Quest Diagnostics 2010 Annual Report Download - page 13

Globalization. There is a growing demand for healthcare services in emerging market countries.
Opportunities are arising to participate in the restructuring or growth of the healthcare systems in these countries.
Additionally, our customers are establishing positions outside the United States. Demographic changes globally
may also create opportunities.
Customers and Payers. We provide testing services to a broad range of customers, with orders for clinical
testing generally generated by physicians, hospitals and employers. In most cases, the customer that orders the
testing is not responsible for the payments for services. Depending on the billing arrangement and applicable law,
the payer may be (1) a third party responsible for providing health insurance coverage to patients, such as a
health insurance plan, self-insured employer benefit fund, or the traditional Medicare or Medicaid program, (2)
the patient or (3) the physician or other party (such as a hospital, another laboratory or an employer) who
referred the testing to us.
Health Plans. 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 plans totaled approximately 13% of our consolidated net revenues in
2010. Our largest health plan accounted for approximately 9% of our consolidated net revenues in 2010.
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.
The trend of consolidation among health plans has continued. 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.
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 offer preferred provider
organization (“PPO”) plans, point-of-service (“POS”) plans, consumer driven health plans (“CDHPs”) and limited
benefit coverage programs. 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. We do not expect
that the design of these plans will pose a significant barrier to accessing clinical testing services. To the extent
that plans and programs require greater levels of 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, seeking to obtain improved
pricing. Although non-contracted providers historically generally were reimbursed at “reasonable and customary”
rates, health plans today are employing several approaches, including “reasonable and customary” rates, to
reimburse non-contracted providers. Contracted rates generally are lower than “reasonable and customary” rates.
We also sometimes are a member of a “complementary network.” A complementary network is generally a
set of contractual arrangements that a third party will maintain with various providers that provide discounted
fees for the benefit of its customers. A member of a health plan may choose to access a non-contracted provider
that is a member of a complementary network; if so, the provider will be reimbursed at a rate negotiated by the
complementary network.
We attempt to strengthen our relationships with health plans and increase the volume of testing services by
offering health plans services and programs that leverage our Company’s expertise and resources, including our
superior access, extensive test menu, medical staff and data, and in such areas as wellness and disease
management.
Physicians. Physicians, including both primary care physicians and specialists, 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
participation in a health plan network; price; and depth and breadth of test and service offering. Physicians also
purchase and utilize our point-of-care tests.
Hospitals. Hospitals generally maintain an on-site laboratory to perform the significant majority of clinical
testing for their 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 typically are negotiated on behalf of hospitals by group purchasing organizations. We provide services to
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