Quest Diagnostics Puts the 2027 PAMA Hit at About 1% of Revenue, Raises Guidance, and Adds Apple Health as a Consumer Channel
Third quarter 2026 earnings call, October 22, 2026
Quest Diagnostics reported third quarter revenue of $3.1 billion, up 10%, and adjusted EPS of $3.00, up 15.4%. It raised and narrowed its full year outlook. The more consequential news for investors was the Protecting Access to Medicare Act (PAMA) fee schedule. Management now sizes the 2027 cut at roughly 1% of total company revenue, or about $125 million on a base of $12 billion plus. That is above the $100 million to $120 million range the company had discussed before the data collection results were known. Management also disclosed a cybersecurity incident on the morning of the call. Details were limited, and the company said the investigation is at an early stage.
PAMA: Larger Cut Than Hoped, and a Data Set Management Calls Skewed
CEO Jim Davis said the preliminary 2027 rates, built on lab data submitted in 2026, are "excessive" and that the collection process was flawed again. Cumulative revenue impact for 2027 through 2029 is expected to be under 1.3%, which implies only about 30 basis points of incremental pressure across 2028 and 2029. Management declined to split that between the two years.
The sharper detail came from the breakdown CMS released the day before the call. Independent labs supplied 76.5% of reported volume, and hospital outreach supplied under 10%. Davis argued that this "way overestimates" the independents' true market share and drags the volume-weighted median down. He noted that over 90% of the data in the prior survey also came from independents. Of roughly 1,550 codes, about 1,200 face cuts, and 775 hit the maximum 15% reduction. Davis acknowledged that the company did not expect that many codes to land at the cap: "We didn't expect the data process to come out this way."
The exposure comes from Medicare, plus straight Medicaid fee schedules tied to Medicare. It does not include managed Medicaid. Davis said a "very, very small minority" of the 700 to 1,000 health plan contracts still link to the Medicare schedule, because the company has spent five years removing that language. Any spillover would be handled within the roughly one-quarter to one-third of contracts renegotiated each year.
Management would not quantify the offset. CFO Sam Samad told analysts not to assume the full impact in their models: "don't assume the full impact in your model, there will be an offset." Davis said it will not come from phlebotomy, logistics or front-line lab staff, given the volume growth. Instead, the company will review about $1 billion of costs outside the work needed to produce patient results, delaying some programs and keeping those that support growth in 2027 through 2029. Firm guidance will come with fourth quarter results in January. Davis said he cannot assign a probability to a further PAMA delay.
The legislative path is the RESULTS Act, which has more than 135 co-sponsors. Quest has been told to expect a Congressional Budget Office score in mid- to late November, and the goal is inclusion in a year-end health care package. A delay is the fallback if that fails. This remains a binary event with limited visibility, and the company is leaning on advocacy rather than offering a base case.
Volume Growth Is Strong, but Rev per Req Is Softening
Requisitions rose 14.5%, with Corewell Health and Fresenius Medical Care contributing 9.5 points. Excluding those two relationships, volume grew 5%, up from 4.1% in the second quarter and 4.3% year to date. Revenue on that base rose 6.6%. Management described the volume as clean, with no weather benefit and a modest drag from ACA exchange attrition.
Revenue per requisition fell 4.2% on mix. Adjusted for Corewell and Fresenius, it rose 1.7%, which is a clear deceleration from about 2.9% in the second quarter. Davis attributed this to two factors. The first was single-test requisitions from large health systems using Quest for Lp(a) and Alzheimer's testing, in a hospital reference business that averages only about 1.6 tests per requisition. The second was a burst of cyclospora testing, where revenue per test is only $15 to $16. Samad stressed that unit pricing was flat and that no negative price effect is embedded in the 1.7%. Pricing outside PAMA is expected to stay "flattish" in 2027.
In the channels, physician revenue grew high single digits, and hospital revenue grew double digits. Reference volumes were up double digits, with revenue slightly below that. Hospital reference revenue was up mid-single digits.
The ACA exchange effect looks minor. Exchange requisitions fell 8%, but tests per requisition rose 8%, which pointed to higher-acuity patients. The net revenue impact was about 10 basis points. Management sized the fourth quarter drag at 10 to 20 basis points.
Apple Health Adds a Consumer Channel, and Consumer Mix Helps Margins
Quest will let iPhone and iPad users order labs through the Apple Health app. The panel covers more than 50 biomarkers, including ApoB and Lp(a), and is priced at $119. Blood pressure and weight are measured at one of Quest's 2,000 patient service centers during the draw. The service is in beta, with a full launch expected before year-end. Davis declined to forecast uptake and said the company would probably comment in January.
The consumer business is growing more than 30% this year, and Samad said it is margin accretive. The reasons are "no denials, no patient concessions," along with requisitions that often carry 10 or more tests. This helps explain why management is willing to push the channel despite flat reimbursement elsewhere.
Margins: Leverage and Invigorate Offset Wage Inflation and Mix
Adjusted operating margin was 16.7%, up 40 basis points year on year. Reported operating income was $479 million, or 15.5% of revenue. Davis said wage inflation of 3% to 4% costs at least $120 million a year, and the Invigorate program, targeting 3% annual savings, is designed to offset it. Fuel costs are now seen near $14 million for the year, versus a prior $10 million estimate. Organic volume leverage on a high fixed-cost base did the rest.
Margin rose about 20 basis points sequentially, which is unusual given that the second quarter is typically the seasonal high. Samad credited improving Corewell and Fresenius margins, some SG&A leverage, and the absence of the second-quarter mark-to-market hit on deferred compensation. That last item does not affect EPS, so the sequential gain overstates underlying improvement. Management expects the two partnerships to keep improving in 2027, but they remain below corporate average margins.
Guidance, Nova and Working Capital
Full year revenue is now guided to $12.065 billion to $12.105 billion, up 9.3% to 9.7%. Adjusted EPS is $11.25 to $11.35, and reported EPS is $10.21 to $10.31. Cash from operations is about $1.9 billion, and capex about $550 million. The guide excludes unannounced M&A. It does include a signed agreement to acquire outreach assets from a Northeastern health system, expected to close this year.
Project Nova, the Epic-based modernization program, costs $0.25 of EPS in 2026, with about 70% falling in the second half and tilted toward the fourth quarter. The project has moved from design to build, and the first lab deployment is scheduled for fall 2027. Samad said 2027 expense will exceed 2026, which is another item competing with the PAMA offset.
Days sales outstanding are up about 3 days since year-end. Management attributed this to client-billed hospital business with longer terms and fewer banking days. It said bad debt is in line with history and patient price concessions are flat.
Lapping Corewell and Fresenius in October removes about 3 points of inorganic growth from 2027. Combined with a roughly 1% PAMA drag, flat pricing and higher Nova spend, the bar for 2027 guidance is higher than this quarter's 10% growth suggests. Management will give its long-term outlook at an Investor Day on March 25 at the New York Stock Exchange.
Advanced Diagnostics and Kidney Care
Quest will add the FDA-cleared Roche pTau217 blood test and has launched an AD-Detect panel combining APOE, amyloid beta and pTau217. Davis explained the logic: pTau217 "can falsely elevate with some comorbidities, so a physician may need to refer to amyloid beta to confirm a true positive." Alzheimer's testing is growing at double digits, and management called the field early-stage.
In women's health, Quest formed a collaboration with Waters Corporation for the Onclarity HPV self-collection kit, with an introduction planned for next year. In kidney care, the Fresenius relationship has opened doors with nephrologists, and Quest has deployed a dedicated sales force for cardiometabolic testing across disease stages. It was also named primary national lab for pre-dialysis chronic kidney disease testing at a kidney care organization.
Cybersecurity Incident
Samad said Quest learned the day before the call of unauthorized access to a test ordering system used by certain clients who do not use an electronic medical record. An 8-K was filed the morning of the call. Management said operations and patient service have not been materially disrupted, but it would not take further questions on the investigation. Financial and regulatory consequences are unknown at this point.