Quest Diagnostics 2012 Annual Report Download - page 54

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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 DIS;
• 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 diagnostic information services
The process for estimating the ultimate collection of receivables associated with our DIS 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, 2012
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 DIS business during 2012 applicable to each payer group:
% of
% of DIS
Volume Revenues
Healthcare Insurers 45% - 50% 45% - 50%
Government Payers 15% - 20% 15% - 20%
Client Payers 31% - 36% 22% - 27%
Patients 2% - 5% 4% - 10%
Healthcare insurers
Reimbursements from healthcare insurers represent approximately one-half of our DIS 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 24% of our DIS 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 requirements as the aging of the related receivables
increases. Our approach also considers historical collection experience and other factors. Collection of such receivables is
normally a function of providing complete and correct billing information to the healthcare insurers within the various filing
deadlines. For healthcare insurers, collection typically occurs within 30 to 60 days of billing. Provided we have billed
healthcare plans accurately with complete information prior to the established filing deadline, there has historically been little
to no collection risk. If there has been a delay in billing, we determine if the amounts in question will likely go past the filing
deadline, and if so, we will reserve accordingly for the billing.