奎斯特診斷 (DGX) 2018 Q4 法說會逐字稿

Welcome to the Quest Diagnostics Fourth Quarter and Full Year 2018 Conference Call.

At the request of the company, this call is being recorded.

The entire contents of the call, including the presentation and question-and-answer session that will follow, are copyrighted property of Quest Diagnostics with all rights reserved.

Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.

Now I would like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics.

Go ahead, please.

Thank you, and good morning.

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

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

We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables through our earnings press release.

Actual results may differ materially from those projected.

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

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

Also, growth rate associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth, are compound annual growth rates.

As a reminder, the company now reports uncollectible balances associated with patient responsibility, which we will refer to as patient concession, as a reduction in net revenues when historically these amounts were classified as bad debt expense within SG&A expenses.

Now here's Steve Rusckowski.

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

This morning, we'll discuss the fourth quarter and full year 2018 and review progress on our 2-point strategy.

And then Mark will provide more detail on the results and take you through our 2019 guidance.

For the fourth quarter, revenues decreased 1.4%.

Reported EPS was $0.92, down about 50% from the same period in 2017.

Adjusted EPS was $1.36, down 2.9%.

Performance in the quarter reflects increased reimbursement headwinds as well as softer organic volume than we expected at Investor Day, and the change in estimate of reserves for revenue and accounts receivable, which Mark will cover later in the call.

For the full year 2018, revenues grew 1.7%.

Reported EPS declined roughly 4% to $5.29.

Adjusted EPS grew approximately 17% to $6.31.

In 2018, we grew revenues, adjusted earnings and cash from operations despite some challenges in the marketplace.

Mark will update you on the quarter and share our perspective on 2019.

Quest is well positioned in 2019 to grow share and deliver revenue growth, as our in-network status now extends to approximately 90% of commercially insured lives in the United States.

Volumes are off to a good start this year.

Our guidance for 2019 reflects our expectation that strong volume growth will continue throughout the year.

It also reflects significant reimbursement pressure, partially offset by our continued execution of our Invigorate program.

As we discussed, at our Investor Day in November, we are poised for growth based on 3 fundamental changes in the marketplace.

First, PAMA's driven reimbursement pressure is the catalyst for structural change.

In 2019, we expect about a 10% reduction in Medicare reimbursement rates and a similar reduction in 2020.

The impact of these cuts will be more significant on smaller independent hospital outreach laboratories, which we believe could eliminate the majority of their profit and will provide a catalyst for market consolidation.

Second, payers are more focused than ever on driving better value in their lab spend, which supports our plan to gain share.

And finally, nobody cares more about the variation in health care costs than employers and their employees, the country's largest payer.

Increasingly, patients are motivated to find the high-value, low-price providers like Quest, so we are very well positioned to benefit from these trends.

Our strategy to accelerate growth has 5 elements, and I will share the progress we've made.

First, we aim to grow more than 2% this year for M&A.

In 2018, acquisitions contributed more than 3% to revenue growth.

The 9 deals we announced and closed since the beginning of 2018 position us well to meet our 2019 target.

Earlier this week, we completed the acquisition of the clinical laboratory services business of Boyce & Bynum, a leading provider of diagnostic and clinical laboratory services in the Midwest.

The second element is to expand relationships with health plans and hospital health systems.

First, on health plans, we're entering 2019 with the best access this company's had in over a decade.

We've added 43 million blinds, which represents about a $1 billion opportunity for Quest as a result of our in-network status with UnitedHealthcare, the rise of BlueCross BlueShield in New Jersey and BlueCross BlueShield of Georgia.

As I said earlier, we have already seen encouraging volume growth early in 2019 resulting from this extended network access.

Hospital health systems are facing unprecedented financial pressures and are therefore motivated to discuss ways we can help them with their lab strategy.

We recently signed 2 new Professional Laboratory Services agreements in the Southeast region.

In both relationships, we will provide full lab management, employing technical lab staff, providing operational lab oversight and maintaining responsibility for the laboratory supply chain.

As we outlined at our Investor Day, most hospital CEOs and CFOs are still not fully aware of PAMA, which impacts hospital outreach labs.

We believe that this impact of PAMA becomes increasingly more visible.

Hospitals will be more motivated to work with us on their laboratory strategy.

The third element of our growth strategy is to offer the broadest access to diagnostic innovation.

We made key acquisitions to expand our capability and enhance our service offerings in 2018.

We saw strong double-digit growth in 2018 from a number of key test categories, including prescription drug monitoring, tuberculosis testing and cardio RQ.

In 2018, we made significant progress executing the fourth element of our growth strategy, which is to be the laboratory provider of choice for consumers.

Before arriving at a patient service center, patients can check in electronically through MyQuest and view estimated wait times before making an appointment.

At the patient service center or in the physician's office our enhanced real-time estimator, lets patients know their financial responsibility before we collect their specimen.

And then once the results are available, patients can view them through MyQuest digital platform, which is now available for more than 6.5 million users, or they can review them on the Apple Health app.

Next, we continue to build out our industry-leading retail strategy.

At year-end, we'll be in more than 200 Safeway and Walmart locations.

In 2018, we launched QuestDirect, a service which enables consumers to offer tests without a doctor's script in the continental United States, and we're pleased with the volumes we've seen so far.

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

Payers understand the value of the lab data and how it can help them improve their member's health outcomes.

This has strengthened our value proposition as well.

We're also growing revenues from pharmaceutical customers.

Quest Clinical Trials Connect, which we launched in 2018, is helping pharma and CROs recruit patients for trials faster, better and more efficiently.

The second part of our 2-point strategy is to Drive Operational Excellence.

Our Invigorate cost-cutting initiative has been successful, and we see more opportunities ahead.

We are confident there's an opportunity to continue to improve and save roughly 3% on a cost structure or about $200 million per year to offset increases in our wage bill as well as reimbursement pressure.

At our recent Investor Day, we identified a number of areas for improvement, such as reducing denials of patient concessions, further digitizing our business, continuing to standardize and automate and optimizing our lab and patient service center networks.

Given the increased reimbursement pressure in 2019, we're also closely managing our cost structure.

We are rebalancing our resources by reducing its expenses in some areas while ensuring we have the operational resources needed to deliver on the volume with increases we expect this year.

Now let me turn it over to Mark, who will take you through our financial performance and our 2019 guidance in detail.

Mark?

Thanks, Steve.

In the fourth quarter, consolidated revenues were $1.84 billion, down 1.4% versus the prior year.

Revenues for Diagnostic Information Services declined 1.5% compared to the prior year, primarily due to a change in estimate adjustment to increase reserves for net revenue on accounts receivable that we previously highlighted in November.

I will share more on this in a moment.

Volume, measured by the number of requisitions, increased 3.4% versus the prior year.

Excluding acquisitions, volumes grew 1.1%.

Revenue per requisition in the fourth quarter declined by 5.5% versus the prior year, driven primarily by the reserve adjustment and increased denials in patient concessions.

For the full year, price headwinds were consistent with our expectations of slightly less than 1.5%.

Now I'd like to provide color on the reserve adjustment we made in the fourth quarter.

You'll recall we discussed this at Investor Day.

We recorded a change in estimate to increase our accounts receivable reserves by approximately $35 million.

We did this based on the following: unexpected increases in coverage denials and patient responsibility and a billing system converging in one of our regional labs that resulted in timely filing denials and impacted our ability to precisely estimate reimbursement rates.

Because these items were not typical with our historical experience, we monitored them and, in accordance with our process, increased our reserve levels.

I am confident in our return process, and we have timed the level of precision around this complex estimation going forward.

Before moving on, I'd also like to provide an update on the headwinds to our prescription drug monitoring hep C and vitamin D test categories that we've been discussing over the prior couple of quarters.

In prescription drug monitoring, we saw increased restricted payer policies that impacted both volume and reimbursement, but we lapped denials for 2 of the more significant payers in the fourth quarter.

In 2019, we continue to expect PDM reimbursement challenges as payers seek more clinical evidence to support coverage.

Turning to hep C. As we noted previously, AbbVie's hepatitis C therapy reduces the need for genotype testing.

While market share of this therapy continues to grow modestly, we expect to lap the most significant headwinds by the second quarter.

And finally, in vitamin D testing, higher payer denials impacted both volume and revenue in 2018.

One national payer implemented a more restrictive policy last March, which we expect to lap in Q1.

But we expect continued pressure on vitamin D testing in 2019.

Moving onto the remainder of our fourth quarter results.

Reported operating income was $220 million or 12% of revenues compared to $269 million or 14.4% of revenues last year.

On an adjusted basis, operating income was $271 million or 14.7% of revenues compared to $317 million or 17% of revenues in the prior year.

Reported EPS was $0.92 in the quarter compared to $1.82 a year ago.

Note, the prior year quarter included a tax benefit recorded as a result of the Tax Cuts and Jobs Act.

Adjusted EPS was $1.36, down approximately 3% from $1.38 last year.

Cash provided by operations was $1.2 billion in 2018 versus $1.18 billion in 2017.

Capital expenditures in 2018 were $383 million compared to $252 million a year ago.

Now turning to guidance.

We're providing the following outlook for 2019.

Revenue's expected to be between $7.6 billion and $7.75 billion, an increase of approximately 1% to 3% versus the prior year, reported EPS expected to be greater than $5.16 and adjusted EPS to be greater than $6.40.

Cash provided by operations is expected to be approximately $1.3 billion, and capital expenditures are expected to be between $350 million and $400 million.

There are several considerations that I will now review for you to think about in 2019.

First, as we've shared previously, we are facing more than $200 million of reimbursement pressure this year.

This headwind is expected to be relatively evenly spread throughout the year.

Second, based on the factors I discussed earlier, the fourth quarter of 2018 should create an easy compare in the fourth quarter of 2019.

Third, our revenue guidance includes more than 1% revenue growth from M&A that has already been announced and executed.

Fourth, as Steve mentioned, our volumes are off to a good start this year, and we expect them to continue to build throughout the year.

Finally, we are incurring incremental costs in the first quarter to support the volume growth from our expanded network access.

We're also tightly managing our cost structure and have undertaken a restructuring in the first quarter of 2019 that will begin to yield savings starting in the second quarter.

As you think about the first quarter, we have approximately 1 less revenue day.

And to remind you, denials in patient concession increased throughout 2018, and we are assuming these headwinds carry into 2019.

Taking these into consideration with some of the items I just highlighted, we expect revenue to be flat to down in the first quarter, while adjusted EPS is expected to be similar to the adjusted EPS we reported in the fourth quarter.

I will now turn it back to Steve.

Thanks, Mark.

Well, to summarize, Quest is well positioned in 2019 to grow revenue and earnings.

Our in-network status now extends to approximately 90% of the commercially insured lives in the United States, and volumes are off to a good start.

Our guidance for 2019 reflects reimbursement pressures, offset by strong volume increases and continued execution of our Invigorate program.

Now we'd be happy to take any of your questions.

Operator?

(Operator Instructions) Our first question today comes from Ross Muken with Evercore.

As we look at sort of the fourth quarter and kind of what's implied in the first part of '19 and then over the balance of the year, I guess, as you think about sort of the state of the lab market in general and some of the reimbursement headwinds you're dealing with and then the flexibility of your cost structure, I guess, what do you -- in terms of your thesis for the business, obviously, there's a lot of things that occurred toward the end of the year that were challenging for you guys, but yet there's a lot positive happening on the volume side.

I guess, how do you sort of put it all together for us, so we can kind of be confident that, clearly, the challenges we saw in the back part of this year you've sort of dealt with and now are reflected accurately, so that we've sort of found a rebasing side?

And then what could you point us to kind of over the balance of this year that we should be looking for to kind of judge that the jumpoff into hopefully '20 and beyond, I guess, is going to be better?

Because, obviously, you had a tough fourth quarter, the Q1 is supposed to a bit weaker and, Mark, you walked through that, and then we sort of recovered.

And so I'm just trying to get a sense for confidence in some of the moving parts and your sort of evolved thesis here.

Yes.

Let me start, and then I'll turn it to Mark.

And thanks for asking your question.

Well, to start, we'd go back to what we shared with you on Investor Day.

We still believe, as the market leader, we have a tremendous opportunity to gain share.

And I think we just announced the kickoff of our journey to pick up share, and it starts in 2019.

We also couple 2019 with the most significant reimbursement that this industry has ever seen, sort of reimbursement costs.

And so it's muting some of the share gains that we're going to pick up this year.

But what we told you at Investor Day, there's 2 parts of market share gains, is; one is we do believe we can accelerate M&A, and we're actually targeting for 2% growth through M&A.

While we said in our guidance we only will put in our guidance what we have seen so far closed.

So it's roughly 1% in the guidance for 2019.

Second is we will see organic growth, and we have to pick up the volumes to be able to offset that reimbursement pressure.

But when you go through the math, we believe there's an opportunity for us to pick up share in '19, and that will continue in 2020.

The second part of this is the setup for what's going on in the industry, and I'll come back to those 3 points again.

One is PAMA is hurting all of us, but it's going to hurt the non-market-leading laboratories much more significantly.

We believe this will be a catalyst for further consolidation.

Second is, with our better-than-ever access changes, payers are working proactively with us in how they do a better job of managing our category of spend.

And then finally, as consumers are pushing back on their physicians, pushing back on their employers and asking questions about the best value in the marketplace, and we are the best value in the marketplace, the best quality, the best service at the lowest price.

So Ross, we have really kicked off '19 with the beginning of a journey here to pick up share.

And we believe, with confidence, that we can deliver on that outlook that we outlined at Investor Day.

Mark, would you like to add to that?

Yes, sure, Steve.

Ross, as I mentioned and we've talked about several times clearly at Investor Day, this year saw more dramatic changes throughout the year than certainly any one I've experienced since I've been at Quest.

Denials were a big part of that.

I'll start with the vitamin D change.

Back in the second quarter, we saw more and more state Medicaid programs, making decisions to deny cystic fibrosis.

We talked about prescription growth monitoring in the payers both tightening policies around same day of service or presumptive and definitive testing, which we think is clinically appropriate, but they've put in policies to deny payment for one of those tests.

We've seen them squeezing panels saying that they're going to pay for fewer and fewer analytes.

And again, we don't think that's necessarily clinically appropriate, but that is the way many of them are paying now.

And even in the area of allergy, there was an NCCI edit that was put in last year that resulted in significant denials in our allergy space.

So it was a tough year from a denials perspective.

We have built all that into our 2019 guidance.

And so when I talked about carrying the fourth quarter business into Q1, we fully accounted for all of that in our thinking in the guidance that we're providing.

The other area of surprise was patient concessions.

And we, based on what we knew going into the year, we're expecting a similar level of patient concessions.

I'm sure you've seen, and we referenced, the Keiser Report that came out about the middle of the year that informed us and others.

But actually, the average deductible went up significantly, so there was more being borne by patients.

Obviously, that meant more of our revenue was coming from patients.

So we were just starting to see that in our collections because there's obviously a delay in the adjudication process of the payers, and then we obviously send the a bills out to the patients, so we start to get an experience of the collection rate that may or may not match our historical rate, and was actually finding that it was being negatively impacted.

The other thing I mentioned was we did have some issues with one of our lab conversions.

We have done a number of these that we've shared.

We're getting close to the endpoint in the standardization process.

This particular lab was not a legacy Quest system.

It was a system we had acquired a couple of years ago as part of an acquisition.

We -- therefore, it did not do us well with this conversion as we did historically and, therefore, we struggled, as I mentioned, with some filing deadlines and other things.

The other issue is this is in a geography where, historically, there's a higher rate of patient concessions.

So -- versus other geographies.

So as we got delays in our ability to send out bills, and as we placed more and more on patients and less directly to the payers, that definitely created a headwind.

The good news on that one is we fully expect that to be behind us.

And so that's more of a temporal issue versus the denials, which, as I've said -- and the overall level of patient responsibility will carry into 2019 and is fully baked within our guidance.

Our next question comes from Patrick Donnelly with Goldman Sachs.

Steve, maybe just on the United trends.

I know you gave some color.

You guys are expecting a first tranche to move pretty quickly.

Can you just talk through how it's come in relative to expectations?

And then any way you can frame the expectations for the year would certainly be appreciated in terms of what's baked into the numbers.

Yes, sure.

So what I said in my prepared remarks, it's off to a good start, and we expected that it would be off to a good start.

So it's our expectations that we expected to be able to pick up some of the volume early in the year.

But what we also said is that it will continue to build throughout '19.

And also, this provides us a growth opportunity beyond '19, into '20 and to '21, okay?

So when I talk about $1 billion worth of opportunity, we'll see a portion of that in '19, and that's contemplated in our guidance.

But there is a large portion of that $1 billion beyond '19.

So it's tracking well.

We're happy with the early volumes we see, and it will continue to build throughout the year.

Our next question comes from Ralph Giacobbe with Citi.

Just lab corporate sized an incremental $30 million headwind from Medicaid related to PAMA.

Are you seeing similar -- I think you said over $200 million of reimbursement headwind seems a little bit worse than what you've previously estimated.

So I wanted to understand that.

And then if you could real quick, you talked about incremental costs in the -- I think you said in the first quarter.

Hoping you can just size that, and whether that does go away for the rest of the year.

Yes.

Mark?

Sure.

Ralph, the $200 million is actually consistent with what I shared at Investor Day.

The amount of PAMA headwinds outside the Clinical Lab Fee Schedule, where we're directly reimbursed from Medicare and fee-for-service, is not large.

There's some Medicaid programs that have reduced their rates.

They may have justified it or cited PAMA changes.

It's hard to know whether these Medicaid rates are directly tied to PAMA.

You can look across all the states.

There seems to be potentially some direct relationship.

Not all of them have changed the rates.

So yes, there's a little bit of headwind in Medicaid, as there typically is.

That's not unusual.

Certainly not for the magnitude of the amount that you asked us about.

And then we're not going to cite the investments specifically, but what we wanted people to understand is when you look at the rhythm of the quarters coming to the year, on the cost side, not only do we not benefit from the restructuring of our cost base that we announced at the end of this quarter until Q2, but we also are actually spending more in Q1, as we're making people aware of our new access in all of the geographies where we need to inform patients and providers.

We're adding -- betting on the com by adding patient service centers, extra purveyors, doing all the things to ensure that as this volume comes, the customer and stakeholder experience is outstanding.

And obviously, we'll continue to monitor that as we see the volume and either add more or less.

But initially, when you add that a little bit ahead of the volume it's cost versus cost of sales.

So that's really what we wanted to make sure people understood.

And then the other significant item, in terms of the quarterly cycling, as I mentioned is one fewer revenue day, that is significant.

We picked it up in Q3, but losing a day of billing in Q1 versus last year is going to be a significant impact in the year-over-year comparison.

Our next question comes from Bill Quirk with Piper Jaffray.

So a couple of questions here.

So first off, on vitamin D real quick, just want to confirm that this is lower volume versus, say, pressure on reimbursement levels?

Also, on the Medicaid denials, I was hoping you could expand on that a little bit because it's pretty much universally covered, at least based on our due diligence.

And then lastly, just big picture question for Steve.

Based on your conversations, how much volume from the hospitals do you think could be in play for M&A over the 3-year PAMA period -- initial PAMA period?

Got you.

Mark, why don't you take the first 2?

Yes.

So the Medicaid denials, and I'm not sure what you're referencing, Bill, but a combination of managed Medicaid, where they put in more restrictive requirements, including preauthorization, that often can result in denials.

Also, some of it, arguably clinically appropriate, where they put in new intelligence to ensure that we can only have this once in a lifetime.

They may have had this done by a different lab historically.

We obviously weren't aware of it.

We get an order.

We think it's legitimate.

We do the work.

We provide it to the payer and they deny it based on a once-in-a-lifetime policy.

So those things are actually tightening in cystic fibrosis.

And we have had a couple of states, I don't have it in my fingertips, we'll circle back with you that actually the state programs with traditional Medicaid that has stopped reimbursing cystic fibrosis as well.

On vitamin D, as I mentioned, it was a combination.

So certainly, we still continue to get and got orders with screening codes.

Quite often, Vitamin D is ordered as a part of a bunch of other common laboratory testing.

So we don't choose to not perform that test even if the diagnostic code initially is not one that suggests we get reimbursed.

So -- and absolutely, the headwind to our revenue per rec, it has resulted in significant denials with a change in this national payer.

But also as physicians have gotten educated on the appropriate use, and certainly we're driving that, the industry is driving that, you have seen a fall-off because some of the vitamin D that was being ordered was for screening.

And clinically, that has been determined not to be appropriate.

But there still is a number of vitamin D tests that are coming through in screening codes that really are not screening.

The doctors just are not coding them appropriately.

And unfortunately, those are resulting in denials and headwinds for us.

Yes.

So Bill, on your question about the opportunities around hospitals, let me start by reminding you and everyone that what we said at Investor Day is in 2018, we have a strong year for M&A.

It's about 300 basis points, roughly.

And if you recall, if you go back to one of those Investor Day slides that we used and charts we used, if you look at the distribution, the M&A we've done over the past 2 years, it's really been a balance of acquiring hospital outreach, acquiring some outreach deals -- excuse me, some laboratory regional deals and then finally buying some capabilities and services in advanced diagnostics.

And if you look at the hospital deals, it's been a good part, but not the majority, of what we have acquired.

And then second is we still pick up, let's say, one regional lab per year.

As a matter of fact, we just said in our prepared remarks that we closed on Boyce & Bynum in Missouri.

So it's a good example of doing that once again.

And what we also indicated is, prospectively, we do believe, from what we see in our pipeline for all 3 categories is that M&A should be north of 2% going forward.

And we also said we would only contemplate it in our guidance, something around 1%, which are the lowest deals for 2019.

So some portion of that is the acceleration in the discussions we're having with hospitals around lab strategy.

And we have those discussions, Bill.

We also have discussions around Professional Laboratory Services, and that's an organic growth opportunity.

And we announced, again, in our prepared remarks that we picked up 2 engagements in the back half of '18 that we feel good about, and we have more engagements in the pipeline as well.

So you need to think about our hospital strategy really from a contributor to M&A.

We go to that 2%, but also equally the opportunity organically to pick up organic revenue growth through these Professional Laboratory Services engagements that we continue to announce.

The next question comes from Lisa Gill with JPMorgan.

I just really wanted to just make sure that I understand how we're thinking about the cadence of earnings this year.

If I look at 2018, it looks like roughly 52% of earnings came in the front half, 48% in the second half.

It sounds like it's going to be vastly different in 2019.

Am I thinking about that correctly that we're going to see a lot more of the earnings come in the third and fourth quarter?

Just based on all your commentary, whether we think about the incremental gain in the third quarter, we think about anniversarying hep C as well as vitamin D as well as some other things.

So that would just be the first part of my question.

And then secondly, also along those lines, Steve, you made this comment around the volume to build throughout the year as it pertains to the managed care contracts.

Can you maybe just give us some color?

Is that you're educating the physicians about being in networks?

Is it -- what are some of the things that will have to happen throughout 2019 to give us comfort that you will see that volume?

Okay.

Mark, the first part?

Yes, So I'll start with the quarterly cadence, Lisa.

Yes, you're correct.

So as we look at 2019, as I mentioned, Q4 should be and we expect to be an easy compare to 2018, given the significant change in estimate that I referenced.

Also, and Steve will comment more color on this in a minute, but we expect volumes to build.

So while we certainly moved a bunch of offices and got incremental access volumes at the beginning of the year, we're continuing to compete.

And we expect to build more and more over time.

And we also have referenced and are anticipating and hopeful that United will announce this preferred lab network, and we're hoping to be included in that.

We're expecting to be.

We're all waiting for that announcement.

We think that will benefit us as well, certainly with United patients.

And yes, we have probably not gotten as much into the calendar impact on quarterly cycling in the past.

But it is so significant we're going to provide more transparency.

So losing a day in the first quarter, gaining a day in the third quarter certainly will change the year-over-year impact.

That is not insignificant.

And then finally, the -- as you mentioned, some of the timing of what we incurred, some of the headwinds last year and when we lap those, and that will not happen in Q1.

So therefore, we have some -- a tougher compare year-over-year in Q1 combined with the cost items that I mentioned earlier.

So for all those reasons, the compare is much tougher in Q1.

Last thing I would add is patient concessions.

As we mentioned at the beginning of the year, we did not anticipate a significant shift to patients away from the payers directly on where revenue would come from.

Now that we saw what happened last year, we are building in a higher rate of patient concessions from day 1. Obviously, over time, as we look at our collections, we will adjust that.

But that's certainly going to be a headwind in the first quarter as well.

All of those things are built into the guidance that we provided for the year.

Yes.

So just to fill out the question around volume growth throughout the year and the first tranche in the first quarter, so what we shared in 2018 is when we announced that we're going to be back in network with United and Horizon and with Anthem in Georgia.

We started to communicate that to our customers.

And so what we will see in the first quarter is the first tranche, if you will, of those really good customers of Quest that they wanted us to get back in the network, and we're ready to flip those accounts as quickly as possible.

So you'll see that.

And the second part of this is why it's going to continue to build because not everyone is flipping on day 1. It provides us an opportunity for the rest of '19 and then into '20 and '21.

And some of this is that some of the market is still hearing firsthand from us that we're back in the network.

So to answer your question, what do we need to do is we continuously work on communication.

We do this with our sales force.

It takes multiple calls to the customer to be able to flip those accounts typically.

Sometimes, we need to work on some of the IT integration issues to make sure we can get those orders, and also result of those from some customers that might be relatively new, and that just takes some time.

So if you take the state of New Jersey, we're -- essentially, we're back in the network with the BlueCross BlueShield system in New Jersey and with United.

We picked up a lot of access.

So we've got a number of accounts that we're detailing to pick up significant share.

But those take more time than maybe where we only had -- we didn't have 10% of the volume of those loyal customers in that first tranche.

So that's what we're going to need to do, and we'll do them back at them.

That will continue in 2020 and 2021, where we still see more opportunities to pick up share.

Our next question comes from Jack Meehan with Barclays.

I have a couple of -- just hoping for some details on both the rev per rec and volumes in the quarter.

So on rev per rec, down 5.5%.

By my math, the accounts receivable change was about 2 points.

So if you could bridge us on the remaining, what some of the factors are there would be helpful.

And on the volume side, how much did M&A contribute and the moving pieces between weather and calendar would be helpful.

And you're asking weather and calendar in Q4, Jack, or just...

Yes, all related in the fourth quarter.

Okay.

So the other drivers of revenue per rec includes things like mix.

So for instance, our PLS business was, as we explained in the past, had higher -- has a lower revenue per rec and a higher growth rate than our overall core business.

So that created some headwinds on a rev per rec.

And then what I referenced in terms of the fact that the business experienced an increasing level of denials throughout the year and also patient concessions relative to the prior year.

So those things all made it a tough compare year-over-year, Q4 '17 versus Q4 '18.

So it wasn't just the change in estimate.

It was actually a recognition that, that business had a lower revenue per rec as we were exiting the year.

So those are some of the contributors.

We certainly had a little bit of weather impact.

It wasn't significant, but it was a headwind as well.

In terms of days, it was a small impact, small negative impact as well.

And the other thing was that we had some price changes in the back half of the year that will annualize in 2019 before the end of the year.

So if you combine all of those things, and those certainly were the drivers in the year-over-year decrease in rev rec.

Our next question comes from Kevin Caliendo with UBS.

So I just wanted to go over the United -- the preferred network.

You made the comments that you hope to be included.

And I would assume that you're planning on being included, given that you're now part of -- you're now in-network.

But if you can clarify that comment a little bit, that would be helpful.

But also I just want to understand what you think is going to actually happen within the United network come July 1. Like what actually changes within the United behavior, within their member behavior?

If you can sort of quantify that, that'd be really helpful.

Yes.

Sure, sure.

First of all, one would think, when we announced the made that we're back in-network, and we're the nation's commercial laboratory that if, in fact, United were to go forward with a preferred laboratory network, that we would be included.

But it's up to them to announce that.

But we're clearly hopeful and planning on being one of a short list of laboratories that are included.

And in that, what we shared with that in the past is that all payers, in particular United, I think in my mind is taking a lead on this, is realizing that they could do more to do a better job in laboratory spending.

And by doing -- by having a preferred laboratory network, they're going to tighten up the network, and they will work with us on things that we can do to make sure that we drive market share gains.

And that would include things like working with their customers, their ASO customers on benefit designs.

It could include working with us on our hospital strategy, where it could be in the best interest of all parties to think about a different network strategy within the geography.

It also could include things that we're proactively going after certain geographies, where we know there's an opportunity for us to gain share.

So, can't announce it before it's announced, but we're hopefully -- we'll be included.

As you would expect, we should be, given we're the largest national and given that we just announced we're back in-network.

And there'll be a lot of strategies within this to help us with our market share gain plans that we've outlined through the course of the last 6 to 9 months.

So Mark, would you like to add to that?

I think that covers it.

And obviously, we're respectful of United's desire and right to announce.

We've applied for that lab network.

There's a certain set of criterias we looked at that we're very confident.

But ultimately, we need to wait for United.

And then in terms of what the particular aspects are, I think Steve captured it well, largely, it's whoever is preferred, you're preferred for a reason.

Obviously, it's better value, but it's also quality metrics and other things that United's looking for, for their members.

And therefore, United, the patients and everybody that's in the ecosystem, who is in that preferred lab network, will all benefit if there's more work sent to those better-value providers.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

So 2 questions.

Let me start with the payer one.

So when you listed the factors that had a negative impact on price in 2018, you talked about payer denial that started in March.

One national payer is going to lap in the first quarter.

So what gives you confidence that other national payers are not going to follow the lead of this specific one?

Have you had conversation with payers?

And how -- and have you kind of like factored in that risk in your guidance range?

Ricky, thanks for the question.

Actually, a majority of the payers are already there in the managed Medicare space.

They've been following MLCP for a while, and that's really where this emanated from.

CIGNA adopted it in 2018.

The last remaining significant payer who hasn't moved there yet is Aetna.

We obviously have a very close relationship with Aetna.

We expect that to move in that direction.

And certainly that is built within our assumptions.

We don't know exact timing.

We don't know for sure.

But certainly, in our assumptions and our guidance, we're expecting to go there as well and, therefore, all the national payers to be there.

Our next question comes from Ann Hynes with Mizuho Securities.

So when I look at your free cash flow guidance, it looks pretty strong despite the reimbursement headwinds.

Can you let us know what is embedded of that free cash flow guidance?

Is it how much your repurchasing is embedded, how much is slate of M&A?

And then secondly, typically, you provide a guidance range and you're just doing a minimum this time.

Is there a reason for that and maybe one of the biggest swing factors that could get you higher than that minimum range?

Sure, Ann.

So the guidance on operating cash flow, $1.3 billion, is obviously commensurate with our expectations around growth and earnings.

There's not a significant change in working capital assumed within those numbers.

There's other puts and calls around some tax items and so on and so forth that impact our operating cash flow that we've taken into account.

But largely the change year-over-year is based on our net earnings.

In terms of cash deployments, I know I talked about the $350 million to $400 million for internal capital, which obviously leaves you somewhere in between $900 million and $950 million of free cash flow.

Our dividend now gets us to a long way towards our majority of commitment to our shareholders.

But certainly we need to do some share repurchases to get ourselves to that at least 50% commitment.

And that is built into our expectations to basically, at this point, prevent dilution, given our equity program.

We're not anticipating in that guidance that I've provided a pickup from any reduction in waste.

So with the remaining free cash flow, it's going to be situationally dependent.

So as Steve talked and I mentioned, we have an M&A strategy.

We expect to deploy a chunk of that cash.

We're coming into the year with some good carryover based on deals that we've already executed.

But we just announced the closing of Boyce & Bynum.

Beyond that, we believe there's opportunity to pour more in M&A, but we're going to use the same financial discipline we always have.

And if we have a deal that will create more value for our shareholders, we're going to move forward on that deal.

And if at a given point in time we don't have any executable deal that meets our expectations, then we will buy back shares, as we have historically.

So at this point, I don't have a specific plan for the balance of the year beyond our majority commitment and how we see beyond the cash that we're deploying for the Boyce & Bynum acquisition.

Next question comes from Brian Tanquilut from Jefferies.

Steve, just a question for you.

As we talk about payers consolidating market share to the top players, on your competitor's call, they talked about BlueCross of Florida as a payer that they're having conversations with.

So is that something that we should start thinking about?

And if you just could give us some details on that contract in terms of expiration and the setup that you have with them right now.

Yes.

So Brian, as we've done in the past, I'm not going to give you a specific comment on a specific payer.

But what we have said is that we're in very nice shape in '19 with our relationships.

What we will say is that going into '19, we should have most of the nationals in good shape.

Obviously, you're there with United.

We're there with Aetna, and the others will be in nice shape as well.

And then also in these big states.

As a matter of fact, we talked about at the Investor Day.

We're particularly strong in the biggest states in the United States.

So if you look at California, if you look at New York, Florida and Texas, about 110 million lives are shared and very strong.

And our relationship with the other payers in most states are quite strong.

So we feel good about that.

We're in nice shape in those states.

And that is true if you go back to your specific question about Florida.

We feel good about our presence in Florida.

We have a strong working relationship with Florida BlueCross BlueShield, and we feel we're in a nice position to deliver on picking up share that we talked overall about doing as Quest Diagnostics in the state of Florida because of that relationship and our great access that we have in Florida.

Yes.

If I could just jump in real quick.

I didn't answer the second part of Ann's question, my apologies, before we come to, Brian.

So the reason we've chosen to give a floor instead of a range this year is given some of the uncertainty this year.

Obviously, to make the call on how quickly we grow that volume, we move access, it's not a negative uncertainty.

It's just more variability than we've experienced historically in terms of how the volume might come, where it will come from, et cetera.

And so the guidance we're providing with the floor, obviously, is towards the lower end of our revenue guidance, and to the extent that we hit the upper end of our revenue guidance or potentially surprise ourselves and beat that.

Those would be the upsides.

So I think we've got our costs down pretty good.

Really the question is around the overall volume growth, the pace at which it comes and the source of which lives, because, obviously, there's variability in the pricing and margin depending on which payer they come through.

So that would be the opportunity to do better.

And hopefully, that answers your question on why we chose to do a floor instead of a range.

Our next question comes from Derik De Bruin with Bank of America Merrill Lynch.

I certainly have seen my out-of-pocket diagnostics costs creep higher, now I'm getting some work done on a regular basis, but I may not have noticed this if I was doing a one-off or annual visit.

I guess, how do you drive consumers who shop around for their diagnostic vendor when they're at the hospital?

And if you're told to go to a hospital lab to give a sample, at what point can you sort of intervene or can they intervene to sort of ask Quest to run the test?

Since basically it's like, how do you give that consumer the choice to send it to a lower cost provider if the hospitals aren't sort of telling you to go there?

Yes, yes.

Excellent question.

So we've been out raising awareness for consumers around the wide variation and medical costs broadly.

And related to that, it's a multipronged approach.

First of all, in some states, we actually provided this at Investor Day, the states are actually providing visibility of the wide variation for consumers.

So the state of Massachusetts, they're actually providing on a website.

And if you go on that website, you'll see the wide variation of what the average commercial rates for Quest Diagnostics are versus hospital outreach laboratories.

And the hope is, in that state, since consumers are picking up a fair share of the cost of health care, that consumers will start to become aware of this and bring that information to their physician.

And the second part of this is physicians are the advocate typically for the patient, even though they have this relationship with a hospital system.

In some cases, they sell their practice.

But still they realized that's coming out of their patient's pocket.

They realized there could be wide variation, which, for a number of patients, it's a considerable sum of money.

And for those of us who are reasonably healthy, it might be once a year.

But for many, it's not once a year.

So it's a considerable portion of out-of-pocket costs.

So we're making sure that the physicians are aware of this as well.

And then also, in all that, when you look at what we're doing with the payers, the payers are increasingly making it visible.

And so the payers all reach out to their membership and have campaigns with simple messages like why pay more?

And related to that, it's not just the lab.

I know many of you realize there's other ancillary services that you have the same issue.

So for instance radiology is getting a lot of visibility.

So the help we're getting here as well is that this topic in general is getting visibility from payers, but equally from physicians and then with consumers asking questions.

And then once they realize they can ask a question, they demand that they know they could come to Quest, we're a network, and therefore, it's unacceptable that you tell them they can only go to the hospital lab.

And they simply point to, I'm going to -- it's going to cost me extra money if I don't go to Quest.

So doc, why does this makes sense?

So that's what we're doing about it.

Our final question today comes from Matt Larew with William Blair.

I wanted to ask about your referral partners.

You mentioned, Steve, that volumes have trended nicely through the first quarter.

I just wanted to get a sense for what of that you attributed to potential share gains versus increasing health care utilization at the end market level?

Yes, yes.

First of all, we're only, I guess, February 14.

Happy Valentine's Day.

But what we see is -- what we see in the first 5 or 6 weeks of the year, as we said, we're off to a good start.

We haven't been asked about it, about share.

We think utilization volumes are stable.

We're not seeing big pickups or drops in our good customers.

So therefore, we think utilization of volume out there is relatively stable.

So therefore, the volume is coming from share gains.

And that's what we expected.

So good start.

We're picking up share, and that's going to build throughout the year.

We're showing no questions in queue.

Okay.

So thanks, everyone, for joining us today.

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

Take care.

Thank you for participating in the Quest Diagnostics Fourth Quarter 2018 Conference Call.

A transcript of prepared remarks on the 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 (866) 424-7881 for domestic callers or (203) 369-0869 for international callers.

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

Eastern time on February 14, 2019 until midnight Eastern time on February 28, 2019.

Goodbye.