Quest Diagnostics 2009 Annual Report Download - page 54

Our Company
Quest Diagnostics is the world’s leading provider of diagnostic testing, information and services, providing
insights that enable patients, physicians and others to make better healthcare decisions. Quest Diagnostics, with a
leading position in most of its domestic geographic markets and service offerings, is well positioned to benefit
from the long-term growth expected in the 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 laboratory testing and anatomic
pathology services. Clinical laboratory testing is performed on whole blood, serum, plasma and other body fluids,
such as urine, and specimens such as microbiology samples. Anatomic pathology services are principally for the
detection of cancer and are performed on tissues, such as biopsies, and other samples, such as human cells. We
are the world’s leading cancer diagnostics company, focused on anatomic pathology and molecular diagnostics,
and provide interpretive consultation through the largest medical and scientific staff in the industry, with
approximately 900 M.D.s and Ph.D.s primarily located in the United States. 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. Our diagnostics
products business manufactures and markets diagnostic test kits and specialized point-of-care testing. We also
empower healthcare organizations and clinicians with state-of-the-art information technology solutions that can
improve patient care and medical practice.
Six Sigma and Standardization Initiatives/Efforts to Improve Operating Efficiency
The diagnostic testing industry is labor intensive. Employee compensation and benefits constitute
approximately one-half of our total costs and expenses. Cost of services consists principally of costs for
obtaining, transporting and testing specimens. Selling, general and administrative expenses consist principally of
the costs associated with our sales and marketing efforts, billing operations (including bad debt expense), and
general management and administrative support. In addition, performing diagnostic testing involves significant
fixed costs for facilities and other infrastructure required to obtain, transport and test specimens. Therefore,
relatively small changes in volume can have a significant impact on profitability in the short-term.
A large portion of our costs are fixed, making it more challenging to fully mitigate the profit impact of lost
volume in the short term. In July 2007, we announced a program to adjust our cost structure while maintaining
and, in some cases improving, service levels. Since then, this program has been a significant contributor to our
increase in operating income as a percentage of net revenues. As we exited 2009, we estimate that our program
has resulted in over $500 million of annualized cost reductions.
We intend to become recognized as the quality leader in the healthcare services industry through utilizing
the Six Sigma approach and Lean Six Sigma principles. Six Sigma is a management approach that enhances
quality and requires a thorough understanding of customer needs and experience, root cause analysis, process
improvements and rigorous tracking and measuring of key metrics. Lean Six Sigma streamlines processes and
eliminates waste. We utilize the Six Sigma approach and Lean Six Sigma principles to increase the efficiency of
our operations and to reduce operating cost. We have utilized Six Sigma to implement the initiatives which are
part of our cost reduction program and to provide a better customer experience. These initiatives relate to
standardizing our operations and processes, and adopting identified company best practices. One of these key
initiatives is to deploy Lean Six Sigma in our laboratories to realize productivity gains. Additionally, we have
realized efficiencies in other areas by better aligning our service capacity with patient and sample flows. We are
driving more of our purchasing through master contracts to take better advantage of our scale. We are continuing
to expand the use of customer connectivity which reduces costs in specimen data entry and billing, and helps
lower our bad debt. We are improving the efficiency of our logistics routes using advanced route optimization
tools and we have streamlined our management structure and administrative functions to improve efficiency and
increase focus. We expect to continue deploying best practices and developing additional initiatives designed to
further improve quality and the efficiency of our operations.
Growth Through Acquisition
The clinical testing industry in the United States remains fragmented and highly competitive. Our growth
will be comprised of a combination of organic and acquired growth. We expect to continue to selectively
evaluate potential acquisitions of domestic clinical laboratories that can be integrated into our existing
laboratories, thereby increasing access for patients and enabling us to reduce costs and improve efficiencies.
While over the long term we believe positive industry factors in the United States diagnostic testing industry and
the differentiated services we offer to our customers will enable us to grow organically, we believe there will
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