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 without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.
Thank you and good morning. I'm here with Steve Rusckowski, our Chairman, President, and Chief Executive Officer, and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements that 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-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. 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 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 Rusckowski.
Thanks, Shawn, 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 two-point strategy. Mark will provide more detail on first 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 first quarter operating under the new clinical lab fee schedule, which accounted for approximately 12% of our revenues last year. Since November, we said we expected the impact of the final rates on PAMA would be a reduction of approximately 4% in 2018, approximately 10% in both 2019 and 2020. Our actual Medicare reimbursement in the first quarter reaffirms our projected 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. Both sides have submitted their initial briefs to the court. 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 followed 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, AdvaMedDx, 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. 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 million in tax savings on an adjusted basis in 2018. We are reinvesting roughly $75 million before tax into the business and our people. Much of this is underway. Turning to the first quarter, we delivered on all five elements of our strategy to accelerate growth.
The first element of our growth strategy is to grow 1%-2% through strategically aligned accretive acquisitions, which we achieved for the fifth consecutive year in 2017. We had a productive quarter for M&A. We completed our acquisition of MedXM, a leading national provider of home-based health risk assessments and related services. More on this acquisition in a few minutes. We are integrating the acquisitions announced in the latter half of 2017. We are pleased by the results. We guided earlier this year, we expect to deliver about 250 basis points of growth from M&A in 2018, which is above the top end of our 1%-2% objective. Our M&A pipeline remains strong. 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 healthcare 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. 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 our 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. Based upon our recent conversations, it's clear that many health plan leaders agree. We're delivering on the third 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, QuantiFERON, 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 in our liquid tumor panels. 70% of patients with cancer are treated by community cancer centers, and we're excited about the opportunities that MedFusion is creating with networks of community cancer practices like US Oncology Network and Texas Oncology, as well as Baylor Scott & White Health, the largest health system in Texas. We continue to make strong progress executing the fourth element of our 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 into 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 fifth 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. 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 a 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 two-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 costs 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. Let me give you a few updates.
Our collaboration with Optum360 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. 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 our 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 eCheck-In process has been used in more than 27 million patient encounters.
Our patients like the convenience, this information helps us place phlebotomists where they are needed most based upon the patient flow. We have over 1,500 sites with eCheck-In and expect to deploy it in all of our patient service centers by the end of 2018. Let me turn it over to Mark, who will take you through our financial performance. Mark?
Thanks, Steve. Starting with revenues, consolidated revenues of $1.88 billion 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 340 basis points attributed to acquisitions. Volume, measured by the number of requisitions, 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 first quarter requisition volumes and created a tougher year-over-year comparison.
Revenue per requisition in the first quarter grew by 1.6% versus the prior year. As a reminder, revenue per req is not a proxy for price. It includes a number of variables such as unit price variation, business mix, test mix, and test per req. Unit 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. After 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 million, or 14.5% of revenues, compared to $279 million, or 15.4% of revenues a year ago.
On an adjusted basis, operating income was $303 million, or 16.1% of revenues, compared to $297 million or 16.3% of revenues last year. Operating income decreased by $8 million compared to the prior year as a result of weather. The decline in operating margin was 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. 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 $1.22 last 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 first quarter 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, Optum360. In the first quarter, our uncollectible balances associated with patient responsibility are flat year-over-year. Cash provided by operations in the first quarter was $180 million versus $196 million last year. The year-over-year difference was largely due to movements in our working capital accounts.
Capital expenditures during the quarter were $73 million compared to $42 million a year ago, which is in line with the higher CapEx spend plan for 2018. Turning to guidance. Our outlook for 2018 remains unchanged as follows: revenues to be between $7.7 billion and $7.77 billion, an increase of 4%-5% versus the prior year. Reported diluted EPS to be between $5.42 and $5.62, and adjusted EPS to be between $6.50 and $6.70. Cash provided by operations to be approximately $1.3 billion, and capital expenditures to be between $350 million and $400 million. 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 2017. We expect the earnings accretion from these deals to continue to ramp up throughout 2018 and into 2019. I'll now turn it back to Steve.
Okay. Thanks, Mark. Well, to summarize, we delivered a strong first quarter. We made solid progress accelerating growth and driving operational excellence. With that, we'd like to take your questions. Operator?
Thank you. We will now begin the question and answer session. If you would like to ask a question, please ensure your phone is unmuted. Please press *1 and record your name clearly when prompted. To withdraw your request, press *2. One moment, please, for the first question. The first question comes from Dan Leonard with Deutsche Bank. You may go ahead.
Good morning, Dan.
Thank you. Good morning. 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?
Sure, Dan. I'll handle that. Certainly, PAMA was in our plan, the reinvestment to some of tax reform. 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 we hadn't planned on was the weather. As I mentioned, there was about $8 million 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 PAMA, despite the reinvestment. Then the wild card is the holidays. We know that the way the calendar falls has impacts. We never quite know exactly how to predict what that impact might be.
I think, as you look at all those pieces, that's probably what I would say. Then the last piece is acquisitions. That was certainly part of our plan when we put together a business case and we planned those synergies. We know, as we've shared in the past, that it can take up to 12-18 months to get them to be at their going rate of profitability. That was certainly in our plans as well.
Okay. Helpful color. Just to 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?
Yeah. Steve here. 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, this I would describe as one of the areas that they're looking at. 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. Second is, with that, it legitimizes, through CMS, the value that the tumor panels add to the diagnostic workup of a cancer patient. It just brings front and center the importance of getting a full 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 US Oncology, our working relationship with Memorial Sloan and IBM Watson. We have a strong and growing presence in this whole space. 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 the value of that, the delivery of that. We do that quite well, therefore, approval for that and some kind of controls around that we think is a good thing.
I appreciate that color. Thank you.
Thank you.
Thank you. Before we take our next question, I'd just like to remind parties, if you have a question, to please press star one. We do just ask that you limit yourself to one question. Our next question comes from Ricky Goldwasser with Morgan Stanley. You may go ahead.
Hey, Ricky.
Yeah. Hi, good morning, congrats on good performance in the quarter.
Thank you.
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.
As the industry knows, our nearest competitor's contract expires in 2018, number one. Number two is we've said that obviously, we would like, under the right terms, to be on contract with United. We have also shared that we are in dialogue, we have nothing to share about that dialogue, at the right time, when we hopefully will have something, we'll share that. We're making progress there. We also make progress with hundreds of others of health plans, some big and some small, we feel as we enter 2019, we'll be in really nice shape in terms of our portfolio of relationships. These relationships, yes, they're contractual related to being in-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. 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. The last part of this is our consumer strategy is really resonating. That whole consumer experience, we're upgrading our patient service centers. We're e-enabling it with our eCheck-In capabilities. We're bringing nice information capabilities to consumers with our MyQuest application, this resonates extremely well with the health plans, big and small. Making good progress, and when we have something, we'll make sure that you all hear it quickly.
Great. Thank you. Just a quick follow-up on the M&A. Obviously, you're looking for 2.5% growth for 2018. In case I missed it, what was the contribution of M&A in the quarter? You said that new M&A is not included in guidance. Now the comment is in place. Have you seen any impact on valuations?
Yep. I'll turn this to Mark. M&A, the question is how much M&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&A and what was excluded. Mark, do you want to take that about Q1 and then the guidance, what's there?
Yeah. In the first quarter, M&A contributed 3.5% of the 3.7% total or the 4.1% of our core business. We had included 250 basis points or 2.5% in our 4% to 5% guidance for the year. That obviously will be stronger in the first half because we annualize some deals as you work through the year. There's also a potential upside without committing to anything for new deals because we do not contemplate that in our guidance. Now, MedXM, 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 you expect it to have on the business? Just a real quick update on the retail growth strategy. How much contribution is that to your growth, and how many more locations are you planning to open up this year?
Yeah. Okay, first of all, on tax reform, what we shared with our fourth quarter results is we're going to take about $75 million and invest in our business, I would say the majority of this is around accelerating growth. What we said around that, we kind of outlined some broad categories, those broad categories would, as you would expect, are some of our growth strategies. Advanced diagnostics, the consumer strategy, but also investing in our people. We also announced that we're going to provide a bonus for the vast majority of our employees that don't have equity, that will be payable in the fourth quarter. All of that has started to feather into what you see starting in Q1, will continue throughout the year. With that, we believe this will help us accelerate growth around those five strategies.
The second part of your question is around Walmart. Yeah, we're really pleased with the early returns. We started with the big states, Texas and Florida. They're going well. The customer feedback is really good. The joint venture continues to look at prospects for other basic health services that we could provide in those stores. We, as you know, formed a JV. This joint venture was about what we do around blood draws and what we do at Quest Diagnostics and our laboratory business. More importantly, it's all around extended care services and population health and providing basic healthcare services to bend the cost curve. 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.
Sounds good. Thank you.
Thank you.
Thank you. The next question comes from A.J. Rice with Credit Suisse. You may go ahead.
Good morning, A.J.
Hey, how are you guys? Thanks. I'll just ask two quick parts here, two questions. You referenced the discussions with hospitals in your prepared remarks, Steve. I wonder, I know lots of times, having 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. 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, maybe it'll take till next year when there's a further step up. 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.
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 discussions.
Sure. Okay, 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. If you talk to hospital executives today, there's a lot of pressure, not just with PAMA. Many have cost improvement goals. Many are anxious to understand ways they can become more efficient. 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. Independent of us, it's accelerating. Second is we are accelerating it as well.
We're knocking on many hospital executives' doors to make sure that they're aware, if they're not aware, or they're ready, and have a conversation around this, and specifically around a lab strategy. We've engaged with many systems, particularly those that have large outreach businesses, to talk about their lab strategy. It's a deliberate strategy of our accelerate strategy to make sure that they're well aware and understand what their options could be and think about the possibilities. We are helping with the information out there as well. The second part of your question has to do with our retail strategy. We've been working on this retail strategy for years. This doesn't happen overnight. As we said, Walmart's a part of that. We have Safeway as a part of that. We do active work for CVS in the MinuteClinic. They've evaluated a strategy.
We have a great working relationship with Aetna. We'll see if that potential merger becomes a reality. Because of the great relationship we have with CVS and Aetna, we're actually hopeful that this can help accelerate some of the work we could do with them as well, number one. Number two is the work with Walmart, I said in my earlier comments, is going well, and speculation on what they will or will not do in health is for them to communicate about. It just reemphasizes their commitment and energy around this topic. 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.
As you know, some of these partners we've announced so far, like Safeway and Walmart, have a center of mass that doesn't necessarily cover the whole population of the U.S. 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. 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. Our strategy was the right one, and it's being supported by the marketplace. This consolidation is interesting, more importantly, it's how do you 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.
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 Shiel Medical Laboratory, performing? In this conversation with hospitals you're having, how much of an appetite is there for PLS versus sale of lab assets?
I'll start. 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, a matter of fact, 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 across diagnostics. Part of that is around what we describe as our hospital strategy. In 2016, in our investor day, we shared this with you. Basically, it has three pieces. One is we ask the question, we want to have a conversation around your lab strategy, and is that important to you, and do you have one? Surprisingly to us, initially, but not anymore, many of the CEOs and the C-suites have it on their list.
It's one of the strategic questions, what they're going to do around lab. Related to that, there's three pieces. One is what they're doing with their hospital inpatient cost. 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 a variety of ways. When we get into that conversation, we have a conversation around their sophisticated testing or advanced diagnostics that they send 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 suppliers, and making sure you do the right test for the right patient at the right time.
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? 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. We end with a comprehensive strategy. If you see one, you see one. We shared last year with PeaceHealth. That was a good example, where we've got their outreach, we're helping with their inpatient laboratories, and as well, we're helping them with their reference testing. When that happens, we're their partner for laboratory services in the integrated delivery system.
That's resonating well, given all the pressures they have and all the priorities that they have in the current dynamic in the marketplace. 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, you mean within the laboratory industry and specifically us as a consolidator, and you ask specifically about Shiel. Shiel is early. We're pleased with the initial results. I mean, I can 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. Certainly, after a few months, we're pleased and on plan. Then I think most critically, retention is good. If you look at the number of customers that moved over from Shiel to us, relative to expectations and the model, we're doing very well. That's what I can share at this point around Shiel.
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 was 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 first quarter. Maybe just comment on that and bad debts. Thanks.
Yeah, sure. 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. When you think about Q4, that is a ramp-down quarter. October is much larger than December. Then if you look at Q1, obviously, it's a ramp-up quarter, so March is much larger than January. 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 Shawn. 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.
Morning, Patrick.
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. 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?
Thanks for the question. What we shared in 2016, and we continuously talk about it, is we have our two-point strategy. First is all around accelerating growth. We talked at great length of our five strategies around that, where we made great progress. The second is operational excellence. What we shared in the end of 2017 is we achieved our goal of $1.3 billion run rate savings. 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. What we shared is, one example of that is we're 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 some opportunities around consolidation of our laboratory network. We've shared that we're building a new laboratory facility in New Jersey. It's a big project for us. When that is completed, it'll allow us to consolidate our physical presence in what we call our east region. It'll allow us to consolidate some of our regional laboratories into one. We continue to see a big opportunity around the e-enablement. When we e-enable the process, we can 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. Now what we've done is educated our customers that you can get these results online.
What it has done is it eliminated a lot of call volume coming into our call centers. It allows us to reduce costs. Customers are happy. We continuously look at opportunities, and we have dialed into our guidance for this year and in our outlook, those opportunities. 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. That will be clearly in our sights in 2018, 2019, and 2020 and beyond. There's a lot of opportunities.
Very helpful. Thank you.
Thank you.
Thank you. The next question comes from Amanda Murphy with William Blair. You may go ahead.
Hi, good morning.
Good morning.
I actually just had a follow-up to A.J. and Jack's questions around your hospital strategy, and thank you for all the comments there. When you first outlined the increased focus, you had talked about opportunities to expand relationships over time, for example, getting incremental reference work. I know it's 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?
Yeah. The one I brought up is PeaceHealth. That's a great example of they looked at their hospital strategy, and it has the three aspects that I talked about, how we can help them with their inpatient laboratory costs. Second is, can we help them become more efficient and effective around the reference testing for inpatient ordering of diagnostics. Finally, is they had an 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 HealthCare'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 existing relationships. We manage the account.
In the case of Hartford HealthCare, we continue to look at how we can help them consolidate some of their purchases of reference testing. We have had dialogue around their hospital laboratories, and could we help them become more efficient. A good example where a working relationship, even though it starts in one area, could build.
Have you seen actual growth then in reference testing as you think back over last year, for example? Is it actually impacting organic volume growth at this point?
Yeah. Interesting enough, what you find is there's two pieces of this. One is what's happening with our share of the marketplace, the second is what's happening in the hospital marketplace. Actually what we've seen in Q1 in hospital volumes, given admissions volumes being relatively flat at best. As we talk to hospital executives, 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. What we see in our reference testing business, even though we might be picking up some more share, volumes are relatively stable. Second is, in that portion of our business, we do see some price challenges. There's more competition. What we have is a deliberate strategy.
When you have a market like that where the leadership gets stronger, this plays into our strategy. Many hospital systems are looking at consolidating suppliers, having a more comprehensive strategy. We hope over time to continue to build share, but probably in a more of a more challenging marketplace than two to three years ago.
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've shared, we serve half the hospitals in the country. In many, I'd probably say most of these cases, if not all, we already were doing some reference work. It was an opportunity to expand that footprint and do more, or in some cases, all of it. That is part and parcel with the relationship. As we shared, we therefore lock that up in a five to seven-year contract instead of being subject to periodic RFPs and competitive situations. 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.
Morning, Ross.
Ross, your line is open. Please check your mute feature.
Hi, hopefully you can hear me. 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. The part that I really would like to dig into is on the OpEx line. It looks like on the restated numbers, OpEx was sort of down even a touch year-on-year or flat-ish, which, given the acquisitions, implies the core was sort of down. Obviously, we know you're doing some investments. 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.
Yeah. Maybe we'll tag team this, Mark and I again. First of all, as I mentioned in my quote, we did execute well. I think as you point out, there's a lot of moving parts within the quarter, 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. Also there was an earlier comment about what are you doing around our Invigorate program around cost improvements. Within Q1, you've got all that going on. Okay? You have that all going on.
What we do as a management team is we pull together that integrated plan 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, we had to manage our way through that. With that as a high-level summary, Mark, you want to give a little more color of the pieces?
Yeah, sure. As you know, Ross, price and inflation are headwinds on margin. We talk about our productivity, which we discussed as 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 billion. You can do the math on that. Obviously, we have also shared that we did a substantial amount of M&A. A lot of that was skewed towards the back end. We expect margin expansion on that new book of business throughout the year, which will help us. Finally, the important piece is organic growth. When we grow organically the way we've been doing, obviously the drop through on the incremental revenue is higher than the fully loaded margin. That's another opportunity to offset some of the headwinds of price and inflation.
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 2016, which is top line of 3%-5%, although I did caution more likely to be in the lower end than the higher end if PAMA stays where it is. Growing our earnings, not earnings per share, but earnings mid-to-high single digits. That obviously also directionally has correlation with the top line as well. Probably more likely to be at the lower end of that. In terms of the rest of the year, the investments that Steve referenced, the $75 million, some of those are fairly smooth over the year.
Some of them are accounting, like the bonus that Steve mentioned. We're accruing that pretty equally. Some of them are going to ramp up a little bit as we move throughout the year. We also have those other factors such as stronger organic growth and expansion of our acquired revenue that's going to offset that incremental investment.
Helpful color. Thank you, guys.
Thanks, Ross.
Thank you. Before we take our next question, I would like to remind all participants, if you'd like to ask a question, to please press star followed by one. Our next question comes from Mark Massaro with Canaccord 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 flat-ish. You called out 60 basis points from weather. Looking at last year, I think you actually grew organic volumes by 2.6%. I think embedded in your guidance for 2018 is 1.5% to 2.5%. 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?
Yeah, sure. 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 PLS deals that were fairly new, and then those were obviously ramping up. We didn't close a significant amount of PLS late in 2017. Remember, our PLS is organic. We're not buying anything. That is organic growth. Certainly, as I mentioned, the timing of the holidays and the floating holidays has significant impact on our. When you look at New Year's, when you look at 4th of 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.
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. It's not just that day, but you get a little spillover from those holidays either right before or right after. Certainly, that had a little impact. I wouldn't read too much into the quarter-to-quarter slight variation. We'll try to share to the best of our abilities what the real drivers are and things that certainly have implications going forward. I'd say the first quarter, there was a fair amount of noise, and there's nothing significant in terms of utilization or other things that you might be concerned about. We certainly are very confident of the guidance that we put out and keeping on track with our commitments.
Yeah. Just to add to that, one part of reaffirming the 4%-5%, if you look at Q1, we go through some of the pieces. Earlier we got a question on what's happening on the hospital side. Hospital admissions are stable. We were very pleased. We 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 testing. We're actually, when you think through the different pieces and you think about what Mark described with some of the headwinds, you couple with that the offset with PAMA in terms of that price reduction in Q1. When we look at that physician business, we actually felt okay about our performance in Q1, and we thought it was solid.
Therefore, we have confidence in the 4%-5% for this year, which includes that 250 basis points for acquisition. As you described it, the rest from organic revenue growth.
Thank you. Very helpful.
Thanks.
Thank you. Our last question comes from Brian Tanquilut with Jefferies. You may go ahead.
Hi, this is Brian Ross on for Brian Tanquilut.
Yes.
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's more on how much does the value of Quest lab data play in those conversations, and do you see that becoming a bigger chip in the negotiations as we move forward? Secondly, how exactly is Quest currently leveraging and monetizing that data, and what further opportunities do you see there as we move forward?
Brian, it's becoming increasingly more important, particularly as I mentioned in my introductory comments, beginning to 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. 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 they use our call centers and then our on-site services, which could be in a convenient location like a Walmart. Also it could include one of our care professionals going into someone's home.
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.
I would also add that some of the things Steve referenced, like our Real-Time Estimation, they see the value in that because one of the difficulties that they deal with is patients being surprised about coverage, patients being surprised about cost. 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. They actually appreciate us rolling out that tool. It's not just for us. It helps them quite a bit as well. Patients can make decisions ahead instead of finding out after around coverage and cost and so on. Really, the value that we bring goes well beyond just the data. The other one is our sales force. 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. With data from the payer, walk in and say, "Hey, Doc, you got some patients on 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. 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, especially if you're monitoring a condition.
If they're a risk-bearing entity, they've got managed Medicare, Medicaid, they want those patients to get these things done. Obviously, if we're putting in more convenient sites, it's more likely the patients will get that critical testing.
A secondary value we bring to the table, I mentioned in my remarks, is around quality scores. If the quality scores are right, they're driving the right care process. To close those gaps in care, we help identify those patients which allows them to score better and get higher reimbursement from payers. It all fits together. The value is well beyond our diagnostic testing.
Appreciate the color. Thanks, guys.
Yeah.
There are no further questions.
Okay. Well, we appreciate your time. Thanks for joining us today. We appreciate your support. You have a great day.
Thank you for participating in the Quest Diagnostics first quarter 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 www.questdiagnostics.com/investor, or by phone at 800-846-1910 for domestic callers or 402-280-9953 for international callers. Telephone replays will be available from approximately 10:30 A.M. Eastern Time. You may disconnect at this time. Thank you.