Quest Diagnostics 2012 Annual Report Download - page 15

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health plans may delegate to independent physician associations (“IPAs”) or other alternative delivery systems (e.g., physician
hospital organizations) the ability to negotiate for diagnostic information services on behalf of certain members.
Health plans and IPAs often require that diagnostic information services providers accept discounted fee structures or
assume all or a portion of the financial risk associated with providing such 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.
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. 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 have limited
their diagnostics information services network to only a single national provider, seeking to obtain improved pricing. Health
plans also are narrowing their networks.
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 our services for their members
by offering to 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 diagnostic information
services for patients are the primary referral source of our services. 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.
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 service providers, which typically
charge the hospitals on a negotiated fee-for-service basis. Fee schedules for hospital reference testing services often are
negotiated on behalf of hospitals by group purchasing organizations. We provide services to hospitals throughout the United
States, including esoteric testing services, 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 leader in servicing hospitals. Hospitals
generally continue to look for ways to fully utilize their existing laboratory capacity: they perform testing their patients need
and may compete with non-hospital providers 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.
Most physicians have admitting privileges or other relationships with hospitals as part of their medical practice.
Hospitals may 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 may require the practices to refer
testing 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. Increased hospital acquisitions of
physician practices enhance physician ties to hospital-affiliated laboratories and may strengthen their competitive position.
Hospitals can have greater leverage with health insurers than do commercial clinical laboratories, particularly hospitals that
have a significant market share; hospitals thus have been frequently able to negotiate higher reimbursement rates with health
insurance plans than commercial clinical laboratories for comparable clinical testing services. In light of continued pressure to
reduce systemic healthcare costs, it is not clear that hospitals will be able to maintain higher reimbursement rates in the future.
We believe that our combination of services, including full-service, bi-coastal esoteric testing capabilities, medical and
scientific professionals available for consultation, innovative connectivity products, point-of-care testing products, strong focus
on quality and dedicated sales and service professionals has positioned us to be an attractive partner for hospitals, offering a full
range of strategic relationships.
We also have joint venture arrangements with leading IDNs in several metropolitan areas. These joint venture
arrangements, which provide diagnostic information services for affiliated hospitals as well as for unaffiliated physicians and