Quest Diagnostics Incorporated (DGX) Earnings Call Transcript
February 24, 2021
Earnings Call Speaker Segments
Okay. I think we're good to get started here. Thanks, everybody, for joining the Citi Healthcare Services Conference. I'm Ralph Giacobbe. I cover managed care and the facilities and provider space here at Citi. We're happy to have Quest Diagnostics here today. Joining from the company is CFO, Mark Guinan; and from IR, Shawn Bevec. Again, appreciate you guys participating. This is going to be a fireside chat format, so I am going to leave the discussion. [Operator Instructions]
But maybe, Mark, let's just start, if you don't mind, with sort of a general update on just current trends, first, specifically with COVID. I think your guidance for the first half embeds about 100,000 tests a day. The first month, I think, trended closer to 130,000. I think we've seen a little bit of a drop-off of late. First couple of weeks of February, I think we're running closer to 100,000 a day. Is that where trends currently sit? And has the falloff started a little sooner than expected?
Yes. So Ralph, there's just one thing that I can say with certainty is that I can't predict the level of testing and the level of infections. We saw the drop-off in the fall last year. I think many of us were hoping that's where it would stay or it would continue to taper off. Obviously, it spiked. We all know why. It's human interaction. So when you think about us getting beyond the holidays and the cold winter months and bad weather and people not traveling as much, it's not surprising that we've seen demand taper off. I think we're all hoping from a societal standpoint that combined with the vaccines that this is the path we're on. One of the reasons we gave a broad range -- you quote the 100,000 a day. That was kind of the midpoint volume. But obviously, there's other dynamics. And the weaker the demand for COVID, one would expect the faster the recovery for the base business. So there's certainly some negative correlation there. So whether we're going to stay at this level, we're going to continue to go down, don't know. I'll certainly hope we go down. But then there's others who are saying with spring break coming up, with the new variants that are much more infectious, we don't know how long immunity lasts. And as scary as it is to remind ourselves, some people had it a year ago. So if immunity only lasts a year or so or something less, then those individuals haven't yet gotten the vaccine, there could be people getting it a second time. We just don't know. So we'll see. But the numbers you cite are correct. We -- as a country, we're doing over 2 million tests a day, not so long ago. Now it's down to 1.4 million. So we've seen a significant -- our share of the ACLA volumes has held pretty steady at 30%, but yes, it has ramped down.
Yes. Fair enough. Makes sense. And I guess -- a similar question, I guess, just on core testing then. Fourth quarter, I think, for the whole quarter, was down about 8%. Any general sense on where that's trended the first couple of months of the year? I know it tends to have a negative correlation. So as you've seen COVID dip, have you seen sort of a natural sort of increase in corr?
We were seeing some strengthening, but I think it's really been confounded by weather. We've arguably had the worst weather in February from an impact on the lab that we've had in the history of Quest. So between the problems in Texas, including impact on the water supply, the weekly snowstorms we're getting in the Northeast, significant snow in the Great Midwest and super cold temperatures, there's no doubt that, that's confounded the volume. So it's hard for me to really know where we're trending. Before this weather all started up late January, somewhat early February, I'd say it was improved from where we started the year and started the month. But it's kind of hard to say right now. But I certainly would be shocked if as COVID, not just testing, but positivity rates are reduced that we don't see the base business offsetting that partially with a stronger recovery than projected.
Right. And just around the weather, it's sort of an interesting comment in terms of the worst you've seen of it. Obviously, there's been different parts of the country hit versus maybe historically one-off areas. Any more framing of sort of understanding, right? Because we're still middle of the quarter. So -- I mean would you expect to get most of that back? Or do you think it could be disruptive and something we need to consider for the numbers as we think about just the fourth -- first quarter?
Yes. So I think there's enough in our guidance range that I'm not suggesting with my weather comments that we're going to change our guidance. But with that said, I don't think we generally recover weather. So we've talked about this in the past, and we say, well, someone needs a doctor. Someone gets canceled because there's a snowstorm then we just reschedule. They do. But it's not as if doctors typically add extra office hours to make that up. So it just replaces somebody else's appointment, and everything kind of gets deferred. The one dynamic this year is of COVID, we think that the weather has also impacted some of the COVID testing. So it -- certainly, it's ramped down because the positivity and infection rates are down. But we also can see in a geography where there's a strong snowstorm or in Texas for several days, the difficulties they had, that the COVID testing falls off significantly. That would be one where you say, well, naturally, they get that at some point. Not sure because you've got some of the accesses through scheduling with the CVS, and we know some of those appointments can get tough to get. You get snowed out, and then you look and it takes a week to 10 days to get back on the schedule. And by that time, you're figuring, okay, either I have it or I don't have it. So I'm not sure whether even the COVID volumes are going to come back. So I do think it's -- as we've shared in the past, it's always a negative relative to what we would have done without weather, but not in any way suggesting to the extent that our guidance range is not still applicable.
Yes. Okay. All right. Fair enough. I do want to go a little bit into the guidance. And forgive me here, just to run through a little bit of the math here. But if I do try to compare your kind of first half guidance, it seems like COVID testing contribution is roughly $1.6 billion of revenue. If I just take the 100,000 a day at that $90 reimbursement level that you've talked about over sort of a 6-month period, basically midpoint of guidance is about $5 billion. So if I back out that $1.6 billion just from COVID, I'm at $3.4 billion. And if I just compare that to the first half of 2019, it seems like it implies a little bit down over 10% or so. And 2019 also had PAMA in it. So it seems like core guidance is for things to be down worse than 10% at the midpoint. I guess the first question, sorry to do all that math, is that -- did you follow it? Does that sound fair?
No, I understand the math. What I would respond is that, no, the midpoint of guidance for the base business is more consistent with where we ended the year. In your math, the maintaining $90 AWR for the first 6 months, I would say, is at the high end of guidance for COVID revenue, not the midpoint. Of course, we're going to do everything we can to defend that $90 price point, but we've already talked about a couple of things. One is the dynamic of CMS moving to this new methodology, which put a little bit of headwind on us. But we're doing well on our turnaround time. So it's minor, but it's still a headwind. And then some of the commercial payers have adopted the same methodology. That's additional headwind. And then the client bill hospital space is incredibly competitive and just getting more so. And as you see the volumes start to fall, you've got more and more excess capacity. So some of our competitors are getting more and more price-conscious. So I did not feel comfortable using a $90 AWR as the midpoint of our guidance. So again, I don't want to suggest that we're not going to do everything we can to keep it close to that, but I think that's where your math is off because there's an offset. And so we think more high single-digit decline versus '19 is the midpoint versus it being double digits.
Got it. All right. That's helpful. But I do want to go to the pricing commentary that you just had and also from the call because I do think it caused some questions and maybe some confusion. And stock post-earnings got hit, I think, a little bit on some of that commentary, so I want to flesh out a little bit. One, I guess I'm still a little confused. The $100 mark and staying within the 2 days, it seems like the vast majority of your tests still have that 2-day turnaround. So you should still be capturing that $100. Is that correct? Or is it just simply, look, yes, we are, but there's always going to be some percentage that isn't, and that's what creates the headwind?
Well, even if 5% of our tests are in turnaround in 2 days, that creates a little bit of a headwind, you can do the math, because we're paid by test. So you have to get to the threshold to be eligible at all to build that code, but then we can only build a code where the individual test is done in 2 days. And remember, it's not laboratory time. So it's end-to-end supply chain time. So sometimes, because of the specimen collection, where it's done and what happens at what time of day, I mean, you've already used up almost 2 days by the time it gets to the lab. So we're not going to be at 100% for 2 days. And then we expanded to the commercial group as well. So the same -- expanding the book of business, just a slight headwind. And then the client bill space, we've said, has not been at $100. And that's why our AWR was just above $90 and not $100 because of that mix, and that's become more competitive. And I would expect it would -- to increase as more people are adding capacity, and we'll see, but as demand is starting to taper.
And I apologize. When you say the client bill piece for -- that's for COVID specifically or more broadly for reference testing?
It's for -- well, it is a competitive area, but I'm talking about COVID specifically, an ability to get that $100 price. The other thing is, Ralph, that there's no guarantees that CMS won't change the reimbursement. So while it was tied to the federal health emergency, they can decouple it tomorrow. So just like they changed the $100 to $75 plus $25 given turnaround times, we can wake up tomorrow and they could change it. So I didn't want to bet on $100 price continuing in the -- through the first 6 months. As I said, we're going to hope it does, and we defend it. Certainly, that's why we have a broad range. And as you get to the higher end, there's multiple variables, but that would be if we maintain that price. But if you're looking at the midpoint, that would contemplate some sort of price erosion. I can't tell you specifically where it might come from, but I can give you some of the potential drivers for that.
Yes. And again, just to be clear, on the direct client bill, what drives that pressure? It's just -- because that's -- is that mainly hospital system? Is that what I'm thinking about in terms of the direct client bill? Or is there something like other -- like employers or other?
No. It's just really hospitals. There's certainly some competition for employers but largely that's relationship. So you spend time with them. You convince them that you can serve them really, really well. And then they generally pay you appropriately. The hospital business, you're going to have every lab of the world knocking on their door saying, "Hey, we'll give you a lower price than you're paying right now." So that's really -- when I'm talking about client bill, it's mostly hospital systems.
But don't most of the hospitals -- having a lot of hospital system in-source that? Or I'm way off with doing those tests themselves? Like do -- they're outsourcing the COVID business? I guess I didn't realize that, that was a big driver.
Well, there's 2 things. It's not all hospital systems have molecular capabilities. So yes, a number of them, especially larger ones, have in-sourced a lot of their COVID testing. But then there's still the testing for elective surgeries. So a lot of -- in some cases, their COVID capacity has been taken up for patients that are admitted as emergency for their own staff and so on. And because there's not the urgency, typically for elective surgery, you can do it a day or 2 before, they've already outsourced some of that work to others, including us.
Yes. Okay. Makes sense. And I guess staying on the pricing topic, and apologies for sort of harping on this a little bit. But as I think you know, we've talked about in the past, we've written a lot about sort of pricing and not exactly understanding why the backdrop isn't better for commercial rates for both you and LabCorp, right, versus the continued -- I think you've talked about 1% sort of pure rate declines, in the past at least. By the payer actions to open up networks to include both LabCorp and Quest, the payers have clearly made the case for sort of the value that you guys bring. And we know the simple fact that if they're not going to Quest and LabCorp, chances are the next lab is a higher-cost lab, right? So just help us a little bit, why can't you negotiate for that annual payment increase even if it is below CPI versus some of the outright declines that you've talked about in the past?
Yes. So good question, Ralph. It's been a long journey. We've made tremendous progress. And over the last couple of years, we've talked about the fact that separate from PAMA, more of our price headwinds have come from the client bill and less and less from the third-party commercial. So we have been making progress. I can tell you that we just extended a very large commercial contract with a price increase. We have another one coming up this year that I fully expect, and they've -- we've had to dialogue with them, will come with a price increase. So I think we are moving in that direction. But we are -- if it's come even more than a -- explicit price increases and what we call this value-based contracting where they're saying, "Okay. You need to convince us that you can actually move the volume away from the high-cost providers." And we've worked really hard on that and demonstrating that we can do it. But many of them, as I would do if I were in their shoes, want us to prove it. And so it's prove it. And as you move volume, we'll share it with you. So instead of just giving us an explicit price increase, we get the ability to earn upside based on our performance. So in one way, shape or form, with all the major payers, we've moved from an inevitable recontract price concession to at least flat pricing with upside potential or in the cases I shared, actually some price increases as well.
No. That's certainly encouraging to hear. I guess the next natural question, though, is does that change then the growth algorithm as you think about the top line going forward for you guys? And I know you've got your Investor Day coming up, so I'm not sure how much you want to share or not share about that but -- right? Because historically, when you think about sort of the top line, there's always more of a compression around sort of the pricing aspect piece of it. So is that alleviating to some degree? And could that actually move the needle to present more opportunity on the top line than what we've seen in the past?
Yes. So as you noted, we do have our Investor Day. I won't get ahead of myself. But all other things equal, that has to be a good thing. And then you combine it with -- our expectation is only really one more bad year of PAMA, which would be 2022. So you look at those 2 headwinds, either being largely mitigated or, in some cases, reversed in the commercial plans and certainly, that's good news for growth going forward.
Okay. That's helpful. So I want to go to the vaccine rollout and just maybe help us get a sense of your discussions with employers and schools, basically accelerating the argument to perhaps get back into buildings, if you will. Or has that conversation sort of died down with them on the premise that sort of vaccine won't require the same level of testing? Or perhaps that's more driven by point of care?
Yes. So a very complex situation, and I'll try to give a straightforward, simple answer. All different views on what is necessary and what the role should be -- certainly, if you listen to Fauci and the CDC, we can't let our guard down at all, even if you get the vaccine. I'm not sure everybody agrees with that, but that's what the experts are saying right now from the federal government. So as we talk to schools, as we talk to employers -- and we've been doing some work for employers throughout the pandemic, large retailers, some manufacturing companies. I think we've shared this in the past. The manufacturing companies is more episodic if they have an outbreak. For the retail companies, more regular testing. Some of them want PCR because it's the gold standard. And you -- we -- I can't share the employers' names but some with deep pockets like, "Why would I do anything less than PCR?" You've heard some of the professional sports leagues because the unions demand it say, "We're going to do PCR." And you're going to have others who say, "I can't afford that, but I want to do something. I want to do it more frequently, want to do monitoring." So maybe they move to antigen testing. But that still is too expensive for a lot of constituencies. So we have been working on, and we believe we have a solution that will be able to be at the price point that a university, that a school system, that an employer without deep, deep pockets will say makes sense to do some sort of screening just -- regardless whether people had vaccines or not because we still don't know if you've been vaccinated if you can carry it and infect someone else. We still don't know how long the resistance remains, if you had it a year ago. We're coming over a year now. So there's a lot of unanswered questions, and so it's hard to tell you exactly when it's going to play out. But I can tell you, there's all sorts of people on the continuum and there certainly is a strong interest in starting to get back to life and with that, to try to do some sort of testing/screening to give people the confidence to feel safe in what they're doing.
Yes. Was that related to the announcement today, too, that you guys made in terms of -- I think it was employer testing or screening. Is that what you're alluding to? And I didn't -- or no?
No. Today's announcement was that we did -- we are rolling out a semi-quant test on the antibodies. So one of the arguments against the antibody testing is that we don't know whether you have sufficient antibodies in order to have resistance or have immunity. So while we don't have a quant version, which would give you the absolute distribution, we have a semi-quant version that's -- will be a yay or nay over a certain level. So we believe that's an important step towards potentially supporting everything we're doing around COVID to give people the confidence, either that they've kept the antibodies if they were infected or if they've been vaccinated that they were in the 95% and not the 5%. So again, the CDC and the guidelines still pooh-pooh antibody testing. Part of it is because we didn't have what they would see as sufficient specificity around the antibodies. Don't know whether this has gotten there or not, but certainly, it's a step in the right direction that we believe can support everything we're doing to try to help people feel safer and to get this pandemic behind us.
Yes. Got it. Okay. And then just one more on sort of the COVID side. On the earnings call, I think it was Steve that suggested COVID testing is going to continue into 2022. I know it's hard to try to even predict 2021, but I did want to ask about that statement and whether it's meant to just say, "Look, there's going to be some continued marginal amount," or do you think it could represent a couple few percent of total requisitions, maybe even more, going forward?
Yes. I mean really, really hard to answer, obviously, so we're leaning on what others are saying. I mean you may have even seen The Times, I think, at an article today or it was yesterday talking about the -- COVID-19 is here to stay. So the question is how broadly. And I think that's going to be wholly dependent on whether the mutations that are invariable in a virus like this are sufficient to need new vaccinations and immunity or whether -- and how long the vaccine works, even if it does work against those mutations. So there's a lot of questions that have yet to be answered that would determine how big this could be. Because people will get vaccine burnout. People will start feeling safe again. If you needed a vaccine like you need the flu vaccine, I think maybe, Shawn, you can help me there, but I think each year, less than 50% of adults get the flu vaccine. And so we'll get complacent. And I would expect that you'll see more infections if though -- if that's what happens. Now if this vaccine lasts multiple years, if the mutations are still -- if you're still protected from those mutations by the vaccine or by having it previously, then it could be small. So I think it was Steve's acknowledgment that everything we see amongst the experts says that it's not going to be done this year, that there's some tail next year. But the size of that tail, really to be determined based on the answers to some of those questions.
Yes. Okay. Fair enough. And I think there's some level of concern around sort of the additional capacity that's come into the system as more lab equipment was purchased to do widespread testing. I mean -- I guess do you expect this to perhaps drive more competition or volume pressures ahead? Or how do you see the phenomenon sort of impacting you or playing itself out?
We don't think it's going to be a big issue. So first off, when you look at what our molecular equipment is used for, a lot of that business is physician support. So women's health is the biggest piece of it. We don't do a ton of that for hospital systems. And so when you think about the physician business, it's not sufficient to have a lab. You've got to have salespeople, you've got to have interfaces, you've got to have logistics. Arguably, you've got to have phlebotomy or draw centers. So I really don't see a big threat from equipment capacity or excess capacity of the physician business. And while maybe there's going to be more competition for the hospital space, it's not a huge book of our hospital business. The reference testing that we do is much broader, and specifically what you would do on the molecular equipment is pretty small.
Got it. That makes sense. I want to jump to PAMA. You had mentioned it earlier in the call. Is the assumption at this point that cuts come back in 2022? Or is there sort of the potential that -- or the belief that you can continue to sort of punt it down the road, almost like the SGR fix from years in the past? And then maybe just an update on where you are with the lawsuit at this point.
Sure. So I would say, highly likely, if not almost certain, that we will get cuts in 2022. We've talked about even though the cap goes from 10% to 15% on any given CPT code that we're getting close enough to the price schedule that was calculated back in 2017 that the dollar value of those cuts should be similar to what we saw in '18, '19 and '20. So one more year of significant cuts to get us to that level. We believe we don't have perfect information. But if they recollect it, which they're supposed to in '22 based on '19 prices, that you're going to see a minimal change. Certainly nothing like we saw with almost a 40% cut over a 4-year period of time for the first schedule. So commercial prices just not -- have not moved that much. And as we've said, some of the price has even gone up. So if they do it again in the same flawed fashion they did the first time, we might see a minor headwind. It might be flat. It's not going to be anything like it's been. If they do it correctly, which we think is low probability, but we can always hold out hope, we know that the price will go up. So there -- absolutely, the calculation is not a market price. It's a LabCorp/Quest price right now. Where are we at? The lawsuit is sitting in the judge's hands. We had communicated and now we've stopped guessing that we had hoped to have a decision for the end of last year. There's nothing to be done other than her to make the ruling. I want to remind you that even if she ruled in our favor, the remedy is not determined. So then we'd have to go back to CMS and maybe talk, "You got it wrong. You got to fix it and do what Congress intended," which is what the lawsuit is based upon. We also got through the LAB Act, an assignment to MedPAC, who advises CMS, to relook at it and see how they could have a more efficient methodology. I mean it's very onerous, very expensive for everyone to submit all this data. Is there not a more effective way to do it, and quite frankly, a better way to find the market? We'll see what they come up with. We'll see if they meet the June deadline. Obviously, we would hope they come up with something simple like statistical sampling and/or go to the payers because that will get you a much better number than the process that they used. But we'll see what they come back with and whether it's in June or not. So that's where we stand. And then finally, as people have asked, I truly believe that we've improved our standing in Washington and the government state houses. I mean certainly, they see the importance of what we do. Everybody wants to be fully prepared for the mass pandemic. So I think sentiment has either improved or we've just gotten on people's radars we weren't on before, but I can't guarantee you that, that's going to result in legislative action or anything else. But we certainly have earned some credibility and some points with people in government positions.
Yes. Makes sense. And again, just to -- just some of the numbers, if the cuts do come back in 2022, to your point, you've sized the headwind, I think, somewhere around $85 million, $90-ish million, I think, which is, I think, a little under $0.50 to earnings, assuming that's sort of in the ballpark as we think about sort of what the impact would be in '22? Does that sound right?
Yes. So I'm not going to provide a specific number, Ralph, but you might be a little bit high. So we'll -- not going to get into specifics for 2022 yet. But I said in the ballpark, not equal or as bad.
Fair enough. And then just quickly on your commentary that if you do win the lawsuit that they'd have to come up with sort of a whole new remedy, so you're not necessarily going to get maybe the price up. But in that scenario, that does take -- that would be one of the scenarios that would take away the 2022 cut, correct? Or it's just a timing question?
Not necessarily. So all that ruling would determine is that they did it wrong. It doesn't mean they have to fix what -- the damage they did. It just means that they need to look at it and understand Congress's intent better and come up with a solution that better matches Congress's intent. And Congress's intent, very explicitly, was to determine a market price. They did not determine the market price.
Yes. Got it. Okay. All right. Fair enough. So we touched on this a little bit earlier in terms of the larger plans, maybe moving away from exclusivity to just you or LabCorp and want both in network. There was supposed to be sort of this push in part via benefit designs and things like United's Preferred Lab Network, but that seemingly has been put on pause given COVID. Do you think 2021 sees any of that sort of potential benefit? Or is this something we're going to have to wait for in terms of 2022? And then maybe what would we see that would be more forceful in shifting share?
Sure. So yes, a lot of it was put on pause during the pandemic. They had priorities. We had priorities. And quite frankly, in order to effectuate that, we have to be able to call in the position. And we were locked out of a lot of customers for an extended period of time. So yes, we are back to it. United is going to follow through with their commitments. We're going to follow through with our commitments. So it's still going to get done. It's just on a delayed basis. The big step, obviously, is for United to roll out the $0 out of pocket to their sponsored plans, not just their fully insured book. They have to market that. They have to convince those paying the bills, the employers, that, that's a good deal for them. We've spent a lot of time with them and they are -- the good news is they actually want our help and support. We've actually called on, with them, some of the larger employers who are wasting money on lab. And so it's a real partnership there to explain why planned benefit design, whether it's narrowing the network or having a $0 out of pocket favorability for the better value labs. And again, it's PLS. So it's not just Quest. In this case, it's anybody who's in the PLN, but having a seat at the table certainly is an advantage for us. It's good for the employer. It will save them money over time. Just very quickly, because I know there were a lot of skeptics, and I understood this at first because lab spend is just not big enough to get necessarily an employers' attention. I mean when I started here, I went back to one of my former employees, who spends a lot of money on their health benefits. And it was millions and millions of dollars that they could save. But at the end of the day, it was a drop in the bucket compared to knee and hip replacement and bypass surgery and all that. But the framing that we've used, which has gotten traction is, you know what, though, when you get better value for your employees in those high-cost cases, while the dollars are big, it's very few employees. If you think that what you're doing is helping your employees by driving them to better value providers but -- and these kind of things -- and we all know that health care continues to accelerate. We're pushing costs to our employees. We've got high-deductible plans. If you want to help your employees, almost all your employees will have a lab any given year. So while the total dollars may not feel like as much as those high-cost procedures, the breadth of this benefit and how many people work for you will say, "Thank you, employer, for helping me with this." And that has gotten a lot of traction, whereas in the past, we couldn't get as much with the employer. So I feel like we're making progress.
Got it. Okay. All right. Makes sense. I want to jump to just the cost side of the equation. Anything on the labor front at this point? Any labor pressures you're seeing? I'd imagine there's a lot of demand for staff, just considering the need to get the population vaccinated. Have you seen any more turnover? And maybe just give us a sense of wage growth that you're seeing in your markets.
Yes. So we've not really seen an increase in turnover. There certainly was wage pressure coming from different places last year, certainly in our molecular department because a lot of people were trying to get molecular tax. And we addressed that appropriately, and obviously, kept our employees, kept them engaged, et cetera. There's a lot of pressure on logistics, so a lot of people looking for drivers. Certainly, some of the companies that are looking for drivers. So that's been -- but that -- we've addressed that. I wouldn't say it's completely behind us, but it's not totally in front of us. And then the other area I think where people get concerned is around the minimum wage. And significantly fewer than 10% of our wage workers earn at or less than the minimum wage that people are talking about a $15 an hour because most of our wage people are skilled. So whether it's the drivers, the phlebotomists or lab techs, they're getting paid above that. So in the unskilled area, it's a small percentage. And certainly, there was a wage pressure as the Amazons and other Walmarts of the world were hiring people left and right, and we addressed that. So I'm not going to say that we won't be subject to any wage pressure if we move forward on this federal minimum wage and so on because certainly, that could put pressure on other wages that are above the minimum wage. But I also want to assure people that in our current cost structure and what we got through and what we're planning and what we'll reflect at our Investor Day on the 11th, all contemplates some higher level of wage compensation than maybe we did a couple of years ago.
Yes. Got it. And I want to stay on sort of the topic of the cost structure. You had this sort of big pop in margin due to COVID testing in 2020. Prior to that, your EBIT margins have been sort of in that high teens, 17%, 18% range. As you think ahead and as sort of COVID rolls off, are there costs that have been permanently sort of taken out of the business where you should sustain higher-than-prior range? Or would you just basically expect margin levels to get back to those sort of pre-COVID levels?
Yes. So when you think about the drivers of our -- let's just talk about the base business. So because COVID going forward, whatever size it is, is not likely to be at a materially different or significantly higher margin than the base business, and certainly, as it was last year and as it will be for this year. So just set COVID aside because it's not going to have a huge mix impact. So when you think about the drivers, we've got annual wage inflation. We've got -- historically, we had significant price headwinds. I've talked about the fact that we're in a much better place with our commercial payers. PAMA, well, we still got 2022. Other years of PAMA -- either PAMA will go away. It could be an increase. Most likely, it will be a very minor headwind as opposed to what we've seen historically. So that's good news for margins. And then we've got our Invigorate program, and we'll talk more about that at Investor Day. But we'll continue to drive at least 3% productivity every year. And so that's been able to pay for the wage inflation and the price erosion. And with less price erosion, there's more Invigorate available for margin expansion. The other one is that we're such a high-cost infrastructure in any short window. As we grow organically, and we talk about accelerating growth with share gains from network access and other things that we're going to go through in great detail at the Investor Day, that drop-through is much higher than our fully loaded margin. So without throwing out any numbers or so on, directionally, certainly, we should be able to improve our margin as we deliver on all the things and those things play out that I just described.
Yes. That's -- okay. That's helpful. Makes sense. [Operator Instructions] Otherwise, I'll keep shooting away my questions here. So I want to get a little bit into the Safeway and Walmart relationships, Mark, at this point. Maybe just frame again how many stores you're in, what the trajectory is maybe for this year and over the course of the next couple of years. And what numbers at this point can you put around those retail offerings on whether it's really driving sort of either incremental volume or benefit to you relative to just sort of the standard PSC?
Sure. So let me start with -- I don't know, Shawn, do you have the latest Safeway and Walmart count?
Yes. We're still hovering around 200 stores, call it, 70, 75 Walmarts, and then the remainder would be the Safeway locations.
Okay. Yes. So given the pandemic, we really haven't expanded our footprint a lot. That may happen -- certainly with Safeway. I think we largely got to a level that made sense for the 2 of us. Walmart, we could be growing more and having more presence in Walmart. I think there's a couple of things that you and investors should appreciate about these relationships. First off, we know that one of the reasons that a proportion of labs never get fulfilled is convenience. And so having our presence in a convenient place when people are going grocery shopping at least once a week, if not more often, they're going to their Walmart regularly and knowing that they can combine their blood draw with their shopping is an advantage. The second thing is that in terms of brand recognition. For the people who maybe haven't gotten labs in a while or haven't gotten labs regularly, then all of a sudden, they get a script for lab, for them to say, "Oh, that's right, I saw a Quest in my Walmart." Whether they go to that Walmart or they just seek out Quest because of the brand recognition, we think that's an advantage in an area where we do feel increasingly that patients/consumers are going to have choice as opposed to just being directed or blindly directed to a lab that they know nothing about. As more and more direct consumer business takes place, as people are paying for labs themselves, going online, et cetera, having a really convenient site for them to do that, we think, is advantageous for us as well. So all those reasons, we feel directionally, it's in our advantage to be present in those retail locations. And then you get to, okay, well, how much incremental volume does that generate? And the honest answer is I can't tell you because it's a really hard question. So we wanted to and we've looked at it. And one of the questions we asked ourselves and couldn't answer is so if someone hadn't come to us in 2 years or 3 years, are they incremental? Well, what if they haven't had a lab in all that time? What if they had labs regularly and they went to somebody else and now they're back to us because we're convenient? So it's really, really hard to say. So what we can tell you is that the activity at those sites because we constantly are monitoring it and we've actually shut down a handful of sites because they didn't meet these thresholds, but they're very busy sites. So we feel good about that. So from a cost-effectiveness perspective, from phlebotomy cost, they're very efficient and effective. And until the pandemic set aside, we saw consistent growth in the draws per day over our overall book of retail sites. So obviously, that changed in the pandemic, and we're not back to prepandemic utilization level. So we'll update more when we feel we've gotten to that point. But really good from us in terms of brand image, really good for us in terms of increasing consumerism, and certainly, from a cost-effectiveness. Whether they're incremental or not, and I'm certainly confident some of the volume is incremental, but it's more efficient cost to serve because of how we're leveraging the phlebotomy there.
Yes. Makes sense. Okay. We've only got a couple of minutes left. I got to hit on the balance sheet. You're only a little over 1x levered. You've got just under $2 billion of share repo. You're paying sort of a nice dividend, I think, $330 million a year. So pretty sound footing. So what's -- what is the appetite to sort of lever up? Some might argue that you're underlevered at this point. And maybe either get more aggressive with M&A or even more sort of capital deployment back to shareholders at this point.
Yes. So in terms of cash on the balance sheet, as we mentioned on the earnings call, I'll give you some specificity around that on the Investor Day. Obviously, part of our leverage ratio is artificially depressed because of the COVID bubble. But if we look at the long-term leverage ratio, we want to be mid-investor grade for all the reasons we talked about in terms of accessibility to capital and the cost. But we also would lever up temporarily if there was something that made a ton of sense and we saw a path to shareholder value creation and we could delever with 18 months or so because we felt confident it wouldn't change our investor rating. So nothing's really different, Ralph, in terms of the balance sheet. We're going to stay with our disciplined approach to capital. We can do the 2% top line M&A with our operating cash flow if we had more opportunity, and certainly, we're trying to drive more opportunity. I got credit facilities I can tap into. And then ultimately, if we had to lever up temporarily because there was just so much opportunity, we'd feel comfortable doing that. And the good news is that what we buy comes with immediate EBITDA, so in cash. So it's not as if we have to worry about product approval or 3 years of development costs or something like that. So it's a pretty easy formula. We're not overly cautious or hesitant to borrow. What -- really, the limiting factor is the finding the deals that we clearly feel confident will create value.
Yes. Got it. Okay. We're right up against time. So I think we're going to cut it off there. Appreciate your time and insights, very helpful. And we'll talk to you soon.
Thanks, Rob.
Thanks, Rob.
Take care.
All right. Thanks. Bye.
Bye-bye.
Take care. Bye.
Bye-bye.
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