Quest Diagnostics 2011 Annual Report Download - page 17

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 patients 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 to limit reimbursement to 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; quality; 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 often are negotiated on behalf of hospitals by group purchasing organizations. We provide services to
hospitals throughout the United States, including esoteric testing, in some cases helping manage their laboratories
and serving as the medical directors of the hospital’s histology or clinical laboratory. We believe that we are the
industry’s market leader in servicing hospitals. Hospitals generally continue to look for ways to fully utilize their
existing laboratory capacity: they perform tests their patients need and may compete with commercial laboratories
for outreach (non-hospital patients) testing. Continuing to obtain referrals from hospitals depends on our ability to
provide high quality services that are more cost-effective than if the hospitals were to perform the services
themselves. We believe that our combination of full-service, bi-coastal esoteric testing capabilities, medical and
scientific professionals available for consultation, innovative connectivity products, point-of-care testing products,
focus on Six Sigma quality and dedicated sales and service professionals has positioned us to be an attractive
partner for hospitals.
Most physicians have admitting privileges or other relationships with hospitals as part of their medical
practice. Many hospitals seek to leverage their relationships with community physicians by encouraging the
physicians to send their outreach testing to the hospital’s laboratory. In addition, hospitals that own physician
practices generally require the practices to refer tests to the hospital’s affiliated laboratory. In recent years, there
has been a trend of hospitals acquiring physician practices, and as a result, an increased percentage of physician
practices are owned by hospitals. Hospitals can have greater leverage with health insurers than do commercial
clinical laboratories, particularly hospitals that have a significant market share; hospitals thus are frequently able
to negotiate higher reimbursement rates with health insurance plans than commercial clinical laboratories for
comparable clinical testing services.
We also have joint venture arrangements with leading integrated healthcare delivery networks in several
metropolitan areas. These joint venture arrangements, which provide testing for affiliated hospitals as well as for
unaffiliated physicians and other local healthcare providers, serve as our principal laboratory facilities in their
service areas. Typically, we have either a majority ownership interest in, or day-to-day management
responsibilities for, our hospital joint venture relationships.
Employers. Employers use clinical tests for drugs of abuse to determine an individual’s employability and
his or her “fitness for duty.” Companies with high employee turnover, safety conscious environments or
regulatory testing requirements provide the highest volumes of testing. Factors such as the general economy and
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