Quest Diagnostics Inc (DGX) Q4 2018 Earnings Conference Call Transcript

DGX earnings call for the period ending December 31, 2018.

Motley Fool Transcribers
Motley Fool Transcribers
Feb 14, 2019 at 3:37PM
Health Care

Quest Diagnostics Inc  (NYSE:DGX)

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Q4 2018 Earnings Conference Call
Feb. 14, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome, to the Quest Diagnostics Fourth Quarter and Full Year 2018 Conference Call. At the request of the company, this call is being recorded. The entire contents of the call, including the presentation and question-and-answer session that will follow are copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Quest Diagnostics is strictly prohibited.

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

Go ahead please.

Shawn Bevec -- Vice President, Investor Relations

Thank you and good morning. I'm here with Steve Rusckowski, our Chairman, President and Chief Executive Officer; and Mark Guinan, our Chief Financial Officer. During this call, we may make forward-looking statements and 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 annual report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. For this call, references to reported EPS, refer to reported, diluted EPS and references to adjusted EPS refer to adjusted diluted EPS, excluding amortization expense.

Also, growth rate associated with our long-term outlook projections including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. As a reminder, the company now reports uncollectible balances associated with patient responsibility, which we will refer to as Patient Concession, as a reduction in net revenues when historically these amounts were classified as bad debt expense within SG&A expenses.

Now, here is Steve Rusckowski.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Thanks Shawn and thanks everyone for joining us today. This morning, we'll discuss the fourth quarter and full year 2018, and review progress on our two-point strategy. And then Mark will provide more detail on the results, and take you through our 2019 guidance. For the fourth quarter, revenues decreased 1.4%, reported EPS was $0.92 down about 50% from the same period in 2017. Adjusted EPS was $1.36 down 2.9%. Performance in the quarter reflects increased reimbursement headwinds, as well as softer organic volume than we expected at Investor Day and the change in estimate of reserves for revenue and accounts receivable, which Mark will cover later in the call.

For the full year 2018, revenues grew 1.7% reported EPS declined roughly 4% to $5.29. The adjusted EPS grew approximately 17% to $6.31. In 2018, we grew revenues, adjusted earnings and cash from operations despite some challenges in the marketplace. Mark, will update you on the quarter and share our perspective on 2019. Quest is well positioned in 2019 to grow share, and deliver revenue growth as our in-network status now extends to approximately 90% of commercially insured lives in the United States. Volumes are off to a good start this year. Our guidance for 2019 reflects our expectation that strong volume growth will continue throughout the year.

It also reflects significant reimbursement pressure, partially offset by our continued execution of our Invigorate program. As we've discussed at our Investor Day in November, we are poised for growth, based on three fundamental changes in the marketplace: First PAMA driven reimbursement pressure is the catalyst for structural change.

In 2019, we expect about a 10% reduction in Medicare reimbursement rates and a similar reduction in 2020. The impact of these cuts will be more significant on smaller, independent hospital laboratories, which we believe could eliminate the majority of their profit and will provide a catalyst for market consolidation. Second, payers are more focused than ever driving better value (inaudible) which supports our plan to gain share. And finally (inaudible) variation in healthcare cost and employers and their employees, the country's largest payer. Increased length patients are motivated to find the high-value, low-price provider like Quest.

So, we are very well positioned to benefit from these trends. Our strategy to accelerate growth has five elements, now I will share the progress we've made. First, we aim to grow more than 2% this year for M&A. In 2018, acquisitions contributed more than 3% to revenue growth. The nine deals we announced and closed since the beginning of 2018 position us well to meet our 2019 target.

Earlier this week, we completed the acquisition of clinical laboratory services business, Boyce and Bynum a leading provider of diagnostic and clinical laboratory services in the Midwest. The second element is to expand relationships with health plans and hospital health systems. First, on health plans. We're entering 2019 with the best access this company has had in over a decade. We've added 43 million lives which represents about $1 billion opportunity for Quest as a result of our in-network status with UnitedHealthcare, the rise of Blue Cross Blue Shield in New Jersey and Blue Cross Blue Shield of Georgia.

As I said earlier, we have already seen encouraging volume growth early in 2019, resulting from this extended network access. Hospital health systems are facing unprecedented financial pressures and are therefore motivated to discuss ways we can help them with their lab strategy.

We recently signed two new Professional Laboratory Services agreements in the southeast region, in both relationships we will provide full lab management, employing technical lab staff, providing operational lab oversight and maintaining responsibility for the laboratory supply chain. As we outlined on our Investor Day, most hospital CEOs and CFOs are still not fully aware of PAMA, which impacts hospital outreach labs. We believe that this impact of the PAMA becomes increasingly more visible, hospitals will be more motivated to work with us on their laboratory strategy.

The third element of our growth strategy is to offer the broadest access to diagnostic innovation. We've made key acquisitions to expand our capability and enhance our service offerings in 2018. We saw strong double-digit growth in 2018 from a number of key test categories, including prescription drug monitoring, tuberculosis testing and Cardio IQ .

In 2018, we made significant progress executing in the fourth element of our growth strategy which is to be the laboratory provider of choice for consumers. Before arriving at a patient service center, patients can check in electronically through MyQuest and view estimated wait times before making an appointment. At the patient service center or in the physician's office, our enhanced real-time estimator lets patients know their financial responsibility before we collect their specimen. And then, once the results are available, patients can view them through MyQuest digital platform, which is now available for more than 6.5 million users or they can review them on the Apple Health app.

Next, we continue to build out our industry-leading retail strategy. At year-end, we'll be at more than 200 Safeway and Walmart locations. In 2018, we launched QuestDirect, a service which enables consumers to offer test without a doctor's visit in the continental United States and we're pleased with the volumes we've seen so far. The fifth element of our growth strategy is to support population health in data analytics and extended care services. Payers understand the value of the lab data and help them improve their members' health outcomes.

This has strengthened our value proposition as well. We're also growing revenues from pharmaceutical customers. Quest Clinical Trials Connect, which we launched in 2018 is helping pharma and CROs recruit patients for trials faster, better and more efficiently. The second part of our two-point strategy is to drive operational excellence. Our invigorated cost-cutting initiative has been successful and we see more opportunities ahead.

We are confident there's an opportunity to continue to improve and save roughly 3% on our cost structure or about $200 million per year to offset increases in our wage bill, as well as reimbursement pressures. At our recent Investor Day, we identified a number areas for improvement such as reducing denials in patient concessions, further digitizing our business, continuing to standardize and automate and optimizing our lab and patient service center networks.

Given the increased reimbursement pressure in 2019, we're also closely managing our cost structure. We are rebalancing our resources by reducing expenses in some areas, while ensuring we have the operational resources needed to deliver on the volume, increases we expect this year.

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

Mark Guinan -- Executive Vice President and Chief Financial Officer

Thanks Steve. In the fourth quarter, consolidated revenues were $1.84 billion down 1.4% versus the prior year. Revenues for diagnostic information services declined 1.5% compared to the prior year, primarily due to a change in estimate adjustment to increase reserves for net revenue on accounts receivable that we previously highlighted in November. I will share more on this in a moment. Volume, measured by the number of our requisitions increased 3.4% versus the prior year. Excluding requisitions, volumes grew 1.1%. Revenue per requisition in the fourth quarter declined by 5.5%, versus the prior year, driven primarily by the reserve adjustments and increased denials in patient concessions.

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

Now, I'd like to provide color on the reserve adjustment we made in the fourth quarter. You'll recall, we discussed this at Investor Day. We recorded a change in estimate to increase our accounts receivable reserves by approximately $35 million. We did this, based on the following: Unexpected increases in coverage denials and patient responsibility and a billing system conversion in one of our regional labs that resulted in timely filing denials and impacted our ability to precisely estimate reimbursement rates.

Because these items were not typical with our historical experience, we monitored them in accordance with our process, increased our reserve levels. I am confident in our current process and we have timed level of precision around this complex, estimation going forward. Before moving on, I'd also like to provide an update on the headwind to our prescription drug monitoring hep-C and vitamin D test categories that we've been discussing over the prior couple of quarters.

In prescription drug monitoring, we saw an increase in restricted payer policies that impacted both volume and reimbursement, but we lapped denials for two of the more significant payers in the fourth quarter. In 2019, we continue to expect PDM reimbursement challenges as payers seek more clinical evidence to support coverage. Turning to hep-C. As we've noted previously, as these hepatitis-C therapy reduces the need for genotype testing. While market share of this therapy continues to grow modestly, we expect to lap the most significant headwinds by the second quarter.

And finally in vitamin D testing, higher payer denials impacted both volume and revenue in 2018. One national payer implemented a more restrictive policy last March, which we expect to lap in Q1. But, we expect continued pressure on vitamin D testing in 2019. Moving onto the remainder of our fourth quarter results. Reported operating income was $220 million or 12% of revenues, compared to $269 million or 14.4% of revenues last year.

On an adjusted basis, operating income was $271 million or 14.7% of revenues compared to $317 million or 17% of revenues in the prior year. Reported EPS was $0.92 in the quarter, compared to $1.82 a year ago. Note, the prior year quarter included a tax benefit recorded as a result of the Tax Cuts and Jobs Act. Adjusted EPS was $1.36, down approximately 3% from $1.38 last year. Cash provided by operations was $1.2 billion in 2018 versus $1.18 billion in 2017. Capital expenditures in 2018 were $383 million compared to $252 million a year ago.

Now, turning to guidance. We're providing the following outlook for 2019. Revenue is expected to be between $7.6 billion and $7.75 billion, an increase of approximately 1% to 3% versus the prior year. Reported EPS is expected to be greater than $5.16 and adjusted EPS to be greater than $6.40. Cash provided by operations is expected to be approximately $1.3 billion and capital expenditures are expected to be between $350 million and $400 million.

There are several considerations that I will now review for you to think about in 2019. First, as we've shared previously, we are facing more than $200 million of reimbursement pressure this year. This headwind is expected to be relatively evenly spread throughout the year. Second, based on the factors I discussed earlier, the fourth quarter of 2018 should create an easy compare in the fourth quarter of 2019.

Third, our revenue guidance includes more than 1% revenue growth from M&A that has already been announced and executed. Fourth, as Steve mentioned, our volumes are off to a good start this year and we expect them to continue to build throughout the year. Finally, we are incurring incremental costs in the first quarter to support the volume growth from our expanded network access. We're also tightly managing our cost structure and have undertaken a restructuring in the first quarter of 2019 that will begin the yield savings, starting in the second quarter.

As you think about the first quarter, we have approximately one less revenue day. And to remind you, denials in patient concession increased throughout 2018 and we are assuming these headwinds carry into 2019. Taking these into consideration, with some of the items I just highlighted, we expect revenue to be flat to down in the first quarter, while adjusted EPS is expected to be similar to the adjusted EPS we reported in the fourth quarter.

I will now turn it back to, Steve.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Thanks Mark. Well, to summarize, Quest is well positioned in 2019 to grow revenue and earnings. Our in-network status now extends to approximately 90% of the commercially insured lives in the United States, and volumes are off to a good start. Our guidance for 2019 reflects reimbursement pressures offset by strong volume increases and continued execution of our Invigorate program.

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


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Questions and Answers:

Operator

Thank you. We would not open it up for questions. (Operator Instructions) Our first question today comes from Ross Muken of Evercore. Your line is open.

Ross Muken -- Evercore ISI -- Analyst

Good morning guys.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Good morning Ross.

Ross Muken -- Evercore ISI -- Analyst

So, as we look at sort of the fourth quarter and kind of what's implied in the first part of 2019 and then over the balance of the year, I guess as you think about sort of the state of the lab market in general, and some of the reimbursement headwinds you're dealing with and then the flexibility of your cost structure. I guess, what do you -- in terms of your thesis for the business, obviously there's a lot of things that occurred toward the end of the year that were challenging for you guys, but yet there is a lot positive happening on the volume side. I guess, how do you sort of put it all together for us, so we can kind of be confident that clearly the challenges we saw in the back part of this year, you've sort of dealt with and now are reflected accurately, so that we've sort of found a rebasing side.

And then, what could you point us to kind of over the balance of this year that we should be looking for to kind of judge that the jump-off into hopefully 2020 and beyond, I guess is going to be better? Because obviously, you had a tough fourth quarter, the Q1 is supposed to a bit weaker and Mark you walked through that and then we sort of recovered. And so, I'm just trying to get a sense for confidence in some of the moving parts and your sort of evolved thesis here.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Well, let me start and then I'll turn it to Mark and thanks Ross for your question. To start, we'd go back to what we shared with you are on Investor Day. We still believe, as the market leader we have a tremendous opportunity to gain share. And I think, we just announced the kickoff of our journey to the pick up share and it starts in 2019. We also coupled 2019 with a more significant reimbursement that this industry has ever seen -- sort of reimbursement cuts, and so that's muting some of the share gains that we're going to pick up this year.

But what we told you at Investor Day, there's two parts of our market share gains is one is, we do believe we can accelerate M&A and we're actually targeting for 2% growth through M&A. While we said in our guidance, we only will put in our guidance what we have seen so far closed, so it's roughly 1% in the guidance for 2019. Second is, we will see organic growth and we have to pick up the volumes to be able to offset the reimbursement pressure. But, when you go through the math, we believe there's an opportunity for us to pick up share in 2019 and that will continue in 2020.

The second part of this is what's going on in the industry and I'll come back to those three points again. One is, PAMA is hurting all of us, it's going to hurt the non-market-leading laboratories much more significantly. We believe this will be a catalyst for further consolidation. Second is with our better than ever access changes; payers are working proactively with us in how they do a better job of managing our category of spend. And then finally, as consumers are pushing back on their physicians, pushing back on their employers and asking questions about the best value in the marketplace, then we are the best value in the marketplace. The best quality, the best service at the lowest price.

So Ross, we have really kicked off 2019 with the beginning of a journey here to pick up share, and we believe with confidence that we can deliver on that outlook that we outlined at the Investor Day. Mark would you like to add to that?

Mark Guinan -- Executive Vice President and Chief Financial Officer

Yes sure Steve. Ross as I mentioned and we've talked about several times clearly in the Investor Day, this year saw more dramatic changes throughout the year than certainly any one I've experienced since I've been at Quest. Denials were a big part of that. I'll start with the vitamin D change. Back in the second quarter, we saw more and more state Medicaid programs making decisions and then cystic fibrosis. We talked about prescription growth monitoring and the payers, both tightening policies around same day of service for presumptive and definitive testing, which we think is clinically appropriate, but they've put in policies to deny (ph) payments for one of those tests. We've seen them squeezing panels saying that they're going to pay for fewer and fewer analytes, and again we don't think that's necessarily clinically appropriate but that is the way many of them are paying now.

And even in the area of allergy, there was an NCCI edit that was put in last year that resulted in significant denials in our allergy space. So, it was a tough year from a denials perspective. We have built all that into our 2019 guidance. And so, when I talked about carrying the fourth quarter business into Q1, we fully accounted for all that in our thinking in the guidance that we're providing. The other area of surprise was patient concessions and we -- based on what when you go into the year, we're expecting a similar level of patient concessions.

I'm sure you've seen it and we've referenced the Kaiser report that came out about the middle of the year that informed us and others that actually the average deductible went up significantly, so there was more being borne by patients, obviously that meant more of our revenue was coming from patients and we were just starting to see that in our collections, because there's obviously a delay in the adjudication process to the payers and then we have decided to bill the patient, so we start to get an experience of the collection rate that may or may not match our historical rate and was actually finding that it was being negatively impacted.

The other thing, I mentioned was we did have some issues with one of our lab conversions. We have done a number of these that we've shared.We're getting close to the endpoint in the standardization process. This particular lab was not a legacy Quest system. It was a system we had acquired a couple of years ago as part of an acquisition.

We therefore did not do as well with this conversion as we did historically and therefore we struggled, as I mentioned with some filing deadlines and other things. The other issue is this is in a geography where, historically there's a higher rate of patient concessions versus other geographies. So, as we got delays in our ability to send out bills and as we put more and more into patients and less directly to the payers that definitely created a headwind. The good news on that one is we fully expect that to be behind us, and so that's more of a temporal issue versus the denials which, as I said -- and the overall level of patient responsibility will carry into 2019 and is fully baked within our guidance.

Operator

Our next question comes from Patrick Donnelly with Goldman Sachs. You may ask your question.

Patrick Donnelly -- Goldman Sachs -- Analyst

Great. Thanks guys. Good morning. Steve, maybe just on the United trends. I know you gave some color, you guys are expecting a first tranche to move pretty quickly. Can you just talk through how it's come in relative to expectations and then any way you can frame the expectations for the year would certainly be appreciated in terms of what's baked into it.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Sure. What I've said in my prepared remarks it's off to a good start, and we expect that it would be off to a good start. So, it's on our expectation that we expected to be able to pick up some of the volume, early in the year. But what we also said is that, it will continue to build throughout 2019 and also this provides us a growth opportunity beyond 2019 into 2020 and 2021, OK. So, when I talked about $1 billion worth of opportunity, we'll see a portion of that in 2019 and that's contemplated in our guidance. But, there is a large portion of that $1 billion beyond 2019.

So, it's tracking well, we're happy with the early volumes we see and it will continue to build throughout the year.

Operator

Our next question comes from Ralph Giacobbe with Citi. You may ask your question.

Ralph Giacobbe -- Citi -- Analyst

Thanks good morning. Just, lab corporate side, an incremental $30 million from Medicaid related to PAMA. Are you seeing similar. I think you said over $200 million of reimbursement headwind, seemed a little bit worse than what you previously estimated, so want to understand that. And then if you could real quick, you talked about incremental costs in the -- I think you said in the first quarter, hoping you can just size that and whether that does go away for the rest of the year. Thanks.

Mark Guinan -- Executive Vice President and Chief Financial Officer

Sure. Ralph, the $200 million is actually consistent with what I shared at Investor Day. The amount of PAMA headwinds outside the clinical lab fee schedule where we're directly reimbursed for Medicare and fee-for-service is not large. There's some Medicaid programs that have reduced their rates, they may have justified it or cited PAMA changes. It's hard to know whether these Medicaid rates are directly tied to PAMA. You can look across all the states. There seems to be potentially some direct relationship. Not all of them have changed the rates. So yes, there's a little bit of headwind in Medicaid as there typically is. That's not unusual. Certainly not to the magnitude of the amount that you asked us about.

And then, we're not going to aside the investments specifically, but what we wanted people to understand is when you look at the rhythm of the quarters coming to the year, on the cost side, not only do we not benefit from the restructuring of our cost base that we announced at the end of this quarter until Q2, but we also are actually spending more in Q1 as we're making people aware of our new access in all of the geographies, where we need to inform patients and providers. We're adding (inaudible) by adding patient service centers, extra couriers (ph), doing all the things to ensure that as this volume comes, the customer and stakeholder experience is outstanding.

And obviously, we'll continue to monitor that as we see the volume and either add more or less. But initially, when you add that a little bit ahead of the volume, it's cost versus cost of sales. So, naturally we wanted to make sure people understood. And then, the other significant item, in terms of the quarterly cycling as I mentioned is one few revenue day that is significant. We pick it up in Q3, but losing a day of billing in Q1 versus last year, this is going to be a significant impact on a year-over-year comparison.

Operator

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

Bill Quirk -- Piper Jaffray -- Analyst

Thank you. Good morning everyone. So, a couple of questions here. So, first off on vitamin D real quick, just wanted to confirm that this is lower volume versus say pressure on reimbursement levels. Also on the Medicaid denials, I was hoping you could expand on that a little bit, is it pretty much universally covered, at least based on our due diligence. And then lastly, just big picture question for Steve. Based on conversations how much volume from the hospitals do you think could be in play for M&A over the three-year PAMA period -- initial PAMA period? Thank you.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Mark, why don't you take the first two.

Mark Guinan -- Executive Vice President and Chief Financial Officer

Yes. So that Medicaid denials, I'm not sure what you're referencing Bill but combination of managed Medicaid where they put in more restrictive requirements, including preauthorization that often resulted in denials. Also some of it arguably clinically appropriate where they put in new intelligence to ensure that we can only have this once in a lifetime. They may have had this done by a different lab historically, we haven't seen -- we're aware of it. We get an order, we think it's legitimate, we do the work, we provide it to the payer and they deny it based on once in a lifetime policy. So those things are actually tightening in cystic fibrosis and we have added a couple of states, I don't have it in my fingertips. We'll circle back with you actually state programs with traditional Medicaid that has stopped reimbursing cystic fibrosis as well.

On vitamin D, as in mentioned it was a combination. So certainly we still continue to get and got orders with screening codes. Quite often, vitamin D is ordered as part of a much -- common laboratory testing. So, we don't choose to not perform that test, even if the diagnostic code initially is not suggests we get reimbursed. So, that's absolutely is a headwind to our revenue, revenue per req and has resulted in significant denials with a change on this national payer.

But also, as physicians have gotten educated on the appropriate use and certainly we're driving that, the industry is driving that. You have seen a follow-up because some of the vitamin D that was being ordered was pre-screening and clinically that has been determined not to be appropriate. But there still is, a number of vitamin D tests are coming through in screening codes that really are not screening. The doctors just are not coding them appropriately and unfortunately those are resulting in denials and headwinds for us.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes. Bill and your question about the opportunities around hospitals, let me start by reminding you and everyone that what we said in, in Investor Day is in 2018 we have a strong year for M&A. It's about 300 basis points, roughly. And if you recall, if you go back to our Investor Day slides that we used in charts -- we used -- if you look at the distribution, the M&A we've done over the past two years, there's really been a balance of requiring hospital outreach, requiring some outreach deals -- excuse me -- some laboratory regional deals and then finally buying some capabilities and services in diagnostics.

And if you look at the hospital deals it's been a good part, but not the majority of what we have acquired. And then second is we still pick up let's say one regional lab per year. As a matter of fact, we just said in our prepared remarks that we closed on Boyce and Bynum so it's a good example of doing that once again. And what we also indicated is prospectively, we do believe based upon what we see in -- for all three categories is that M&A should be north of 2% going forward. And we also said, we will only contemplate it in our guidance something around 1%, which were for those deals for 2019.

So, some portion of that is the acceleration and the discussions we're having with hospitals, around their lab strategy. And we have those discussions, Bill, we also have discussions around professional laboratory services and that's an organic growth opportunity and we announced again in our prepared remarks that we picked up two engagements in the back half of 2018 that we feel good about and we have more engagements in the pipeline as well.

So, you need to think about our hospital strategy, really from a -- contributing to M&A to get to that 2% but also equally the opportunity, organically to pick up organic revenue growth through these Professional Laboratory Services engagement that we continue to announce.

Operator

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

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Good morning Lisa.

Lisa Gill -- JPMorgan -- Analyst

Good morning Steve. Good morning Mark. I just really wanted to just make sure that I understand how we're thinking about the cadence of earnings this year. If I look at 2018, it looks like roughly 52% of earnings came in the front half, 48% in the second half. It sounds like it's going to be vastly different in 2019.

Am I thinking about that correctly that we're going to see a lot more of earnings coming in the fourth quarter, just based on all your commentary whether we think about the incremental gain in third quarter, we think about anniversarying hep-C as well as vitamin D as well as some other things. So, that would just be the first part of my question.

And then secondly, also along those lines, Steve you made this comment around the volume to build thought the year, as it pertains to the managed care contracts. Can you maybe just give us some color, is that you're educating the physicians around the network, is it -- what are some of the things that will have to happen throughout 2019 to give us comfort that you will see that the volume?

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Okay Mark. First question?

Mark Guinan -- Executive Vice President and Chief Financial Officer

Yes. So I'll start with the quarterly cadence, Lisa. Yes you're correct. So, as we look at 2019 -- as I mentioned, Q4 should be and we expect to be an easy compare to 2018, given the significant change that I referenced. Also in (inaudible) more color on submitted, but we expect volumes to build. So while, we certainly moved a bunch of offices and got incremental access volumes at the beginning of the year, we're continuing to compete that we expect that we build more and more over time. And we also have referenced and are anticipating and hopeful that United will announce this preferred lab network, and we're hoping to be included in that.

We're expecting to be. We're all waiting that announcement. We think that will benefit us as well certainly with United patients. And yes, we have probably not gotten as much into the calendar impact on quarterly cycling in the past. But, it is still significant -- we're going to provide more transparency. So, losing a day in the first quarter gaining a day in the third quarter certainly will change the year-over-year impact. That is not insignificant.

And then finally the -- as you mentioned, some of the timing of what we incurred some of the headwinds last year and when we lap those and that will not happen in Q1. So, therefore we have some -- a tougher compare year-over-year in Q1, combined with the cost items that I mentioned earlier. So, for all those reasons the compare is much tougher in Q1.

The last thing I would add is patient concessions. As we mentioned at the beginning of the year, we did not anticipate a significant shift to patients, away from the payers directly on where revenue would come from. Now, that we saw what happened last year, we are building in a higher rate of patient concessions from day one. Obviously, over time, as we look at our collections, we will adjust that. But that's certainly going to be a headwind in the first quarter as well.

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

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes. So, just to fill out the question around volume growth throughout the year and the first tranches for first quarter. So, what we shared in 2018 is when we announced that we're going to be back in network with United and Horizon and Anthem (ph) in Georgia. We started to communicate that to our customers, and so what we will see in the first quarter is the first tranche, if you will of those really good customer request that they wanted us to get back in the network and we're ready to flip those accounts as quickly as possible. So, you'll see that.

And the second part of this is, why it's going to continue to build, it's not everyone that's flipping on day one. It provides us an opportunity for the rest of 2019 and then into 2020 and 2021. And some of this is that some of the market is still hearing firsthand from us that we're back in network.

So, to answer your question, what do we need to do is we continuously work on communication. We did this with our sales force, it takes multiple calls to the customer to build -- to flip those accounts typically. Sometimes, we need to work on some of the IT integration issues to make sure we can get those orders and as a result, those some customers that might be relatively new and that just takes some time. So, if you take the State of New Jersey, we're essentially -- we're back in the network with Blue Cross Blue Shield system in New Jersey and with United.

We picked up a lot of access, so we've got a number of accounts that we're detailing to pick up significant share, but those take more time than maybe where we only had -- didn't have 10% of the volume of those loyal customers in that first tranche. So, that's what we're going to need to do and will do in the back half, and that will continue in 2020 and 2021 where we still see more opportunities to pick up share.

Operator

Thank you. Our next question comes from Jack Meehan with Barclays. You may ask your question.

Jack Meehan -- Barclays -- Analyst

Thanks. Hi Steve. Hi Mark. I had a couple of -- just hoping for some details on both the rev per req and volumes in the quarter. So, on rev per req, down 5.5%. By my math the accounts receivable change was about two points, so if you could bridge us on the remaining, what some of the factors are there will be helpful. On the volume side, how much did M&A contribute and the moving pieces between weather and calendar would be helpful.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

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

Jack Meehan -- Barclays -- Analyst

Yes, all related to the fourth quarter.

Mark Guinan -- Executive Vice President and Chief Financial Officer

Okay. So, the other drivers of revenue per req includes things like mix. So, for instance, our POS business as we explained in the past had higher -- has a lower revenue per req, had a higher growth rate than our overall core business, so that created some headwinds on our rev per req. And then, what I referenced in terms of the fact that the business experience and increasing level of denials throughout the year and also patient concessions relative to the prior year. So, those things all made it a tough compare year-over-year, Q4 2017 versus Q4 2018.

So, it wasn't just the change in estimate, it was actually a recognition that, that business had a lower revenue per req as we're exiting the year. So, those are some of the contributors. We certainly had a little bit of weather impact -- it wasn't significant, but it was a headwind as well. In terms of days, it was a small impact -- small impact as well.

And the other thing was -- we had some price changes in the back half of the year that will annualize in 2019 before the end of the year. So, you combine all of those things and those certainly were the drivers in the year-over-year decrease in rev req.

Operator

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

Kevin Caliendo -- UBS -- Analyst

Good morning. Thanks. So, I just wanted to go over the United -- the preferred network. You made the comment that you hope to be included and I would assume that you're planning on being included, given that you're now part of your now in-network. But, if you can clarify that comment a little bit that would be helpful. But also, I just want to understand what you think is actually going to happen within the United network, come July 1? Like what actually changes within the United behavior, within their member behavior, if you can sort of quantify that, that would be really helpful.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes. Sure sure. First of all, when we think when we announced in May (inaudible) United and we're the nation's largest commercial laboratory that if in fact United were to go forward with a preferred laboratory network, then we would be included. But, it was up to them to announce that. But we're clearly hopeful and planning on being one of the shortlist of laboratories that are included. And in that, what we shared with that in the past is that all payers, and particularly United, I think in my mind is taking a lead on this, is realizing that they could do more to do a better job in laboratory spending.

And by doing -- by having a preferred laboratory network, they're going to tighten up the network and they will work with us on things that we can do to make sure that we drive market share gains, and that would include things like working with their customers -- their ASO customers on benefit designs, it could include working with us on our hospital strategy where it could be in the best interest of all parties to think about a different network strategy within the geography. It also could include things that we're proactively going after certain geographies, where we know there's an opportunity for us to gain share. So, can't announce it before it's announced, but hopefully we'll be included as you would expect, we should be -- we're the largest national and given that we just announced we're back in network and there will be a lot of strategies within this to help us with a market share game plans that we've outlined through the course of the last six to nine months. So, Mark you'd like to add to that?

Mark Guinan -- Executive Vice President and Chief Financial Officer

I think that covers it. And obviously, we're respectful of United's desire and try to announce. We've applied for that lab network. There's a certain set of criteria we looked at that we're very confident, but ultimately we need to wait for United. And then in terms of what the particular aspects are, I think Steve captured it well. Largely, it's whoever is preferred, you're preferred for a reason. Obviously, it's better value, but it's also quality metrics and other things that United's looking for, for their members. And therefore United, the patients and everybody in the ecosystem who is in that preferred lab network, will all benefit if there's more work sent to those better value providers.

Operator

Thank you. Our next question comes from Ricky Goldwasser from Morgan Stanley. You may ask your question.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Good morning Ricky.

Ricky Goldwasser -- Morgan Stanley -- Analyst

Yes good morning. So two questions. Let me start with the payer one. So, when you listed the factors that had a negative impact on price in 2018, you talked about payer denial that started in March, one national payer is going to lap into first quarter. So, what gives you confidence that other national payers are not going to follow the lead of specific one have you had conversation with payers. And how -- and have you kind of like factored in that risk in your guidance range?

Mark Guinan -- Executive Vice President and Chief Financial Officer

Yes. Ricky, thanks for the question. Actually, majority of the payers are already there in the managed Medicaid space. they've been following MLCP for a while and that's really where this emanated from. CIGNA adopted it in 2018. The last remaining significant payer who hasn't moved there yet is Aetna and we obviously have a very close relationship with Aetna, we expect that one to move in that direction and certainly that is built within our assumptions. We don't know exact timing, we don't know for sure, but certainly in our assumptions and our guidance we're expecting to go there as well and therefore all the national payers to be there.

Operator

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

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Good morning Ann.

Ann Hynes -- Mizuho Securities -- Analyst

Good morning. So, why don't you give free cash flow guidance. It looks pretty strong, despite the reimbursement headwinds. Could you let us know what is embedded of that free cash flow guidance? Is it -- how much of your repurchase is embedded, how much is slated for M&A? And then secondly, typically you provide a guidance range and you're just doing a minimum this time. Is there a reason for that? And maybe one of the biggest swing factors that could get you higher than that minimum range? Thank you.

Mark Guinan -- Executive Vice President and Chief Financial Officer

Sure Anne. So, the guidance on operating cash flow $1.3 billion is obviously commensurate with our expectations around growth and earnings. There is not a significant change in working capital, assumed within those numbers. There's other puts and calls around some tax items and so on and so forth that impact our operating cash flow that we take into account. But largely, the change year-over-year is based on our net earnings. In terms of cash deployments, I know I talked about the $350 million to $400 million for internal capital, which obviously leaves you somewhere between $900 million and $950 million of free cash flow. Our dividend now gets us to a long way toward our majority commitment to our shareholders, but certainly we need to do some share repurchases to get ourselves to that at least 50% commitment and that is built into our expectations to basically at this point prevent dilution, given our equity program. We're now anticipating in that I guidance provided, a pick up from any reduction in ways. So with the remaining free cash flow, it's going to be situationally dependent.

So, as Steve talked and I mentioned, we have an M&A strategy we expect to deploy. A chunk of that cash we're coming into the year with some good carryover based on deals that we've already executed, but we just announced the closing of Boyce and Bynum. Beyond that, we believe there's opportunity to deploy more in M&A, but we're going to use the same financial discipline, we always have. And if we have a deal that might as well create more value for our shareholders, we're going to move forward on that deal. And if in a given point in time, we don't have any executable deals that meets our expectations, then we will buy back shares as we have historically. So, at this point I don't have any specific plan for the balance of the year beyond our majority commitment and obviously beyond the cash that we're deploying for the Boyce and Bynum acquisition.

Operator

Thank you. Next question comes from Brian Tanquilut from Jefferies. Your line is open.

Brian Tanquilut -- Jefferies -- Analyst

Hey, good morning guys. Steve, just a question for you. As we talked about payers consolidating, market share to the top layers on your competitor's call, they talked about Blue Cross of Florida as a payer that they're having conversations with. So, is that something that we should start thinking about? And if you just could give us some details on that contract in terms of expiration and the setup that you have with them right now? Thanks.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes. So Brian, as we've done in the past, I'm not going give you the specific comment on a specific payer. But, what we have said is that we're in very nice shape entering 2019 with our relationships. What we will say is that, going into 2019, we should have most of the nationals in good shape. Obviously you're there with United, we're there with -- and the others will be in nice shape as well.

And then also in these big states. As a matter of fact, we talked about in the Investor Day. We're particularly strong in the biggest states in the United States. If you look at California, if you look at New York, Florida and Texas about 110 million lives are shared and very strong and our relationship with the other payers in most states are quite strong. So, we feel good about that and we're in nice shape in those states. And that is true, if you go back to your specific question about Florida. We feel good about our presence in Florida. We have a strong working relationship with Florida Blue Cross Blue Shield and we feel we're in a nice position to deliver on picking up share that we talked overall about doing as Quest Diagnostics in the state of Florida because of that relationship and our great access that we have in Florida.

Mark Guinan -- Executive Vice President and Chief Financial Officer

If I could just jump in real quick. I didn't answer the second part of Ann's question. My apologies before we come to Brian. So Ann and others, the reason we've chosen (inaudible) this year, is given some of the uncertainty this year. Obviously, to make the call on how quickly we grow that volume, we move access. It's not a negative uncertainty, it's just a more variability than we've experienced historically in terms of how the volume might come, where it will come from et cetera. And so, the guidance we're providing with the floor, obviously is toward the lower end of our revenue guidance and to the extent that we, to the upper-end of our revenue guidance or even potentially surprise ourselves and beat that. Those would be the upside. So, I think we've got our cost down pretty good. Really the question is around the overall volume growth, the pace at which it comes and the source of which lives, because obviously there's variability in the pricing and margin depending on which payer they come through. So that would be the opportunity to do better and hopefully that answers your question on why we chose to do a floor instead of a range.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Operator, next question?

Operator

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

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. Thanks for taking my call. I certainly have seen my out-of-pocket diagnostics costs creep higher, now that I'm getting some work done on a regular basis. But, I may not have noticed this if I was doing a one-off or annual. I guess, how do you drive consumers who shop around for their diagnostic vendor when they're at the hospital? And if you're told to go to the hospital lab to give a example, at what point can you sort of intervene or can they intervene to sort of ask Quest to run the test? And so, basically it's like how do you give that consumer the choice to send it to a lower cost provider, if the hospitals aren't sort of telling you to go there?

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes excellent question. So we've been raising awareness for consumers around the wide variation and medical costs, broadly. And related to that, it is multi-pronged approach. First of all, in some states, we actually provided this at Investor Day. The states are actually providing visibility of the wide variation for consumers. So, in the state of Massachusetts they're actually providing a website, if you go in that website, you will see the wide variation of what the average commercial rates for Quest Diagnostics are versus hospital outreach laboratories.

And the hope is, in that state, since consumers are picking up a fair share of the cost in healthcare, that consumers will start become aware of this and bring that information to their physician. And the second part of this is physicians are the advocate, typically for the patient, even though they have this relationship with the hospital system -- in some cases, they sell their practice. But still, they realize that this is coming out of their patient's pocket, they realize there could be wide variation, which for a number of patients, it's a considerable sum of money.

For those of us who are reasonably healthy, might be once a year. But for many, it's not once a year. So, it's a considerable portion of our out-of-pocket costs. So, we're making sure that the physicians are aware of this as well, and then also, in all that, when you look at what we're doing with the payers; the payers are going to increasingly make it visible. And so the payers will reach out to their membership and have campaigns with simple messages like, why pay more.

And related to that, it's not just the lab. I know many of you realize there's other ancillary services that you have the same issue. So, for instance radiology is getting a lot visibility. So, the help we're getting here as well, is that this topic in general is getting visibility for payers, but equally from physicians and then with consumers asking questions. And then, once we realize they can ask a question, they demand that they -- come to Quest, we're in network and therefore it's unacceptable that you tell them, they can only go to the hospital lab. And they simply point to, I'm going to -- it's going to cost me extra money, if I don't go to Quest. So that's why this just make sense. So, that's what we're doing about it.

Operator

Thank you. Our final question today comes from Matt Larew with William Blair. You may ask your question.

Matt Larew -- William Blair -- Analyst

Hi good morning. I wanted to ask about your referral partners. You mentioned Steve that volumes had trended nicely through the first quarter. I just wanted to get a sense for what does that -- you attributed to potential share gains versus increasing healthcare utilization at the end market level? Thanks.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Yes. First of all, we're here in -- it's February 14, happy Valentine's Day. But what we see is what we see in the first five or six weeks of the year. As we said, we're off to a good start. We haven't been asked about it -- about share. We think utilization volumes are stable, we're not seeing big pickups or drops in our good customers, so therefore we think utilization environment out there is relatively stable. So therefore, the volume is coming from share gains and that's what we expected. So good start. We're picking up share and that's going to build throughout the year. Operator?

Operator

We're showing no questions in queue.

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Okay. So thanks everyone for joining us today. We appreciate your support and questions and have a great day. Take care.

Operator

Thank you for participating in the Quest Diagnostics Fourth Quarter 2018 Conference Call. A transcript of prepared remarks on the call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at 866-424-7881 for domestic callers or 203-369-0869 for international callers. Telephone replays will be available from approximately 10:30 A.M. Eastern time on February 14, 2019 until midnight Eastern time on February 28, 2019.

Goodbye.

Duration: 59 minutes

Call participants:

Shawn Bevec -- Vice President, Investor Relations

Steve Rusckowski -- Chairman, President and Chief Executive Officer

Mark Guinan -- Executive Vice President and Chief Financial Officer

Ross Muken -- Evercore ISI -- Analyst

Patrick Donnelly -- Goldman Sachs -- Analyst

Ralph Giacobbe -- Citi -- Analyst

Bill Quirk -- Piper Jaffray -- Analyst

Lisa Gill -- JPMorgan -- Analyst

Jack Meehan -- Barclays -- Analyst

Kevin Caliendo -- UBS -- Analyst

Ricky Goldwasser -- Morgan Stanley -- Analyst

Ann Hynes -- Mizuho Securities -- Analyst

Brian Tanquilut -- Jefferies -- Analyst

Derik De Bruin -- Bank of America Merrill Lynch -- Analyst

Matt Larew -- William Blair -- Analyst

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