Quest Diagnostics 2006 Annual Report Download - page 33

performed by non-contracted providers and simplified administration of payment for clinical laboratory testing
services.
Hospitals
Hospitals generally maintain an on-site laboratory to perform testing on patients and refer less frequently
needed and highly specialized procedures to outside laboratories, which typically charge the hospitals on a
negotiated fee-for-service basis. Fee schedules for hospital reference testing are typically negotiated on behalf of
the hospitals by group purchasing organizations. We believe that most hospital laboratories perform approximately
90% to 95% of their patients’ clinical laboratory tests. We provide services to hospitals throughout the United
States that vary from esoteric testing to helping manage their laboratories. We believe that we are the industry’s
market leader in servicing hospitals. Our hospital customers account for approximately 11% of our net revenues,
the majority of which represents services billed to the hospitals for certain testing that the hospitals do not
perform internally. Hospitals continue to look for ways to fully utilize their existing laboratory capacity through
test internalization as well as competing with commercial laboratories for outreach (non-hospital patients) testing.
Most physicians have admitting privileges or other relationships with hospitals as part of their medical practice.
Many hospitals leverage their relationships with community physicians and encourage the physicians to send their
outreach testing to the hospital’s laboratory. In addition, hospitals that own physician practices generally require
the physicians to refer tests to the hospital’s affiliated laboratory. Hospitals can have greater leverage with
healthcare insurers than do commercial clinical laboratories, particularly hospitals that have a significant market
share; hospitals thus are frequently able to negotiate higher reimbursement rates with healthcare insurers than
commercial clinical laboratories for comparable clinical laboratory testing services.
We have dedicated sales and service teams focused on serving the unique needs of hospital customers. We
believe that the combination of full-service, bi-coastal esoteric testing capabilities, medical and scientific
professionals for consultation, innovative connectivity products, focus on Six Sigma quality and dedicated sales
and service professionals has positioned us to be a partner of choice for hospital customers.
We have joint venture arrangements with leading integrated healthcare delivery networks in several
metropolitan areas. These joint venture arrangements, which provide testing for affiliated hospitals as well as for
unaffiliated physicians and other healthcare providers in their geographic areas, serve as our principal laboratory
facilities in their service areas. Typically, we have either a majority ownership interest in, or day-to-day
management responsibilities for, our hospital joint venture relationships. We also manage the laboratories at a
number of other hospitals.
Employers, Governmental Institutions and Other Clinical Laboratories
We provide testing services to federal, state and local governmental agencies and to large employers. We
believe that we are the leading provider of clinical laboratory testing to employers for drugs of abuse. We also
provide wellness testing to employers to enable employees to take an active role in improving their health.
Testing services for employers account for approximately 3% of our net revenues. The volume of testing services
for employers, which generally have relatively low profit margins, decreased slightly in 2006, due to our no
longer serving certain low-priced business and some reduction in hiring activity among some large retail
customers. We also perform esoteric testing services for other commercial clinical laboratories that do not have a
full range of testing capabilities. All of these customers are charged on a fee-for-service basis.
Sales and Marketing
We market to and service our customers through our direct sales force, healthplan sales force, customer
service representatives and couriers.
We focus our sales efforts on obtaining and retaining profitable accounts. We have an active customer
management process to evaluate the growth potential and profitability of all accounts.
Our sales force is organized by customer type with the majority of representatives focused on marketing
clinical laboratory testing and related services to physicians, including specialty physicians such as oncologists,
urologists and gastroenterologists. Additionally, we have a healthplan sales organization that focuses on regional
and national insurance and healthcare organizations. We also have a hospital sales organization that focuses on
meeting the unique needs of hospitals and promotes the specialized capabilities of our Nichols Institute esoteric
testing laboratories and our Focus Diagnostics infectious and immunologic disease testing laboratory. Supporting
our physician sales teams are genomics and esoteric testing specialists, who are specially trained and focused on
educating our clients on new and more complex tests. A smaller portion of our sales force focuses on selling
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