Welcome to the Quest Diagnostics Second Quarter 2018 Conference Call. At the request of its company, this call is being recorded. The entire contents of the call, including the presentation and question and answer that will follow are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of Call. 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 Ruskowske, our Chairman, President and Chief Executive Officer and Mark Guyan, our Chief Financial Officer. During this call, we may make forward looking statements and will discuss non GAAP measures. 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 and references to adjusted EPS refer to adjusted diluted EPS excluding amortization expense. As a reminder, adjusted diluted EPS excludes excess tax benefits associated with stock based compensation. Additionally, net revenues and selling, general and administrative expenses have been restated for the basis of prior year comparisons to reflect the impact of the new revenue recognition standard that became effective January 1, 2018, and was adopted on a retrospective basis. Under the new rules, the company now reports uncollectible balances associated with patient responsibility as
a reduction in net revenues, when historically these amounts were classified as bad debt expense within selling, general and administrative expenses. Now here is Steve Ruszkowski. Thanks, Sean, and thanks, everyone, for joining us today. This morning, I'll provide you with highlights of the quarter and review progress on our 2 point strategy, which continues to drive results. And then Mark will provide more detail on second quarter performance.
The highlight of the quarter was establishing our long term strategic partnership with UnitedHealthcare. I'll share more on this relationship in a few minutes. We delivered strong earnings growth in the quarter, driven by revenue growth and the benefits of tax reform. Here are some key highlights from the quarters. Revenues were up 3% despite some headwinds in the marketplace.
Reported EPS was up more than 14% from 2017. Adjusted EPS grew more than 20%. Before I describe the progress we've made, I'd like to provide an update on PAMA. We continue to support efforts by our trade association to implement a market based laboratory reimbursement schedule. On the legal front, ACLA has sued CMS and both sides have submitted their briefs to the court.
We're awaiting the judge to rule on the briefs or set the date to hear our oral arguments. In the meantime, we continue our outreach efforts to find the legislative solution. Earlier this month, we were pleased to learn that CMS is asking stakeholders to provide comments on how to improve future data collection and reporting periods under PAMA. This is a proper step since, as we've said all along, PAMA's current reporting requirements undermine any effort to establish a sustainable market based payment model and deliver the care that patients need. But the key will be what CMS does with the requested comments.
And moreover, the need for change is now. Changing data collection for the future reporting periods does not undo the harm caused by the flawed data collection process that was used in connection with establishing the current rates. Turning to the 2nd quarter, we delivered on all five elements of our strategy to accelerate growth. The first element of our growth strategy is to grow 1% to 2 percent through strategic line accretive acquisitions. We completed our previously announced acquisition of the Outreach Laboratory Services business Cape Cod Healthcare in Massachusetts, the leading provider of healthcare services for residents and visitors of Cape Cod.
Our integration efforts from acquisitions completed in 2017 continue to drive revenue growth and our M and A pipeline remains strong. As we continued our conversations with hospital system CEOs from around the country, it's clear from those discussions that there is a growing awareness of PAMA and the impact it has on their outreach laboratory business. CEOs are increasingly interested in talking more about how we could help them execute their lab strategy. As you recall, this can involve improving their hospital lab operations, working with us on reference testing, and potentially selling their outreach laboratory business to us. In addition to PAMA, hospital CEOs are also seeing the trend in health plans like Aetna and UnitedHealthcare partnering with high value providers like Quest to reduce laboratory spend and bring down the cost of care.
Under the second element of our growth strategy, we continue to expand relationships with health plans and hospital health systems. In May, we announced our long term strategic partnership with UnitedHealthcare. Beginning on January 1, 2019, CLAASP will be participating as a national provider of laboratory services for all UnitedHealthcare plan participants. We're excited about this partnership as it includes a broad range of value based programs rewarding high quality, easily accessible laboratory services at the best value in real time data sharing to drive more personalized care. We are positioning ourselves to be well prepared to provide UnitedHealthcare members with a first class customer experience.
Our commercial team has already begun proactively reaching out to physician customers that let them know will be in network with UnitedHealthcare on January 1. Additionally, we'll be fielding inquiries from customers who will be committed to sending us an increasing share of their UnitedHealthcare patient specimens in 2019. We're delivering on the 3rd element of our growth strategy, which is to offer the broadest access to diagnostic innovation. We continue to see strong growth in prescription drug monitoring, QuantiFERON, tuberculosis testing, non invasive prenatal screening. In the second quarter, we did experience 3 dynamics which impacted the marketplace.
First, the growth we saw in prescription drug monitoring marketplace, although strong, was less than expected because of policy trended as opposed by some payers to limit testing. We're engaging directly with these payers to show the medical necessity of this testing and so far have had success getting at least one payer to reverse its policy change. 2nd, in the hepatitis C market, we saw a faster than expected decline in genotyping and resistance testing. This is largely due to the rapid acceptance of AbbVie's new hepatitis C therapy, which works across multiple genes and does not require the same level of testing as previous therapies. We still see a tremendous opportunity in hepatitis C screening.
Our screening business continues to grow, and we estimate 2 thirds of more than 70,000,000 baby boomers still have yet to be screened. Finally, on vitamin D testing, it did slow the quarter due to increased reimbursement to dialysis. We're working with payers and providers to ensure the appropriate testing is being performed for patients who need it. We continue to make strong progress executing the 4th element of our growth strategy, which is to be the provider of choice for consumers. Our Walmart applications continue to see increased traffic and be well received by customers.
We're now operating inside 12 Walmart locations in Florida and Texas, and we'll be providing more around our consumer strategies, including MyQuest, our digital experience, and our consumer offerings at our Investor Day in November. The 5th element of our growth strategy is to support population health with data analytics and extended care services. I'm excited about last month's launch of Quest Clinical Trial Connect, a new patient recruitment service to help pharma companies and CROs speed the development of new therapies. We have already engaged several pharma, biotech and CRO companies with this solution. In the area of population health, in June, we released a study on pleural wellness and screening at the American Diabetes Association Scientific section, showing a strong association between wellness participation and healthcare outcomes.
The study showed that a third of the at risk employees identified by screening who then participated in a behavioral health program to reduce diabetes risk reduced glucose and hemoglobin A1C to normal levels. Also, more than 1 quarter participants lost 5% or more of body weight, reducing the risk of many obesity related conditions. This news is catching the attentions of both employers and health plans as they proactively look for opportunities to bend their healthcare cost curve. We're strengthening our already strong position in the marketplace. The second element of our 2 point strategy is to drive operational excellence.
We are continuing to drive efficiency and effectiveness within Quest to cover the cost of wage inflation and reimbursement pressure. Our reference to digitize our processes are improving the customer experience. So here are 2 simple real examples of improvement opportunities in front of us. First, as we've shared previously, processing of paper requisition takes approximately 4 minutes. The enablement allows us to improve both efficiency and quality.
We're making progress in our efforts to get clients to submit electronic requisitions. Today, more than 70% of the requisitions we receive are sent electronically, and this is up from approximately 60% in 2016. 2nd, we have developed a client friendly application, which allows physicians and their staffs to order specimen pickups. Since the launch early last year, over 5,000 clients have converted to online pickup through what we call Quantum HCP portal, and we're adding 200 clients each week. Each day, more than 13% of routine on demand pickup requests are received electronically through our new application.
And we expect that this rapid adoption will continue. Now this translates into fewer calls to our call center and a significantly fewer occurrences of our couriers arriving to find an empty lockbox. Now let me turn
it over to Mark, who
will take you through the financial performance. Mark? Thanks, Steve. Consolidated revenues of
1.9 $2,000,000,000 were up 3% versus the prior year. As a reminder, we now report uncollectible balances associated with patient responsibility as a reduction of net revenues instead of bad debt due to a change in revenue recognition accounting. Revenues for Diagnostic Information Services, or DIS for short, grew 3.3% compared to the prior year, driven largely by acquisitions. Volume, measured by the number of acquisitions, increased 2.5% versus the prior year, with acquisitions contributing approximately 200 basis points. Volume was softer than expected due in large part to the specific market dynamics highlighted by Steve earlier.
Revenue per acquisition in the 2nd quarter grew by 20 basis points versus the prior year. As a reminder, revenue per rec is not a proxy for price. It includes a number of variables such as unit price variation, business mix, test mix and test per rep. During the Q2, unit price headwinds remained consistent with those observed in the Q1, with a headwind of approximately 50 basis points from PAMA and less than 100 basis points from all other factors. Absent any changes to PAMA, Medicare reimbursement pressure will increase in 2019 as we have indicated previously.
Beyond unit price, other mix elements remained strong in the quarter and more than offset reimbursement headwinds. Reported operating income for the quarter was $305,000,000 or 15.9 percent of revenues compared to $319,000,000 or 17.1 percent of revenues a year ago. Operating income was $340,000,000 or 17.7 percent of revenues compared to $343,000,000 or 18.4 percent of revenues last year. The decline in operating margin was due to several factors, including investments using tax reform savings that had a 60 basis point adverse impact on operating margin some of our larger acquisitions, which are in the early stages of integration and therefore not yet delivering full margin and contribution and pay a month. Reported EPS was $1.57 in the quarter compared to $1.37 a year ago.
Adjusted EPS was $1.75 up more than 20% from $1.45 last year. During the quarter, uncollectible balances associated with patient responsibility, which we now call patient price concessions, were flat year over year. Cash provided by operations year to date was $503,000,000 versus $490,000,000 last year. Capital expenditures year to date were $151,000,000 compared to $107,000,000 a year ago, which is in line with the higher CapEx spend planned for 2018. Now turning to guidance.
We are narrowing our outlook for 2018 as follows: revenues now expected to be between $7,700,000,000 $7,740,000,000 an increase of 4% to 4.5% versus the prior year. Reported diluted EPS to be between $5.50 $5.64 and adjusted EPS to be between $6.53 $6.67 Cash provided by operations continues to be approximately $1,300,000,000 and capital expenditures continue to be between $350,000,000 $400,000,000 In addition, keep in mind that the investments in the business we are making related to tax reform savings will continue to ramp up as we progress throughout the remainder of 2018. Some of these investments are related to preparing to be a national in network provider for UnitedHealthcare. Our narrowed revenue guidance reflects our performance through the first half. As you think about the second half of the year, consider the following.
First, the actions we are taking in the areas of PDM and vitamin D testing. 2nd, as Steve mentioned, health systems are talking to us more about how we can help them execute their lab strategy. We have a few professional lab services agreements we expect to close in the second half. Taken together, we expect the benefit of these items will build as we progress through the remainder of the year. Finally, last year's severe hurricane impacts should make for an easier comparison this year.
The majority of the impact was in the 3rd quarter with some carryover in the 4th quarter as well. To sum it up, we expect growth to accelerate throughout the second half and remain confident in our ability to achieve our 2018 outlook.
I will now turn it back to Steve. Thanks, Mark. And to summarize, we grew revenues and delivered strong earnings in the 2nd quarter. We're excited to build on the strategic relationship that we now have with UnitedHealthcare Group. And we remain focused on executing our 2 point strategy, and we are confident we'll meet our commitments for the remainder of 2018.
Now I'll be happy to take any questions. Operator?
Our first question comes from Patrick Donnelly with Goldman Sachs. Your line is open. You may ask your question.
Great, thanks. Hey, Patrick.
How are you?
When you
think about the shifting payer contracts to non exclusive, can you just talk through your initial discussions with United ahead of the contract opening up in January? How quickly you think you can capture share? And then just from the outside, what are the key dynamics to understand around the ramp up of business and your focus points going into January?
Yes. So Patrick, thanks for the question. And we have a tremendous opportunity in front of us. When we launched the new relationship, we've talked about the opportunity to have access to over 40,000,000 lives. And we've already started and we've started working on this aggressively.
So we have detailed out by thousands of accounts, which sales reps in which geographies will engage with customers. 1st of all, making them aware of the contractual changes, talk about what we need to do to potentially serve them in a broader way. And finally, is be prepared to ramp this up as quickly as possible. And so what I'll share with you is we've already left the blocks. We're off and running.
We're engaging long for some time for us to be back on contract. And the biggest opportunity for us is for those accounts that might have had another laboratory because we were not on contract with United now have an opportunity to continue to bring us more of their laboratory services work. And then second is, we have an opportunity just broadly in many accounts to gain more share. So we're optimistic about it and working hard at it.
Okay, that's helpful. And then maybe just on the capital allocation side, pretty light quarter in terms of M and A activity. Can you just update us what you're seeing in the market? Are things developing slower than you anticipate around PAMA driving consolidation? Or is it more just around the process inside of hospitals taking a long time to get deal consummated?
Yes, Patrick, just to underscore my comments, the conversations have increased. We are engaged in many more conversations today with CEOs of integrated delivery systems around their lab strategy. And in that regard, they are considering given what's happening with PAMA and given the change they see happening with health plans of what they should do going forward with their outreach business if they have it. So we're optimistic by the prospect. Again, there's 3 parts of our strategy.
First is what we call professional laboratory services business. As Mark said, we've got a few opportunities in front of us. We're hopeful in the back half to be announcing a couple of these at least. 2nd is, it affords us an opportunity to do more of their sophisticated testing, which we call reference testing in the hospitals. And usually, when we have those conversations, we then have a conversation around outreach.
So there's more conversations today than a year ago in that funnel and that whole opportunity list continues to build for us.
Very helpful. Operator, next question?
Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open. You may ask your question.
Hi, Ricky.
Hey, good morning.
Good morning.
First of all, point of clarification, when we think about the guidance for second half of the year, does it incorporate continued weakness with drug monitoring hep C and vitamin D?
Yes. So Ricky, the Hep C impact, we don't expect to be reversed. So that is kind of a permanent change. So we'll continue to have some headwinds, but on that particular part of hep C. But as Steve mentioned, screening continues to grow.
So it's still an attractive business. It's just the genotypic testing, which is largely going to go away. So continued headwinds of hep C, but certainly mitigating because there will be some business that obviously will remain in other drugs that do require that testing. On the prescription drug monitoring, we mentioned that we got one payer to change their position. We are well down the road in discussing that with a couple of other payers who made those changes.
We're optimistic because we think that our view is the medically appropriate approach to this very necessary important area of testing. So we have some plans in place and we're counting on not just the one payer being reversed, but a couple others we're feeling like we're making progress in that space. And then on vitamin D, it's really a market that has probably not always been coded appropriately. There's been changes in vitamin D that make a lot more people eligible for vitamin D testing. And there's some practices where people are still using old coding, not understanding that it's going to have an impact on the providers.
So I think there is increasing education around the appropriateness of vitamin D testing, which of course we support, but then ensuring that you code accurately as well to ensure that the providers get paid. So we're optimistic that some of that will be mitigated as well over time, and that's why we talked about increasing momentum throughout the back half
of the year. So the guidance for the full year does contemplate obviously what happened in the first half, but what we will address for these three issues that we talked about in our remarks in the second half as well. So yes, it's in.
Okay, great. And then two follow ups here. First of all, when we think about a step up in SG and A investment in preparation for bringing on the United volume, should we think about that as $75,000,000 in investment that are related to tax reform savings that you talked about in the past? And should we think about this as a new SG and A base that will carry over for 2019? Or are these just one time investments?
And then the second follow-up is just on unit price. I think in the prepared remarks, you talked about the mix versus the unit price headwinds and you mentioned that 2019 reimbursement pressure will accelerate on the unit price. So I know it's a little bit early, but how should we think about mix versus unit price in 'nineteen? Yes.
So thank you for the questions. First off, the investments that we talked about ramping up are included in that 75,000,000 dollars So it's not incremental to the $75,000,000 we talked about. We at the beginning of the year, we talked about a portion of that being invested in our people and that $500 onetime bonus. We talked about some investments in areas of accelerated growth around advanced diagnostics and PDM. Well, we didn't talk about the 3rd piece and we couldn't because that was really earmarked for United.
So it's still all contained within the initial $75,000,000 we talked about. And then importantly, it's not all SG and A. A large portion of it is actually cost of sales. And it's investment before the volume comes, but then once the volume comes, it's just cost of sales. So as we add incremental draw centers, incremental phlebotomists, couriers and laboratory techs ahead of that volume to ensure we're fully prepared for what we expect to come.
It's an investment, but then over time, obviously, it's just the normal support you need to deliver the our business. And then in terms of 2019, Ricky, I'm not yet going to give any guidance for 2019, but I can assure you that when we gave the multi year outlook when I presented in 2016 and we reaffirmed when PAMA was announced last fall that all of that is contemplated. So we'll give you more granularity on that, how all those pieces fit at the Investor Day later in the year.
Thank you very much.
Thank you. Our next question comes from Amanda Murphy with William Blair. You may ask your question.
Good morning, Amanda.
Hi. This is actually Max on for Amanda. Good morning and thank you for taking my questions.
Good morning.
Just wanted to follow-up a little bit around some unit price headwinds. I know you mentioned you had a 50 basis point headwind from PAMA and 100 basis points from other factors. Can you maybe speak around what exactly those other factors are? How transitory do you think those factors are going to be moving forward? And then maybe also just some additional context around the benefit from mix in the quarter in terms of how much that contributed?
Sure. So we didn't say it was $100,000,000 to clarify it's less than $100,000,000 So that's kind of in the normal course of the last couple of years of some of the non governmental pricing headwinds that we've had. And it has to do with any other part of our business, whether it's extending 3rd party commercial contracts, whether it's the direct business in which we compete through hospital reference testing or it can even be in the states where it's permitted where we are actually billing physicians directly as a client who then mark up that work and bill it to the 3rd party. So we have certainly competition amongst all those areas. And while we've certainly turned the tide from where pricing was some years ago, as we said, there's still some degree of headwinds in the balance of our business.
And that's generally gone somewhere between 50 and 100 basis points over the last several years quarter to quarter and continues to be less than 100 basis points. Then we mentioned that when you take price and all the mix elements together, we had a favorable revenue per record of 20 basis points. So obviously, with 50 basis points of PAMA, somewhere south of 100 basis points on other pricing, we had significant lift from the other mix elements. And then finally, we've talked about professional laboratory services, which is an increasing part of our growth. That is a business that has lower revenue per rack because of the unique nature of what it is.
It's basic testing done for hospital in patients where typically we have fewer tests per rack and more basic testing. We're not doing advanced diagnostics in that business and so on. So the revenue per rec tends to be lower. And so that creates a mixed headwinds, it's math in terms of our revenue per rec. It doesn't in any way speak to its profitability.
It's still a very attractive profitable business. It just has a lower rack volume and more basic routine testing.
Yes, just to reiterate something we always say, and Mark said in his prepared remarks, we do this calculation called revenue per requisition. But really when you get into managing the business and understanding how that eventually yields margins, there's a lot of other considerations. Some of this lower revenue per rep business actually can be more profitable than higher dollar per requisition business. So it's not necessarily a surrogate for margins at all. So something to keep in mind.
So in the quarter, we improved our revenue per requisition by 20 basis points, which you saw our margins were quite good, the consideration for what we had to do with a lot of moving pieces, as Mark outlined.
Got it. Appreciate the color on that. And following up on a bit of a related note, we saw a little over a week ago with the preliminary physician rules that CMS had proposed a tweak to a few thresholds to define what's an applicable lab for reporting purposes. And just wondered if there have been any discussions around what the implications could be of this internally or externally as you continue to adopt PAMA here in 2018?
Well, as I said in my prepared remarks, we're encouraged that they're asking us for input related to how to improve the data reporting. Albeit, we still believe what they did with the current clinical FDA schedule was wrong and that needs to be corrected and we're challenging CMS in that regard. Prospective, we do need to get it right. We are pursuing a legislative solution to that. And we're engaging as we have all along with CMS on how we can include more labs and how we get those statistics to really reflect the market based approach to laboratory services.
So we're encouraged by that. 2nd, on the physician fee schedule, there will be modest tweaks in that. We think it's for 2019, not necessarily that notable for our business. We have small piece of our endocrine pathology business that get built that way, but nothing that is material for us.
Got it. Thank you.
Thank you. Our next question comes from A. J. Rice with Credit Suisse. You may ask your question.
J. Rice:] Hi, everybody. First of all, just a cleanup question from some previous ones. Is there any way that we can quantify the headwind you saw from the drug testing, hep C, vitamin D in terms of maybe percentage headwind that represented?
Yes. So we have been at a pretty steady rate of organic improvements and organic growth over the last number of quarters. And then obviously, we've fallen back from that. Really, the things that we talked about are really the primary drivers of that difference, A. J.
So while I'm not going to give you a specific number, what I would say is those are the reconciliation between kind of run rate organic performance we've been delivering consistently and what we delivered in the 2nd quarter.
Yes. So we outlined the 3 areas, A. J, in her remarks. And if you look at the issues that we saw reflect what we thought we could have done versus what we really did do. So those 3, we won't quantify exactly of the 3 buckets the total will be broken down from, but they do outline the difference between expectations of the market, our expectations and what we actually delivered.
Okay. And then my follow-up.
With that said, we are taking actions for a few of those to reverse it in Q3 and Q4. We mentioned the work we're doing with payers on prescription drug monitoring, the work we're doing with payers who are on vitamin D. As Mark said, the hep C care business, which is the genotyping resistance testing business will essentially slow down because it's no longer needed given the new therapy for Mavi. But the screening business continues to be a big opportunity and there's plenty of baby boomers left that need to be screened. So even though it did slow in the quarter, we're working on things to reverse that in the second half.
Okay. And then my follow-up, I just want to ask you about a couple of growth opportunities.
We talked a
lot about United. Optum is in the process of buying DaVita's Medical Group. I know lots of that medical group practice that volume tends to go to you. Have you looked at the opportunity that might present for you and given any sizing of that? And then is there any update on your work with HCA?
I know about a year, year and a half ago, you started to work with them in Denver and the idea was just sort of exploring opportunities and that could extend. Any update on those that discussion?
Yes. So first of all, on Optum, when we talked about our relationship with UnitedHealthcare Group, it's BAWK. We clearly are now back in network in 2019 with UHC as an in network provider laboratory services, that's big. As you know, we have partnered with them at Revenue Sector Management. We're one of their biggest customers.
3rd is we provide their wellness services for Optum. And so we're their somewhat exclusive provider of wellness services for OptumCare when they sell those to payers. Also, they're becoming one of our biggest customers, to your specific question. In OptumCare, as you said, they're buying physicians and they're buying many of our existing customers, and the opportunity with DaVita physician business supports us yet another opportunity. So if that closes, they will have close to 50,000 physicians and we're actively working with them on how we can better serve all their physicians, the existing accounts, but also growing growing list of physicians in OptumCare.
So this relationship continues to build, and we see a good growth prospect of building a bigger and better relationship with OptumCare as they consolidate those practices into their business going forward. 2nd part of the question? ACA. 2nd part of the question? On HCA.
HCA, The Denver opportunity, which is called the Continental division, is going well. We're optimistic that we can leverage that relationship
throughout the rest of HCA. We continue
to work that. Announced in the second half. So stay posted. Okay. And then, as Mark said, there will be more professional laboratory services relationships announced in the second half.
So stay posted.
Yes. I would just add, A. J, and certainly you can ask them, but I'm very confident they would tell you that we've delivered the quality and the cost savings that they were looking for targeted upfront. So now, of course, the question is what does that mean? Could it mean you expand to other sites?
Obviously, at the point in time, if we had something to announce or something, we'd be happy to announce this. But I think the good news is that both parties are happy with what was delivered and it's worked out very well.
Okay, great. Thanks a lot.
Thanks, A. J.
Thank you. Our next question comes from Jack Meehan with Barclays. Please ask your question.
Hey, good morning.
Good morning.
My first question, I
was curious if you could weigh in on the women's health business in the quarter. I think there was some impact in the Q1 from weather and the flu. Just what were some of the trends you were seeing in the Q2 there?
Yes. First of all, as we mentioned in our remarks, predatal testing business continues to grow nicely. So we're optimistic about that. 2nd is if you look at just ongoing activity, and we've shared this many, many times, if you look at our existing accounts and we do the same account or same store analysis and if you look at activity within those accounts that we know we have, we haven't lost any share. I would say just in general, the market is stable.
And I would say just in general, that's true for, let's just call it, the more routine portion of our women's health business. We continue, Jack, to see continuation of a slow decline in our PAP business. The change in practice guidelines back in 2013 did affect the marketplace where women in the past used to go annually for their check. That's happening less frequently and that continues to be phased in,
Great. And then I had 2 follow ups on capital deployment. I caught M and A added 2% to volume. What was the total revenue contribution? And then on share repurchase, I think this is the Q1 with no repurchase since 2011.
So just if you give any color on what you think the pacing is from here and why it's repurchased in the quarter?
Yes. So the contribution from M and A was similar. So there wasn't a big difference. Obviously, what we're buying, Jack, is a business that's very similar to our core business. So you wouldn't see a tremendous mix difference or differential between the volume and revenue contribution.
And then on share repurchase?
Yes. So share repurchases, we actually were quiet in the quarter. We stepped out in the market due to what we thought was the impending announcement of UnitedHealthcare. So going forward, as we said, we're going to do the minimal level to meet our 50% or at least half commitment of cash return to our free cash flow return to our shareholders. Certainly, you should expect that level of activity, but any other share repurchases would be dependent on the amount of M and A activity we have in the back half.
Great. Thank you, Mark and Steve.
Thanks, Jack.
Thank you. Our next question comes from Brian Tanquilut with Jefferies. You may ask your question.
Hey, good morning, guys.
Hey, Brian.
Steve, so I guess as
I think about the recent rule that came out of CMS or the rule proposal and how they're still viewing obviously PAMA as excluding
the hospitals. How do you assuming
that holds right, how do you view the recent changes in managed care contracting, you getting to United, LIBOR getting to Aetna, like how does that impact the repricing of PAMA a few years down
the road?
Well, what they use, Brian, for the majority of the data points for what we got in the refresh of clinical FP schedule, the vast majority of the data points were from the 2 large nationals. So that was what was used and we think that was incredibly flawed in its approach. Actually what CMS buys from all the laboratories and buy from thousands of laboratories, roughly 20% of what they buy is from the nationals. So the data they collected was a distortion of what they really buy. And so this is one of the biggest points we've had.
They got to collect more data from more laboratories. And as you know, there's wide variation in this marketplace. And the best value is from a company like Quest Diagnostics. So that was the data they collected. We're hopeful given this current request for more data and how they can collect more data.
They obviously by asking the question, know that they got it wrong and they need to get it right and the next time they collect the data. And again, we're challenging what they did the first time around with their lawsuit. It's still in the court. We're hopeful that that will progress and we'll have a favorable consideration there. But in parallel with that, we're also looking for a legislative solution.
So we're going to continue to work this because we believe at its core, how they refresh clinical lab fee schedule was done wrongly. But given all that, what we've outlined in our guidance for this year, what we've outlined in our outlook for 2019 and 2020 is assuming worst case, that is if this sticks and it continues to be the case, then that in fact will be what we'll absorb and we'll be able to manage the business and hit our outlook despite it. So hopefully we'll have better news in that regard, but we're assuming the worst case. And then in the future, yes, there'll be data points gathered from payers. But again, hopefully it'll be more laboratories included in the collection process.
So therefore, that will move the needle quite a bit. So hoping that answers your question. Yeah. So let
me just quickly comment, Brian, on its impact on PAMA. So as we've shared, we're very vocal with all the payers, not just getting in United. And I certainly can't speak for our competitor. But I can tell you that when we go in there, and say, hey, now there's full transparency. We know where the weighted volume median is amongst the national providers.
We know we provide the best prices. And the fact that you already get the best prices from us and that we're going to be paying for it potentially twice with PAMA means that you're not getting any better prices. And if anything, it's an opportunity has been an opportunity for us to talk about getting paid for more because even if getting paid more because even if we're paid a little bit more than we have been recently or historically, it's still a much better value than a majority of the people are paying. And in fact, in the United contract, when we talk about value based contracting, as we move volume away from those high cost providers, part of the contract is what you call a bonus rate. So basically, we share the savings with our partner and that will ensure that as we're saving the healthcare system, patients and the payers all money that it doesn't damage us from a PAMA perspective, but actually, we should be neutral to positive depending on how we perform and where that volume growth comes from.
I appreciate that. I guess the follow-up to that is, as we think about the networks built around United and Aetna, how do you think about the pace of market share shift, not necessarily from your national competitor, but from the regionals? What is that opportunity and how hard of a lift or how heavy of a lift is that?
Well, that's the opportunity in front of us. And this relationship with United and we're having conversations with all the payers despite the 2 nationals having strong presence, there's still an opportunity to pick up share for the rest of the marketplace. We talked about the opportunity when we talked about United, roughly more than 40,000,000 lives. If you go quickly through the mathematics of that, we basically have shared that their spend laboratory spend is north of $7,000,000,000 In that regard, if you look at the 2 large national, it's still a minority. And so the opportunity, given the trend in general in healthcare, is to move more of those higher costs, more expensive laboratory volumes to us.
And so what we're detailing right now is precisely that. We're knocking on the doors of many thousands of customers, Brian. And they have many laboratories and many of those laboratories aren't the 2 large nationals, but there are many others. And in some cases, they have those laboratories because we were not in network with United. They no longer need those laboratories to serve them and therefore those support us a big opportunity.
So we need to think about this not just between us and the other large national, but more importantly, the opportunity to really continue to gain share, particularly for the regional portion of this market.
I appreciate it. Thanks, Steve.
Thank you.
Thank you.
Our next question comes from Lisa Gill with JPMorgan. Your line is open. You may ask your question.
Great. Thanks and good morning.
Good morning.
Good morning. In your prepared comments when talking about United, you talked about value based programs. When we think about the contracting for the new relationship, is it a traditional lab relationship when we think about being paid for the rec or are you seeing changes in the way that you're contracting around value based programs? That's my first question. And then secondly, if that's not the case, can you help us understand what some of the opportunities are around value based programs, especially with United and NetNez as we think about the new contracts?
Yes. So Lisa, it is a traditional relationship. We're paid for activity generally. Obviously, there's some portions where they're fully insured where they have an HMO plan. But for the most part, this is a traditional fee for service contract.
The difference is that the rate is variable dependent on our performance. So when we talk about value based contracting, as I referenced earlier, there's incentive payments that we can earn by saving them money. When I say saving them, I'm talking about not just United, but obviously the healthcare system and especially the patient. So there's an awful lot of work going to high cost providers. Some of it because they have significantly higher prices.
So we've talked about hospitals and physician owned laboratories, but even some regional payers. The other thing is that the payers are becoming increasingly aware of that. We don't all conduct ourselves in the same way. So price is one thing, but the level of activity for a patient with a given condition is also a driver. So you can have some labs that might have lower pricing with the same pricing as we do, but they're actually charging more because there's more activity for a given condition.
So really the focus around what is the total cost per interaction with a patient and saving money on that by doing things medically appropriate at a good price. And to the extent that, that saves money for the system and overall stakeholders, some of that will come back to us. So there's incentives for us. A lot more detail will come down the road. We believe that around the middle of next year, maybe a little ahead of that, United will talk about their preferred network and what some of the conditions are to be a preferred provider, but also what some of the structure is, including things that we are hopeful about, including planned benefit design, where there's actually incentives for patients and other in the decision process financially to drive things toward that preferred network because that preferred network will be of the highest quality and the best value of any of the options within the network.
So that's about what we can share right now. And we're very excited about it because that is different from historically where we would get a network and to a large extent, it'd be kind of good luck. I hope you do well because you're a great value. In this case, the United and certainly we're talking to other payers about similar relationships actually is going to be partnering with us, working to drive that, not just sitting on the sidelines and hoping we do all that on our own.
Great. That's very helpful. And then just secondly, you did comment on the Walmart relationship, but is there any update on the Safeway relationship or any other retail relationships that you have in the market?
Well, first of all, Safeway continues to go very well. We've said that we're approaching 200 stores. The results in those stores have been great. So we're very encouraged there. 2nd is we continue to build out the presence in Walmart and the number will be significantly higher than 12 stores.
I can assure you that. And yes, it's putting our draw stations in, but it's also providing better healthcare or more healthcare services with what we call extended care services. The conversation has become very broad and deep. Matter of fact, today, I'm meeting with a very senior executive from Walmart about that opportunity, our JV and specifically Walmart is doing in healthcare. So we continue to build that out.
And then third is we are with their pending potential merger with Aetna. We have great relationship with Aetna. We have a great relationship with CVS. The opportunity that they see also is what we've been talking about here. So we're optimistic of working more proactively potentially with CVS and Aetna as they expand the potential merger with those two companies as well.
So a lot in front of us. We have the right strategy. We're executing it and we're making a lot of progress.
Thank you. Thank you. Our next question comes from Kevin Ellich with Craig Hallum. Your line is open. You may ask your question.
Steve, just
wanted to follow-up on your consumer comments to Lisa's question. I guess, as we think about it big picture and holistically, over time, how much do you think all of these consumer initiatives could really add to your growth, whether it's through volume or revenue?
Well, we think you just so take a step back and look at where we're going. Our access with United would be greater than 90%. So we want to remove the obstacle of mapping in the network with many of, if not the majority of health plans throughout the United States. In the big states, as we mentioned, we announced the United relationship, the big states of New York, Texas, Florida and California, our access is greater than 95%, so very strong access. So when we have access, we have an opportunity to compete for laboratory services in accounts.
So that's number 1. So great access, it's improving every day. 2nd is the consumer is becoming increasingly more important, particularly as employers have pushed more of the cost of healthcare to consumers. Consumers, patients are asking questions of what they can do to lower their out of pocket costs and also serve themselves in a better way. And so our consumer strategy addresses that.
That it is making sure that we have a great experience for that patient and a consumer. So many aspects factor into that. One is what we've done with our electronic or e tools, we call it MyQuest. We now have over 5,000,000 registered users. The application continues to get stronger every day.
You now can get your lab results, you can schedule an appointment, you can see wait times in a patient service center throughout any area you're in, and there'll be more to come. So that's exciting. Looking more and more like a contemporary consumer application every day. 2nd, our access gets better and better. We're refreshing our patient service centers.
You'll see that if you go into a number of your patient service centers throughout the United States. And then we augment that with the access through retailers. So we'll have more retail like settings, making it much more physically easy for consumers to go to Quest Diagnostics. 3rd is we'll have products and we have taken our experience in Arizona and also in Colorado, in Missouri with a direct to consumer offering. We now believe there's close to 20 states that we can go direct to consumers.
We're working on broadening that solution and there'll be more to come in that regard in the fall. And with all that, you take a step back and you say, when the physician eventually knows that we're in network and they ask their patient, who would you like to go to, Quest or someone else, they remember that great experience. We have an experience as far as their data. And they also know that if not ordered by the physician, they can order product directly help us gain share in the marketplace because healthcare is becoming increasingly more of a consumer marketplace.
Got you. That's super helpful, Steve. And then just a quick follow-up on the headwinds that you caught on earlier on the call, hep C, drug testing, vitamin D. Wondering did that have any impact on your or what impact did it have on your revenue per requisition, if any?
Mark? Yes, really not anything substantive. I mean, those businesses are within the same zip code as
our overall revenue per rack.
Sounds good. Thanks, Mark.
Yes. The one difference is obviously when you get denials, that's going to have a negative impact. So when you don't when the tests aren't ordered like an F C case, then it kind of has a neutral impact. But certainly when we do work and then get denied, obviously that's a headwind to revenue per rack.
Yes. Thank you.
Thank you. Our next question comes from Dan Leonard with Deutsche Bank. You may ask your question.
Hi, Dan. Hello. Just one question on the pacing of M and A. So how much of a catalyst do you think the UnitedHealthcare contract is going to be by itself with its value based components? And how quickly do you think that could accelerate the discussions you're having with health system CEOs?
Well, the first catalyst is PAMA, okay? So PAMA is a substantial change for hospitals running outreach businesses. In many hospital system outreach businesses, their Medicare mix is 25%, 30%, so not insignificant. And when they're looking at essentially a 30% cut over 3 years, it's a notable difference. That's number 1.
2nd is they are seeing what's happening with United and also with Aetna. And they are hearing that what those 2 large nationals have done will carry over to the rest of the health insurance marketplace. So they're realizing there'll be pressure on their commercial rates going forward for ancillary services and in this case, laboratory services. So with all that, it's allowing us we've always had great access around this concept of talking to them about their lab strategy, but it is accelerating the pace of them considering their options going forward.
Okay. Thank you.
Thank you. Our next question comes from Mark Massaro with Canaccord Genuity. You may ask your question.
Hey, thanks guys. So your large lab competitor will become an in network lab provider to Aetna beginning in 2019. Is there anything your team can or need to do to defend your share of that business? And then secondly, you expect a resolution from the panel lawsuit perhaps in Q3?
Yes. So first of all, we're actively detailing out account by account, what we need to do. The way we broadly think about it is in 3 categories. 1 is we have rent accounts and an account a client might be using another laboratory that they have to because we work in network with United. And we're going directly for those accounts and we're trying to flip those as quickly as possible.
So as I said earlier, we've left the blocks and we're running and we're detailing out thousands of accounts throughout the United States with our sales force and with our regional teams. Number 2, there is accounts that have kind of a mixed model where they're using multiple labs And now where we have much more significant share of their laboratory volume because we're back in network, It's an opportunity where they potentially get to a tipping point and we potentially could become their majority of their lab service provider. So we have a number of accounts that were categorized that way. And the 3rd category, as you outlined, is in some cases, we are not the majority and other national competitor has more share. And we're also detailing out those to make sure we defend what we deliver.
Our value that we deliver every day is quite good. Our quality gets better. Our service performance is outstanding. Our consumer strategy is resonating. And so we think we have a very, very strong value proposition to defend that piece of our marketplace as well.
And are you ready for the next question?
Yes. I am.
Thank you. That comes from Ann Hynes with Mizuho Securities. You may ask your question. Hi, good morning.
Morning, Ian.
Just a couple of follow-up questions. One is your DSOs are up year over year 4 or 5 days and then up sequentially. Is that due to acquisitions or is it a lot to do with this increased dials for the vitamin D in the drug modeling testing?
Yes. So Ann, the denials are not increasing, our DSOs. The denials, we don't recognize revenue. So what's really driving it is a handful of things. One of them is doing a significant laboratory conversion in one of our major labs and billing just ends up being a little more delayed.
It's a rhythm of things that we've done over time. It's something to be concerned about. In fact, if you look at the aging of the DSOs, the profile has not really changed. So if you look at the key metric of what proportion of our DSOs are over 90 days, it hasn't changed even though the DSOs have gone up. So we're this is just a temporary spike and something that we're not concerned at all about and very confident that we're going to hit our 1,300,000,000 dollars on operating cash flow guidance that we provided.
Okay. And then I think in your prepared remarks, you talked about you think the growth will accelerate in the second half and you're confident you will make your guidance. So is that driven by acquisitions? Or do you think that organic growth will improve from the 0 point 5% that you reported this quarter?
So our organic growth will markedly improve. We walked through the drivers. Obviously, it's an easier compare, so that's part of it. We just remind everybody about that. A majority of that compares in Q3, but we had a little bit of impact in Q4.
So each of the quarters is going to get some lift from that. We mentioned, both Steve and I, that we had some professional laboratory services deals that we feel are very close. That's organic, and we're expecting to get some volume for that in the back half of the year with that accelerating sequentially. And then the actions that we talked about that we've taken around shift in drug monitoring and vitamin D denials where we've already gotten some of those addressed and we're optimistic that a couple of others are on the cusp that, that will help as well. And then of course, as we near the entry to the United contract, we would expect that some of that volume will flip over a little bit early.
So when you put all those pieces together, that's why we're highly confident. So we're not depending on executed M and A, but obviously to the extent that we do some deals between now and the end of the year, that would just be additional upside.
Okay. Great. And just one last test. With the hepatitis C testing, I think you highlighted that the drug monitoring testing and the vitamin D should come back once you work with the payers, but the hep C won't. Can you is that a huge percentage of volume as a percent of total hep C testing?
No, it's not a huge percentage. It's a small percentage, but every several $1,000,000 makes a difference in the quarterly performance. So yes, and a lot of that is behind us because of I mean, we're not experts, but we believe that Happy has more
than half the market already. And
therefore, a lot of
that is already behind us. The other part, so there's 2 parts is what we call a hep C care, which is the testing we do if you've been prescribed the drug that is going to decline. The second part is the screening piece of this. We did see a small decline in the growth rate and we're hopeful there's still a tremendous opportunity in front of us that we're going to work with the pharmaceutical companies to continue to build on the awareness necessary in the marketplace, because I said in my prepared remarks, there's still the majority of baby boomers, the 70,000,000 of us that still need to be screened. So that did slow as well in Q2, and we're hopeful in the back half with some of the work we're doing to build awareness with pharma, that should pick up as well.
But just to be clear, it still grew. It just didn't grow.
Okay, great. Thank you so much.
Thank you. Our final question comes from Doctor. Tobey with Citi. You may ask your question.
Thanks. Good morning. Hop on a little bit late, so not sure if you gave this, but do you have a baseline of how much drug monitoring hep C and vitamin D all in makeup of total requisitions, just a rough ballpark? Yes.
No, we roughly, we haven't provided that. We have other franchises, other test segments that are obviously a lot larger, certainly our chemistry panels and our lipid panels and so on. I think these are obviously areas, not vitamin D as much, but the hep C and prescription drug monitoring that have been major growth drivers for us. And prescription drug monitoring, as Steve mentioned, and I did as well, continues to be a growth driver. It just slowed somewhat because of these policy changes that we again feel are inappropriate.
It really has to do everything with around covering definitive testing after screening. The traditional practice has been if you do a screen and it's positive, you move automatically or revert to the definitive on the same day with the same sample. And some of the payers, for reasons that we're pushing back on, decided they would change that and make the patient come back in for a second trial. We don't think that's medically appropriate. So that was a big headwind in PDM, why we slowed our growth.
And then on hep C, certainly we expect that to continue to grow. It's a nice business, but certainly it's nowhere near some of the routine testing or other requisition volume that we see within our business.
Yes. So what we did is we outlined 3 areas that caused us to have less than what we had expected in Q2. We started working already on Q2 on some of the remedies for that slowdown. And so the ones that we outlined particularly around prescription drug monitoring, the growth rate was strong, but not nearly as strong in the past. And again, what we talked about with vitamin D.
So we've already started to work on these in Q2 that will carry over and we'll have some rebound in a portion of this. But what we want to do is provide visibility of where we thought we were going to do strong more have a stronger performance in Q2, but we did not and we outlined those in the 3 that we provided to you.
Okay. And is there anything separately, is there anything with the timing of the UNH contract we need to be aware of? In other words, know the contract starts Jan 1, 2019. So do you remain out of network for this year with UNH and sort of still charge the out of network rate? Or have you agreed to of an in network rate sooner even without the open network?
Yes. So we I'm not going to comment on any specifics around rates, but we remain out of network. We'll be adjudicated out of network for the balance of the year. And then as we said, starting January 1, we'll be in for a majority of their plans. There's still some HMO plans that we're working through the details.
But for a vast majority of United, we're going to be in network as of January 1.
Last one, if I could squeeze it in. Just and I know you're not going to guide for 2019 at this point, but can you give us a directional sense of margin as we think about next year? There's a lot of moving parts obviously with PAMA headwinds, UNH coming on, Aetna opening up, the investments you're making. In your mind, does that mean that maybe there's sort of a revenue boost, but we should think of margins as generally flat? Or do you think you can get margin expansion?
Or vice versa, do you think there could be some margin contraction as we think just directionally of the margin trend for 2019?
Yes. So Ralph, as I'm sure you would expect, I can't comment on 2019 in any way specifically. But what I did talk about was on a multiyear basis that we would grow earnings, not earnings per share, but earnings faster than the top line over multiyear. So certainly, from a given year to year, that formula might be a little bit different. So we that obviously implies continued margin expansion.
Now margin net margin, so obviously, with tax reform, we took advantage of that and made some investments, which actually reduced our before tax margin slightly this year, had some impact on that. But we would expect to continue that over a multiyear look, and we'll give an update on that in November at our Investor Day.
Okay. All right. Thank you.
Okay. Well, thanks for joining us today. We appreciate your support, and you have a great day.
Thank you for participating in the Quest Diagnostics' Q2 2018 conference call. A transcript of prepared remarks on this call will be posted later today on the Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online atwww.plusdiagnostics.com/investor or by phone at 866-483 9,044 for domestic callers or 203-369-1586 for international callers. Telephone replays will be available from approximately 10:30 am Eastern Time. Thank you.