Welcome to the Quest Diagnostics First Quarter 2020 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. I would now like to introduce Shawn Bevec, Vice President of Investor Relations for Quest Diagnostics. Go ahead please.

Thank you and good morning. I'm on the line with Steve Rusckowski, our Chairman, Chief Executive Officer and President; and Mark Guinan, our Chief Financial Officer. During this call we may make forward-looking statements and we'll 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 including the impact of the COVID-19 pandemic that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent Annual Report on Form 10-K and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K. 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. References to adjusted operating income for all periods excludes amortization expense. Finally, growth rates associated with our long-term outlook projections including total revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Now, here is Steve Rusckowski.

Thank you, Shawn, and thank you all for joining us today. We are certainly facing extraordinary times. The COVID-19 pandemic has transformed how we live, work, and interact with each other. While the effects of this crisis will likely linger in the coming weeks and months, one thing is clear – we will overcome this. This morning, I will talk about our performance before the crisis, how it has affected us, and the steps we are taking to manage its impact moving forward. Then Mark will provide more details on our first quarter results and financial position. Our financial performance in the first quarter began strongly in January and February. By the end of February, total revenues had grown over 4%. Even after adjusting for calendar and weather advantages in the first two months, organic volume increased more than 4%. However, in March, the implementation of social distancing and shelter-in-place measures to control the spread of COVID-19 led to significant declines in our business. In the last two weeks of the quarter, we saw volume reductions exceeding 40%, affecting all metropolitan markets, not just areas like New York City. In April, the decline in volume worsened, hovering around 50% to 60%. As you know, Quest Diagnostics has been crucial in enhancing COVID-19 testing capacity nationwide. Since we began COVID-19 testing with our laboratory-developed tests at our Advanced Diagnostic Laboratory in San Juan Capistrano, California, we have conducted and reported results for nearly 1 million tests across the U.S., accounting for about a quarter of all tests performed nationwide. We continue to operate 12 laboratories and are now able to conduct more than 50,000 COVID-19 tests daily. Our backlog has been reduced, with current turnaround times of one to two days, and under one day for priority hospital patients. We’ve optimized our output by effectively managing the global supply chain, ensuring we have sufficient supplies for specimen collection, testing, and protecting our employees. This effort has involved significant teamwork and collaboration. Since early March, we've maintained regular communication with federal, state, and local governments at all levels. We are working closely with payers, IVD manufacturers, retailers, and trade associations to enhance our testing capacity for the American public. Additionally, we've partnered with Walmart to offer drive-through testing sites for anyone showing symptoms of the virus, as well as for all healthcare workers and first responders, regardless of symptoms. We currently operate approximately 10 sites in five states and expect to expand to about 20 locations by the end of the month. There are no out-of-pocket costs for testing at these sites. We are also assisting state and local governments with their COVID-19 testing initiatives across the country. Lastly, we were pleased to see CMS increase reimbursement for high throughput molecular COVID-19 testing to $100 last week, which acknowledges the essential role laboratories are playing in the nation's response to the pandemic. We hope other payors will follow CMS's example. As we move into the next phase of managing the virus, we’ve started performing antibody testing to enhance our understanding of infection rates in specific areas and potentially indicate an individual's immunity.

Thanks, Steve. In the first quarter, consolidated revenues were $1.82 billion, down 3.7% versus the prior year. Revenues for diagnostic information services declined 3.8% compared to the prior year. As Steve noted earlier, our business performance was strong in January and February, but we experienced a substantial decline in volumes in March. Volume measured by the number of requisitions decreased 2.4% versus the prior year. Excluding acquisitions, volumes declined 2.7%. Before describing some of the volume trends we saw in March and early April, I do want to spend a moment on the strong performance of our business prior to the COVID-19 pandemic. Through February, year-to-date total revenue growth was just over 4%, with organic revenue growth of just over 3.5%. Total volume growth was strong at 6.3%. Volume through February included a calendar benefit due in part to leap year, as well as mild winter weather. Adjusting for these benefits and the impact of acquisitions, organic volume growth in the first two months of 2020 was nearly 4.5%, indicating that the strong progress you made in 2019 continued into 2020. As we moved into March, we started to see single-digit volume declines through the first two weeks of the month. Stay-at-home measures were implemented in several states by the third week of March, and volume declines accelerated to nearly 40%. And by the last week of the month, volume declines across the business started to approach 50%. So far in April, we have indications that volume declines have stabilized in the 50% to 60% range. These declines include the benefit of COVID-19 molecular testing, which has been running at approximately 30,000 tests per day on average or approximately 6% volume growth through April.

I’m very proud of how our Quest colleagues have stepped up in so many ways. There are so many heroes at Quest from our scientific and medical staffs who have quickly brought up and validated new tests, through our operations teams, to our procurement teams, to our front line phlebotomists, couriers, pilots and specimen processors. And we've taken extra precautions to protect our employees with mandatory temperature checks at our labs and require the use of protective equipment such as gloves, lab coats, masks, and face shields, all this very dependent on circumstances. Our employees take pride in their work because so many Americans depend on the insights our testing delivers to make decisions to improve care. These efforts for all of us are inspiring. COVID-19 testing is critical to managing the pandemic. And while the volume of testing is substantial, it is not nearly enough to offset the reductions we're seeing in the rest of our business.

So, to summarize, we believe our financial position and ability to access additional capital is strong, and our Board of Directors remains committed to the company's quarterly dividend at this time. As many of you know, we withdrew our 2020 guidance on March 31, given the unprecedented uncertainty caused by the COVID-19 pandemic. We expect to provide updated 2020 guidance at a more appropriate time when visibility improves around the impact of COVID-19 and the duration of current stay-at-home measures in place across the United States.

While we aren’t providing guidance today, I'd like to share some details for you to consider as you build your models. As many of you know, our business is one of high fixed costs. We have modeled a number of different volume scenarios over the near to medium term and at this point our best estimate is that volumes for the business excluding COVID-19 testing will be down 50% to 60% in the second quarter. Once the COVID-19 crisis mitigates or passes and stay-at-home measures begin to lift, we believe our volume will slowly improve but to a lower level in 2020 than where we started the year. While we have taken several cost reduction steps, which we first shared in an 8-K on April 13, these steps are not sufficient to enable us to generate a profit at this volume assumption. If the conditions affecting lower lab utilization continue throughout the second quarter, it is highly likely we will incur a net loss. Molecular COVID-19 testing does serve as a partial offset to the volume declines we're experiencing across the rest of the business. We expect that demand for molecular COVID-19 testing will remain high throughout the second quarter and likely the foreseeable future.

We’ve been in advanced discussions with our lead lender regarding an amendment to certain financial covenants of our unsecured revolving credit facility. We believe this would provide us with the necessary flexibility to remain in compliance for the remainder of 2020. Based on these discussions and the strong support from our lead lender, we are confident we will be able to enter into this amendment later in the quarter.

Quest has been at the tip of the spear in responding to the crisis, and we will continue to play a critical role in the next phase of containing COVID-19. While there's uncertainty in the near-term, we look forward to the gradual improving conditions we see in front of us. Eventually, the healthcare system will start to return to normal and when that happens, Quest will emerge from the crisis stronger with significant opportunities in front of us.

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

Good morning, Ann.

Good morning. First, I want to commend you and all the Quest employees working through this crisis. It's been nice to see.

I appreciate that.

But my questions are focused on antibody testing.

Sure.

I know you mentioned that by mid-May your capacity will reach approximately 200,000. What do you anticipate your peak daily capacity could eventually be? Since this is related to a serology test, it might be higher. Additionally, how should we perceive this opportunity? Should we expect that everyone in the U.S. will take a serology test at some point, whether for vaccine testing, returning to school, or going back to work? Also, what steps is Quest taking to increase its market share? Are you collaborating with governments, employers, school systems, and similar entities? Thank you.

Yes. All right, Ann. All right. So all around antibody testing and serology testing. So as you read our press release yesterday, we launched our broad implementation of serology testing. We actually brought up a week or so ago, our first limited LDT laboratory developed tests on the EUROIMMUN platform. And we did that in two of our facilities and we did that for limited customers, hospitals and at-risk individuals. So we had some experience with it. We introduced our first app platform, which we mentioned last night, and it's present at many of our sites. We plan to roll it out quickly, along with a few other platforms between April and May. This will enable us to reach our goal of 200,000 tests per day by mid-May. We're operating seven days a week, 24 hours a day, totaling about 1.5 million tests weekly, or approximately 6 million per month. However, we are not stopping there; we have additional capacity available. Our progress is largely dependent on the capacity provided by IVD manufacturers for the necessary reagents. Therefore, while we have the lab capacity, our growth is somewhat constrained by the reagents and supply chain from our suppliers, and we are actively collaborating with them. That's what we anticipate will be available in May. Now, how broad would this be? What we announced in a press release and you see the guidance from the FDA, while we do believe there are several things, one is after a certain number of days, and the best indication is after 14 days of being infected, the person can have an IGG response. That's the last antibody. Therefore, it is obviously a good measurement that you have been infected in the past. It's important to those individuals that have not been tested and might be asymptomatic. So it's another good indication of infection rate within the geography or within a population. That's number one. Point number two is based upon other viruses. We believe that there may be immunity for some period of time. This is what we need to study. And that's why we have the conditions on our press release that we need to have more evidence, and this is why we need to do more of it. The vast majority of viruses in the past have had immunity for a period of time, but we need to confirm this with evidence. So with that said, I would share with you we have tremendous interest in both continuation of the molecular testing that has to be done going forward. Combining this with serology testing is taking place at the state level to address broad infrastructure needs. Recently, California announced they will begin testing asymptomatic residents. Additionally, we have utilized our capabilities from our employer population health business, previously known as our wellness business, to enhance our relationships with employers in their return to work strategies. These programs vary by industry, and the approach differs significantly for manufacturers with plants, office environments, or food processors. We are actively engaged with various employers who are collaborating with their states, cities, and local communities to navigate the challenges surrounding return to work and shelter-in-place mandates affecting schools. And then finally, we are working with the states. Many of the states have mounted now task forces to look at what needs to happen next with testing. As I said, California has made now a broader announcement of what they want to do to expand testing. We see this coming from out from a number of states. We're right in the middle of all those conversations. In fact yesterday, I did a press conference with the governor of Connecticut, Governor Lamont in Connecticut, where we work proactively with one of our partners, Hartford HealthCare and expanding testing in the state of Connecticut. So as Mark said, there's substantial opportunities in front of us both for the molecular testing, which has to be done to rule in, rule out COVID-19. And then you, coupled with the opportunities we see for serology or antibody testing as well for overall surveillance within a population and returning to work. So a good opportunity in front of us.

All right. Thanks.

Thank you, Ann.

Thank you. Our next question comes from Ralph Giacobbe with Citi. Your line is open.

Hey, Ralph.

Thanks. Hey, good morning. Thanks for all the detail. So you mentioned the minus 50% to minus 60% volume ex COVID, I guess first just want to clarify that the profit loss commentary is inclusive of COVID-19, so sort of it's an all-in number or is it enough to offset that profitability loss? And then how do you think about decremental margin with that type of revenue decline? If you can give us any sense there that would be helpful as well. Thanks.

Yes, Mark.

Sure, Steve. So, Ralph, the statement around net loss would be a volume inclusive of COVID testing continued to be down around 50% to 60%. Now, what that does not include is serology. So as I said in my prepared remarks, while we're encouraged by the potential demand and a lot of the things that Steve just explained are either in mid-term or late-stage conversations around stepping up some testing for government entities, for employers, etcetera. We haven't been performing that test. Obviously, we just launched serology, so we wanted to be cautious about forecasting in any way how meaningful serology would be. But based on all the things we've talked about, it could be significant. We also don't know the reimbursement rate yet, but hopefully fairly soon. And I think the trigger for commercial rates will largely be based on where CMS comes out. So we're all waiting on that. So that net loss comment and the 50% to 60% would include the current level of PCR where we said we're averaging about 30,000 tests a day. It's offsetting about 6% of our loss, but it does not contemplate significant upside if it happens from serology testing at some point in this quarter. And then on a margin perspective, obviously, if we're losing money, the answer to that, but from a drop-through perspective, because we are high fixed costs and we've already counted on as much adjustment to our cost structure as we can optimize through our furloughs, through reduced hours to some of those salary reductions for the next twelve weeks. We're largely fixed cost after that. So therefore, any sort of volume changes would likely be at a very high ratio if things were to get worse. As we said, we believe we've bottomed out because we've seen some stability over the last couple of weeks. There's some encouraging signs in some of the areas that were most impacted because not all geographies are created equal. So, some of those are bouncing back a little bit. But at this point, we wanted to be cautious, we wanted to be conservative, we wanted to tell you what we know today. And therefore the outlook for the quarter is not based on speculation. That is based on what we're seeing and what we know today.

Okay. Helpful. Thank you.

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

Hi.

Hi. Thanks. Thanks for taking my call. Good morning. A lot to think about here. But one thing I guess we'd like to focus on a little bit is on the cost side, you Invigorate and the plans that you have had in place for a long, long time. How do we think about cost savings, net growth Invigorate, all of that kind of that we had originally built into the model. I'm guessing part of that …

Yes, yes. Sure, sure. So let me start, then Mark will I'm sure add to it. First of all, Invigorate continues. That's a regular cadence and one of our two strategies that we have is to drive operational excellence and a portion of that is our efficiency program and we continue to look for that 3% of our cost basis for years. So that hasn't changed. So we continue to work on those programs. And in that regard, one of our flagship programs that we talk about is the new Clifton Laboratory that will allow us to consolidate the footprint to allow us to put in some new platforms, the immunoassay platform we talked about in the past, that project continues. But what I'll say, we're in the process of refreshing our plans because some of those plans might change. So, for instance, construction in the state of New Jersey might slip some. So some of those might change. And then secondly, some of the expectations around costs within a given year in terms of magnitude might be lower because some of it is volume dependent. However, in terms of percentage, if we're at lower volume levels, they'll be even higher percentages given some of this is fixed. So we're refreshing our perspective, but the goal of getting at least 3% of our cost basis for a year still stands. But we haven't provided an absolute number beyond the 3% in the past. So, Mark, would you like to add to it?

Yes, I think Steve summarized it well. A lot of our Invigorate is around volume-related activities, whether it's labor, whether it's our lab throughput, whether it's the draws we're doing in a patient service centers. So any sort of savings, certainly will continue as we implement some of the cost improvement efficiency opportunities, but they will be proportional. So obviously the dollars will be less. We always talked about 3% on a $6 billion plus cost base. Obviously if the cost base goes down, given lower volumes, you can expect lower dollar savings. The other thing I would add is that a lot of our efficiency programs are designed along the normal level of testing. So it is difficult to operate as efficiently when you lose half your volume on a given line, some places even more than that and given assays. So there is some offset to our Invigorate program and lost efficiencies, while we continue at this low level of volume because we're not going to rescale our business obviously to that extent.

Could you provide some clarification regarding the volumes? When you mention that things have stabilized, are you indicating that there is now a baseline comprised of the essential tests that need to be conducted, or are you beginning to notice an increase in additional testing that wasn't present in March but has resurfaced in April?

Mark, you want to take that?

Yes. So volume has not turned around. We said it stabilized. So when you asked about whether things in March and now we're seeing them pick up, what I would say is that we worked across what we call our clinical franchises, and there's absolutely differences depending on the acuteness of the condition and the necessity of the testing. But there's some very acute important areas of adjustments like cancer screening led testing in children, etcetera, that are down significantly just because physician offices are closed and people are uncomfortable going out, or people being told not to go out except for extreme necessary situations. So while we absolutely see some levels of difference across the testing venue and how much it's down, some more than 50% to 60%, some less than that. I can't tell you that we've seen more discretionary type testing come back dramatically yet.

Guys, thanks so much for all your help on this.

Thank you. Our next question comes from Jack Meehan of Barclays. Your line is open.

Good morning, Jack.

Yes. Good morning. Hope you guys are doing well.

Yes, we're doing well.

If you don't mind, I have a three parter on COVID testing. They're all …

Let me write it down, Jack.

The first one is where do you think reimbursement is going to shake out? Do you think commercial payers will follow the higher Medicare price? Second, how much further do you plan to scale up the testing? The stimulus package last night seem to call for further expansion. And then finally, just as you fold this all together with the core volumes down, if you look to the second half of the year, do you think net, net, it could be a positive impact as this testing persists? Thanks.

Yes, let me start. We are encouraged by CMS increasing the reimbursement rate to $100. We are in discussions with all the commercial insurance companies about their rates. Although we don't have specific answers yet, CMS's increase gives us leverage with these companies. Additionally, we still do not have the CMS rate for serology testing, which is crucial for us as it represents a significant opportunity for reimbursement. Regarding scale, we are working on increasing our capacity. We are introducing new platforms and seeking ways to enhance productivity from our existing setups, both in molecular and serology testing. The White House task force has requested us to think creatively about expanding our capacity beyond our current achievements. Right now, we are performing 50,000 molecular tests a day and are planning to increase that number, though we cannot provide specifics at the moment as we are actively pursuing it. We are optimistic about the recent developments from the Senate regarding funding, and we hope the House will also consider this, with the expectation that some portion will support our ongoing testing efforts in the country. Testing relies heavily on both molecular and serology tests going forward. We are pleased with our progress and see more opportunities ahead. And as I said earlier, when I am asked the question about capacity on serology we have to look at the whole supply chain, the front end and the back end. So, yes, we have the lab capacity. But one of the issues we had on the molecular side is not having the supplies, the swabs in the right places. We actually have shipped out in excess of a million swabs and we haven't resulted in excess of a million. So we have some inventory sitting out there. And also on the back end, it's very dependent upon IVD manufacturers providing us with the reagents and the kits to be able to increase our capacity as well. So we're working with them. And I can tell you, we're getting a lot of help from the task force, the White House, help from the states, everyone is rolled up their sleeves and trying to get more capacity out there. So there will be more coming, but what we’ve said so far is what we feel comfortable so far, I would say. Mark, you like to add to that?

Yes. Let me add a couple of things. So, Jack, almost without exception and certainly all of the national payers and large regional payers, the commercial reimbursement for the PCR test was based on the rate for Medicare and was not a subset or proportion, which obviously it's in the industry practice, but was with at or above the CMS rate. So therefore, I'm confident that we're going to do well. As you know, CMS has updated this price. We are in advanced discussions and I think it's very probable that most, if not all the company, the commercial payers will recognize the higher rate from CMS and our commercial rates will change. So I'm optimistic there. In the second half of the year, we are proceeding with caution. None of us can predict how things will unfold, but you can analyze the current situation. The capacity for serology is expected to meet demand, as mentioned, with an anticipated 200,000 tests per day. Currently, PCR testing is at 50,000 tests a day, so combined, these figures account for almost half of our usual daily testing volume. While we are uncertain about serology, we are optimistic that its pricing will be close to our average requisition price. PCR testing rates are above that due to CMS rate revisions, leading us to believe the value of a requisition will be comparable to our current average. Although I can't predict the speed or extent of recovery in core volume, if there is an increase in demand for COVID-19 testing, as we've heard publicly, the numbers suggest that the latter half of the year could look very different compared to the second quarter.

And just to remind everyone there is a difference. And hopefully it's clear between the molecular testing, which requires a health care professional in most cases to do the specimen collection. And in many cases, they're protected with full garb of personal protection equipment. So that created a bottleneck of people getting tested. And we've worked on some different approaches to that. As a matter of fact, in the Walmart, the Walmart sites, we have observed self-collection where actually we have an approved kit from the FDA where it is a nasal swab, but the person can use that swab themselves, but it has to be observed by a health care professional. But in the case of Walmart, what actually happens is the person drives up, they provide the order to a health care worker in those parking lots that aren't nearly as protective as what we need to do before, they confirm all the information. The health care worker provides information that close up their window, and they do the self-collection themselves and it's observed through the window. So that's proven to be highly efficient. And we're looking at other ways of collecting that trend on the molecular side. So that has been a little bit of a bottleneck too on that and we're improving how we get the specimens. Remember, serology is blood based. And so it leverages all our infrastructure. And so as you know, we have 12,000 phlebotomists, we have 2,200 patient service centers, we have 4,000 phlebotomists and physicians' offices. And so when this starts to light up, that provides us a nice opportunity to collect those specimens quickly and potentially tag those orders onto other orders that might be coming in from the health care delivery system as health care starts to turn on. So when you think about serology and you think about the front end being much simpler and much more pervasive and leveraging everything already have, not exceptional like the molecular test has been so far.

Thank you. Our next question comes from Ricky Goldwasser from Morgan Stanley. Your line is open.

Good morning, Ricky.

Good morning, and thank you for the updates you've provided over the past four weeks. They have been very helpful and transparent. I have a question about unemployment, which is an important factor as we look at this year and next. How are you incorporating unemployment into your assumptions that Mark mentioned? Historically, you have had more exposure to Medicaid. Can you help me understand if this is a structural issue, or do you expect that higher unemployment will lead to a shift from commercial to Medicaid? Additionally, could you provide some insight into the relative pricing or margins so we can better understand the potential impact of this mix shift for the second half of 2021? Thank you.

Mark, you want to start with that?

Certainly. Our Medicaid revenues are currently in the low single digits. Typically, Medicaid rates are lower than those of Medicare and commercial insurance. We are mindful of the impact of unemployment on our volumes, which have not bounced back to earlier levels. The ongoing unemployment could remain higher than what we've seen in recent years, influencing our outlook for the remainder of the year. Historically, there are notable differences this time; for instance, the Affordable Care Act provides a safety net for people who lose their jobs, which is a positive aspect. However, the speed and scale of recent unemployment make it hard to predict its effects on utilization. We are carefully monitoring our receivables and collection rates because we anticipate challenges with revenue collectability moving forward. With the decline in utilization over the past months, it's likely that a larger portion of our revenues may come from patients who are taking longer to meet their deductibles. We've considered all these factors and recognize the potential headwinds. In previous recessions, while utilization did decrease, our collectability rates didn't significantly decline; now, it mostly revolves around patient concessions. Still, we think there's a strong chance for challenges this time. The expansion of Medicaid in many states under the Affordable Care Act offers a level of protection. While I can't predict exactly how these elements will play out together, we are actively analyzing the trends and will remain transparent about our observations.

Thank you for your insights. I have a follow-up question regarding volume. Are you noticing any geographical differences? Since you have a national presence, we're trying to analyze volume declines across various states to understand potential recovery patterns. Specifically, are there any variations in volumes between the northeast, south, and west regions?

Yes. So we've built up a model looking at our business from multiple perspectives. One, Mark, said earlier we have variation by types of clinical franchise business we have, some have declined greater, some have declined less. And we're thinking about why that has happened and when there is turning back on to health care delivery system, how quickly they will come back up. So that's one. Second is we do have differences between what's happened in the hospital environment and also physician environment. And so as hospitals start to change what they are going to allow back in their doors, that will change. That is well. And then third, we do see a difference in what's happening by state and by cities. And so we've tracked all of that. And what we have found, as we said in my introductory comments, all metropolitan areas have dropped. Obviously, some of those areas like New York, New Jersey, and now Lawson is starting to light up, parts of Florida have come in later than the West Coast. So we're tracking all that and we're doing that because we're also trying to see when things might start to turn back on. So you start to see some of the individual states starting to loosen up their shelter-in-place and started to loosen up employers coming back to work. And so we're watching that carefully, so we can kind of indicate where we need to bring back our capacity. We talked about our costs programs. We've talked about furloughs. I want to make sure it's clear. Our furlough program was a program where we offered it to employees, but they had requested from us and we had to grant it. And so we grant out furlough. It allows them to continue to benefits request, but also allows them to collect unemployment and apply to the CARES Act for a weekly stipend. But it also allows us to bring them back. And so they have an obligation to come back when we need them. So as these states start to turn back on, we will bring back the capacity we need to turn it back on. But we're watching that Ricky carefully to understand what's gone down and when did we start to see some recovery by state and by clinical franchise going forward.

Yes, I would like to add that although shelter-in-place measures had a significant impact on utilization and we saw some of the largest declines in those areas, every major metropolitan area in the country experienced notable decreases. While the situation wasn't as pronounced outside urban areas, people in metropolitan regions acted cautiously, including in physician offices regarding patient acceptance and their operational status. Patients were also hesitant about going out due to the extensive media coverage and related concerns. Thus, while there is certainly a connection to shelter-in-place rules, other factors are also contributing to the decline in utilization.

Thank you.

Folks, there's a number of people still in the queue. And we're getting towards the bottom of the hour and we'd like to get to most of you, so please limit to one question.

Thank you. Our next question comes from Steve Baxter with Wolfe Research. Your line is open.

Hi, Steve.

Hey, guys. Thanks. Hey, thanks for all the information and thanks for everything you guys are doing to stand up testing capacity.

Appreciate it.

I appreciate all the color on the antibody testing so far. So I'm just wondering, I guess, how you guys are thinking about sizing the demand when you scale up capacity to those levels? Because if you could run 6 million tests a month, you could test more than 20% of the country yourself over the next year. And obviously others will be ramping up their antibody testing capacity as well. I was hoping you could help us see the bigger picture here, from where you think this might be going over time. Thanks.

Yes, well, to start with, if you look at the numbers that come out of the White House in their press briefings, we said that we've done over a million tests. We're close to 25% of the total country's testing. Obviously, we have better percentages, a higher percentage in certain states grew up broader presence. And some states are really just ramping up their testing in a bigger way. If they look at Florida, where we have a big presence that's just really started to light up in a big way. As far as the opportunity in front of us, we are encouraged by the opportunity we see. We're waiting to see how quickly it does ramp up and just what kind of pickup there will be from physicians on serological testing and how fast that ramp will be. But we're building enough capacity to respond to it. And again, a lot of our capacity will be highly depended upon the equipment we have and the reagents we get. So if there's more, we're hopeful we can build on what we have, but we are very limited by that. So we're going to keep our eye on it, push it as one of the two testing categories that should be done to respond to the virus and see how quickly it ran. So we will keep you updated as we learn more.

Is there something that's going to be an add on to your typical kind of routine panels, or do you anticipate people coming in sort of exclusively for these types of tests? That’s it for me. Thank you.

I would say both. As I mentioned earlier, we are collaborating with employers since many are trying to figure out how to bring their employees back. There's a lot of variation among employers, but these employee programs will include both molecular tests for the virus and antibody tests. We may conduct these, especially the antibody test, at various venues such as corporate-sponsored events, where we can quickly collect specimens, similar to corporate events for flu shots or the Blueprint for Wellness program. We already have the ability to scale up these corporate programs, which will be quite different from the traditional testing methods we currently use with physicians or hospitals.

Thank you. Our next question comes from Derik de Bruin of Bank of America. Your line is open.

Hi, Derik.

Hi. This is Ivy for Derik today. Thank you for taking the question and thank you for comments so far and all the COVID updates in the past few weeks. It's very helpful. So I wanted to talk about longer term here and looking across COVID. So the two parter. One, does COVID change your thought on future wellness and routing testing demand? And two, does COVID and the PAMA delays change your view on lab consolidation. So with this change there could be more difficult to have those conversations with hospital C levels? Just wanted to get your thought on that here?

Mark, you start the first one, I had a hard time hearing the first question. Mark, did you pick it up?

Go ahead. If you wouldn’t mind repeating, you talked about future wellness.

Right. So that's the COVID-19 changed your thought on future wellness and routine testing demand. So in other words, does the crisis drive more routine and wellness testing, given that people with pre-existing conditions are at higher risk from that virus or there may be more of a downside from the post-COVID disruptions.

Yes. So on that one, it's very hard to predict. And just like you're asking, it could go either direction. We don't have any sort of crystal ball better than anybody else. Obviously, in my prepared remarks and then one of my answers, I expressed a concern that we're deferring critical diagnostic testing that's important for our health and well-being. And one would hope that at some point we say, that's really important, we've got to find a way to get it done regardless of what risks might be around COVID and whether that bounces back to where it was before or whether to your point could it potentially be more because COVID is obviously much riskier for those with pre-existing conditions that we're all familiar with and that means we want even more tightly manage that. I certainly can't predict it. I’m not sure, if Steve wants to comment anything differently. So that's unclear. But as we said, as we progressed through this and we all learned together, we will be highly transparent around what we're seeing so that you all can understand as much as possible how that is playing out.

Yes. We see an opportunity. So if you think about what's happening within the healthcare provider market, we're an indication that volumes are down. You have all the data on possible missions. You have data on physician visits. You see it reflected in our volumes being down. And so hospitals and as we all know, 50% of physicians now are employed by hospital systems are going to be struggling as they enter this quarter. And we'll be looking at opportunities to become more efficient, reduce their cost, generate some cash. And so we believe there could be an opportunity for us to continue our consolidation strategy in the back half the year, it is more of these systems and some of those dialogues we've had for years may become more active now because there's now more likely to think about creative ways that they can work with a company like Quest on their lab strategy. So we think that could be another catalyst for consolidation. And as you know, this is also a fragmented industry. There's other regional, especially laboratories. And it also might have worsened other opportunities for us to consolidate. So we believe this is a good opportunity in the long-term for us to continue our strategy of accelerating our growth and consolidating the marketplace. And in the short term, it's difficult, but in the mid to long-term, we think it could be yet another opportunity to do what we’ve said we wanted to do.

Operator, next question.

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

Hey, Matt.

Thanks. Hey, how are we doing? Thanks for fitting me. I wanted to ask about this sort of pacing through the recovery second quarter and third quarters here. A number of states have targeted opening up at the beginning of May and then some in the second week of May. A component of that and the administrations kind of guidelines are focused on getting some of the non-emergent care back opened up and physician offices opened up. But Mark, I think you mentioned that you anticipate non-COVID testing down 50% to 60% for the quarter. Could you maybe just give a sense for how in terms you're thinking about what those months might look like as states start to open up in some of that care, which as you’ve alluded to, isn't necessarily entirely not elective starts to return?

Yes. So as I said, we are not going to speculate, because it shows too hard to predict. So, yes, there's absolutely some potential for volume bouncing back from where it is now. We're not assuming any material improvement for the quarter, not because we know that won't happen, but because we think that's the appropriate point of view to take in order to make sure people are aware of some of the potential downside. We also haven't built in any significant serology volumes into those assumptions. And we've heard a lot of discussion today around that potential demand and ramping up fairly quickly. We don't know to what extent. So I don't want anyone to assume we have too much precision around this 50% to 60% down for the quarter and a net operating loss. But that's potential if it does stay where it is and we don't get significant serology testing or significant upwards in our PCR testing. I don't know if you want to add anything, Steve, to that.

I think I'll add is what I just said earlier. There is going to be a lot of pent up demand from patients. And Mark said there's been a lot of physician offices that have been canceled, postponed and delayed. And so they will start to come back to the system. When that will be, we will vary by city and by state. And so that's what I said earlier in the comments we're tracking all that. So one could think later in the quarter you start to see some recovery. There'll also be those physicians' offices in those hospital systems want to bring back in those patients as well. So we're actually going to do a survey of our customers to get a perspective of what they're thinking about when they turn back on their offices or open up their offices with extended hours, extended workdays. I think people are now thinking that the summer won't be the same summer. July and August won't be the heavy vacation period. So we're watching all that. But as Mark said, too early and too much uncertainty around it for us to give you anything more than we provided. But we're keeping an eye, our eyes on it closely.

Operator, next question.

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

Hi, Don.

Great. Great. Good morning. So in last quarter, you called out some significant expenses around your advanced diagnostics. And I think a part of that was associated with the very interesting acquisition. I think a Blueprint that was kind of thinking about that being a nice tailwind for 2021. It sounds a little discretionary to me. Is that's something you're going to continue to pursue and as we think going forward?

Yes, absolutely. Our strategy to accelerate growth continues. One of those strategies is to continue to build our advanced diagnostics platform. Again, that's all genetics and molecular. The acquisition that we did complete early this year was a nice platform capability acquisition. We feel good about that company coming into Quest Diagnostics. The integration is going well. There's a lot of opportunities in front of us with a genetic base testing. And our plans for that do not change given the crisis step that we have.

Operator, next question.

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

Hey, good morning, Lisa.

Good morning.

Good morning, everyone. Steve, in your prepared comments, you talked about changes to the lab industry. And I'm just curious around your thoughts on telemedicine and the impact going forward. So clearly, at some point we're going to start to see physician offices open again, etcetera. But I think every large hospital system, to your point, that own physicians has talked about the fact that we'll see more telemedicine going forward. How do you think about your relationship? Do you have any preferred relationships today with Telehealth providers that you anticipate that you'll see more Telehealth services in the home and then they'll be coming to your patient services center? I'm just curious, as to how you think that trend plays into Quest going forward?

Yes. So, we’ve been working with all the Telehealth providers and platforms in this many different models as we know. So we do see that as another channel, if you will, or another type of capability as health care provision. And this crisis has burned some of those models there and established some credibility and some comfort with patients. And so we do believe that will become a larger percentage of our volume. And when you have those engagements, many of you on the call probably have had those engagements, they do order testing. And then it follows the workflow that we have for testing within Quest Diagnostics. And then depending upon the model we’ve used in the platforms, the use is telemedicine going to be your primary care physician or would they be an adjunct to it and therefore, we have the connectivity to connect back to the EMR in the primary care physician. So good opportunity. We have strong relationships with many of the Telehealth platforms, big and small. We actually are always prospecting what new startups and ventures are coming up with new capabilities. There's been a lot of new front end capabilities, triage capabilities that you see to run COVID-19, which has been interesting, some of which we're very well aware of and have good relations with. So it is changing and this crisis has brought more visibility to it. So we believe that's a good opportunity for us and we're very well positioned with those companies going forward.

Operator, next question.

Thank you. Our next question comes from Erin Wright of Credit Suisse. Your line is open.

Good morning, Erin.

Great.

Good morning.

Hi. Good morning. Hope everyone is well. In terms of PAMA, do you think that you've also earned some goodwill in light of the COVID response that can help with the lobbying efforts overall and for the recalculation of rates there? Thanks.

Yes. What I'll say, Erin, is it can't hurt. This crisis has brought to the forefront the importance of testing. And I never believed when I joined this company over eight years ago that would be on the front page of every news story in America and all over the media, but we are. So it's much easier now for us to make our case with members of Congress, to the administration in HSS with the value of testing and the need for us to get fairly reimbursed. And also to reinforce the intent of Congress in making sure we get a new process put in place that properly reflects the market rates. So it is actually a very good fact for us. We're going to leverage that. Just to remind everyone, the CARES Act did change the timing. I had those in my prepared remarks. And then second is we still have the lawsuit going on, which is still happening. And we're hopeful we'll get a decision sometime this year on that.

Thank you. Our next question comes from Eric Coldwell of Baird. Your line is open.

Hey, Eric.

Thank you very much. You mentioned in your prepared remarks the $65 million distribution from the first $30 billion out of the CARES Act. I have a couple of questions about that. Are you anticipating receiving another $150 million in the short term? Given that the $65 million represents 30%, I assume the total is around $150 million less. Additionally, regarding the $25 billion of testing stimulus that has just been announced, are there any implications for Quest beyond increased volume and market activity? Are there any direct effects from the new $25 billion for testing?

Yes. That was a unique situation. They created a pot of money of $30 billion emergency relief. There were no stipulations for how you would get that money. In fact, we are surprised, it showed up in our bank account. It was based on proportional billings to Medicare and that probably divided up at $30 billion. So anyone who had billed Medicare in the prior year got a portion of that. The other parts of this bill are, for various aspects of getting testing up and running. I will turn to Steve to cover some of that, but there's nothing else that quite mirrors that emergency relief fund where we got the $65 billion. So while there's opportunities for us to utilize some of the other funds, it's not as straightforward and it's not as simple as what happened with that emergency relief fund. So, Steve.

Yes. Mark, the package approved by the Senate last night lacks clarity and specific details. It will also be debated in the House, and we will monitor it closely and provide input as it is refined. It is essential for America to get back on track by ensuring we have the necessary resources and are properly compensated for our work. As the leader in testing for a significant portion of the country, I expect we might be able to access some of those funds, but it is uncertain at this moment.

Operator, last question.

Our last question comes from Brian Tanquilut of Jefferies. Your line is open.

Hi, Brian.

Good morning, Brian.

Good morning, everyone, and thank you for your time. For my final question, Steve, I appreciate your insights regarding the hospitals and physicians. As we consider your referral sources in relation to the recovery, could you provide more detail on where most of your referrals originate? Are they primarily from primary care specialists and then hospitals? Additionally, could you share what the average reimbursement for your serology tests is across the platform? Thank you.

Yes. To provide a clearer picture of our various businesses, approximately a billion dollars of our revenue prior to the crisis was generated from hospitals. Additionally, another billion came from related services such as our population health initiatives with employers, our drug testing services for employers, and our insurance operations. The remaining portion, around $6 billion of our total $8 billion before the crisis, was physician-driven. Therefore, referrals from physicians are crucial, as they account for the majority of our volume.

Regarding serology testing, while we haven't disclosed a specific dollar amount, you can refer to some of the CMS rates. We've communicated through our trade association that we don't believe the default crosswalk they are considering is adequate. As you may recall, in the initial case for PCR, we weren't successful at first. They set a rate, then revised it and nearly doubled it. We're optimistic that for serology testing, there is compelling evidence and detailed information that will lead to a serology rate for COVID testing that accurately reflects the costs we will incur to perform it.

Steve, closing remarks.

Sure. Well, thanks everyone for joining us today. Glad we got everyone's questions and we appreciate your continued support and you have a great day.

Thank you for participating in the Quest Diagnostics first quarter 2020 conference call. A transcript of the prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call will be assessed online at www.questdiagnostics.com/investor or by phone at 1800-839-1170 for domestic callers or 402-998-0559 for international callers. Telephone replays will be available for approximately 10:30 A.M. Eastern Time on April 22 until midnight Eastern Time on May 6, 2020. Goodbye.