Good morning. Welcome to the Quest Diagnostics Second Quarter 2022 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow, are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited. Now I'd like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead, please.

Thank you and good morning. I'm joined by Steve Rusckowski, our Chairman, Chief Executive Officer and President; Jim Davis, CEO elect; Mark Guinan, Chief Financial Officer; and Sam Samad, our incoming Chief Financial Officer. During this call, we may make forward-looking statements and will provide 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, including the impact of the COVID-19 pandemic 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. The company continues to believe that the impact of the COVID-19 pandemic on future operating results, cash flows and/or its financial condition will be primarily driven by the pandemic severity and duration, healthcare insurer, government, client payer reimbursement for COVID-19 molecular test, the pandemic impact on the U.S. health care system and the U.S. economy; and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, including the impact of vaccination efforts which are drivers beyond the company's knowledge and control. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Any references to base business, testing revenues or volumes refer to the performance of our business excluding COVID-19 testing. Growth rates associated with our long-term outlook projections, including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Finally, revenue growth rates from acquisitions will be measured against our base business. Now, here is Steve Rusckowski.

Thanks, Shawn and thanks, everyone, for joining us today. We performed well in the quarter, growing our base business year-over-year while increasing our share of COVID-19 molecular testing since March. As we have said before, we believe demand for COVID-19 molecular testing is not going away anytime soon. It will continue into 2023. Based on our overall performance in the quarter and our expectations for the remainder of 2022, we have raised our full year guidance. We also made very good progress on our leadership transition. Jim will give you an update and take you through our second quarter highlights and then Mark will take you through our financial performance in more detail before we get into your questions. But before I turn it over to Jim, I'd like to say a few words about the saving access to Laboratory Services Act, now called Salsa, the important new federal laboratory legislation recently introduced in Congress as well as the U.S. Court of Appeals for the D.C. Circuit's recent ruling on our trade associations PAMA lawsuit. We're grateful for the efforts of Senate and House members who introduced this legislation on both sides of the aisle. In our view, Salsa could fix PAMA permanently, setting the Medicare clinical lab fee schedule back on a sustainable path. In 2014, the intent of Congress when passing PAMA was to reform the Medicare clinical lab fee schedule to a single national fee schedule based on private payer rates for the clinical laboratory services. Unfortunately, the first round of data collection failed to collect the data from large significant segments of the marketplace. The result was billions of Medicare cuts over 3 years, with more on their way if Salsa is not passed. Our trade association is coordinated to Congressional Meetings along with public advocacy efforts that involves collaboration with the provider and patient communities. Last week, the D.C. Circuit Court issued a decision in the PAMA lawsuit filed in 2017 by our trade association, ACLA. In short, the court sided with ACLA and called the CMS's exclusion of hospital price data "arbitrary and capricious." Importantly, this case has been rejected for procedural reasons and this is the first opinion based on its merits. Unfortunately, the court is not requiring CMS to recalculate the flawed payment amounts. While disappointing, we believe this favorable ruling will give Congress additional strong grounds to finally fix PAMA's mini flaws by passing Salsa. Now, I'd like to turn it over to Jim Davis.

Thanks, Steve. Our base business performed well despite softer utilization trends which we believe impacted us and the rest of the health care industry. I'm proud of the efforts our team has made to grow our share of COVID-19 molecular testing since the end of the first quarter. We also ramped our investments to further accelerate growth in the areas of advanced diagnostics and direct-to-consumer testing. In the quarter, we announced the selection of our next CFO, Sam Samad. Sam joins us from Illumina, where he served as Chief Financial Officer for 5-plus years. As many of you know, he brings a depth of health care experience that will help us in many ways. Prior to Illumina, Sam held several financial and operational leadership roles at Cardinal Health and Eli Lilly and Company. Sam, welcome to Quest Diagnostics.

Thanks, Jim. It's an honor to join the Quest Diagnostics team. In previous roles, I had the opportunity to observe the many contributions Quest is making to health care. Just arriving less than 2 weeks ago, I've been impressed by the passion and dedication of everyone that I've met so far. I'd like to thank Mark Guinan for his partnership during this transition. I'm excited to be here. Jim, I'll turn it back to you.

Thanks, Sam and I look forward to working very closely with you. Now, turning to our performance in the second quarter. Total revenues were $2.5 billion. Earnings per share were $1.96 on a reported basis and $2.36 on an adjusted basis. Cash provided by operations was $402 million. COVID-19 testing revenues were approximately $355 million in the second quarter, down approximately 31% from 2021 and 41% from the previous quarter. In July, with the spread of the BA4 and BA5 variance, we continue to see the demand for COVID-19 molecular testing, consistent with the volumes we reported in June. Our positivity rate has increased since March and approximately 25% of the tests we performed in the first 2 weeks of July were positive. We believe that the COVID-19 trends since March contributed to the softness we observed in the broader health care utilization. As you've seen, we're successfully executing a strategy to increase our share of COVID-19 molecular testing. A key element of our strategy is to increase the number of testing access points through retail relationships. In addition to our CVS and Walmart relationships, we are now also collecting specimens at Rite Aid locations and the number of access points will continue to grow. Approximately half of our COVID-19 volume in the quarter came from retail channels. Quest is proud to have been selected by the CDC to participate in its increasing community access to testing, or ICATT program for COVID-19 testing. Through this program, qualified uninsured individuals can access COVID-19 molecular diagnostic testing for zero out-of-pocket costs. In addition, we're pleased to be the provider of COVID-19 PCR testing for qualified insured and uninsured customers of Rite Aid nationwide for zero out-of-pocket expense. We now have approximately 6,000 COVID-19 patient access testing sites through retail relationships as well…

Thanks, Jim. In the second quarter, consolidated revenues were $2.45 billion, down 3.8% versus the prior year. Base business revenues grew 2.9% to $2.1 billion, while COVID-19 testing revenues declined approximately 31% to $355 million. Revenues for Diagnostic Information Services declined 3.6% compared to the prior year. The decline reflected lower revenue from COVID-19 testing services versus the second quarter of 2021, partially offset by growth in our base testing revenue. Total volume measured by the number of requisitions declined 1.4% versus the prior year. Acquisitions contributed approximately 100 basis points to total volume. Total base testing volumes increased approximately 2% versus the prior year. Excluding acquisitions, total base testing volumes grew less than 1%. As we have seen in prior COVID surges, we experienced some softening of base testing volumes beginning in April as COVID-19 cases began to rise again throughout the spring. COVID-19 testing volumes were stronger than expected during the second quarter. Together with our JV partnership, Sonora Quest, we resulted approximately 3.7 million molecular tests. Quest alone resulted roughly 3.5 million molecular tests, down approximately 1.3 million tests and 2.8 million tests versus the prior year and first quarter, respectively. Our July COVID-19 molecular volumes have been consistent with the volumes we reported in June, averaging roughly 40,000 tests per day, excluding Sonora Quest. Revenue per requisition declined 2.6% versus the prior year, driven primarily by lower COVID-19 molecular volume. Base business revenue per req was up modestly. As we have highlighted in recent quarters, the pricing environment has improved with unit price reimbursement pressure of less than 50 basis points in the quarter. Reported operating income in the second quarter was $388 million, or 15.8% of revenues compared to $533 million or 20.9% of revenues last year. On an adjusted basis, operating income was $435…

Thanks, Mark. As many of you know, this will be Mark's last earnings call as he is retiring next week. Mark, you've been a key member of our leadership team as we have transformed Quest and accelerated its growth. I'm grateful for everything you've done for the company, especially for the last 2.5 years of the pandemic. I would miss your partnership and consult as we navigated many challenges over nearly a decade. I wish you and your family, health and happiness as you approach the next chapter in your life. Thanks.

Thanks, Steve. Quest is a special place and it has been an honor to serve as CFO for the last 9 years. Thanks to the analysts and investors on this call. I have enjoyed working with all of you. My family and I are excited for what lies ahead.

Thanks, Mark. And to summarize, as Jim shared, we had another good quarter driven by our efforts through share of COVID-19 testing while we believe our base business performed in line with the software utilization trends we're seeing in health care. We have raised our full year guidance based on our performance in the quarter and our expectations for the remainder of 2022. Finally, we're grateful for the efforts of Senate and House members who introduced the saving access to Laboratory Services Act and fully support the passage of this important legislation. Now, we'd be happy to take any of your questions. Operator?

Our first question comes from Brian Tanquilut with Jefferies.

Mark, congrats on the upcoming retirement and thanks for all the help over the years. So I guess, just my question on the base business, I mean, you called out some of the softness, right? I mean do you guys think that it's more COVID driven with the current mini surge that we're seeing? Or just any color you can share with us on that? And maybe I guess, Steve, taking it a little bit further, how are you thinking about the business today as we face a recession down the road in terms of the defensiveness of the volumes and the business overall as we get past COVID?

Yes, sure. So thanks, Brian, for the question. So as we indicated, we were a little softer in the second quarter where the base business than what we expected in the second quarter. And we do believe there's a relationship, as we have said before, between pickup in COVID infections and the amount of people that are going into their physicians and to some extent, what's happening with hospitals, even though that's a secondary slowdown, if at all. And the second part of your question is longer term with worries about a potential slowdown in our economy and approaching recession. What's our view on that and we're taking a hard look at what happened over the last 10 to 15 years of our business. And things did change quite a bit over the last decade, as you know. The first -- over the last recession, the big -- Great Recession, 2008, we have in parallel with that, the Affordable Care Act. We also had changes with health care policy and we had PAMA, so there's a lot of other effects. And so yes, we do believe there may be some impact in our business related to a slowdown in the economy and the recession. We do believe that we're so essential through the delivery of health care and the need for health care going forward that we believe that utilization will continue to be reasonable throughout any up and down in an economic cycle. So -- but we're taking a look at it and we're seeing if there's any differences this time around, as you know, maybe people were saying this is an unusual set of circumstances given what's happened with health care and what's happened in the economy over the last 2 to 3 years. So Jim, anything you'd like to add to what we see with our base business?

Yes, Steve, what I would add is, look, we're in close touch with the payers. And the payers have indicated to us and you saw UnitedHealthcare's announcement earlier this week, that they saw softer utilization of health care services as well. In addition to that, we track a group of Quest accounts that we know are 100% loyal to us. We call it our same-store sales analysis. And we noticed in the quarter that it was basically flat, those accounts that are 100% loyal. So, the other thing we look at is just the mix business. And we noticed our general health and wellness panels grew at a lower rate than some of our infectious disease, non-COVID infectious disease and chronic care types of testing that we do. So we -- based on all that information, we come to the conclusion that the base was certainly softer this quarter.

Our next question is from A.J. Rice with Credit Suisse.

I want to offer my congratulations to Mark and best wishes and welcome, aboard, Sam. Look forward to working with you. Maybe I'll just pivot over to talk about margins. Obviously, within the base business, you've called out some inflationary pressures. They seem like they've been manageable. But you also talked about the Invigorate savings and they're largely offsetting it. I wonder if you could just sort of comment on how you're viewing base business margins? And then I'm assuming also on the COVID-related testing. As long as the PHE is in place, that margin is stable but has there been any reason to think that, that has changed? We get the aggregate margin but I'm wondering about the underlying trends there. If you could just comment on it and how much that factored into your back half guidance outlook as well? Any changes?

Thanks, A.J., for the questions. Let me start with COVID. So as I mentioned in my prepared remarks, when you look at our COVID business, the good news was a lot more volume, a lot more revenue, a lot more dollars of operating margin. However, with that also goes less pooling, a larger mix shift towards the retail outlets which have higher expenses. And then we have had some slight erosion versus last year on average reimbursement a couple of dollars, not anything super significant. So the margin percentage was less but still, its contribution to the bottom line from COVID was much higher. As we look into the back half at this point, we don't know where the positivity rates are going to go but we've not assumed a material change in the amount of pooling. We would expect to continue with the current mix or potentially grow that as a proportion of our total COVID volumes. So within the ranges, that's kind of how we're seeing the balance of the year play out on COVID. So if the positivity rate drops down and the positive rate, I'm looking at Jim here, has been as high as we've seen through the pandemic, now a lot more people are doing rapid antigen testing and so on, we believe that the cases are underreported. But we believe that the prevalence of COVID right now is extremely high. And so in the earlier answer that we provided to Brian around the base business, there has been a historical negative correlation between those. And we do believe that the base business has absolutely been impacted by the surge in COVID. We just aren't sure how long it will last. On the base business, we've shared that as we built our plan and the…

And A.J., just so it's clear. You all know that the Emergency Act has been extended and so we're assuming in our guidance that will be extended through October but we're not assuming in our guidance that it extends past October until we have certainty around that, okay? So that is the assumption and what we've just provided for guidance for the remainder of the year. And I think since you asked, A.J., Jim, why don't you comment a little bit about the opportunities we still see around the bigger rate and you mentioned in our opening remarks about the things we have changed. But why don't you chat a little bit about why we're still bullish on the prospects of improving productivity.

Yes. So A.J., as we've talked in the past, there's still certainly a lot of opportunity around automation of manual processes in the laboratory. I touched on in my comments around some of the automated check-in procedures. So we've long had appointment scheduling. What we've added recently is when a patient walks into the PSC without an appointment, you actually go to the check in and you -- and if the wait room is full, you schedule an appointment at that point. And what we've seen is it really does help productivity in the PSC, as well as if the patient leaves, they may not come back to Quest. If they make an appointment to come back in 2 hours or the next day, we feel like the patient retention is better. But automation, the use of artificial intelligence in terms of readouts of manual curves and laboratories, all of that work continues. And then I'd tell you, the other thing that will help continue to drive productivity is our work around retention of our employees. So our productivity, like all companies, we're seeing a much higher increase in turnover. We feel like it is stabilized, albeit at a higher point. So as we now drive retention higher and turnover lower that will certainly help our productivity efforts in the back half of the year.

And I just want to add one thing about peace in the back half. Steve talked about the potential for the PHE to not be extended which at this point, we're not assuming it does extend. But I want to remind people that the price drop is not a full margin drop because when we get to beyond the PHE, first off, there's not absolute certainty but most people would expect the positivity rate will be significantly lower. We can pool a lot more. So we can get some margin offset there dollar-wise. And then, the second one is that the retail relationships that we have will change in the structure. We know how that's going to work. And basically, the significant costs we're incurring right now to get that volume for the retail outlets will go away because it's only permitted under the PHE. It's complicated but it will go away. So while the value per requisition will drop to whatever price we end up with and people have talked about the CMS rate that was originally published and certainly, that's potential, over time, that's not all a margin hit because there's some other costs that go away. So we still will make a decent percentage margin, certainly fewer dollars per patient encounter. But I just want to make sure people are clear that COVID profitability doesn't fall completely off the cliff when the PHE goes away.

Our next question is from Jack Meehan with Nephron Research.

First, Sam, congrats. I think you're going to be a great for the Quest. And Mark, of course, really enjoyed working together. But before you go, I do have more margin questions for you here.

Let me go otherwise, Jack, Thanks.

Of course. So specifically, can you just talk about what was the COVID testing margin in the quarter? Or how did it compare to the overall margin? And I guess what I'm trying to get into is just like how much of the sequential step down in earnings might have been related to the margin impacts you've talked about?

Yes. So Jack, as you know, we don't provide specific margins on subsegments of our business. But what I can give you directionally is I referred to half of our volume coming from retail channels or nontraditional channels and we talked about dollar-wise, what the incremental cost per counter is there. A year ago, in the second quarter, it was about 1/3 of our volume. So you can see that's pretty significant. In the second quarter last year, we did quite a bit of pooling and that's varied in the interim quarters between that and now but there was quite a bit of pooling last year because the positivity rate had fallen -- very well. I think many of us by June of last year were thinking this might have been behind us before Delta hit us. And this quarter, we expected in our plans to do quite a bit of pooling but in reality, it was not a large amount. So that should give you a little bit of idea. The other thing I did mention a couple of dollars erosion on the average reimbursement. So I think you got all the pieces, not going to provide a specific number but that should help you understand. But I think the key thing is that the dollars we earned off COVID was much better than our plans. And that's -- and we expect it to continue and that's why we're rising guidance. So while the percentage was worse, the dollar bottom line was better.

Yes, Jack, as you know, in Q1, we did about $600 million worth of COVID. And in the second quarter that we're talking about right now, it was roughly $350 million. So that was a material change in COVID. And as Mark has gone through, there's a lot more dynamics in what the margin is in COVID. But essentially, that sequential compare and our margin drop is primarily related to the drop in COVID testing.

Got it. If I can squeeze in one more on the core business. What are your expectations for merit increases and SW&B this year? Have that changed at all?

Jim, do you want to take that?

No, it hasn't changed at all, Jack. We said 3% to 4% for the year. We're still within that guidance. We've already provided the merit increase for the year. We do that annually in the April time frame. So it's already in the Q2 numbers for sure.

Yes. As Jim referenced, the vast majority of our increase has already taken place. Certainly, like all other companies, we have some off-cycle adjustments based on promotions and other things. But most of the "inflationary headwinds" in SWB were incurred in the second quarter. So if you look sequentially, that's one of the drivers of margin reduction first quarter to second quarter. That's been a historical event as well. That's not new. But we don't anticipate going forward to see significant inflation beyond kind of the run rate we were on in Q2.

Jim and I actually in a couple of financial conferences try to dimensionalize what's going on with our wage bill. And we talked about of the 50,000 people that the most pressure we see is what there really are real frontline people and they're primarily what we call specimen processors. When the specimens come into our laboratories, they do the sorting, it's a tough job. It's at night and we're paying them, we think, fairly and we've increased that for their hourly wages. And the second is couriers. And to give you an idea because it is the area of most pressure, roughly, it's about 10% to 11% of our workforce salary, okay? So -- and at the same time, it represents a larger percentage of our workforce count of the 50,000 people. So that's where we have the most pressure. So even if that number went up, considerably, you get an idea of the impact that would have on our margins. So that's where we see the most pressure, okay?

Our next question is from Patrick Donnelly with Citi.

Sam, looking forward to continue to work with you and not to put you on the spot on your first call here. But I'm sure on the way in, as you know, there's a lot of questions as you've seen on this call already in terms of the margin and the margin profile going into kind of next year as we work our way through kind of the high margin COVID coming out, some of the expenses around DTC and retail, wage inflation. I guess when you came in and Mark, feel free in to chime in obviously but Sam, I guess how did you get comfortable with that? It would just be helpful maybe to hear your perspective on that as I'm sure it was a key consideration, something you dug into on your way in and I know investors are hyper focused on that piece as well. So if you're willing, I would love to hear your general thoughts on kind of how we work our way through the margin side as we kind of work our way into next year.

Yes. Patrick, thanks for the welcome and I look forward to working with you and the rest of the folks on the call as well. Listen, it's really early days. I've been here in -- I'm in my second week here. So all I can tell you is coming in, obviously, we're in a challenging environment right now. But Quest has an incredible reputation with incredible people that really provide a significant value to health care. So I've been so far really impressed with the passion that I've seen people here, the knowledge and the contributions that I think we can make in health care. So I'm going to punt a little bit on your question because it's really early days and really ask Mark to more comment on it but I'm very excited about how we can work through these challenges. But it's really early days, Patrick. I'm in my second week here. So I'll let maybe Mark talk about it more.

Yes. So Patrick, appreciate the question. We know where people's heads are at right now around the business and that's where ours are as well. So I can assure you we're spending a lot of time on that. We've spent a lot of time on that. There's a number of things that we generally control. And then there are some things that are a little bit less in our control. So we do our best to forecast those things. We put together ranges. And then we -- I think and believe we're very transparent with you about how those things play out. So you get a sense of, okay, well, what really is going on in the business? And because of that, I believe that, generally, we've not surprised people. And we've given you delivered on your expectations. We've given you timely updates. We've given you interim information. And based on my time with Sam and I think the team here, I would expect that to continue. So you would expect that with my departure that we're not going to change the way we talk to, the way we share, give all those updates. I think everybody appreciates what a great job Shawn does and know they can call them any time, any place and get him and he'll be as transparent as possible. So really, I think what it comes down to is, I believe we're focused on the right things. And also, I believe we do our best job of being as transparent as possible around all those key drivers.

Yes, that's helpful. I appreciate it guys. And then Steve, maybe a quick one. You've continued to talk about more constructive conversations with some of the covering lives and payers. Can you just talk about, I guess, the kind of outlook on pricing? It seems as confident as you guys have sounded on that front in years. Maybe just talk about how you're feeling on the pricing side given some of those payer conversations?

Yes. So thanks for the question. And we are very pleased with the progress we have made with all payers and where we are today versus when I started which was over 10 years ago. We've got a network now that is the strongest network that we've ever had. And I would say our relationship with all the significant payers, national and regional is very strong. And they are increasingly realizing that it's good for their membership and good for their competitiveness in the market to have us in the network and we bring a lot of value. And so we're entirely focused on what we call powering affordable care which is consistent with what Jim has driven in the company around making sure that we have great quality, great service and a great experience. And you heard earlier from Jim as we continue to push on just working smarter and by working smarter, we're getting more productivity but we're also going to have a better product. And payers understand that. And so as Jim mentioned, we have gotten some increases from the payers over the last several negotiation rounds. We continue to believe that is something we're going to continue to push for because we do bring a lot of value in the marketplace. And we're very competitive in the marketplace. And so if you look at the price effect that we saw in the quarter and what we have typically said in the past historically, remember, historically, we said you should plan at about 100 basis points with the price effect. Well, in this quarter, in the last quarter, we've actually saw less than that. And that's the best position we bet in. And I will share within that envelope, the commercial payer portion of it is significantly less than where we've been historically. But we still see pressure with price, with our hospital business, with our client bill business and that's in that envelope as well. But on the commercial payer side, we're in a very different place than we were before. And I'll share with you a part of Jim and I on my transition is Jim and I are going into the nationals and the regional payers and we're talking about what we've done in the past and more importantly, what we're doing in the future. We just had a meeting last week with one of the national payers and they see us as a much more significant player in the marketplace than what people think about us as which is a laboratory. We're much more of the lab. We actually help them improve the value of health care going forward. So a much better place than where we were in a good place right now.

And so what I will add is that we really moved the needle on commercial. Over the last couple of years, we've talked about more pricing pressure in the client bill which is, as Steve referenced the hospital and then in some cases, where we contract directly with physicians. But instead of being a headwind on price, I will tell you that starting next year and going forward, I would expect that -- to be at least neutral, if not a tailwind. So we've moved it from a major headwind to be at least neutral and more likely positive. So wanted to dimensionalize a little more why you're hearing the positive comments for us. And it's in really recognition of what Steve said which is our strategic value to them. We're not a commoditized provider of a laboratory result. There's so much more to how we're helping them and then these value-based contracts that we referenced were based on performance, we can earn a better payment for ourselves. And so because of that, we really, really moved the environment and the relationships with the commercial payers.

Our next question is from Pito Chickering with Deutsche Bank.

Mark, it's a pleasure working with you over these years. And Sam, I look forward to working with you in the future. Quick two part on the inflation side. So the first one is a follow-up on the pricing question that you just gave. Can you quantify what the better commercial rates are for 2023 because you priority locked it in at this point versus 2022? And then a follow-up on A.J.'s question just to make sure I understand, you were seeing an additional $0.05 to $0.08 of inflationary pressures. Was that more or less than you expected when you guys gave guidance on the fourth quarter call? And then on previous calls, you talked about sort of the 2023 EPS of $8.50. Should we add those inflationary pressures against that $8.50? Or can you offset those with increased efficiency as well as the new recent COVID retail agreements you've done?

Well, thanks for all the questions, Pito. I'll start with 2023. We've not locked down our plan. And if we did, we generally don't give specific guidance until our fourth quarter earnings call. And I'll leave it to the management team. I'll be leaving exactly when they decide to do that but we're not going to comment any specifics around 2023. In terms of the amount of the increases, again, I'm not going to dimensionalize. We don't have a planned lockdown. But we have enough contracts that are already set for next year and enough progress on some that are either, as we referenced like Florida Blue or some others that are getting close to being locked down for renewal that I have confidence to say what I said which is, this is not going to be a next year for us on a price perspective...

So just to add to that, so what you're hearing from us is, yes, we hear your comments about inflation. And yes, we have inflationary pressure. And yes, we're managing that. But what you're also hearing from us is we're in a better price position than we've been in. You need to think about that too and thinking about the prospect of what we're going to do in '23. We're not going to provide guidance. But we still feel confident with what we shared at Investor Day in 2021 around the prospects of what we're going to do going forward.

And yes, so I was going to continue that what you're hearing from us is what's happening now, Pito. And the $0.05 to $0.08 is more inflation than we would have anticipated. However, other things have changed as well. Most notably, we did a lot more COVID. So we delivered a lot more earnings. So just like we don't expect the high level of COVID and we could be wrong to expect and continue into 2023. Also, we'd be really disappointed if the inflation we're seeing in the noncontracted areas were to carry to 2023. But even if it does, we've got multiple pieces that are moving, including a better pricing environment in the commercial book. So in no way, shape or form, are we saying that when you put all these together, that, that $8.50 or in that range is not something we're still confident in.

Our next question is from Ricky Goldwasser with Morgan Stanley.

Mark, wishing you best of luck in the future and really enjoyed working with you. So thank you for all the color always and your patience. In terms of the question, I just want to go back to the utilization environment. I mean you gave some color there but what we're hearing from the managed care companies is that the softness that they're seeing is the ER visits and inpatient admissions which shouldn't really have an impact on lab testing, right, if it's more outside the four walls of the hospitals. So can you maybe give us color on where are you seeing softness in utilization by geography and maybe by end market, i.e., what type of test? And how do you think about it, right, sort of 2.5 years into the pandemic? What's structural in the software utilization versus transition in your view?

If I can just start quickly and then I'll pass it on to Jim. So Ricky, our source is not just seeing their medical loss ratios. But I'd point to two things in addition to what Jim talked about earlier which is our same-store sales as we call it. So one is we actually get data from the payers, okay, in total. So we know how many patient encounters they had for laboratory work. We know what our volume was and we can see that. The good news is we continue to gain share in those commercial books. However, we continue to see their total volume has been down, certainly in the second quarter. So it's payer data that's being provided by them to us that is the confidence to say, utilization has dipped in our space. The other one is I'd point to the data which is based on billings of other independent labs. And if you look at that, that certainly suggests that utilization is down. So while you may be hearing its emergency room and inpatient, the data that we have and the best data we have also suggests that the market in which we operate is also depressed in the second quarter.

And the second part is, remember COVID and we're 2 years into it. And every time COVID infections go up, our base business comes down some. And if you think about a physician and what they need to do to run their offices and as you know, a large portion of our business is through physicians in their offices, if there's call outs of their staff or if their patients are missing their appointments because they are now infected, it affects volume. So there's no question there's a correlation. And the good news for us is when that happens, our COVID business goes up, right? So Jim, why should...

Ricky, the last thing I'd say is we're not immune to hospital. The inpatient work -- remember, we get $1 billion a year in reference work. We have another $0.5 billion in PLS. So when inpatient and outpatient procedures are down, that certainly does affect our business on the health system, hospital side. On the physician office side, again, we closely look at a set of accounts spread across the country that we know are 100% loyal to Quest and we measure that we call it same-store sales. Again, our general health and wellness panels from a mix standpoint, were certainly lower than some of our chronic disease panels in the quarter. And then the last thing, geographic mix. We've talked and it hasn't changed dramatically that our book of business in New York City is down still low to mid-double digits. On the other hand, we see incredibly strong growth in the southern part of the country, in the southeast portion as well as the southwest and parts of the West. So if there's been a population migration out of New York City into the southeast, then we're certainly seeing some of that in our business.

Our next question is from Derik De Bruin with Bank of America.

This is John on for Derik. And thanks for all the colors and thanks for being out the initiatives for renew you were going to ask. But in addition to that and in addition to the price increases you're expecting and the plan to clamp down the employee turnover, how should we think about the incremental spend in 2023? Are you thinking about ramping these down to offset the inflationary pressure? And on PAMA, could you just remind us what your expectations are in '23, especially if nothing else happens on the legislative front?

Yes. So in terms of 2023, as Mark said, there's a lot of moving parts at this point. We're committed to investments in advanced diagnostics. We're committed to investments in our consumer direct consumer initiated testing business. Obviously, we can modulate those things if we see inflation getting worse. But at this point, we can't give you any further guidance than what we've given you around those. We're committed to advanced diagnostics, we're committed to our clinical -- our consumer direct -- consumer-initiated testing business. In terms...

So just to add to that, because we've commented on this before, it's important to think about this as you think about '23. We started to make investments in 2020 to accelerate growth beyond what we had already invested in to accelerate growth. So think about '20 and '21 and now we're at to '22. And we obviously would not make investments unless we thought there would be a return. And so therefore, you have heard from us, you're seeing growth rates in advanced diagnostics that have come up, you've heard about us feeling good about our consumer-initiated testing, growing faster than we have seen growing in the past. And as you think about '23, you should think about the improvements you're going to see in those two businesses in relationship with that in what we invested. And so therefore, you should not think about this as headwinds because you really think about it as tailwinds because we will get a return on those investments we made over the last several years. Jim?

Yes. You asked about PAMA. And we've said that it's in our 2023 guidance outlook that we provided at this point and we've said it's about a $90 million headwind.

So the only thing I would add is that, to Steve's point, when you ask our investments ramping down, I think there's two ways to think of investments. One is what's the P&L net impact and what is the level of spend. So we, at Investor Day, talked about growing our direct consumer business to $0.5 billion by 2025. That is still our intention. So as you can imagine, over the next several years, including 2023, we're expecting significant revenue growth. And in order to drive that revenue growth, we believe we need to spend more. However, the good news is that a lot of 2020 and 2021 was pre-revenue, pre-contribution margin. And as we go ahead, we would expect the net impact to actually be less and to be less of a headwind. So really, we're going to be investing less on the bottom line but spending more money to drive that accelerated growth. And then obviously, when we get to the scale and size that we're aspiring to, then we expect a healthy margin on that business.

Our next question is from Matt Larew with William Blair.

This is actually Madelin Malman on for Matt Larew. Just going off of the previous question for your investments into the base business. I know previously, you've given a number around $160 million for this year. Do you anticipate it's still being about that? Has inflation driven that cost higher? Any color you have there? And then my other question, just speaking to your investments in advanced diagnostics. You mentioned that you are ahead of schedule for your anticipated 8% growth. Is that still the case?

Sure. So let me take part of it, then I'm sure either Steve or Jim will jump in. So first of all, inflation really hasn't impacted the level of investment in a material way. And we're on track to spend about what we told you previously. As I referenced a minute ago, we haven't put our final plans together. But at this point, I would expect we're going to spend more next year. And we're going to spend more in marketing but we're going to spend a lot less and not much at all in the IT platform creation. So it's really going to be tied a very high variable cost and highly tied to revenue growth and we'll monitor, as Jim says and I'm sure Sam and Jim will be all over is to make sure we're making the progress and to make sure we don't get the spending ahead of ourselves. But if we do what we expect to do and we need to do to get to $0.5 billion by 2025, the spending will continue to go up. The only other dimension I want to mention here is because when we talk about investments in the base business, there's a little nuance here. Advanced diagnostics absolutely is the base business. But really this consumer business is new. So while a lot of the work we do is similar to what we've done historically in our base business, it's really a new business category or opportunity. And some of it may cannibalize what would have otherwise come through our traditional channels. But we do believe that a lot of it is actually incremental to the overall amount of volume that we perform. Jim or Steve, you want to...

Yes. So as you know, we don't generally give you numbers every quarter about different segments of our business. In advanced diagnostics, we generally give you an annual update and we'll do that again. But we keep on indicating that we believe we are making progress of getting to a higher level of growth, as we indicated in our Investor Day in '21. We feel good about the progress. And we gave you a number in the beginning of the year. And the same is true about our consumer initiated testing. We periodically give you an update to show that we're making progress. So we're feeling good about the investments made, the returns we'll get. And again, you should see more returns in our '23 guidance or the expectations around that because we believe they still remain to be good opportunities.

And just to clarify, the target that we outlined at the Investor Day for the direct-to-consumer business was $250 million by 2025.

My apologies.

Our last question will come from Rachel Vatnsdal with JPMorgan.

So can you spend a minute talking about the monkeypox market? You flagged in your prepared remarks that Quest was 1 of the 5 labs that was selected by the CDC to expand testing capacity and you guys are going to have roughly 30,000 testing capacity for a week. So can you just walk us through the market opportunity there? And then is this contemplated in the guidance at all?

Jim will handle that.

Yes. So at this point, it's hard to anticipate what the market opportunity has been or will be. I can tell you, our testing volumes at this point are modest. If we've done 500, 600 tests that would be on the high side. However, it is growing. And we do see growth. We've only had the test up and running for 2 weeks. And over that 2-week period, it's grown day by day. Right now, we're not yet approved for New York state. We expect that to happen within the next week or 2. I'm sure you're reading that, that is where the major outbreak is in New York City. So we would expect to participate in that market. But most of our volume at this point is coming actually off of the West Coast. And so we'll keep you updated on what we're seeing.

Great. And then in line of the environment, can you just walk us through some initial color on how you're considering use of cash between share repurchases, dividends and then M&A?

Sure. So we're going to continue with what we've done. And what that is, is that between the dividend and we've already gotten there this year with the share repurchases to deliver a majority of our free cash flow to our shareholders. And with the $1.7 billion guidance and $400 million of capital, says at least $650 million between the dividend share repurchases and we already covered that. As we've also shared, we rather do M&A than share repurchases because we have some very rigorous financial parameters around the deals that we do. And so it's really going to be situational quarter-by-quarter. It may be different. Jim referenced that we have a deep pipeline and actually also commented that we have some negotiations that are well advanced. So I think we'd all be very disappointed if we didn't execute some deals before the end of the year. Don't know the exact timing of those. But certainly, as I said, I'd rather spend more on M&A and I know Steve would and you'll hear from Sam and Jim as they take over the reins, their view but I wouldn't expect it to materially change. So really no change to what we've done in the past. And at this point, no specific plans for cash deployment because we're really -- it's really dependent on that progression of the M&A.

Okay. So thank you, everyone. And again, thank you, Mark, for your time here at Quest. We're going to miss you and we wish you well. So thanks, everyone, for joining the call. We appreciate all your questions and support and we'll see you in our travels. Have a good day.

Thank you for participating in the Quest Diagnostics second quarter 2022 conference call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics' website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 888-5660439 for domestic callers or 203-3693045 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on July 21, 2022, until midnight Eastern Time, August 4, 2022. Have a great day. Goodbye.