Quest Diagnostics 2010 Annual Report Download - page 49

Growth Through Acquisition
The clinical testing industry in the United States remains fragmented and highly competitive. We expect to
grow through a combination of organic and acquired growth. We expect to continue to selectively evaluate
potential acquisitions of domestic clinical laboratories, both routine and esoteric, 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 continue to be opportunities to grow beyond our current principal business of offering clinical testing
in the United States. Technology is enabling testing to be performed closer to the patient, whether in the
physician’s office or at the hospital bedside, in the form of point-of-care testing. Given that physicians and
hospitals are primary sources for both point-of-care testing and laboratory performed tests, we believe providing
both forms of testing will strengthen our relationships with customers and accelerate our growth.
Additionally, diagnostic testing in international markets, particularly developing countries, is highly
fragmented and less mature. Continued expansion into point-of-care testing and international markets will
diversify our revenue base, and provide increased access to fast growing markets.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions and select accounting policies that affect
our reported financial results and the disclosure of contingent assets and liabilities.
While many operational aspects of our business are subject to complex federal, state and local regulations,
the accounting for most of our business is generally straightforward with net revenues primarily recognized upon
completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar
transactions, and about one-half of our total costs and expenses consist of employee compensation and benefits.
Due to the nature of our business, several of our accounting policies involve significant estimates and judgments:
•revenues and accounts receivable associated with clinical testing;
•reserves for general and professional liability claims;
•reserves for other legal proceedings;
•accounting for and recoverability of goodwill; and
•accounting for stock-based compensation expense.
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 generally recorded as revenues net of allowances for differences between amounts
billed and the estimated receipts from such payers. Adjustments to the allowances, based on actual receipts from
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 revenues and 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, 2010 were outstanding more than 150 days.
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