LabCorp 2013 Annual Report Download - page 20

16
LABORATORY CORPORATION OF AMERICA
Management’s Discussion and Analysis
of Financial Condition and Results of Operations (in millions)
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, or fees made available through patient
hardship programs. 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 con-
sidered 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, 2013 and 2012:
Days Outstanding 2013 2012
0 – 30 46.4% 48.9%
31 – 60 19.3% 18.6%
61 – 90 11.5% 11.7%
91 – 120 7.1% 6.5%
121 – 150 3.4% 3.9%
151 – 180 3.8% 3.3%
181 – 270 7.3% 6.1%
271 – 360 0.9% 0.8%
Over 360 0.3% 0.2%
The above table excludes the percentage of net accounts
receivable outstanding by aging category for the Other segment,
and its other smaller foreign operations. Combined, these foreign
net accounts receivable balances comprise less than 8.0% of the
Company’s total net accounts receivable balances. The Company
believes that including the agings for these foreign operations
would not be representative of the majority of the accounts
receivable by aging category for the Company. The majority of
the foreign accounts receivable are due from the provincial
government and are generally paid within 30-60 days of billing.