Quest Diagnostics 2007 Annual Report Download - page 54

industry. Over 90% of our revenues are derived from clinical testing with the balance derived from insurer
services, clinical trials testing, diagnostic products and healthcare information technology. Clinical testing is
generally categorized as clinical pathology testing and anatomic pathology testing. Clinical pathology testing is
performed on body fluids, such as blood and urine. Anatomic pathology testing is performed on tissues, including
biopsies, and other samples, such as human cells.
Over the last eighteen months, we have completed the acquisitions of AmeriPath Group Holdings, Inc.
(“AmeriPath”), POCT Holding AB (“HemoCue”), Enterix Inc. (“Enterix”), and Focus Technologies Holding
Company (“Focus Diagnostics”). With the acquisition of AmeriPath, we have become the world’s premier cancer
diagnostics company, focused on dermatopathology, anatomic pathology and molecular diagnostics and are now
able to provide interpretive consultation through the largest medical and scientific staff in the industry, with
approximately 900 M.D.s and Ph.D.s around the country. In addition, we are the leading provider of: gene-based
testing and other esoteric testing, risk assessment services for the life insurance industry, and testing for drugs-of-
abuse. We are also a leading provider of testing for clinical trials. The Company’s diagnostics products business,
which includes the operations of HemoCue, Enterix and certain of Focus Diagnostics’ operations, manufactures
and markets diagnostic test kits and specialized point-of-care testing, including tests for hemoglobin, white blood
cell counts, micro-albumin, colorectal cancer screening and infectious diseases. Through our MedPlus subsidiary,
we empower healthcare organizations and clinicians with state-of-the-art information technology solutions that can
improve patient care and medical practice.
We have established operations in Gurgaon, India, where we will offer many of Quest Diagnostics’ services.
The diagnostic testing business in India is poised for rapid expansion. We see significant opportunities for Quest
Diagnostics to strengthen the delivery of healthcare services in India utilizing our quality diagnostics and
technology expertise.
Recent Changes in Payer-Relationships
In October of 2006, we announced that effective January 1, 2007 we would cease to be a national contracted
provider of laboratory services to United Healthcare Group Inc. (“UNH”) because we could not reach agreement
on an appropriate reimbursement for our services and other key terms. We determined that in the long term,
agreeing to the terms offered by UNH would not be in the best interest of our Company and our shareholders.
While we expect to continue to service UNH’s members as a non-contracted provider, UNH has threatened
physicians with penalties if they continue to send laboratory testing to non-contracted providers, and has
aggressively communicated to its members that they may be faced with higher co-payments and deductibles if
they use an out-of-network laboratory. We believe UNH’s actions are unprecedented. AmeriPath, which we
acquired in May 2007, continues to service UNH members as a contracted provider under a long-term agreement
which was entered into subsequent to our acquisition.
UNH accounted for approximately 7% of our net revenues in 2006, with some of our regional laboratories
having concentrations as high as 15% to 20%. We retained virtually all of our UNH business through December
31, 2006 and we estimate that as of December 31, 2007, we retained over 20% of our previously contracted
UNH volume.
We estimate that no longer being a contracted provider to UNH, reduced our clinical testing volume in 2007
by 7%, most of that resulting from the direct loss of previously contracted work, and some of it associated with
the loss of other work from physicians who choose to consolidate their testing with a single laboratory. The
impact of the change in status with UNH was the principal driver of lower earnings in 2007 compared to the
prior year, due to the significant impact it had during the first half of the year. However, we successfully
mitigated the ongoing impact during the third quarter of 2007 as a result of actions taken to reduce costs, and
higher reimbursement for the work we continue to perform for UNH members. During the second half of the
year, our profits, before considering the acquisition of AmeriPath, exceeded those of the prior year, when we
were a contracted provider to UNH.
We have remained committed to providing a superior service level to patients, physicians and other
customers. As a result, during 2007 we were able to renew, and in some cases expand, our relationships with a
number of important health plans, in each case on economic terms which satisfied both parties and at prices
which recognized the differentiated level of service we provide. While there remain a number of managed care
agreements to be renewed over the next six months, all of our largest agreements have been renewed or
expanded with most of the newly contracted business extending into 2010 or beyond.
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