Quest Diagnostics 2008 Annual Report Download - page 58

Revenues and accounts receivable associated with clinical testing
The process for estimating the ultimate collection of receivables associated with our clinical testing business
involves significant assumptions and judgments. 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 as an adjustment to net revenues.
We have a standardized approach to estimate and review the collectibility of our receivables based on a
number of factors, including the period they have been outstanding. Historical collection and payer reimbursement
experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition,
we regularly assess the state of our billing operations in order to identify issues, which may impact the
collectibility of receivables or allowance estimates. We believe that the collectibility of our receivables is directly
linked to the quality of our billing processes, most notably those related to obtaining the correct information in
order to bill effectively for the services we provide. As such, we have implemented “best practices” to reduce the
number of requisitions that we receive from healthcare providers with missing or incorrect billing information.
Revisions to the allowances for doubtful accounts estimates are recorded as an adjustment to bad debt expense
within selling, general and administrative expenses. We believe that our collection and allowance estimation
processes, along with our close monitoring of our billing operations, help to reduce the risk associated with
material revisions to reserve estimates. Less than 5% of our net accounts receivable as of December 31, 2008
were outstanding more than 150 days.
Healthcare insurers
Healthcare insurers reimburse us for approximately one-half of our net revenues. Reimbursements from
healthcare insurers are based on negotiated fee-for-service schedules and on capitated payment rates.
Receivables due from healthcare insurers represent approximately 28% of our net accounts receivable.
Substantially all of the accounts receivable due from healthcare insurers represent amounts billed under negotiated
fee-for-service arrangements. We utilize a standard approach to establish allowances for doubtful accounts for
such receivables, which considers the aging of the receivables and results in increased allowance requirements as
the aging of the related receivables increases. Our approach also considers historical collection experience and
other factors. Collection of such receivables is normally a function of providing complete and correct billing
information to the healthcare insurers within the various filing deadlines. For healthcare insurers, collection
typically occurs within 30 to 60 days of billing. Provided healthcare insurers have been billed accurately with
complete information prior to the established filing deadline, there has historically been little to no collection
risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing
deadline, and if so, we will reserve accordingly for the billing.
Approximately 5% of our net revenues are reimbursed under capitated payment arrangements in which case
the healthcare insurers typically reimburse us in the same month services are performed, essentially giving rise to
no outstanding accounts receivable at month-end. If any capitated payments are not received on a timely basis,
we determine the cause and make a separate determination as to whether or not the collection of the amount
from the healthcare insurer is at risk and if so, would reserve accordingly.
Government payers
Payments for clinical testing services made by the government are based on fee schedules set by
governmental authorities. Receivables due from government payers under the Medicare and Medicaid programs
represent approximately 15% of our net accounts receivable. Collection of such receivables is normally a function
of providing the complete and correct billing information within the various filing deadlines. Collection typically
occurs within 30 days of billing. Our processes for billing, collecting and estimating uncollectible amounts for
receivables due from government payers, as well as the risk of non-collection, are substantially the same as those
noted above for healthcare insurers under negotiated fee-for-service arrangements.
Client payers
Client payers include physicians, hospitals, employers and other commercial laboratories, and are billed
based on a negotiated fee schedule. Receivables due from client payers represent approximately 34% of our net
accounts receivable. Credit risk and ability to pay are more of a consideration for these payers than healthcare
insurers and government payers. We utilize a standard approach to establish allowances for doubtful accounts for
such receivables, which considers the aging of the receivables and results in increased allowance requirements as
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