LabCorp 2008 Annual Report Download - page 28

26 Laboratory Corporation of America® Holdings 2008
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (in millions)
Laboratory Corporation of America
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported periods.
While management believes these estimates are reasonable and consistent, they are by their
very nature, estimates of amounts that will depend on future events. Accordingly, actual results
could differ from these estimates. The Company’s Audit Committee periodically reviews the
Company’s significant accounting policies. The Company’s critical accounting policies arise in
conjunction with the following:
• Revenue recognition and allowances for doubtful accounts;
• Pension expense;
• Accruals for self insurance reserves; and
• Income taxes
Revenue Recognition and Allowance for Doubtful Accounts
Revenue is recognized for services rendered when the testing process is complete and test results
are reported to the ordering physician. The Company’s sales are generally billed to three types
of payers – clients, patients and third parties, such as managed care companies, Medicare and
Medicaid. For clients, sales are recorded on a fee-for-service basis at the Company’s client list
price, less any negotiated discount. Patient sales are recorded at the Company’s patient fee
schedule, net of any discounts negotiated with physicians on behalf of their patients. The Company
bills third-party payers in two ways – fee-for-service and capitated agreements. Fee-for-service
third-party payers are billed at the Company’s patient fee schedule amount, and third-party
revenue is recorded net of contractual discounts. These discounts are recorded at the transaction
level at the time of sale based on a fee schedule that is maintained for each third-party payer.
The majority of the Company’s third-party sales are recorded using an actual or contracted fee
schedule at the time of sale. For the remaining third-party sales, estimated fee schedules are
maintained for each payer. Adjustments to the estimated payment amounts are recorded at the
time of final collection and settlement of each transaction as an adjustment to revenue. These
adjustments are not material to the Company’s results of operations in any period presented.
The Company periodically adjusts these estimated fee schedules based upon historical payment
trends. Under capitated agreements with managed care companies, the Company recognizes
revenue based on a negotiated monthly contractual rate for each member of the managed care
plan regardless of the number or costs of services performed.
The Company has a formal process to estimate and review the collectibility of its receivables
based on the period of time they have been outstanding. Bad debt expense is recorded within
selling, general and administrative expenses as a percentage of sales considered necessary to
maintain the allowance for doubtful accounts at an appropriate level. The Company’s process
for determining the appropriate level of the allowance for doubtful accounts involves judgment,
and considers such factors as the age of the underlying receivables, historical and projected
collection experience, and other external factors that could affect the collectibility of its receivables.
Accounts are written off against the allowance for doubtful accounts based on the Company’s
write-off policy (e.g., when they are deemed to be uncollectible). In the determination of the
appropriate level of the allowance, accounts are progressively reserved based on the historical
timing of cash collections relative to their respective aging categories within the Company’s
receivables. These collection and reserve processes, along with the close monitoring of the billing
process, help reduce the risks of material revisions to reserve estimates resulting from adverse
changes in collection or reimbursement experience. The following table presents the percentage
of the Company’s net accounts receivable outstanding by aging category at December 31, 2008
and 2007:
Days Outstanding 2008 2007
0 – 30 43.6% 42.5%
31 – 60 19.2% 22.2%
61 – 90 11.3% 10.6%
91 – 120 7.4% 7.6%
121 – 150 4.4% 4.7%
151 – 180 4.1% 3.7%
181 – 270 8.2% 7.3%
271 – 360 1.5% 1.2%
Over 360 0.3% 0.2%
The above table excludes the Ontario operation’s percentage of net accounts receivable
outstanding by aging category. The provincial government is the primary customer of the Ontario
operation. The Company believes that including the aging for Ontario would not be representative
of the majority of the accounts receivable by aging category for the Company.
Pension Expense
Substantially all employees of the Company are covered by a defined benefit retirement plan
(the “Company Plan”). The benefits to be paid under the Company Plan are based on years of
credited service and compensation earned while an employee of LabCorp. The Company also
has a nonqualified supplemental retirement plan which covers its senior management group
and provides for additional benefits, due in part to limitations on benefits and pay imposed on
the Company Plan under the Employee Retirement Income Security Act of 1974.