奎斯特診斷 (DGX) 2017 Q4 法說會逐字稿

Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2017 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.

I would now like to introduce Shawn Bevec, Executive Director of Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you, and good morning.

I'm here with Steve Rusckowski, our Chairman, President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer.

During this call, we may make forward-looking statements and will discuss non-GAAP measures.

For this call, references to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS, excluding amortization expense.

Actual results may differ materially from those projected.

Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K.

This quarter, we have included a 2018 adjusted EPS bridge on the Investor Relations page of our website.

The text of our prepared remarks will be available on the site later today.

Now here is Steve Rusckowski.

Thanks, Shawn, and thanks, everyone, for joining us today.

This morning, I'll provide you highlights for the fourth quarter and full year 2017 and review progress on our strategy, and then Mark will provide more detail on the results and take you through our 2018 guidance.

Well, we finished the year on a high note by delivering a strong fourth quarter.

Revenues grew 4%, reported EPS grew 67% and adjusted EPS grew nearly 7%.

For the full year 2017, revenues were up 2.6% on a reported basis and up 2.9% on an equivalent basis versus 2016.

EPS was up 22% on a reported basis and more than 10% on an adjusted basis.

Cash provided by operations was up by nearly 10% from 2016.

2017 was a good year.

I'm pleased to announce we are increasing our quarterly dividend by 11%.

This is the seventh increase since 2011.

Before I describe the progress we have made, what I'd like to do is to talk about 2 dynamics impacting our industry, PAMA and tax reform.

PAMA represents a significant headwind.

In November, we said that we expect the impact of the final rates under PAMA to be approximately 4% of our revenues from the Clinical Lab Fee Schedule in 2018 and approximately 10% in both 2019 and 2020.

As you know, in December, we fully supported ACLA's lawsuit, charging that the Centers for Medicare & Medicaid Services failed to follow a congressional directive to implement a market-based laboratory payment system, and we believe we could have a decision from the judge by midyear.

In the meantime, our trade association will continue to work with Congress to secure a legislative solution.

Now turning to tax reform.

Quest is a significant beneficiary of lower corporate tax rates, which will enable us to grow earnings per share and invest in our business and our people.

We will realize approximately $180 million in tax savings on an adjusted basis in 2018.

With those tax savings, we are reinvesting roughly $75 million, before tax, into the business and our people.

Some of these initiatives includes: advanced diagnostic innovations for new tests and high-touch concierge services; investments to deliver consistently excellent consumer experience, both online through our MyQuest patient app and all of our Patient Service Centers.

And then finally, we'll pay a bonus of up to $500 to about 40,000 employees as a way of saying thanks for playing a vital role in our success.

This bonus will be based on the company's performance and accelerating growth in 2018.

Now turning to the progress we've made in the fourth quarter.

We delivered on all 5 elements of our strategy to accelerate growth.

The first element of our growth strategy is to grow 1% to 2% per year through strategically aligned accretive acquisitions, which we achieved for the fifth consecutive year.

We had another very productive quarter for M&A.

We completed our previously announced acquisitions of the Cleveland HeartLab, which builds on our position in advanced diagnostics; and Shiel Medical Laboratory, which will further strengthen our position in the New York metropolitan marketplace.

Our M&A pipeline remains very strong, and our strategy is delivering growth.

And this is evidenced by our recently announced acquisition of Mobile Medical Examination Service, or MedXM, a leading national provider of home-based health risk assessment and related services.

Our 7 announced acquisitions in 2017 will enable us to exceed our long-term M&A objective of 1% to 2% top line growth for 2018.

And of course, any earnings accretion realized from these acquisitions in 2018 will help offset the impact of new Medicare rates.

Under the second element of our growth strategy, we continue to expand relationships with hospitals and health systems.

Our Professional Lab Services revenues grew by double digits in 2017 and delivered healthy operating margin as more hospitals benefited from the standardization, scale and innovation that we bring to these relationships.

While the new Medicare rates are headwinds for us, we also believe that the rates will be a catalyst for consolidation later in 2018 and beyond as hospital systems face increasing pressure from lower Medicare rates.

We've had a number of conversations with hospital C-suites that indicate their increased sense of urgency about rethinking their lab strategy.

We took a number of actions to deliver on the third element of our growth strategy, which is to offer the broadest access to diagnostic innovation.

In Women's Health, we continue to be excited about the progress we are making in noninvasive prenatal screening.

Our QNatal test enjoyed strong double-digit growth in 2017.

Our contributors to growth in 2017 were prescription drug monitoring, with growth in excess of 20%; QuantiFERON tuberculosis testing; hepatitis C screening, which posted double-digit growth in 2017.

We also established new advanced diagnostic centers for excellence for [cardio med lab] testing and precision oncology in conjunction with our acquisitions of the Cleveland HeartLab and Med Fusion.

We continue to make strong progress executing the fourth element of our growth strategy, which is to be the provider of choice for consumers.

We opened 6 locations in Walmart stores in 2017: 5 in Florida and 1 in Texas.

The early feedback from our patient satisfaction surveys is extremely positive.

Our customers appreciate the convenience of being able to get their testing done where they shop.

The ease of the check-in provided in eEnablement and the professionalism of our phlebotomists are noted in all these surveys.

There's more to come in 2018 as our collaboration with Walmart expands to include basic healthcare services.

So we'll keep you posted on our progress.

Our relationship with Safeway, which is now in its second year, continues to expand.

We're now operating in 184 stores in 12 states.

We have similar positive feedback from both our employees and our customers on their experience in these locations.

We're also powering the healthcare consumer with our MyQuest mobile application, which is now delivering lab results into the hands of nearly 5 million users.

This is an increase of more than 1.3 million users in 2017.

The fifth element of our growth strategy is to support population health with data analytics and extended care services.

We are building a solid data analytics pipeline, with a strong number of partners interested in leveraging our data, including pharma, CRO and health plan customers.

We are very excited of our acquisition of MedXM.

This will give us access to more mobile healthcare professionals, which expands our scale and reach into the mobile and home segments as well as bolstering our overall capabilities in extended care.

The second element of our 2-point strategy is to drive operational excellence.

I'm very pleased to report that we've exceeded our $1.3 billion goal of cumulative run rate Invigorate savings as we exited 2017.

We will maintain our discipline in this area, continuing to drive efficiency and effectiveness.

Every year, we need to cover the cost of wage inflation and price compression.

Given our track record of delivering in this area over many years, going forward, we will provide periodic updates on our progress in lieu of a specific run rate savings goal.

Quality and efficiency go hand-in-hand.

And as we drive operational efficiency, we continue to improve the customer experience.

More than half of our 2,200 Patient Service Centers are live with eCheckIn kiosks, which improve the patient experience.

By the end of the year, we expect to have that capability in all of our locations.

eCheckIn enables phlebotomists to spend less time on clerical tasks and more time delivering a better patient experience.

Turning to our outlook.

Our guidance for the full year 2018 reflects expectations for continued acceleration of top line growth of 4% to 5% and more than 20% adjusted earnings growth, driven in part by solid mid- to high single-digit adjusted earnings growth from operations.

Now I'd like to turn it over to Mark, who will take you through our financial performance and our 2018 guidance in more detail.

Mark?

Thanks, Steve.

Starting with revenues.

Consolidated revenues of $1.94 billion were up 4.1% versus the prior year.

Revenues for Diagnostic Information Services, or DIS for short, grew 4.5% compared to the prior year, with approximately 210 basis points attributed to acquisitions.

Volume, measured by the number of requisitions, increased 2.4% versus the prior year, with acquisitions contributing approximately 150 basis points in the quarter.

The lingering impact of Hurricane Maria on our operations in Puerto Rico presented a headwind of approximately 20 basis points to volume in the fourth quarter.

Revenue per requisition in the fourth quarter grew by 2.1% versus the prior year.

As a reminder, revenue per req is not a proxy for price and includes a number of variables, such as unit price variation, business mix, test mix and test per req.

Unit price headwinds remained less than 100 basis points in the fourth quarter, consistent with the trends we observed throughout 2017.

Excluding the impact of PAMA, we would expect unit price headwinds in 2018 to remain less than 100 basis points, with PAMA adding an additional headwind of approximately 50 basis points on our DIS segment.

After many changes to PAMA, Medicare reimbursement pressure will step up in 2019, as we have indicated previously.

Beyond unit price and the impact of growth in our PLS partnerships, other mix elements, including test mix, were strong, contributing more than 200 basis points in the quarter.

This trend has remained consistent over the last couple years.

Reported operating income for the quarter was $269 million or 13.9% of revenues compared to $276 million or 14.8% of revenues a year ago.

On an adjusted basis, operating income was $317 million or 16.4% of revenues compared to $305 million or 16.4% of revenues last year.

Reported EPS was $1.82 in the quarter compared to $1.09 a year ago.

The increase is related to a net tax benefit recorded as a result of the recent tax legislation.

Adjusted EPS was $1.40, up nearly 7% from $1.31 last year.

The company recognized an after-tax net benefit totaling $74 million in the quarter.

This primarily reflects the tax benefit mentioned previously, partially offset by system conversion, restructuring, integration and other charges.

The net impact of these items increased our reported EPS by $0.53.

Our reported fourth quarter tax rate was significantly lower than the prior year as a result of tax reform.

In the quarter, we recorded approximately $0.02 per diluted share of excess tax benefit associated with stock-based compensation, or ETB, compared to approximately $0.01 per share benefit last year.

In the full year 2017, we recorded $0.27 per share of ETB, which is an increase of $0.21 year-over-year.

At this point, I would like to highlight that beginning in 2018, we will exclude ETB from our adjusted EPS calculation.

We believe this change will provide you with better insight into the operational performance of our business.

Bad debt expense for the fourth quarter as a percentage of revenues was 3.8%, 20 basis points higher than last year and 20 basis points lower versus the prior quarter.

For the full year, 2017 bad debt was 4.1%, flat year-over-year.

As a reminder, beginning in 2018, new revenue recognition will also require us to classify uncollectible balances associated with patient responsibility as a reduction in net revenue as opposed to bad debt expense.

As you think about 2018, consider the impact of this change on our revenue for each quarter of 2017, which is shown in Note 8 at the end of this morning's earnings press release.

You should use these adjustments as the basis for comparability in 2018.

The reduction in revenues for each quarter in 2017 is accompanied by an equal reduction in SG&A expense, with no impact to operating or net income.

Turning to cash provided by operations.

We generated $1.2 billion in 2017 versus $1.1 billion last year.

Capital expenditures during the year were $252 million compared to $293 million a year ago.

Now turning to guidance.

We are providing the following outlook for 2018: Revenue is to be between $7.7 billion and $7.77 billion, an increase of 4% to 5% versus the prior year; reported diluted EPS to be between $5.42 and $5.62; and adjusted EPS, excluding both amortization and ETB, to be between $6.50 and $6.70; cash provided by operations to be approximately $1.3 billion; and capital expenditures to be between $350 million and $400 million.

Here are some items for you to consider, given all the moving pieces in 2018.

First, as a result of tax reform, we expect our effective tax rate in 2018 to be approximately 24%.

We expect to realize approximately $180 million in adjusted tax savings.

Of this amount, we expect to deliver roughly $120 million after tax or approximately $0.85 to our adjusted EPS in 2018.

Additionally, we intend to reinvest approximately $75 million before tax of the benefit to support our 2-point strategy.

From a cash perspective, we expect our lower tax rate to increase cash from operations by approximately $160 million in 2018.

Second, we expect unit price reimbursement pressure on our DIS segment to remain less than 100 basis points, excluding PAMA, with an additional headwind of approximately 50 basis points including PAMA.

Recall, in November, we sized the impact of PAMA as approximately 4% of our 2018 Medicare revenue from the Clinical Lab Fee Schedule and approximately 10% in both 2019 and 2020.

Our forecasted impact on the business over the next 3 years from the fee schedule reduction remains unchanged.

Third, our revenue guidance of 4% to 5% growth includes only the M&A that we've closed to date, including MedXM.

We estimate the revenue impact of recently closed acquisitions as well as carryover from acquisitions that closed earlier in 2017 to be roughly 2.5% in 2018.

The earnings accretion from these deals will ramp throughout 2018 and into 2019.

Fourth, our 2018 revenue guidance reflects the classification of patient-related bad debt against revenue in accordance with the new revenue recognition standard.

Fifth, as Steve noted earlier, we exceeded our $1.3 billion goal of cumulative run rate Invigorate savings through the end of 2017.

Our efforts around Invigorate will continue indefinitely, as they should.

Best-in-class organizations can take out at least 3% of cost per year.

We believe Quest is a best-in-class organization, and we'll continue to drive operational excellence to drive annual efficiencies of this magnitude.

As Steve mentioned, given our track record of delivering in this area, going forward, we will provide periodic updates in lieu of a specific run rate savings goal.

Sixth, as I highlighted earlier and as noted in our earnings release, beginning in 2018, we will exclude ETB from our adjusted EPS calculation.

For historical comparisons, our adjusted EPS results for 2016 and 2017 included $0.06 and $0.27 of ETB, respectively.

Seventh, the increase in our CapEx guidance reflects, in large part, the planned start of our multiyear new lab construction in New Jersey, additional investments in our advanced and consumer growth strategies as well as final build-out costs associated with our headquarters' move to Secaucus.

And finally, as you think through your models for the first quarter of 2018, please note that to date, we have already experienced nearly as much weather impact as we did in the entire first quarter of 2017.

Before I turn it back to Steve, I'd like to provide some final comments on our capital allocation philosophy and 2020 outlook.

Our capital deployment philosophy has served us very well over the last several years and remains unchanged.

We expect to continue to return the majority of free cash flow to shareholders through a combination of dividends and buybacks.

We continue to prefer to use the remainder of free cash to fund M&A activity, which we believe will be more robust over the coming quarters in light of PAMA.

With regards to our 2020 outlook, we remain confident in the targets that we've outlined for 2017 through 2020.

These targets include a revenue CAGR of 3% to 5%, with 1% to 2% growth expected from acquisitions; and an adjusted earnings CAGR faster than revenue in the mid- to high single-digit range.

Last quarter, we shared that this outlook implied adjusted EPS in the range of $6 to $7 by 2020.

We also shared at that time that we would expect to be toward the lower end of this range, given the reimbursement cuts associated with PAMA.

While the cumulative PAMA headwind through 2020 remains severe, we now believe we will exceed $7 in light of tax reform.

I will now turn it back to Steve.

Thanks, Mark.

Well, to summarize, we delivered a strong fourth quarter.

In 2017, we made great progress accelerating growth and driving operational excellence.

Our guidance for the full year 2018 reflects expectation for this continuation of the acceleration of the top line and bottom line growth.

Quest benefits from tax reform and we are investing in our business and our people.

Now we'll be happy to take your questions.

Operator?

(Operator Instructions) And our first question is from Amanda Murphy with William Blair.

So just a question on guidance.

So from a top line perspective, it's a little difficult, obviously, given all the moving parts to sort of compare to consensus, but it feels like the numbers or the top line growth rates are sort of pretty strong relative to expectations.

And so I was just curious, so you've, obviously, given a lot of information around M&A and the unit pricing dynamics.

But what are you thinking in terms of, at least, maybe qualitatively, how to think about the various dynamics around organic growth, such as underlying volume growth, the PLS contribution that we might expect?

Is it similar to this year?

And then -- or I guess last year, technically.

And then, also how to think about mix, particularly given some of the comments you made around investment in new tests, et cetera?

Okay.

All right, thank you.

Well, we're pleased to be able to provide the guidance for 2018 that we just did, which is 4% to 5% growth.

We feel good about that.

Our strategy historically, and remains in 2018, is a balance between acceleration of our organic growth and also to achieve at least 1% to 2% growth through acquisitions.

And as what I said in my remarks, we've exceeded that high end of that range of 1% to 2% through acquisitions.

Well, what I will say in that 4% to 5%, you see both.

You see an improvement in organic growth and you also see an improvement in growth through acquisitions, and that's in that 4% to 5%.

As far as the growth drivers organically, we continue to see good growth in our Professional Lab Services business.

We continue to get good interest.

And as we've talked about, this fuels a couple things.

One is we have an acceleration in the number of conversations we're having with the C-suite of integrated delivery systems around their lab strategy.

And that hits many aspects of our strategies for growth.

First of all, they're quite interested in what we can do with them to make it more efficient, and this is our Professional Lab Services business.

And so that has impacted our growth in '17 and it will continue in '18.

Second is we sell them our most sophisticated testing, and so that acceleration of advanced diagnostics will continue as well into '18.

And then finally, in some cases, like in the example of PeaceHealth in 2017, they want us to buy their outreach business.

So implied in our guidance is the continuation of that strategy, which hits on 3 aspects of our growth strategy going forward.

So again, a balanced guidance set, with both acceleration of organic growth as well as an acceleration of growth through acquisitions.

Mark, anything you'd like to add to that?

Yes, I appreciate the comment, Amanda, that there's a lot of moving parts, but on the top line, the restatement of bad debt really should not change the growth in revenue because bad debt is not going to vary dramatically year-over-year.

So the 4% to 5% is a solid number that doesn't have a lot of moving parts to it.

And then in terms of your questions around the future, we would expect more of the same, continued trend shift towards advanced diagnostics, as Steve said, which should benefit our revenue per req, but also continued strong growth in PLS, which will offset that partially through [math].

And then, price, I covered that pretty thoroughly, which is more of the same.

Some headwinds on the nongovernment side and then the additional 50 basis points coming from PAMA.

Our next question is from Jack Meehan with Barclays.

Could you elaborate on the volume dynamic in the fourth quarter?

So you delivered around 1% ex M&A, but I think there's probably some PLS in there.

So what are you seeing in terms of underlying volume?

And what's the expectation for 2018 there?

Mark, you want to take that one?

Yes.

So we -- remember, volume, we report requisitions.

And what we've also reported is that we continue to see increasingly dense requisitions.

So in fact, tests are growing faster than the volume report, and that's really what we do is we do tests.

So we don't fully understand the trend.

We talked a little bit about this, but certainly, there's things that are being added when someone goes in for a general healthy checkup.

Whether it's a baby boomer getting the hep C test.

Certainly, a while back, it was adding vitamin D. So people are getting more done when they go in to get our services in a given encounter.

So really, we've talked about a desire to give you better insight into volume, which is really tests.

We just haven't found a way to do it yet.

So don't read too much into volume as reported by requisitions.

So certainly PLS, as we mentioned, was a double-digit grower, but volume trends continue to be solid.

We don't see anything that suggests a market shift in utilization.

We continue to accelerate our growth, and that's what we're expecting to do in 2018 as well.

Our next question is from Kevin Ellich with Craig-Hallum.

Kind of two-parter here.

Mark, you talked about test mix was strong.

Is there any specific test that you can call out?

Or is it really just a function of the -- more tests per requisition?

And then Managed Care contracting, any update there on the United and Aetna contracts?

Yes.

Well, Kevin, as I mentioned in my remarks, we continue to take nice growth out of our QNatal testing, our prenatal testing, number one.

Number two is, hep C continues to grow.

We've got a long ways to go as far as testing the baby boomers in this country and that continues to grow nicely.

Prescription drug monitoring continues to be a big grower for us.

We're the market leader in that regard, and that's growing strong double digits.

So if you look across the board, in many of our advanced diagnostic testing categories, we're getting some nice growth.

Our next question is from Ricky Goldwasser with Morgan Stanley.

Just a couple of follow-up questions.

So one just kind of like on the pricing.

Obviously, pricing trends look really, really good in the quarter.

You're talking about a little bit less than 100 basis points of a headwind into next year.

Is this all because of the mix of the acquisition?

Or how should we think about the pricing environment?

And then on just kind of like -- just kind of more big picture, when we think about CVS/Aetna deal and focusing on transforming retail pharmacy and healthcare hubs, how do you think about your role as part of this overall strategy?

And any updates?

Yes, the first part, Mark will take around what's in our guidance for price.

And the second part, I'll take on where this is all going with the transformation of healthcare.

Mark?

Yes, Ricky, thanks for the question.

So on the pricing, I think you're referring to revenue per req and -- which includes mix.

Pricing itself is apples-and-apples, real price, and it will continue to be less than a 100 basis point headwind, as we mentioned.

Obviously, when you net all the mix elements, including PLS, including test, payer mix, density of our requisitions, we have seen an increase in revenue per req and that's based on mix.

So we don't expect any change in trend in 2018 relative to what we've seen in the last couple years in our business.

Regarding M&A, there's really not a mix element to the M&A, for the most part.

I mean, certainly, the hospital acquisition deals that we do, the book of business is very similar to our core book of business.

Obviously, the reimbursement is going to be somewhat different by payer type, but generally the same pricing.

So really M&A, unless it's a very different business like a MedXM or something like along those lines, well, Med Fusion had a different mix, but generally, our M&A will not change revenue per req dramatically.

I'll turn it back to Steve to answer the other part of your question.

Yes.

So with all the news now on these consolidations and a particular interest around employer-sponsored health plans and what that segment of the population or the industry could do, we think it's very positive for the strategy we've been on for a number of years now.

So as we've talked about, we, as one of our strategies, want to be the most consumer-oriented laboratory.

We talked about that in our prepared remarks.

There's multiple aspects.

There's an aspect around our experience, there's an aspect around that around data, around products and around information, and I mentioned the MyQuest app.

And this is making a lot of progress, and 2018 will really be a watershed year of really fulfilling a lot of our promises in that space.

And if you go there, then it all -- it is all about serving the consumer and the customer.

And a number of these mergers and discussions are all about what needs to do -- what needs to happen to get better access for consumers, or that consumer is getting to be more and more involved in healthcare decision making.

And fortunately for us is we've partnered with a number of these players already.

So we're right in the middle of these discussions.

So we are all now -- we're all waiting to see about the merger of CVS and Aetna.

We have strong relationships with both, we work with both already.

Second is, the relationship with Walmart will continue to extend itself.

We mentioned our Patient Service Centers opening up in their stores.

And also in that regard, we're going to provide health services.

And then third is, we have an employer business.

We sell our Blueprint for Wellness, our Wellness product, into large employers.

And as we know, 170 million people, roughly, in this country get their insurance from their employers, and we've been all over this as an opportunity of working with those employers and working with our healthcare insurance partners to do a better job within the cost curve for those corporations as well as for their employees.

And we've actually done this at Quest.

We've been working on this for a couple, 3 years.

We've changed our organizational model.

We've got more data.

We're working with a number of partners.

And actually, what we have seen is we have bent their cost curve.

So we're quite excited about these new developments, and we believe we're really strongly positioned to take advantage of those going forward.

Our next question is from Bill Quirk with Piper Jaffray.

Just a couple quick ones here.

First off, Steve, can you just talk a little bit about M&A deal flow and whether or not any valuations have been reset, given PAMA?

Or maybe it's just a little too early to see those resets at this point.

And then secondly, I know that flu doesn't have a big, direct impact on the business, but is there any sort of ancillary testing that you tend to pick up, just considering the very severe season that we're going through right now?

Yes.

So on the M&A, we did 7 deals.

We're now at 7 deals.

It's reflected in our guidance for 2018.

That's beyond the 1% to 2% that we have stated as our strategy.

We feel good about that.

And as we said, we -- the deal flow continues to be strong, and we're optimistic going forward.

And there's a lot more interest in what integrated delivery systems we'll have for their lab strategy going forward, given the potential pressure there will be, either with PAMA or preferred commercial rates on the ancillary services side.

So that continues to be an opportunity for us.

As far as resets, we already, in our modeling, are prudent as far as how we price things and work out our [modeling] in terms of when we buy a business and we restate it for that business in our hands, we do take into consideration what might happen with Medicare rates.

And we feel past deals and forward-looking deals, we will take that in consideration because that's a real consideration that we need to consider in the model to make sure we earn back any investments we make in an acquisition for our shareholders.

So Mark, do you want to fill in that and the second part of the question?

Yes, as Steve this morning recalled, that our valuation really is independent of what the business might look like in their hands.

And if you go back to the Investor Day, we went through an example.

So the revenue is dramatically lower because of commercial payers, and then the cost is even more proportionally lower, given the economies of scale, and that's how we create value.

So really, our pro forma P&L looks nothing like the P&L that it was in the hands of the seller.

So have things changed?

Absolutely.

Because we're taking into account the change in government reimbursement, which impacts both the seller and the buyer.

We've been modeling some potential for that for several years now, so it's not recent.

We've been taking that into account.

But obviously, with the new publication of rates, we're building those rates in right now as an assumption into what the future is and ensuring that we pay appropriately for any acquisition.

And then on the flu piece, do you want to take that?

Yes, we do track a number of dynamics in our industry, and we do believe flu rate is up.

It does have an impact on, let's just call it, activity or utilization into physicians' offices.

So there's some modest increase from it, but there's, as you know, many variables.

And as Mark said earlier, when we look at our same-store analysis, we feel that the market is stable.

So it's not a big mover, but we did notice the change.

Our next question is from Donald Hooker with KeyBanc.

My question was, I'm interested in your comments around consumerism, and you referenced concierge services a few times or that buzz word, at least, and then how that might dovetail with that recent acquisition you did of, I guess, it's Mobile Medical Examination.

And I know you have a life insurance business where you're going into people's homes as well.

Can you maybe tie that together?

Does that fit into a consumer strategy?

Or what are you thinking there with all those?

Maybe elaborate on those themes.

Absolutely, absolutely.

So first of all, when we talked about concierge, we talked about -- in advanced diagnostics, there's a lot of science.

And it is an innovation business.

And we have a new leader that started about a year ago, Carrie Eglinton Manner, and she has updated our strategy.

We're putting more resources in it.

And a portion of our incremental investment from tax reform benefit will be invested in that business.

And as part of it, yes, there's more science and there's more capability through new tests that we'll bring to the marketplace.

But a large part of what you also deliver in advanced diagnostics, particularly around genetics, is that whole experience for the patient and making it seamless and easy for the physician that's ordering that test.

And so we're going put some more resources in that part of it.

It's the preauthorization piece, it's the ordering piece, it's the resulting piece.

So my comment in my prepared remarks had to do with that portion of what we described as concierge services.

The second part of your question had to do with our consumer strategy.

We've been on this for multiple years.

We made excellent progress in '17.

And in '18, I will tell you, by the end of '18, we're going to be a long ways along with what our vision was.

First of all, it's around the whole experience.

We are contemporizing that experience, bringing it into this new world.

So being eEnabled in a big way.

I mentioned the kiosks that now are in about half of our Patient Service Centers.

You go into that experience, it's a completely different experience than the old days.

And I would argue, some portion of this market where you have labs that are not nearly our size that can't make these investments, so we're really excited about that.

Second is the whole information flow.

So MyQuest is our app that allows the consumer, the patient to get access to the results.

We have 5 million users.

It's continuing to grow, and we will provide more and more capability on that app to schedule appointments, to get your results and to do other things in your healthcare going forward.

So we're excited about that.

And third is we're bringing new products to the marketplace.

We've tested this over-the-counter direct-to-consumer model in a number of states.

We realized there is a market where consumers want to directly order cholesterol testing or glucose testing, hemoglobin A1c or sexually transmitted diseases without going to the physician, and so we're going to grow that business as well.

So if you put that all together and what you're going to get from Quest Diagnostics is a completely different experience with a different set of capabilities in a brand that consumers will recognize.

And as healthcare continues to evolve, where more and more choice will be given to the consumer of who they use, they're going to look for the best value, and we offer the best value on the planet.

And we're proud of that, and it's getting better every day.

Now the second part of this is related to, you take all that data and you take that experience and you combine it with healthcare services, and these healthcare services are the basic healthcare services.

This is where we have an amazing capability.

We have over 10,000 phlebotomists.

We have over 10,000 healthcare workers that go in homes already.

You mentioned our life insurance business, our Wellness business.

And so those 20,000 employees, and also with our other, let's just call it, operational capabilities, our 3,500 couriers and our call centers, can be applied to managing lives in a better way.

And so the ambition we have with our partner Walmart and other partners is to take our data, point us in a direction and provide those healthcare services to surround those lives in a more efficient and effective way.

And typically, as we know, in healthcare, 5% of the population is 50% of the cost.

And we believe with better data, with better oversight over those individuals in a convenient good-access location, we can do something about it, and we have a lot of assets to bring to the table.

And so this is what we call our data and extended care service portion of our strategy.

And obviously, we're going to need some partners.

We mentioned a few, and I'm sure there's going to be many others because healthcare is local and what we do in different states will be different, but we're excited about the prospects of leveraging our capabilities.

And we see this is where the market is going.

It's all about the consumer.

It's all about better quality at lower cost, and we're nicely positioned in that respect.

Our next question is from Patrick Donnelly with Goldman Sachs.

So with PAMA now implemented, can you talk a bit about future pricing conversations with payers and the importance of price discipline from your end?

It seems like this will give you even more incentive to hold on price with private payers given your value proposition, while the smaller regional players struggle a bit to deal with PAMA hitting their thin margin.

So curious to see your perspective on that.

Yes, Mark, why don't you take that?

Yes, I appreciate the question.

I can assure you, we've had plenty of motivation to be price disciplined for many years, so this doesn't change that.

I think the dynamic, as I described at JPMorgan, is that the payers now are understanding that the market is evolving.

In this world where somehow the commercial rates for the independent labs, obviously for a lot of the hospitals and some of the physician-owned laboratories and so on, the rates are still well higher of CMS' rates, but certainly, for the independent labs, it's been lower.

And there's full transparency, so we can go into them and say, here's the data that was collected by CMS.

You know where the market is.

So there's no uncertainty around where your rates are compared with the rest of the commercial market.

And therefore, let's talk about what's fair.

Let's talk about how we partner together in the long run, that we succeed and fail together.

So it might feel good to try to get some sort of price concession in the short run, but you know that's not in your best long-term interest because we're part of the solution.

We give the best value.

You know that when you drive more volume through one of the national labs, it's much better than going somewhere else.

Everything from the data we provide to the services that Steve mentioned, which differentiate us from many of the other providers, and obviously, to the cost.

So much more of an opportunity to talk partnership, get the conversation away from price, or if anything, get conversations towards we need prices to migrate towards that mean.

You can't have a subset that's significantly lower and a subset significantly higher, getting to an average.

Everyone's got to kind of be in a market price, which ultimately is where CMS wants to get to.

So that enables the conversation, to enhance the conversation that we've been having for several years.

It doesn't change our motivation, which has been very strong.

And if you look at what we've accomplished over the last couple years, we did significantly mitigate the price headwinds that we've been facing 4 or 5 years ago through that discipline.

And we've talked about the fact that if some prices aren't sufficient, then we will walk away from volume if we don't feel that it's appropriate.

Not all volume at any price is value accretive, and therefore, we have shown a desire, willingness and defended our value proposition to those payers, and I think we're yielding results.

Our next question is from Dan Leonard with Deutsche Bank.

This is perhaps a somewhat related question, but can you talk about the Managed Care contracting environment?

And what assumptions you have in your guidance for 2018, if any, regarding the large Managed Care exclusive contracts in the industry?

And then also, if no assumption is baked in, what impact you'd anticipate could occur?

Yes.

So for '18, assume the continuation of our set-up, if you will, with our access through the national players as well as through the regional players.

I would argue that our access through healthcare insurance has gotten better over the years.

And obviously, our objective, which we talked about, is to continue to get it better past 2018 to 2019.

So what I'm saying in that regard is we continue to enjoy a national exclusivity relationship with Aetna.

That's implied in our guidance for 2018.

We feel good about that relationship.

Its potential merger with CVS, we think is an interesting development that might happen.

We have a strong working relationship with CVS as well, so we feel good about that and that's assumed in our guidance for '18.

Second is we have talked about that we know that a contract with United with our largest competitor expires in '18.

We'd love to get access through United as one of their national partners.

We've described that we're working on that.

We feel good about progress made.

We have nothing to share there, but we continue to be hopeful that as we enter '19, we'll have strong access.

And we do have access already with United lives as an out-of-network provider in some states and for some carve-out plans that they have.

And as I mentioned, the relationship continues to get stronger.

We've announced a strategic relationship with Optum of revenue cycle management.

That continues to go well.

Optum continues to buy physician practices.

They're becoming one of our biggest customers in those physician practices, so that will continue to build.

And then throughout the rest of our hundreds of contracts we have, you should assume in '18 that we have good extension of those and good implied continuation of those.

And it's implied in the price assumption that Mark talked about, is the continuation of our access through our many partners we have throughout the United States.

And just to add to that, and to specifically address your question.

We gave a pretty broad range, 3% to 5%, so 200 basis points.

So while I can't tell you explicitly what that means for getting back into United or any other sort of potential changes, I can tell you that it's likely covered within that range, whatever scenario might happen in 2019 and beyond.

And then if we do get to a point where there's something to share, as Steve mentioned, we would consider some -- a change like that material enough that we would communicate in a very timely fashion and let you know what's going on.

And then at that point, it'll obviously give you some idea of what we think it might mean.

And then, obviously, as we got further in the year, we're planning another Investor Day in the fall.

We'll give you a more detailed update on what this next several years might mean, given everything we know at that time.

Our next question is from Ralph Giacobbe with Citibank.

Was hoping you can talk a little bit about expectations around wage growth, just given tight labor market.

Do you expect pressures there?

And then maybe what you see as underlying wage growth over kind of the next couple few years?

Yes, Ralph, we continue to look at our competitiveness of our wages throughout our broad work force.

We employ about 45,000 people, many of which are frontline employees.

We believe we've been competitive in the past, and the expectation for 2018 is the inflation we have in our wage bill is about what we've been running at.

Matter of fact, we track attrition of our employees and we put a lot of time and energy into retaining our employees.

So we've actually spent a lot of time as a management team looking at the other aspects of why people come to work, around things like scheduling and the environment and their supervisors.

And so actually we've seen a slight reduction in our attrition of employees and feel good about the value proposition we have with employees.

And then prospectively, we think employees have feel -- have felt better and better about working at Quest Diagnostics.

We run an engagement survey where we have a phenomenal, phenomenal participation rate.

About 90% of employees fill out this survey.

And our engagement scores for 2017 have never been higher.

They are much higher than in '16.

So we had nice pick-up in engagement scores.

And as you see in our announcement this morning, we want to thank all those employees because these are the frontline employees in many aspects, so we have more attrition than other places that have helped us through this journey we've been on.

And so the $500 recognition that we're going to provide this year that's tagged to company-wide initiatives we think will, again, give a lot of these people a good feeling about working at Quest, and we want to thank them for their hard work.

So what you should assume in '18 is about what you've seen in the past in terms of inflationary pressure on our wage bill.

And to answer, I think, probably your implicit question, many of our wage employees earn above where the minimum wages are targeting to end up.

We also, obviously, have -- many wage employees are not in the states or the cities that have this increasing minimum wage.

So we're already above that market, if you're thinking about minimum wage.

And so when we look at the pressure on our wages, certainly that's not a huge factor.

What the timing of the labor force is going to bring, unknown.

But at this point, we've not experienced any dramatic pressure.

To Steve's point, certainly wages are one part of the equation, but we also provide outstanding benefits for our employees.

That is highly valued.

And then the work experience itself is greatly improving.

I'll give you one example.

A lot of the investments we're making in our Patient Service Centers, as Steve referenced, through eEnablement, we're also doing some of -- significant refreshes to those centers, updating them, et cetera.

That makes the phlebotomist's work experience much more positive as well.

They really like not having to handle as many of the administrative duties that now can be done electronically and they can focus on phlebotomy.

So there's other things that we're doing to offset some potential wage pressure.

But certainly, we've addressed where we needed to, some market adjustments.

And we're not exposed heavily to inflation from minimum wage increases because we already generally pay a lot of our people above that minimum wage.

Our next question is from Kevin Ellich with Craig-Hallum.

Just a quick follow-up.

Mark, you made a comment in your prepared remarks about to date in Q1, you've experienced nearly as much weather impact as you did last year.

Wondering -- I mean, how should we think about that in terms of volume impact or in -- on a year-over-year comp?

I mean, is it just really due to the cold in the Northeast or cold throughout the country?

Yes, well, it's been not just cold.

I mean, we've had precipitation events.

You've had snow as far south as Northern Florida.

So certainly, we've had a number of weather events from ice to snow in areas, which is unusual, to some snow in Massachusetts and then some cold.

Although we -- it's hard to really attribute cold.

I mean, there are some times when it's been so cold where everything is closed, schools are shut down and so on.

But generally, cold, while we think it has some impact, we don't really calculate on our weather.

So weather is more when we see a day where there's something going on that inhibits travel to the extent that we look at that day's activity, and we say, "Hey, there's definitely an impact.

This is out of the norm."

And so it's -- there's some art to that calculation, but we've been doing it long enough that we feel it's directionally correct.

We just wanted people to be aware, as they're thinking about the modeling for the various quarters, that we don't know what the next couple months are going to bring.

But last year, January was pretty benign.

We didn't get our weather until later in the quarter, and this year, we've already had a handful of weather events that kind of puts us already where we were for the full quarter last year.

At this time, we are showing no further questions on the phone line.

Okay.

Well, thanks, again, for joining us today.

We appreciate your support and interest, and have a great day.

Thank you for participating in the Quest Diagnostics Fourth Quarter and Full Year 2017 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) 667-5784 for domestic callers, or (402) 220-6427 for international callers.

Telephone replays will be available from approximately 10:30 a.m.

Eastern Time on February 1, 2018, until midnight Eastern Time on February 15, 2018.

Goodbye.