NOTE E — REVENUE RECOGNITION AND CONTRACTUAL ADJUSTMENTS

The Company recognizes revenues when (a) the price is fixed or determinable, (b) persuasive evidence of an arrangement exists, (c) the service is performed and (d) collectability of the resulting receivable is reasonably assured.

The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent and revenues are recognized once the diagnostic services have been performed, and the results have been delivered to the ordering physician. These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. The Company reports revenues from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules. The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount estimated to be collected from non-contracted payers is recorded as an allowance to arrive at the reported net revenues. The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, as appropriate. The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests. The Company regularly reviews its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods accordingly.

The table below shows the adjustments made to gross service revenue to arrive at net revenues (in thousands), the amount reported on our statement of operations.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012

Gross Service Revenues	$	45,159		$	34,807		$	129,625		$	118,131

Total Contractual Adjustments and Discounts		(28,275	)		(20,605	)		(81,481	)		(73,158	)


Net Revenues	$	16,884		$	14,202		$	48,144		$	44,973

Proposed CMS Rule Changes

On July 8, 2013 the Centers for Medicare and Medicaid Services (“CMS”) released a new proposed rulemaking entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014 (CMS-1600-P)”. This 652 page proposed rule contains a number of provisions that may adversely impact the level of reimbursement for a variety of tests for which NeoGenomics receives reimbursement from the Medicare program beginning in 2014. Among other things, CMS has proposed examining approximately 1,200 laboratory tests that appear on the Clinical Lab Fee Schedule (“CLFS”) over a period of five years to determine whether advances in technology may have reduced the cost of providing such tests and whether or not the level of reimbursement should be revised. NeoGenomics is currently performing cytogenetics and molecular testing which are reimbursed using the CLFS. CMS has also proposed changing the methodology used to determine reimbursement rates for the technical component of certain tests reimbursed off of the Physician Fee Schedule (PFS). Among other provisions, CMS has proposed limiting the Relative Value Units (RVUs) ascribed to the Practice Expense component of their reimbursement formula for tests performed in “Non-Facilities” (which would include most clinical laboratories like NeoGenomics) to the RVUs that have been ascribed for the same procedures under the Hospital Outpatient Prospective Payment System, or the Ambulatory Payment Classification system which are used to reimburse “Facilities” (such as hospitals and ambulatory surgery centers). NeoGenomics is currently performing FISH, Flow Cytometry, Immunohistochemistry, and morphology testing, which may be impacted by this PFS rule change if it is enacted. CMS has not yet proposed any specific rates for CY 2014 and NeoGenomics is examining the potential impact that this type of rule change may have on its operations. NeoGenomics provided three different comment letters to CMS with our thoughts on why implementing this proposed rule as drafted, would be bad for Medicare patients and cause a number of disruptions to the independent laboratory industry. We also collaborated with the American Clinical Laboratory Association and the College of American Pathology in response to the proposed rule. The final CLFS and PFS for CY 2014 are not expected to be issued until November 2013, and it is likely we will not know the rates for 2014 until that time. There also may be legal challenges to the proposed rule change if CMS does not make any modifications, which could impact the timing of implementation. Although we are unable to quantify the impacts of the proposed rules at this time, if they are enacted without any changes, such rules will likely have a material adverse impact to NeoGenomics revenue.