Welcome to the Quest Diagnostics Third Quarter 2019 Conference Call. At the request of the company, this call is being recorded. The entire contents of this call, including the presentation and question and answer session that will follow are the copyrighted property of Quest Diagnostics, where all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Sean Bevec, Vice President of Investor Relations for Quest Diagnostics.
Go ahead, please.
Thank you, and good morning. I'm here with Steve Ruszkowski, our Chairman, Chief Executive Officer and President and Mark Guinan, our Chief Financial Officer. During this call, we may make forward looking statements and will discuss non GAAP measures. We provide a reconciliation of non GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected.
Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10 ks and subsequently filed quarterly reports on Form 10 Q and current reports on Form 8 ks. For this call, references to reported EPS refer to reported diluted EPS from continuing operations and references to adjusted EPS refer to adjusted diluted EPS from continuing operations excluding amortization expense. References to adjusted operating income for all periods excludes amortization expense. Finally, growth rates associated with our long term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth, our compound annual growth rates. Now here is Steve Ruskowski.
Thanks, Sean, and thanks, everyone, for joining us today. Well, this morning, I'll discuss the Q3 and review progress on our 2 point strategy. And then Mark will provide more detail on the results and take you through updates to our 2019 guidance. We had a solid quarter of top and bottom line growth, while PAMA reimbursement pressures persist throughout the industry. Our expanded network access and laser focus on driving operational excellence are enabling growth.
Based on our progress to date, we have updated our outlook and are well positioned to meet our commitments for the year. For the Q3, we grew revenues 3.5 percent despite continued reimbursement pressure. Reported EPS was $1.56 up nearly 3% from the same period in 2018. Adjusted EPS was $1.76 up nearly 5%. Then volume growth remained very strong at 5.1%, and year to date volume growth is up 4.3%.
Now I'd like to briefly update you on the 3 fundamental changes in the laboratory marketplace that we discussed at last year's Investor Day. And as you know, our PAMA, our expanded network access and increased consumerization of healthcare. First on PAMA, the reimbursement pressure remains a catalyst for structural change in the marketplace. And there is mounting evidence that PAMA is hurting this industry. We see and hear the negative impact that PAMA is having whenever we evaluate potential lab acquisition targets.
In CAP Today, a respected industry journal, it recently highlighted how PAMA and other reimbursement pressures are already starting to drive consolidation in the industry. As you know, here at Quest, we took a series of actions earlier this year to further reduce our costs to align with the PAMA cuts. Some decisions that we made were difficult and our employees have felt the changes. More PAMA reimbursement cuts are coming in 2020. Our industry continues to fight PAMA Swan implementation in the courts and in Congress.
We recently received a favorable U. S. Court of Appeals decision to allow the lower court to review the merits of the ACLA's case. ACLA submitted its initial brief last week and the decision is expected in 2020. This is encouraging news and so is the introduction of the Laboratory Access for Beneficiaries Act or LAB Act, introduced in June by 6 members of Congress from both sides of the aisle and now with nearly 40 co sponsors.
The ACLA is also working to build support for a Senate companion bill to improve the LABA Act and a larger end of year healthcare extender bill. The second fundamental change affecting our industry is our expanded network access and payers becoming more focused than ever on driving better value in their lab spend. We are partnering with UnitedHealthcare to move testing volumes to high value labs like Quest from high cost hospital and out of network labs. UnitedHealthcare began offering a product with $0 member out of pocket charges for laboratory testing for the majority of fully insured lives in select states on October 1. UnitedHealthcare will also make the lab savings programs available for their self insured employer groups beginning in 2020.
And then finally, we continue to see the ongoing consumerization of healthcare with more and more healthcare costs borne by consumers. In September, the Kaiser Family Foundation reported that the annual premiums for employer sponsored healthcare coverage grew 5% were families, surpassing $20,000 for the first time. The number of employees in high deductible health plans has increased over the past decade. Turning to our recent progress. The first part of our 2 point strategy is to accelerate growth with just 5 elements: to grow 2% per year through accretive, strategically aligned expand relationships with health plans and hospital health systems, offer the broadest access to diagnostic innovation, be recognized as the consumer friendly provider of diagnostic information services, and then finally, support population health with data analytics and extended care services.
Now, let me take you through a few highlights from our strategy to accelerate growth in the quarter. Our acquisition pipeline remains strong. As we said before, most deals in our pipeline are taking more time to develop than we have in the past. Conversations with hospital systems are getting broader. Hospital CROs are also interested in how we can help them with their professional lab services taking on more of their reference work.
As a result of this complexity, proposed relationships take longer to develop. Hospital systems are also interested in learning more about our recently unveiled Quest Lab Stewardship, an innovative new service that employs machine learning to help optimize laboratory test utilization. We have partnered with HC1, a healthcare IT company, to provide a solution that gives Quest a differentiated offering in a competitive hospital market place. We continue to see revenue and volume growth as a result of our expanding network access. In aggregate, growth continues across our top 50 major health plan customers.
Key test growth drivers in the quarter include drug monitoring, continued strength in tuberculosis testing in both QuantiFERON and C SPOTs, STD testing and Cardio IQ. Each of these test categories posted solid contributions to the revenue growth in the quarter. The second part of our 2 point strategy is to drive operational excellence. We remain on track to deliver 3% cost efficiencies for 2019 by continuing to drive increases in productivity. We have some examples, which include using digital technology to enhance the customer experience.
We now have more than 8,200,000 patients now making appointments and receiving the results through our MyQuest digital platform. We continue to drive productivity improvements across logistics, patient services, lab services, enabling us to reduce our overall cost per laboratory requisition. And we're also putting new innovations to work while reducing costs. We're in the process of consolidating and simplifying our immunoassay platforms, moving to a single supplier. This approach enables greater throughput, a more efficient footprint and is expected to save us tens of 1,000,000 of dollars per year.
Now let me turn it over to Mark, who will take you through our financial performance. Mark?
Thanks, Steve. In the Q3, consolidated revenues were $1,960,000,000 up 3.5% versus the prior year. Revenues for Diagnostic Information Services grew 3.7% compared to the prior year, driven by strong volume growth and acquisitions, partially offset by higher reimbursement pressure. Volume measured by the number of requisitions increased 5.1% versus the prior year. Excluding acquisitions, volumes grew 3.7%.
We benefited from an extra revenue day in the Q3, while the impact of Hurricane Dorian was a modest volume headwind. The net impact of these two items added roughly 1% to our organic growth in the quarter. Recall, we also highlighted last quarter that we recently exited some capitated contracts. In the 3rd quarter, this change represented a headwind of nearly 1% to our organic volume growth. Importantly, we continue to see a modest acceleration in our volume growth associated with our UnitedHealthcare contract.
Revenue per requisition declined by 1.2% versus the prior year, primarily driven by higher reimbursement pressure. Unit price headwinds were approximately 2.5% in the 3rd quarter. This includes the impact of PAMA, which amounted to a headwind of approximately 120 basis points. As a reminder, the PAMA impact includes both direct cuts to the clinical lab fee schedule as well as modest indirect price changes from Medicaid and a small number of floating rate contracts. Reported operating income was 313,000,000 dollars or 16 percent of revenues compared to $304,000,000 or 16.1 percent of revenues last year.
On an adjusted basis, operating income was $349,000,000 or 17.9 percent of revenues compared to $333,000,000 or 17.7 percent of revenues last year. The year over year increase in adjusted operating margin was primarily driven by strong volume growth and ongoing productivity improvements related to our Invigorate initiatives, partially offset by higher reimbursement pressure. Additionally, patient concessions are down year over year. Reported EPS was $1.56 in the quarter compared to $1.53 a year ago. Adjusted EPS was $1.76 up approximately 5% from $1.68 last year.
Cash provided by operations is $895,000,000 year to date versus $905,000,000 last year. Capital expenditures were $228,000,000 year to date compared to $232,000,000 a year ago. Now turning to guidance, our updated outlook for 2019 is as follows. Revenue is expected to be approximately $7,720,000,000 an increase of approximately 2.5 percent versus the prior year. Reported EPS expected to be between $5.48 $5.53 and adjusted EPS to be between $6.45 $6.50 Cash provided by operations is still expected to be approximately $1,300,000,000 and capital expenditures are expected to be between $350,000,000 $400,000,000 I will now turn it back to Steve.
Well, to summarize, we had a solid quarter of top and bottom line growth. While PAMA reimbursement pressure persists throughout the industry, our expanded network access and laser focus on driving operational excellence are enabling growth. But based on our progress to date, we have updated our outlook and are well positioned to meet our commitments for the rest of the year. Now we'd be happy to take any of your questions. Operator?
Thank you. We will now open it up to Our first question comes from Ralph Giacobbe with Citi. Your line is open.
Good morning, Ralph. Good morning, Ralph.
Good morning. Good morning. Thanks. I guess I wanted to ask on the pricing side and just your comments on sort of the higher reimbursement pressure. I guess what's
just help us on sort
of what's driving that outside of PAMA? And then if you could maybe just level set the expectation on sort of where expectations
are for that pricing mix that kind of
going forward, exclusive of PAMA? Stat kind of going forward exclusive of PAMA?
Greg, Mark, do you want to?
Sure. So as we've shared before, at the Investor Day last year and then also coming into this year, this year's pricing pressure is primarily driven by 2 factors. One is PAMA. The second one is getting back in with United. We moved from out of network rates to a market based in network rate.
So obviously, we have grown our volume dramatically. As we've said this year, we expected and we feel we are delivering enough incremental volume to offset the price hit, but it is a significant price headwind relative to the rates we were being reimbursed as NANA Network Labs. You then have the typical pricing pressure that this industry has faced. In the past, we've talked about it being around 100 basis points or less. Number of those pricing pressures are coming from the client bill.
It's not all third party reimbursement where we're contractually agreed with a health plan and what those rates are in the hospital business and also where we sell directly to physicians and they're allowed to build a 3rd party. There's a lot of competition, a lot of pricing pressure in that area. And so while we've talked about we're going to be price disciplined when we certainly walked away from some contracts that haven't made sense, the reality is that it's a very competitive environment. And that has not really changed. So the big change over the last 2 years, obviously, PAMA last year, but it wasn't fully implemented because you had some offsets to in the 1st year that we talked about previously.
This was the 1st year of the full 10% of PAMA. And then additionally, we have the United price as well. Going forward, as we shared, we would expect this to get back to more of its historical rate. I'm not going to give any specific guidance for a given year, but there's no reason to believe once we get through the transition period in the United that we shouldn't be really facing kind of the traditional pricing pressure and then PAMA.
Okay. And could you just quantify that UNH pricing pressure this year?
Ralph, it's going to be $40,000,000 to $50,000,000
Okay. All right. Thank you.
Our next question comes from Bill Quirk with Piper Jaffray. Your line is open.
Good morning, Bill.
Thank you. Good morning, everyone. Good
morning. So Steve, I want to follow-up on a comment
that you made concerning the decision to consolidate the immunoassay vendors. Can you speak a little bit about whether or not there's an opportunity here to consolidate some of your other testing methods, things like clinical chemistry and hematology and such? And if so, can
you just help us think
a little bit about the timing? Is this something we should think about over the next couple of years to help offset some of the PAMA pressure?
Yes, sure. Absolutely. So Bill, we've been working on this for about 7 years, getting smarter and more strategic with all our suppliers. And so we've done a lot of consolidation in the past, and we'll continue to do more in the future. So as far as immunoassays, we're close to deciding on the supplier.
I believe that will be announced shortly who that is. It affords us a nice opportunity. And this is all part of our 3% productivity gain that we are dialing in to be able to offset PAMA. We need it to be able to offset PAMA and deliver on the earnings outlook that we've provided at Investor Day. And so part of that 3% is working with our suppliers and part of that working with suppliers.
An example of that is Newhouse, but there's others. Another example would be the automation we're putting in place in some of our newer facilities, particularly we're investing this year in our branding facility here in New Jersey, in Clifton, New Jersey. It's a big project for us. That will have this new platform, but equally, it will have this latest approach to automation, which will increase our productivity, but also allow us to consolidate some facilities if we want to get some productivity gains from that. But that's all part of that 3%.
And we need that 3% to offset the price pressure, particularly with PAMA, next year and maybe the year after.
Yes. And I just want to add some color there, Bill, to make sure and understand this is not just consolidating our purchases. This is actually a new innovation in the platform where we can do multiple tasks that previously were performed on separate pieces of equipment on a single piece of equipment. So this will drive not just the procurement efficiencies, but actually will drive operational efficiencies in our labs.
Our next question comes from Donald Hooker with KeyBanc. Your line is open.
Great. Good morning. Good morning. So maybe you guys in terms of that new collaboration you announced with HC1, I know you guys do a lot of interesting things in the population health space. I'm just trying to maybe can you elaborate on that a little bit?
What exactly are you doing?
And is this something that I
guess you're doing? Sure. Sure. We're going to a hospital client and it's part of our 5 point strategy. We talked to them about three things in regards to the last strategy.
One is, can we make them more efficient in running their inpatient laboratory? And so this is where we talk about professional laboratory services or sometimes we use the acronym PLS and we continue to have active dialogues about making them more efficient. And we can with good evidence now save them about 10% to 20%. Part of that typically also is looking at the sophisticated send out testing referred to as reference testing. And in that regard, we can consolidate who they're buying from, we can potentially get them a better price.
But the third part that we're looking at and this new offering allows us a tool to do a better job of getting smarter about what they're testing in the hospital is interrogate their order patterns and look for variation of their order patterns and look at ways of optimizing what the order within the hospital. A you should also order more because it's smarter diagnostic workup for the inpatient study. But the second part of this, which is more even more intriguing, what many hospital administrators are interested in is making sure that we have the right diagnosis. And if you look at the total quality and outcomes for a hospital stay, there's nothing more expensive than a biog diagnosis. So what this tool allows us to do is to work with our clients on getting smarter on their inpatient diagnostics.
And as part of that, we clearly become more strategic than this vendor providing reference testing within that account. And then finally, the 3rd piece of what we work with hospital systems, and when we have those discussions, is you want to stay in the outreach business. And we have bought some outreach businesses from hospitals. We have some in our numbers for this year and we'll continue to aggressively pursue buying outreach businesses as this industry consolidates. And I would tell you that many hospital systems are now well aware of PAMA and well aware of other reimbursement pressures that are happening on their laboratory outreach business.
So as we mentioned in our commentary, that funnel of discussions continues to grow.
Our next question comes from Erin Wright with Credit Suisse. Your line is open.
Hi, Erin.
Hi. In terms of the timing and magnitude of contributions from the managed care access, I guess, can you break out what you're seeing in terms of underlying market growth and what portion of volume may be stemming from the Managed Care contracts and possibly also the PLN in early days? And are you still anticipating those contributions to ramp from here? How should we conceptually be thinking about that ramp? I'm not asking for 2020 guidance, but how should we be thinking about that ramp into 2020?
Sure. So what we'll share with you, and we always share the same quarter, is it feels like the market is stable. We don't see any notable changes in terms of volume increases within the marketplace, both outside the hospital also inside the hospital. So it's stable. So if you look at the volume growth, we're clearly gaining share.
And a lot of and large portion of that share gains is coming from managed care relationships. And what we have also said is that our access changes, which is the best in over a decade, will continue to grow. It will continue to grow this year in 2019, but it will also have growth in 2020 and probably in 2021 as we take advantage of that opportunity that we see in front of us. That will be helped in 2020 for certain with for lab network, particularly with UnitedHealthcare. So you should look for in 2020 continued growth again because of our expanded network access.
So Mark, anything you'd like to add to that?
Yes. So you asked about the PLN. It's still very, very early. To this date, I'd say very little, if any, growth has come from the PLM that's still in front
of us, which is a
good news. We talked at Investor Day about kind of 3 tranches of volume growth, Aaron. We sized the new Maniscare Access at about $1,000,000,000 at our price, our fair share. We fully expect to get to our fair share, but it's going to take several years. There was easier
to convert
accounts, obviously came quickly. We call them Quest Loyalists, where we had the rest of the book of the office and they were sending some of the managed care work that we were out of network to those to other labs who were in network and they immediately moved that to us once we were in network. We then had some of the accounts where they had multiple labs. We showed you the picture where there were 3, 4, sometimes 5 boxes outside. We've done a better job of consolidating some of that, getting a more larger share of wallet per se in those positions.
That will take a period of time, but certainly we've got some growth from that, but that will continue in the future. And then there's the ones where we have had no none of the work. And a lot of that is in the hospital space, hospital outreach and in some of the physician home laboratories. That's where we really think the preferred lab network is going to be a big driver. We're going to be able to have a very simple message to patients.
Hey, if you use one of the preferred labs, and obviously, we're 1 of the 5, 0 out of pocket. That's a very simple message instead of trying to compare how expensive one option might be the other. It's free to you if you use this lab. So we're very confident, very excited. This will be a multiyear tailwind, and we're going to get to that fair share eventually of about $1,000,000,000 at our price.
Our next question comes from Michael Newshel with Evercore ISI. Your line is open.
Hi, Michael. Hi, good morning.
Sam, maybe to follow-up on that. Do you have any visibility at this point after the selling season from United on the level of uptake in the self insured base for the PLN for 2020?
They have not shared specific information. Obviously, that's their question you could ask them, because we're not the only preferred lab. So we obviously get the same information the other preferred lab network providers do. They talk to us about as we've shared the states where they're rolling this out and making this available. And then they've talked to us about the fact that they're marketing it to the full insurance sponsored plans for 2020, rolling that out.
Still very early in that process, and they didn't give us any specific proportionality or percentage of their overall insured lives that are adapting this. But they I'm sure you've heard them talk about it. We've heard them talk publicly and in the conversation we had, they're very, very confident that this is going to be something that people will embrace and then it's going to make a difference.
Our next question comes from Kevin Ellich
with Cowen.
Your line is open.
Good morning. Thanks for taking the question.
Good morning.
Hey, Steve. Two quick things. So first, M and A pipeline, you said that the deals are taking a little bit longer to materialize. Wondering if the environment's changed or if this is what you've experienced historically? And then also, could you talk about maybe any tailwinds you're seeing from opioid testing and the opportunities within behavioral health facilities?
Yes, sure. So on the first one, as I mentioned in our opening remarks, these deals are getting bigger and more complicated. And those are more complexity, it takes more time. There's good news in that and bad news in One is it takes more time, that's the bad news. The good news is the bigger and more complicated.
And so therefore, we clearly have a discussion around how we could be their partner for laboratory services around those three topics that I mentioned earlier. And what I did also share is that the interest level around what we could do in partnering continues to grow because of more people are well aware of the pressure on this portion of their business. I would say that was not nearly where we were last year at this time. So if you look at our growth rate from acquisitions year to date, we're just a little shy of that 2% we indicated. Last year, we're well north of that 2%.
We still feel confident that over an extended period of time, we'll continue to be 2% or greater. And so we feel confident between the 3 buckets that we acquire. 1 is hospital outreach, we have a lot of engagement around that. 2nd is regional laboratories, as I mentioned in my remarks, there continues to be interest in evaluating options for smaller operators because of the pressures that they see. And then finally, we continue to build capabilities and we have a number of acquisitions in the past around that.
A good example is a Muotek, which is bringing us new capabilities around tuberculosis testing and also hip horn illness testing. So all three continue to be our focus going forward. You will see that and we're still confident around our guidance we provided around 2% on a CAGR basis over a multiyear period of time.
Yes. And you asked about opioid testing and tailwind. Certainly, our prescription drug monitoring business, which is a subset of that is opioid testing. It's been a strong growth engine for us for a number of years. It continues to be a nice growth driver.
Like anything else, when something gets large enough, the payers start putting in policies and all sorts of barriers to reimbursement that dampen that somewhat despite some of those restrictions around frequency of testing, grid authorization, other things that they're putting in, it's still a nice growth driver for us. It just would be even larger if they hadn't made those changes.
Our next question comes from Jack Meehan with Barclays. Your line is open.
Hey, Jack. Good morning. Good morning. So I just wanted to focus on the margins here. So in the quarter, nice to see the expansion.
Can you maybe walk us through the moving parts between pricing impact, efficiency programs and the calendar? And as we look to 2020, as you pull all these pieces together, do you think what's the right way to think about? Are margins flat? Is PAMA too big of a headwind to grow through? What are some of the things that you're thinking about?
Yes. So let me first touch, Jack, on the longer term, so I'm not going to talk to 2020. But what I did talk about at the Investor Day was on a 4 year outlook that we could grow earnings faster than the top line. And we talked about the assumption, although that may not play out depending on how we deploy our cash, but that's on flat share count. So therefore, we're actually growing earnings, not earnings per share.
So that implies margin expansion that I can tell you that we're not expecting some sort of a tax windfall. So that's before tax margin growth. I can assure you that will happen every quarter. I can assure you that and then I'm not going to get into 2020 and every year, but over multiple years, we expect to grow our earnings faster than our top line. And it's really having the efficiency program continue.
We talked about it being 3% per year. We've got really good at that. We need that. We'll continue to do that with over time tempering pricing headwinds. In this quarter, we shared the pricing headwinds of 2 50 basis points.
Obviously, that all drops to the bottom line for a very small piece for the bad debt element, but basically it drops to the bottom line. So we had enough efficiency and some lift from volume. How much of that is the extra day? How much of that is just the volume growth? Obviously, we have a higher drop through in the share on organic volume growth, enough to offset the pricing headwinds and basically hold our margin pretty flat in the quarter.
So I mean, if getting any more precise than that, I'd be stretching my credibility and ability to give that, Matt. So I would just say that you can see that despite some pretty significant pricing headwinds, we've held our margins in this quarter and that as we continue to drive strong organic volume growth and deliver our 3% over a period of time, we're going to grow our earnings faster.
Our next question comes from Kevin Caliendo with UBS. Your line is open.
Hi, thanks for taking my call.
Could we talk a little bit about the 4th quarter guidance?
The revenue guidance is in line with our model. The EPS fall short. I'm just wondering if there's any accelerated spending or you maybe trying to position better for 2020 by spending more in 2019. Can you give us a little color around the Q4 and maybe into how you're thinking about spending in 2020?
Yes. So we raised our guidance for the year. So importantly, we're signaling stronger finish to the year than we did at the beginning the year. And until now, we've not signaled anything above our original guidance. So, hopefully, people are taking us the positive message, which we're saying based on our performance through 3 quarters of the year and what visibility we have for Q4, we're feeling confident that we're going to over deliver relative to what we said at the beginning of the year.
So in terms of spending, there's nothing out of the ordinary in Q4. The only thing out of the ordinary is the easy compare on the top line, which we've talked
about. Our next question comes from Brian Tanquilut with Jefferies. Your line is open.
Hi, Brian.
Good morning, guys. Good morning. Mark, just to follow-up on Jack's question earlier, as I think about the G and A line, you've obviously done a good job bringing the G and A percentage down. It flattened out this quarter at about 17.8%. So as I think about your efficiency program, is there more to percent range?
Let me start on this. And for some reason, there's always a lot of focus around G and A, thinking that a lot of our invigorate savings show up in the expense categories. To the contrary, most of our invigorate savings actually show up in our cost of sales. So if you think about what's in our expense category, a lot of it is G and A and we've made really good progress over the last 7 years. So getting more efficient with everything that's in that category in the P and L from IT costs to the cost of running our finance organization, the cost associated with our billing operations, with a relationship
with Optum. And outside of
general administration, it is our sales and marketing costs, which we're always evaluating, getting more efficient. So we have taken a lot of cost off already, and we're also leveraging that fixed cost going forward. So the lift we generally get now has to do with that operational leverage related to the top line growth while maintaining the same cost perspective. And that's what you see this year. So a lot of that 3% productivity gain will show up in productivity gains in our cost of sales and not in the expenses.
Mark, anything you'd like to add to that?
Yes. I just would like to add that, yes, over time, Steve is absolutely correct that a large proportion, if not a majority, of that efficiency is going to drive margin and gross margin and be in the cost of sales. We'll continue to focus on G and A. You can't really look quarter to quarter. In this quarter, we had some a couple of high cost health claims.
Over time, we're going to deliver what we expect, and we've done a really good job in managing very, very minor increases in our self funded employee health care costs. But in a given quarter, you get a couple of large claims that can make some noise quarter to quarter. So there's no trend or there's no nothing should be read in terms of we've lost our ability to continue to drive efficiency. There's always going to be noise on that line quarter to quarter.
Our next question comes from Derik De Bruin with Bank of America. Your line is open.
Hi, good morning. How are you?
Hey, good morning. Good. Hey, I just want to
follow-up 2 questions. One is
a quick follow-up to Bill's question on the vendor consolidation platform consolidation. Can you talk a little bit about that process and about how that's going to look and sort of like how you're judging the different vendors and basically how many you have now particularly in the IA and going down? And then the other question I wanted to follow-up on was when you look at the Q4 last year, obviously you had a number of weather issues, but there were issues with patient concessions, lower cash collections in that sense. Can you just sort of talk about going into Q4, how we are relative to some of those issues? I know you mentioned concessions were down, but just talk a little bit more about the comps some of the different things that are sort of going on in the Q4 versus?
Yes.
Okay. So let me take the first part, Mark will take the second part. The first part, so this is a comprehensive review that we perpetually look at with our suppliers on how we run our laboratories. And we worked we work actively with all our suppliers and that's after the past 7 years we've worked hard to make sure that we really have more of a strategic relationship with all our suppliers, particularly those that are driving a large portion of our spend. And so in that regard, in the IBD automation space, there is consolidation with a number of those platforms, as Mark mentioned.
And there are a number of suppliers that we buy from that are bringing to the marketplace platforms that allow us to replace up to about 5 different work cells from different manufacturers over time. And so what we have done is evaluate those vendors that have a product either in the marketplace or will have our product in the marketplace. And we do that through a thorough review process with their sales force on understanding what they'll have and what they'll have for functionality at what time and also what the economics around their offerings are. We narrowed it down to a few. We actually put in place a few of those platforms in some of our facilities to do some trial runs.
And then we're at the final strokes of selecting more of those suppliers going forward. And we believe that we will choose a vendor that meets all the requirements of what we need. And yes, a portion of this is economics. That is how cost how much productivity we're going to get by getting more throughput by being able to consolidate those operations. But also we think about it holistically.
We need to make sure that we have good confidence around their ability to service us, good confidence around their quality, good confidence around what's in their installed base. So it's a very comprehensive operational review of who will be our strategic provider for this new platform going forward. And as I said, we're at the final strokes of deciding that and shortly it will be announced.
Yes. So on your second question, last year, there were a couple of drivers that led us to the change in estimates and obviously, the change that we made at Investor Day on our outlook for 2018. 2 of them really relate to patients. The first one was that there was more patient responsibility in the year than we saw coming. And again, we're always accruing based on a forward looking expectation of how the revenue is going to play out.
We looked at all the available data at the beginning of the year as we shared. It wasn't a great growth in the amount of people with high deductible plans. We assumed it would be a pretty flat year in terms of the proportion of our revenue from patients. And instead, what happened was there was more patient deductibles themselves have gone up markedly as we found out in the September timeframe, which started to actually validate why our cash collections were lagging what we expected from the payer. So anytime, as we shared, we almost collect 100% of the accepted claims that were owed from 3rd party payers.
And we've shared that we get collect about $0.70 on the dollar from patients. So you move 1% of revenue from the 3rd party to the patient, that's a 30 basis point headwind. So it's pretty significant. The good news is this year, nothing changed significantly from last year. We're very confident with that.
There was no surprise. Obviously, going in, we were very, very diligent in watching that, being conservative, and there's no surprises in terms of the proportion of our revenue coming from patients. The second piece related to patients was we had more patient concessions, not just because more revenue was coming from them, but we actually had some issues we talked about in our lab conversion in the South. And that delayed some billing because of the way these conversions go. And because of that, the more bills age out, the more you're going to have concessions, less likely you're going to collect it.
So that's well behind us. We're fully converted. We don't have that anymore, so that's behind us. And then also related to that, we had a higher level of denials because of some timely filing and so on because of the last conversion we So we always are dealing with denials, but they spiked the mid to late last year when we went through this lab conversion. So when you add all those things up, they've been cleaned up.
The issues that we had last year are well behind us.
Our next question comes from Matt Larew with William Blair. Your line is
I wanted to ask for an update on progress in the retail setting. First, just broadly in terms of the footprint transformation in the Walmart and Safeway stores. And then also, anything that you're doing with the new Walmart Health initiative? I know there's a first center that just opened up in Georgia that you're participating in.
Yes. So we continue to move forward with our retail strategy as we call it. We have about 2,100 patient service centers and of which we characterize from about 35% to 40% of those are more retail like, some of which are within Safeway Stores and Walmart. The Safeway relationship continues to be a good one. We actually have some new opportunities with Safeway going forward as we kind of work that relationship, so we're optimistic there.
And then second is we continue to build our presence with Walmart as well. And as you mentioned, they opened up a new health concept store and we are their laboratory provider for that store. So they're still working through how that works. And as you know, if you know anything about Walmart, they've product a lot of things and we're seeing how well that goes to be able to tune up and we're working with them proactive on that concept going forward. And as what we said is our goal is to be north of 50 percent of our patient service centers.
So we have some ways to go. And it does a number of things for us. One is we think it's a better customer experience consistent with our strategy to be the most consumer friendly laboratory. And we think this will continue to be a differentiator for us
in the
market place. 2nd is it's better for employees in a lot of ways and it also allows us to manage the demand and when people are there, if we can have larger patient service centers with more phlebotomists, it just gives you a lot more operational flexibility to manage the demand based upon location and time of day that patients are coming in over extended period of time. And then finally is the patients really the feedback is quite good. They come in, they have flexibility to walk the store while they wait, they have flexibility to do some shopping after their visit. And we believe that improvement in access and the quality of that access will allow us to differentiate ourselves in the marketplace and pick up share gradually over time.
So it's going well. We're pleased with it. And then lastly, I'll just say, yes, we have a relationship with Safeway and yes, we have a relationship with Walmart, but we continue to work with others in the market place, like we continue to work with CVS, Aetna, their MinuteClinic and what they're doing around their strategy as a partner of ours.
Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.
Hey, Ricky. Good morning. Good
morning. This is actually Alexa in for Ricky. Thanks for taking my question. I just wanted to come back to the UnitedHealth PLN. You guys mentioned, I think in your earlier remarks that they're offering starting October 1, dollars 0 member out of pocket charges.
So I guess my question is, are there any other things that you're looking for to do over the balance of the year to continue kind of incentivizing the use of the TLN? And how does that 0 pocket compare to labs not in the network?
Mark, do you want to take that? Yes.
So for labs not in the network, it would be the typical out of pocket determined by their plan benefit design. Whether they have a high deductible plan or they just have some sort of coinsurance, but it won't be 0. So if you think about the average requisition being somewhere between $40 $50 and typical patient responsibility over time, employee responsibility over time might be 20% to 25% of their health care dollars, with the balance being paid for by the company. You can do the math. Now that's an average.
Obviously, there's some very high cost tests. So it would be a big, big advantage if you have a genetic test or some of the other screening tests that could run 100 of dollars. But just the simplicity of the message, so not having to worry that, hey, the same series of tests would be $50 from a national lab and it's $500 from this hospital. And what does that mean for me? It's just you don't have to worry about it.
They're not as good and it's not just about price, it's also about quality and service and access. So those are all the metrics that were required to get in. We did not change our price with United in order to get into the Preferred Lab Network, nor do we think any else did, but we know we definitely did not. So this is really about the total value of the offering. So if you want to go to the best lab with a great price and also have 0 out of pocket, it's a very simple decision for the patient.
So that's important. There's also and United should talk about this, but there's also some things that they're doing around incenting physicians as well. So it's not just a patient driven initiative. And I'll let you talk to United about what they're doing on that end. And then obviously, you can imagine, we're doing a lot of work in the field with our own commercial sales force to make sure that physicians are aware because this is really good for patients.
And most physicians, their number one priority is their patients, not their owner, not anybody else. But when they know this is a good thing for their patients, they like that. The other thing is it's a source of some patient dissatisfaction is getting a bill. And so now you don't have to call to the office about, hey, that lab you ordered for me, I got a bill, I thought it was covered by the office visit, etcetera, etcetera. So reduces noise for the payer, reduces noise for the physician's office, obviously, a good thing for us
and a good thing for patients. Yes. And just what Mark just said, obviously, the savings here is 0 coinsurance and co payments. But the biggest driver is you're moving to a laboratory that has a significantly lower reimbursement rate than if they're working with a non preferred lab network. So the savings to the consumer is very considerable, but the biggest portion of that has to do with the rate differential, not necessarily the patient response that they might have or not have with us.
So a big opportunity and we're hopeful, as we mentioned, just getting started this month. It's early, but we're hopeful. And this change, coupled with the changes that we spoke to, that will take place in 2020, will continue to allow us to grow our presence and our share with United, but also with other payers because we do believe it's a trend overall in the marketplace.
Our next question comes from Mark Massaro with Canaccord Genuity. Your line is open.
Hey, Mark. Hey, Mark.
Hey, guys. Thanks for the question. I guess my first question is for you, Mark. Obviously, the volume growth is the strongest we've seen in a long time. You talked about the one extra revenue day in the quarter, but you also talked about health plan access with United continuing to build.
So can you just give us a sense for whether or not the 5% growth is a level that you think can continue? Can you just give us a little sense of the puts and takes around some of the drivers there?
Yes. So we talked about the fact that the extra day net of Hurricane Dorian gave us about 100 basis points. So you can kind of take that math in your thinking. Obviously, each quarter has different puts and takes in terms of the amount of revenue days, and we usually try to be very transparent about how that all plays out. At the beginning of the year, we talked about Q1 having 3 days and Q3 having an extra day.
And obviously, next year, we have leap year and the quarters will play out a little bit differently. We'll give you as much transparency on that as possible. But really, when you think about the whole year, the next year, you just think about generally revenue days are pretty similar year over year other than when you have a leap year. And then we did talk about the capitated volume, which is not really impacting the bottom line. But if you're just focused on revenue, at some point next year, we lap that change.
So that was about 100 basis points this quarter. If you recall, we shared about 70 basis points in Q2. So at some point, that volume headwind gets behind us. And I think just to share a little additional color in the quarter, our employer pre employment testing business is actually a headwind to our growth. It was pretty flat.
So that's the non DIS, if you remember, at about a 20 basis point higher growth rate I shared at the beginning of my prepared remarks for our core clinical business. So we'll see how the pre employment drug screening business goes. But that was if you want to really think about the clinical business, which is what where we're benefiting from the expanded access, the volume performance is actually slightly stronger than it may have appeared on the surface. So is it going to be 5%, obviously, we're not going to have an extra day every quarter, but is it going to continue to be really positive organic revenue growth into the future? Absolutely, that's our expectation as we work our way to that fair share I talked about is eventually getting to $1,000,000,000 of revenue in these new lives, the 3 expanded access plans.
Our next question comes from Eric Caudwell with Baird. Your line is open.
Hey, thanks very much. At the end of the call, some of these have been hit on, but I think it's always helpful to get maybe a little more emphatic or explicit commentary. It's all around the M and A and then the capital deployment around M and A. Inorganic growth will really start to abate here in the quarter based on the timing of prior period deals. I'm hoping you can give us some sense on what you're expecting from inorganic growth in 4Q.
Also, you have a long term model of 2% plus M and A driven growth. To the extent that the analysts have built in a placeholder here, it sounds like we need to be pulling that in for 2020, at least in the beginning of the year. Can you give us a sense on what you would be comfortable with if people have in a placeholder? And then 3rd, as you see these elongated decision cycles on M and A, cash is building. So are you more comfortable with us leaving that cash on the balance sheet?
Or would you be comfortable with maybe assuming some accelerated share repurchase activity as you have those unnecessary balances start to build? Thanks very much.
Yes. So let me go back to our capital deployment strategy. So as we've shared, we're going to do M and A where it's value accretive to our shareholders. There's a clear path. We're not going to do an M and A just to meet some outlook that we gave.
But with that said, we're very confident in that 2% CAGR. So we never include un executed M and A in our guidance. So just because we, at this point, are implying a low level of M and A either in Q4 or early in the next year doesn't mean that we might not be close to something, but that's just not in our practice. So we don't actually include M and A in our guidance until we have a signed contract and so on. So we're very confident in that 2% CAGR.
If you look at what we've done last year and what we're implying this year, we're going to be well north of that 2% after 2 years. We're highly confident that in the next 2 years to complete that 4 year CAGR, we're going to be at that level, if not beat it, because there is a lot of interest. As Steve shared and as we've talked about, these deals have just taken a while. It doesn't mean they've fallen by the wayside. We're still working on the same deals that we thought we could would have gotten done several months ago, but we're very optimistic some of these are going to get completed.
So I'm not going to give you any guidance for 2020, what I'm comfortable with. Obviously, we'll give guidance in late January for the year. We'll talk about the organic M and A mix. And then at that point, if we have some additional deals that closed in the interim, those will be included. But otherwise, we don't typically do that include that in our guidance.
Our last question comes from Stephen Baxter with Wolfe Research.
I wanted
to follow-up on the patient concessions question. So I'm glad you mentioned the Kaiser report. I was flipping through it and it looks like we're seeing a fairly similar trend in this year's report as discussed at the Investor Day last year in terms of high deductible enrollment, not really increasing that much, but deductibles continuing to march upwards at a similar clip. So I was hoping you could clarify a little bit what you're seeing in 2019 relative to 2018 in terms of where in the ecosystem you're seeing improvement in collections and your level of visibility into that versus this time last year? And then finally, in terms of quantification, would you be able to give us a sense of what the collections improvement has contributed to this year's growth?
Is it reasonable to think about it as offset in the United out of network impact? Or should we be thinking about something less than that? Thanks.
Yes. So at this point, we share where our sources of revenue are. And so at this point, patient responsibility has not grown significantly year over year. So despite what the Kaiser report is talking about in terms of increased deductible this year, it's not impacted us per se year over year. One of the things we did in response to some of the surprises we had last year was we shortened our time frame.
So the way we do our revenue recognition, we're looking at more recent trends. We used to have a longer term trend that worked for years years years. So we're looking at a lot more recent, which would allow us to not have surprises like we had last year. So we've been on top of this. We're very comfortable with what we've been accruing.
We're very comfortable with our cash collections. We have a very robust process. And as we look at that, we've done better on patients' concessions, partially because last year was a particularly poor year for some of the reasons I shared earlier. But part of it is we continue to roll out the tools and partner with Optum, our partner, around doing things like offering credit card collections upfront. We support that with our real time estimation tool, where if you come into our patient service center, you go to an office where we have an in office phlebotomist.
We can tell you on the spot whether the test is covered or not and importantly, what your responsibility will be based on that coverage decision and then have an opportunity to say how would you like to pay for it upfront like most of healthcare has done. So we're collecting more of our cash upfront. That makes a significant difference in the overall collectability. We've also seen an improvement in denials. So some of the things we talked about last year, especially in the PDM space where we're surprised by a couple of major payers, I will tell you, as I shared earlier, the payers in general continue to throw us curveballs.
We're always having to deal with new policy changes, new opportunities for them to deny, but we've cleaned up some of the things last year that were more significant. So we've reduced our overall denials in a couple of key test areas.
That's helpful. We've also shared in the past that
we continue to get some and they actually waive that for a couple of labs, including us, because they know we do things right. We don't do excessive testing. We partner with them on what clinically appropriate panels are and approach to testing are. So that not only reduces our denial rate because pre auth is a great challenge for the labs, but it also makes us advantageous for the prescriber because they don't have to worry about pre auth if this doesn't work to us. So all of those things together are actually helping revenue growth and they're helping our overall margin.
And part of our Invigorate is on the top line. It's not all on cost. Some of it is actually getting paid for more of the work we do, as Jim Davis has said at multiple Investor Day. So we're seeing good positive improvement in that
space. Okay. Well, we thank everyone for joining us today.
We appreciate your support.
Have a great day and talk to you soon.
Thank you for your participating in Quest Diagnostics' Q3 2019 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www dotquestagnostics.com/investororbyphone@88 566-0408 for domestic callers, 402-998 0597 for international callers. Telephone replays will be available from approximately 10:30 am Eastern Time on October 22, 2019 until midnight Eastern Time on November 5, 2019. Goodbye.