Welcome to the Quest Diagnostics First Quarter 2018 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form 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, President and Chief Executive Officer and Mark Guinan, 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 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 now excludes excess tax benefits associated with stock based compensation. Also, net revenues and selling, general and administrative expenses have been restated for the basis of prior year comparisons to reflect the impact of new revenue recognition rules that were effective January 1, 2018, and were adopted on a retrospective basis. Under the new rules, the company now reports uncollectible balances associated with payroll 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 Ruskowski.
Thanks, Sean.
And thanks, everyone, for joining us today. This morning, I'll provide you with some perspective on PAMA, highlights on the quarter and review progress on our 2 point strategy. Then Mark will provide more detail on 1st quarter performance. We delivered strong revenue growth despite the negative impact of severe weather and lower Medicare reimbursement under PAMA. Earnings growth was driven by continued strong execution as well as the benefits of tax reform.
We also completed our previously announced acquisition of MedXM, which is off to a good start. Now here are some highlights from the quarter. Revenues were up 3.7%. Reported EPS was up nearly 10% from 2017. Adjusted EPS grew 25%.
Before I describe the progress we've made, what I'd like to do is to provide an update on PAMA and our investments in the business using a portion of savings from tax reform. Turning to PAMA. This was our Q1 operating under the new clinical IP schedule, which accounted for approximately 12% of our revenues last year. Since November, we said we expected the impact of the final rates on the PAMA would be a reduction of approximately 4% in 20 18, 18, approximately 10% in both 2019 and 2020. Our actual Medicare reimbursement in the Q1 reaffirms impact for 2018.
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 initial briefs to the court and we still believe we could have a decision from the judge by mid year. We want to reiterate that ACLA's complaint is not challenging the new Medicare rates themselves, but rather the process CMS follow to arrive at those rates. As the lawsuit progresses, ACLA is continuing to seek a legislative fix to PAMA, coordinating closely with aligned trade associations like NILA, AetnaMedx and other stakeholders. This issue is about ensuring that Medicare beneficiaries have access to critical laboratory services.
While the new rates have impacted us, other laboratory providers, including many serving remote and underserved areas, may be forced to close their doors. So that's why this is an important issue to us all. Turning to tax reform. Last quarter, we shared with you that we'll realize approximately $180,000,000 in tax savings on an adjusted basis in 2018. We are reinvesting roughly $75,000,000 before tax into the business and our people, and much of this is underway.
Turning to the Q1, 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% through strategically aligned accretive acquisitions, which we achieved for the 5th consecutive year in 2017. We had a productive quarter for M and A. We completed our acquisition of VadXM, a leading national provider of home based health risk assessments related services. More on this acquisition in a few minutes.
We are integrating the acquisitions announced in the latter half of twenty seventeen, and we are pleased by the results. We guided earlier this year, we expect to deliver about 2 50 basis points of growth from M and A in 2018, which is above the top end of our 1% to 2% objective. Our M and A pipeline remains strong and our strategy is delivering growth. Under the second element of our growth strategy, we continue to expand relationships with hospital health systems. In March, we entered into a professional lab services relationship with an integrated health care delivery system in New England.
We acknowledged earlier that PAMA is a headwind for us. However, reimbursement cuts are bigger headwinds for hospital systems operating outreach laboratories. Hospital executives are starting to become more aware of the impact of PAMA and we're having more frequent conversations with them about their lab strategy and how we can help. Many of you have asked about the possibility of expanding your access with major health plans. We continue to have productive conversations and make progress with a number of payers.
Quest offers health plans and their members unmatched convenience, access, quality and value. And based upon our recent conversations, it's clear that many health plan leaders agree. We're delivering on the 3rd element of our growth strategy, which is to offer the broadest access to diagnostic innovation. Key growth drivers in the quarter were prescription drug monitoring, guanofuron and non invasive prenatal screening. In advanced diagnostics, we're making strong progress with our new center of excellence in precision medicine oncology in Texas.
This center is helping community oncologists determine the most appropriate treatment of patients with cancer. Since we acquired MedFusion, we've seen an acceleration of growth for electretumor panels. 70% of patients with cancer are treated by community cancer centers, and we're excited about the opportunities of Medfusion that is creating with networks of community cancer practices like U. S. Oncology Network and Texas Oncology, as well as Baylor Scott and White Health, the largest health system in Texas.
Continue to make strong progress executing the 4th element of growth strategy, which is to be the provider of choice of consumers. Our Walmart locations continue to perform well with an increase in patient traffic across the board and outstanding feedback on the customer experience. We're expanding it to different markets and we expect to open many more locations throughout this year. We're pleased with the progress and excited about the future of this important partnership with Walmart. The 5th element of our growth strategy is to support population health with data analytics and extended care services.
The integration of MedXM is going well. Customers are excited that we can help them close their gaps in care using mobile healthcare professionals to reach patients when and where it's convenient for them. So let me give you one example how this capability is closing gaps in care. Diabetic eye screening is a key part of diabetes care. Medxm's national health plan customers identify at risk Medicare Advantage or managed Medicaid members.
MedXM call centers then reach out to those patients to schedule health risk assessment to visit the patient and perform a series of tests, which include capturing a retinal image. This program helps identify people at risk of diabetes and enables health plans to improve their quality scores. The second element of our 2 point strategy is to drive operational excellence. Early this month, we launched a pilot program with Humana MultiPlan Optum UnitedHealthcare to use blockchain technology to improve the quality of healthcare providers' data and reduce administrative costs. We look forward to continuing to use our data and expertise for this project, which we believe can lower cost and improve efficiency within the healthcare system.
We are continuing to drive efficiency and effectiveness within Quest to cover the cost of wage inflation and reimbursement pressure. So let me give you a few updates. Our collaboration with Optum 360 continues to perform well. As consumers bear an increased share of cost of their healthcare, more of our revenues come from patients, which poses collection challenges. And despite the pressure from increased patient responsibility, we are succeeding in keeping our uncollectible balances associated with patient responsibility in line with last year.
We're collaborating with payers to bring price transparency to healthcare through our real time estimation tool. This tool enables a health plan member at a patient service center to know before a specimen is drawn if the test is covered and what out of pocket cost the health plan member will pay for that test. We continue to enable our business and to improve the customer experience. Our e check-in process has been used in more than 27,000,000 patient encounters. Our patients like the convenience, and this information helps us place phlebotomists where they are needed most based upon the patient flow.
We have over 1500 sites with eCheckin and expect to deploy it in all of our patient service centers by the end of 2018. Now, let me turn it over to Mark, who will take you through our financial performance. Mark?
Thanks, Steve. Starting with revenues, consolidated revenues of $1,880,000,000 were up 3.7% versus the prior year. Please note that due to a change in revenue recognition accounting, we now report uncollectible balances associated with patient responsibility as a reduction of net revenues instead of as bad debt. Revenues for Diagnostic Information Services, or DIS for short, grew 4.1% compared to the prior year with approximately 3.40 basis points attributed to acquisitions. Volume, measured by the number of acquisitions, increased 2.2% versus the prior year, driven by acquisitions with organic growth essentially flat.
Volume was negatively impacted by weather and the timing of major holidays during the quarter. The impact of weather presented a volume headwind of 60 basis points. The timing of the Easter and Passover holidays this year versus last year weighed on Q1 requisition volumes and created a tougher year over year comparison. Revenue per requisition in the Q1 grew by 1 0.6% 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 variations, business mix, test mix and test per rec. EBIT price headwinds during the quarter were approximately 50 basis points from PAMA and less than 100 basis points from all other factors. This is consistent with the outlook we provided in February and is in line with the trends we've observed for several quarters. 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 $272,000,000 or 14.5 percent of revenues compared to $279,000,000 or 15.4 percent of revenues a year ago. On an adjusted basis, operating income was $303,000,000 or 16.1 percent of revenues, compared to $297,000,000 or 16.3 percent of revenues last year. Operating income decreased by $8,000,000 compared to the prior year as a result of weather. The decline in operating margin is caused by a mix of PAMA, weather and acquisitions, which are in the early stages of integration and therefore not yet delivering full margin contribution. Also, as Steve mentioned, we are using a portion of our savings from tax reform to reinvest into the business and our people.
We expect these investments to help us continue to accelerate growth, which also impacted operating margin this quarter. Reported EPS was $1.27 in the quarter compared to $1.16 a year ago. Adjusted EPS was $1.52 up roughly 25% from year. Note that our adjusted EPS now excludes excess tax benefits related to stock based comp to provide greater clarity into the underlying operational performance of our business. Our effective tax rate in the Q1 was approximately 23% compared to 32% last year.
As I mentioned earlier, our uncollectible balances associated with patient responsibility are no longer reported in selling, general and administrative expense. That said, we intend to provide periodic updates on the progress we continue to make with our revenue cycle management partner Optum 360. In the Q1, our uncollectible balances associated with patient responsibility are flat year over year. Cash provided by operations in the Q1 was $180,000,000 versus $196,000,000 last year. The year over year difference was largely due to movements in our working capital accounts.
Capital expenditures during the quarter were $73,000,000 compared to $42,000,000 a year ago, which is in line with the higher CapEx spend planned for 2018. Now turning to guidance. Our outlook for 2018 remains unchanged as follows. Revenues to be between $7,700,000,000 $7,770,000,000 an increase 4% to 5% versus the prior year. Reported diluted EPS to be between $5.42 $5.62 and adjusted EPS to be between $6.50 $6.70 Cash provided by operations to be approximately $1,300,000,000 and capital expenditures to be between $350,000,000 $400,000,000 Recall that our guidance includes only the acquisitions that we've closed to date and that we closed several acquisitions in the back half of twenty seventeen.
We expect the earnings accretion from these deals to continue to ramp up throughout 2018 and into 2019. I will now turn it back to Steve.
Okay. Thanks, Mark. Well, to summarize, we delivered a strong Q1. We made solid progress accelerating growth and driving operational excellence. And with that, we'd like to take your questions.
Operator?
Thank you. We will now begin the question and answer session. The first question comes from Dan Leonard with Deutsche Bank. You may go ahead.
Good morning. Thank you. Good morning. So just a quick clarification on the EBIT margins. It sounds like there's a number of moving parts between PAMA, weather acquisitions and some reinvestment in your people.
Can you comment on how EBIT margins arrived in the quarter compared to your internal plan?
Yes, sure, Dan. I'll handle that. Certainly, PAMA was in our plan, the reinvestment of some of tax reform. And again, I know this is self evident, but when you reinvest tax, you're going to see a negative impact to the EBIT margins, obviously, offset by tax with the net results still obviously being an increase in net income as a percent of revenue. The one thing that obviously Wenn planned on was the weather.
And as I mentioned, there was about $8,000,000 impact of operating margin, which certainly you can see that if that had not happened, we actually still would have grown our EBIT margins despite Panama, despite the reinvestment.
And then kind
of the wildcard is
the holidays. We know that the way the calendar falls has impact. We never quite know exactly how to predict what that impact might be. So, I think as you look at all those pieces, that's probably what I would say. And then the last piece is acquisitions.
That was certainly part of our plan when we put together a business case and we plan those synergies. We know, as we've shared in the past, that it can take up to 12 to 18 months to get them to be kind of at their going rate of profitability. So that was certainly in our plans as well.
Okay. Helpful color. And then just a follow-up. You commented on tumor profiling in the prepared remarks. Can you comment on how your tumor profiling strategy might evolve now that there's an NCD from Medicare for FDA approved tumor profiling tests?
Yes. So Steve here. So this is evolving. It has evolved and I would say it will continue to evolve. I think there's more and more interest by the FDA on how they will continue to think about oversight and regulatory controls around laboratory developed tests.
And this I would describe as one of the areas that they're looking at. So with the new guidance that's out, that did take a form that we're actually pleased about because we believe that we do have the process capabilities and the control capabilities to be able to support that. And then second is, with that, it legitimizes through CMS the value that the tumor panels add to the diagnostic workup of a workup when you make that expensive next choice in cancer care. I gave my earlier comments with our acquisition of MedFusion, about our strong working relationship with U. S.
Oncology, our working relationship with Memorial Sloan and IBM Watson. We have a strong and growing presence in this whole space. So we're very well positioned and actually pleased that there's some energy around it and some guidance about the controls in general because I think it's very important as we go forward that legitimate operating companies like ourselves that bring a lot of good value to the marketplace, have tight controls around the value of that, the verification of value of that, and then the delivery of that. And we do that quite well. And so therefore approval for that and some kind of controls around that we think is a good thing.
Appreciate the color. Thank you.
Thank
you. And before we take our next question, I'd just like to remind Our next question comes from Ricky Goldwasser with Morgan Stanley.
So I have one question and then a quick follow-up. Just if you can give us an update on the United Lab contract and timing for an Aetna RFP?
Yes, sure. So as the industry knows, our nearest competitor's contract expires in 2018, number 1. Number 2 is, we've said that obviously we would like under the right terms be on contract with United. We have also shared that we are in dialogue, and we have nothing to share about that dialogue and at the right time when we hopefully will have something, we'll share that. So we're making progress there.
We also make progress with hundreds of others of health plans, some big and some small. And we feel as we enter 2019, we'll be in really nice shape in terms of our portfolio of relationships. So these relationships, yes, are contractual related to being a network, but they're becoming more and more strategic. I mentioned the work we're doing with our extended care services and population health, the work we're doing around price transparency and our estimation tool. So what we're finding is we definitely are showing ourselves as a laboratory.
But as we said, we're in the diagnostic information services business. And the last part of this is our consumer strategy is really resonating. The whole consumer experience, we're upgrading our patient service centers, we're e enabling it with our e checking capabilities. We're bringing nice information capabilities to consumers with our MyQuest application. And this resonates extremely well with the health plans, big and small.
So making good progress and when we have something, we'll make sure that we all hear it quickly.
Great. Thank you. And just a quick follow-up on the M and A. Obviously, you're looking for 2.5% growth for 2018. So in case I missed it, what was the contribution of M and A in the quarter?
And you said that new M and A is not included in your guidance. So now the comment is in place, I mean, have you seen any impact on valuations?
Yes. So I'll turn this to Mark. So M and A, the question is how much M and A is in the quarter in Q1? And then let's make more clarity around what we said around what was in the guidance for the 4% to 5% for M and A and what was excluded. So Mark, do you want to take that about Q1 and then the guidance, What's that?
Yes. So in the Q1, M and A contributed 3.5% of the 3.7% total or the 4.1% of our core business. And we had included 2 50 basis points or 2.5% in our 4% to 5% guidance for the year. And that obviously will be stronger in the first half because we annualize some deals as you work through the year. But there's also potential upside without committing to anything for new deals because we do not contemplate that in our guidance.
Now, Medexam, which we closed early in the year, was contemplated because it was completed by the time we shared our guidance in late January.
Thank you.
Thank you. The next question comes from Kevin Ellich with Craig Hallum. You may go ahead.
You bet. Thanks for taking the question. Good morning, Steve. I guess, first off, can you talk a little bit more about the investments that you guys are making from the tax savings? What impact do you expect it to have on the business?
And then just a real quick update on the retail growth strategy. How much contribution is that to your growth and how many more locations you're planning to open up this year?
Yes. Okay. So first of
all, on tax reform, what we shared with our Q4 results is we're going to take about $75,000,000 in investment in the business. And I would say the majority of this is around accelerating growth. What we said around that, we kind of outlined some broad categories. And those broad categories would, as you would expect, some of our growth strategies, so advanced diagnostics, the consumer strategy, but also investing in our people. So we also announced that we're going to provide a bonus for the vast majority of our employees that don't have equity and that will be payable in the Q4.
So all of that has started to feather into what you see starting in Q1 will continue throughout the year. And with that, we believe this will help us accelerate growth around those five strategies. The second part of your question is around Walmart. We're really pleased with the early returns. We started with the big states, Texas and Florida.
They're going well. Customer feedback is really good. And the joint venture continues to look at prospects for other basic health services that we can provide in those stores. And so we, as you know, formed a JV. This joint venture was about what we do around blood draws what we do at Quest Diagnostics and our laboratory business.
But more importantly, it's all around extended care services and population health and providing basic healthcare services to bend the cost curve. And so we're excited about those prospects as well. We won't give you a number today about how many stores. We're still kind of working out the details with Walmart around that, but there will be more. We have the initial stores and there will be more because the early returns and the progress we're making is quite good.
The next question comes from A. J. Rice with Credit Suisse. You may go ahead.
Good morning, A. J. Hi.
How are you guys? Thanks. So I'll just ask 2 quick parts here to questions. You referenced the discussions with hospitals in your prepared remarks, Steve. I wonder, I know a lot of times I haven't covered the hospitals for many years that they don't always see the reimbursement changes coming and when they come, they tend to then react to them.
And I wonder where we're at in that sort of appreciating what PAMA might mean to their lab business and whether you've seen an uptick in discussions because of that. And maybe it will take till next year when there's a further step up. But I just wondered where you think hospitals are in understanding the implications of that and whether that's changing their thinking in any meaningful way about their lab business? And then just to expand on the last question, with all the consolidation activity going on at the CVS, Cigna Express reports about Walmart as well. I wonder has that changed either urgency of your discussions with some of your retail partners or has it opened up new people coming to you and asking about maybe potential collaboration?
Just curious if it's having an impact to your discussion.
Sure. So let me take the first part, which is hospitals. I would say this is, the pace of awareness is accelerating. What you find is that we have a number of hospital executives that are aware of PAMA. And second is they're greatly aware of all the other pressures that they have in hospitals.
So if you talk to hospital executives today, there's a lot of pressure and not just with PAMA. And so many have cost improvement goals, many are anxious to understand ways they could become more efficient. And so our hospital strategy plays nicely into being a program that they can launch with us to put some points on the board, if you will, particularly around inpatient laboratory costs, which is a key part of our value proposition. So independent of us, it's accelerating. 2nd is we are accelerating it as well.
So we're knocking on many hospital executives' doors to make sure that they're aware. If they're not aware, they're ready and have a conversation around this and specifically around the lab strategy. So we've engaged with many systems, particularly those that have large outreach businesses to talk about their lab strategy. So it's a deliberate of our Accelerate strategy to make sure that they're well aware and understand what their options could be and think about the possibilities. So we are helping with the information out there as well.
The second part of your question has to do with our retail strategy. Now we've been working on this retail strategy for years. This doesn't happen overnight. As we said, Walmart is a part of that. We have Safeway as a part of that.
We do active work for CVS in the MinuteClinic. They've evolved a strategy. We have a great working relationship with Aetna. We'll see if that potential merger becomes a reality. But because of the great number 1.
And number 2 is, the work with Walmart, number 1. And number 2 is the work with Walmart, I said in my earlier comments, is going well. And speculation of what they will or will not do in health is for them to communicate about. But it just reemphasizes their commitment and energy around this topic. And as far as other retailers, we're working on making sure that we have the right number and also don't leave any geography uncovered.
And as you know, some of these partners we have announced so far like Safeway and Walmart have a center of mass that doesn't necessarily cover the whole population of the United States. So as we continue to work through this, we continue to understand how there might be a fitting of different retail partnerships that could complement what we already have. But fortunately, we're early to the table around this. We're off and running. You see the reinforcement of this with some of the deals that are out there in the marketplace.
So our strategy is the right one and it's being supported by the marketplace. And this consolidation is interesting, but more importantly is how to bring the resources together with the capabilities. And we think our capabilities of data and services are quite essential to what this is all about, which is to bend the cost curve. And that was a portion of my prepared remarks about what we're actually doing with MEDXM in the middle of it all.
Okay, great. Thanks a lot.
Thank you.
Thank you. The next question comes from Jack Meehan with Barclays. You may go ahead.
Thanks. Good morning. I wanted to stick with consolidation. How are some of the recent acquisitions you've closed like Shield Medical Lab performing? And in this conversation with hospitals you're having, how much of an appetite is there for sale of lab assets?
Yes, I'll start and I'll turn it to Mark with some more color. First of all, when we walk in and have a conversation with the C Suite, the math act this week, we just had a leadership group of our top 40 to 50 executives that we want to make sure are prepared to have a broad conversation about all the capabilities of Quest Diagnostics. Part of that is around what we describe as our hospital strategy. And our Investor Day, we shared this with you and basically has 3 pieces. One is, we asked the question, we want to have a conversation around your lab strategy and is that important to you and you have one.
Surprisingly to us initially, but not anymore, many of the CEOs the C suites have it on their list. It's one of the strategic questions, what they're going to do around lab. And related to that, there's 3 pieces. One is what they're doing with their hospital inpatient cost and our simple value proposition there is we have now a good confidence, a track record of accounts that are all referenceable that we've actually saved them some money because it is a cost center and we do that in a variety of ways. When we get into that conversation and we have a conversation around their sophisticated testing or advanced diagnostics that they said to reference laboratories.
We're a player there. We're the market leader in that regard, and we believe there's more we could do in terms of consolidation, getting smarter about the diagnostics in the inpatient care setting, collapsing at the right time. And then the third part of this is a conversation, if they're in outreach, if they partner with us with inpatient, if they partner with us around reference testing, what's their strategy around outreach? And this is where we have a conversation around what's happening with PAMA, with their Medicare volumes, the pressure that's going to be on commercial rates given the reality of what's happening in this marketplace. And so we end with a comprehensive strategy.
If you see 1, you see 1. But we shared last year with PeaceHealth, that was a good example, where we thought their outreach were helping with their inpatient laboratories and as well, we're helping them with their reference testing. So when that happens, we're their partner for laboratory services in the integrated delivery system. And that's resonating well, given all the pressures they have and all the priorities that they have in the current dynamic in the marketplace. So, Mark, specific to the opportunities around consolidation, you want to share a little bit about how that's going?
Sure, Steve. When you talk about consolidation, meaning within the laboratory industry and specifically us as a consolidator. And you asked specifically about Sheel. Sheel is early. We're pleased with the initial results.
I mean, if I could share a little bit. Commercial is fully integrated from an operational standpoint, largely integrated, including billing, which is critically important. We haven't completely consolidated the entire infrastructure of the draw centers and things like that. That takes a little bit of time. But certainly, after a few months, we're pleased and on plan.
And then I think most critically retention is good. So if you look at the number of customers that moved over from ShieldOS relative to expectations in the model, we're doing very well. So that's what I can share at this point around Shield. So feel like it was a very nice deal. And at this point, it's on plan.
Great. Mark, I had one follow-up for you, which on accounts receivable. I know there's some seasonality at the beginning of the year, but it took a bigger step up than we expected in the Q1. Maybe just comment on that and bad debt. Thanks.
Yes, sure. So if you look at the dollars, obviously, we're a larger business, especially with the acquisitions. If you look at the days, 47 and change, that's kind of where we typically are. Last year, we ended at a relatively low AR level for a couple of different reasons. I think you may have been asking about from year end Q4 to Q1.
And when you think about Q4, that is a ramp down quarter. So October is much larger than December. And then if you look at Q1, obviously, it's a ramp up quarter. So March is much larger than January. So you're always going to see a dollar dynamic where the end of Q1 in terms of receivables is much larger than Q4.
Jack, I'd also add to that. This is Sean.
With the accounting change around bad debt, that's obviously going to impact all of the historical DSOs. So you'd have to go back and recalculate those after you make the revenue adjustment to get a comparison quarter by quarter.
Great. Thank you. Thank you.
The next question comes from Patrick Donnelly with Goldman Sachs. You may go ahead.
Great. Thanks. How are you? One of the more common topics that comes up in our conversations is just the durability of margins once the heavier impacts from PAMA are felt beyond 2018. So can you just talk through any opportunities you see given that you guys have hit your Invigorate targets?
And also how you're thinking about that in the context of an environment where we're seeing a bit of a tick up in wage growth? Yes. So thanks for the question. What we shared in 2016 and we continuously talk about it is we have our 2 point strategy. First is all around accelerated growth.
We talked at great length of our 5 strategies around that where we 1,300,000,000 run rate savings. But what we shared at the end of 2017 is we achieved our goal of $1,300,000,000 run rate savings, but what we also shared is we have more opportunities in front of us. This is a large, highly complex business, and we still have plenty of opportunities to get better. And what we shared is one example of that is we're kind of at the final push of harmonizing our processes and standardizing our systems. When we do that, it allows us to streamline our workflow.
And then second is reduce our IT cost by way of an example. This will happen in 2018. You'll see that in 2019. We still have opportunities around consolidation of our laboratory network. We've shared that we're building a new facility, a new laboratory facility in New Jersey.
It's a big project for us. When that is completed, it will allow us to consolidate our physical presence in what we call our East region. So it will allow us to consolidate some of our regional laboratories into 1. We continue to see a big opportunity around the e enablement. When we e enable the process, we could take cost out.
In prior calls, we talked about simple things. For instance, we got a lot of calls that came in to our call centers around results. And so now what we've done is educated our customers that you can get these results online. And so what it has done is it eliminated a lot of call volume coming into our call centers, allows us to reduce costs, customers are happy. So we continuously look at opportunities.
And so we have dialed into our guidance for this year and our outlook. Those opportunities, and we haven't given you a specific number, but I'll assure you that it's embedded in those numbers and that allows us to offset the wage inflation and also the reimbursement pressure that we provided you some color around. And that will be clearly in our sights in 2018, 2019 2020 and beyond. There's a lot of opportunities.
The next question comes from Amanda Murphy with William Blair.
I just had a follow-up to AJ and Jack's questions around your hospital strategy and thank you for all the comments there. When you first outlined that the kind of increased focus, you had talked about opportunities to expand relationships over time, for example, getting incremental reference work. I know it's kind of early on some of these deals, but I just was wondering if you could give some comments there in terms of how the conversations are progressing or are there any anecdotal examples of where you have been able to expand relationships over the course of the relationships that you've got in place now? Yes.
So the one I brought up is PeaceHealth. I mean, that's a great example. They looked at their hospital excuse me, looked at their hospital strategy, and it has the three aspects that they talked about, how we can help them with their inpatient laboratory costs. 2nd is, can we help them become more efficient and effective around the reference testing for inpatient ordering of diagnostics. And then finally is the added outreach business, and we now acquired that outreach business and integrating it into our West region, great example.
I would share another example. If you recall back a couple of years ago, we bought Hartford Hospital's outreach business. The way we look at all this, Amanda, is these are beachheads. We start there and then we build. We build credibility.
We build the existing relationships. We manage the account. And in the case of Hartford, we continue to look at how we can help them consolidate some of their purchases of reference testing. And we have had dialogue around their hospital laboratories and could we help them become more efficient. So a good example or working relationship ship, even though it starts in one area, could build.
Have you seen actual growth then in reference testing if you think back over last year, for example, is it actually impacting organic volume growth at this point?
Yes. So interesting enough, what you find is there's 2 pieces of this. 1 is what's happening with our share in the marketplace and the second is what's happening in the hospital marketplace. So actually what we've seen in Q1 in hospital volumes, given admissions volume is being relatively flat at best, as we talk to hospital executives and this puts a log in our fire to help them become more efficient. There's a lot of pressure on hospitals, both from a volume perspective of patient admissions and second is reimbursement changes.
And so what we see in our reference testing business, even though we might be picking up some more share, volumes are relatively stable. And then second is, in that portion of our business, we do see some price challenges. There's more competition. And what we have is a deliberate strategy. We have a market like that where the leaders should get stronger and this plays into our strategy.
So many hospital systems are looking at consolidating suppliers, having a more comprehensive strategy. So we hope over time to continue to build share, but probably in a more of a more challenging marketplace than 2 to 3 years ago.
Yes. And just, Amanda, to add, we don't do a PLS deal without a reference deal. The only question is how much of the reference business comes, but we certainly would not just do PLS alone. In many of these cases, as we shared, where we serve half the hospitals in the country. So in many, I'd probably say most of these cases, if not all, we already were doing some reference work.
So there's an opportunity to expand that footprint and do more or in some cases, all of it. So that is part and parcel of the relationship. And as we shared, we therefore locked that up in a 5 to 7 year contract instead of being subject to periodic RFPs and competitive situation. So it's a nice longer term relationship between us and the hospital.
Okay. Thanks very much.
Thank you. The next question comes from Ross Muken with Evercore ISI. You may go ahead.
Good morning, Ross.
Ross, your line is open. Please check your mute feature.
Hi. Hopefully, you can hear me. So I'm just trying to make sense of how you were able to essentially hold margins almost flat, they were down a touch considering what we saw with PAMA. And the part that I really would like to dig into is on the OpEx line. It looks like on the restated numbers, OpEx was down even a touch year on year or flattish, which given the acquisitions implies the core was down.
And obviously, we know you're doing some investments. So help us understand just kind of sequentially the cadence and then what is implied through the rest of the year because that seems like really good performance considering all of the sort of things you had to deal with in the quarter on the weather and PAMA side?
Yes. So, we will tag team this, Mark and I again. First of all, as I mentioned in my quote, we did execute well. And I think as you point out, there's a lot of moving parts, a lot of moving parts within the quarter. And so we had to make sure that we managed all those levers.
We mentioned in Mark's comments, we have acquisitions coming in, we have investments for tax reform. And also there was an earlier comment about what are you doing around our Invigorate program, around cost improvements. And so within Q1, you've got all that going on, okay? You have that all going on. And so what we do as a management team is we pull together that integrated plant to continue to show progress to get to the outlook that we laid out in the marketplace with those moving parts, with the uncertainty sometimes of what's happening in the market.
For instance, you cannot predict the severe winter that we saw, but we had to manage our way through that. So with that as a high level summary, Mark, you want to give a little more color of the pieces?
Yes, sure. As you know, Ross, price and inflation are headwinds on margins. And we talk about our productivity, which we've discussed with Invigorate in the past. And we said we believe we've got best in class capability. We can drive about 3% a year on a cost base of over $6,000,000,000 So you can do the math on that.
Obviously, we have also shared that we did a substantial amount of M and A. A lot of that was skewed towards the back end. So we expect margin expansion on that new book of business throughout the year, which will help us. And then finally, the important piece is organic growth. So when we grow organically, like we've been doing, obviously, the drop through on the incremental revenue is higher than the fully loaded margins.
So that's another opportunity to offset some of the headwinds of price and inflation. So when you add all those together, that's where we came out with reaffirming our longer term outlook despite PAMA being more significant than any of us had anticipated, we still said we're going to be able to do by 2020 what we said in '16, which is top line of 3 to 5, although I did caution more likely to be in the lower end than the higher end if PAML stays where it is. And then growing our earnings, not earnings per share, but earnings mid to high single digits. But that obviously also directionally has correlation with the top line as well. So probably more likely to be at the lower end of that.
So in terms of the rest of the year, the investments that Steve referenced, the $75,000,000 some of those are fairly smooth over the year. Some of them are accounting like the bonus that Steve mentioned. So we're accruing that pretty equally. And then some of them are going to ramp up a little bit as we move throughout the year. But we also have those other offset that incremental investment.
Genuity. You may go ahead.
Good morning, Mark.
Hey, good morning. Thanks for the question. I wanted to touch on organic volumes and revenue in the quarter. Mark, I know you indicated that organic volumes were flattish. You called out 60 basis points from weather.
Looking at last year, I think you actually grew organic volumes by 2.6%. And so I think embedded in your guidance for 2018 is 1.5% to 2.5%. So can you help us think of some of the key drivers that will get you to your midpoint of 2% organic revenue growth for the year?
Yes, sure. So volume is going to bounce around quarter to quarter. There's a number of factors. When you look at early last year, we had a couple of POS deals that were fairly new. And then those were obviously ramping up.
We didn't close a significant amount of POS late in 20 17. And remember, our POS is organic. We're not buying anything. So that is organic growth. Certainly, as I mentioned, the timing of the holidays as a big and the floating holidays have significant impact on our so if you have when you look at New Year's, you look at 4th July and you look at Christmas, if those fall on a weekend versus a Wednesday, there is a dramatic difference in that quarter in terms of the volume.
And so when you look at the way this year started out, the previous year we had New Year's on a weekend and this year we didn't. So it's not just that day that you get a little spillover from local holidays either right before or right after. Certainly, that had a little impact. So I wouldn't make too much read too into the quarter to quarter slight variation. We'll try to share the best of our abilities, what the real drivers are and things that certainly have implications going forward.
But I'd say the Q1, there was a full amount of noise and there was nothing significant in terms of utilization or other things that you might be concerned about. And we certainly are very confident of the guidance that we put out and keeping on track with our commitments.
Yes. So just to add to that, one part of reaffirming the 4% to 5%, if you look at Q1 and we go through some of the pieces and earlier we got a question of what's happening on the hospital side and hospital admissions are stable. But we were very pleased when you kind of look at all the different pieces of the volumes we see from our physician portion of our business, which is the vast majority of where we get our We're actually, when you think through the different pieces and you think about what Mark described and some of the headwinds, if you couple with that, the offset with PAMA in terms of that price reduction in Q1. And when we look at that physician business, we actually felt okay about our performance in Q1 and we thought it was solid. And therefore, we have confidence in the 4% to 5% for this year, which includes that 2 50 basis points for acquisition.
And as you described it, the rest from organic revenue growth.
And our last question comes from Brian Tanquilut with Jefferies. You may go ahead.
Hi, this is Brian Roth on for Brian Tanquilut. I just had a quick one on commercial contract discussions. I know in the past you've highlighted the overall value prop that Quest demonstrates during payer conversations negotiation. I guess my question is more on how much does the value of Quest lab data play in those conversations? And you see that becoming a bigger chip in the negotiations as we move forward?
And then secondly, how exactly is Quest currently leveraging and monetizing that data? And what further opportunities do you see there as we move forward?
Yes. So Brian, it's becoming increasingly more important, particularly as I mentioned in my introductory comments, if you get into manage Medicaid and Medicare Advantage, when the payers are obviously taking the risk and they're really trying to understand that 5% of the population that represents 50% of the cost. So what we described with our capabilities in extended care services and specifically called out what we're doing with MEDXM, the ability for us to have specific programs where we use the data we have to pinpoint and to identify the patient and then use our call centers and then our on-site services, which could be in a convenient location like a Walmart, but also it could include one of our care professionals going into someone's home. So a lot of interest around, yes, we're the world's largest lab, but what we are is the world's largest diagnostic information services company, which includes using the data to identify the opportunities and then manage the care in a more active way and bend the cost curve.
Got it. Thanks.
And I would also add that some of the things Steve referenced, like our real time estimation, they see the value of that because one of the difficulties that they deal with is patients being surprised about coverage, patients being surprised about cost. And so this is, as we've shared in the past, one of the win win win all around, the patient's happier, we're happier, the payer's happier. So they actually appreciate us rolling out that tool. It's not just for us, it helps them quite a bit as well. So patients can make decisions ahead instead of finding out after around coverage and cost and so on.
So it really the value that we bring goes well beyond just the data. The other one is our sales force. So when you look at how they're struggling to control costs, we are part of the solution. The national labs have great value. And the fact that we can deploy our sales force to help them with physicians, we call it leakage or steerage, who are sending work to high cost providers and with data from the payer, walk in and say, hey, doc, you got some patients with a high deductible plan, you're costing them money when you send them to this laboratory.
Let me show you from their insurance company, the difference between sending it to us and sending it to who you're currently utilizing. That's powerful for the payers. They know that actually in that case, we are fully aligned. And then finally, the retail strategy, they really like that. Yes, they want to control costs, but they want their patients to get their diagnostic work done, those patients to get these things done.
And obviously, if we're putting at more convenient sites, it's more likely the patients will get that critical testing.
And the secondary value we bring to the table, I mentioned in my remarks, is around quality scores. So if the quality scores are right, they're driving the right care process and to close those gaps in care, we help identify those patients, which allows them to score better and get higher reimbursement from payers. So it all fits together. The value is well beyond our diagnostic testing.
Appreciate the color. Thanks, guys.
And there are no further questions.
Okay. Well, we appreciate your time. Thanks for joining us today. We
Thank you for participating in the Quest Diagnostics Q1 2018 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 ww w.questdiagnostics.com/investororbyphone at 800-846-1910 for domestic callers or 402 280-nine thousand