Q3 2019 Earnings Call
[noise] welcome to the Quest diagnostics third quarter 2019 conference call at the request to the company. This call is being recorded the entire contents of this call, including a presentation and question answer session follow other copyrighted property of quest diagnostics will all right.
Sure sure any redistribution retransmission or rebroadcast of this call any form without the written consent of quest diagnostics is strictly prohibited now I like to introduce Shonda deck, Vice President of Investor Relations for Quest Diagnostics go ahead. Please.
Thank you and good morning, I hear what Steve Rusckowski, Our chairman Chief Executive Officer, and President and Mark on our Chief Financial Officer. During this call. We may make forward looking statements and we'll discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release actual result.
This may differ materially from those projected.
Risks and uncertainties that may affect quest diagnostics future results include but are not limited to those describing our most recent annual report on Form 10-K , and subsequently filed quarterly reports on Form 10-Q , and current report on form 8-K.
This call references to reported EPS referred to reported diluted EPS from continuing operations and references to adjusted EPS refer to adjusted diluted EPS from continuing operations, excluding amortization expense.
References to adjusted operating income for all periods excludes amortization expense.
Finally growth rate associated with our long term outlook projections, including total revenue growth revenue growth from acquisitions organic revenue growth in adjusted earnings growth our compound annual growth rates now here, Steve Rusckowski, Thanks, Sean and thanks, everyone for joining us today, well this morning I'll discuss.
The third quarter review progress in our two points strategy.
And then Mark will provide more detail on the results Ticky true updates to our 2019 guidance.
I had a solid quarter on top and bottom line growth well Pamela reimbursement pressures hershas persist throughout the industry.
Our extended network access and laser focus on driving operational excellence are enabling growth.
Based on our progress to date, we updated our outlook and are well positioned to meet our commitments for the year.
For the third floor.
Grew revenues, 3.5% despite continued reimbursement pressure.
Reported maybe yes was $1.50 cents.
Nearly 3% from the same period at 28 chain.
Adjusted EPS was $1.76 up nearly 5%.
The volume.
Well, it's remained very strong at 5.1% and year to date volume growth is up 4.3%.
Now I'd like to briefly update you on the three fundamental changes in the laboratories marketplace that we discussed that last year as Investor day.
And as you know they are CAMMO, our expanded network access and increase consumerization of healthcare.
Yes.
First I will tell them up.
Reimbursement pressure remains a catalyst for structural change in the marketplace.
Yeah. There is mounting evidence that camera is hurting this industry.
We see and here the negative impact that Tam is having whenever we evaluate potential Alaska acquisition targets.
In cap today, a respected industry journal.
Recently highlighted help him up and other reimbursement pressures are already starting to drive consolidation in the industry.
As you know here requests we took a series of actions earlier this year to further reduce our costs is aligned with the Tam of costs.
So decisions that we made were difficult and our employees has helped the changes.
More people to reimbursement cuts are coming in 21.
Our industry continues so slight Airbus lawn implementation ports and then Congress.
We recently received a favorable use court of appeals decision. So all the lower ore to review the merits of these CLS case.
Usually submitted its initial released last week and his decision is expected in 2020.
This is encouraging news and so as the introduction of the laboratory to access for better structure is that we're allowed to act.
Produced in June by six members of Congress from both sides of the idle and now with nearly 40 co sponsors.
Hey, so it is also working to both support for a seven anecdotes and lab.
And the larger end of year sulfuric Centerville.
The second fundamental changes happening or industry is our expanded network access and payers, becoming more focused than ever on driving better value into less sense.
We are partnering with United Healthcare.
Uhhuh testing volumes to high value labs requests from high cost hospital and all those network labs.
United Healthcare began offering a product was zero dollars number out of pocket charges for laboratory testing for the majority of fully insured buys and slight stays on October onest.
United Health care also make the lab savings programs available for their self insured for groups beginning in 2020.
And then finally, we continue to see the ongoing consumerization of healthcare with more aboard healthier HOS worn by consumers.
In September the Kaiser family Foundation reported the yen premiums from Ford sponsored Health Care Conference grew 5% where families surpassing $20000 for the first time.
The number of employees at high deductible health plans has increased over the past decade.
Turning to our recent progress the first part of our two points strategy is to accelerate growth would just five elements.
To grow 2% per year through accretive strategically aligned acquisitions.
Expanded relationships with health plans at hospital health systems.
Offer the broadest access to diagnostic innovation.
The recognized as a consumer friendly provider of diagnostic information services.
And then finally support population health and data analytics and extended care services.
Now let me take you through a few highlights from our strategy to accelerate growth in the quarter.
Our acquisition pipeline remains strong.
As we said before most deals in our cards were undertaking more times involved than we have in the past.
Conversations with hospital systems are getting broader.
We'll see arrows are also just how we can help them with our professional lab services and taking on more of the reference work.
As a result of this complexity proposed relationships take longer to develop.
Hospital systems are also interest and learn more about originally on deal West Labs stewardship.
And ended the those new service employees machine learning.
Optimize laboratory test utilization.
We have partnered with HC one.
You're right he comes.
To provide a solution that gives quests differentiated offering in a competitive possible marketplace.
We continue to see revenue and volume growth as a result over us expanding network access.
In aggregate growth continues across our top 50 major health and customers.
[noise] key test growth drivers in the partner through a monitoring.
Continued strength in tuberculosis tested both quality assurance and see spots.
STD testing in car you like to you.
Each of these test categories posted solid contributions to revenue growth and water.
The second part of our two points strategy is to drive operational excellence.
We remain on track to deliver 3% cost efficiencies for 2019 by continuing to drive increases in productivity.
We have some examples which include using digital technology to enhance the customer experience.
We now have more than 8.2 million patients now, making appointments and receiving the results through our Myquest digital platform.
We continue to drive productivity improvements across logistics patient services lab services, enabling us to reduce our overall cost per laboratory rep position.
And we're also putting new innovations to work, while reducing costs were in the process of consolidated and simplifying our immuno assay platforms moving to a single supplier.
This approach enables greater throughput more efficient.
Footprint and is expected to see those tens of millions of dollars per year.
Now, let me turn of some work can take you through our financial performance Mark.
Hey, Steve.
Third quarter consolidated revenues were 1.96 billion.
Up 3.5% versus the prior year.
Revenues for diagnostic information services grew 3.7% compared the prior year, driven by strong volume growth and acquisitions, partially offset by higher reimbursement.
Hi, as measured by the number of requisitions increased 5.1% versus the prior year, excluding acquisitions volumes grew 3.7%.
We benefited from an extra revenue during the third quarter, while the impact Hurricane Dorian was a modest volume headwinds the net impact these two items at roughly 1% to our organic growth in the quarter.
The call. We also highlighted last quarter, we recently exited some capitated contracts in the third quarter. This change represented a headwind of nearly 1% to organic volume growth.
Currently we continued to see a modest acceleration in our volume growth associated with our United Healthcare contract.
Revenue for requisitions declined by 1.2% versus the prior year, primarily driven by higher reimbursement pressure.
The price headwinds were approximately 2.5% in the third quarter.
This includes the impact of Pamela which amounted to a headwind of approximately 120 basis points.
As a reminder, panda impact includes both direct cuts clinical lab fee schedule.
As well as modest indirect price changes from Medicaid and a small number of floating rig contracts.
Reported operating income was 313.
Or 16% of revenues compared to 304 million or 16.1% of revenues last year.
On an adjusted basis operating income was 349.
17.9% of revenues compared to 333 million or 17.7% of revenues last year.
The year over year increase and adjusted operating margin was primarily driven by strong volume growth.
And ongoing productivity improvements related to our invigorated initiatives, partially offset by higher reimbursement pressure.
Additionally, patient concessions are down year over year.
Reported EPS was $1.56 in the quarter compared to $1.53 a year ago.
Adjusted EPS was $1.76 up approximately 5% from $1.68 last year.
Cash provided by operations is 895 million year to date versus 905 million last year.
Capital expenditures were 228 million year to date compared to 232 million a year ago.
Now turning to guidance, our updated outlook for 2019 as assaults.
Revenues expected to be approximately 7.72 billion, an increase of approximately 2.5% versus the prior year.
Reported EPS expected to be between $5.48 and $5.53.
And adjusted EPS to be between $6.45 and $6.50.
Cash provided by operations is still expected to be approximately 1.3 billion and capital expenditures are expected to be between 350 and 400 million.
I'll now turn it back to Steve.
Well to summarize we had a solid quarter of top and bottom line growth.
While pamela reimbursement pressure persist throughout the industry.
Our extended network access in laser focused on driving operational excellence are enabling growth.
Based on our progress to date, we've updated our outlook and are well positioned to meet our commitments for the rest of the year.
Now we'd be happy to take any of your questions operator.
Thank you we will now open it up two questions at the request to the company. We ask that your limit yourself to one question you have additional questions. We ask that you fall back into the Q.
Our first question comes from Ralph Giacobbe with Citi. Your line is open.
Good morning, good morning. Thanks.
I guess I wanted to ask on the pricing side and just see her comments on sort of the higher reimbursement pressure.
What's just help us on sort of what's driving that outside of time and then if you could maybe just level set the expectation on sort of where expectations are for that pricing mix that kinda going forward exclusive of panel. Thanks.
Hi, Mark.
Sure so as we've shared before.
At the Investor Day last year, but also coming into this year.
This year's pricing pressure is primarily driven by two factors what is panna. The second one is getting back in with United We moved from out of network race to a market based network right. So obviously, we have brought our volume dramatically as we've said this year, we expected and.
We are delivering enough incremental volume to offset the price thats. It is a significant price headwind relative to the rates. We are being reimbursed has not about work class. You then have the typical pricing pressure that this industry has space in the past, we've talked about it being around 100 basis points or less.
Number of those pricing pressures are coming from the client Bill it's not all third party reimbursement where were contractually.
I agree with of Health plan and what those rates are in the hospital business and also what we sell directly to physicians and they're allowed to build the third party theres a lot of competition a lot of pricing pressure in that area and so while we've talked about you know we're going to be price discipline that we certainly walked away from some contracts that have made sense. The reality is that it's a very.
Under the environment and that does not really change so the big change over the last two years, obviously, Panama last year, but it wasn't fully implemented because you had some offsets during the first year that we've talked about previously this was a pulse first gear a full 10% of ammo and then additionally, we have the United price as well.
So going forward as as we shared we would expect as to get back to more of its historical rate I'm not going to give any specific guidance for a given year, but there's no reason to believe once we get true.
The transition period in the United that.
It should be really facing car the traditional pricing pressure and then Tim.
Okay could you quantify that you when each pricing pressure this year.
Ralph it's going to be $40 million to $50 million.
Okay all right. Thank you.
Our next question comes from Bill Quirk with Piper Jaffray. Your line is open.
Good morning, everyone.
Morning.
Steve I want to follow up in a comedy made concerning the decision to consolidate immuno assay vendors, Keith a little bit about whether or not there's an opportunity here to consolidate some other testing methods things like clinical chemistry, and hematology and such and if so can you just help us think a little bit about the timing is something we should think about over the next couple of years help <unk>.
At some of the Tam of pressure Yep sure absolutely. So so we were working on this for about seven years.
Getting smarter.
More strategic with all our suppliers and so we've done all along consolidations.
We'll continue to do more of the future.
So as far as me or assays were were close to deciding on the supplier.
That will be announced shortly.
As for us as a nice opportunity.
Yes.
This is all part of our 3% productivity gains that we.
We are dialing in.
To be offset Pamela we needed to be lost a halo deliver on the earnings up what they will be provided us investor day.
So part of that 3% use is working with our suppliers as part of that was players. They met all of them yourself, but theres others. Another example would be the automation, we're putting in place and some of our newer facilities, particularly.
We are investing this year rising facility here in New Jersey and clips in New Jersey is a big project for us that will help us new platform and equally those Ellis our latest approach automation, which will reduce our productivity, but also allow us to consolidate facilities as Watson gets productivity gains from that but thats all part of that 3%.
And we need that 3% offset.
Perfect.
Next year and maybe your effort.
Just want to add some color their bills make sure I understand this is not just consolidated or purchases. This is actually a new innovation in the platform, where we can do multiple tasks that previously were performed on separate pieces of equipment on a single piece of equipment. So this will drive noxious procurement efficiencies with.
Actually will drive operational efficiencies in our labs.
Our next question comes from Donald Hooker with Keybanc. Your line is open.
Great Good morning.
So maybe you guys in terms of.
That new collaboration you announced with HC. One I know you guys do a lot of interesting things in the population health space I'm, just trying to maybe can you elaborate on that a little bit what exactly are you doing.
Sure sure you're going to a hospital clients as part of our Lifepoint strategy.
Talk to them above three things is in regards to the lab strategy is one is.
And we can we make them more efficient and running either inpatient laboratory.
So this is where we talk about professional laboratory services such as we use the after the appeal us and we continue to have that dialogues and well, making them more efficient and we can with good evidence now save them above 20%.
Yes, typically also is looking at the sophisticated said, though testing referred to as reference testing.
And in that regard consolidation, where the volume from with potentially get them a better price, but the first part of that we're looking at in this new offering allows us a tool to do a better job getting smarter about what they're testing of the also is interrogate there their order patterns.
And look for variation of the order patterns and looking at ways of optimizing what the order within the hospital and there's two parts of that one is to get more efficient at what you're ordering so maybe the quarter as much in some cases, you should also order more because its.
Smarter diagnostic diagnostic workup for them in patients today, but the second part of this which is more even more intriguing what many hospital administrators are interested in is making sure that we have the right diagnosis and if you look at the total quality outcomes for a hospital stay there's nothing more expensive than that but no.
So what this tool allows us to do is to work with our clients are getting smarter on their inpatient diagnostics and as part of the we clearly become more strategic than this.
Vendor provided reference testing within that account and then finally, the third piece of what we work with hospital systems.
We have those discussions is you want to stay the outreach business and.
We bought some average businesses hospitals, we have someone in our numbers for this year, we'll continue to aggressively pursue.
By now offers businesses as these does this industry consolidates and I would tell you. The many hospital systems are now well aware gamma and well aware of other reimbursement pressures are out there.
There.
Inventory outreach business. So as we mentioned the commentary that's bottle of discussions continues to grow.
Our next question comes from and ride with credit Credit Suisse. Your line is open.
Layer.
In terms of the timing and magnitude of contributions from the managed care access I guess can you break out what you're seeing in terms of underlying market growth and what portion of volume maybe stemming from the managed care contracting, possibly offset the PLN in early days and are you.
Still anticipating those contributions to ramp from here, how should we consider maybe thinking about that ramp.
I'm not asking for 2020 guidance, but how should we thinking about that ran into 2000 sharp.
So.
What will share with you we always drug for several quarters it feels good.
The market is stable.
We don't see notable changes in terms of.
No volume increases within the marketplace both outside the hospital also as other hospital sustainable. So you look at a volume growth for clearly gaining share.
And a lot of.
Large portion of that share gains is coming through to managed care relationships and what we have also said is that.
Yes changes, which is the best in over a decade, we'll continue to grow it will continue to grow this year 19, but it will also.
Growth in 20, and probably in 2021 as we take advantage of that opportunities that we've seen in front of those up that will be felt in 2020 for certain with for lab work, particularly with United Healthcare. So you should look for in 2020 continued growth again because of our expanded network access some work.
And if you like to add to the yeah. So you asked about the PLN, it's still very early.
I'd say very little if any growth has come from the PLM, that's still in front of US which is the good news.
We talked at Investor day about.
Three tranches of volume growth Erin.
Side, the new managed care access at about $1 billion at our price our fair share, we still expect to get to our fair share, but it's going to take several years, there where the easier to convert accounts. Obviously came quickly we call them Quest loyalists, where we had the rest of the book of the office and they are.
And they some of the managed care work, we are out of network to those smaller lapse and were in network and they need as they move that to US. Once we were network with that had some of the accounts where they have multiple labs. We showed you the picture where they were very fortunate that slide boxes outside we've done a better job.
Consolidating some of that getting more larger share of wallet per se in those positions that will take a period of time, but certainly we've gotten some growth for that that will continue into the future and then there's the ones where we have had no none of that work and a lot of that is in the hospital stays hospital outreach and then.
Some of the physician laboratories, that's where we really think the preferred lab network is going to be a big driver, where you'll be able to have a very simple.
Message to patient Hey, if you use one of the preferred labs and obviously, we're one of the five zero out of pocket. That's a very simple messages. So trying to compare how sensitive what option like any other it's free to you. If you use a slap. So we're very confident very excited this multi year tailwind and we're going to get to that.
Fair share eventually of about a billion dollars are for us.
Our next question comes from Michael Newshel with Evercore ISI. Your line is open.
Michael.
Hi, Good morning thing I, maybe to follow up on that do you have any visit visibility at this point. After this selling season from United on the level of uptake in the south shore bases appeal in for 2020.
They have not shared specific information obviously, that's their question Nick It asks them.
Because we're not the only preferred lab so we obviously.
At the same information for our lab network providers do they talk to us about.
As we've shared the states, where theyre rolling this out making this available.
And then they talk to us about the back their marketing into those fully trained sponsored plans for 2020 rolling that out still very early in that process.
And David will give us any specific proportionality or percentage of there.
Overall in short lives that are adapting this but you know they im sure Youve heard them talk about it we heard we'll talk publicly in the conversation. We had very very positive. This is going to be something that people will embrace and then it's going to make a difference.
Our next question comes from Kevin Ellich.
Hey, Kevin.
In line is open.
Good morning, Thanks for taking the question or.
Two quick things. So first M&A pipeline, you said that the deals are taking a little bit longer to materialize wondering.
Environments change or if this is what you've experienced historically and then also you talk about maybe any tailwinds using films.
Opioid testing and the opportunities within behavioral health facilities.
Yes, sure so the first one.
As I mentioned in our.
I will say remarks.
We are getting bigger and more complicated and they'll just north of places. It's more time, if there's good news and that was bad news and that was to take more time.
It is the bigger and more complicated. It's therefore, we clearly evident discussion rather that we could be.
Their partner for laboratory services.
Rather three topics as I mentioned earlier.
And.
What I did also shows that the interest level around.
What we could do in partnering continues to grow because of poor people are well aware of pressure. This portion of their business I would say that was not nearly where we were last year. This side.
So if you look at our growth with acquisitions year to date.
Just a little shy that 2% we indicated.
Last year were well north of that 2%, we still feel confident with over over an extended period of time will contribute to be 2% of rate or so we feel confident between the three buckets that we acquired one of this hospital off rich senior level on a litigation around the second is.
Regional laboratory as I mentioned my remarks to continues to be interested evaluating options for smaller operators because of the pressures that they see and then finally, we continue to build capabilities and we had a number of acquisitions.
Passed around that's a good example is a view of which is a rigorous new buildings.
So broker losses tested and also fit for an illness testing. So all three continue to be our focus going forward you will see that and we're still confident around our guidance we provided around 2%.
As a basis over a multiyear period.
As you asked about open access in the Intel and certainly.
Certain drug monitoring business, which is subset of those opioid testing. This strong growth engine for us for a number of years. It continues to be a nice growth driver.
Anything else when something is large enough to better start putting in policies and all sorts of barriers to reimbursement that dampen that somewhat despite some of those restrictions around frequency of testing pre authorization other things that they put again, it's still a nice growth driver for us it just looks even larger.
If they can make those changes.
Thanks.
Our next question comes from Jack name Meehan with Barclays. Your line is open at JP Morgan.
Good morning, So I just wanted to focus on the margins here so in the quarter nice to see the expansion.
Can you maybe walk us through the moving parts between pricing impact efficiency programs in the calendar and as we look to 2020 as you pull all these pieces together do you think what's the right way to think about our margins flat you know is pamela too big of a headwind to grow through.
What are some of the things that you're thinking about.
Yes, So let me let me first touch Jack on the longer term, so I'm not going to talk to 2020, but what I did talk about at Investor Day was at a four year outlook that we could grow earnings faster than the topline.
And talked about the assumption, although that may not play out depending on.
We declared a cash that thats on flat share count. So there were actually growing earnings not earnings per share. So that implies margin expansion as it were not expecting some sort of attacks windfall. So that's before tax margin growth.
Assure you that will happen every quarter I can assure you that and then we're going to get into 2000 12000 every year, but over multiple years, we expect to grow our earnings faster than our topline and it's really having the efficiency program continue we talked about it being 3% per year. We've got really good at that we need that we'll continue to do that with.
You know overtime tempering pricing headwinds in this quarter, we share the price headwinds of 250 basis points, obviously that all drops to the bottom line in over a very small piece or the bad debt element, but basically it drops the bottom line. So we had enough.
Efficiency and some lift from volume how much of that is.
Yesterday, how much of that is just the volume growth. Obviously, we have a higher drop through shared on organic volume growth enough to offset the pricing headwinds and basically older margin pretty flat in the quarter. So I mean, it's getting any more precise than that I'd be stretching like credibility and ability to give that Matt. So I would just say that.
You can see that despite some pretty significant pricing headwinds their margins in this quarter and that.
As we continue to drive strong organic volume growth and deliver a 3%.
Over a period of time, we're going to grow our earnings faster.
Our next question comes from Kevin Kelly Endo, what you see your line is open.
Hi, Thanks for taking my call.
Could talk a little bit about the fourth quarter guidance that revenue guidance is inline with our model the NPS fall short.
Im just wondering if there's any accelerated spending or you maybe.
Trying to position better for 2020 by spending more in 2019 can give us a little color around the the fourth quarter and maybe into how you're thinking about spending in 2020.
Yes so.
We raised our guidance for the year.
So importantly, we're signaling stronger finished the year than we did begin to year end until now not signals anything above original guidance. So.
Okay people are taking less the positive message, which were say based on our performance through three cars a year and what visibility we have for Q4, we're feeling confident that we're going over deliver relative to what we said at the beginning of year. So.
Terms of spending there's nothing the ordinary in Q4.
The only thing the ordinary is easy compare on the topline, which we've talked about.
Our next question comes from Brian Tanquilut with Jefferies. Your line is open.
Hi, good morning, guys.
Good morning weren't just to follow up on Jack's question earlier, I think about the DNA line you about these obviously you've done a good job, bringing the DNA percentage down.
Flattened out this quarter at about 78% so.
As I think about your efficiency program is there more to squeeze out of that or how should we be thinking about that number.
It seems like it's bottoming out here in this in a 17.8% range, but early start on this and for some reason.
There's always love focus around DNA. Thank you that a lot of our bigger eight savings.
Show been in excess categories through the contrary most of our degrade savings actually sort of sharpen our cost of sales.
So if you think about what's in our expense category, though a lot of images.
With that really good progress over the last seven years.
Getting more efficient with everything that's in the categories CNL from CICC costs costs are running our finance organization.
Costs associated with our billing operations with our relationship with us.
Outside of Gels administration, and as our sales and marketing costs, which we're always evaluating getting more efficient. So we have taken a lot of costs already.
And we're also leveraging that fixed costs going forward to lift we generally Jeff ill have to do that operational leverage related to the topline growth while maintaining the same cost perspective message you see this year.
So a lot of that 3% productivity gains will show up in productivity gains in our cost of sales.
Stasis markdown, if you'd like to add to that yes, it would like to add that yes over time well Steve.
It is absolutely correct that.
Large proportion if not a majority of that efficiency is going to drive.
Margin and gross margin and be in the cost of sales will continue to focus on DNA, you can't really look quarter to quarter.
This quarter, we had some.
A couple of high cost health claims.
Note overtime, we're going to deliver what we expect and we've done a really good job and managing very very minor increases in our self funded employee health care cost, but then again this quarter.
A couple of large claims that can exceed noise quarter to quarter. So there's no trend where there is no nothing should be read in terms of we've lost or ability to continue to drive efficiency, there's always going to be noise on that line quarter to quarter.
Our next question comes from Derik de Bruin with Bank of America. Your line is open.
Hi, good morning area.
Good morning.
Hey, just wanted to fall into two questions. When the quick follow up to Bill's question on the.
The vendor consolidation platform consolidation can you talk a little bit about that process about how that's going to walk ins or like how youre judging the different vendors and basically how many you have now, particularly the <unk> and going down and then the other question I wanted to follow up on was when you look at the fourth quarter last year, obviously, you had a number of weather issues, but there.
Were you issues of patient concessions lower cash collections.
In that sense can you sort of talk about.
Going into fourth quarter.
How we are relative to some as issues I know you mentioned concessions were down, but just talk a little bit more about the comps in some of the different things are going on in fourth quarter versus yes. Okay. So let me take first part Mark with the second part of the first part. So this is a comprehensive review that we.
Got you look at with our suppliers, we run our laboratories.
Yes, we worked we working actively with all our suppliers enough.
US seven years, we've worked hard to make sure that we really have more of a strategic relationship.
With all our suppliers, particularly those that are driving a lot a large portion of our said.
So in that regard.
In the IBT automation.
Space.
The risk consolidation with a number of those platforms as Mark mentioned.
There are a number of suppliers that we advice from our.
Rate to the marketplace platforms that will allow us to replace up to about five different work sells for different medicine features over time.
So what we have done is evaluate those vendors that have a product either in the marketplace or will have a product in the marketplace and we do that through a thorough review process there.
Sales for us on understanding what the.
And what the four four.
Functionality at what time and also what the economics around their offerings are we narrowed it down to a few.
Actually put in place with.
A few of those platforms and some of our facilities to do some trial runs and then what were the fido strokes of select few more of those suppliers going forward and we believe that we will choose a vendor that we saw the requirements of what we need and yes, a portion of this is economics.
That is all costs.
Activity, we're going to get the getting more throughput by view you'd be able to consolidate goes operations, but also we think about holistically you need to make sure that we have.
Good confidence rather ability to service us to comp rather quality.
That does run what's in their salt basins, a very comprehensive.
Sure view of who will be our strategic provider for this new platform going forward and as I said.
The final stroke so.
Okay.
Deciding that and shortly it will be announced.
So on your second question.
Last year, there are couple of drivers that let us change in estimates and obviously.
Change that we made at Investor day on our outlook for 29 2018.
Two of them really related to patients. The first one was that there was more patient responsibility.
The here than we saw coming and again, we're always accruing based on a forward looking expectation of how the revenues going to play out we looked at all there available data at the beginning of the year as we shared wasn't a great growth of the amount of people with high deductible plans, we assumed it would be a pretty flat year in terms of the proportion of our revenue.
From patients and the said what happened was there were more patient responsibility because the deductibles themselves have gone up markedly as we found out in the September timeframe, which started to actually validate why our cash collections were lagging what we expected from the payer so any time as we've shared we almost collect the one.
Hundred percent of the accepted claims that were owed from third party payers and we've shared that we get collect about 70 cents on the dollar from patients. So you move 1% of revenue from the third parties to the patient that's a 30 basis point headwind. So it's pretty significant the good news is this year nothing.
And change significantly less we're very confident with that there was no surprise, obviously going in we were very very diligent and watching that being conservative and there's no surprises in terms of the proportion of our revenue coming from patients. The second piece really the patients was we had more patient concessions not just because more red.
I think it was coming from them, but we actually had some issues we've talked about it or lap conversion in.
In the south and that delayed some belated because of delays. These conversions go and because of that no. The more bills age outs the more.
You are going to have concessions less like youre going to collect so thats well behind us. We're fully converted we don't have that anymore. So thats behind US and then also related to that we had higher level of denials because of some time with filing insulin because the lab conversion. So we always are dealing with denials, but they spiked.
The mid to late last year, we went to the slap conversion. So when you add all those things up they've been cleaned up.
The issues that we had last year it well behind us.
Our next question comes from Matt Liberal with William Blair. Your line is open.
Hey, Matt.
Hi, Good morning, I wanted to ask a.
Progress in the retail setting.
Broadly in terms of the footprint transformation and Walmart and simply stories and then also.
Anything you're doing but the new Walmart Health initiative I know, there's just opened up.
George I think Europe .
Yes, yes, certainly continuing to move forward with our retail strategy as we call it.
We have about 2100 patient service centers.
And of which can be characterized as well.
35% to 40% of those are more retail alike.
Several of which are with within Safeway stores in Walmart.
Of the same way relationship continues to be a good what.
We actually have some new opportunities, particularly going forward as we kind of work that relationship. So we're optimistic there and then second as we continue to build their presence with with Walmart as well and as you mentioned they opened up a new.
Concept store and we are there laboratory provider.
For that store, so there's still working through the how that works and as you know feeling about Walmart the part of it a lot of things and we're seeing how will that goes if yields and fuel enough.
We're working with the would that proactive on that cost going forward and that's what we said as our goal is to be north of 50% of a patient service centers. So we have some ways to go.
And those a number of things for US one as we think it's a better customer experience consistent with our strategies most consumer friendly laboratory.
And we think this will seem to be a differentiator for us in the marketplace second is it's better for our employees.
Waterways and it also allows us to manage the demand and what are the people over there we could have larger patient service centers with more for bottoms. It just gives you a lot more operational.
Flexibility to manage the demand deposit location to accommodate the patients are coming in over extended period of time.
Finally as patients really.
You bet is quite good they come in the flexibility to walk the store whether they way.
Flexibilities in shopping after their visit.
We believe.
Improvement in access quality that gets us will allow us to differentiate ourselves to the marketplace and pick up share gradually over time, so it's going well.
Pleased with it and then lastly ill just say, yes, we have a relationship with safely yesterday relationship with Walmart full we continue to work with others in the marketplace to work with CBS .
They had been a clinic and what you're doing world their strategy is there or as a partner of ours.
Our next question comes from Ricky Goldwasser with Morgan Stanley . Your line is open.
Ricky already recorded.
Good morning, this is actually Alexa in Cherokee Elecsys, taking my question.
I just wanted to come back to the United Health.
You guys mentioned I think in your earlier remarks that their offerings like October one.
Joe di member out of pocket charges. So I guess my question is any other things that you're looking for you over the balance of the yet can you kind of incentivizing the use of the PLN, how did that pocket compared to to labs.
Thanks.
Yes, so for last not in the network.
The the typical out of pocket determined by their plan benefit designs. So.
Hi, ductile planned outage assessments are co insurance, but it won't be zero.
So if you think about the average.
Requisition being somewhere between 40 and $50 and typical patient responsibility over time employing problem spots, but every time might be 20% to 25% their health care dollars, what the balance being paid for by the company you can do the math you know Thats an average obviously there so.
Very high cost test, so it'd be a big big advantage. If you have a genetic test or some of the other screening test that could run hundreds of dollars.
Just the simplicity of the message so not having to worry that hey, the same series of tests would be $50 from National lab and its $500 from this hospital and what does that mean for me. It's just you have to worry about it they are not as good and it's not just about price. It's also about quality and service.
And access so those are all the metrics that were required to get in we did not change our price with United in order to get into the preferred led network nor do we think anybody else did but we know we definitely did not so this is really about the total value of the offering. So if you want to go to the best lab with a great price and also.
Zero out of pocket very simple decision for the patient. So thats important theres also an United should talk about this but theres also some things what they're doing around incenting physicians as well so it's not just a patient driven.
Initiative and I'll, let you talked to United about what the doing on that and then obviously you can imagine we're doing a lot of work in the field with our own commercial salesforce to make sure that physicians are aware because this is really good for patients and most physicians. There are number one priority is their patients not their older not anybody else that when they know some.
Good thing for their patients.
They like that the other thing is it's a source of some patient satisfaction is getting a built in so now you don't have the call. The office about any of that lab Youre currently I got a bill I thought it was covered by the office visit et cetera, et cetera, So reduces noise for the payer reduces noise for the.
Physician's office, obviously, a good thing for US one good thing for patients, Yes, just what mark just.
Obviously.
Savings here is zero gold insurance and co payments was the biggest driver as you move its little laboratory business. This is lower.
First rate than if they are working with was up for less network. So the savings as a consumer is very considerable but the biggest portion of that has to do the rate differential not necessarily the.
The revision responses in line.
So.
Big opportunity and we're hopeful.
You mentioned is just getting started as well it's early but we're hopeful this change coupled with the changes that we spoke to take place in 2020, well continue to allow us to grow our presence in our share with United but also what other peers as we do believe but overall the marketplace.
Our next question comes from Mark Massaro Canaccord Genuity. Your line is open.
Mark Mark.
Hey, guys. Thanks for the question I guess my first question is for you Mark obviously the volume growth is the strongest we've seen in the long time, you talked about the one extra revenue revenue during the quarter, but you also talked about health plan access with United continuing to build so can you just give us a sense for whether or not the 5% growth.
It's a level that you think continue I can you just give us a little sense of the puts and takes around some of the drivers there.
Yes, so we talked about the fact that the extra day net of Hurricane Dorian gave us about 100 basis points. So you can kind of as.
I would take that math and you're thinking obviously each quarter as different puts and takes in terms of the amount of revenue days than we usually you try to be very transparent about how that all plays out as began the year. We've talked about Q1 Havent days in Q3, having an extra day and obviously next year, we have leap year in the quarters will play out a little bit differently.
It is much transparency on that as possible, but really when you think about the whole year next year, you think about generally revenue days are pretty similar year over year other than when you have a leap year.
And then we did talk about the Capitated volume, which is not really impacting the bottom line, but if you're just focused on revenue at some point next year, we lap that change. So that was about 100 basis points. This quarter. If you recall, we shared about 70 basis points in Q2, so at some point that volume headwind.
It's behind Us.
Just to share a little additional color in the quarter our employer.
Employment testing business is actually a headwinds to our growth it was pretty flat. So thats. The non with the is if you remember that about 20 basis point higher growth rate I shared at the beginning of my prepared remarks for our core clinical business. So we'll see now that preemployment.
Screening business goes but that was if you want to really take out the clinical business, which is what we're benefiting from the expanded access the volume performance was actually slightly stronger than they have appeared on the surface. So is it going to be 5%, obviously, we're not going to have an extra day every quarter.
But isn't going to continue to be you know really positive organic revenue growth into the future absolutely. That's our expectation as we work our way Thats fair share and talked about as eventually get into a billion dollars.
Revenue in these new lies the three expanding access plans.
Your next question comes from Eric Coldwell with Baird. Your line is open.
Thanks, very much at the end of the care and with these have been hit on but I think it's always helpful to get maybe a little more emphatic or explicit commentary, it's all around the M&A and then to capital deployment around M&A.
Inorganic growth will really start to abate here in the fourth quarter based on the timing of prior period deals I'm, hoping you can give us some sense on what you're expecting from inaugurate inorganic growth in Fourq. You also you have a long term model of 2% plus M&A driven growth.
To the extent that the analysts have built in a place holder here it sounds like we need to be putting that in for 2020 at least in the beginning of the year can you give us a sense on what you would be comfortable with if people have built in a place holder and then third as you.
Cds elongated decision cycles on M&A cashes building. So are you more comfortable with us, leaving that cash on the balance sheet or would you be comfortable with maybe a assuming some accelerated share repurchase activity is you have those unnecessary balances start to build thanks very much.
So let me let me go back to our.
Capital deployment strategy so.
As we've shared if we're going to do M&A, where.
So its value accretive to our shareholders as a clear path.
I can do an M&A just to meet some outlook that we gave but with that said, we're very confident in that 2% CAGR. So.
We never include on executed M&A in our guidance. So just because we know at this point are implying a low level of M&A either in Q4 early in the next year doesn't mean that we might not be close to something but that's just not that our practice. So we don't actually include M&A in our guidance until we haven't seen.
Im contract and so on so we're very confident than that 2% CAGR. If you look at what we've done.
Last year and what we're applying this year, we're going to be well north of that 2%. After two years, we're highly confident that and the next two years to complete that four year CAGR, we're going to be at that level, if not if not beat it because there is a lot of interest as Steve shared and as we've talked about these still has just taken a while it doesn't.
And they followed by the Wayside, we're still working on the same deals that we thought we would have gotten done several months ago, but we're very optimistic some of these are going to get completed so I'm not going to give you any guidance for 2020 , what I'm comfortable with obviously, we'll give guidance and late January for the year, let's talk about the organic M&A mix.
Then you know at that point, if we have some additional deals that closed in the interim those will be included.
Otherwise, we don't typically do that include that in our guidance.
Our next question comes from Stephen Baxter from Wolfe Research. Your line is open.
Given that.
Yes.
A follow up on the patient concessions question. So I'm glad you mentioned the Kaiser report as flipping through it and it looks like we're seeing a fairly similar trend in this year's report as discussed at the Investor Day last year in terms of high deductible enrollment not really increasing that much but deductibles continuing to March upwards at a similar clip. So I was hoping you could clarify little bit.
What you're seeing in 2019 relative to 2018 in terms of where in the ecosystem you're seeing improvement in collections.
And your level of visibility into that versus this time last year and then finally, you know in terms of quantification would you be able to give us a sense of what the collections improvement has contributed to this year's growth.
It reasonable to think about it as offset in the United out of network impact or should we be thinking about something less than that thanks.
So at this point we share.
We're sources of revenue are and so at this point patient responsibility has not grown significantly year over year. So despite what the Kaiser report is talking about in terms of increased production. This year, it's not impacted us per se year over year.
I want to things we did.
In response to the some of the surprise, we had last year, which we shortened our timeframe. So the way we do our revenue recognition. We're looking at more recent trends that we used to have longer term trend that workforce for years and years and years. So we're looking at a lot more recent which would allow us to not have surprises like we had last year. So we've been on top of the.
Yes, we're very comfortable with what we've been accruing, we're very comfortable with our cash collections, we have a very robust process and as we look at that we've done better on patients concessions, partially because last year was a particularly.
Four year for some of the reasons I shared earlier.
But part of it as we continue to roll out the tools and partner with Optum, our partner around doing things like.
Offering credit card collections upfront.
We support that with our real time estimation tool, where it can come into our patient service Center you go to an office, where we have an office will bottom as we can tell you on the spot whether its tests has covered or not and importantly, what your responsibility will be.
Based on that coverage decision and then have an opportunity to say and how would you like to pay port upfront like most of healthcare has done. So we're collecting more of our cash upfront that makes a significant difference in the overall collectability. We've also seen an improvement in denials. So some of the things we've talked about last year, especially in the PBM space, where we surprise.
By a couple of major payers I will tell you as I shared earlier.
Payers in general continue to.
As Curveballs, we're always having to deal with new policy changes new opportunities for them denied we cleaned up some of the things last year that were more significant so we've reduced our overall denials and a couple of key test areas Thats helpful. We've also shared in the past that we continue to get some preferential treatment from a couple of payers where they.
Preauthorization requirements for certain tasks and they actually wave that for a couple of labs, including us because they know we do things right. We don't do access testing, we partner with them on what clinically appropriate panels. Our approach to testing are so thats not only reduces our denial rate because pre office is great channel.
Just the labs, but it also makes us advantageous for the prescriber because they don't have to worry about pretty often say some of the work to us. So all of those things together are actually helping revenue growth and theyre, helping.
Our overall margin and part of our Invigorates see us on the topline it's not all on cost some of that is actually getting paid for more of the work we do as Jim data set of multiple.
Investor Day, So we're seeing good positive improvement in that space.
Okay, well, we thank everyone for joining us today, we appreciate your support upgrade and talk to you. So.
Thank you for your participating in quest diagnostics third quarter 2019 conference call.
Kept the prepared remarks on this call will be posted later today quest diagnostics website at Www Dot Quest diagnostics dotcom, a replay of the call maybe assessed online at Www Dot Lifesize Mastecs dotcom for slash investor.
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