Quest Diagnostics 2011 Annual Report Download - page 55

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, 2011 were outstanding more than 150 days.
The following table shows current estimates of the percentage of our total volume of requisitions and net
revenues associated with our clinical testing business during 2011 applicable to each payer group:
%of
Volume
%of
Clinical
Testing
Revenues
Healthcare Insurers . . ........................................................... 45% - 50% 45% - 50%
Traditional Medicare and Medicaid Programs .................................... 15% - 20% 15% - 20%
Physicians, Hospitals, Employers and Other Monthly-Billed Clients . .............. 31% - 36% 22% - 27%
Patients ........................................................................ 2% - 5% 4% - 10%
Healthcare insurers
Reimbursements from healthcare insurers represent approximately one-half of our clinical testing 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 25% of our clinical testing 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
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