectively, of net revenues were
generated by Medicare and Medicaid programs. Under capitated arrangements with healthcare insurers, the
Company recognizes revenue based on a predetermined monthly reimbursement rate for each member of an
insurer’s health plan regardless of the number or cost of services provided by the Company.
F-7