Welcome to the Quest Diagnostics Second Quarter 2019 Conference Call.At the request of the Company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.Now, I would like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Please go ahead.

Thank you, and good morning. I’m here with Steve Rusckowski, our Chairman, Chief Executive Officer and President; and Mark Guinan, our Chief Financial Officer.During this call, we may make forward-looking statements and 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, references to reported EPS refer to reported diluted EPS from continuing operations, and references to adjusted EPS refer to adjusted diluted EPS from continuing operations, excluding amortization expense. References to adjusted operating income for all periods exclude amortization expense. Finally, growth rates associated with our long-term outlook projection including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth, are compound annual growth rates.Now, here is Steve Rusckowski.

Thanks, Shawn, and thanks everyone for joining us today. This morning, I’ll discuss the second quarter and review progress on our two-point strategy. And then, Mark will provide more detail on the results.Our volume growth accelerated in the second quarter and we continued to build momentum through the first half of 2019. Our expanded network access continued to accelerate volume growth and our strategy to drive operational excellence improved efficiency. Both have helped to offset the significant reimbursement pressures we are experiencing this year.For the second quarter, we grew revenues despite significant reimbursement pressure; reported EPS was $1.51, down about 4% from the same period of 2018; adjusted EPS was $1.73, down about 1%; volume growth remained very strong at 4.4% as the expected volume continued to accelerate in the second quarter. Year-to-date, volume growth is now at 4%.Now, let me briefly update you on three fundamental changes in the laboratory marketplace. They are PAMA, our expanded network access, increased consumerization of health care. First, PAMA-driven reimbursement pressure remains a catalyst for structural change in the marketplace. Our Medicare rates in the first half of 2019 were down by 10% from the prior year, which is in line with our expectation. The next data reporting period remains scheduled for the first quarter of next year. However, we are encouraged by the introduction of the Laboratory Access for Beneficiaries Act or LAB Act introduced in the House last month.The LAB Act would be the first step towards ensuring clinical laboratory service rates under PAMA are sustainable and Medicare beneficiaries have adequate access to crucial laboratory services. By delaying the next round of PAMA data reporting by one year, the Lab Act will provide all applicable laboratories with additional time to report private payor data. A second provision in the Lab Act…

Thanks, Steve.In the second quarter, consolidated revenues were $1.95 billion, up 1.8% versus the prior year. Revenues for diagnostic information services grew 2% compared to the prior year, driven by strong volume growth and acquisitions, partially offset by higher reimbursement pressure and patient concessions. Volume measured by the number of requisitions, increased 4.4% versus the prior year. Excluding acquisitions, volumes grew 2.9%.As we said before, not all volume is created equal and we regularly emphasize our strategy to be price disciplined. Recently, we had a few of our capitated contracts open for renewal. These contracts, while profitable in the past, represented large volumes at very low margins. In the competitive contract renewal process, apparently one of our competitors was willing to offer lower rates that were prospectively very unprofitable for us. Therefore, rather than accept the rate cut, we walked away from the business. Walking away had very little top and bottom line impact, but did create a 70 basis-point headwind volume to our organic volume growth and will do so throughout the balance of the year. We believe this is important for you to understand as you assess our relative volume performance. Despite that headwind, organic volume growth accelerated in the second quarter, consistent with our expectations.Revenue per requisition declined by 2.3% versus the prior year, driven primarily by higher reimbursement pressure and patient concessions. Unit price headwinds were approximately 2.3% in the second quarter. This includes the impact of PAMA, which amounted to a headwind of approximately 120 basis points. As a reminder, the PAMA impact includes both direct cuts to the clinical fee schedule as well as modest indirect price changes from Medicaid and a small number of floating rate contracts.Reported operating income was $307 million or 15.7% of revenues compared to $305 million or 15.9% of…

Thanks, Mark.To summarize, our growth accelerated in the second quarter due to our expanded network access, and we continued to build momentum through the first half of 2019. Our strong volume growth combined with our strategy to drive operational excellence enabled us to help offset the significant reimbursement pressures we're experiencing this year. We're excited to be back for being a new Preferred Lab Network status, with UnitedHealthcare, and the opportunities to extend this approach through other players in the marketplace are with us. And then, finally, we believe we're well-positioned to meet our commitments in 2019.Now, we'd be happy to take any of your questions.

Thank you. We will now open it up for questions. [Operator Instructions] Our first question comes from Ralph Giacobbe with Citi. Your line is open.

Thanks. Good morning. Can you maybe help on how volume progressed through the quarter, if you're still seeing a build sort of month to month there, if it has stabilized? And then, I just wanted to kind of clarify what you said around sort of the capitated contract that you lost? Is that a regional or a national contract? And then, just help us on kind of the timing on when it happened? And just broader thoughts, obviously, there's a lot of discussion around the open network approach and sort of structural changes there. So, this goes sort of against that tide. So, maybe flush that out a bit for us. Thanks.

Sure, Ralph. So, because we have these artificial conventions called fiscal years, months, quarters, et cetera, there is going to be some noise. So, if you look at our volumes throughout the quarter, they didn't accelerate each month because of the calendar. However, when you look at -- there is something else to look at, which requisitions per day on an apples to apples basis, they did absolutely continue to grow throughout the quarter. And as I noted in my closing comments, that is our expectation for the balance of the year. So, throughout each month, the beginning of the year, in the first quarter, we saw accelerate volume growth; and then throughout the second quarter when you look at an apples and apples comparison, absolutely, we continue to strengthen, despite that 70 basis-point headwind. The headwind itself was actually a handful of regional capitated contracts, they were exclusively capitated. There was no fee [ph] for service element in those contracts. And as said, they were very large volumes and low margins. And they started feathering in beginning of the year, really fully hit us largely in the second quarter.

Our next question comes from Kevin Caliendo with UBS. Your line is open.

Hey, guys. Great. Thanks for the question. This is Adam Noble in for Kevin. I just wanted to see if you could size, in the second quarter, what the benefit to the organic volumes was from managed care access versus just general market growth? And did you expect to have further penetration of those contracts in the back half?

Yes. Let me start and then I’ll pass it to Mark. First of all, we continue to talk about we’re always looking at the marketplace and trying to understand what's going in the marketplace. And with all our measurements and metrics that we have, and we've talked about for many years now the same store analysis, we still believe the market is stable. We see stable volumes in our physician accounts and also our hospital business seems to be stable versus the prior year. So, Mark, can you add some color beyond that?

So, it’s hard to tease out specifically. I think, to Steve’s point, we don’t think the market has been accelerating in terms of its growth. So, we say market access, if you're asking specifically around United versus more generally, as we shared in the prepared remarks other than Aetna, we’re obviously -- we had a major competitor who entered that contract. We were the sole national. And we’re growing at every single major health plan. So, in terms of market access, it’s not just United. Obliviously, it just makes us more competitive; it enables us to win the office. And so, therefore, we’re seeing growth across the board, not just limited to United or Horizon.

Got you. If I could just sneak in one more, just any update around the M&A pipeline. Neither you or your main competitor announced any acquisitions year-to-date. Is that a more function of a elongated conversion time line or are you seeing any change to the size or nature of the pipeline?

Yes. So, you saw in our results that we inched up a little bit Q2 versus Q1 in terms of the amount of our revenue from some acquisitions. So, we're feathering in some of the acquisitions and they are delivering well. Second is, as we said before and we’ll continue to say and our funnel remains strong. We have a number that support our ambition to be close to 2% this year and into future. So, we keep on working on that. And just what I said in my remarks, the pressures that we see are now becoming real and becoming more visible. And those pressures are with PAMA cuts, some of that does extend itself, particularly for hospital outreach businesses and for Medicare rates, and then the commercial changes that I talked about in my prepared remarks are clearly going to impact the hospital marketplace and the independent lab marketplace. And so because of that we continue to have a lot of conversations around integrated delivery systems, lab strategies. And you again saw that we announced this new deal with Catholic Health systems out of Long Island, which is another supporting proof point that we continue to advance our strategy in that front. And the pipeline will be there to support our strategy, as we indicated.

As Steve highlighted and as you noted, we did the transaction in the second quarter. As Steve commented, we did get more growth from the M&A, we closed a deal, regional acquisition, Boyce and Bynum in the first quarter. So, obviously, we’ve got the first full quarter of growth from that in Q2. And I would say, there is no attitudinal change in terms of people’s view around potentially getting out of outreach, hospital customers. And certainly, some of the regional labs are feeling the PAMA pain. I think, the interesting dynamic that we’ve seen has been actually more of the conversations with hospital systems are getting broader. So, it’s not just about outreach but actually about doing a PLS deal, doing a reference deal and potentially selling the outreach, like we did with PeaceHealth last year, and that’s a positive. But on the other side, those take longer. And an outreach deal can be done much more quickly. So, that dynamic has emerged a little bit over last year, so, which adds a little bit to the timeframe to get these transactions completed.

Our next question comes from Ross Muken with Evercore. Your line is open.

On the cost side, I mean, it seems like pretty strong sequential OpEx management. I know that you called out in Q1 it’s a pull forward. But, give us a little color, it looks like restructuring tick up a bit, your depreciation came down, how you are tracking on your cost plan and sort of some of the realization of the main program versus some of the other timing elements that played out.

Yes. So, I’ll start again and Mark will follow. We continue to execute our plan for 2019. We indicated in our first quarter that we have planned for a number of restructuring efforts to start to kick in, start to kick in, in the second quarter. That will continue in the back half of the year. So, we feel good about that. So, we think we have our handles on the levers of cost in the right way. And then, second, Ross, is we continue to drive our operational excellence program. I did say in my remark, it’s 3% of our cost saves, and I'll remind everyone, that's about $200 million. And we continue to yield good results from that. We continue to see good productivity across the board. And yes, that's expense areas but also in cost of sales. And we will continue that into 2020 or 2021. So, Mark?

Yes. Ross, I thank you for reminding everyone. There were really the two drivers, if you look into Q2 versus Q1. One was the investments that we did at the beginning of our new access in terms of some marketing, adding some commercial resources, et cetera. Certainly, we haven't stepped back on the commercial resource. We have stepped back on some of the marketing campaign information. There were also some things that were expensive because we were betting on the commanding [ph] patient service centers, adding some logistics, assuming the volume would come, making sure we were in position. Now, that volume is coming, it just became kind of the classic typical cost of sale. So, it’s not incremental expense. And then, the other key driver was the restructuring that we completed at the end of the first quarter, which had taken out, on a run rate basis, a substantial amount of expense. That will continue throughout the balance of the year and going forward.

Our next question comes from Stephen Baxter with Wolfe Research. Your line is open.

I wanted to try to understand the sequential improvement in the decline of revenue per requisition. So, obviously, PAMA is a known quantity at this point. So, I was wondering if you could update us on some of the other moving pieces there, whether it's commercial pricing or bad debt. I guess, the other potential is, maybe this capitated contract, you just got -- had some kind of impact. Any color you can give there is very helpful.

Mark, why don’t you take him through the math?

Yes. So, typically, in terms of commercial pricing, typically those contracts run on the calendar year. There's been a couple of exceptions where we've done things in the midyear. So, there really wasn't anything in terms of commercial price changes between Q1 and Q2, nor, as you know, is there anything different than PAMA? So, this was really driven by mix. Some of it was some test mix as have some seasonality that can drive things up or down in the rev per req. But as we’ve noted, that doesn't always necessarily directionally align with profitability, even though it does drive changes in rev per req. And then, of course, losing some of the capitated revenue certainly is a lift from a mixed perspective. And then, finally, PLS is a driver as well. Because as we shared in the past, those tend to be more basic requisitions, got a lot of complex testing, and, certainly as the PLS grows, business grows disproportionately; to the rest of the business it can add or put a drag on our revenue per req.And then finally, patient concessions. When you look at the patient concession rate in the second quarter versus the first quarter, it was improved. And, a lot of that is really the result of the efforts that we've had to really improve the collectability of a lot of the tools that we put in place at our patient service centers with our real time adjudication to give people that cost upfront, the ability to collect the credit card as well as really working hard with our partner Optum to get better information on pensions, do a better job of presenting the bill and overall collecting at a higher rate.

Our next question comes from Ann Hynes with Mizuho Securities. Your line is now open.

So, in your prepared remarks, you did talk about all the payers initiatives, what they are doing on the PLN side, you specifically mentioned them and some recent contracts include some PLN aspects. Can you just go to more detail on what you are talking about? Thanks.

Yes, sure. Well, first of all, let’s go back to the opportunity this year. The biggest opportunity is best to access -- health insurance access we have for over a decade. And the PLN is going to be nice to have and it will provide some more momentum, and we believe it’s a nice lever for us. And yes, we talk a lot about the effect that will have with United. But as we talked about, we're having a number of conversations with other payers. And then, finally is some of the new contract extensions that we already have signed include some of the elements that we will talk about.United will be releasing more and more as we go and they will provide details. As I did mention in my remarks, if you are out of network, it’s going to require more authorization to allow that to happen. So, that’s one point. Second is what we’ve said in the past is there clearly will be a benefit design change, so less out of pocket cost for consumers. And then, third, there will be physician incentives. So, when you think about what's going to be the big element, it’s all around benefit design, less out of pocket cost for consumes, physicians being managed to drive towards that preferred lab network and then finally is really making sure there is no leakage to other network. And it will be stronger than ever with United and we see a lot of momentum with other payers as well.So, more to come on that, Ann. But, we're off and running and working this hard, and we do believe it’s going to be an additional lever. We don’t let it overshadow that the biggest opportunities were back in network. And what I also said in my remarks, yes we had good growth obviously from United but all our major health plans grew with the exception of that network, we actually did expect the modest decline which we saw.

So, just to add, Ann, to Steve’s point that a lot of the benefits of the PLN type elements is still in front of us. So, it hasn’t driven the volume growth to this point, it’s an enabler to continue to drive. So, what are some of those things and it’s going to be different by payer type. But these are concepts that we’ve talked about and various payers have embraced some of these or are all of these to a certain extent. A lot of them are rooted in us getting additional payment or a bonus payment what have you as we’ve shown the ability to scale work to better value away from higher cost providers.So, we’ve gotten that in a couple of contracts recently where we have a metric in a way of showing that as they save money, as their members save money that we get a piece of that. And so, we’re aligning those incentives. Number one is around treatment of preauthorization, which is a huge driver for denial. So, and a couple of payers we’ve gotten -- as our chief competitors and some others, the lab that have shown themselves to be high quality, actually differentiate themselves positively from a service perspective and other things around panels and how conduct themselves. We’ve actually gotten the status where they wave the preauthorization. So, it's an advantage for us from a physician ordering perspective that payers, as we know, if you send the work to these, following labs that who are going to be okay with it. So, therefore, you don't require a preauth. So, that's another element that we've gotten in some of our contracts.Steve mentioned some of the zero out of pocket, and some of the payers are coming up with products that they are offering, but obviously got market. We’ll see the adoption rate and then some other payers have voiced an interest in going heavily in that kind of plan benefit design. So, again, it's not as if there's a one size fits all. That's why we talk about these being in elements in some of the other payers. And then, finally, there is a lot of interest in kind of sharing we’ll call it the win fail game from our outreach acquisition. So, when we buy hospital outreach, obviously those commercial rates immediately go to our negotiated rates, which is a huge savings for patients, huge savings for the payer and the notion that, hey, this is good for all stakeholders, and we should share some of that value.So, those are a couple of details that certainly have gotten a lot of traction with the payers. And as Steve pointed out, that is in front of us. So, when I say in front of us, we've gotten those in some of the contracts but obviously, we have to perform and we have to earn those. And then, those are upside going ahead.

Our next question comes from Lisa Gill with JP Morgan. Your line is open.

Good morning. I'm just wondering if you can maybe just give us an update on your consumer retail strategy. I didn't hear anything in the prepared comments this morning.

Yes. It’s one of our strategies for growth. And several parts of being what’s consumer diagnostic information service provider, we have talked about in the past, just to remind everyone, we have really digitized and brought our patient experiences to today’s world. And so, when you look into a Quest patient service center, it will remind everyone of the other experiences they have in their other experiences as a consumer and as a health care experience. So, a lot of progress there.Second is we continue to make progress on the tools and the access and information. So, MyQuest app, which is our smartphone app, has continued to expand its registration, and continued to expand the capability so you can schedule appointment online, you can see wait times at patient service centers, you obviously get your results. And we now have over 7 million registered users, which is remarkable.And there is a last piece of this, which is your specific question, is the physical presence we think is quite important. So, we have continued to manage our retail strategy and move our patients service centers to a more retail setting over time. Right now, we have roughly 200ish patient service centers between our Safeway relationship and Walmart. Walmart is about 70 of that. And we continue to evaluate the best path forward to eventually have about 50% of our 2,200 patient service centers in more retail like settings.Now, what I’ll also share is we have said that roughly 25%, let’s call it, 500 of our current patient service centers are more retail like, not all with retailers, but as we evolve over time, with our current retail relationships and with possible others, that number will grow to be about half of our fleet of patient service centers. And our experience in those is quite good. We believe that the patient obviously experience better with much more consumer experience, our employees, there is -- a lot of us like it better. We can consolidate our operations at the fewer sites. And the patient have access. They walk in, they can walk around with the pager, as they can do some shopping, they can eat after they’ve been fasting. So, overall, m our perspective it’s quite good. And then, our relationship with retailers is good as well because they benefit from that store traffic. So, we feel positive about the response and results so far and we will continue to drive it.

The only thing I would Lisa is that there is some always some outliers. But if you look at on average, our retail draw sites continue to increase the amount of activity. We had the highest average amount of draws in our Walmart sites in June that we’ve had since we started this. So, we're very happy with the amount of traffic we're getting, we’re feeling really good about the presence. And of course, our volume is growing. So, there is things that are probably driving it. So, part of it is awareness. People are starting to figure out, we’ve got these draw sites in Walmart and getting comfortable going there, and we’d expect that to continue over time.

Our next question comes from Kevin Ellich with Craig-Hallum. Your line is now open.

Steve, in your prepared remarks, you comment about Anthem shifting hospital base rates to independent lab rates. We saw something, I think at Lab Economics that that was shifted for pathology. Can you give little bit more color, is this for all of the tests that are being done in hospitals or just pathology? And then, are you seeing other commercial payers follow this, doing something similar, then what will that do for your hospital outreach and PLS deals?

So, I would just say, as an overarching comment and it’s embedded in our introductory remarks that we have PAMA, and PAMA to some extent is independent of what's happening on the commercial side. But, we now continue to see pressure from commercial payers on hospital outreach. So, yes, we mentioned Anthem but I will also share that there is pressure from other payers, typically with those that we work with, to push down the rates for all the ancillary services and obviously that includes labs, that includes radiology and includes other ancillary services that are provided by the hospital. And, Kevin, two parts to this. One is just in general to move more of the volume to most -- the highest value reach provider like ourselves in lab, but second is because we add a cost to consumers. And the consumers, given the high percentage of corresponsive health plans that have high deductibles and high out of pocket costs for these expensive hospital based services, the payers are looking at more aggressive strategies to normalize the rates more.So, yes, we call that Anthem is proactively having a strategy but we see this in many other places with many other commercial payers that are pushing back on what they’ve done in the past with ancillary services in general but specific to lab.

So, Kevin, I would encourage you to ask Anthem directly. There is a -- I don’t know, they’ve led a couple of places with pathology. There is a publically available document, which we’re referencing. And as you might imagine, before we said anything, we checked with them to make sure they were comfortable with the statement that we are attributed to. For more detail, I would encourage you to ask Anthem about the schedule and how broadly they're doing it and so on. But, there is something they've published and put out in the public domain.

Yes. And part B of this, Kevin, I mentioned in my remarks, the movement across the country towards more price transparency. As you know there is wide variation in our marketplace with ourselves having what we believe the best value proposition on the planet, great quality, great service at some of the lowest prices. And in that regard, actually there was a story today in the journal, which speaks to a number of the payers, providing apps and services, if you will, to provide visibility to consumers to do a better job of shopping. And they called out Anthem, as we did, but others including Humana and UnitedHealthcare that are working proactively as by way of another example, to help consumers manage their costs.

Our next question comes from Jack Meehan with Barclays. Your line is open.

Good morning. Just given some of the recent progress in terms of the commercial contracting that you talked about, I was wondering if you could give us some line of sight into how you think commercial unit pricing is shaking out for 2020, and just how that compares to the long-term guidance that you laid out at the Investor Day later year.

Mark?

So, I’m sure you appreciate, Jack, I'm not going to speak to 2020. We're in very good shape in terms of where we stand with the commercial payers and the need to extend contracts. So, there's no surprises that anyone should expect, we're in great shape. And around the pricing, I mean, obviously, those prices already set those contracts. Really, some of those incentive payments that I referenced, those have to be determined, as we as we perform. So those could be some upside. However, if you recall, I gave you a pretty broad range on the revenue CAGR. So, what I would tell you is that within those scenarios, between the low end and the high end, we've contemplated all the different kind of outcomes that might happen, including, obviously, how quickly we get our fair share of some of the new network access contracts, and then how quickly and to what extent we earn some of those potential incentive payments. So, I would say everything within the multiyear outlook that I provided has been reasonably contemplated. And that's why we give a broad range.

Our next question comes from Dan Leonard with Deutsche Bank. Your line is open.

Thank you. Question for Mark. Hello. I just wanted to clarify your organic volume growth expectations in the second half of the year. So, you said that volume should gradually increase as you progress through the year. The comps do get tougher. So, are you expecting organic volume growth in the back half of the year to be higher than this kind of rounding to 3ish percent you've delivered in the first half of the year?

Yes. So, we absolutely expect the revenue, despite any sort of comps -- I'm sorry, the volume, to increase on an organic basis. So, it may not happen every week, may not happen every day, every month. But when we look at Q3 and Q4, we expect to continue to see improvements versus the second quarter in our year-over-year organic volume.

Our next question comes from Donald Hooker with KeyBanc. Your line is open.

So, I just wanted to ask maybe a question on the PLS business. I think, in the past you guys have targeted some good -- some optimistic outlook -- an optimistic outlook. So, I think you talked about 50 basis points of revenue growth and going forward or something, a revenue growth tailwind going forward from just PLS deals. Are you on track with these deals? It looks like there’s been a couple. I’m not sure if there have been others that you haven’t announced but in terms of trying to size these deals and sort of put you on a trajectory with PLS, can you kind of reiterate that or...

Yes. So, as we shared with you our five strategies, one of which is the proactively conversations with integrated delivery systems on their lab strategy, and also the access to health care as well within geographies where we had issues with not having good access with some of their patients. So, this continues to be a nice growth driver for us. We announced the Catholic Health Systems deal in Long Island. We did announce some other relationships last year and they studied in and built throughout 2019. And I’ll just close with say the funnel continues to build. In the past, we shared where we’re going and we have conversation where the lab strategy. It starts with how we can make them more efficient and this is what we call professional lab services or PLS, and this is their in-patient hospital lab and it’s a cost matter. So, we could save them anywhere from 10% to 20% of their costs. So, that’s an opportunity.Second, as we get into that, we look at them to rationalize and to become more efficient in their sophisticated reference testing that we said out. That’s another opportunity. And then, the third piece, it’s very unusual not to have this conversation. We didn’t have a conversation about their outreach where they are in the commercial marketplace with us and does it make a sense for us to them to continue to be in it or should we buy their business. So, those discussions continue to progress. We have a bigger funnel than ever. We’ve backed out the United States. We know all the integrated delivery systems with big outreach businesses, we know those that have substantial number of beds in their cost centers and that continues to be a nice growth driver for us.

Our next question comes from Patrick Donnelly with Goldman Sachs. Your line is open.

Steve, maybe just on the contracts you walked away from. Can you just provide some more color there? It’s a bit surprising to hear competitors are once again being aggressive on price, I still hear there is a bit of a low there. Given the PAMA backdrop the industry seems to realize price discipline is best way to fan that off. So, maybe just more context on what you’re seeing, what would lead these other labs to be price competitive, given this backdrop?

Great question, yes, they are competitors. So, it’s not something we can speak to. Obviously, we control our own towards pricing. We’ve been pretty vocal and consistent that we feel our price is already really good. There is an awful lot of competitors in this marketplace that have prices that are multiple of our price, and we are an excellent value. There was no need for Quest to offer lower price. So in terms of other people's motivation to drop price further in some instances, that’s a question you will need to put to them.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Ricky, we can't hear you.

Hi. Sorry. This is Alexa on for Ricky. Can you hear me?

Yes.

Okay. Thanks. Ihad a little line trouble there. I wanted to come back to your expectations for the second half of the year. You beat the quarter but maintained guidance, which sort of implies the lower second half earnings than what the Street is currently modeling. Are there any headwinds you feel the Street isn't factoring into the back half of the year? Can you just give us a sense of the puts and takes here, and what the sources of upside to the guide could be?

Let me just start and then Mark will give details. What we showed in the first half is we've delivered on what we set for expectations that we wanted to show the moment to build throughout the first half of 2019 that we did. So, we're pleased with the results in the first half. Second is, we’re midway through the year. And we thought it was prudent at this point to maintain our outlook. I’m not going to ahead of ourselves, but what Mark said earlier is and what we’ve said about this year but also in general about the growth opportunities in front of us, it will continue to build throughout 2019, but this is not just a build for 2019. It will conclude the build in 2020, 2021. So, Mark little more color around the rest of the year?

Yes. So, we are not in any way, influenced by the Street’s feelings into the back half. What we do when we give guidance is really what we think our shareholders and stakeholders should understand from our perspective. So, when you look at the first half, we're very pleased with our results. We feel like we're on track, it's still halfway through the year. Of course, in the back half, we have things that sometimes happened that are beyond our control, like hurricanes and snow in December, and so on. So at this point, we just felt, there wasn't any need since we've given a 4 and not given any certain range. So, there's nothing negative in terms of our signaling for the back half. We are on track to do what we expected, which is to do at least $60.40 starts. We’re obviously feeling good I think as many others with what we've done in the first half. But we'd rather just continue to perform, and then obviously cross our fingers around any sort of weather events and other things that might impact the back half, but certainly nothing operational that we're signaling or that anyone should be concerned.

Our next question comes from Bill Quirk with Piper Jaffray. Your line is open.

So, kind of a multi-part question here, guys. First, I think the answer is no. But, is there any negative effects from Anthem? Second piece is with respect to the capitated contract loss, was that contemplated in the original guidance? And then, lastly, just any comment with respect to genomics business, given that the principal supplier into that industry had obviously cited some challenges in that space couple weeks ago? Thank you.

So, I'm sorry. I didn't catch your question Your question Bill on Anthem.

First part.

Yes. The first part of the Anthem question was just, I think the impact here was predominantly for hospitals. I just want to confirm, guys, that you're not seeing any negative effects from some of the Anthem reimbursement changes that they're implementing.

No. We have a contract -- multiple contracts with Anthem. We contract with them regionally that we have a negotiated price and so on. And certainly, we are not in the ZIP code of the hospitals that they are now starting to say need to be rationalized. So, this is really a movement to get everyone -- it's not targeting anyone specifically, except for the outliers to be more in a more consistent rate. So, we feel we’re already in that in that ZIP code. And certainly there's going to be no changes in the current timeframe because we have contracts with Anthem. On the capitated, we really don't give guidance on volume. So, was this a possibility that we contemplate it? Yes, certainly. But as I pointed out in my prepared remarks, it’s had minimal impact to our revenue, and certainly no impact to our bottom line. So, really, it's more of a volume effect. And we try to encourage our stakeholders to not -- to pay quite as much attention to volume because of very reason. So, we thought given the magnitude of this change we’re going to make sure that you understood, there was a big volume shift from us to others or to another direct headwind but really no financial or economic negativity to us, just volume.

The last part, Bill, I had hard time hearing that as well.

Just a comment, Steve, on your outlook for the consumer genomics business, given one of the principal suppliers a couple of weeks ago.

Got you. Thank you. As you know, we have relationship with the Ancestry and that’s a good relationship and continues to build. No material effect on our -- at our growth plus or minus. So, I would just say in general fairly stable. Second is I did remark about our consumer testing business, which for us is a nice platform that is growing nicely and we're very pleased with the pick-up around our general diagnostic testing. And I mentioned that we just introduced a new line with these tests. But we're going to use that as well as a platform for consumer genetics in the future. So, more to come. But overall, stable environment as we see it. As you know we're not the only provider of the Ancestry at this time. And it’s not a big piece of our revenue. So, stable business for us at this point and still good opportunity in front of us.

Our next question comes from Derik de Bruin with Bank of America Merrill Lynch. Your line is open.

Could you talk a little bit about the esoteric testing business and just sort of volume and mix trends within that and sort of how that’s impacting revenue per requisition, just pricing getting better, reimbursement stable in that, just any additional color would be great.

First of all, the term esoteric is an industry term. We have defined our genetic and molecular as being what we call advanced diagnostics, and we don’t break out specially that business and provide color. But in general, what we’ve said in the past, it’s a business and an opportunity that’s been growing mid single digits, and we want to continue to accelerate it and it’s active part of our strategy. And within the quarter we felt good about the progress we made in that business in a number of fronts. We had some good growth and some portions of women's health. And in addition to that we define it esoteric. Esoteric, it typically includes a toxicology presence. Prescription drug monitoring continues to be a nice, big growing business for us. We're pleased with the progress and the quarter as well. And just in general, I think, our esoteric or more sophisticated testing, we had good year-on-year compressions, better than last year in the hospital presence, that’s not all esoteric but in general a lot of it is. And then, as we pull more growth in a general diagnostics business, it typically will also pull some of advanced diagnostics or esoteric business as well. So, overall, as we raise the tide, it’s going to help all the boats in the harbor, including advanced or esoteric as well as general diagnostics.

Our next question comes from Matt Larew with William Blair. Your line is now open.

Obviously, PAMA was an initial catalyst for hospitals and health systems thinking about the feature of their lab business. But it sounds like the preferred lab network, both specifically with United and then more broadly as payers are being more aggressive with the way you think about laboratory testing may actually be perhaps a more dramatic catalyst. I wonder if you could just discuss the conversations you're having with hospitals and health systems be it for outright M&A or PLS arrangements. And how payer behavior has started to change those conversations?

First of all, recall, we've been talking about three changes in the marketplace, the PAMA effect, and could argue, it really just got started within 2018. And because of some of the nuances of how payment works, it was somewhat muted related to some of the offsets to the fee reduction, which grew about 10%. So, the first year, ‘19 is the second year, is a full year, no muting any of the effects, acts and then another effect in 2020. So, that is starting to become more visible in hospital outreach businesses, and administrations of hospitals are becoming more aware of that.And the second part of that is it will spill over and has already spilled over to Medicaid. Typically Medicaid in all states is lower than Medicare. And then, finally, as I talked earlier, a lot of the commercial payers are pushing back on, wide discrepancy of health care costs, specifically in our space, in laboratory, wide variations where hospital rates could be 2 to 10 times higher than our rates. And the last piece is the reason why they're pushing on this is because consumers are paying for more and more health care every day, employers are asking questions about it and it’s getting visibility in Washington.So, those three changes in the marketplace, they're getting a lot of visibility for -- from the administration of any and it’s great delivery system. And then second is small regional operators clearly see a different environment going forward.But sometimes we're asked question what inning we're in, okay, in anything we do. I would say, in this front, for those three structural changes, we're still in the early innings, but it’s building momentum as we get into the middle of the game. So, I think we're now beyond the start, and we're starting to get a lot more visibility to it. And there's going to be a lot more change in 2020 and that can be affecting decisions of whether hospitals stay the business or whether regionals continue to operate as the operator consider their options and considering selling the business. And it is part of our strategy to be a consolidator in a smart way since we are the leader.

Our next question comes from Eric Coldwell with Baird. Your line is open.

Hey. Thanks very much. Most of my topics were covered. But on these capitated contracts, we know from past filings that they were in total representing about 11% of volume and 3% of your revenue. Were the contracts that you specifically walked away from the low end of a capitated contract because you're seeing absolutely no impact on revenue? So, I'm just trying to understand -- typically capitated contract is a quarter of your average profitability. So, were these the low end of that range or is there perhaps some slight impact from this change? Thanks very much.

So, they were definitely low margin, as I referenced. We've actually maintained some of the work at a higher rate. So, there's an offset to the lost OM, because in the particular states that this took place, they're obligated to pay us for a subset of test, even if we're not in contract, and they're obligated to pay us at a rate that’s of much higher. So, therefore, you can get that detail in the prepared remarks. But that's why it is really very little, if any OM impact. That’s a partial offset to the revenue, not a 100% because it’s lower volume, less revenue, even though at a much higher rev per req but not enough to compensate in total. So, it’s within certainly rounding overall annual revenue, it’s not a huge number with that offset and on an OM basis, it’s really had no impact because we continue to get paid for some of the work that we’ve maintained.

Our last question comes from Mark Massaro with Canaccord Genuity. Your line is now open.

I wanted to ask about, in regards to your consumer initiatives, QuestDirect is certainly one of the initiatives. I know it seems fairly early and other lab providers are doing similar pilots. But can you just speak to any traction you are getting there? Maybe can you help us think about whether or not that has moved the needle in terms of actual orders coming from new types of individuals? And then, my second question is on the Clinical Trials Connect program. Also seems like it’s early days but can you speak to any wins there that gives you confidence that this can grow in the future?

So, first of all, on direct-to-consumer, we’ve been at this for a while. We’ve actually started to test the water. We built a business with the relationship with the New York Football Giants and we call it Sports Diagnostics, and really put our toe in the water of understanding very specific segments, how we can market a product directly to consumers, how we can fulfill that order because it’s a different order fulfillment change resulted. So, we had to build some capability years ago to do that.And then, second is we actually tested the waters on our general diagnostics business is the state of Arizona several years ago. We have a joint venture partner with Banner Health. And as you recall, one of our competitors, given in that state they passed legislation where consumers no longer needed a physician order to order laboratory test. And so, we actually priced out about 100 tests and found out in fact in Arizona there was a market. And so, we took that success and we moved it to Missouri and to Colorado. And then this past fall, we actually expanded it to 48 continental states. About so, 22 of those states who no longer need a physician order, and that’s what we’ve also done in the other 26 states, is we lit up a self help [ph] network with PWN to provide in order for consumers that they need it. So, we're deeply engaged in this. We worked out some of the things operationally from years ago with all those experiences and we're off and running. And as I said in my prepared remarks, we are very pleased with the sequential improvement and sequentially actually month upon month we're seeing some nice volume growth.And there is a segment. Now, this is all private pay. And we price it accordingly for private pay. And there is a segment where people rather cold get some of these tests done without engaging their health care insurance company. So, off and running, and we're pleased with it and show results. The second part of the question had to do with -- Mark, could you remind of the second question?

Mark, are you still there? No. Operator, we’ll end it from there.

We will take it from there. Well, thank you everyone for joining us today. We appreciate your support, and have a great day. Thank you.

Thank you for participating in the Quest Diagnostics’ second quarter 2019 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics’ website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by calling at 800-871-1320 for domestic callers or 402-280-1688 for international callers. Telephone replays will be available for approximately 10:30 am Eastern Time on July 23, 2019 until midnight Eastern Time on August 6, 2019. Goodbye.