Labcorp Holdings Inc (LH) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Laboratory Corporation of America press call of 2008 earnings conference call. My name is Sylvanna and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. David King, Chief Executive Officer. You may proceed, sir.

Thank you Sylvanna. Good morning and welcome to LabCorp's 2008 first quarter conference call. Joining me today from LabCorp are Brad Smith, Executive Vice President Corporate Affairs, Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer, and Eric Lindblom, Senior Vice President Investor and Media Relations. This morning we will provide a review of our first quarter 2008 results, discuss our 2010 plan and update you on achievements in key strategic areas during the quarter. Later in the call we will review guidance for 2008 and cover a few anticipated questions.

I would now like to turn the call over to Brad Smith who has a few comments before we begin.

Before we begin I would like to point out that there will be a replay of this conference call available via the telephone and Internet. Please refer to today's press release for replay information.

This morning the company filed an 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information.

Additionally, we refer to today's press release for a reconciliation of EBITDA, which is nonGAAP financial information discussed during this call.

I would also like to point out that any forward-looking statements made during this conference call are based upon current expectations and are subject to change based upon various important factors that could affect the company's financial results. These factors are set forth in detail in our 2007 10-K and subsequent filings.

Now Brad Hayes will review our financial results.

Thank you, Brad. Our first quarter results are as follows. Net sales increased 10.5% to $1.1032 billion. Compared to the first quarter of 2007, testing volume, measured by excessions, increased 8.6% and price increased 1.9%. Excluding the consolidation of our Ontario, Canada, joint venture, revenue increased 4.1%, with volume increasing 1.6% and price increasing 2.5%.

Earnings per diluted share increased 16.3% to $1.14 versus $0.98 in the first quarter of 2007. EBITDA increased to $285.5 million or 25.9% of net sales, compared to $260.5 million or 26.1% of net sales in the first quarter of 2007. The 20 basis point margin contraction reflects the impact of the consolidation of our Canadian joint venture business.

Operating cash flow for the quarter was $176.5 million, net of $13 million in transition payments to United Healthcare. In the quarter, the company was billed $9.6 million in transition payments. To date, the company has been billed $47.9 million in transition payments with approximately $45 million paid. The $47.9 million billed, represents the vast majority of claims activity through December 2007.

DSO at the end of March was 58 days.

During the first quarter, we increased our bad debt rate, which reduced our EBITDA margin by 20 basis points. The increase in our bad debt rate was a result of increased patient responsibility due to higher deductibles and co-insurance, combined with the impact we believe the economy is having on the collectibility of those balances. We're disappointed with the increase in the bad debt rate and continue to implement initiatives designed to improve our performance in this important area.

At the end of March, the company had cash and short-term investments of $50.1 million, and $20 million in borrowings outstanding under our revolving line of credit. Capital expenditures in the quarter were $37.9 million, which included several nonrecurring instrument investments to enhance our laboratory platforms and performance.

During the quarter, the company repurchased $55.7 million worth of stock, representing approximately 700,000 shares. Approximately $370.1 million of repurchase authorization remained under our approved share repurchase plan at the end of the quarter.

We are pleased with our financial results for the quarter. I will now turn the call over to Dave.

Thank you, Brad. We had a very good first quarter. Our U.S. business grew 4.1% in challenging economic conditions. Adjusting for the effects of the loss of the Aetna contract in the Easter holiday, our U.S. business grew a healthy 6.2% in the quarter. Although volumes were below expectations, improved pricing and discipline expense control led to both EBITDA and earnings per share growth.

Before I discuss progress on our key areas of strategic focus, I want to talk about our LabCorp 2010 plan. As you know, we have invested substantial amounts over the past ten years in standardizing our lab and billing systems, our laboratory instruments, and other key parts of our operations, such as information technology. These investments have enabled us to become the most efficient provider in the industry.

The 2010 plan is the next step in optimizing our enterprise to enhance company performance. When complete, the 2010 plan will provide a robust platform for continued organic growth and will facilitate integration of strategic acquisitions. It will allow us to enhance the customer experience, provide better tools to our valued employees, reinvest some of our savings in growing the business and approve our overall efficiency.

Think of the 2010 plan as the refinement of our existing platform, so that it provides a broader and deeper foundation for sustainable long-term growth.

We are well into the process of improving our supply chain management, and optimizing our logistics, which have already generated substantial cost savings that are in our run rate. We have undertaken a number of pilot projects to test core concepts of the 2010 plan, refine assumptions and develop precision around the investment and return estimates associated with the plan.

Examples of the pilot projects under way include web based appointments and patient check-in, self-check in at patient service centers for walk in customers, realtime decision support tools to ensure appropriate draws at the time of service, improved bar coding to reduce the number of human touches required to transport and process a specimen, robotic specimen preparation and splitting, and automated tube sorting at our laboratories.

All of these tools are designed to improve customer service and extend our operational capabilities, allowing us to handle more volume with greater speed and accuracy. Again, because of our standardized platforms and systems, we will be able to take all of the tools that are successful in the pilot phase and rapidly deploy them through our entire network of facilities.

Capital investment in the plan during 2008 will not be significant, as we will primarily fund these pilot projects and build out core foundational elements such as information system improvements. We expect to begin seeing returns on these investments in 2009, but believe it prudent to complete a thorough assessment of these critical pilot projects before providing estimates of the 2010 plan's overall financial impact to the company.

I would now like to bring you up to date on the progress the company is making toward achievement of our key strategic objectives. In managed care, our strategy of partnership continues to be successful. I'm pleased that year-over-year we've seen an increase in our united volumes. As you know, Lab One becomes non-contracted in May of this year, providing us with an additional growth opportunity.

We're pleased that WellPoint, Cigna, Humana and Horizon have shown year-over-year growth. Regarding Aetna, we continue to retain a significant amount of the business, demonstrating that physicians and patients continue to select LabCorp for innovation, quality and convenience.

All of our managed care partners have stressed the importance of redirecting work from higher cost labs to more efficient providers. This is a significant opportunity for us because approximately 80% of clinical laboratory services in the United States are performed by laboratories other than LabCorp and our principal competitor. We are working with our managed care partners on a number of initiatives that we believe will ultimately redirect work away from higher costs, less efficient providers.

In science, LabCorp continues to lead the industry in the introduction of new capabilities where there is an unmet clinical need. During the first quarter we added two new tests in disciplines including, -- I'm sorry, we added ten new tests, in disciplines including companion diagnostics, genetics, oncology and toxicology.

We also announced an exclusive license from OncoMethylome Sciences to perform commercial MGMT methylation laboratory testing services in the United States and Canada. MGMT methylation has been shown to be a common event in many cancers, and is predictive of response to certain cancer therapies.

We close our acquisition of Tandem Labs and we're pleased with it's performance to date. We continue to believe that bio marker discovery and clinical trials will be critical to our long term strategy of being the leading laboratory in personalized medicine and companion diagnostics.

We remain excited about our partnerships with Athumetrics, Duke University and Yale University, and we'll keep you updated on the progress of the innovative tests that we're developing and offering through these relationships. We'll continue to seek out new and important scientific discoveries, and develop them through partnerships such as these.

Although I discussed our LabCorp 2010 plan earlier, I want to remind you that a critical reason we're embarking on this project is to position ourselves for future growth, and to better serve physicians and patients. We believe that we must help return physicians to their deserved central role in managing the health outcomes of their patients. Our leadership position in personalized medicine and companion diagnostics will bring the laboratory closer to doctors and their patients.

We'll provide educational and prognostic tools that will enable both doctors and patients to make more informed decisions about wellness, and about the diagnosis and treatment and monitoring of disease. This in turn will lead to better outcomes for patients and for our healthcare system.

Lab core 2010 and our strategy of leadership in personalized medicine will provide the foundation for our valued employees to better serve our physician and patient customers.

Now I would like to review our guidance for 2008. Excluding the impact of any share repurchase activity after March 31, 2008, our guidance for 2008 remains. Compared to 2007, LabCorp expects 2008 revenue growth of approximately 13.0 to 14.3%. EBITDA margins of approximately 25.6 to 26.0% of revenues. Diluted earnings per share in the range of $4.74 to $4.90. Operating cash flow of approximately 775 to $800 million, excluding any transition payments to United Healthcare. Capital expenditures of approximately 120 to $140 million, and net interest expense of approximately $66 billion.

We expect to achieve this growth through the following initiatives. Organic growth and further shifts in our test mix, particularly in our esoteric and genomic businesses. Managed care opportunities previously discussed. Contributions from acquisitions and continued discipline expense control.

Now Brad Smith will review anticipated questions and our specific answers to those questions.

Thank you, Dave.

Can you update us on the mix of your business coming from esoteric testing? At the end of March, approximately 34% of our revenues were in the genomic esoteric and anatomic pathology categories. Our goal over the next three to five years is to increase our esoteric test mix to approximately 40% of revenue.

Our ability to increase this percentage depends on factors such as continued adoption of existing esoteric tests, development and acceptance of new esoteric tests, acquisition and licensing opportunities, and the mix of our new business.

Can you update us on your progress and image guided path in HPV? Adoption of the Tripath, Surepath system and Cytec ThinPrep imaging system by our physician clients continues to increase. By the end of the first quarter, image guided pap screening was being requested for approximately 61% of all liquid based pap smears ordered.

We continue to experience growth in primary screening HPV testing. During the first quarter of 2008, HPV testing increased to approximately 11% versus the first quarter of 2007.

What are your plans for uses of free cash flow during 2008? We remain committed to returning value to our shareholders. First, by using our free cash flow to grow our business through strategic acquisitions and licensing agreements, and second, through continuing our approved share repurchase program.

The acquisition market remains attractive with a number of opportunities to strengthen our scientific capabilities, grow our esoteric testing franchise and increase our presence in key geographic areas. As you know, we purchased additional shares in our Ontario based Canadian joint venture, and acquired Tandem Labs during the first quarter. We also made several smaller acquisitions.

As Brad mentioned earlier, LabCorp repurchased $55.7 million worth of common stock during 2007. At the end of the quarter, 370.1 million remains under our approved share repurchase authorization.

Have economic conditions affected your volumes? The clearest impact from the economy was in our drugs of abuse testing business, which during the quarter saw a 4% decline in volumes compared to quarter one of 2007.

What is the status of the Medicare competitive bidding demonstration project? On April 8, the Federal District Court for the southern district of California issued a preliminary injunction, in joining the Medicare competitive bidding demonstration in San Diego, Carlsbad, San Marcos. The preliminary injunction will remain in effect until there is a trial on the merits.

The important findings of the court in connection with the ruling included, first, that the plaintives demonstrated a likelihood of irreparable harm both to laboratories and to patients, and second, that they were likely to win the trial on the merits of their claim that the agency improperly sought to implement the demo without proceeding through rule making under the Administrative Procedure Act. The agency is currently reviewing the decision to determine what action it will take.

Our tradists organization, The American Clinical Laboratory Association, or ACLA, has contacted key congressional staff to update them on the status of the litigation, and to emphasize that the injunction does not eliminate the need for legislative repeal of the demo, but bolsters the case for appeal, as the judge's findings and conclusions in the preliminary order back up what the lab community has been arguing all along. We are continuing to work toward inclusion of a provision repealing the demonstration project.

Now I'd like to turn the call back over to Dave.

Thank you, Brad. In summary, we had a very good quarter and through continued focus on our strategic priorities, we are well positioned for continued success. Thank you very much for listening. We are now ready to answer any questions you may have.

(OPERATOR INSTRUCTIONS). And our first question comes from the line of Art Henderson from Jefferies and Company. You may proceed, sir.

Hi, good morning. Nice quarter. A couple of questions for you.

Dave, or whoever can answer this one, your cost to goods as a percentage of revenue declined, and I assume that there is some cost savings initiatives that you guys are working through, this may be tied to your LabCorp 2010 initiative but you can talk a little bit more about what you're doing there to kind of drive those costs down?

Art, the real reason for the decline in cost of goods sold has to do with the Canadian consolidation. And, while we have a number of cost saving initiatives that are, as you know, both in the run rate from last year and part of the 2010 plan, I don't think they had any material impact on cost of goods sold in this quarter.

Okay. Do you have some, a certain amount of cost savings embedded in your guidance here for the year.

We have not -- the guidance for the year does not include any additional cost savings beyond the $60 million that we told you we had saved through cost reduction efforts last year that are in the run rate for this year. Any further cost savings that we recognize this year would be in addition to what we've guided to.

Okay. That's helpful. And can you remind us again how much the drug testing business is of your revenue?

In total, it's about 3% of revenue. So we should have -- as Brad read that question, we should have provided the clarification that although we did see a 4% year-over-year decline in the drug testing business, it is not material to our revenue or to our guidance.

Okay. And you do not have any other sort of risk assessment revenues that are -- that could be impacted as well, do you.

No, we do not.

Okay. One last question and I'll jump back in the queue.

You talked a little bit about the uptick in bad debt expense. What are you doing to sort of address that issue and what should we think about in terms of the DSO's going forward? Thank you.

We have a number of initiatives under way to improve collection of our bad -- of our existing bad debt.

And I'll start out by saying that the fundamental bad debt issue is patient bad debt. The amount of bad debt that -- from the government and from managed care and from the third party payers is minimal. So we have patient bad debt that comes from two areas.

One is original patient, which is the uninsured population or the underinsured population, and as you can see from the pie chart we provide, that's in the range of 9% of revenue.

Then the second component of patient bad debt is bad debt that is originally billed to a third party, such as managed care but then becomes patient responsibility through either deductibles or co-pays. And with the growth in high deductible plans, we're seeing, particularly in the first quarter of the year, when people's deductibles reset, we're seeing more dollars going into that patient responsibility bucket. And that, we think, is somewhere in the range of 6 to 7% of total revenue.

Now, what are we doing to address the fact that patients are paying more slowly? We've initiated a number of projects for getting payment from patients at the time of service, unlike the pharmacy, where the patient knows specifically and the pharmacist knows specifically at the time of service, whether the drug is a formulary drug, how much the patient's co-pay or deductible is, we do not have that information real time. So we are taking payment information from patients through credit cards, debit cards, HSA cards or otherwise, in patient service centers to be able to bill patient responsibility after service.

We also have initiated a number of programs around creating additional incentives for our front-line employees to collect past balances from patients when they present at our patient service centers, and over time, we'll be moving those tools into physician office, phlebotomy placements as well. Eventually, as we get to the self check-in and the kiosks and the web check-in, we'll be able to handle all of that directly with the patient without immediate human intervention.

And of course, we have our standard process of collection through letters to patients, outgoing phone calls and various other techniques that we use to secure payment of patient balances.

Brad Hayes may have some additional comment.

And Art, this is Brad. On your DSO question, I expect to see DSO in the mid-50s. We historically see a tick-up in the first quarter, so we think of it sort of in a normal state basis being in the mid-50s.

Okay, great. That's very helpful. Thanks a lot.

Thank you.

And the next question comes from the line of Adam Feinstein from Lehman Brothers. You may proceed, sir.

Great. Thank you. Good morning, everyone.

Good morning, Adam.

Just a few questions here, maybe just talk a little bit more about volumes. As we look at the volumes, excluding the consolidation of Canada, it was a little bit lower than what I would have thought. I just wanted to get more clarity there. And then converse on the pricing, it was stronger than I would have thought, so I just wanted to get you to provide some more details.

Sure. Obviously we had some impact from the loss of the Aetna contract because that will be annualizing this quarter and next quarter. And that was approximately a percent and a half of volume. And then, we think, Adam, that there was probably somewhere in the range of 0.6% due to the impact of the Easter holiday falling in the first quarter versus the second quarter.

So if you add those back in, then we end up, instead of at 1.6, we end up at about 3.7 volume growth.

And then in terms of pricing, we're getting some positive pricing impact ,obviously from the annualization of price reductions last year, as well as some small positive impact from pricing improvements that are built into contracts that rolled over at the first of the year. And we're continuing to see positive pricing as a result of mix.

One of the comments that Brad Smith made with HPV being up 11%, primary HPV screening being up 11% year-over-year, obviously that's a driver both of volume and price, and that's affected by the fact that it looks like that number declined, but again if you look at that number in light of the Easter holiday, we still think HPVs testing both in terms of volume and prices continuing to grow very, very robustly.

Okay. Great. Thanks for the details. Maybe one quick followup question here.

So, as we think about, I guess the UNH contract, in that you guys have been at a run rate for a while, so Dave, you had said earlier there is still growth there and then you talked about the Lab One piece coming on and, but just curious, is there a price escalator that kicks in at some point later, in another year. How do we think about the pricing for that business?

There is a contractual price escalator that does take effect later in 2008 in the United contract, yes.

Okay. Thank you very much,.

Thank you.

And the next question comes from the line of Ricky Goldwasser from UBS. You may proceed, sir.

Good morning.

Good morning.

I have a few questions. On the bad debt expense side, can you give us a little bit more detail as far as the slow down in collection. Are you seeing it more in specific geographic regions or potentially are you seeing it more in kind of the esoteric tests rather than routine, ie., the kind of more high priced ticket items.

We haven't seen anything geographically or test-mix based. What we've just seen is a general slowing in patient collections, combined, as I mentioned, with the resetting of deductibles in January that, more dollars are going into the deductible bucket, and patient collections are coming in at a slower pace.

I will say, I mean, if you look at the raw numbers, year-over-year we are continuing to collect a higher percentage of the total patient responsibility than we collected in 2007. But the patient responsibility bucket is growing faster than our collection success is growing. And that's the real reason behind the bad debt increase.

Okay. And then on the volume side. Obviously when you add back Aetna, it gets you to around 3.1%, but do you think that there is some softness involved in the result of the economy as well that you think is not related, and also if you can comment on what is the impact you're seeing on volumes from Cigna.

I absolutely think there is an impact on volume from the economy. I mean, I think it would be naive to think otherwise. We've gone out and spoken with large customers, and a substantial majority of them say that they are seeing fewer patients. And when physicians are seeing fewer patients, we're going to be seeing lower volumes.

So again, I think it would be naive to think given the current economic conditions and given the way that consumers are being effected that it's not going to have an impact on our volumes.

That said, we think there are still substantial opportunities to grow volume. The managed care opportunities that we discussed, continued focus in our sales force on the attractive opportunities in the marketplace, particularly esoteric testing, attractive opportunities in key markets such as the northeast, such as Chicago, such as California, and our continued focus on hospital redirection.

On Cigna, Ricky, we are seeing year-over-year increase in volumes. And I would describe it as consistent with kind of the mid range of our expectations. So, I think that there is still more upside for us with Cigna. We're happy with where we are but I still think there is more opportunity to excel there.

Okay. Thank you.

And the next question comes from Robert Willoughby from Banc of America Securities. You may proceed.

Buenos dias. Hey Dave, if you look at -- I'm trying to just grasp the drug testing business, it's never been go-go growth or unmitigated disaster, though I would probably lean one way on that business. Are you billing the employers directly for that service, I'm trying to figure out what the synergy for you to be in there from a customer standpoint would be.

Yes, we typically bill the employer directly for the service. And the reason it's a good business, Bob, is that, while the pricing is not as favorable as the overall business, the leverage in the business is that it takes advantage of our existing draw stations, our existing logistics, our existing infrastructure, and to some extent our existing laboratory network and logistics network.

So, unlike our principal competitors that just do drugs of abuse testing work, or do substantially drugs of abuse testing work, who have to pay other people to do contract draws, who have to pay other people for logistics, that's all just bolted right on top of our existing system. And that's why the business -- we've seen healthy volume growth over the last couple of years but even in circumstances like this one, where volume is off, the business is still a nice business for us.

And would you argue the same then for prison testing, and forensics and paternity, or is there at some point a competitor who would pay you more maybe to get you out of those businesses.

Well I think forensics and paternity, we like the business. We have never taken a very aggressive position on prison testing because there, the pricing is historically extremely low, and the hassle factor of doing the testing, and and collecting it and transporting it is relatively high. So, we're always looking for opportunities to grow in strategic areas and strategic opportunities, and we're always also looking at are there opportunities to refocus our business on areas where we can see greater growth.

Okay. Thank you.

And the next question comes from the line of Ralph Giccobbe from Credit Suisse. You may proceed.

Thanks, good morning. Just in terms of bad debt, I may have missed it, but so going forward, this 5% level seems like it is here to stay, at least for the rest of this year. Is that fair?

I think that's fair. Obviously, we're going to continue to be aggressive in coming up with ideas and finding ways to pursue better patient collections. And, certainly we want to see that bad debt number decrease. But we also have to be realistic that if the consumer continues to be affected by the economy, where there is a house payment and a car payment and a credit card payment, the lab payment is not necessarily rising to the top of the pile, Ralph, so I think it's realistic to think about this as continuing probably throughout the year.

And what about, I guess you commented that you increased the reserve going forward. Is there a risk that it increases significantly from the current level? What is the risk of that?

I don't think there is a risk that increases significantly. We've had a very successful historic run of reducing bad debt from the 12% range to the 5% range. And I don't see bad debt returning to any significantly higher level.

Okay. That's helpful. And then I guess is there something we need to keep in mind in the -- as we head toward the rest of the year, that gives you guys comfort in sort of maintaining that top line guidance because even after adding back Aetna and Easter, the revenue run rate, if you will, is a little bit lower than that 13 to 14 in change percent in growth that you have in your guidance. So I guess what should we expect in the back half of the year that should get us a little more comfortable in that range, given your comments around the economy, et cetera.

Well, obviously there is opportunity, as Lab One goes out of the contract, and there is opportunity to continue to grow these managed care opportunities. We have a very focused sales force on volume growth. And we have a number of activities under way to make sure that we continue to have the sales force focused on volume growth and on capitalizing on the opportunities from significant sized accounts where currently we're getting some of the volume but not all of the volume.

We continue to think we have opportunities in some key markets, as I mentioned the northeast, Chicago, St. Louis, California, where we are, again, going to focus on the growth opportunities and particularly in the ability to sell esoteric and genomic testing to existing accounts.

And we continue to work with the managed care partners on hospital redirection, which we think, as they are looking for opportunities to reduce their overall spend, they have to have an increasing level of seriousness about moving work out of the higher priced, less efficient providers into the more efficient providers. So, we're not changing our top line guidance, we still feel very comfortable with it. It would be easier if the economy were not where it is. But we're very determined to deliver on those numbers.

Okay. Can you remind us, is there anything from Sierra built into your guidance.

There is nothing from Sierra built into the guidance.

And my last one, is there a time frame for when you will quantify LabCorp 2010.

Yes, there is and I had hoped that we would be able to have some quantification on this call, but I -- as I think I've said to you and a to a number of other people who have asked, I feel very, very strongly that we have to have a very solid, precise and detailed number supported by a very solid, precise and detailed plan. And I've seen a precise and detailed plan, I don't think we're at the number yet. Certainly by the time we talk to you again in the call at the end of the next quarter we will have precise and detailed numbers.

Great. Tank you very much.

Thank you.

And the next question comes from the line of Bill Bonello from Wachovia. You may proceed.

Thanks. Good morning. A couple of follow-up questions.

The first one just has to do with the trends we're seeing out of some of the large insurers. It looks like we're seeing pretty healthy enrollment growth at Aetna and pretty substantial enrollment declines at United. And then within the United growth that they do have, it tends to be in some of these higher deductible, sort of patient-directed kinds of products, and so I'm just curious, as you think about where your contracts are with the large payers, whether you're concerned at all that those enrollment trends could have some kind of a noticeable or meaningful impact on your volume growth going forward.

Bill, I don't see the changes in enrollment, at least the ones I've read about, as being big enough to really move the needle for us one way or the other.

And, with respect to growth in Aetna lives, we have some thoughts about ways in which we can address that that we are already in the process of implementing. So I don't look at what I consider -- I mean, obviously the managed care plans are never happy to lose lies but I don't look at what I see as being some loss of lies by the larger plans that the margin as having any great impact on our overall volumes.

Okay. And then the second question is, again on the bad debt, but just sort of coming at it a little bit different, it was helpful that you clarified that you're actually seeing an improvement in the collections.

I guess I'm wondering if you can give us any color around the kind of assumptions that you make on, sort of what you collect on the dollar for a patient's out of pocket component on the co-insurance or deductible, and maybe when a patient is just 100% responsible for the bill, what kind of assumptions you make.

Hey, Bill, this is Brad. I'm not going to give out the specific assumptions, but we do make that delineation. And the co-pay deductible folks tend to pay at a greater rate than the uninsured folks, and we are able to split out our experience that way and model and estimate that way.

And I mean, how confident are you around those numbers? I mean obviously the hospital guys, that was a huge chunk of their bad debt problem, and part of it was the growth in the uninsured, but a huge part was they just way over-estimated how much of that out of pocket they could collect and how much of the uninsured they could collect. I mean, how comfortable are you that you're estimating that collection appropriately.

Well it's based on history. So we have a pretty good historical database that tells us what we have collected. The trick would be, anticipating any changes economically that could impact that number.

So, I don't think we're starting out from scratch on our thinking in self-pay because it really started to take shape in the late '90s to early 2000's. As Dave mentioned earlier, I think it has grown in terms of what is going to the patient, so again we have some good history. The challenging part would be to estimate any changes in that experience based on external factors.

Okay. And then just to one of the questions that was asked earlier, I mean, I guess I'm not sure that I understand, I mean if we're only one quarter into sort of another big increase in move towards out of pocket expenditures, a lot of those people probably haven't even been to the doctor yet or et cetera, I mean why wouldn't we think that you would see some upward pressure on that bad debt number, that the mix would sort of continue to get worse?

Well, again, the initiatives, and they always have been, have been designed to have those headwinds offset by the help from the initiatives. And without going into great detail, we have some that are taking place that are being fully implemented in the first quarter that we think will be able to offset anything that we might see.

Okay. That's helpful.

And then the only other question, just, is the tax rate in the quarter, it was a little bit higher I guess than what we had suspected and that might have just been our modeling, but was there anything unusual at all about the tax rate this quarter.

Nothing unusual. I think on a year-over-year basis it was very consistent. It's probably up from the fourth quarter, but if you look at how last year went with the adoption of FIN 48, we have some -- the way that happens is it's pretty much higher in the first two to three quarters and then is adjusted in the fourth.

Okay. All right. Okay. Yep, that's helpful. Thank you.

Thank you.

And the next question comes from the line of Amanda Murphy from William Blair. You may proceed.

Hi. Good morning. Just a couple quick questions.

In terms of the hospital redirection, have you seen any additional interest from health plans in terms of implementing specific benefits design changes in 2009?

Yes. We've seen interest from health plans in both benefit design and also use of tiered co-pay and deductible structure. So this is an area that we're getting a lot of attention from our managed care partners on. And again, expect to see some progress in the back half of the year and into 2009.

Okay. And how about your efforts to educate employers this year and next year. How is that progressing?

Well the process of educating employers is a collaborative process with the managed care plan. So we have initiatives under way with a couple of large employers to cooperate with them or collaborate with them in educating employees about the additional cost of testing at the higher-priced providers. But again, I think the real opportunity here continues to be as we design specific programs with our managed care partners to be able to jointly educate employers and employees about the additional cost of testing going through the higher cost providers.

Okay. Thank you.

Thank you.

And the next question comes from the line of Bill Quick from Piper Jaffray. You may proceed.

Great. Thanks. Good morning.

Good morning.

Do you have any impact of the incremental United Health price benefits later this year. Is it reasonable to assume that the positive pricing benefit we saw in the first quarter is sustainable throughout the balance of the year?

Well, we always desire positive pricing and with both -- I don't want you to think that just because there is an increase built into United Healthcare that that has an overall significant impact on pricing, because if you think about our total book of business, managed care in total is less than half. And if you have a price increase with one managed care plan, it's not enough to drive pricing across the whole book of business.

But that said, on the one hand we do not get price increases from the uninsured patients and we don't get price increases from the government. We have some price increases built in with managed care contracts. We have some positive price opportunity with our client billing book, and then we have the positive impact of mix. So we have annualized or we've annualized most of the price reductions other than the Cigna reduction, which annualizes in July, and we do think we'll see positive pricing throughout the year.

Understood. And then I know you probably do not want to get down this granular. But to the extent that Aetna presumably, the off contract business helped out in terms of pricing, I don't know if you can give us some type of indication as to whether or not that was a significant contributor or not.

It's not a significant contributor to the overall price growth.

Understood. Thanks very much.

Thank you.

And the next question comes from the line of Matthew Borsch from Goldman Sachs. You may proceed.

Hi, thanks for taking our question. This is Shelley Knoll in for Matt Borsch this morning.

Just a couple more follow-ups on the bad debts issue. To help us understand how the economy might impact demand for lab testing, could you describe the average commercially insured patient, what they are paying for lab tests, as far as is it a percent of the cost. This is not the high deductible health plan. this is the average, what is the average co-pay or deductible for a lab test.

I don't think I could really answer that question in a meaningful way because it depends on what tests are ordered and how many tests are ordered.

In the first quarter of the year with the high deductible plans, basically everything is going to patient responsibility. That's the reality. And until you get up to 1,000 or $1,500. And that's the deductible.

Now the co-pay piece depends plan by plan, and also depends on the amount of testing that is ordered. It's not unusual that a patient has a 20% co-pay or a 30% co-pay for lab testing services. But it depends on what the overall services are to be able to figure out what the co-pay is.

Okay. And do you have any sense of what mix of your commercially insured patients are in high deductible health plans.

We do not. We do not have anything other than anecdotally I believe it's increasing. Certainly our employees here at LabCorp, there is an increasing number and percentage that are in high deductible plans, and I suspect that's true of most large employers.

And then sort of on the other side of the story. Can you tell us what your self-pay mix is, the uninsured mix and maybe what it was last quarter.

It's consistently about 9% of revenues. And I do not think that it's materially changed quarter over quarter.

Okay. And I think you just answered this question. But you're not assuming in your revenue guidance pay or mix change to -- I guess maybe as we see some jobs lost, not assuming a self-pay mix increase would benefit revenue growth.

No we are not.

And one follow-up on the revenue guidance given this deeper ramp in the later part of the year. I understand the guidance incorporates some small scale acquisitions. Is that reflected in the revenue growth number?

Our guidance also includes some revenue growth as a result of fold-in acquisitions, so it doesn't include any major acquisitions but there is always some acquisition impact. And in our top line revenue growth, yes.

And is that part of what helps you think that it was -- that the affirmed revenue guidance maybe reflects acquisitions in the later part of the year.

Yes.

Okay. Great. Thank you. That's it for our questions.

Thank you.

And the next question comes from the line of Tom Gallucci from Merrill Lynch. You may proceed.

Thank you. I just wanted to clarify a couple of things if I could.

First, I think you had said earlier that your collection of the so-called patient direct bucket are getting better, but the bucket is growing. So what is the size of that bucket this year versus last year?

Well I'm not going to talk about the specific size of the bucket.

Maybe not in dollars but in terms of percent of the business or something.

Yes, in terms of percent of the business, the total percent of revenue that comes from the patient if you add the 9 % uninsured and the 6 or 7% that is patient responsibility through managed care, it's about 15 or 16%.

And then last year it might have been, you said the 9 is pretty steady, so the 6 to 7 was what?

It's probably up about 1% in that original managed care that goes over to patient, it's probably up 0.5 or 1% year-over-year.

Okay. And what percent of your volume is going through your PSE's these days.

It depends on the state. In states where in-office phlebotomy is prohibited, it's probably in the 30 to 40% range. That would be Florida, New York, Pennsylvania, several others I can't name off the top of my head, California. In states where in-office phlebotomy is permitted, it's probably more in the range of 20%.

So on average it's maybe in the range of --

I would say probably 20, 25% total.

Okay. I'm just thinking that's probably the place where you have the best ability to get that upfront information and things.

I would say there and also with the in-office phlebotomists who are placed in the doctor's office, which actually is one of the -- that -- we've had significant growth in in-office phlebotomy over the last couple of years, so that's another opportunity where we see the patient face-to-face.

There's a LabCorp's phlebotomist in a doctor's office.

Yes. And if you add those two together, you're probably up close to half the patients are seen by a LabCorp employee, either in a patient service center or in a doctor's office.

Okay. That's great.

In terms of the volume, I think you got up to about 3.7% when you add back some of the negatives. Maybe just trying to really get an understanding of the organic volume. I know you didn't do any big acquisitions but you did a bunch of small ones over time, so what does that add to your volumes, that 3.7 number that we were talking about before.

Say that again. I didn't quite catch it.

I'm wondering what the contribution of acquisitions was to volume growth. I know you didn't do any big deals last year but you did a bunch over the course of the year, so just trying to get more of an organic number. So you took your 1.6% volume and added back an impact of Aetna and added back the negative impact of Easter and got 3.7. I'm wondering what that would be if you hadn't done any acquisitions over the course of last year.

Hi Tom, this is Brad. We're not breaking it out that way. But I think about that acquisition activity as probably in terms of number of was greater, but in terms of size, I wouldn't expect it to be that much greater than what we would have expected to see in our performance.

So, all together they didn't even equal 0.5% of volume.

I think they may have been that.

Okay. And then on the acquisition front, you mentioned, I guess in response to the last question or two, probably expect some deals over the course of this year. How are you seeing sort of the availability out there and the pricing, and is there any particular geography or niche that we should be thinking about your focus in?

I would say the availability is high. There is a lot for sale. The pricing is high. And, so we're going to be very selective about what we're interested in.

In terms of a particular geography, I don't think there is anything that jumps off the page at us. We're always looking to enhance our infrastructure in places where we feel that we're under-represented, so again some of the large markets that I discussed earlier, California, St. Louis, Chicago, the northeast outside of New York and New Jersey. Those are places that we certainly would think about acquisition opportunities.

In terms of niches, I mean, we did some esoteric acquisitions last year in the coagulation area, in the endocrinology area. And we like those businesses. We think they're very attractive and continue to look at them.

I would say the anatomic pathology business, there is quite a bit for sale. It's richly priced. And so that's going to be somewhat of a constraint on our willingness to make further significant acquisitions there.

Okay. And one last question. I think you mentioned about $48 million of United related transition payments billed to date. What are your expectations there as we think about the next year or two and what that total number might be given sort of the trends you've seen?

We haven't changed the expectation this quarter. And so I think the number that we're booking to is in the 115 to $120 million range. Now if you look at the first year and you say well, the first year was 50, 115 to 120 to me, I think it's 115, seems to have some conservatism built into it because the trend is clearly downward, and as I think we mentioned, in the fourth quarter, we were billed $9.6 million, so less than 10. And we continue to see the trend going downward and we view that as a positive.

Okay. Great. Thanks for the color.

Thank you.

And the next question comes from the line of James Star from Longview Asset Management. You may proceed. Mr. Star, your line is open if you would like to ask a question. Please unmute your phone.

Yes. Oh.

Mr. Star, do you have a question?

Yes. Can you hear me?

Yes we can now.

Sorry about that. Good morning. When do you see the managed care fee for service price per acquisition trend leveling out or stop declining.

I think the decline, Jamie, in the first quarter is basically mix related rather than price related, as we've taken a preliminary look at it. So I don't think we're seeing real price declines there, I think we're just seeing a small change in mix, and I think the total decline there was $0.25 or so. So we expect to see that turn in a positive direction going into the second quarter and going forward.

Great. Okay. Thanks.

Thank you.

And the next question comes from the line of Ricky Goldwasser from UBS. You may proceed.

Hi, just a few follow-up questions. First of all, as far as the bad debt expense, what percent of bad debt expense is, percent of revenue is embedded into guidance.

Well we didn't guide to bad debt for the year, so -- but obviously when we gave guidance we did not anticipate increasing bad debt. So what you can see in this -- in the quarter, Ricky, is that through control of other expenses, we were able to offset the impact of the bad debt increase and that's what we expect to be able to do throughout the year. So to answer the question directly, we're not reducing guidance because of the increase in bad debt.

So would it be fair to say that as long as you have other ways to lower -- to offset the increase in the cost, you feel comfortable within the guidance range, ie, there is enough moving parts for you to maintain guidance?

Absolutely.

Okay, and then just as far as your exposure to states where patients actually go to your patient service centers, for LabCorp in terms of marketing, do you have more exposures to states where phlebotomists are permitted in physician offices?

I don't have the list off the top of my head. The vast majority of states permit phlebotomists in physician offices.

We have obviously, for those states that do not permit it, we have a substantial market share in Florida, we have a substantial market share now in the New York metro area, we've always had a substantial market share in upstate New York.

We have a reasonable market share in Pennsylvania. We have very little in Rhode Island, which I think is on that list, and California we have a decent business but we're clearly not the largest provider there.

So is it basically the states that do not allow for direct billing to physicians, just to patients of managed care?

Are those --

Are those the same states?

No. I think New Jersey and New York are the major non-direct bill and California is anti-markup but there is not complete congruence.

Okay. Is New Jersey another state where phlebotomists are not permitted.

No they are permitted in New Jersey.

They are. Okay.

And then lastly, as far as again guidance. What are your assumptions regarding reimbursement in the second half of the year, ie., are you assuming that Congress basically allows for the physician fee schedule to remain unchanged into the second half.

Yes. The guidance assumes that the physician fee schedule fix gets implemented in July.

Okay, great. Thank you.

Thank you.

And the next question comes from the line of Kemp Dolliver from Cowen & Company. You may proceed.

Hi. Thanks. A couple of questions. First, any sense as you look back, say back to 2000, 2001, what the mix of patient responsibility dollars would have been compared to this 15 to 16% mix now?

Because of the company was a very different size then and it was a very different managed care environment, I think it's not meaningful to do those comparisons, Kemp. What I would say is that the patient responsibility bucket for managed care has been growing. And we look at it regularly, obviously and it has been growing. It continues to grow, largely as a result of the -- of plan design. And we do not see any likely near term change in that trend.

Okay. And just to be clear, you indicated that your self pay collections are up but that the obligations are up more. So at least initially, the rate of collection is down a bit?

Yes. So the bucket is growing, although we're doing a better job collecting and we're collecting a greater percentage of what is going into the bucket, the bucket is growing faster than the increase in our rate of collections.

Okay. I guess it still sounds like the dollars collected are still lagging even though your making some progress?

Yes. I would agree with that. If you think -- think about it this way. If $100 goes into the patient bucket, and I'm making up the number, so please understand I'm making up the number. And we collect 30% of it, we collected $30. If $200 goes into the patient bucket and we collect 32% of it, we collected a higher percentage, but we had more writeoffs because the bucket was bigger.

Okay. Right. It's a difference between the percentage and the absolute dollar amounts.

Right. And that's the position we're in. We're doing a better juror in terms of a percentage of what is going into that bucket, which means we're collecting more absolute dollars but what is going in there is growing faster.

Understood. Also a separate question is with Sierra, any sense of timing from United to this point with regard to when they think they will be able to at least give you some sense of their plans.

We do not have a sense of timing. My understanding is that they are in a stand-still situation until the spinoff of that work, whatever they have to spin off to Humana is completed. And so we do not have a sense of when that timing is going to occur.

Okay. My last question related to the histology business. The revenue per session there is up year-over-year but it looks like it's bounced around. Is that just a function of the mix quarter to quarter.

Kemp, this is Brad. The mix as well as the contract changes. So for example in the year-over-year we do not have the Aetna contract and that line I think was disproportionately impacted by the Aetna contract change. You see volume down but price up.

Okay. Got you. Thank you.

Thank you.

And there is no further questions in the queue. I will turn the call back to Mr. David King for closing remarks.

Thank you very much. Thank you all for listening to our first quarter conference call. We hope you have a great day.

Thank you ladies and gentlemen. This concludes the presentation for today. You may now disconnect.