Good morning. Welcome to the Quest Diagnostics second quarter 2022 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 the 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 joined by Steve Rusckowski, our Chairman, Chief Executive Officer, and President, Jim Davis, CEO-elect, Mark Guinan, Chief Financial Officer, and Sam Samad, our incoming Chief Financial Officer. During this call, we may make forward-looking statements and will provide non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties, including the impact of the COVID-19 pandemic, that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.
The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows, and/or its financial condition will be primarily driven by the pandemic severity and duration, healthcare insurer, government, and client payer reimbursement for COVID-19 molecular tests, the pandemic's impact on the U.S. healthcare system and the U.S. economy, and the timing, scope, and effectiveness of federal, state, and local governmental responses to the pandemic, including the impact of vaccination efforts, which are drivers beyond the company's knowledge and control. Before this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business testing revenues or volumes refer to the performance of our business excluding COVID-19 testing.
Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Now, here is Steve Rusckowski.
Thanks, Shawn, and thanks everyone for joining us today. We performed well in the quarter, growing our base business year-over-year while increasing our share of COVID-19 molecular testing since March. We believe demand for COVID-19 molecular testing is not going away anytime soon and will continue into 2023. Based on our overall performance in the quarter and our expectations for the remainder of 2022, we have raised our full year guidance. We also made very good progress on our leadership transition. Jim will give you an update and take you through our second quarter highlights, and then Mark will take you through our financial performance in more detail before we get into your questions.
Before I turn it over to Jim, I'd like to say a few words about the Saving Access to Laboratory Services Act, now called SALSA, the important new federal laboratory legislation recently introduced in Congress, as well as the U.S. Court of Appeals for the D.C. Circuit's recent ruling on our trade association's PAMA lawsuit. We're grateful for the efforts of Senate and House members who introduced this legislation on both sides of the aisle. In our view, SALSA could fix PAMA permanently, setting the Medicare clinical lab fee schedule back on a sustainable path. In 2014, the intent of Congress when passing PAMA was to reform the Medicare clinical lab fee schedule to a single national fee schedule based on private payer rates for the clinical laboratory services. Unfortunately, the first round of data collection failed to collect the data from large, significant segments of the marketplace.
The result was billions in Medicare cuts over three years, with more on their way if SALSA is not passed. Our trade association is coordinating congressional meetings along with public advocacy efforts that involves collaboration with the provider and patient communities. Last week, the D.C. Circuit Court issued a decision in the PAMA lawsuit filed in 2017 by our trade association, ACLA. In short, the court sided with ACLA and called the CMS's exclusion of hospital price data, quote, "arbitrary and capricious". Importantly, this case has been rejected for procedural reasons, and this is the first opinion based on its merits. Unfortunately, the court is not requiring CMS to recalculate the flawed payment amounts. While disappointing, we believe this favorable ruling will give Congress additional strong grounds to finally fix PAMA's many flaws by passing SALSA. Now I'd like to turn it over to Jim Davis.
Thanks, Steve. Our base business performed well despite softer utilization trends, which we believe impacted us and the rest of the healthcare industry. I'm proud of the efforts our team has made to grow our share of COVID-19 molecular testing since the end of the first quarter. We also ramped our investments to further accelerate growth in the areas of advanced diagnostics and direct-to-consumer testing. In the quarter, we announced the selection of our next CFO, Sam Samad. Sam joins us from Illumina, where he served as chief financial officer for five-plus years. As many of you know, he brings a depth of healthcare experience that will help us in many ways. Prior to Illumina, Sam held several financial and operational leadership roles at Cardinal Health and Eli Lilly and Company. Sam, welcome to Quest Diagnostics.
Thanks, Jim. It's an honor to join the Quest Diagnostics team. In previous roles, I had the opportunity to observe the many contributions Quest is making to healthcare. Since arriving less than two weeks ago, I've been impressed by the passion and dedication of everyone that I've met so far. I'd like to thank Mark Guinan for his partnership during this transition. I'm excited to be here. Jim, I'll turn it back to you.
Thanks, Sam, and I look forward to working very closely with you. Now, turning to our performance in the second quarter. Total revenues were $2.5 billion. Earnings per share were $1.96 on a reported basis and $2.36 on an adjusted basis. Cash provided by operations was $402 million. COVID-19 testing revenues were approximately $355 million in the second quarter, down approximately 31% from 2021 and 41% from the previous quarter. In July, with the spread of the BA.4 and BA.5 variants, we continue to see the demand for COVID-19 molecular testing consistent with the volumes we reported in June. Our positivity rate has increased since March, and approximately 25% of the tests we performed in the first two weeks of July were positive.
We believe that the COVID-19 trend since March contributed to the softness we observed in the broader healthcare utilization. As you've seen, we're successfully executing a strategy to increase our share of COVID-19 molecular testing. A key element of our strategy is to increase the number of testing access points through retail relationships. In addition to our CVS and Walmart relationships, we are now also collecting specimens at Rite Aid locations, and the number of access points will continue to grow. Approximately half of our COVID-19 volume in the quarter came from retail channels. Quest is proud to have been selected by the CDC to participate in its Increasing Community Access to Testing or ICATT program for COVID-19 testing. Through this program, qualified uninsured individuals can access COVID-19 molecular diagnostic testing for zero out-of-pocket costs.
In addition, we're pleased to be the provider of COVID-19 PCR testing for qualified insured and uninsured customers of Rite Aid nationwide for zero out-of-pocket expense. We now have approximately 6,000 COVID-19 patient access testing sites through retail relationships, as well as our own patient service centers. Through these efforts, we estimate that we are performing approximately 8% of COVID-19 molecular testing in the U.S., up from approximately 4% in March. Finally, the public health emergency was extended into October, which will help us maintain our current level of reimbursement. Based on these factors, we raised our COVID-19 revenue guidance for full year 2022 to between $1.15 billion and $1.30 billion. Now, turning to our base business. In the second quarter, we continued to make progress executing our two-point strategy to accelerate growth and drive operational excellence.
Here are some highlights from the quarter. Our M&A funnel remains strong. We are in late-stage discussions with several hospital health systems on the purchase of their laboratory outreach business. This is in addition to our normal conversations we have with C-suite leaders on performing reference testing and providing professional lab services. While this pandemic paused some of these discussions, it has also created opportunities because of the financial and labor pressures that many hospital health systems are facing. We continue to accelerate growth through health plan access. Excluding COVID-19, health plan volumes and revenues grew faster than our overall base business in the quarter. Health plans continue to see the value of working with us. Over the last two years, we have renewed 12 national and large regional health plan contracts with price increases.
We expect more renewals with price increases this year, and we're proud to be selected as one of the UnitedHealthcare's preferred lab network providers for the fourth consecutive year, providing physicians and patients with improved access, quality, and value. Finally, we're pleased to share today that we have renewed our strategic relationship with Florida Blue. Florida continues to be an important, large, and growing state for us. Earlier this month, the CMS Transparency in Coverage final rules became effective to help consumers know the cost of a covered item or service before receiving care. Beginning July 1st, 2022, group health plans and issuers of group or individual health insurance are required to post pricing information for covered items and services. We are leveraging that data to ensure patients and employers are aware of the value we offer.
This trend will continue to gather momentum as more pricing transparency requirements will go into effect in the next two years. We believe that pricing transparency favors Quest Diagnostics, which powers affordable care. We do this by offering clinical innovation, enabling better clinical outcomes through our quality, speed, and accuracy of test results, improving the patient experience with accessible and easy-to-use patient resources, and finally, reducing the cost of care. We continue to ramp our investments in advanced diagnostics capabilities. In the quarter, we saw growth from hematology, prenatal genetics, and pharma services. We also introduced Quest AD-Detect, a blood test to aid in the early assessment of Alzheimer's disease. We are seeing good early adoption from both primary care physicians and neurologists. Finally, last week, we launched a lab-developed molecular test to aid in the detection of monkeypox.
The test can differentiate monkeypox from other orthopoxviruses, and we will be able to perform nearly 30,000 tests a week by the end of July. In addition, we can expand testing to other laboratories in our network to further increase capacity if needed. We continue to see growth in direct-to-consumer testing, thanks to our COVID-19 offerings and more importantly, our base business testing. Within the base business testing category, we saw strong growth from testosterone, comprehensive metabolic panels, and Lyme disease. We're excited about upcoming improved digital experience, which we expect to debut later this year. We believe this improved experience will help us acquire, convert, and retain more customers who visited QuestDirect digital platform. We expect to have much more to say about our improved digital experience before the end of this year. The second part of our two-point strategy is to drive operational excellence.
We remain focused on improving our operational quality, service, and cost, thereby driving productivity gains. We have several initiatives underway to make this happen. Focused on attracting and retaining our people, optimizing our network, automating and digitizing our processes, and getting paid for the work we do. Here are three examples. One, we're partnering with universities to help build our pipeline of expertise in medical technology, cytology, and histology. We're also teaming up with a learning and development recruiting company to provide phlebotomy certifications to pre-screened candidates in exchange for a two-year commitment to work at Quest. Two, our Schedule a Check-In initiative, which encourages patients to make appointments, has now expanded to 1,000 of our patient service sites. In one area which has implemented the program, we are seeing a 20% decrease in average wait times, as well as an improvement in patient satisfaction.
We're also building the payment process into the digital customer experience, which frees up our phlebotomists to focus on specimen collection, thereby increasing their capacity and improving the patient-employee experience. Three, we continue to implement digital technology to provide end-to-end specimen tracking, including the arrival patterns that enable load leveling across the network, which improves our productivity and provides greater transparency for our clients. We're not immune to the current inflationary environment and are managing through rising fuel and labor costs. Like many companies, higher than normal employee turnover in some job categories is impacting our ability to drive further productivity gains. However, these increased costs are in line with our expectations and are built into our guidance. We are expecting another year of solid and vigorous savings and productivity improvements to help offset these pressures.
Finally, I'm very proud of our recently re-released 2021 corporate responsibility report and invite you all to download it. You can find it on our website. Among the highlights, in 2021, we launched our first formal materiality assessment to help identify the most significant ESG topics to the company and our stakeholders. Also, to enhance the level of our ESG disclosures, we began reporting in accordance with the SASB guidelines. We're very proud of the contributions Quest is making to empower better health and grateful to our 50,000 colleagues who are making that vision a reality every day. Now, Mark will provide more details on our performance and share more insights on our updated guidance for the remainder of 2022.
Thanks, Jim. In the second quarter, consolidated revenues was $2.45 billion, down 3.8% versus the prior year. Base business revenues grew 2.9% to $2.1 billion, while COVID-19 testing revenues declined approximately 31% to $355 million. Revenues for diagnostic information services declined 3.6% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the second quarter of 2021, partially offset by growth in our base testing revenue. Total volume, measured by the number of requisitions, declined 1.4% versus the prior year. Acquisitions contributed approximately 100 basis points to total volume. Total base testing volumes increased approximately 2% versus the prior year. Excluding acquisitions, total base testing volumes grew less than 1%.
As we have seen in prior COVID surges, we experienced some softening of base testing volumes beginning in April as COVID-19 cases began to rise again throughout the spring. COVID-19 testing volumes were stronger than expected during the second quarter. Together with our JV partnership, Sonora Quest, we resulted approximately 3.7 million molecular tests. Quest alone resulted roughly 3.5 million molecular tests, down approximately 1.3 million tests and 2.8 million tests versus the prior year and first quarter respectively. Our July COVID-19 molecular volumes have been consistent with the volumes we reported in June, averaging roughly 40,000 tests per day, excluding Sonora Quest. Revenue per requisition declined 2.6% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per req was up modestly.
As we have highlighted in recent quarters, the pricing environment has improved with unit price reimbursement pressure of less than 50 basis points in the quarter. Reported operating income in the second quarter was $388 million or 15.8% of revenues, compared to $533 million or 20.9% of revenues last year. On an adjusted basis, operating income was $435 million or 17.7% of revenues, compared to $584 million or 22.9% of revenues last year. The year-over-year decline in adjusted operating income is primarily related to lower COVID-19 testing volume, a higher portion of COVID-19 molecular testing volume from non-traditional retail channels, which carry additional expenses and logistics costs, investments to accelerate growth in our base business, and slightly lower average reimbursement for COVID-19 molecular tests.
In the quarter, approximately half of our COVID-19 molecular volume came through our retail partners versus roughly a third last year. We expect the mix of COVID-19 molecular volumes through this channel to continue to grow in the third quarter. Reported EPS was $1.96 in the quarter, compared to $4.96 a year ago. Adjusted EPS was $2.36 compared to $3.18 last year. Year-to-date cash provided by operations was $882 million in 2022 versus $1.2 billion in the prior year period. Given the limited M&A activity, we repurchased $200 million in stock during the second quarter. Now, turning to our updated guidance. Revenues are now expected to be between $9.5 billion and $9.75 billion.
Base business revenues are expected to be between $8.35 billion-$8.45 billion. COVID-19 testing revenues are expected to be between $1.15 billion-$1.3 billion. Reported EPS expected to be in a range of $8.24-$8.64, and Adjusted EPS to be in a range of $9.55-$9.95. Cash provided by operations is expected to be at least $1.7 billion, and capital expenditures are expected to be approximately $400 million. Before concluding, I'll touch on some assumptions embedded in our updated 2022 guidance, as well as some additional considerations. Our guidance assumes COVID-19 molecular volumes to average approximately 15,000-25,000 tests per day for the rest of the year.
As we look toward 2023, we continue to assume our COVID-19 molecular testing run rate in the second half of 2022 continues into next year. Last week, the public health emergency was again extended another 90 days through mid-October. We assume average reimbursement for COVID-19 molecular testing to hold relatively steady through this period. While the public health emergency could be renewed beyond October, additional extensions are not captured in our guidance. As Jim noted earlier, we have successfully grown our share of COVID-19 molecular testing through our retail partners, which accounted for approximately 50% of our COVID-19 molecular volume in the second quarter. As these retail partnerships continue to expand, we expect the mix through this channel to continue to grow throughout the remainder of the year. We continue to incur incremental costs to serve this channel.
As COVID-19 positivity rates remain in the double digits, our ability to pull specimens for COVID-19 molecular testing continues to be limited. As a reminder, we are ramping investments to accelerate growth this year. We spent approximately $70 million in the first half of the year, and we expect these investments to continue to ramp in Q3 to support the launch of our new consumer site later this year. A portion of these stand-up IT costs are temporary, but variable marketing costs will increase following the launch of the new site. We'll also be adding additional headcount this year to support our consumer offering as well as bioinformatics capabilities within advanced diagnostics. I will now turn it back to Steve.
Thanks, Mark. As many of you know, this will be Mark's last earnings call as he is retiring next week. Mark, you've been a key member of our leadership team as we have transformed Quest and accelerated its growth. I'm grateful for everything you've done for the company, especially for the last two and a half years of the pandemic. I would miss your partnership and counsel as we navigated many challenges over nearly a decade. I wish you and your family health and happiness as you approach the next chapter in your life. Thanks.
Thanks, Steve. Quest is a special place, and it has been an honor to serve as CFO for the last nine years. Thanks to the analysts and investors on this call. I have enjoyed working with all of you. My family and I are excited for what lies ahead.
Thanks, Mark. To summarize, as Jim shared, we had another good quarter, driven by our efforts to increase share of COVID-19 testing, while we believe our base business performed in line with the softer utilization trends we're seeing in healthcare. We have raised our full year guidance based on our performance in the quarter and our expectations for the remainder of 2022. Finally, we're grateful for the efforts of Senate and House members who introduced the Saving Access to Laboratory Services Act and fully support the passage of this important legislation. Now we'd be happy to take any of your questions. Operator?
Thank you. We will now open it up to questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back in the queue. To be placed in the queue, please press star one from your phone. To withdraw, press star two. Again, to ask a question, please press star one. Our first question comes from Brian Tanquilut with Jefferies. Your line is open.
Hey, good morning, guys. Mark, congrats on the upcoming retirement, and thanks for all the help over the years. I guess.
Thank you.
Just my question on the base business, I mean, you called out some of the softness, right? I mean, do you guys think that it's more COVID driven with the current mini surge that we're seeing? Or just any color you can share with us on that. And maybe, I guess, Steve, taking it a little bit further, you know, how are you thinking about the business today as we, you know, face a recession down the road, in terms of the defensiveness of the volumes and the business overall as we get past COVID? Thanks.
Yeah, sure. Thanks, Brian, for the question. As we indicated, we were a little softer in the second quarter with the base business than what we expected in the second quarter. We do believe there's a relationship, as we have said before, between pickup in COVID infections and the amount of people that are going into their physicians and to some extent, what's happening with hospitals, even though that's a secondary slowdown, if at all. The second part of your question is longer term with worries about a potential slowdown in our economy and an approaching recession. What's our view on that? We're taking a hard look at what happened over the last, you know, 10 to 15 years of our business. You know, things did change, you know, quite a bit over the last decade as you know.
You know, the last recession, the Great Recession in 2008, you know, we had in parallel with that, the Affordable Care Act. You know, we also had changes with healthcare policy, and we had PAMA, so there's a lot of other effects. Yes, we do believe there may be some impact in our business related to a slowdown in the economy and the recession. We do believe that we're so essential to the delivery of healthcare and the need for healthcare going forward, that we believe that utilization will continue to be reasonable throughout any up and down in an economic cycle. But we're taking a look at it, and we're seeing if there's any differences this time around.
As you know, many people are saying this is an unusual set of circumstances given what's happened with healthcare and what's happened to the economy over the last 2-3 years. Jim, anything you'd like to add to what we see with our base business?
Yeah. Steve, what I would add is, look, we're in close touch with the payers. You know, the payers have indicated to us, and you saw UnitedHealthcare's announcement earlier this week, that they saw softer utilization of healthcare services as well. In addition to that, you know, we track a group of Quest accounts that we know are 100% loyal to us. We call it our same-store sales analysis. We noticed in the quarter that it was basically flat, you know, those accounts that are 100% loyal. The other thing we look at is just the mix of our business, and we noticed our general health and wellness panels grew at a lower rate than some of our infectious disease, non-COVID infectious disease, and chronic care types of testing that we do.
Based on all that information, we come to the conclusion that the base was certainly softer this quarter.
Thank you.
Thank you for your question. Our next question is from A.J. Rice with Credit Suisse. Your line is open.
Hey, good morning.
Thanks.
I also wanna offer my congratulations to Mark, and best wishes, and welcome aboard, Sam. Look forward to working with you. Maybe I'll just pivot over to talk about margins. Obviously, within the base business, you've called out some inflationary pressures. It seem like they've been manageable, but you also talked about the Invigorate savings and that they're largely offsetting it. I wonder if you could just sort of comment on how you're viewing
Base business margins. I'm assuming also on the COVID-related testing, that as long as the PHE is in place, that margin is stable. Has there been any reason to think that has changed? We get the aggregate margin, but I'm wondering about the underlying trends there, if you could just comment on it and how much that factored into your back half guidance outlook as well, any changes.
Thanks, A.J., for the questions. Let me start with COVID. As I mentioned in my prepared remarks, when you look at our COVID business, you know, the good news was a lot more volume, a lot more revenue, a lot more dollars of operating margin. However, with that also goes less pooling, a larger mix, shift towards the retail outlets, which have higher expenses. We have had some slight erosion versus last year on our average reimbursement, a couple of dollars, not anything, you know, super significant. The margin percentage was less, but still its contribution to the bottom line from COVID was much higher.
As we look into the back half at this point, you know, we don't know where the positivity rates are gonna go, but we've not assumed a material change in the amount of pooling. We would expect to continue with the current mix or potentially grow that as a proportion of our total COVID volumes. You know, so within the ranges, that's kind of how we're seeing the balance of the year play out on COVID. So, you know, if the positivity rate drops down and the positivity rate, I'm looking at Jim here, has been as high as we've seen through the pandemic. Now a lot more people are, you know, doing rapid antigen testing, so on. We believe that the cases are underreported. But, you know, we believe that the prevalence of COVID right now is extremely high.
In the earlier answer that we provided to Brian Tanquilut around the base business, there has been a historical negative correlation between those, and we do believe that the base business has absolutely been impacted by you know the surge in COVID. We just aren't sure how long it'll last. On the base business, you know, we've shared that as we built our plan and the ranges for 2022, we you know built in a higher you know SWB salary with benefits assumption. That was in our guidance. Certainly, that's something we control and that's really within expectations. We have $2 billion that we have long-term contracts. You know, really not exposed to inflation in a short window for that.
We have some other costs where, you know, we don't have long-term contracts, and they're things, you know, everybody's familiar with, and you've heard from other companies as well, things like fuel, things like housekeeping, security, temporary labor. Those areas have been a little more inflationary than we would have anticipated going into the year. The good news is those are in our results here to date. They're in our guidance. We're not expecting that to go away immediately. We certainly hope it's not long-term inflation. Unlike where if you have wage inflation, you generally expect it will continue. If you add contractual inflation with your key suppliers around reagents and other things, you know, that might be, you know, longer term as well, or certainly a couple of years.
We don't know how long this spike is gonna last, but I can tell you it's probably like $0.05-$0.08 a quarter in the first half, and we're not expecting that to change. We hope it might, but in the guidance that we provided. Hopefully that's helpful to you, A.J.
A.J., just so it's clear, you all know that the public health emergency has been extended. We're assuming here in our guidance that it will be extended through October, but we're not assuming in our guidance that it extends past October until we have certainty around that. Okay. That is the assumption and what we've just provided for guidance for the remainder of the year. I think since you asked, A.J., Jim, why don't you comment a little bit about, you know, the opportunities we still see around the Invigorate, and you mentioned in our opening remarks about, you know, the things we have changed. Why don't you chat a little bit about why we're still bullish on the prospects of improving productivity?
Yeah. A.J., as we've talked in the past, there's still certainly a lot of opportunity around automation of manual processes in the laboratory. I touched on in my comments around some of the automated check-in procedures. We've long had appointment scheduling. What we've added recently is when a patient walks into the PSC without an appointment, you actually go to the check-in and if the wait room is full, you schedule an appointment at that point. What we've seen is it really does help productivity in the PSC as well as if the patient leaves, they may not come back to Quest. If they make an appointment to come back in two hours or the next day, we feel like the patient retention is better.
Automation, the use of artificial intelligence in terms of readouts of, you know, manual curves and laboratories, all of that work continues. I tell you, the other thing that will help continue to drive productivity is our work around retention of our employees. Our productivity, like all companies, we're seeing a much higher increase in turnover. We feel like it is stabilized, albeit at a higher point. As we now drive you know, retention higher and turnover lower, that will certainly help our productivity efforts in the back half of the year.
Yeah, I just wanna add one thing about PSC on the back half. Steve talked about the potential for the PHE to not be extended, which at this point we're not assuming it does extend. I wanna remind people that the price drop is not a full margin drop. Because when we get to, you know, beyond the PHE, first off, you know, there's not absolute certainty, but most people would expect the positivity rate will be significantly lower. We can pool a lot more so we can get some margin offset there on dollar-wise. The second one is that the retail relationships that we have will change in the structure. We know how that's gonna work.
Basically, the significant costs we're you know, incurring right now to get that volume for the retail outlets will go away because it's only permitted under the PHE. It's complicated, but it will go away. While the value per requisition will drop, you know, to whatever price we end up with, and, you know, people have talked about the CMS rate that was originally published, and certainly that's potential over time, that's not all a margin hit because there's some other costs that go away. We still will make a decent percentage margin, certainly fewer dollars per patient encounter. I just wanted to make sure people are clear that COVID profitability doesn't fall completely off a cliff when the PHE goes away.
Okay, great.
Thank you for your question. Our next question is from Jack Meehan with Nephron Research. Your line is open, sir.
Hey, Jack. Good morning.
Hey, Jack.
Good morning. First, Sam, congrats. I think you're gonna be a great fit at Quest. Mark, of course, really enjoyed working together. Before you go, I do have more margin questions for you here.
Wouldn't expect otherwise, Jack. Thanks.
Of course. Specifically, can you just talk about what was the COVID testing margin in the quarter, or how did it compare to the overall margin? I guess what I'm trying to get into is just, like, you know, how much of the sequential step down in earnings might have been related to the margin impacts you talked about?
You know, Jack, as you know, we don't provide specific margins on subsegments of our business. What I can give you directionally is I referred to half of our volume coming from, you know, retail channels or nontraditional channels, and we talked about dollar-wise what the incremental cost per encounter is there. A year ago, in the second quarter, it was about a third of our volume, so you can see that's pretty significant. In the second quarter last year, we did quite a bit of pooling, and that's varied in the interim quarters between that and now, but there was quite a bit of pooling last year 'cause the positivity rate had fallen, you know, to fairly low. I think many of us by June of last year were thinking this might have been behind us before Delta hit us.
This quarter, we expected in our plans to do, you know, quite a bit of pooling, but in reality, it was not a large amount. You know, that should give you a little bit of idea. The other thing I did mention, $2 erosion on the average reimbursement. I think you got all the pieces. You know, I'm not gonna provide a specific number, but that should help you understand. I think the key thing is that the dollars we earned off COVID was much better than our plans, and that's, you know, and we expect it to continue, and that's why we're raising guidance. While the percentage was worse, the dollar bottom line was better.
Yeah, Jack, as you know, in Q1, we did about $600 million worth of COVID, and in the second quarter that we're talking about right now, it was roughly $350 million. That was a material change in COVID. As Mark has gone through, there's a lot more dynamics in what the margin is in COVID, but you know, essentially that sequential compare in our margin drop is primarily related to the drop in COVID testing.
Got it. If I can squeeze in one more on the core business, what are your expectations for merit increases and SW&B this year? Have they changed at all?
Jim, you wanna take that?
Yeah. No, it hasn't changed at all, Jack. We said 3%-4% for the year. We're still within that guidance. We've already provided the merit increase for the year. We do that annually in the April timeframe, so it's already in the Q2 numbers for sure.
Yeah, as Jim referenced, the vast majority of our increase has already taken place. Certainly, like all other companies, we have some off-cycle adjustments based on promotions and other things, but you know, most of the quote "inflationary headwinds" in SWB were toward the second quarter. If you look sequentially, that's one of the drivers of margin reduction first quarter, second quarter. That's been a historical event as well. That's not new. You know, we don't anticipate going forward to see significant inflation beyond kind of the run rate we were on in Q2.
Jim and I actually in a couple of financial conferences tried to dimensionalize what's going on with our wage bill. We talked about, of the 50,000 people, that the most pressure we see is what are really our real frontline people, and they're primarily what we call specimen processors. When the specimens come into our laboratories, they do the sorting. It's a tough job. It's at night, and we're paying them, we think, fairly, and we've increased that, for their hourly wages. The second is couriers. To give you an idea, 'cause it is the area that we have the most pressure, you know, roughly it's about 10%-11% of our workforce salary, okay? At the same time, it represents a larger percentage of our workforce count of the 50,000 people.
That's where we have the most pressure. Even if that number went up, you know, considerably, you get an idea of the impact that would have on our margins. That's where we see the most pressure.
Okay.
Thank you.
Thank you for your question. Our next question's from Patrick Donnelly with Citi. Your line is open.
Great. Thanks for taking the questions, guys. Sam-
Morning
Looking forward to continuing to work with you. Not to put you on the spot on your first call here, but, you know, I'm sure on the way in, as you know, you know, there's a lot of questions as you've seen on this call already in terms of the margin and the margin profile going into kind of next year as we work our way through kind of the high margin COVID coming out, you know, some of the expenses, you know, around DTC and retail, wage inflation. I guess when you came in, and Mark, feel free to chime in, obviously, but, Sam, how did you get comfortable with that?
It would just be helpful maybe to hear your perspective on that as I'm sure it was a key consideration, something you dug into on your way in, and I know investors are hyper-focused on that piece as well. If you're willing, we'd love to hear your general thoughts on kind of how we work our way through the margin side as we kinda work our way into next year.
Yeah, Patrick, thanks for the welcome. I look forward to working with you and the rest of the folks on the call as well. Listen, it's really early days. I've been here. I'm in my second week here. So, you know, all I can tell you is coming in, you know, obviously we're in a challenging environment right now, but Quest has an incredible reputation with incredible people that really provide a significant value to healthcare. So I've been, so far, really impressed with the passion that I've seen in people here, the knowledge and, you know, the contributions that I think we can make in healthcare. So, you know, I'm gonna punt a little bit on your question because it's really early days and really ask Mark to comment more on it.
you know, I'm very excited about how we can work through these challenges. It's really early days, Patrick. I'm in my second week here, so I'll let maybe Mark talk about it more.
Yeah. Patrick, appreciate the question. We know where people's heads are at right now around the business and, you know, that's where ours are as well. I can assure you we're spending a lot of time on that. We've spent a lot of time on that. You know, there's a number of things that we, you know, generally control, and then there's some things that, you know, are a little bit less in our control. You know, we you know, do our best to forecast those things. We put together ranges, and then we're, I think, and believe we're very transparent with you about how those things play out. You get a sense of, you know, okay, well, what really is going on in the business?
You know, because of that, I believe that, you know, generally we've not surprised people, and we've given you delivered on your expectations. You know, we've given you timely updates, we've given you interim information. You know, based on my time with Sam and I think the team here, I would expect that to continue. You know, you would expect that, you know, and that with my departure, that we're not gonna change the way we talk to you, the way we share, you know, give all those updates. You know, I think everybody appreciates what a great job Shawn does and knows they can call him anytime, any place and get him, and he'll be as transparent as possible.
Really, I think what it comes down to is I believe we're focused on the right things, and also I believe we do our best job of being as transparent as possible around all those key drivers.
Yep, that's helpful. I appreciate it, guys. Then Steve, maybe a quick one. You know, you've continued to talk about more constructive conversations with some of the covered lives and payers. Can you just talk about, I guess, the kind of outlook on pricing? I mean, it seems as confident as you guys have sounded on that front in years. Maybe just talk about how you're feeling on the pricing side, given some of those payer conversations.
Yeah. Thanks for the question. We are very pleased with the progress we've made with all payers, and where we are today versus when I started, which is over 10 years ago. You know, we've got a network now that is the strongest network that we've ever had. I would say our relationship with all the significant payers, national and regional, is very strong. They are increasingly realizing that it's good for their membership and good for their competitiveness in the market to have us in network, and we bring a lot of value. We're entirely focused on what we call powering affordable care, which is, you know, consistent with what Jim has driven in the company around making sure that we have great quality and great service and a great experience.
You heard earlier from Jim, as we continue to push on, you know, just working smarter, and by working smarter, we're gonna get more productivity, but we're also gonna have a better product. Payers understand that. As Jim mentioned, you know, we have gotten some increases from the payers over the last, you know, several negotiation rounds. We continue to believe, you know, that is something we're gonna continue to push for because we do bring a lot of value to the marketplace, and we're very competitive in the marketplace. If you look at the price effect that we saw in the quarter, and what we have typically said in the past, historically. Remember, historically, we said you should plan at about 100 basis points was the price effect.
Well, in this quarter and the last quarter, we've actually saw less than that. That's the best position we've been in. I will share within that envelope, the commercial payer portion of it is significantly less than where we've been historically, but we still see pressure with price, with our hospital business, with our client bill business, and that's in that envelope as well. On the commercial payer side, we're in a very different place than we were before. I'll share with you a part of Jim and I's on my transition is Jim and I are going into the nationals and the regional payers, and we're talking about what we've done in the past, but more importantly, what we're doing in the future.
We just had a meeting last week with one of the national payers, and they see us as a much more significant player in the marketplace than what people think about us as, which is a laboratory. We're much more than a lab. We actually help them improve the value of healthcare going forward. Much better place than where we were. In a good place right now.
What I will add is that we've really moved the needle on commercial. Over the last couple years, we've talked about, you know, more pricing pressure in the client bill, which is as Steve referenced, the hospital, and then some cases where we contract directly with physicians. Instead of being a, you know, a headwind on price, I will tell you that, you know, starting next year and going forward, I would expect the commercial book to be at least neutral, if not a tailwind. We've moved it from a major headwind to a net that's at least neutral and more likely positive.
you know, I wanted to, you know, dimensionalize a little more why you're hearing the positive comments for us, and it's in really recognition of what Steve said, which is our strategic value to them. We're not a commoditized provider of a laboratory result. There's so much more to how we're helping them, and then these value-based contracts that we've referenced, where based on performance, we can earn a better payment for ourselves. because of that, we've really moved the environment and the relationships with the commercial payers.
Great. Thank you, guys.
Thank you so much for your question. Our next question is from Pito Chickering with Deutsche Bank. Your line is open.
Hey. Yeah, good morning, guys. Thanks for taking my questions. Mark, it's a pleasure working with you over these years. And Sam, I look forward to working with you in the future. A quick two-part on the inflation side. The first one is a follow-up on that pricing question that you just gave. Can you quantify what the better commercial rates are for 2023, because you've probably already locked this in at this point versus 2022? Then follow up on A.J.'s question just to make sure I understand that you were seeing an additional 5-8 cents of inflationary pressures. Was that more or less than you expected when you guys gave guidance on the fourth quarter call? Then on previous calls, you talked about sort of a 2023 EPS of $8.50.
Should we add those inflationary pressures against that $8.50, or can you offset those with increased efficiency as well as these new recent COVID retail, our retail agreements you've done? Thanks so much.
Well, thanks for all the questions, Peter. I'll start with 2023. You know, we've not locked down our plan, and even if we did, we generally don't give specific guidance until our fourth quarter earnings call, and you know, I'll leave it to the management team. I'll be leaving exactly when they decide to do that. You know, not going to comment any specifics around 2023. In terms of the amount of the increases, again, I'm not going to dimensionalize it. We don't have our plan locked down.
We have enough contracts that are already set for next year and enough progress on some that are either, as we referenced, like Florida Blue or some others that are, you know, getting close to being locked down, for renewal, that I have confidence to say what I said, which is that it's not going to be a headwind, next year for us on a price perspective. Go.
Just to add to that, so what you're hearing from us is, yes, we hear your comments about inflation, and yes, we have inflationary pressure, and yes, we're managing that. What you're also hearing from us is we're in a better price position than we've been in. You need to think about that, too, in thinking about, you know, the prospect of what we're going to do in 2023. We're not going to provide guidance, but we still feel confident with what we shared at Investor Day in 2021 around the prospects of what we're going to do going forward.
I was going to continue that. What you're hearing from us is what's happening now, Pito, and the $0.05-$0.08 is more inflation than we would have anticipated. However, other things have changed as well. Most notably, we did a lot more COVID, so we delivered a lot more earnings. Just like we don't expect the high level of COVID to continue into 2023, and we could be wrong. Also, you know, we'd be really disappointed if the inflation we're seeing in the non-contracted areas were to carry to 2023. Even if it does, we've got multiple pieces that are moving, including a better pricing environment in the commercial book.
In no way, shape, or form are we saying that when you put all these together that, you know, $850 or in that range is not, you know, something we're still confident in.
Thanks so much.
Yep.
Thank you for your question. Our next question is from Ricky Goldwasser with Morgan Stanley. Your line is open.
Yeah. Hi, good morning. Mark, wishing you best of luck in the future, and really enjoyed working with you. Thank you for all the color always and your patience. In terms of the question, you know, I just want to go back to the utilization environment. I mean, you gave some color there, but you know, what we're hearing from the managed care companies is that the softness that they're seeing is in ER visits and in inpatient admissions, which shouldn't really have an impact on lab testing, right, if it's more outside the four walls of the hospitals. Can you maybe give us some color on where are you seeing softness in utilization by geography and maybe by end market, i.e., what type of tests?
How do you think about it, right? Sort of two and a half years into the pandemic, what's structural in the softer utilization versus transitional in your view?
If I can just start quickly, and then I'll pass it on to Jim. Rikki, our source is not just seeing, you know, their medical loss ratios, but I'd point to two things in addition to what Jim talked about earlier, which is our same store sales, as we call it. One is we actually get data from the payers, okay, in total. We know, you know, how many patient encounters they had for laboratory work. We know what our volume was, and we can see that, you know, the good news is we continue to gain share in those commercial books. However, we continue to see their total volume has been, you know, down, certainly in the second quarter.
It's payer data that's being provided by them to us that is the basis for our confidence to say that utilization has dipped in our space. The other one is I'd point to the XiFin data, you know, which is, you know, based on billings of other independent labs. If you look at that certainly suggests that utilization is down. While you may be hearing it's, you know, emergency room and inpatient, the data that we have and the best data we have also suggests that the market in which we operate is also depressed in the second quarter.
Yeah. The second part is, remember COVID, and we're two years into it, and every time COVID infections go up, our base business comes down some. If you think about a physician and what they need to do to run their offices, and as you know, a large portion of our business is through physicians in their offices. You know, if there's call-outs of their staff or if their patients are missing their appointments because they are now infected, it affects volume. There's no question there's a correlation. The good news for us is when that happens, our COVID business goes up, right? Jim, why don't you-
Yeah.
Round it out.
Ricky, the last thing I'd say is, you know, we're not immune to a hospital, the inpatient work. Remember, we get $1 billion a year in reference work. We have another half a billion dollars in PLS. So when inpatient and outpatient procedures are down, that certainly does affect our business on the health system hospital side. On the physician office side, again, you know, we closely look at a set of accounts spread across the country that we know are 100% loyal to Quest, and we measure that we call it same store sales. Again, our general health and wellness panels, you know, from a mix standpoint, were certainly lower than some of our chronic disease panels in the quarter.
The last thing, geographic mix, you know, we've talked and it hasn't changed dramatically that our book of business in New York City is down still low to mid double digits. On the other hand, we see incredibly strong growth in the southern part of the country, in the southeast portion as well as the southwest and parts of the west. If there's been a population migration out of New York City, you know, into the southeast, then we're certainly seeing some of that in our business.
Operator, next question.
Thank you. Our next question is from Derik De Bruin with Bank of America. Your line is open.
Hey, Derik.
Hey, Derik.
Hi. Good morning. This is John on for Derik.
Hello.
Thanks for all the colors, and thanks for laying out the initiatives because you knew what we're gonna ask. In addition to that and in addition to the price increases you're expecting, and the plan to clamp down the employee turnover, how should we think about the incremental spend in 2023? Are you thinking about ramping these down to offset the inflationary pressure? On PAMA, could you just remind us what your expectations are in 2023, especially if nothing else happens on the legislative front?
Yeah, in terms of 2023, as Mark said, there's a lot of moving parts at this point. You know, we're committed to investments in advanced diagnostics. We're committed to investments in our consumer direct, consumer-initiated testing business. Obviously, we can modulate those things if we see inflation, you know, getting worse. At this point, you know, we can't give you any further guidance than what we've given you around this. We're committed to advanced diagnostics, committed to our clinical and for our consumer-initiated testing business.
Yeah.
In terms of.
Just to add to that, 'cause we've commented on this before, it's important you think about this as you think about 2023. We started to make investments in 2020 to accelerate growth beyond what we had already invested in to accelerate growth. Think about 2020 and 2021, and now we're into 2022. We obviously would not make investments unless we thought there would be a return. Therefore, you have heard from us, you're seeing growth rates in advanced diagnostics that have come up. You've heard about us feeling good about our consumer-initiated testing growing faster than we have seen growing in the past. As you think about 2023, you should think about the improvements you're gonna see in those two businesses in relationship with investments or in what we invested.
You should not think about this as headwinds, but you should really think about it as tailwinds 'cause we will get a return on those investments we made over the last several years. Jim?
Yeah. You asked about PAMA, and we've said that it's in our 2023 guidance outlook that we've provided at this point, and we've said it's about a $90 million headwind.
Yeah.
Only thing I would add is that, to Steve's point, you know, when you ask are investments ramping down, I think there's two ways to think of investments. One is what's the P&L net impact, and one is the level of spend.
Right.
We at Investor Day talked about growing our direct consumer business to half a billion by 2025. That is still our intention. As you can imagine, over the next several years, including 2023, we're expecting significant revenue growth. In order to drive that revenue growth, we need to spend more. However, the good news is that a lot of, you know, 2020 and 2021 was pre-revenue, pre-contribution margin. As we go ahead, we would expect the net impact to actually be less and to be less of a headwind. Really, we're gonna be investing less on the bottom line, but spending more money to drive that accelerated growth. Then, obviously, when we get to the scale and size that we're, you know, at this point aspiring to, then we expect a healthy margin on that business.
Gotcha. That makes sense. Thank you.
Mm-hmm.
Thank you for your question. Our next question is from Matt Larew with William Blair. Your line is open.
Hey, Matt.
Hi. This is actually Madeline Mol on for Matt Larew.
Hello.
Just going off of the previous question for your investments into the base business. I know previously you've given a number around $160 million for this year. Do you anticipate it still being about that? Has inflation driven that cost higher? Any color you have there. My other question, just speaking to your investments in advanced diagnostics, you mentioned that you are ahead of schedule for your anticipated 8% growth. Is that still the case?
Sure. Let me take part of it, then I'm sure either Steve or Jim will jump in. First off, inflation really hasn't impacted the level investment in any material way, and we're on track, you know, to spend about what we told you previously. As I referenced a minute ago, you know, we haven't put our final plans together, but at this point, I would expect we're gonna spend more next year, and we're gonna spend more in marketing, but we're gonna spend, you know, a lot less and not much at all in the IT, you know, platform creation. It's really gonna be tied to a very high variable cost and highly tied to revenue growth.
We'll monitor, as Jim says, and you know, and I'm sure Sam and Jim will be all over this to make sure we're making the progress and to make sure we don't get the spending ahead of ourselves. If we do what we expect to do and we need to do to get to half a billion by 2025, the spending will continue to go up. The only other dimension I wanna mention here is 'cause when we talk about investments in the base business, you know, there's a little nuance here. Advanced diagnostics absolutely is the base business, but really this consumer business is new.
While a lot of the work we do is similar to what we've done historically in our base business, it's really a new business category or opportunity, and some of it may cannibalize what would've otherwise come through our traditional channels. But we do believe that a lot of it is actually incremental, you know, to the overall amount of volume that we perform. Jim or Steve, you wanna-
Yeah. As you know, we don't generally give you numbers every quarter about different segments of our business. In advanced diagnostics, we generally give you an annual update, and we'll do that again. We keep on indicating that we believe we are making progress of getting to a higher level of growth, as we indicated in our investor day in 2021. We feel good about the progress. We gave you a number in the beginning of the year, and the same is true about our consumer-initiated testing. We periodically give you an update to show that we're making progress. We're feeling good about the investments made, the returns we'll get, and again, you should see more returns in our 2023 guidance or the expectations around that because we believe that they still remain to be good opportunities.
Just to clarify, the target that we outlined at the investor day for the direct-to-consumer business was $250 million by 2025.
My apologies.
Great. Thank you so much. Thank you for your question. Our last question will come from Rachel Vatnsdal with J.P. Morgan. Your line is open.
Hi, guys. Thanks for taking the questions. Can you spend a minute talking about the monkeypox market? You flagged that you're prepared to surge. Quest was, you know, one of the five labs that was selected by the CDC to expand testing capacity, and you guys are gonna have roughly 30,000 testing capacity for a week. Can you just walk us through the market opportunity there, and then is this contemplated in the guidance at all?
Jim will handle that.
Yeah. At this point, it's hard to anticipate what the market opportunity has been or will be. You know, I can tell you our testing volumes at this point are modest. You know, if we've done 500, 600 tests, that would be on the high side. However, it is growing, and we do see growth. You know, we've only had the test up and running for two weeks, and over that two-week period, it's grown, you know, day by day. Right now, we're not yet approved for New York State. We expect that to happen within the next week or two. I'm sure you're reading that is where the major outbreak is in New York City, so we would expect to participate in that market.
Most of our volume at this point is coming actually off of the West Coast. We'll keep you updated on what we're seeing.
Great. In light of the current environment, can you just walk us through some initial color on how you're considering use of cash between share repurchases, dividends, and then M&A? Thanks.
Sure. We're gonna continue with what we've done. You know, what that is is that between the dividend and you know, we've already gotten there this year with the share repurchases to deliver a majority of our free cash flow to our shareholders. You know, with a $1.7 billion guidance and $400 million of CapEx at least $650 million between the dividend and share repurchases, and we've already covered that. As we also shared, we'd rather do M&A than share repurchases 'cause we have some very rigorous financial parameters around the deals that we do. You know, it's really gonna be situational quarter by quarter. It may be different. Jim referenced that we have a deep pipeline and actually also commented that we have some negotiations that are well advanced.
You know, I think we'd all be very disappointed if we didn't execute some deals before the end of the year. Don't know the exact timing of those. But certainly, as I said, I'd rather, you know, spend more on M&A, and I know Steve would, and you'll hear from Sam and Jim as they take over the reins, their view, but I wouldn't expect it to materially change. Really no change to what we've done in the past. At this point, no specific plans for cash deployment because it's really dependent on that progression of the M&A.
Okay. Thank you, everyone. Again, thank you, Mark, for your time here at Quest. We're gonna miss you, and we wish you well. Thanks everyone for joining the call. We appreciate all your questions and support, and we'll see you in our travels. Have a good day.
Thank you for participating in the Quest Diagnostics second quarter 2022 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 888-566-0439 for domestic callers or 203-369-3045 for international callers. Telephone replays will be available from approximately 10:30 A.M. Eastern time on July 21st, 2022 until midnight Eastern time, August 4th, 2022. Have a great day. Goodbye.