Quest Diagnostics 2012 Annual Report Download - page 52

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The legislation also includes provisions aimed at reducing the overall cost of healthcare. Impacting laboratories
specifically, the legislation provides for annual reductions in the Medicare clinical laboratory fee schedule of 1.75% for five
years which began in 2011 and includes a productivity adjustment which reduces the CPI market basket update. The legislation
also imposes an excise tax on the seller for the sale of certain medical devices in the United States, including those purchased
and used by laboratories, beginning in 2013.
In addition, the legislation is focused on reducing the growth of healthcare costs. The legislation establishes the
Independent Payment Advisory Board, which will be responsible, beginning in 2014, annually to submit proposals aimed at
reducing Medicare cost growth while preserving quality. These proposals automatically will be implemented unless Congress
enacts alternative proposals that achieve the same savings targets. Further, the legislation calls for a Center for Medicare and
Medicaid Innovation that will examine alternative payment methodologies and conduct demonstration programs.
The legislation may result in a higher demand for our services as a result of increased access to health insurance
coverage for previously uninsured and underinsured individuals. Because of the many variables involved, we are unable to
predict with certainty the effect of the legislation on our business. However, we believe that we are well positioned to respond
to the evolving healthcare environment and related market forces.
Reimbursement for Services
Payments for diagnostic testing services are made by physicians, hospitals, employers, healthcare insurers, patients
and governmental authorities. Physicians, hospitals and employers are typically billed on a fee-for-service basis based on
negotiated fee schedules. Fees billed to healthcare insurers and patients are based on the laboratory's patient fee schedule,
subject to any limitations on fees negotiated with the healthcare insurers or with physicians on behalf of their patients.
Medicare and Medicaid reimbursements are based on fee schedules set by governmental authorities. Government payers, such
as Medicare and Medicaid, as well as healthcare insurers and larger employers, have taken steps and may continue to take steps
to control the cost, utilization and delivery of healthcare services, including diagnostic testing services.
Part B of the Medicare program contains fee schedule payment methodologies for diagnostic testing services, and for
pathology and other physician services, performed for covered patients, including a national ceiling on the amount that carriers
could pay under their local Medicare clinical testing fee schedules. The Medicare Clinical Laboratory Fee Schedule for 2013 is
decreased by 2.95% (excluding sequestration) from 2012 levels. In December 2012, Congress delayed by one year a potential
decrease of approximately 26% in the physician fee schedule that otherwise would have become effective January 1, 2013, but
implemented relative value unit changes significantly impacting physician fee schedule reimbursement for tissue biopsies that
are expected to reduce reimbursement for tissue biopsy services. Also, an additional 2% reduction in the Medicare Clinical
Laboratory Fee Schedule for 2013, associated with sequestration, was delayed until April 1, 2013. In 2012, approximately 13%
of our consolidated revenues were reimbursed by Medicare under the Clinical Laboratory Fee Schedule.
Healthcare insurers, which typically negotiate directly or indirectly on behalf of their members, represent
approximately one-half of our DIS volumes and one-half of our net revenues from our DIS business. Larger healthcare insurers
typically contract with large commercial clinical laboratories because they can provide services to their members on a national
or regional basis. In addition, larger commercial clinical laboratories are better able to achieve the low-cost structures necessary
to profitably service the members of large healthcare insurers and can provide test utilization data across various products in a
consistent format. In certain markets, such as California, healthcare insurers may delegate their covered members to
independent physician associations, which in turn negotiate with laboratories for diagnostic testing services on behalf of their
members.
The trend of consolidation among physicians, hospitals, employers, healthcare insurers and other intermediaries has
continued, resulting in fewer but larger customers and payers with significant bargaining power to negotiate fee arrangements
with healthcare providers, including clinical laboratories. Healthcare insurers sometimes require that diagnostic testing service
providers accept discounted fee structures or assume all or a portion of the utilization risk associated with providing testing
services to their members enrolled in highly-restricted plans through capitated payment arrangements. Under these capitated
payment arrangements, we and the healthcare insurers agree to a predetermined monthly reimbursement rate for each member
enrolled in a restricted plan, generally regardless of the number or cost of services provided by us. In 2012, we derived
approximately 12% of our testing volume and 4% of our DIS net revenues from capitated payment arrangements.
Most healthcare insurers also offer programs such as preferred provider organizations (“PPOs”) and consumer driven
health plans that offer a greater choice of healthcare providers. Most of our agreements with major healthcare insurers are non-
exclusive arrangements. As a result, under these non-exclusive arrangements, physicians and patients have more freedom of