Quest Diagnostics 2008 Annual Report Download - page 22

The following table shows current estimates of the breakdown of the percentage of our total volume of
requisitions and net revenues associated with our clinical testing business during 2008 applicable to each payer
group:
Requisition Volume
as % of
Total Volume
Net Revenues
as % of
Total
Clinical Laboratory
Testing
Net Revenues
Traditional Medicare and Medicaid Programs .............. 15% - 20% 15% - 20%
Physicians, Hospitals, Employers and
Other Monthly-Billed Clients. ........................... 30% - 35% 20% - 25%
Health Plans: Fee-for-Service.............................. 30% - 35% 40% - 45%
Health Plans: Capitated . . . ................................ 15% - 20% 5% - 10%
Patients .................................................. 2% - 5% 5% - 10%
Health plans, including managed care organizations and other health insurance providers, typically reimburse
us as a contracted provider on behalf of their members for clinical testing services performed. Reimbursement
from our two largest health insurer payers totaled approximately 13% of our net revenues in 2008. Aetna, which
accounted for over 7% of our consolidated net revenues for 2008, was our largest health insurer payer.
Physicians. Physicians requiring testing for patients are the primary referral source of our clinical testing
volume. Physicians determine which laboratory to recommend or use, based on a variety of factors, including:
service; patient access and convenience, including inclusion in a health plan network; price; and depth and
breadth of test and service offering. Physicians also order our point-of-care tests.
Most of our clinical testing is referred by primary care physicians. We historically have provided a strong
value proposition in routine and esoteric clinical testing. In 2007, we acquired AmeriPath, expanding our service
capabilities. This will enable us to leverage our capabilities and to more effectively compete in several physician
sub-specialties, including dermatology, urology, gastroenterology, hematology and oncology, where historically we
had a smaller market share. We plan to continue to enhance our test menu and service capabilities.
Health Plans. Health plans typically negotiate directly or indirectly with a number of clinical laboratories,
and represent approximately one-half of our total clinical testing volumes and one-half of our net revenues from
clinical testing. In certain markets, such as California, health plans may delegate to independent physician
associations (“IPAs”) the ability to negotiate for clinical testing services on behalf of certain members. The trend
of consolidation among health plans has continued.
Health plans and IPAs often require that clinical test service providers accept discounted fee structures or
assume all or a portion of the financial risk associated with providing testing services through capitated payment
arrangements and discounted fee-for-service arrangements. Under capitated payment arrangements, we provide
services at a predetermined monthly reimbursement rate for each covered member, generally regardless of the
number or cost of services provided by us. Average reimbursement rates under capitated payment arrangements
are typically lower than our overall average reimbursement rate. Health plans continue to focus product offerings
on point-of-service (“POS”) plans, and consumer driven health plans (“CDHPs”) that offer a greater choice of
healthcare providers. Reimbursement under these programs is typically negotiated on a fee-for-service basis,
which generally results in higher revenue per requisition than under capitation arrangements. In addition, several
health plans have made strategic acquisitions or have developed products to more broadly serve the individual
(non-group) market. We do not expect that the design of these plans will pose a significant barrier to accessing
clinical testing services. Increased number of patients in CDHPs and high deductible plans, such as those offered
in the individual market, involve greater patient cost-sharing; this could negatively impact patient collection
experience.
Most of our agreements with major health plans are non-exclusive arrangements. Certain health plans,
however, have limited their laboratory network to only a single national laboratory to obtain improved pricing. In
cases where members choose to use a non-contracted provider due to service, quality or convenience, the non-
contracted provider is generally reimbursed at rates considered “reasonable and customary.” Contracted rates are
generally lower than “reasonable and customary” rates because of the potential for greater volume as a contracted
provider. A non-contracted clinical test service provider with quality and service preferred by physicians and
patients to that of contracted providers may realize greater profits than if it were a contracted provider, if
physicians and patients continue to have choice in selecting their clinical test provider and any potential
additional cost to the patient of using a non-contracted provider is not considered prohibitive.
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