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F500-2021-324-Quest Diagnostics

Millions of people turn to the laboratory company to conduct the important tests that track cholesterol levels, white blood cell count, and other crucial measurements that ensure healthy lives. Quest Diagnostics also helps pharmaceutical companies conduct the clinical trials that could lead to life-saving treatments.

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Quest Diagnostics is a major diagnostic testing company, offering lab and direct-to-consumer tests that touch one in three U.S. adults every year and half the nation’s hospitals and doctors. Since its 1967 founding, the company has grown to have a presence in 130 countries. It works with hospitals, doctors, patients, insurers, government agencies, employers, and pharmaceutical companies, with more than 2,250 locations in the U.S. Quest operates under the Quest Diagnostics brand, as well as under the AmeriPath, Dermpath Diagnostics, ExamOne, and Quanum brands.

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Quest Diagnostics (DGX): Company Profile, Stock Price, News, Rankings

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Quest Diagnostics

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Welcome to the Quest Diagnostics third quarter 2026 conference call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question and answer session that will follow, are the copyrighted property of Quest Diagnostics, with all rights reserved. Any redistribution, retransmission, or rebroadcast of this call in any form without written consent of Quest Diagnostics is strictly prohibited. I would like to introduce Dominique Joshi, Vice President of Investor Relations for Quest Diagnostics. Please go ahead.

Thank you, and good morning. I am joined by Jim Davis, our Chairman, Chief Executive Officer, and President, and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and we will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. For this call, reference to reported EPS refer to reported diluted EPS, and references to adjusted EPS refer to adjusted diluted EPS.

Growth rates associated with our long-term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth, and adjusted earnings growth are compound annual growth rates. Now here is Jim.

Thanks, Dominique, and welcome everyone to this morning's call. I am excited to discuss our strong performance in the third quarter and how our strategy to connect people and providers to innovative testing and actionable insights is illuminating paths for better health and generating shareholder value. We grew revenues 10% and adjusted earnings per share over 15% in the quarter on continued strength across our physician, hospital, and consumer channels, complemented by productivity gains from automation and AI. Our robust organic revenue growth demonstrates that our solutions are fulfilling the expanding clinical care needs of an aging population, as well as the increasing number of people focused on prevention and wellness. With these growth trends and our strong performance, we are again raising our guidance for revenues and earnings per share for the full year.

Now I'll provide more detail on how we executed our strategy across our key customer channels and operations during the quarter. Quest operates at the center of healthcare. We deliver solutions that make testing simpler and smarter for our core clinical customers, physicians, and hospitals, as well as for customers in the higher growth areas of consumer health, life sciences, and data analytics. In the physician channel, we delivered high single-digit revenue growth in the third quarter on strong commercial execution and broad demand across our test portfolio. We also continued to grow in geographies where we've expanded our access in recent years through health plan collaborations and outreach acquisitions. We are excited about our collaborations with Fresenius Medical Care and opportunities to serve new customers based on our growing kidney diagnostics expertise.

In addition, we are taking steps to serve the growing nephrology call point and were recently named the primary national lab provider for pre-dialysis chronic kidney disease testing for a kidney care organization. In the hospital channel, we grew revenues by double digits during the quarter on strong volume from Co-Lab Solutions with Corewell Health in Michigan. Reference testing revenues grew in the mid-single digits. As a preferred strategic partner, Quest provides a range of solutions to help hospitals address continuing financial, workforce, and other pressures. From reference and Co-Lab arrangements to outreach acquisitions, we improve quality, innovation, and efficiency. Our role serving half of the nation's hospitals each year continues to fuel a robust pipeline of potential Co-Lab collaborations and outreach acquisitions. During the quarter, we finalized a definitive agreement to acquire select outreach assets from a longtime Co-Lab customer, a leading health system in the Northeastern U.S.

We expect to close this transaction later this year. In the consumer health channel, we continued to generate robust growth as we delivered solutions that enable people to own their health. We are excited to announce the ability for iPhone and iPad users to order labs directly from the Apple Health app, which we see as a continuation of our strategy to deliver innovative solutions that will fulfill the growing interest in preventative health and wellness. Users of the Apple Health app will be able to seamlessly purchase, schedule, and receive test results for over 50 biomarkers, including ApoB and Lp(a), all within the app. The panel also includes biometric measurements such as blood pressure and weight at the same time blood is drawn at one of our 2,000 Patient Service Centers.

The offering will unlock greater health insights based on both biomarker and biometric data, and we look forward to the full launch of this service later this year. At Quest, we often say that wellness is not the absence of sickness. It's health that is proactive, personal, and connected. Through questhealth.com and our many collaborations, we are making wellness possible for more people. We expect our growth rate across consumer health to exceed 30% for the full year. Turning now to advanced diagnostics. We continue to focus on delivering innovative tests in five key clinical areas. Advanced cardiometabolic and endocrine, autoimmune, brain health, oncology, and women's and reproductive health. During the quarter, we grew revenues by double digits for key tests across several of these key areas, including in advanced cardiometabolic, hormone, and Alzheimer's disease.

As we approach Alzheimer's Disease Awareness Month in November, I'd like to share our view of this fast-changing area of dementia care. Many diseases today are highly preventable, thanks largely to diagnostic innovations enabling early diagnosis. We envision a future where Alzheimer's is also a preventable disease and primary care physicians, guided by blood-based tests, diagnose and even treat the disease at a much earlier stage. We also believe our multi-biomarker approach can improve clinical evaluation of Alzheimer's disease and other dementias. Over the summer, we announced that we will soon add the FDA-cleared Roche p-tau217 test to our portfolio. We launched a new AD-Detect panel with APOE, amyloid beta, and p-tau217, as these biomarkers provide different but complementary information to improve accuracy. For instance, p-tau217 can falsely elevate with some comorbidities, so a physician may need to refer to amyloid beta to confirm a true positive for Alzheimer's.

Blood testing for this highly complex disease is in the early phases of development, and we look forward to adding significant new biomarkers to our portfolio to support earlier diagnosis and treatment. In women's health, we recently formed the first industry collaboration with Waters Corporation focused on providing access to Onclarity self-collection kit through clinical, health plan, and consumer health channels, including Patient Service Centers in the U.S. This new collaboration builds on our experience providing HPV self-collection options for cervical cancer screening with a new, convenient at-home option. We expect to introduce the Waters innovation to clinicians, health plans, and consumers of questhealth.com next year. I'd like to now turn to operational excellence. We remain on track to deliver 3% in annual cost savings and productivity improvements through our Invigorate program. Automation and AI continue to be major drivers of improvements in quality, productivity, and efficiencies.

As one example, specimen aliquoting involves splitting specimens into small portions prior to testing. The process traditionally requires several human touchpoints, raising the risk of errors that can slow down the whole testing process. During the quarter, we extended an automated aliquoting solution to three drug monitoring labs to enhance quality and efficiency. Today, 10 of our labs use an automated aliquoting solution, and we plan to extend these capabilities to other labs. We also recently began to use AI at our Clifton, New Jersey lab to scan water for signs of microbes and other impurities as part of our dialysis water testing services. The solution improves quality as well as efficiency because it automatically releases specimens with negative findings, so our medical team has more time to concentrate on positive or questionable cases.

Lastly, Project Nova, our initiative to enhance the experiences of healthcare providers and patients, recently advanced from the design phase to the solutions build phase, and we are on schedule to begin to deploy Epic Solutions in our first lab in the fall of 2027. Our strong third quarter reflects the critical role lab insights play in our nation's healthcare. Before I turn it over to Sam for details of our performance and guidance, I want to share our perspective on the 2027 preliminary rate-setting process under PAMA and steps we are taking to support passage of the RESULTS Act. Since PAMA was passed into law in 2014, we have been concerned about the flaws in the data collection process. After six years of PAMA delays by Congress, labs were required for a second time to provide their lab data in 2026.

We remain deeply concerned that the data collection process this year was also flawed, and the resulting preliminary rate cuts for 2027 are excessive. With ACLA, we continue to advocate for the passage of the bipartisan, bicameral RESULTS Act to permanently reform PAMA to ensure the data used to set rates properly reflects the market. Over 135 co-sponsors in Congress share our concerns about PAMA and our commitment to RESULTS. We have been told by our champions on the Hill to expect CBO to score the legislation by mid-November. Securing a score is an important milestone as the sponsors work toward potentially including the RESULTS Act in any year-end package. RESULTS is the innovative reform our industry and patients need, and we are calling on Congress to enact this important legislation by year's end.

Now, I'll turn it over to Sam for more details on our performance and guidance before sharing some final thoughts about the quarter. Sam?

Thanks, Jim. As Jim shared, we delivered a strong third quarter with consolidated revenues of $3.1 billion, up 10% versus the prior year. Revenues for diagnostic information services were up 10.2% compared to the prior year, and 10.1% organically, reflecting continued strong growth in our physician, hospital, and consumer channels. Total volume measured by the number of requisitions increased 14.5% versus the third quarter of 2025, with organic volume up 14.4%. Our Corewell Health and Fresenius Medical Care relationships contributed 9.5% of volume in the quarter. Excluding these two relationships, volumes grew by 5%. As anticipated, total revenue per requisition was down 4.2% versus the prior year due to the Corewell and Fresenius business mix. Adjusting for that business mix, revenue per requisition was up by 1.7% versus the prior year, driven primarily by an increased number of tests per requisition.

Unit price reimbursement remained generally flat, consistent with our expectations. Reported operating income in the third quarter was $479 million, or 15.5% of revenues, compared to $386 million, or 13.7% of revenues last year. On an adjusted basis, operating income was $517 million, or 16.7% of revenues, compared to $458 million, or 16.3% of revenues last year. The 40-basis point improvement versus the prior year was driven by organic revenue growth, partially offset by wage increases and the business mix impact from Corewell and Fresenius. Reported EPS in the quarter was $2.78 compared to $2.16 a year ago. Adjusted EPS was $3.00 versus $2.60 in the prior year, an increase of 15.4%. This increase was largely driven by strong organic operating performance. Cash from operations was $1.49 billion year to date versus $1.42 billion in the prior year.

This year-over-year increase is the result of higher operating income in the current year, partially offset by timing of net working capital and prior year favorability associated with a one-time CARES Act tax credit. Turning now to our updated full-year 2026 guidance. With our strong performance and continued momentum across our business, we are raising and narrowing our full-year revenue and EPS estimates. We now expect revenues to be between $12.065 billion and $12.105 billion, reflecting a growth rate of 9.3%-9.7%. Reported EPS to be in a range of $10.21-$10.31, and adjusted EPS in a range of $11.25-$11.35. Cash from operations to be approximately $1.9 billion and capital expenditures to be approximately $550 million. Our 2026 full-year guidance reflects the following considerations. The revenue guide does not include any contribution from prospective M&A other than what we have announced to date.

Project Nova expense expectations remain consistent for the full year at an EPS impact of $0.25, with approximately 70% of these expenses to be incurred in the second half of this year. Operating margin is expected to expand versus the prior year. Share count is expected to be slightly below 2025. Adjusted effective tax rate is expected to be consistent with 2025, and interest expense is now expected to be lower than 2025. Looking ahead, while we will provide 2027 and longer-term guidance at a later time, I want to offer a few comments on the potential impact of PAMA. The PAMA impact for 2027 is estimated at approximately 1% of total company revenues, consistent with our previous commentary. The cumulative impact is expected to be less than 1.3% of total revenues for years 2027 through 2029. We intend to offset some of this anticipated headwind.

Consistent with prior years, we will provide 2027 guidance in the context of our fourth quarter and full-year earnings results early next year. We also look forward to sharing our long-term outlook, along with updates on our growth strategies at our 2027 Investor Day on March 25th at the New York Stock Exchange. We will provide additional information on this event over the coming weeks. With that, I will now turn it back to Jim.

Thanks, Sam. In summary, during the quarter, we delivered robust revenue and earnings growth on sustained demand from physicians, hospitals, and consumers, complemented by productivity gains from AI and automation. Revenues grew by 10% and adjusted EPS grew by over 15%, demonstrating continued broad demand for our innovations and insights. With our strong business performance and growth momentum, we are raising our revenue and EPS guidance for the full year. I want to close by thanking my Quest colleagues for their commitment and care to delivering diagnostic insights to create a healthier world, one life at a time.

Thank you, Jim. Now we would be happy to take your questions. Operator?

Thank you. We will now open it up to questions. At the request of the company, we ask that you please limit yourself to one question. If you have additional questions, we ask that you please fall back in the queue. To be placed in the queue, please press star one from your phone. To withdraw, press star two. Again, to ask a question, please press star one. Our first question comes from Ann Hynes with Mizuho Securities. You may ask your question.

Good morning, and thank you for the question. Thanks for the details on PAMA. Can you just provide some color on how much of the PAMA headwind you could offset and maybe some other high-level headwinds and tailwinds we should consider for 2027? Thank you.

Yeah. Thanks, Ann. Good morning. Let me just make a few comments on PAMA, the data collection process, and then I will have Sam talk about offsets and things like that. CMS yesterday released some very important data. I do not know if you all saw that. We had been pushing CMS since they announced the fee cuts to provide the information and the volumes by the segment. So how much of the data came from independents, how much came from hospital outreach, and how much came from POLs? Recall in the last survey that over 90% of the data came from independent labs, and independent labs surely do not have 90% share of this market. On the new, what they released yesterday is that the independents represented 76.5% of the volume reported. Again, it is way overestimating the share that independent labs have.

Hospital outreach, which has a significant amount of share, hospitals owning outreach share, was less than 10% of the data reported. If you do not have information, strong volumes being reported by the hospital segment, again, it is going to shift the volume-weighted median way to the left. With this information, it emboldens us even further to push fast and furious for the RESULTS Act. Now, what we are doing, our trade association, Quest, and all the members continue to work hard to pass the RESULTS Act. We are eagerly anticipating a score by the CBO. We think that will come at some point in mid to late November. Once that score comes out, the primary committees, House Ways and Means, House Energy and Commerce, Senate Finance, they will convene, and we are going to urge these committees to include the RESULTS Act in some end-of-year package.

We are going to continue to push hard for the RESULTS Act. Again, we are emboldened even more because now we realize that, again, the data collection process has way overestimated the share position of the independent labs. Sam, let me give it to you to talk a little bit about our budgeting process and offsets and things like that.

Yeah, thank you, Ann, for the question. I think you asked about PAMA offsets. First of all, as we mentioned on the call, the impact from PAMA, we expect to be next year roughly 1% of revenues. That is largely consistent with our expectations prior to the data collection and the outcome of the data collection. As we have indicated repeatedly, I think, in the past, we intend to offset a portion of this impact. When we announce our Q4 results, provide guidance, we will give you a lot more clarity on what that means, assuming that the PAMA impact is real and has materialized or is about to materialize because PAMA, essentially the prices have come down, if that in fact were to happen. In terms of just qualitatively on 2027 impacts, first of all, as I said, roughly 1% of impact from PAMA.

We intend to offset a portion of it. We are going to look at many aspects of our, I would say, infrastructure, support functions, and look at potential efficiencies that we can generate beyond the efficiencies that we have been generating across our business. We will not impact things that drive growth. We will not impact our front line. We will not impact our lab operations in any way or our ability to serve patients, because utilization has been very strong, and we continue to be very pleased with the utilization that we are seeing.

Again, in terms of 2027, without giving you numbers, I would say the Corewell and Fresenius impact, which we expect this year to be roughly 3% in terms of additional revenue growth, that obviously will not be a factor next year in terms of growth because we will lap these partnerships in October of this year.

We've got the 1% impact from PAMA. If it were to happen, that would be a negative impact on revenue growth.

Utilization, we expect it to continue at the same levels that we're seeing. There's no reason to expect any moderation of the utilization that we're seeing. From a margin perspective, Ann, we do expect to see some continued improvement on the margin from those two partnerships, Corewell and Fresenius as we enter 2027. As we said before, those came with lower margins because of integration and investments, integration expenses and investments, but we expect improvement on those margins in 2027. We will be making additional investments in Project Nova as expected, because we intend to at least launch Epic in our first lab at the end of 2027. We do intend to make some investments in Project Nova that are beyond the investments that we've made in 2026. There will be some additional expenses year-over-year regarding Project Nova.

From a pricing perspective, ex PAMA, we expect to maintain this flattish outlook in terms of pricing across our third-party payer partners.

Thank you. Our next question comes from Michael Cherny with Leerink Partners. You may ask your question.

Good morning, and thank you for taking the question. Maybe if I can just dive in a little bit on that underlying 5% volume growth. This seemingly tracks above most market stats that we see, and as you think about where that growth is coming from, can you give a little bit of the dynamics of where your execution comes from versus what market underlying performance, and how do we think about your growth going forward, in terms of what you have the ability to control, relative to trying to outpace the market? Thank you.

Yeah. Good morning, and thanks, Michael. Let me start, and Sam can interject here. The 5% you referenced here is our volume growth in the quarter, ex Fresenius and ex Corewell. So it was 5% volume growth and 6.6% revenue growth. As we look across the channels that we always talk about, our physician channel, our hospital channel, both reference and Co-Lab Solutions, and our consumer channel, we are seeing strong growth across all three. In the physician channel in the quarter, revenue grew above mid-single digits, so strong revenue growth, strong volume growth. In our hospital reference business, again, this is reference, not Co-Lab Solutions, not Corewell, our volumes were double digit in the quarter, revenue slightly less than that, but strong growth through our hospital segment.

As I noted in the commentary, our consumer channel, all in, both Quest Health Direct plus our partnerships continue to generate growth north of 30% this year. So I would tell you it's across all channels in our business, and we feel good about this going into next year.

Great. Thank you. Operator, next question, please.

Thank you. This question comes from Erin Wright with Morgan Stanley. You may ask your question.

Great. Thanks. I want to dig into consumer a little bit and talk about your partnership with Apple. How do you expect that to ramp here as it kicks off, and are there any nuances to the relationship that are inherently different from contracts with other wearables or consumer platforms, and how material do you think this will be for you? Can you remind us of just the overall pricing environment across the consumer-directed business? Thanks.

Yeah. Thanks, Erin. Look, we are really excited about the Apple Health partnership. It is in what I would call beta testing mode at this point, and they expect to go live at some point later this year, before the start of next year. I gave a lot of detail in the script. It is $119 rack, the types of biomarkers. We are going to do like we do for other what we call employer health stuff. We do check the patient's weight, and blood pressure in our PSCs. That is routine for other types of wellness work that we do. It is a seamless experience that one can use through the Apple Health app. I cannot really provide a forecast because we will have to wait and see after the launch how quick the uptake is. But it is a great partnership.

Look, the ability to combine biometrics with biomarkers, we strongly believe will unlock additional insights into what is going on inside the human body. Those insights then can lead to actionable actions for the patient consumer to take in order to improve their biomarkers, which ultimately leads to an improvement in their human health. So, excited about it. Again, expect full launch later in the year, and we will know more in terms of the uptake, and we will probably comment on that in January. You asked, Erin, as well, this is Sam, about pricing across consumer. Let me focus more on margins across consumer. Margins across our consumer business are actually accretive to our overall operating margins. So, that is an important note because as you see, this channel is growing above 30%, and it is really driving also accretive margins.

The reason margins are accretive to our overall business, number one, no denials, no patient concessions. So we benefit from that tailwind in addition to the fact that these are much more dense requisitions. So we see sometimes 10 tests per requisition and maybe even north of that in certain cases. So you see dense requisitions that help our overall tests per requisition and also more accretive margins. So that is the part that I wanted to make sure is clear.

All right, great. Thank you. Next question, operator.

Thank you. Our next question comes from Tycho Peterson with Jefferies. You may ask your question.

Hey, thanks. I want to maybe just pick up on the margin commentary. So, 40 basis points this quarter, how much of that's volume leverage versus Invigorate? Maybe can you just talk a little bit about how you're thinking about the automation AI angle on margins going forward?

Yeah. I think, Tycho, to be fair, it's a combination of the leverage you get off of volume. This is a rather high fixed cost business, so an incremental rec drops down at a very, very nice contribution margin. But our Invigorate program, we've always targeted for our Invigorate to offset wage inflation at 3%, probably north of 3% this year, somewhere between 3% and 4%. That's at least $120 million of pressure on us every single year. I do not know that we mentioned fuel cost in the script, but we had given an estimate of $10 million for the year. It's actually going to be closer to $14 million based on prices going up again here in the third quarter, and we do not see them coming down at this point in the fourth quarter. So we're offsetting that. So our Invigorate program continues to deliver.

You push through the organic volume, you deliver on the Invigorate, and that's what leads us to 40 basis points of margin improvement in the quarter.

Great. Thanks, Jim. Next question, operator.

Thank you. Our next question comes from Lu Li with BofA Global Research. You may ask your question.

Great. Thank you for taking my questions. I think earlier you mentioned the utilization is still pretty good, but I am wondering can you comment a little bit on the ACA disenrollment impact? What do you see in the second half? Then maybe just tag on a one short one. I think you have an 8-K out this morning on the cybersecurity. I am wondering if you have any more color on the potential financial impact. Thank you.

All right. Let me address the ACA and Sam will give some comments on the additional 8-K. So, in the quarter, we saw a reduction of about 11% in terms of rec volume from ACA exchange members. Requisition volume down 8%, but our tests per rec on those requisitions was up 8%. The net impact from a pure test standpoint was down 3%. When we then look at the types of tests that are being ordered on that requisition, it suggests a higher acuity patient. These are higher revenue tests. The net impact overall was maybe 10 basis points of revenue loss on the exchange. It is next to nothing. We are not really feeling an impact from it like some of the health systems hospitals are reporting. In terms of the additional 8-K filing, Sam, you can comment on that.

Yeah. Thank you for the question. Yesterday we learned of unauthorized access to a test ordering system used by certain clients who do not use an EMR. As we stated in the 8-K that we filed this morning, this incident has not materially disrupted our business operations or our ability to serve physicians and patients. The investigation is in its early stages. We are not in a position right now to provide any more information or take additional questions on the details at this time, but we will provide updates as appropriate as we go forward.

Thank you. Our next question comes from Lisa Gill with JPMorgan. You may ask your question.

Thanks very much. Jim, I just want to go back to your comments around PAMA and just really understand two things. One, when we think about the RESULTS Act, have you quantified what the impact of RESULTS would be? Two, we have heard rumblings that potentially we have another delay of PAMA as they try to work through RESULTS. What is your anticipation there? Lastly, I know it has been asked around the offsets, but historically you have talked about this being roughly $100 million. Now you are talking about 1%, which would be like $125 million. As we think about modeling for 2027, all things being equal today, should we assume that there is roughly $20 million or $25 million that you can offset, or is it more logical at this point to put $125 million into the model?

Okay. So, again, on the data itself, 76.5% of the data collected by CMS here in 2026, which was from the January to July period of 2025, came from independent labs, which we know is significantly higher than the share that independent labs have. Only 9%, less than 10% came from hospitals, and we know that the share of the outreach market by hospitals, primarily from the physicians they own, is significantly higher than 9%. That obviously affects the volume weighted median calculation in a very adverse way. So again, with respect to the RESULTS Act, it requires a CBO score. We expect that CBO score to come, we are being told, in the mid to late November timeframe. Then we go hard at work through the committees. I cannot give you a probability of RESULTS Act getting included or the potential for another delay.

What has seemed to become traditional at the end of the year is some type of healthcare package. There are always extenders that look to be extended, and so our goal is to be included in that end-of-year package. Could there be a delay in the raise? That is always a possibility. Obviously, if we do not see RESULTS getting done, if the committees cannot get together and get agreement on the new approach, then we will push for a delay.

Having said that, the House Ways and Means, I am sorry, the House Energy and Commerce had a hearing on the RESULTS Act earlier, late this summer. It was a positive hearing. So we believe it has momentum. We have stated that over 135 congressional people have signed on to support it. So when Congress is back in session post the election, we are going to be hard at work.

We are hard at work right now. We are visiting with staff members on both the Senate and the Finance side that still remain in Washington, D.C. In terms of the offset, look, we would love to give you a number, and we are not being coy at all. We have said 1% of 2026 revenue, $12 billion. Cannot give you guidance yet, but expect it to be another $500 million or $600 million next year. So take 1% of that number, and that is the impact. That is from Medicare, that is from Medicaid plans that are absolutely tied to the Medicare. It is not managed Medicaid, it is straight Medicaid plans. Then there is a very, very small number of health plans that over the last five years, we did not get off of a tie to that schedule.

But over the last five years, the vast majority of our health plans, we have taken out any language that would tie their fee schedule to a Medicare fee schedule. So we roughly feel it is in that 1% range. Is 100% of that going to drop to the bottom line? Absolutely not. Okay? We are in the midst of our budgeting process. As Sam said, the things we are not going to touch are the variable cost structure of the company, which we produce Invigorate savings on every year. We cannot touch phlebotomy. We cannot touch logistics. There are always going to be more efficiencies in the lab. But given the incredibly strong volume growth that we have right now, we have to keep the frontline physician staffed in order to handle the volume. The best way to offset this is to grow our way out of it.

Now, we are left with $1 billion of other costs in the company outside of the work required to provide patient results. As Sam indicated, we are in the middle of our budgeting process right now. We go through every program in the company, and some we will delay, some we are going to keep because they are important to growth in 2027, 2028, and 2029. So there will be some portion that we offset. Again, we are not trying to be coy. We are working through our budgeting process, and we will give you the firm uptake on our January earnings.

Yeah. So key takeaway, Li, says don't assume the full impact in your model. There will be an offset. We can't tell you what the offset is because we are working through our plans right now.

Okay. Thank you. Next question, operator.

Thank you. Our next question comes from Luke Sergott with Barclays. You may ask your question.

Great. Thanks. Jim, congrats on the Brew Crew. I just wanted to follow up on the PAMA stuff because you just said at a recent sell-side conference that you didn't think it was going to be more than $100 million impact. Now you're talking about $125 million-$165 million after you've sharpened your pencils on it. Can you just talk about where that incremental headwind came from, or what led you for the increase there?

Yeah. Look, I think we've always set a range of $100 million-$120 million, not knowing the results of the latest data collection process, which again, we believe to be flawed. There were 1,500 codes that are going to get some type of reduction. 775 of those, Luke, are going to face the maximum 15% cut. It wasn't an exact science that we knew until the data came out. There's again, 775 that get a 15% cut. 1,200 in total will get cut of the 1,550. There's less than 15% codes on another roughly 400-500. So that's how we sharpen the pencils. Now, did we expect it to be 15% on 775? No, we didn't.

We didn't expect the data process to come out this way. Obviously, based on the data I gave you, that 76.5% of the data came from independent labs, we thought it would be a better process, but it wasn't. We can't change that now. All we can do is push for the RESULTS Act. I will give you one prediction, though, today, and that is the Brewers in six games. Thanks for the question.

Thank you. Our next question comes from David Westenberg with Piper Sandler. You may ask your question.

Hi, guys. This is Sky for Dave. Thanks for taking the question. Could you help us understand the drivers of the increase in DSO in the quarter? I think you previously described the movement as time related, but can you just remind us how much of that is reflecting normal seasonality or collection timing? Also, how should we think about the cadence of DSO over the next 12 months? Thanks.

Yeah. So, thank you for the question. First of all, let's talk about a couple of things which drive the DSOs that maybe are part of your question and maybe to alleviate some of your concerns there. We look at two key things that are drivers of our business and our ability to collect from our patients, from our customers, and those are bad debt and what we call patient price concessions. Bad debt is usually what we attribute to our inability to collect from certain client bill customers, mostly hospitals, and patient price concessions are the inability to collect from patients on whether it's their copay or if they're uninsured patients that we haven't collected from at the time they come to our PSCs, for instance, then there might be a bill that we might not be able to collect from them.

Now, for those two, bad debt and patient price concessions, we have not seen any meaningful increase on both of these. Patient price concessions are flat versus same period last year. Bad debt is mostly in line with what we have seen traditionally. So there's no issues with regards to those two. DSOs are up about three days since year-end. A lot of that is mix driven by some of our client bill business, which usually has longer terms on it. That doesn't mean it's higher exposure. It just means we have longer terms and we collect on those longer terms accordingly. There's also a nuance here with regards to less collection days in Q3 and so far this year in terms of less banking days than we had last year. So that also drives DSOs higher.

In terms of what we expect, again, no meaningful negative impact on patient price concessions or bad debt. Those are still in line with what we see historically.

Thank you. Our next question comes from Elizabeth Anderson with Evercore ISI. You may ask your question.

Hi, guys. Thanks so much for the question. Maybe one housekeeping question and one longer question. In terms of, I heard what you said about the Nova investment in terms of your expectations being stable Q3 versus Q4, sorry, for the full year. Is that true within the quarters as well? If we think about PAMA, you have done a great job, obviously, being able to share with us what you know so far about the potential impact. Are you expecting it to have any impact on other types of pricing apart from those who just specifically price based on the CLFS?

Yeah. Thank you, Elizabeth. Let me start with the Nova piece, and Jim can talk about the PAMA impact, and I think you're referring to some of the health plan contracts. With regards to Nova, let me just make sure everybody is on the same page. We expect this year that it's going to be a $0.25 impact. We expect that 70% of that impact is going to be in the second half, 30% in the first half. Our expectations between Q3 and Q4 is that there's a slight ramp in Q4 versus Q3. If you think about that 70% in the second half, it's more tilted towards Q4 in terms of investment, which is fairly in line with the activity on the Nova project overall.

As we progress through this project, we are incurring more expenses around the resources that are involved and all the efforts that go into it as we now go from design to build stage. Jim, did you want to refer to the PAMA or address the PAMA?

Yeah. Again, on the PAMA impact, $120 million, which includes Medicare and straight Medicaid state fee schedules that are tied to Medicare. Look, we have probably over 700, maybe even closer to 1,000 contracts with various health plan organizations. I know we're used to the big five or six and all the Blues plans, but there's a lot of various health plans out there. A very, very small minority of those contracts had some tie to the Medicare fee schedule. Over the last five years or since the first hit on PAMA, our organization worked incredibly hard to make sure in all of our contracts that language was completely taken out, and for the most part, it was. We look at our health plan book of business. Every year, we're getting some price increases. We've been saying on the calls that we've been flat to slightly up.

Whatever that impact is will be worked in the construct of the entire health plan set of contract negotiations. As you know, we routinely negotiate 1/3-1/4 of all health plan contracts every year in our business. Any addition beyond that 1% impact is worked within the construct of those negotiations. Great. Next question, please.

Thank you. Our next question comes from Kevin Caliendo with UBS. You may ask your question.

Thanks for getting me in. I appreciate it. I just want to talk a little bit about the organic volumes and sort of what's driving and how to think about the weather impact and HIX and the like. Organic volumes, ex-Fresenius and Corewell improved sequentially. Rev per req came down sequentially. I'm just wondering if there was anything related to mix and how to think about weather year-over-year, if there was any impact. I think there was no weather last year, no weather this year, if this is like a true number. If there was anything in the mix that affected the rev per req number, which again, I think was closer to 3% in the first half of the year, it was 1.7% in the third quarter.

Yeah. Thanks, Kevin. Let me address it. Organic volume growth in the quarter, again, 5%. In Q2 it was 4.1%, for the year it's running 4.3%. You did note a shift in rev per req increase from Q2 to Q3, in Q2 roughly 2.9%, in this quarter 1.7%. Here's what's driving it. As I mentioned, on one of the questions, our growth from the hospital reference business was up significantly. It was double-digit volume growth in the quarter. What we saw in the quarter, what was driving a bunch of that growth, was a lot of single test reqs from some very large health systems that were leveraging our Lp(a) business or leveraging our Alzheimer's business. Hospital reference work in general has a very low test per req. It's like 1.6 tests per req.

We saw that number drop slightly because, again, a lot of organizations started to leverage our capacity for some very important tests. The other thing we saw in the quarter, we haven't talked much about it, but was the cyclospora spurt that the volume that came our way during the third quarter. Those were a lot of single test requisitions. The revenue on that test is pretty low, $15, $16 or somewhere in that range. That's why we saw a shift down in the growth rate of our rev per req. Again, it's still growing. It's growing at a very nice clip. It just slowed from Q2 to Q3. Again, nice volume increase sequentially Q2 to Q3 from 4.1%-5%.

Kevin, let me add a couple of points as well, I think, to address the other parts of your question. First of all, just to close out on the rev per req comment from Jim. Within that 1.7%, excluding Corewell and Fresenius, within that growth of rev per req, there is no negative price impact, okay? I just want to make sure that is clear. Price is relatively flat, which is in line with what we have been seeing in past quarters. With regards to volume, it is a clean volume quarter. The 5% has no unusual items within it. It does not have any weather, or mostly no weather impact. We have had a pretty, I would say, good weather quarter here in Q3. So there is no negative weather impact.

With regards to HIX in the quarter, we did have a 10 basis point impact from HIX, and Jim mentioned that earlier. Expectation for Q4 is that we have sized it as a 10-20 basis point impact from HIX in Q4. But again, pretty modest impact because what we are seeing is higher acuity patients staying, tests per req increasing with the patients that are remaining on the exchanges.

Thank you. This question comes from Jack Mann with Nephron Research. You may ask your question.

Thank you. Good morning. Hope you guys are doing well. I want to follow up on Tycho's margin question. Looking at it sequentially, I was just surprised. I think Q2 historically is usually the high watermark for the year and margins improved sequentially. I was wondering if maybe you could just walk us through, was there anything that stood out for why this year kind of bucked the normal seasonality and whether there's any change in the business that we should be thinking about? Thanks.

Yeah, thanks, Jack, and hope you're doing well. This is Sam. From a sequential standpoint, yeah, so we were essentially up, and I'm referring to operating margins here. We were up 20 basis points versus Q2 of 26, so the past quarter. A couple of things as we think about that. We did have the improvement in the margins on Corewell and Fresenius helping us as we go from Q2-Q3. As we said, sequentially throughout the year, we're going to continue to improve the margin rates of those partnerships, so it's in line with that. Some SG&A leverage that we saw in Q3, some benefits on SG&A that we talked about in our prepared remarks, but really nothing that's that substantial. There's also a benefit related to supplemental deferred compensation, which is entirely driven by market performance.

It's a mark-to-market valuation of those investments in our supplemental deferred compensation plans. We saw a hit from that in Q2. We saw really no material impact from that in Q3. I'll remind everybody, that's a neutral EPS impact. It just impacts operating margin. It did help Q3 operating margins versus Q2. So those are the main things there, Jack. Nothing that's materially impactful in terms of business performance, except for the Corewell and Fresenius sequential improvement in margins that we are pleased about.

Thank you. Our next question comes from Yoojin Park with Baird. You may ask your question.

Hi. Thank you for taking my question. I wanted to get back into the PAMA estimates comments. You talked about 1.3% cumulative impact on revenue from 2027 through 2029. This implies some incremental impact in 2028 and 2029. Can you talk a bit more about year two and year three impacts? Thank you.

Yeah. Thank you for the question. We're not going to provide a breakdown right now in terms of how that breaks down between 2028 and 2029. Again, these are estimates.

We're still going through the data and really analyzing it and getting more precise on these estimates, especially for 2028 and 2029. But I think what we've said, I would say it captures mostly the impact that we expect in those two years, which is a 30-basis-point cumulative impact of revenues and a roughly 1% impact of revenues in 2027.

Thank you. Our next question comes from Jared Haase with William Blair. You may ask your question.

Quest Diagnostics (DGX) Q3 2026 Earnings Call Transcript

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