Quest Diagnostics Incorporated
Q4 2010 Earnings Call Transcript

Published: 25 Jan 2011

[Operator:]

Welcome to the Quest Diagnostics Fourth Quarter and Full Year Conference Call. [Operator Instructions] Now, I'd like to introduce Kathleen Valentine, Director of Investor Relations for Quest Diagnostics. Go ahead, please.

[Kathleen Valentine:]

Thank you, and good morning. I am here with Surya Mohapatra, our Chairman and Chief Executive Officer; and Bob Hagemann, our Chief Financial Officer. Some of our commentary and answers to questions may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations or beliefs, and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, adverse results from pending or future government investigation; lawsuits or private actions; the competitive environment; changes in government regulations; changing relationships with customers, payers, suppliers and strategic partners; and other factors described in the Quest Diagnostics' 2009 Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. A copy of our earnings press release is available, and the text of our prepared remarks will be available later today in the Investor Relations Quarterly Updates section of our website at www.questdiagnostics.com. A PowerPoint presentation and spreadsheet with our results and supplemental analysis are also available on our website. Now, here is Surya Mohapatra.

[Surya Mohapatra:]

Thank you, Kathleen. We generated strong cash flow in the quarter and we're encouraged by the continued improvement in our volume trends and the stability in revenue for acquisition. During the fourth quarter, earnings per share were $0.97, unchanged from 2009; revenues are $1.8 billion, 1.3% below 2009 and cash flow was $340 million. For the full year, earnings per share increased 5% to $4.06, revenues were $7.4 billion, 1.2% below 2009 and cash from operations was $1.1 billion. 2010 was a year in which we saw pressure in our volume due to the general slowdown in physician office visits. Despite being negatively impacted by the volume decline, our business remained strong and we grew earnings per share. In addition, we are making progress on a number of key growth initiatives. Looking ahead to 2011, we expect organic revenues to grow approximately 1%, earnings per share to increase to between $4.10 and $4.30 and we will generate approximately $1.1 billion in cash. We are committed to using our substantial cash flow to generate value for our shareholders. Our first priority is to deploy cash to grow the business. In addition, we will deploy excess cash into share repurchases. In 2010, we returned $750 million to our shareholders through share repurchases. This morning, we announced that our Board of Directors have approved an additional $750 million for future share buybacks, bringing our current authorization to $1 billion. I'll update you on our progress after Bob discusses the financial results. Bob?

[Robert Hagemann:]

Thanks, Surya. Revenues for the quarter were $1.8 billion, 1.3% below the prior year, and earnings per share were $0.97, unchanged from the prior year. Included in EPS is a $0.03 charge associated with workforce reductions and a $0.03 charge for settlement of certain employment litigation. These charges were partially offset by a $0.05 benefit associated with non-recurring tax items. Clinical testing revenues, which account for over 90% of our total revenues, were 1.4% below the prior year in the quarter. For the full year, Clinical testing revenues decreased 1.3%. Revenue per requisition in Q4 was 1.5% below the prior year and has been stable for the last three quarters. For the full year, revenue per requisition approximated that of the prior-year level. Year-over-year, revenue per requisition continues to benefit from an increased mix of gene-based and esoteric testing and increases in the number of test order per requisition. However, this benefit has been offset by some business in payer mix changes and Medicare fee decrease and pricing changes in connection with several large contract extensions executed in 2009 and the first half of 2010. The business in payer mix changes, which continue to pressure revenue per requisition, include further rebound in lower price drugs of abuse testing and weakness in our higher priced Anatomic Pathology testing. Volume in the quarter was 0.1% above the prior year and continued to be pressured by the general slowdown in physician office visits. However, the fourth quarter volume reflects continued and steady improvement from the first part of the year. For the full year, volume was off 1%. Drugs of abuse testing has continued to rebound and grew 8.2% in the quarter and contributed modestly to the improved volume trend. Revenue in our Non-Clinical Testing businesses, which include Risk Assessment, Clinical Trials Testing, Point-of-Care Testing and Healthcare IT, was generally in line with the prior-year level for the quarter and for the full year. In the quarter, operating income, as a percentage of revenues, was 16.1% compared to 17.9% in the prior year. The charges, which I referred to earlier, reduced the current year percentage by 1%. We continue to make progress in managing our cost structure and driving quality improvements and are evaluating a number of new opportunities to further improve our efficiency and quality. While doing so, we have also made recent investments in sales and service, which are temporarily pressuring margins, but which we expect over the longer term will result in accelerated revenue growth and return to margin expansion. We continue to see strong performance in our billing and collection metrics. Bad debt expense, as a percentage of revenues, was 3.8% in the quarter compared to 3.9% a year ago. Days sales outstanding were 44 days compared to 43 days at the beginning of the year. Cash from operations was $340 million and compares to $360 million in the fourth quarter of 2009. Cash from operations totaled $1.1 billion for the full year. Capital expenditures were $69 million in the quarter compared to $50 million a year ago. While we did not repurchase any shares in the quarter, for the full year, we repurchased 14.7 million shares for a total of $750 million. Earlier today, we announced that our Board has authorized an additional $750 million of share repurchases, bringing our total authorization to $1 billion. There is no set time frame for utilizing our current authority and no level of share repurchase in any given quarter will continue to be a function of a number of factors. Acquisitions continue to be our first priority for deploying our cash and utilizing our credit capacity. And we continue to evaluate a number of opportunities. In addition, as we've done in the past, we plan to deploy our excess cash into share repurchases. Before I discuss guidance, I would like to point you to footnote six in the press release, which provides an update on the status of our litigation with respect to the California MediCal program. Given that we are currently in litigation, we cannot comment beyond the information contained in the footnote. In developing guidance for 2011, we have assumed that there will not be a material change in our MediCal reimbursement. Turning to 2011 guidance. We expect results from continuing operations before special items as follows

[Surya Mohapatra:]

Thanks, Bob. As you have heard, we are seeing continued improvement in volume trends and stability in revenue per requisition, which positions us for revenue growth this year. I want to update you on the progress we are making on some of the growth initiatives we have shared with you recently. We continue to promote new genetic esoteric and Anatomic Pathology tests, which represents 36% of our total revenues. During the quarter, esoteric and gene-based testing revenues grew about 3%, with sales primarily to hospitals and physician specialists. The growth was driven largely by Vitamin D testing, which grew more than 30%, as well as testing for blood cancers, particularly our Leumeta family of blood tests. We have made good progress during our innovative test pipelines in areas of cancer, infectious disease and cardiovascular disease. In cancer diagnostics, we introduced ColoVantage, the first blood test for the detection of colorectal cancer. We also continue to see growing interest in OVA1, the first blood test cleared by the FDA to help detect ovarian cancer before surgery. In infectious disease, our recently introduced SureSwab real-time PCR test for gynecologic infections is being well-received. In addition, our focused diagnostics unit continues to enhance and expand its Simplexa platform with new influenza tests. And in cardiovascular disease, we are pleased at the growing recognition of the value of our AccuType CP test from physicians, patients and health plans. This test helps assess the patient's response to the anti-clotting drug Plavix. We are making progress with our Healthcare IT. Our Care360 EHR has received an important milestone during the quarter when it was certified for meaningful use. This means that now, our physician customers can qualify for government incentives of up to $44,000 by using our EHR. Since introduced last year, more than 1,800 doctors are using Care360 EHR. Care360 EHR is not just an EHR. We use this platform to run our business and it has attracted a record of more than 40 billion transactions to date. As we exited the year, our customers are using the ePrescribing features of Care360 at the rate of 22 million medications a year, up 70% compared to last year. We continue to invest in our sales organization to respond to a changing marketplace. During the quarter, we continue to add sales people and our sales force expansion is now substantially complete. We have filled a number of key sales positions including hiring new sales leaders for our hospital and physician businesses. With these enhancements, we entered 2011 well-positioned to capitalize on market opportunities in various sub-specialties. We see continued interest from health plans and employers in working collaboratively on reducing high costs and out-of-network legislation. As we look at 2011, we have good visibility into health plan pricing with no middle contract renewals. We are driving operating efficiencies. In the fourth quarter, we took actions to reduce costs and we'll continue to close the managed cost to align with volume levels and improve our operational efficiencies. We are committed to deploying our cash to drive growth and shareholder value. We continue to actively evaluate opportunities for acquisitions. Apart from holding acquisitions, we are focused on acquiring genetic and esoteric capabilities to further strengthen our positions in areas such as cancer, cardiovascular disease and infectious disease. In closing, in 2010, we strengthened our business in a changing marketplace. During the fourth quarter, we saw a continuous improvement in volume trends and stability in revenue per requisition. Our focus, combined with our industry leadership and positive long-term demographic trends, position us for sustained growth. We remain committed to enhancing shareholder value by effectively executing our strategy. Thank you. We'll now take your questions. Operator?

[Operator:]

[Operator Instructions] Tom Gallucci with Lazard.

[Thomas Gallucci:]

First, I guess just curious about the assumptions behind the revenue growth for 2011. You're talking about investing in the sales force. I think the comps get easier in some cases on volume and on price, so I might have thought it would have been a little better than the 1%. Just curious if you could give us some color on the thinking in terms of the details?

[Robert Hagemann:]

Well, I would tell you that we believe that the guidance that we put out there both top line and bottom line is reasonable. And certainly, we are committed to achieving or exceeding that. And with respect to top line growth, it's also before acquisitions, you should know.

[Thomas Gallucci:]

Are there any significant moving parts that you can let us in on in terms of price or volume that we should be thinking about in terms of the positives or negatives for the year?

[Robert Hagemann:]

Well, Tom, as you know, there's a Medicare fee decrease coming, which hit us actually as of January 1, that was 1.75%. Surya commented on the fact that we've got good visibility into our managed care contracts in terms of access and pricing, so we feel very good about that. In terms of physician office visits, we are not thinking that there's going to be a significant change from the level of physician office visits that we're seeing today, i.e, what that means is that we'll start to anniversary the declines that we saw in 2010 and see some stability, going forward. Those are really the key assumptions for us.

[Thomas Gallucci:]

And then just -- I understand you don't want to comment directly on the MediCal. Maybe more broadly, can you tell us why we should be concerned or not concerned about similar sort of issue popping up elsewhere in other states?

[Robert Hagemann:]

What I can tell you is that California is, by far, our greatest percentage of Medicaid revenues. At $66 million a year, it's a little over 25% of our total Medicaid revenues. Every state has slightly different regulations, but we believe we're compliant with those.

[Thomas Gallucci:]

And then just one clarification, the drug testing you mentioned is up. Is that more paid management-driven as opposed to employer sort of-driven or any color there?

[Robert Hagemann:]

No, it's principally employer-driven. Pre-employment drug testing is really what's driving that.

[Operator:]

Ralph Giacobbe with Credit Suisse.

[Ralph Giacobbe:]

Does the guidance include the share repurchase?

[Robert Hagemann:]

The guidance assumes that we will deploy our cash, either into acquisitions or into share repurchases. We don't provide specific guidance on the amount of share repurchases that we plan to do in a given year. And that share repurchase authorization that was announced today has no set time frame attached to it as well. And as we mentioned in the prepared remarks, there's a number of factors that could either keep us in or out of the market in a particular quarter, and the share purchase amount is going to be variable, principally driven by the level of acquisition activity. But the EPS number, you should think of as an all in number where we deploy the cash either into acquisitions or share repurchases, whereas the revenue number is principally an organic number. And that's consistent with what we've down historically.

[Ralph Giacobbe:]

And just, I guess, reconcile or clarify, if I just grow revenue 1% and I take an 18% margin, which is kind of what the guidance implies, and I just keep current share count, my numbers get to over 420 as it stands now. Am I thinking about anything wrong? Or there considerations I need to be thinking about when I do that math? It seems pretty straightforward.

[Robert Hagemann:]

No, that gets you kind of right in the zone of what we put out there in terms of guidance.

[Ralph Giacobbe:]

And then, you talked a lot about, sort of investing in the business, sales organization, maybe talk a little bit more about that. It seems like you're, by and large, done. So when do you expect to see the benefits? And at this point, should we think that some of the cost pressures that print margins may be help shift in 2011?

[Robert Hagemann:]

Yes. In terms of investments in the business. The areas certainly had been in the sales force to start to drive top line growth and overall improved sales effectiveness. And we're starting to get some traction there. We're not quite there yet because as Surya said, we're now substantially complete in the sales force expansion, but now we need to get those folks up to speed and producing at the rates the we'd expect them to produce once they're fully trained and out in the field. In addition though, we've been investing in the service levels. I think we've mentioned in the past that we've added a number of phlebotomists, whether they'd be in offices or in our patient service centers, and we've opened up patient service centers. And we think it's a combination of both the investments in the sales force and investments in the service levels that are actually going to pay dividends, longer-term, in terms of accelerating top line growth and actually help us into expand margins along with that. And as you think about 2011, think about not anniversarying a lot of those investments until we get into the back half of the year.

[Surya Mohapatra:]

Ralph, this is Surya. Let me just make some comment about our 2010. 2010 was really a difficult year, but also an interesting year in which we saw a new water line as far as the physician office visits are concerned. It was down by 5%. Despite the decline in volume, we are able to generate $1 billion cash and we increased our EPS. So the company is strong, but as far as 2010 is concerned, we also took an opportunity to strengthen our business while we are going through the healthcare reform. So just to tell you, we strengthened and expanded our sales force, we introduced new tests and also new technology like Care360, and we have extended and renewed the managed care contracts for multiple years. So when I look at what we have done in 2010 in a changing environment, I feel very good about 2011 and going forward.

[Ralph Giacobbe:]

And then just my last one. Obviously, there's been a lot of acquisition activity in the space. Can you maybe talk about why you haven't been as active in the space in 2010? And maybe just your thoughts on deals, going forward, is you just said, Surya, your focus area on other areas of the business as a reason maybe why you haven't been as active as acquisitions? Or why has that been the case and what should we expect for 2011?

[Surya Mohapatra:]

The first thing you should assume that we look at most of the acquisitions. But you have seen, over the last 10 years, we have grown both organically and also through acquisitions. So we take acquisitions as the major strategy for our growth. However, the acquisition has to make economic sense and strategic sense. And we are very conservative when it comes to doing the appropriate due diligence. So having said that, what are we focused on? We are focused on acquiring genetic, esoteric and Anatomic Pathology capabilities to strengthen our cancer, infectious disease and cardiovascular disease and another high growth areas. So that's actually our focus. We are not looking at any international acquisition at the moment. And we believe that we have an active pipeline and if it makes sense for us, we will acquire.

[Robert Hagemann:]

Ralph, acquisitions are sort of choppy, right? While we're actively looking at just about everything that comes on the market, you need to get comfortable that a deal makes sense and you do a thorough diligence and ultimately, you need to reach agreement on value. And unless all those things come together, you don't have a deal. But rest assured, we are actively looking at just about anything in our space that comes on the market.

[Operator:]

Shelley Gnall, Goldman Sachs.

[Shelley Gnall-Sazenski:]

I was just wondering if you could comment on expectations from the FDA on lab develop tests during 2011? I guess any of your expectations on what we could be seeing from the FDA? And any potential impact on longer-term esoteric growth?

[Robert Hagemann:]

It's still a little too early to tell at this point in terms of what the FDA will do. That's not finalized yet. We do understand though that -- look, they're not looking to slow innovation. They're not looking to take proven and reliable tests off the market, which have been on the market. And we, as a company and as an industry, are going to work through with them -- what needs to happen to make sure that this is beneficial for patients and quality. It doesn't slow innovation and add to costs. And we feel very good about our capabilities in dealing with the FDA. The knowledge that we have and the experience that we have through our Focus division, as well as through our Nichols Institute, puts us in good position to deal with what we believe will just be about anything that comes down the pipe. But it's a little too early to tell exactly what that will be.

[Shelley Gnall-Sazenski:]

Do you have any sense of when we may hear something? I mean, do you have a sense of whether it's another month or maybe later in the year?

[Robert Hagemann:]

Probably sometime later in the year. It's not clear exactly when.

[Kathleen Valentine:]

And Shelley, our trade associations is in discussions with the FDA, so it is progressing. But we don't have a sense for when during the year we'll get some clarity.

[Robert Hagemann:]

And the other thing, Shelley, to keep in mind is whatever does come out, we'd expect will take several years to implement. It's not all going to happen at once. So that will give companies a chance to adjust to whatever changes might take place.

[Shelley Gnall-Sazenski:]

And then just one quick final question on Vitamin D testing, do you have a sense -- is it too early to tell when that growth, which I know has been good news for esoteric testing growth, do you have a sense of when that could be flattening? Could that be a 2011 issue?

[Robert Hagemann:]

Well, we're expecting it could continue to grow in 2011. Obviously, the rate of growth has to start to slow down as the total revenues in the base of which you're growing becomes larger. But we expect that, that will be a test that continues to grow in 2011.

[Operator:]

Amanda Murphy with William Blair.

[Amanda Murphy:]

I had a question on underlying utilization. I'm curious, you've mentioned that you've seen improvement there. Is there a way to tease out how much of that is related to deductible effects and other people using more tests into the end the year? Or is it really the just underlying improvement?

[Robert Hagemann:]

Amanda, that's an interesting question, one which we look at all the time. And to the degree that there's going to be that sort of phenomena, you would expect it to be in every fourth quarter towards the end of every year. I would tell you that I don't think we've seen anything significantly different in this quarter than we've seen in the past. So it is a little hard to tease that out though because you don't get that sort of information either through your physician customers or through your sales force. But our view is that whatever impact there may have been, is just generally consistent with what we would have seen in the past.

[Amanda Murphy:]

And then a couple AP questions for you. Last quarter you mentioned that the growth of insourcing has slowed. Is that the same trend that you saw this quarter? And could you even call, sort of a bottom to that, at this point?

[Robert Hagemann:]

Well, I think it's too early to say that there is a bottom, and insourcing is continuing. The rate of growth, we believe, has slowed as we've gone through the back half of the year. But it's a little hard to say from quarter-to-quarter how much it may have slowed. But we are starting to see a trend of that slowing, we believe.

[Amanda Murphy:]

And then lastly, you mentioned the reimbursement on the clinical lab fee schedule. I'm curious though, on the other side, on the AP side, it looks like there's some positive reimbursement benefit for Medicare in '11. Is that going to be a meaningful tailwind for you or is it just too small?

[Kathleen Valentine:]

Amanda, the net impact from the physician fee schedule changes for '11 will be very negligibly positive for us and it's the impact of the RBU changes, coupled with some of the changes that they made on CF testing, for example. But net-net, it's a slight positive.

[Robert Hagemann:]

And to put it in perspective, our Medicare reimbursement, about 90% of that reimbursement comes off the clinical lab fee schedule and only about 10% come off the physician fee schedule.

[Operator:]

Bill Quirk with Piper Jaffray.

[William Quirk:]

Again, recognizing sensitivity around MediCal, but Bob, if I'm doing the math right, if we hadn't stop billing them, volume would have been a little over 1% in the fourth quarter. Is that the right thing to think about that?

[Robert Hagemann:]

No, Bill. The revenue and the volumes of that testing we performed is in our numbers.

[William Quirk:]

And then just a follow-up to the earlier LDT Question, Bob or Surya, any comments concerning the most recent election here? Does that affect the overall pace or perhaps the breadth of what we might see in terms of eventual LDT regulations?

[Surya Mohapatra:]

I think the FDA is interested to make sure that the tests are done appropriately and tested fully and has clinical relevance. And as Kathleen said, we are working with FDA through our trade association and we want to achieve the same as they want, but we just want to make sure that they don't do anything which is going to slow down innovation. If you remember, all these things started because of some genetic tests done by direct-to-consumer ways. So I think it's going to take some time, but we are working with the FDA to do the right thing for the patients.

[Operator:]

Jason Gurda with Leerink Swann.

[Jason Gurda:]

Can you talk about the magnitude of the changes that you did with the sales force? I think you had mentioned last quarter that you have added 100 new sales people? If I could get that perspective of the total size?

[Surya Mohapatra:]

We don't break down the total size, but let me tell you philosophically what we have been doing. We are organizing our sales force basically to focus on various subspecialties, whether it be the physicians or the hospitals, whether it is oncologists or whether it's the employers. And what we did over the last year that we have added more than 100 people but also we have provided tools and training to improve the knowledge and efficiency of our sales people and in many cases, we have also upgraded our sales force. So I can't give you the breakdown, but I feel very good about having subspecialties sales force and I feel very good about the new people we have added and we're just waiting for them to get fully trained.

[Jason Gurda:]

Another question, we're seeing increased interest in using capitated contracts to reimburse physicians, whether it's in Massachusetts but also with some ACL pilot programs, and I think you'll probably see more of that in the future. But in these contracts, there's a lot more relative to the 90s, there's a lot more focus on various quality metrics. Do you have any sense for whether that leads to physicians ordering more or less tests?

[Surya Mohapatra:]

Well, I don't know the Massachusetts program. But the whole healthcare reform, they started with two things, basically [indiscernible] are quality and then [indiscernible] and then accessibility. So we have a number of discussions going with a lot of health plans, where they want to get information and that's one of the reasons why we have invested money in Healthcare IT and informatics. And we see that going forward, whether it's accountable care organizations or whether it's the health plans or whether it is the physicians, not only they are to practice every day in gross medicine, but the best we've seen in medicine is lab results, lab tests. So we feel that we will be net benefactor of these drive towards quality because we will provide them with the data. And I think the health plans are now getting involved to getting really substantial data, quality data so they can monitor the progress of how they are doing in a particular disease, and how a physician is practicing. And some reimbursement is based on that.

[Jason Gurda:]

Is it fair to say it's a little bit too early for you to have actual data on that, however?

[Surya Mohapatra:]

Yes. I think it's a little bit too early. And again, this whole move towards accountable healthcare organization is going to make quality very important and how we provide information is very important. But you know we are keeping an eye on it and it's too early to make any comments, specific comments.

[Operator:]

Ricky Goldwasser with Morgan Stanley.

[Ricky Goldwasser:]

I have a couple of follow-up questions. First of all on the volume side, I think you said before that you expect no improvement in physician office utilization. So should we think about the volume increase that you've reported in the fourth quarter, is it reasonable run rate for 2011?

[Robert Hagemann:]

Yes, Ricky, as we've stated in the past we don't break out volume or revenue per requisition in providing revenue guidance. And there's a lot of reasons for that including making sure that we manage the business to be profitable business and sometimes walking away from volume that doesn't make sense, et cetera, a whole bunch of reasons. But as you think about physician office visits and you think about our volume, your volume for the year was down about 1% in the quarter. It was about flat, up 0.1%. But physician office visits for the bulk of the year were down around 5% or so. And with those physician office visits being off a pretty consistent level and our volumes starting to improve and show an improvement in trend, we feel good that some of the things that we've been talking about in terms of the sales force, the added focus, et cetera, are starting to pay off a little bit here. And we would expect that we'll see continued improvement as we get into 2011. But remember, we're coming off of a year where volumes have been down. We're coming off of the quarter where revenues are still down versus the prior year. And we need to get to the point where revenues are stable with the prior year and then they start to grow and we expect that as the year progresses, we'll see continued improvement.

[Ricky Goldwasser:]

And what do you think volume growth will stabilize and without not thinking about a timeline. There's just -- what do you think volume growth where it stabilizes for the industry on a normalized level?

[Surya Mohapatra:]

Well, Ricky, you know this industry, as well as I do. But we usually say that it's 3% to 5% revenue growth with 2%, 3% in pricing or revenue per req and 2% to 3% in volume. I still believe that that's eventually is going back going back to the 5% to 6% growth a year. All the long-term trends are positive. And what we have gone through over the last 18 months, organic growth has been difficult, whether it is due to economic slowdown or due to the healthcare reform. But I'm very positive about 5% to 6% growth in this industry.

[Ricky Goldwasser:]

And then lastly, just to clarify, does the guidance include the additional SG&A associated with just the sales force becoming effective in picking up, which I assume, will drop just as additional compensation?

[Robert Hagemann:]

Yes, absolutely. The cost of the sales force is fully baked into our guidance.

[Operator:]

Bill Bonello with RBC.

[Bill Bonello:]

Just wanted to revisit sort of how you think about leverage in the modeling. I guess it seems a little surprising that you can maintain EBIT margin, which just 1% revenue growth, especially when you've been adding sales and service headcount. And so I'm just curious, I mean, should we think about as sort of the natural leverage in the model, 1% growth allows sustainable margins? Or are there other cost reductions that are kind of offsetting those adds and allowing you to maintain margins?

[Surya Mohapatra:]

I think that I'm going to pass you on to Bob.

[Robert Hagemann:]

Here's the way I think you need to think about the leverage in the business. At 1% revenue growth, it's really hard to maintain margins or expand them without doing something associated with your cost base. And as I mentioned in my prepared remarks, we're continuing to take actions to drive efficiency in our business. We're looking at additional programs to drive costs out of the business. And that's a big driver of why you see margins stable despite the fact that we're only showing 1% top line growth. And what does do though as we continue to take costs out of the system, it really did does help with the leverage, so that as the top line starts to return, we'd expect to see nice incremental margins on that.

[Bill Bonello:]

And that's exactly where I was heading. Without getting too specific, do you want to give us some sense of how we should think about marginal profitability if volume starts to improve? I mean, it strikes me that this is a high fixed-cost business if you do start to get some volume growth, a lot of that flows through, but...

[Robert Hagemann:]

It absolutely does and you've seen the way this business has performed over the years. I think it's safe to say that there is strong incremental margins on that. But then we've got to decide whether or not we want to reinvest that for future growth. We want to take it all to the bottom line. But you should rest assure that incremental volume and incremental tests, which don't show up necessarily as volume but show up in revenue per requisition, are strong drivers of margin enhancement.

[Bill Bonello:]

At then just one last question if I can, on the acquisitions front, you've been pretty clear about what it is you're looking at. Can you just -- I guess, two follow-ups, I mean, should we take from those comments then that you're pretty committed that where you're going to be acquiring sort of within sort of core lab services itself as opposed to something sort of adjacently strategic like a big IT investment or that sort of thing and a follow-up on that?

[Surya Mohapatra:]

Well, first of all, we'll always look into the four lean acquisitions whether it’s a regional lab or a hospital outsource [indiscernible]. But our main focus has been in the U.S. We want to further strengthen our franchise in cancer, cardiovascular disease, infectious disease and other high-growth areas. We are not looking at any international acquisitions, nor any adjacent space in Healthcare IT at the moment.

[Bill Bonello:]

And would you consider doing a meaningfully diluted acquisition if it was strategically a good bit?

[Surya Mohapatra:]

We'll always look at, as you know, that we have grown the company between both organic and acquisition growth and we will look at the deal and if it's going to provide us a long-term settled value, we'll do it.

[Operator:]

Brendan Strong with Barclays Capital.

[Brendan Strong:]

Just calling in on Adam Feinstein on behalf of him this morning. Just maybe first off, I want to ask about empire contract. The contract, obviously, open up the competition during the summer. Any losses under that contract that you've seen through the fourth quarter? Is that sort of what we should be expecting for run rate, going forward or could there be some additional changes as we get to 2011 or on that contract?

[Robert Hagemann:]

Brendan, that was a contract were other providers were added, obviously, when you have additional providers added to contract you'd expect them to pick up some volume, but we have held on to substantial portion of that business. And it's very much in line with what we expected, maybe a little better than what with had expected. So we feel pretty good about that. And it speaks a lot to the value proposition. And you heard me say in the past, we're very comfortable competing for business on a level playing field where were one of the participating laboratories. We usually get more than our fair share. And I think the empire contract fares that out.

[Adam Feinstein:]

But just in terms of incremental gains or losses there, I mean do you think we've already seen enough time pass for us to have seen the full impact of it?

[Robert Hagemann:]

We're not expecting there to be any significant changes from the level of business that we've retained at this point.

[Adam Feinstein:]

And then Bob I wanted to follow-up on guidance. I mean, just I'm struggling with the low end of guidance. I mean is it more of a situation where you kind of come out maybe towards the middle, but you're just trying to put some brackets around it and you get higher and lower? Or is there something specific that really gets you down to that lower end of the range?

[Robert Hagemann:]

Look, the guidance here, as we indicate, we used the word approximately and some of these numbers particularly the top line. Approximately 1% has some variability. And as we just talked about a moment ago with Bill, there's a fair amount of leverage in this model so slight changes in the top line dropped down to the bottom line pretty significantly. So I think we've tried to give you as reasonable range as we can at this point. And as I said earlier, we're certainly committed to achieving that or see if as we can.

[Adam Feinstein:]

On MediCal, I know you don't want to comment on a settlement. But just around that $66 million a year that you generate from MediCal and you still going to be recording revenue from it. Is there a possibility that we see some increased bad debt expense around that in 2011?

[Robert Hagemann:]

I don't know that it's necessarily bad debt expense, I mean, as think about -- it's all going to be resolved ultimately, I believe, as part of the negotiations here. But as we said earlier, we feel that as though we're billing appropriately. We're billing in compliance with the laws and the state. And as a result, we've continued to service the patients there. We do have an interim agreement with the state that expires March 1. And we've agreed with them to negotiate in good faith to extend that and hopefully, we'll get to that point. But right now, we're working through with the state but we're also trying to make sure that patients in the state aren't disadvantaged as a result of this.

[Adam Feinstein:]

Maybe just the last one, I don't know if this is for you, Bob, or for Surya. But just one of the things in healthcare reform is to remove the co-pays and deductibles around a number of rendered services and a lot of the services, I think, end up having lab test done around them. You think there's any benefit either for some volume pickup or maybe even just slightly lower bad debt on the co-pays and the deductibles as we get maybe later into the year?

[Surya Mohapatra:]

Well, as we always thought and we believe that the outcome of the healthcare reform is going to be a net positive for us as far as tests because we're adding some tests for preventive care, we're adding some tests for some of these particular monitoring of drugs. So those from volume point of view and from new test point of view, I think it's going to be positive. Now as far as changing the health plans, we see the health plans are very anxious and they're working with us to reduce they are out of network costs.

[Robert Hagemann:]

And Brendan with respect to bad debt, the vast majority of our bad debt is associated with patient bills. And about half of our patient bills are -- where we're billing uninsured, the other half is principally co-pays and deductibles. And there's a much higher bad debt percentage on the billing of the uninsured than there is on the co-pays and deductibles. So I would think that over time, as health care reform kicks in, and we start to get more insured lives that, that will be beneficial to the bad debt percentage.

[Surya Mohapatra:]

[indiscernible] over 5% to total?

[Robert Hagemann:]

Yes, between 5% and 10%. Yes.

[Operator:]

Darren Lehrich with Deutsche Bank.

[Darren Lehrich:]

I did have a follow-up with regard to the AP business and your revenue by product disclosures sheet. The annual decrease is about 9% in 2010. Bob, I think you've characterized that throughout 2010, maybe is getting slightly better in the back half of the year. I'm just wondering if you can put a little bit more discussion around the trend and put that 9% number into context for us?

[Robert Hagemann:]

Well, yes, Darren, as you point out, as we've been saying throughout the year, the trend has been showing some signs of improving there, particularly on the insourcing piece. And as you'd expect if we were down 9% for the year, we were down a little bit more than that in the first part of the year. We're still down at this point and as we go into the beginning of 2011, that will still be down. We won't anniversary those declines until hopefully the back-end of the year, next year.

[Darren Lehrich:]

The expectation and I know you're not providing too much specific guidance on product line, but the expectation we should have then for AP is it is still negative for 2011?

[Robert Hagemann:]

Well, again, I don't want to give guidance for the full year on it, but we're going to start out certainly down versus the prior year.

[Surya Mohapatra:]

Let me make a comment about it. The reason why we provided this information is to really give you an indication about the various businesses and the strategy we have on various segments. If you look at the esoteric and gene-based testing for the whole year, it grew almost by 5%, 4.6%. And that's much faster than the Routine business because the Routine business were down 1.4%. And not only Pathology remains a very strong element of our cancer diagnostics. And if you think our cancer diagnostics and that is what we're going to provide eventually which will include Anatomic Pathology, molecular diagnostics and also hem path[ph] . Now it is down at the moment to some extent affected by the same general slowdown and some insourcing and we're working with the government as far as insourcing is concerned. But strategically, Anatomic Pathology is very important for cancer diagnostics. So all in all, we're giving you an opportunity to look at actually how we are driving strategy towards these esoteric, gene-based and AP to solve the issue of cancer, infectious disease and cardiovascular disease. So that's the goal for that chart there.

[Darren Lehrich:]

It's a helpful disclosure and we only get it once a year. So that's why I'm asking the question. I guess the other question I have for you is you've suggested approximately 1% organic revenue growth for 2011. And Bob, I just want to make sure I understand, are there any known contract changes with hospital or reference clients or anything that you know today that would come out of that organic number? Just want to make sure that we're not missing anything that you know at this point?

[Robert Hagemann:]

Yes, anything that we know about contracts is baked into that number and you heard Surya say, our largest health plan contracts are all locked up for 2011. In fact, many of our largest ones are locked up beyond 2012 at this point. So we feel very good about the visibility there. Our contracts on the hospital side with GPOs and whatnot we feel good about those as well. So I think we have pretty good visibility into access and reimbursement levels as we head into 2011. And the one thing that will continue to be variable will be the business mix and how that changes an impact things. But in terms of contract access, we feel very good at this point.

[Darren Lehrich:]

And then just on the managed care contracts, you've talked about steerage and some of the goal that you had in re-opening them. And I know I asked this before, is there anything just with your contracts, specifically, that switches in 2011 such that you have some more visibility into measurable volume or incremental volume due to steerage that you're hoping for?

[Robert Hagemann:]

There's nothing contractual that changes with respect to that. It's really execution. We're continuing to work with multiple plans in driving these. We've had some successes and we're hopeful that we'll continue to drive volume to us as a result of continued effort between ourselves, the health plans and the employers.

[Darren Lehrich:]

My last question is just, what actions specifically did you take in your restructuring in Q4? And maybe can you update us on the number of lab facilities that you have? I'm not sure if there were any specific closures in your lab operations per se. And then my sort of last thing, I'll put in this question is, just on the patient service centers it sounds like you're adding more service with more phlebotomists and more PSCs perhaps. What you have done to extend the PSC footprint just to size it for us?

[Robert Hagemann:]

First, let me start with the Q4 restructuring charge. For the most part, there were no testing facilities that were closed as part of that. That was basically for the most part a workforce reduction. It was principally folks that where we've started to look in spans and layers and these are individuals that don't necessarily touch the customer, administrative positions to a large degree are the ones that were taken out. That's why much of the charge showed up in SG&A as opposed to cost of sales. With respect to patient service centers and phlebotomists. Principally, what we're adding are phlebotomists, we're adding them in physicians offices, we're adding them in our patient service centers. In physicians offices, they're principally a tool to generate additional business and in getting to accounts where we may not have been able to get into before. In the patient services, the goal there is really to continue to improve service levels and reduce wait times. And while we've added some patient service centers in some very specific geographies that we're targeting, again that's not been the biggest driver. It's really been the additional phlebotomists.

[Operator:]

Gary Lieberman with Wells Fargo.

[Gary Lieberman:]

Bob, could you just clarify the guidance. Does it include acquisitions or not? So I guess, it didn't include acquisitions but in your answers to another question you said that the guidance include the use of cash which might include acquisitions, just some clarification would be helpful.

[Robert Hagemann:]

Gary, just to further clarify, the top line guidance does not include any [indiscernible] that's all organic. [indiscernible] The bottom line...

[Gary Lieberman:]

The EPS guidance? The EPS guidance, is that included?

[Robert Hagemann:]

The revenue number does not. The EPS guidance assumes that our cash is deployed and we're assuming that's going to be deployed either into acquisitions or share repurchases.

[Gary Lieberman:]

And then maybe Surya, could you comment on some of the [indiscernible] you did in the past couple of quarters about tracking process and, I guess, maybe some of the revisions to some [indiscernible] contracts? Are you for the most part complete with that or is that still ongoing and how might that impact results in 2011?

[Surya Mohapatra:]

Gary, most of our contracts negotiations are complete and [indiscernible]. We have now [indiscernible] beyond 2012.

[Robert Hagemann:]

And many of them 2013 even, with some of our largest.

[Gary Lieberman:]

So maybe fewer changes in the coming year than you've seen in the past year, is that fair way to characterize it?

[Robert Hagemann:]

Yes. And over the next several years the percentage of revenues from health [indiscernible] coming up, I would say through 2012, into 2013, are generally less than what we would have averaged in the past.

[Operator:]

Bob Willoughby with Bank of America.

[Robert Willoughby:]

Bob, you've called out some of the spending on sales and services over the course of the year, can you size that for us in terms of what's not likely to recur? What was truly one-time in nature and forget about whatever revenue come in out of that but what falls out of the income statement next year for 2011?

[Robert Hagemann:]

Bob, we have not specifically quantified that for folks. Obviously, it has put some pressure on the margins at this point. And I don't necessarily think about it as one-time. Those are going to be costs that continue. What we're expecting though is that those that costs that generate will generate some top line growth for us which in the end will help us expand margins, as opposed to putting pressure on. But we haven't quantify the specific impact of those.

[Robert Willoughby:]

Can you maybe comment on in terms of the quarterly impact, there wasn't much in the first quarter was my understanding, but second and third pretty heavy, how was the fourth relative to the second and third quarter?

[Robert Hagemann:]

You started to see it ramp up in the second. I would say in the third is where you've got probably the most significant impact and it continued into the fourth.

[Robert Willoughby:]

And you've commented in healthcare reform in a number of different ways obviously, somewhat positive for you. But some of the impact in terms of the preventive screening, I guess for some plans would've felt as early as the fourth quarter. Anecdotally, I mean, your sense of contribution from any type of reform issues, either in the fourth quarter or just starting January 1, on the preventive screening what has come in?

[Robert Hagemann:]

Yes, Bob, I would tell you that I don't think there's really been any impact at all to our business in the fourth quarter as a result of healthcare reform and what we might see in terms of additional volume there. And it's really hard to say what we might be seeing at this point in the first quarter. I think we'll have better visibility into that as we get later into the year but we're not expecting that in 2011 we're going to have significant benefit from that.

[Robert Willoughby:]

And maybe lastly, pressure on the Medicare reimbursement rates, are you seeing any impact on the acquisition landscape? What are smaller labs doing? Are they committing? Are they retreating? The hospital labs, et cetera, what's been the competitive response?

[Robert Hagemann:]

I don't know that the changes in Medicare reimbursement are big enough at this point for laboratory to use that as the reason to either put itself on the market or get out of the business. Certainly, as time goes on, the regulation drives costs and reimbursement comes down, that might impact smaller laboratories but I don't think what we've seen to date is having that sort of impact.

[Operator:]

Steven Valiquette with UBS.

[Steven Valiquette:]

The comments on physician insourcing are helpful. But there also seems to be more discussion around just the general trend of the hospitals accelerating direct employment of physicians. I guess, really, just two questions on that. One, if you can just talk about something that you're kind of worried about at the moment. And also, if you had to rank order of the two risk factors of your hospitals, directly employing physicians versus just physicians insourcing lab work. Which ones really a bigger challenge at the moment?

[Surya Mohapatra:]

Well, the bigger challenge at the moment is the specialists insourcing their Pathology work, whether gerologist, or whether it's oncologist because that's the one which is affecting us more. As far as the hospitals buying practices, the rate of acquisitions have gone up. But still, they have to really increase capacity and I think what people have not realized that even though some of the physicians maybe a part of the hospital, that does not always lead into that those physicians have to only work with the hospitals. They still have to really do the out patients, so that's less impactful at the moment versus insourcing of Pathology by specialists.

[Steven Valiquette:]

As far as the hospital -- was it material enough where it was a factor in your guidance for 2011? Or was it just so immaterial that it's not really a factor on the decision tree?

[Surya Mohapatra:]

It's not a factor in 2011.

[Operator:]

Anthony Vendetti with Maxim Group.

[Anthony Vendetti:]

Just back to the preventive care, as this rolls out, I know you've said you're not seeing any significant impact yet. You're not expecting any material right now. But as this rolls out, additional screening and tests, should that contribute to volume this year? And are the managed care companies going to as there is additional tests, are they going to scrutinize, do you expect them to scrutinize those tests or any additional tests and try to look at the overall testing volume, in general and what tests are being administered?

[Robert Hagemann:]

Anthony, again, I don't think that we're going to see a significant impact in utilization or volume this year as a result of healthcare reform. There might be some modest uptick as a result now of having preventive services covered. And with respect to whether or not the health plans will scrutinize that more, yes, I think it's really a function of not necessarily the utilization because I would assume that they're expecting utilization on some of those tests to go up. But are they being ordered onto the right circumstances? Most of the health plans have [ph] (1

[Anthony Vendetti:]

And then there's been no real mention of weather. Obviously, we had pretty rough January, so far, in the East Coast. Does your volume guidance for the year take into account the potential lower volume during this month?

[Robert Hagemann:]

Yes. As we think about volume forecast and we think about certainly the first quarter, which is the one that's generally is impacted the most by weather. What we're looking at is generally what we've seen kind of the average over the years and in any particular year where you have real severe weather that would be something that you didn't anticipate in your guidance. Yes, I would tell you at this point, look, we're not even through January yet. It's a little too early to tell what the impact in the first quarter is going to be from weather. It's certainly not helping us. It's, in fact, it's snowing outside the window right now. But look, as I think about the impact of weather on our business, it is something that happens, it's something that we have to deal with, but it doesn't impact the underlying performance or health of the business. And we just respond to it and move on.

[Anthony Vendetti:]

Let me just clarify though, you said that the guidance assumes second half to be stronger, back-end loaded is that correct?

[Robert Hagemann:]

Basically, what we're telling you is that the comps get less difficult in the back half of the year. So that I think as you're thinking about comparisons to the prior year, that's what we ask you to factor in.

[Anthony Vendetti:]

The revenue growth of 1%, because, Surya, you mentioned that goal is to get back up to the 5% or 6% and you could see 2% or 3%. Once again, the revenue growth is organic. It sounds like, what you're saying is right now, as the landscape's changing, 1% is your kind of conservative kind of look. And then leaving room for upside, is that about right or...

[Surya Mohapatra:]

I was responding to the question about the industry, and this industry, 5% to 6% organic growth, as I said, 2% to 3% volume, 2% to 3% revenue per rec. And I believe that it's going to go back to that level. But it would probably take a couple of years to go to that level just because we're just going through the economic downturn and the healthcare reform. As far as our company is concerned, we think the guidance we have input for 2011 is reasonable based on where we are coming from. But when I look at our company versus the competition in our differentiators, gene-based testing, esoteric testing, and Anatomic Pathology our focus on cancer, infectious diseases and cardiovascular, and our strong Healthcare IT strategy is going to make us different from our competitors and certainly, my goal and our goal is to really do better than the 1% we have. But that's the guidance we have given.

[Anthony Vendetti:]

Do you expect to be able to take some share for many competitors either small or large?

[Surya Mohapatra:]

I always expect to take some shares from our competitors.

[Anthony Vendetti:]

Lastly, have you repurchased any shares so far in 2011?

[Robert Hagemann:]

We're actually out of the market between the end of the year and when we do our earnings release.

[Operator:]

Gary Taylor with Citigroup.

[Gary Taylor:]

Going back to just the managed care discussion, I didn't have a chance to go back and check all my notes from the 2Q. But the biggest payer, by far, on the commercial side for you guys is Aetna. Have you told us specifically when that contract expires?

[Robert Hagemann:]

No, we have not, but that's one of our longest term contracts and goes out beyond 2013 along with several others.

[Gary Taylor:]

And I was listening, I was writing as quickly as I could, but Surya was talking about, I think, esoteric and gene-based testing, up 3% year-over-year including Vitamin D, up 30%. Were those revenue figures or requisition figures?

[Surya Mohapatra:]

Those are revenue figures.

[Gary Taylor:]

And then my last question, just going to the comment that with revenue growth being approximately 1%, it would basically take some hard work on the expense side to get the margins to be flat. Is there going to be an opportunity, I guess, to provide more color around that or anything more detailed? I guess I'm just thinking back to a few years ago when you had targeted several hundred million dollars of savings over and there was very formal and detailed proposal for what you're going to do on the cost side. Is there an opportunity to do something like that again and to give us more visibility on what you think you can do on expenses?

[Robert Hagemann:]

Look, we continue to drive the execution of that program. In fact, today, it's continuing to drive the efficiencies in our operations. As I said in the prepared remarks, we're looking at some other opportunities. But I wouldn't expect there to be a big announcement from us anytime in the near term about another program. That program is continuing. We're doing some things to enhance it and keep the momentum that we've got there. And we do have good momentum there.

[Gary Taylor:]

Last question, can you just remind us because typically, the last five years it looks there's some pretty pronounced seasonality where operating margins moved sequentially lower from 4Q into 1Q. And that's not -- doesn't appear to always be driven by any revenue weakness. Can you kind of remind us some of the things that impact sort of first quarter margin seasonality?

[Robert Hagemann:]

Well, certainly a lot of it does get driven by top line. There isn't a whole lot of seasonality on the cost side of the business. But a lot of it gets driven by top line, as well as in the first part of the year, what you tend to see is slightly higher bad debt as there's more deductibles, some co-pays that kick in and the bad debt starts to moderate a little bit as you get into the back half of the year. And then in the fourth quarter, your volume just do tend to be, and top line in general, tends to be softer simply because of the old holiday periods that you have in there. The week between Christmas and New Year's, for example, is an extremely slow week. So it's really just the general seasonality that you got there. The second quarter tends to be one of our strongest quarters. You don't have a whole lot of holidays in there affecting things. You don't necessarily have a lot of the summer vacations and whatnot that starts to kick in when you get into August. That's been the general trend for the business and expect it will generally continue.

[Gary Taylor:]

So your thought would -- I know you don't give quarterly guidance, but your thought would be operating margins probably weaker sequentially in 1Q than building over the summer and through those easier comps, I guess?

[Robert Hagemann:]

The first and the fourth quarters tend to be the quarters with the lowest margin percentages.

[Operator:]

Art Henderson with Jefferies & Company.

[Arthur Henderson:]

Bob, you referenced some of the success you'd have with working with managed care on the leakage issue. Is there anything you could mention there just in terms of what is working? And is it related more to the patient service centers you're doing?

[Robert Hagemann:]

Art, it's an interesting question. I don't want to give too much in the way of details in terms of what we're doing with specific employers. But patient service centers is a piece of that, but I would say it's not the biggest piece necessarily. It's really us working collaboratively with the health plan, getting in front of the employers, being able to communicate to their employees, what the benefits are of using Quest Diagnostics versus using either out-of-network laboratory or some higher-cost in-network laboratory. And a lot of that has to do with employee communication and I would say that's probably the principal driver. In some cases though what we might be doing is to the degree that an employer has a significant concentration of employees in a particular area, we would look at our PSC footprint there and see if it makes sense to expand that in that area to help capture more. We would look at whether or not it makes sense to have a phlebotomist potentially even at the employers' site to help in that regard. But I would say that the biggest driver is really just the ability to get in front of employees and communicate the benefits of working with Quest Diagnostics.

[Arthur Henderson:]

Last question, Bob, is your sense that the training related to the sales force that, that all should relatively be completed in the first quarter. I think, as I recall, that's kind of what you thought, through the first quarter would be the time it would take to get these folks train and in second quarter the productivity factor would go higher?

[Robert Hagemann:]

Certainly as we get through the end of the first quarter, we would expect that the sales folks that we've hired in 2010 are going to be getting up to speed. Generally, if you think about a three or six months period or so for folks to fully get up to speed, there's still some of that as we come out of the first quarter, folks that were hired in the latter part of the year. But generally, we'd expect sales force productivity would be much stronger in the first quarter than it was on the back half of this year.

[Arthur Henderson:]

And are you planning to add the same degree to the sales force this year as you did last or has it slowdown of it?

[Robert Hagemann:]

As Surya said in his remarks, we're substantially complete with the expansion of the sales force.

[Operator:]

Your last question is from Dawn Brock with Kaufman Bros.

[Dawn Brock:]

Guys, just in terms of the discussion that's pursued on the volume side, would you be willing to more specifically distinguish between all the work you've been doing with the health plans and employers? Are you seeing the recent stability in volume coming more from some market shared gains based on these new partnership initiatives? Or do you view it as an uptick in your demand based on the partnership initiative?

[Robert Hagemann:]

It's a difficult question to answer precisely. I would say that it's a combination of all of the things that we're doing. I think it's clearly the focus that we placed on particular disease states, as Surya talked about cancer and cardiovascular and infectious disease. The fact that we've hired up sales folks to go after particular geographies or physician specialties and the efforts that we have ongoing with health plans and employers. But it's not any one thing, quite honestly. It's a combination of all of those.

[Dawn Brock:]

And where you're competing in more of the open-network contracts, are you feeling as though you're gaining traction?

[Robert Hagemann:]

As I said earlier, I feel very good when we're in an open contract in terms of us getting more than our fair share of the work.

[Dawn Brock:]

And then my second question is, can you talk a little bit about the more recent adoption piece of the EHR system and the utilization trends that are accompanying the new adopters?

[Surya Mohapatra:]

As I said that since we introduced we have now more than 1,800 doctors using our Care360. I think the most important thing is to really note by during the quarter we've got certified for meaningful use. That means now our physicians can earn up to $44,000 and that's really a great incentive. But apart from that, the Care360 not only provides them [indiscernible] with laboratory orders and results but physician support and also electronic prescription. So we are very pleased that how we are gaining ground in that area, we're also very pleased at how it's differentiating us from our competitors. And hopefully, we are also counting on this to have some revenue as we expand in our in-service.

[Dawn Brock:]

So just to follow-up on that, are you seeing greater adoption from your existing physician relationships? Or are you seeing an uptick in new relationships?

[Surya Mohapatra:]

I think it's a mix. We're still looking at new relationships. We're also looking at the existing relationships and what's changing. We're seeing both.

[Dawn Brock:]

And then just as far as utilization, do you feel as though you're getting more testing, i.e, not that these physicians are necessarily ordering more testing that were already using it, but you're seeing more tests go to Quest from the existing testing base?

[Surya Mohapatra:]

We have seen results. I don't have current results, but we have seen each time one our customer, physician customer use our Care360, we tend to get more business from that customer.

[Operator:]

Thank you for participating in the Quest Diagnostics Fourth Quarter 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 [phone] for domestic callers, or [phone] for international callers. No access code will be required. Telephone replays will be available 24 hours a day beginning at 10