LabCorp 2009 Annual Report Download - page 32

LABORATORY CORPORATION OF AMERICA
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
30 LABORATORY CORPORATION OF AMERICA
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
cost 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 col-
lection 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 per-
centage of the Company’s net accounts receivable outstanding
by aging category at December 31, 2009 and 2008:
Days Outstanding 2009 2008
0 – 30 47.7% 43.6%
31 – 60 16.8% 19.2%
61 – 90 10.5% 11.3%
91 – 120 6.8% 7.4%
121 – 150 4.4% 4.4%
151 – 180 4.0% 4.1%
181 – 270 7.8% 8.2%
271 – 360 1.7% 1.5%
Over 360 0.3% 0.3%
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 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 the PEP 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.