Laboratory of America Holdings Earnings Call Insights: Payers and Molecular Testing

Laboratory Corporation of America Holdings (NYSE:LH) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Payors

Robert Willoughby – Bank of America Merrill Lynch: Dave, what recourse do you have to get payment back from some of these payors that denied you, and maybe more importantly, what’s a reasonable time frame for recovery?

David P. King – Chairman and CEO: Let’s separate it into the commercial, the Medicaid and then TRICARE. So with commercial payors, this is a negotiated process. As we mentioned, many of them incorporated these payment policies without the realization of the impact that it would have on the claim filing process, a lot of paper claims, a lot of additional information and the impact on patients, and so most of it is just a question of sitting down and talking with them, explaining the circumstances and then we get the coverage issues resolved. With the Medicaids, a couple of the key Medicaids still have not priced the codes, so they’ve told us they’re going to pay for the tests but they still haven’t priced the codes and these are a couple of sizable Medicaids, and we have a commitment that they will price the codes within the third quarter, but obviously claims are not going to be paid until the codes are priced. There are a couple of Medicaids that have said they are not going to pay for this testing even though they have paid for it in the past and they have covered it in the past because either they call it new tests or because of budgetary constraints. On those, it’s beating with the Medicaids, it’s getting ACLA involved, and ACLA is fully engaged in this as are our other industry colleagues and it’s also potentially legislative and executive remedies in those particular states. Finally, with TRICARE, initially, TRICARE placed cystic fibrosis on its no-pay code list. Our understanding is that after some inquiries from us and others, that the code is off the list but it still hasn’t been priced, so we’re back in the situation that we have to wait for them to price the code. So as you can tell from that discussion, the timing is somewhat uncertain. We do expect the — we’re optimistic that the commercial ones, for the most part, will be resolved within the year. Whether some of the governmental ones go over into next year, we just have no way of knowing, and that’s part of the reason we say as these get resolved, they provide additional upside to the guidance because we’ve incorporated the view that we stated here into how we think about guidance for the rest of the year.

Robert Willoughby – Bank of America Merrill Lynch: Okay. And has this triggered, from your standpoint — I mean, other labs are seeing this as well, you have this factor plus some of the cuts and proposals going forward. I mean, how is this changing the M&A pipeline for you? Is it too early to call at this point? Or are you seeing more activity as a net result of this?

David P. King – Chairman and CEO: I think it’s a little bit early to call, but the pipeline continues to be quite robust and there are good opportunities out there for us in a variety of areas. When you think about nonpayment for molecular codes, you think about cuts to 88305. There are a number of either specialized laboratories or laboratories with broad exposure to Medicare in these payment areas that are either thinking about entering the acquisition market or are already in the market.

Molecular Testing

Thomas Gallucci – Lazard Capital Markets: I guess just following up on the couple of Bob’s questions there. Can you just help me explain sort of how you’re handling the revenues related to the molecular testing that’s not getting paid for at this point, I mean the DSOs didn’t really go up in the bad debt didn’t really go up. So, you said you got it all factored in, but your house is actually flowing through, is there any way to sort of frame the magnitude of what we’re talking about?

William B. Hayes – EVP and CFO: Tom, it’s Brad. The way it’s flowing through and manifesting itself is in price. These kinds of adjustments we have historically considered non-coverage items and items where payers don’t pay for certain things as revenue adjustments. So, that’s where they are showing you and while the DSO was flat, we expected it to be down and if we look at why it’s not down this particular item for the delays in the non-payment are exactly what’s causing it.

Thomas Gallucci – Lazard Capital Markets: And is there any way to frame sort of the magnitude of what we’re talking about here relative to I know the overall company whether its revenue or test or any other perspective?

William B. Hayes – EVP and CFO: What I would say is it’s about 4% of our revenue that’s affected by this entire process, our molecular pathology revenue is a little bit higher but some of its commercial build and capitated. So, it doesn’t really fall into this CPT code related process. So, it’s about 4% of revenue and then a subset of that is what we’re having the difficulty with here. We’re not going to give a specific number about what we’ve seen in the first quarter and expect for the back half of the year because as Dave mentioned, we’re fighting this and we hope to get it reversed because it’s really not merited. And when we look at price year-over-year the 1.8% that we reported, if you take into account sequestration and these changes and some of the other factors that we talked about those are the issues that are resulting in that price…

Thomas Gallucci – Lazard Capital Markets: Then, just more broadly on the acquisition front, I guess, Bob asked about already – the reimbursement changes affecting the pipeline. Dave, I know you’ve talked about diversifying revenue streams a bit, so maybe areas that are outside of some of these sectors that are being hit by reimbursement. Your drug testing did very well in the quarter, I think that’s the idea in that business. It doesn’t have exposure to some of this stuff. Can you talk about maybe where you are in the process or what the pipelines might look like for you to continue to expand into sort of areas outside of some of the Medicare, Medicaid areas that have more pressure?

David P. King – Chairman and CEO: Yeah, Tom. I think if you look at the key acquisitions that we’ve done in the last couple of years, we made an acquisition that gave us greater international capability in our pharma services, clinical trials, central lab business. That is not exposed to government reimbursement. It’s well priced, and we’ve been very, very pleased with that because that business continues to expand as does the clinical trial business that is – that comes in through monograms. Our paternity and forensic testing area where we made the Orchid acquisition, that not only gave us exposure to some private revenue and some nongovernmental revenue, but also just some international revenue with the U.K. and now we’re getting some work in that business out of the Middle East. MEDTOX is a commercial pay. It’s typically an employer pay clinical trials and commercial pay business. There’s essentially no exposure to government. So, we are continuing to look at acquisitions that will help us diversify the revenue base. We have looked at and decided not to make some acquisitions, for example, in pathology where we think we would be further exposing ourselves to these kinds of issues. And then we continue to look, as I mentioned in speaking about Pillar Five, in ways that we can take our data and that we can tuck things in that help us create potential revenue streams out of the data and the analytics. So I think there’s a — I think we’ve had a broad approach to broadening the revenue base, and at the same time, sticking close to our knitting in terms of businesses that we fundamentally understand that know how to run and that fit our long-term strategic priorities.

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