Now as I said earlier, we are still seeing turnover in — higher than what we would expect. It has improved slightly in Q3, but it is still trending higher than where it was pre-pandemic. And as I said, given the strong utilization that we’re seeing across the business, and we saw that in Q3 as well, we’re having to make some targeted increases across frontline staff and phlebotomists to help service some of these volumes. And we expect that to be an impact in Q4 and offsetting more of a headwind of an impact.
Operator: Our next caller is Elizabeth Anderson with Evercore.
Elizabeth Anderson : I guess I just want to double click on the gross margin a little bit more in the third quarter. I think in different answers, you’ve given us bits and pieces. But if you could just talk either sequentially or on a year-over-year basis, sort of rank or either if you have dollar amounts or sort of rank order the biggest contributing factors? And then secondly, it sounds like you have some good sightline into the Invigorate savings in fourth quarter and some continued productivity initiatives. How do we think about the flow-through on sort of that — as we start to think about 2024 and sort of what we might be expecting from those sort cost saving in Invigorate programs?
Sam Samad: Yes. Thank you. So with regards to gross margin, gross margins in Q3 were in line with our expectations. I mean, the key driver, I would say, for them being below Q2 levels, were the fact that we had lower revenues of $45 million going in Q3 versus Q2. So sequentially, we saw a $45 million lower revenues. Now a portion of that was COVID, not the biggest portion. It was about roughly $15 million lower revenues in terms of COVID. And then because of seasonality, as expected, we saw lower revenues on the base [Technical Difficulty] as well. So when you think about the impact on gross margins and gross margins were down a percentage point sequentially, that’s almost entirely driven by revenue, the revenue decline. And then on COVID, we’re also talking about — or what we are seeing in Q3 was a lower price around COVID.
In Q2, driven by the fact that the PHE didn’t end until midway through the quarter, we saw a higher price on average for COVID, we saw a lower price in Q3. So that has an impact on gross margin as well. So those are the key drivers on gross margin. It’s in line with our expectations. Invigorate, and Jim will make a couple of comments on Invigorate here. But with regards to Invigorate the actions are yielding the 3% productivity improvements and cost reductions that we expected. And those will continue into 2024. But Jim, maybe make a couple of comments.
Jim Davis: Yes, certainly, Elizabeth. So we’re going to set targets going into 2024 that are similar to what we’ve done in the past. So we expect to generate approximately 3% variable cost productivity throughout our entire operations. That’s phlebotomy, logistics, the front end of our lab and then actually all of the processing. We’ve talked broadly about the use of automation. We’re Driving that as fast and furious as we can. We’ve talked about the use of artificial intelligence to do some of the manual work that our lab text, this could be automated reading of curves. We’ve talked about in the past, the use of artificial intelligence and microbiology, hematology, urinalysis, and then we continue to work the standard things that we always work as a business, reimbursement and denials is always a big bucket of opportunity for us.
Paper [reqs], I talked in the prepared remarks about implementing OCR technology to read all of these paper [reqs] that still come in. We work them down every single year, but there’s still a fair number. Even if it’s 15% to 20%, when you do the math on that, close to 200 million rec, there’s still a ton of opportunity there. So we feel good about our productivity efforts going into next year. We invest in it. We put talented teams around it, and we’ll continue to drive it hard.
Operator: Next caller is Derik De Bruin from Bank of America.
Derik De Bruin : I’ve got two. The first one, just going back to PAMA. In 2023, it got delayed, and I think it will probably get delayed in ’24. But in ’23, we didn’t see a lot of the savings dropped down to the bottom line because of Haystack and some of the other investments that you’re doing. I guess, for ’24, does that drop down, if we’re to get delayed, i.e., is it accretive to what your plans would be is that you’re going to do it? Or does it get offset by that? So that’s the first one. And then I’ve got a follow-up.
Jim Davis: Yes. Well, first, I’d say with respect to the drop down, when we look at the drop-down on the incremental growth we’ve gotten through our base business and we look at the drop-down on that growth, we’re pretty happy with it, okay? And that is after the dilution effect that we’ve seen from Haystack, the investments we’re making there, which are going to propel future growth. As we go into next year, we will take — we’re not going to give guidance today, but we’re going to take a close look if PAMA does get delayed, we’ll obviously look at both investment opportunities to drive future growth. We’ll look at investment opportunities to drive margin improvement, Invigorate investments. And then we’ll also obviously look at returning like we always do, the majority of our free cash to shareholders.
Derik De Bruin : And just a follow-up on the Alzheimer’s diagnostics, are you going to seek FDA approval for that? I’m just sort of curious on reimbursement, patient cost, what’s the test cost in doing it? I’m just curious on sort of what your strategy is there given that it is a new diagnostic category.
Jim Davis: Okay. So there is reimbursement for the test today. CMS has established about $100 reimbursement for the blood-based AD 4240 test. Having said all that, the preponderance of our orders and the preponderance of our reimbursement actually comes from client build, where we directly bill health systems that are carrying for these patients. And I would tell you that the reimbursement is better than what we see on average from Medicare because it’s an incredibly value-added test. So we price it appropriately. At this point, we’re not seeking FDA approval for it, it’s an LDT like many of the LDTs that we run. And so, we’re pretty happy with it. The growth has been substantial and I would also tell you that the growth of our CSF testing, the cerebral spinal fluid testing is also significantly up in the quarter as clinicians are using both CSF and blood-based biomarkers to make to help with the diagnosis of patients.
Sam Samad: And Derek, maybe just to come back to the PAMA question and add a couple of points there for you and others that are on the call. Given the uncertainty around PAMA, we will plan today as if PAMA is going to come back and will not be delayed in 2024. I’d say that’s the prudent thing to do. That’s the only thing we can do at this stage given the uncertainty. So we will plan as if prices will come down next year because PAMA will come back. Now if — as we — I would say, on balance, I’d say there’s a likely chance that PAMA will get delayed. And if that were to happen, and as we’ve talked about before, we could see an $80 million to $90 million benefit as a result of that delay, not benefit versus this year, but benefit versus our planning.
And when that — and if that happens, I should say, then we will assess how much we invest in the business to everything that Jim said earlier to how much potentially could drop to the bottom line to EPS. But that decision is not made yet. We’ll make that decision when we set guidance. And will evaluate investments that we can make and then evaluate what we can drive as EPS improvement.
Operator: Our next caller is Andrew Brackmann with William Blair.
