Quest Diagnostics 2013 Annual Report Download - page 51

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Our Company
Diagnostic Information Services
Quest Diagnostics is the world's leading provider of Diagnostic Information Services ("DIS") providing insights
through clinical testing and related services that empower and enable patients, physicians, hospitals, IDNs, health plans,
employers and others to make better healthcare decisions. Our DIS business makes up over 90% of our consolidated net
revenues. We offer the broadest access in the United States to DIS through our nationwide network of laboratories and
Company-owned patient service centers and we are the leading provider of clinical testing including routine testing, gene-based
and esoteric testing, anatomic pathology services, and drugs-of-abuse testing, as well as related services and insights. We
provide interpretive consultation throughout our organization, with the largest medical and scientific staff in the industry and
hundreds of M.D.s and Ph.D.s, many of whom are recognized leaders in their fields.
The clinical testing that we perform is an essential element in the delivery of healthcare services. Physicians use
clinical testing to assist in detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions.
The U.S. clinical testing industry consists of two segments. One segment, which we believe makes up approximately 40% of
the total industry, includes testing done within hospitals, including both inpatient and outpatient testing. The second segment,
which we believe makes up approximately 60% of the total industry, includes testing done outside of hospitals, including
hospital outreach testing and testing done in commercial clinical laboratories, physician-office laboratories and other locations.
Within the second segment, we believe that hospital outreach has been increasing share in the last few years. We believe that
hospital-affiliated laboratories account for approximately 60% of the total industry, commercial clinical laboratories
approximately one-third and physician-office laboratories and other locations account for the balance.
The clinical testing industry is subject to seasonal fluctuations in operating results and cash flows. Typically, testing
volume declines during the summer months, year-end holiday periods and other major holidays, reducing net revenues and
operating cash flows below annual averages. Testing volume is also subject to declines due to severe weather or other events,
which can deter patients from having testing performed and which can vary in duration and severity from year to year.
Additionally, orders for diagnostic testing generated from physician offices, hospitals and employers can be affected by factors
such as changes in the United States economy, which affect the number of unemployed and uninsured, and design changes in
healthcare plans, which affect the number of physician office and hospital visits.
Diagnostic Solutions
Our Diagnostic Solutions ("DS") business, which represents the balance of our revenues, is comprised of our risk
assessment services, clinical trials testing, diagnostic products and healthcare information technology businesses. Through our
DS businesses, we offer a variety of solutions for insurers, healthcare providers and others. We are the leading provider of risk
assessment services for the life insurance industry. We also are a leading provider of testing for clinical trials. In addition, we
offer healthcare organizations and clinicians robust information technology solutions and diagnostic products, including test
kits.
2013 Highlights
Our 2013 performance was impacted by a softer market than we expected entering the year, and our efforts to restore
growth are taking longer than expected. Healthcare utilization declined broadly in 2013 and the healthcare industry as a whole
continues to face utilization headwinds which we believe will continue into 2014. This is supported by commentary from
industry stakeholders, including hospitals, physicians, payers and suppliers. Additionally, the industry faces ongoing pressure
on reimbursement, including: (1) reductions in Medicare payments; (2) cuts to the pathology codes on the Medicare physician
fee schedule; (3) changes to Medicare fee schedules and coding requirements for molecular diagnostics; and (4) the effects of
renewed commercial payer contracts.
Our total net revenues of $7.1 billion were 3.2% below the prior year. DIS revenues of $6.6 billion were 3.4% below
the prior year. DIS volume increased 0.2% as compared to the prior year period, with acquisitions contributing 2.0% to our
overall DIS volume. Excluding the impact of acquisitions, DIS volume was lower by 1.8%, which reflects lower than