Erin Wright : You laid out some of those key profit drivers for the fourth quarter. And as we think about what kind of continues into 2024, I think you mentioned in the previous question kind of — or a previous question, productivity gains should continue, and I understand there’s PAMA dynamics as well that are somewhat unknown. But should we anticipate a deviation from the long-term profit guidance is like 50 to 100 basis points operating margin expansion next year?
Sam Samad: Well, let me clarify, Erin, and thanks for the question, by the way. So what we talked about at Investor Day is an improvement of 75 to 150 basis points over the 3 years and that’s off of the rate that we have for 2023. So we had said at the time the rate was approximately 17%. We said we could improve over the next 3 years by 75 to 150 basis points in terms of operating margin with the lower end being PAMA did come back in ’24 and the higher end of 150 being either if we had comprehensive reform around SALSA or PAMA gets delayed. So the 75 to 150 over the 3 years still applies. That has not changed. Now it’s going to apply off of a lower base in 2023 because our operating margin expectations have come down. As I said earlier on the call, we expect it to be slightly below — marginally below the approximately 16.5% that we talked about on the Q2 call.
The positive drivers and by the way, that operating margin expansion was for 3 — over the 3 years, not for 2024. But the positive drivers in 2024 still apply. I mean, first of all, first and foremost, I would say, is the pricing environment. We are very encouraged by the pricing environment. We talked about the strategic relationships that have been renewed, and we’re seeing positive price ex PAMA, depending on what happens next year, but we’re seeing positive price, and we expect that to continue. We’re seeing the growth investments starting to yield fruit and CIT being one of them. And we talked about that becoming profitable. Productivity improvement, both in terms of Invigorate and also hires that we do, for instance, phlebotomist that we’re adding we expect that productivity or their productivity to improve next year as well as they gain more experience and they’re more productive.
So all of those drivers we expect to continue. Turnover is a bit of an uncertain item. We don’t necessarily expect it to become worse than it is today. But it’s too early to say right now whether that improves markedly in 2024. The early signs that we saw in Q3. Right now, we’re encouraging. We saw some slight improvement, but it’s too early to say to project what that would mean for 2024.
Jim Davis: Yes. Erin. The last thing I’d say is we’re encouraged by the volume trends. And as you know, incremental volume coming into the business in a business that has lots of fixed costs certainly mixes up the existing margin rate. So we feel good about the volume trends in our physician office. We feel good about the volume trends in health systems. And as I mentioned in the script, we feel good about our funnel of M&A opportunities that are in front of us as we march through the fourth quarter and early next year.
Operator: Our last caller is Brian Tanquilut with Jefferies.
Brian Tanquilut : I guess, Sam, just to follow up on Erin’s question really quickly. If we think about the composition of margin between gross profit and G&A, is this the right baseline to build off of factoring all the things that you mentioned, such productivity gains and maybe PAMA. And then maybe just, Jim, a quick follow-up. Hospital deals. Obviously, you’ve had some growth there. How should we be thinking about the pipeline and your ability to sustain the growth rate given what’s in the pipeline today?
Sam Samad: Yes. I mean with regards to the first question, Brian, we believe it is the right baseline to build off of. 2024 is not the period to look at in terms of that improvement that we talked about, the 75 to 150. There are a couple of factors in there. One of them, there’s the uncertainty of PAMA, obviously. But the other one is COVID, which is approximately $200 million this year, is going to be a factor next year in terms of the drop off. It’s going to be a negative factor. Again, albeit a much smaller one than what we saw from ’22 into ’23, but it’s still going to be a factor in terms of the approximately $200 million going to something we believe much less than that as it becomes just another regular test like a flu test, for instance, but the baseline, we believe, is the right one, and we are still confident about the 75 to 150 basis point improvement on operating margin over the 3 years.
Jim Davis: Yes. Brian, as I said in the script, we’re encouraged by the breadth and depth of our funnel of opportunities in hospital outreach as well as PLS. And I say that our teams are working them very hard. And the trends are pointing in our direction, right, with the cost of capital going up for health systems, their investments, I think, are truly focusing on the things that will drive growth for health systems, whether that’s investments in neurology, cardiology, cancer, obstetric, those are the things that drive growth in health systems. And so when you make all those investments, albeit now at capital costs that are significantly higher, they can turn to us to make the investments they need in laboratories. When you see institutions like New York Presby sell their outreach book of business and really focus their investments on the things that are driving their growth.
I think that’s a good sign of how health care systems, they’re really good strategic ones are really thinking today.
Operator: That was our last question for the day.
Jim Davis : All right. Everyone, thanks again for joining our call today. We certainly appreciate all your continued support. I also want to thank the Quest Diagnostics team who, as we’ve transitioned away from COVID, have really done a magnificent job in continuing to drive growth in our base business, drive productivity and continue to satisfy our patients, providers and all those that use Quest Diagnostics. So thanks, everyone, and have a great day.
Operator: Thank you for participating in the Quest Diagnostics Third Quarter 2023 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 may be accessed online at www.questdiagnostics.com/investor or by phone at 203-369-3502 for international callers or 1-800-945-5759 for domestic callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on October 24, 2023, until midnight Eastern Time, November 7, 2023, Thank you, and goodbye.
