Labcorp Holdings - Earnings Call - Q4 2013
February 7, 2014
Transcript
Operator (participant)
Ladies and gentlemen, and welcome to the Q4 2013 Laboratory Corporation of America Holdings earnings conference call. My name is Glenn, and I will be your operator for today. At this time, all participants are on a listen-only mode. Later, we will facilitate a question-and-answer session. If at any time during the call you should require audio assistance, please press star followed by zero, and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. David King, Chairman and Chief Executive Officer. Please proceed, Mr. King.
David King (CEO)
Thank you, Glenn. Good morning and welcome to Labcorp's fourth quarter 2013 conference call. Joining me today from Labcorp are Brad Hayes, Executive Vice President and Chief Financial Officer, Ed Dodson, Senior Vice President and Chief Accounting Officer, Adam Feinstein, Senior Vice President, Corporate Development and Strategy, and Steve Anderson, Vice President, Investor Relations. This morning, we will discuss our fourth quarter and full year 2013 financial results, update 2014 guidance, highlight our progress on our five pillar strategy, and provide answers to several frequently asked questions. I'd now like to turn the call over to Steve Anderson, who has a few comments before we begin.
Steve Anderson (VP of Investor Relations)
Before we get started, I would like to point out that there will be a replay of this conference call available via telephone and internet. Please refer to today's press release for replay information.
This morning, the company filed a Form 8-K that included additional information on our business and operations. This information is also available on our website. Analysts and investors are directed to this 8-K and our website to review this supplemental information. Additionally, we refer you to today's press release, which is available on our website for a reconciliation of non-GAAP financial measures discussed during today's call to GAAP. These non-GAAP measures include adjusted EPS excluding amortization, free cash flows, and adjusted operating income. I would also like to point out that we are making forward-looking statements during this conference call. These forward-looking statements include, among others, statements about our expected financial results, the implementation of our business strategy, and the ongoing benefits from acquisitions. These statements are based upon current expectations and are subject to change based upon various factors that could affect the company's financial results.
Some of these factors are set forth in detail in our 2012 10-K and subsequent filings. The company has no obligation to provide any updates to these forward-looking statements, even if our expectations change. Now, Brad Hayes will review our financial results.
Brad Hayes (EVP and CFO)
Thank you, Steve. On today's call, I will review four key measures of our financial performance: cash flow, revenue growth, margin, and liquidity. I'll also update our 2014 guidance. First, cash flow. Our cash flow continues to be solid. Free cash flow for the 12 months ended December 31st, 2013, was $616.5 million. DSO at the end of December was 49 days, which was down one day sequentially. In addition to our run rate bad debt expense during the fourth quarter, we increased our allowance for doubtful accounts by $5 million due to an increase in patient responsibility. For the year, our bad debt expense was 4.4% of revenue compared with 4.3% in 2012. As we've previously discussed, our 2014 guidance assumes a slight increase in our bad debt rate. Second, revenue growth. Revenue increased 2.3% year-over-year in the fourth quarter.
During the quarter, total company volume increased 5%. Organic volume increased approximately 2% year-over-year. Revenue per requisition was flat sequentially but decreased 2.6% year-over-year. It is important to note that managed care revenue per requisition increased year-over-year and was flat sequentially. Third, margin. For the fourth quarter, our adjusted operating income margin was 15.2% compared to 17.2% in the fourth quarter of 2012. During the fourth quarter, government payment reductions and molecular pathology payment issues reduced our year-over-year margins by approximately 170 basis points, reduced year-over-year revenue per requisition by approximately 2%, and reduced year-over-year operating cash flow by more than $30 million. Also, growth in our toxicology business reduced year-over-year revenue per requisition by approximately 2% in the fourth quarter. Fourth, liquidity. We remain well capitalized.
At the end of December, we had cash of $404 million and no borrowings outstanding under our $1 billion credit facility. During the fourth quarter, we repurchased $251.6 million of stock, representing 2.5 million shares. For the full year of 2013, the company repurchased approximately $1 billion of stock, representing 10.4 million shares. At the end of December, approximately $1.1 billion of repurchase authorization remained under our share repurchase program. Our share repurchase activity reflects our continued disciplined capital allocation program and commitment to return capital to our shareholders. This morning, we updated our 2014 financial guidance. We expect revenue growth of approximately 2%, adjusted EPS excluding amortization of $6.35-$6.65, operating cash flow of approximately $780 million-$820 million, and capital expenditures of approximately $185 million-$205 million. The guidance excludes the impact of any share repurchase activity after December 31st, 2013.
There's already been an unusual amount of inclement weather in the first quarter of 2014. Our guidance does not take into account business losses due to weather. Consistent with our past practice, we will comment on the impact of weather to our performance during our earnings releases. I'll now turn the call over to Dave.
David King (CEO)
Thank you, Brad. We are pleased with our fourth quarter results. During the quarter, we grew volume 5% and organic volume by approximately 2%, and we continue to execute well on our key growth initiatives. Although our nominal revenue per requisition was down 2.6% year-over-year, managed care revenue per requisition increased year-over-year and was flat versus last quarter. The drag on year-over-year revenue per requisition was due to government reimbursement reductions, molecular pathology payment issues, and test mix. We repurchased $251.6 million of our shares, demonstrating our commitment to our stated capital allocation objective to return capital to our shareholders. We are also pleased with our full year 2013 results, particularly when we take into account the significant government payment reductions and the unexpected reimbursement issues related to new molecular pathology codes that we faced through the year.
As a reminder, our reported results for the year were negatively impacted by Medicare payment reductions and molecular pathology payment issues that lowered revenue by approximately $100 million and adjusted EPS excluding amortization by $0.68. Finally, during 2013, we repurchased approximately $1 billion of our stock, representing 10.4 million shares. I would now like to update our progress on each aspect of our five pillar strategy. The first pillar of our strategy is that we deploy capital to investments that enhance our business and return capital to shareholders. I have just reviewed our share repurchase activity during the fourth quarter and the year. Our share repurchase to date brings us closer to our target leverage ratio of 2.5x debt to EBITDA. In addition, our acquisition pipeline remains attractive, and we believe that components of healthcare reform will drive consolidation in our industry.
Thus, acquisition should provide an attractive way to expand our test menu and geographic footprint for the next several years. We will maintain a disciplined approach to valuation as we look for the best strategic opportunities. The second pillar of our strategy is to enhance our IT capabilities to improve the physician and patient experience. We continue to enhance our Beacon Analytics platform for managing practice and population health data as we add new clients and plans to the platform. This platform helps clients unify the multiple components of population health management, providing primary care physicians with complete access to their patient's healthcare picture, rules for monitoring gaps in care, and reporting that addresses more than 600 quality measures. Beacon: Analytics helps providers reduce expenses, improve outcomes, and enhance patient satisfaction.
The robust rules engine is highly customizable and provides compliance with meaningful use requirements, as well as ACO, Joint Commission on Accreditation of Healthcare Organizations, and Physician Quality Reporting System reporting requirements. These industry-leading data-driven services position Labcorp as a trusted partner to healthcare stakeholders, providing knowledge to optimize decision-making, improve health outcomes, and reduce treatment costs. We also continue to improve our tools to assist physicians and patients in understanding test results and optimizing decision-making. We introduced a new report format for Pap results, which provides a result history chart and improves clarity of result delivery. In addition, we now have more than 400,000 registrations on our patient portal, and this figure continues to grow every day. Looking ahead, we will expand the conditions covered by our comprehensive clinical reports that integrate and track test results for at-risk patients.
We will continue to help customers analyze their population health and clinical practice data with new tools for hospitals, physician practices, and ACOs, supplemented with insights derived from our extensive patient database. We are working with clients to use our data to benchmark ordering patterns and to determine preclinical markers in specific diseases. Insights gained from these efforts help payers and physicians better manage healthcare expenses and patient outcomes. The third pillar of our strategy is to continue to improve efficiency to offer the most compelling value in laboratory services. The second installation of our Propel robot is underway at our major laboratory in Tampa. Propel has begun to drive expense reductions, increase throughput and accuracy, and enhance specimen management at our Burlington Lab. We continue to consolidate facilities into our new Phoenix campus, and we are now processing more than 23,000 specimens per day at this state-of-the-art facility.
We have continued the installation of our new automated chemistry platform, and upgrades have now been completed in our Burlington, Phoenix, San Diego, and Seattle labs. Our Raritan, New Jersey lab will be converted later this quarter. These instruments, enabled by advanced software systems, are expected to increase testing throughput and reduce labor and supply expenses. Finally, as part of our ongoing commitment to efficiency, we have begun a comprehensive enterprise-wide review of our cost structure. The fourth pillar of our strategy is to continue scientific innovation at reasonable and appropriate pricing. We introduce new tests and collaborate with leading companies and academic institutions to provide our physicians and patients with the most scientifically advanced testing in our industry. We launched 152 new tests in 2013, many of which we expect to drive growth in our genomic and oncology testing businesses.
This reflects our commitment to offer products and services on the cutting edge of science, as well as our strategy to develop real revenue growth opportunities. One such growth opportunity relates to our recent entry into the sizable BRCA testing market, which is composed of a suite of tests for the assessment of breast cancer risk that the payer community values and reimburses. Our BRCA test menu now includes a comprehensive panel of BRCA1 and BRCA2 complete gene sequence analysis and deletion duplication testing, targeted analysis tests for other family members once a mutation is identified, and a panel for mutations prevalent among the Ashkenazi Jewish population. Our BRCA testing capabilities and services give physicians and patients powerful tools to better comprehend and predict breast cancer risk.
In combination with our care coordination pre-authorization service, Labcorp offers an end-to-end program that includes compliance with insurance requirements, comprehensive testing, and expert interpretation from our licensed directors and a team of 122 board-certified genetic counselors and nine medical geneticists. We expanded our next-generation sequencing test menu by launching our first multi-gene oncology panel. The IntelliGEN Assay provides an assessment of targetable mutations with a panel profile of 50 cancer genes known to be involved in the development, progression, and treatment of cancers. IntelliGEN will be a useful tool in multiple clinical settings, including when guideline-recommended biomarker evaluations yield no targeted therapeutic option, when relapse or disease progression occurs, or when a tumor is poorly differentiated and of uncertain origin. We continue to expand our oncology offerings to enhance our women's health initiatives.
We recently launched the Prosigna Breast Cancer Prognostic Gene Signature Assay, an FDA-cleared assay developed by NanoString Technologies, Inc. This test enters a large existing market and is routinely covered by the payer community. Studies show that Prosigna is able to better categorize high-risk patients, providing more prognostic clarity than other predictive breast cancer assays. The fifth pillar of our strategy is the development of knowledge services. Labcorp recently performed a comprehensive retrospective study involving over 55,000 patients, comparing the treatment of patients enrolled in our innovative chronic kidney disease management program with those patients diagnosed with CKD who were not in the program. The study showed that patients who were enrolled in Labcorp's CKD program showed an approximate 10 percentage points increase in compliance with guideline-recommended testing, meaning that their physicians were more closely monitoring their disease state and progression.
The study concluded that the use of a laboratory-based point-of-care CKD clinical decision support program is associated with increased compliance with guideline-recommended disease monitoring, particularly among primary care physicians. Labcorp leads the industry in the development of decision support tools for kidney stones, CKD, and coagulation, as well as for cardiovascular risk assessment. These tools are an important differentiator, and we will continue to develop them and integrate them into the fifth pillar of our strategy. We have also begun work with UnitedHealthcare to implement Beacon LBS across its physician and patient base in Florida. We remain on schedule to launch the program in the latter half of 2014, and we are excited about the valuable services that Beacon LBS will provide physicians, patients, and payers. Healthcare reform is upon us, and delivery systems continue to change.
The critical components of success will be quality, efficiency, scale, and a central role in improving patient outcomes. Labcorp is uniquely positioned to achieve these goals in the years to come. Now, Steve Anderson will review anticipated questions and our specific answers to those questions.
Steve Anderson (VP of Investor Relations)
Thank you, Dave. Can you elaborate on Labcorp's capital allocation policy? As we have stated, we are committed to achieving a 2.5x debt to EBITDA ratio, and we have taken steps toward this goal over the last year. Based on our capital allocation history, we target half of our free cash flow for acquisitions and half for share repurchase. In the absence of a large acquisition over the next year, we would anticipate using additional leverage to repurchase shares. We have a strong history of returning capital to our shareholders. Over the last decade, we have repurchased $5.4 billion of our stock, representing 76.9 million shares at a price of approximately $71. How big of an opportunity is the recently released Alberta RFP? The size of this opportunity is approximately $200 million annually, and the RFP is for a sole source private provider.
DynaLife is currently the sole source private provider in Alberta, and we are a minority partner in this business. The performance of this joint venture is captured on the equity method income line item on our P&L and is not consolidated into our revenue line. Can you remind us of how drugs of abuse volume trended during the year? In the fourth quarter, our drugs of abuse volume increased approximately 15% year-over-year. This compares to a year-over-year increase of 14% in Q3 of 2013, 10.6% in Q2 of 2013, and 10.2% in Q1 of 2013. We also delivered strong year-over-year growth this quarter in our wellness and pain management businesses, which fall within our occupational testing services operations. We believe wellness and pain management testing will provide a great growth opportunity for Labcorp over the next several years.
Now, I'd like to turn the call back over to Dave.
David King (CEO)
Thank you, Steve, and thank you very much for listening. We are now ready to take your questions.
Operator (participant)
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone. If your question has been answered or you would like to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Bob Willoughby with Bank of America. Please proceed.
Bob Willoughby (Managing Directr and Equity Research Analyst on Healthcare Technology and Distribution)
Dave, has anything changed since you gave your preliminary guidance to 654 back in December? Anything to the positive or negative on that front?
David King (CEO)
Bob, nothing has changed to the positive or negative in terms of how we think about the guidance. Obviously, we provide a range because there's a range of outcomes within the guidance. I guess the one factor I would point to that we know is different is, as Brad mentioned, we have had a pretty significant amount of weather in the first quarter, which is going to have an impact. Maybe if I just can expand a little bit on the thrust of your question, there are some things that are not included in the guidance, and that would be, as we've mentioned, share repurchase. The second thing would be improvement in test mix. Specifically, there's nothing material in the guidance for growth in BRCA testing, allergy, or some of our other new tests. The guidance assumes that the MOPAT situation remains the same going forward.
If we start getting paid for MOPAT by some of the payers, which we're optimistic that we will, and obviously, if we were to receive retro payments for what we did not get paid for in 2013, none of that is included in the guidance. The guidance also does not include any future acquisitions, and the guidance does not include any significant expense reduction activity. On the other side, the guidance also does not include whatever may occur as a result of congress's decisions around the SGR fix. I mentioned weather, and the guidance does not include any potential disruption if, in fact, ICD-10 is implemented in October. Hopefully, that gives you a good sense of how we're thinking about the guidance today and how it looks versus December.
Bob Willoughby (Managing Directr and Equity Research Analyst on Healthcare Technology and Distribution)
I guess, Dave, you have stated goals of half the cash flow going into share repurchases. Why would it not assume $400 million in buybacks at a bare minimum? We know you have done some deals in the first quarter. Covance kind of spoke to one of them. Does the guidance contemplate activity in the first quarter as yet?
David King (CEO)
The Covance deal is not going to be material from a revenue or earnings perspective. It's a strategic deal, but it's not a large deal. The reason that we don't incorporate share repurchase in the guidance is that we have never incorporated share repurchase in the guidance. That's been our long-standing way of approaching guidance, and we felt that to change it this year would, number one, assume that you're going to do that amount of share repurchase, which could inflate the number that we put out, and two, just be a major change in the way we think about how we guide.
Bob Willoughby (Managing Directr and Equity Research Analyst on Healthcare Technology and Distribution)
Okay. It just seems, Dave, you've got a stated rule, but then to not put it in, there's a bit of a disconnect there. Okay, that's the policy, I guess, going forward, or what it's been. Any update on the CFO search?
David King (CEO)
We continue to speak to candidates. I feel confident that we will, and we have terrific candidates, by the way. I feel confident that within this upcoming quarter, we will have a candidate identified and in place and start the transition.
Bob Willoughby (Managing Directr and Equity Research Analyst on Healthcare Technology and Distribution)
Okay. Thank you.
Operator (participant)
As a reminder, ladies and gentlemen, please limit yourselves to one question and one follow-up question. Your next question comes from the line of Will Bonello with Craig-Hallum. Please proceed.
Will Bonello (Senior Equity Research Analyst)
Good morning. Thanks. Thanks for highlighting what wasn't in the guidance. That is helpful. As we look at sort of longer term here and think about how you might position for the future, Dave, just two questions on that. First of all, on the cost side, can you give us a sense? Is there an opportunity here in this environment to maybe streamline the infrastructure and substantially reduce the number of labs that you have, maybe even the number of patient service centers, phlebotomists, and couriers? I don't mean just little headcount reductions, but is there something on a more significant scale that you might be able to do here? I'll have a follow-up.
David King (CEO)
Bill, obviously, given the environment, and as I think you know, we always have been attentive to how we can reduce costs by incremental amounts, $20 million, $30 million a year, and I think we've done that very consistently. I think given the environment, we're going to look at whether there are bigger cost opportunities, and that would include lab infrastructure, that would include patient service centers, that would include G&A and the corporate infrastructure. I don't think we're ready to talk about scale or numbers at this point, but we are looking at that, and if there are significant opportunities, we will tell you what they are, and we'll do the very best we can to quantify them as soon as they become more certain.
Will Bonello (Senior Equity Research Analyst)
Okay. That's helpful. The second piece is just sort of on the price/business mix side of the equation. It seems like for the last five years or so, this industry, the large players have pretty much been price takers, and I know you have no choice with the government. Is there an opportunity here to sort of look at your customer base and maybe walk away from some less profitable payers, some less profitable physician practices, some less profitable regions? Is that a process you're going to go through to try and really determine where you're getting marginal profitability and where the return isn't so great?
David King (CEO)
Yeah. It's a great question, and I think I'd highlight a couple of things. I mean, first of all, as we mentioned, year-over-year managed care pricing was quarter-over-quarter sequentially, it was flat. I think we've done an excellent job in balancing the managed care plan's desire for price relief against the fundamental economics of our business. I also think of demonstrating to them that in a high fixed cost business, continually looking for price decreases is going to have an impact on the service that their patients are going to receive. By that, I don't mean the quality of the testing, but I mean the number of patient service centers, the wait times, all of those things that they focus on. I think we've done a good job in terms of our non-government pricing.
At the same time, we have to look at every relationship, and particularly some of our smaller relationships, and determine whether there's enough value in continuing to provide those services to justify the cost that we're putting into them. We do that regularly, and we will continue to do it. If we find business that isn't profitable or that is absorbing more cost than we're gaining value from it, we have in the past and won't hesitate in the future to move away from that business.
Will Bonello (Senior Equity Research Analyst)
All right. Thank you.
Operator (participant)
Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed.
Gary Lieberman (Senior Healthcare Services Equity Research Analyst)
Good morning. Thanks for taking the question. It seems like when you were first talking about the pressure from government reimbursement, at least to me, it seemed like you were more optimistic about receiving the revenue and maybe receiving it in more of a timely fashion. Is that accurate, or can you maybe characterize kind of what your thinking is now in terms of eventually getting that?
David King (CEO)
There are two aspects of it, as you know, Gary. The sequestration and the SGR reduction and the various technical extenders that accounted for the $55 million last year are not coming back, and we're not going to get those. Those are just in the run right now, but it is important to note that when you look at the year-over-year comparison and you say, "Why is the price down 2.6%?" One of the reasons is last year we were being paid at a 1% higher rate by the government. That is not insignificant. As to the MOPAT, yeah, I think we were more optimistic originally that the payers, TRICARE and some of these Medicaid plans, would be more reasonable in the way that they approached reimbursement.
Quite frankly, it's still a mystery to me why tests that are medical standard of care that have been paid for for years are suddenly on lists of tests that are not going to be paid for. It's harmful to patients. It ultimately would be harmful to physicians who are going to be ordering standard of care testing that's not going to be delivered and exposing them to potential malpractice liability. I was fairly optimistic throughout last year that we would get paid fairly promptly. I still think we will get paid in time, and if we don't, then we'll take steps to make sure that we're not doing $40+ million of free testing in the future. This has been a long and frustrating, in my view, unreasonable process on the payer side.
We either got to get paid or we got to stop doing the testing.
Gary Lieberman (Senior Healthcare Services Equity Research Analyst)
I take that to mean you haven't reached the point yet where you've stopped doing some of the testing that you've pointed out in the past that you might?
David King (CEO)
I'm not going to talk specifically about that. I'm just going to repeat that we're either going to get paid or we're going to stop doing the testing, or the patients are going to start getting billed for it. You may have seen the article that came out yesterday in Stars & Stripes, the military publication, about a colonel in the military who has cancer who a test was ordered from a non-military facility, and he got a bill for $1,100 from the laboratory because Tricare said they didn't cover that because it was ordered at a non-military facility. However, if it had been ordered at a military treatment facility, Tricare would have covered the test. Now, somebody needs to explain to me how that makes any kind of sense in terms of logic or patient care or fairness to the laboratory industry.
Gary Lieberman (Senior Healthcare Services Equity Research Analyst)
Okay. And then maybe just finally, in terms of accruing the revenue for those tests, can you talk about sort of what the methodology is in terms of deciding not to accrue it versus if you were? What is the threshold for accruing it in terms of believing you're going to get paid for it?
Brad Hayes (EVP and CFO)
Gary, this is Brad. We have actually a—I mean, there are many payers who are paying us, so this does not apply to every payer. Those payers are in the normal revenue recognition process. We have a list of payers that we have issues with, and for each one of those payers, we do a probability assessment of how those discussions and where we think that's going to end up, and that dictates the reserve we place on the revenue for that group of payers.
Gary Lieberman (Senior Healthcare Services Equity Research Analyst)
Okay.
David King (CEO)
Gary, it's Dave. Just one further comment. Most of that you're not seeing in the revenue line, and you're not seeing it in price. Again, this is high-value testing, and it's not hitting the revenue line or the revenue per requisition line, and that's another 1% of the year-over-year price comparison.
Gary Lieberman (Senior Healthcare Services Equity Research Analyst)
Okay. Great. Thanks a lot.
Operator (participant)
Your next question comes from the line of Amanda Murphy with William Blair. Please proceed.
Amanda Murphy (Principal and Life Sciences Tool and Diagnostics Senior Analyst)
Hi. Thank you. I had a question on the volume side. It seems like underlying utilization seems to have held up pretty decently at 2%. I'm just curious how to think about that. Is that driven by, obviously, there's some tech and acquisitions in there, but how should we look at underlying utilization on a per-patient basis? Is that going up? Also, how to think about seasonality, just given some of the higher deductible plans that are going into effect at the beginning of the year? How to think about utilization through the year going forward?
David King (CEO)
Amanda, it's Dave. I think the seasonality, based on what we saw in 2013, is less pronounced than it has been historically in terms of there used to be—as we move toward these high deductible plans, there used to be greater utilization probably in the third and fourth quarters as people got through their deductibles. I would not say that we saw that in 2013. I mean, I think the demand was relatively steady throughout the year. From an organic volume perspective, I think organic volume was in the 2% range this quarter. It was in the 2% range last quarter. I feel pretty good about the fact that organic volume seems to be quite stable, and volume generally has been strong in the last two quarters and strong for the year.
It's very hard to say what—it's very hard to say how volume and demand are going to play out going forward, but we're pleased with both the reported volume growth and the organic volume growth over the last couple of quarters.
Amanda Murphy (Principal and Life Sciences Tool and Diagnostics Senior Analyst)
Got it. Okay. Just to follow up on some of the reimbursement questions, I'm curious, since you just launched IntelliGEN, and I know it's a bit early, but how are payers looking at some of these newer higher-value-add tests at this point? Also, just thinking about some of the issues on the single-gene testing that you've had from a reimbursement perspective, how are you thinking about reimbursement in context of some of your R&D-type decisions for next-generation sequencing, for example?
David King (CEO)
Yeah. Obviously, with tests like BRCA and the Prosigna assay, you're entering a market where there's a well-established market and where payer reimbursement is well-established. We talk to the payers, but we feel good that we're not going to have major hurdles in getting paid. With things like the next-gen sequencing, the IntelliGEN panel, those are ongoing conversations with payers about the value that you're delivering, the price relative to the price of other tests in the marketplace. The thing I like about the IntelliGEN panel is it's very targeted with 50 markers. Those markers are highly correlated to development, progression, treatment, and relapse of cancer and toward targeted therapies that will help to address the patient's cancer.think payers will be pleased at the idea that we are introducing a targeted and therapeutically well-correlated test into the market, and those will be the continuing discussions that we'll have to make sure that we're well-positioned for getting those tests reimbursed.
Amanda Murphy (Principal and Life Sciences Tool and Diagnostics Senior Analyst)
Got it. Thanks very much.
Operator (participant)
Your next question comes from the line of Kevin Elyck with Piper Jaffray. Please proceed.
Kevin Elyck (Analyst)
Good morning. Dave, I was just wondering if you'd give us a little color as to what's behind the strong drugs of abuse growth. Then how should we think about the wellness and pain management business? What's the market opportunity? What type of growth are we looking at? I guess, what should we expect for contribution?
David King (CEO)
I think the drivers behind the drugs of abuse and toxicology testing, Kevin, obviously employment growth is helping and pre-employment screening is helping. I think there is just a broader—there certainly has been a broader use of pain management and therapeutic drug monitoring given the intense focus from the DEA and from the state governments on over-utilization and diversion of pain drugs. Those have been, I would say, the primary drivers of growth. In terms of what the total market is, it is hard to size that market. As you know, there are several laboratories that really specialize in pain management testing in particular, and we do quite a bit of therapeutic drug monitoring. I think it is a nice opportunity for growth over time.
You'll certainly see continued demand because of, I think, physician concern over patients being compliant with pain drug regimens and the risk of diversion of pain drugs. I think we're very well-positioned to take advantage of that market movement.
Kevin Elyck (Analyst)
Got it. Okay. Just wondering, you called out the $0.03 impact from weather during the quarter. Just wondering if that had an impact on revenues or volumes, and if so, could you quantify that for us?
Brad Hayes (EVP and CFO)
Kevin, it's Brad. Absolutely, they did. We neutralize weather for the 2% organic growth.
Kevin Elyck (Analyst)
Okay. 2%. Got it. That's helpful, Brad. And then since I have you, you talked about the managed care, we have per rec increasing year-over-year. Could you quantify that?
Brad Hayes (EVP and CFO)
No.
Kevin Elyck (Analyst)
Okay. And then lastly, since your organic volume of 2% seems to be stable, Dave, what do you think the overall market's growing at this point? Is it flattish? If so, are you taking share? If so, I guess, which categories would it be?
David King (CEO)
Kevin, I think the market is relatively flat. I think there is share moving around. We've talked about health systems acquiring physician practices and insourcing some share. On the other hand, there are some health systems that are getting out of the outreach lab business, and so share is definitely moving around. I think it's always, given the general uncertainty around market size and numbers, I think it's always risky to say that you're taking share or that you're losing share. What I would say is, again, we're pleased with the volume. We're certainly growing the drugs of abuse, toxicology, and pain management testing business very, very well, and our operators are doing a terrific job capitalizing on the opportunity there. Organic volume is stable, and it's pretty decent. We are happy about that.
Kevin Elyck (Analyst)
Got it. Thank you.
Operator (participant)
Your next question comes from the line of Tom Galucci with FBR. Please proceed.
Tom Galucci (Analyst)
Thanks. Good morning. I guess I just first wanted to clarify, in that 2% organic number, you mentioned toxicology and drug testing being very strong. What is that area contributing to that 2%, if you could identify it?
David King (CEO)
We don't specifically break down all the bits and pieces, Tom. It is a significant contributor to the 2%, though. That's an accurate statement.
Tom Galucci (Analyst)
Okay. I guess I was just wondering about reform. You listed as sort of one of the uncertainties for this year. I'm curious, is that stemming more from the pace of the rollout, or are there other things, as we sort of see reform evolve here, that make you a little bit more uncertain about even the longer-term potential of the Affordable Care Act?
David King (CEO)
There are two things in terms of the this-year impact of reform, which we basically see little to no impact on our—the guidance assumes little to no impact, positive or negative, from reform. We all know about the rollout, and I do not need to tell you that it has been bumpy. The latest numbers that I have been seeing, whether from McKinsey or Kaiser Family Foundation, are that somewhere between 10%-20% of the enrollees in the exchanges are actually new patients, and that about 80% of the enrollees through the exchanges are people who previously had other types of coverage. If we just focus on that for a second, it is a relatively small increase in the number of covered patients.
Many of those exchange products, even though the patients qualify for premium subsidies, have significant deductibles, and the patients may or may not qualify for deductible subsidies. You may actually have people coming from their prior insurance and having a less attractive product through the exchange. The premium may be lower, but the deductibles may be higher. I'm sure you saw in the paper yesterday the concern expressed about the narrowing of networks through the exchanges and the number of physicians who are not going to be participating. I think the impact of the exchanges is very much a question mark. The third area where I think indisputably there's been growth is Medicaid and Medicaid expansion.
Obviously, as you know, both from a price perspective and getting back into these molecular pathology issues, those are somewhat positive, somewhat negative, and very hard to quantify in the near term. For 2014, not assuming anything material positive or negative from reform. In the long run, Tom, I still think reform is a positive because of all the things that we've talked about. It's going to favor the most efficient provider. It's going to favor the scale provider. It's going to favor the provider who's able to deliver the highest quality in the most cost-effective manner. I think if you add on to that all of the other strategic initiatives that we've been pursuing, the knowledge services, the LBS, we're going to be very, very well-positioned to capitalize on the opportunities that reform brings us. I view it long-term as definitely a positive for Labcorp.
Tom Galucci (Analyst)
Thank you, Dave.
Operator (participant)
Your next question comes from the line of Gary Taylor with Citigroup. Please proceed. Mr. Taylor, your line is now open. Please check all mute features.
Gary Taylor (Managing Director and Equity Research Analyst)
Sorry. I thought I had that turned off. Hey, good morning. Just a couple of questions. Dave, you had mentioned, I think, two or three times that the managed care revenue per requisition was up year-over-year. I thought maybe the second time you actually quantified that, but you said it quickly, so I was not sure if I missed that.
David King (CEO)
No, I did not quantify it. Quickly or slowly.
Gary Taylor (Managing Director and Equity Research Analyst)
Okay. Would you be willing to, or you're not going to disclose that?
David King (CEO)
No, we're not going to for practical and competitive reasons. There's really no reason to disclose it, but it was up year-over-year and flat quarter-over-quarter.
Gary Taylor (Managing Director and Equity Research Analyst)
Okay. On the acquisition opportunities you were talking about, you had mentioned you thought healthcare reform continued to drive acquisition opportunities. Just more specifically, is there any type of your historic business that you think becomes more active? Is there any type of your historic business that you wouldn't be interested in? For example, would you still be willing to buy an AP business? Also, what are your latest thoughts on international?
David King (CEO)
There's nothing in our historic business that has become less attractive or less interesting. I actually think the right anatomic pathology assets might be more attractive now than they've been for the last couple of years just because the payment reduction to the 88305 code has reversed a lot of the physician insourcing. Some of the business practices that we were not comfortable with had been weeded out of the marketplace by competitive pressures and others. Again, the anatomic pathology is an area in which I think scale is starting to become a greater advantage than it has been in the past. The key question there, Gary, is just valuation. We're not going to overpay for these assets, and so we got to make sure that if we're looking at anatomic pathology assets, that we're looking at the right assets and that the price range is right.
In terms of international, as I've said a number of times in the last couple of months, I think the international market is probably more attractive to us than it has been historically simply because there are growth opportunities there, and it helps us to diversify our revenue base away from kind of our traditional revenue base and specifically helps us to reduce the percentage of revenue that comes from the government. I will be clear that we are not contemplating some big international transaction. I think when we talk about being interested in international opportunity, the question is, can we do it in a "capital light" way? Can we do it with partners? Can we do it without big investments? Can we focus on markets where there's high population density, good transportation, good understanding of the value of diagnostics?
The environment is not a politically or economically corrupt environment. There are some specific things we're looking for around the potential for international expansion, but it's very much something that we're thinking through.
Gary Taylor (Managing Director and Equity Research Analyst)
That's very helpful. If I could just do one more, I thought the quarter looked really unique, actually, from an expense control perspective. If we look at COGS per requisition flat year-over-year, I think that's the first time in five years that we've seen that in the model. I know you've touched on potential new cost initiatives for 2014, but could you just talk about just kind of what your base assumptions are right now for cost of goods inflation in 2014 and G&A inflation in 2014?
David King (CEO)
The biggest driver of all of our cost inflation is people. We just assume, and I'm not going to give you a specific number, but we assume kind of low single-digit wage inflation as part of our model. We also assume that if we get improved test mix, we will see an increase in supply cost trend. That's not because unit price is going up. It's because utilization and mix, if they move positively for us, obviously there's a supply cost associated with every incremental specimen that we process. The other kind of pressure point from an expense perspective is bad debt, which we've mentioned is we're likely to see a slight increase in 2014, and you can see even in 4Q of 2013 that SG&A was flat, but that was because of the increase to bad debt.
If you actually, or the increase to the reserve, if you actually took that $5 million out, SG&A as a percentage of revenue would have been down year-over-year. We have the whole uncertainty around the implementation of ICD-10 as a potential first to drive some cost, but it also drives some uncertainty in the model. We are very much focused on improvement of gross margin. We are very much focused on improvement of SG&A as a percentage of revenue. I would say if you think about where we look at the cost opportunities being, those are the highest priorities.
Gary Taylor (Managing Director and Equity Research Analyst)
Okay. Thanks so much.
Operator (participant)
Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.
Isaac Ro (Senior Analyst on Life Science and Diagnostics Tools)
Good morning, guys. Thanks for taking the question. I wanted to ask sort of a big-picture question. The pharmacies are clearly placing a greater focus on their role as wellness centers here in the U.S. and not just retail outlets and supply chain partners. I am wondering if you look at that trend and see that as an opportunity for you to expand your footprint through partnership or perhaps as a competitive threat. Just wondering if you have a thought on the pharmacies.
David King (CEO)
Hi, Isaac. It's Dave. I think the pharmacies and generally the in-store clinic models are very interesting in kind of the sense of a Petri dish of how we can look at healthcare evolving. You probably remember when the in-store clinics started, managed care discouraged their use, did not pay for them, and there was an evolution, and they were as a result, they had a very tough time getting off the ground. You can probably remember multiple grocery store and pharmacy chains that started these clinics and then closed them because they were not generating any profit from them. As managed care's view evolved to, this is a way to keep people out of the emergency room.
It's a way to keep people from additional doctor visits for things like earaches and infections and even things like flu shots, kind of simple levels of care, you saw the clinics start to gain some traction in the marketplace. I guess I think it remains to be seen whether they're going to be able to expand beyond sort of routine services like sore throats, ear infections, flu shots, other types of vaccinations. I will say historically, the amount of laboratory work done in these clinics has been very small, and I think it'll be interesting to watch the trend and see whether it is an opportunity, whether it is a threat, or whether it continues to have very little impact on the clinical laboratory business in general.
Isaac Ro (Senior Analyst on Life Science and Diagnostics Tools)
Gotcha. That's helpful. Just follow-up more specifically on the BRCA opportunity. Can you maybe give us a qualitative sense of payer willingness to adopt some of the new offerings either from yourselves or others? I'm just trying to get a sense of whether you think the market will expand as a result of some of these new entrants and better awareness of BRCA testing in general, or if it's really more of a dynamic where you think they'll be chipping away a share from the incumbents. Thanks.
David King (CEO)
I think the payers are absolutely willing to pay. I will say many of them have moved to a pre-authorization model. Again, I think that's with a test of that high value and that specific application, I can understand that. I do think our genetic counseling capability puts us in a unique position to be able to help payers with that pre-authorization model. I do not see resistance to paying for BRCA assuming that the test ordering guidelines are met. In terms of the market and the potential market expansion, I mean, clearly pricing is being adjusted even as we speak because of the lack of patent protection. If you look at just the reported quarter that Myriad just had, I mean, they had very sizable growth in tests and revenue.
That suggests to me that as price comes down, awareness broadens, other competitors enter the marketplace, there is an expanding market and there is great opportunity. Nobody's really even considered the international market opportunity as we think about the BRCA market broadly. I think there's good opportunity for us there as there are for others and that we'll see good reimbursement as well.
Isaac Ro (Senior Analyst on Life Science and Diagnostics Tools)
Got it. Thanks so much.
Operator (participant)
Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.
Darren Lehrich (Managing Director and Equity Research Analyst)
Thanks. Good morning, everybody. I just wanted to go back to the comprehensive enterprise-wide review that you referenced, Dave, a couple of times. Maybe can you just help us understand when you began that review, when you expect to be complete in terms of having a plan or not to share with us? Specifically, if you can just talk about the kind of folks you've engaged to help with that review.
David King (CEO)
Sure. We began the review basically back in October internally. We've since evaluated some external support as well. I really don't have much more to say at this point other than once we have better definition around our plan, we will tell you, and that'll include timing and what we see as the cost opportunities and the timeframe for implementation. This is a I don't want people to think that we haven't been looking at costs historically because we have. Again, given the environment and given the guidance, we felt that it was very important to really take an in-depth, detailed look at all of our expenses and where there might be opportunity for us to resize them.
Darren Lehrich (Managing Director and Equity Research Analyst)
Okay. Just to be clear, is this something you'd expect in the first half to have some better definition around? Is that the right timeframe to be thinking about?
David King (CEO)
Yeah. I think that's the right timeframe.
Darren Lehrich (Managing Director and Equity Research Analyst)
Okay. If I could just ask you, Dave, just about the fee schedule and the 2015 and beyond rebasing process, I guess I'd be curious just to get from your perspective, what are the key priorities here? I think the original proposal was that this would be a five-year process, but it's not clear that that's the case in the final rule. Is there any sort of indication that they may tackle a certain number of tests per year? Can you just give us a sense for what maybe your priorities, ACLA's priorities are, and how you think this might be framed by CMS?
David King (CEO)
Sure. At the outset, Darren, we all recognize that the entire healthcare system, including CMS, are focused on reducing the cost of care. We've been focused on that for a long time. It is no surprise that in thinking about potential ways to reduce the cost of care, everybody is thinking about what providers are paid. I will say that, and we could spend a lot of time on this, which we're not going to, but I will say that if you look at what the lab industry is getting paid in real dollars versus what they have historically gotten paid in real dollars, I think a test that we were getting paid $10 in the 1990s for, we're now getting paid about $6 for. We took a huge reimbursement cut this year, $55 million, which represented almost 1% of our company revenue.
Others took the same cut. I put that in to give some context to these discussions about the clinical lab fee schedules. What we are looking for at ACLA, what we are looking for as an industry, and what I am looking for is a fair process. I will say it again, a fair process. The process of reimbursement adjustment that has occurred over the past several years has not been a fair process. It has not been a transparent process. It has been an arbitrary process. We are perfectly willing to engage in a fair process with CMS.
In fact, we as an industry have been suggesting for years a negotiated rulemaking around the fee schedule with transparency and fairness because one could argue that there are some tests on the fee schedule that the technology has improved dramatically and the ability to run those tests has improved dramatically for some labs, not all labs, and that there would be a reason to adjust the price. On the other hand, there are many tests on the fee schedule that did not exist at the time the fee schedule was initially created, and those tests are being grossly underpaid by comparison with what we receive from other payers. We would like to have a fair process in which there is transparency and engagement by the government in reviewing this fee schedule.
Now, and I just go back to this TRICARE example again, and I do not mean to dwell on it, but I go back to this TRICARE example of a test that has been paid for for years is suddenly not paid for, and there is a scramble on the part of a government agency to explain and come up with a rationalization for why they have decided to stop paying for standard of care testing that they have been paying for for years on end. There is no transparency. It is a completely opaque decision-making process. There is no rationality to it. That is not good for anybody. It is not good for the government. It is not good for the industry. It is not good for the patients, which at the end of the day, that is who we are here for, the patients.
We have been working with congress on a proposal to make this a fair process to limit the number of codes that could be reduced in a given year to make sure that there are transparent inputs and outputs from the process, to limit the percentage reductions to a particular CPT code that could be done in a given year. This is very much a work in process. I think ACLA has done a terrific job, and the industry has done a terrific job coming together. The proposal is supported by AdvaMedDX, the 21st Century Coalition, and the Clinical Lab Coalition. The industry has done a terrific job in coming together to put a constructive and responsible proposal in front of congress, and I hope that it will be met with a constructive and responsible response.
Brad Hayes (EVP and CFO)
Got it. Thanks very much, Dave.
Operator (participant)
Your next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed.
Ricky Goldwasser (Managing Director)
Morning. Just a few follow-up questions here. First of all, on the top-down growth in the quarter, I think that you said that 2% was organic and 5% was reported. I mean, that implies that you've had some pretty significant token acquisitions. Can you give us some color on how many token acquisitions did you do throughout the year? We might have missed something. Again, to confirm that the guidance really does not include any in the future.
Brad Hayes (EVP and CFO)
Hey, Ricky, it's Brad. I'll start. One thing that one of the things to get from five to two is year-over-year, from a volume growth perspective, weather was a tailwind. We had Sandy last year. We did have weather this year, which we called out as part of our EPS because we did not expect that in our guidance. year-over-year, that is an easier comp. The drugs of abuse testing business, we had an acquisition in that we're excluding there from our reported to get to our organic. As Dave mentioned earlier, the drugs of abuse testing business is a strong contributor to that 2% organic.
Ricky Goldwasser (Managing Director)
When you think about what's kind of like true from acquisitions in the quarter, can you quantify that for us? Because you have easy comps, right? You have organic growth, and then you have the acquisitions.
David King (CEO)
Hey, Ricky, it's Dave. Again, I just think going into every bit and piece of every number isn't particularly constructive. As Brad said, the acquisitions, particularly in the toxicology area, helped us. The weather helped us. I go back to the numbers. We had 5% reported volume growth, and 2% of it was organic, and we're quite pleased with that.
Ricky Goldwasser (Managing Director)
Okay. My next question would be around managed care. We're hearing so much about the talk about moving from fee-for-service to risk-sharing and outcome-based reimbursement. How does lab reimbursement fit into that?
David King (CEO)
I think we need to create a distinction between what we're hearing about and what's happening in the marketplace. Everybody is talking about bundled payments and value-based reimbursement and all of these things. However, in the real world, our capitated revenue is, I believe, about 4% of total revenue, 3% of total revenue. It has not increased. It's actually been decreasing. As I talk to my colleagues who run health systems, they're talking about 5% or less. In the largest cases, maybe 10% of their business are on some kind of a bundled payment demonstration plan. That does not include, obviously, the DRG and the outpatient prospective payments and the daily rates that they're paid. It's a very small component of the business today.
While there is great discussion about it growing over time, I think there are a lot of obstacles to the whole bundled payment methodology growing over time, including how do you deal with catastrophic events, how do physicians get fairly reimbursed, or health systems get fairly reimbursed in a risk-sharing model where an unexpected risk occurs. There is a lot to be worked out. I think the notion that there is going to be this very rapid migration to some sort of bundled payment or capitated system is really misplaced. Having said that, in any kind of a fee-for-value payment system, the payments are going to be based on the value that you bring. The value that the lab brings is 3% of healthcare spend driving 70%-80% of decisions. The value that the laboratory brings is a highly cost-effective way to diagnose and treat disease.
The value that Labcorp brings is high quality, efficiency, low cost, and all of the other innovations that we have built around laboratory services, like the CKD program, like decision support, like the LBS. I think fee-for-value is great for Labcorp because we bring an enormous amount of value, particularly by comparison with other providers of lab services, including much higher-priced providers. We are excited about that opportunity. As I said earlier, in the long term, healthcare reform has to be a positive for us if it works at all.
Ricky Goldwasser (Managing Director)
Thank you.
Operator (participant)
Your next question comes from the line of Lisa Gill with JPMorgan. Please proceed.
Lisa Gill (Managing Director)
Thanks very much. Dave, just to follow up on one of your earlier comments around LBS and the new relationship with United in Florida, can you maybe just talk in terms of growth drivers around Beacon LBS? What are the opportunities, number one? Number two, just remind us how you, what the revenue model is and the profit model around that piece of business.
David King (CEO)
We have not talked about the revenue or the profit model, and we will not in detail except to say that the revenue model for Beacon LBS is based on a fee-for-the-service provided and then a shared savings opportunity in terms of helping United to improve its laboratory spending trend. In terms of how it works and what the opportunity is, Beacon LBS provides front-end decision support tools for key tests identified by payers that they are concerned about, typically growth and utilization trend or growth and expense trend. All of the front-end utilization tools are designed by an independent group of physicians and medical personnel, and they are implemented in accordance with the payers' desires. The opportunity is twofold.
One, it's to bring into the Beacon LBS network RVUs that are now going outside the network to higher-cost providers and often to providers that don't have the quality standards that the payers would like. Second of all, it's to help manage the utilization of higher-value tests and make sure that, just like with BRCA pre-authorization, the standards for those tests are being met.
Lisa Gill (Managing Director)
Dave, when we think about that and you think about the list of drugs that the, or I'm sorry, of lab tests, should we be thinking about this as almost like a lab formulary as being part of this, outside entity making the decisions around what is the best lab test and where it should be done? Will this only be adopted via Beacon LBS clients, or do you think that this is something that's going to be more widespread adopted across the lab industry over time?
David King (CEO)
I don't think you should think of it as a formulary because a formulary is really a structure to say you have to use, as I understand a formulary, it's a structure that sort of says you have to use this drug and you can't use that drug. You should think of it as a decision support tool that says, "If you want to use this test, these are the criteria for ordering it." And these criteria are not set by Labcorp or anybody else. They're set by this independent group, and they're implemented by Beacon LBS. I think of it more that way than a pure formulary. The opportunity over time depends, first of all, on us getting Beacon LBS to be successful in the test market.
Second of all, on showing that it can do the things that we're committed to, which are making sure that we're getting the highest quality, lowest cost, and best practical utilization of lab testing, which I feel good that we'll be able to do.
Lisa Gill (Managing Director)
Based on those comments, you wouldn't expect a material change in overall utilization of lab tests, just potentially where they're done and the quality of the test that's done. Is that the right way to think about it?
David King (CEO)
Yeah. I mean, obviously, it's too early to tell because this has only been a product that's been beta tested. I think it's hard to say, "Yeah, we expect a material change in utilization." I think the idea is to make sure that utilization meets the guidelines for ordering particular tests. I think this has become pretty standard in almost every area of healthcare except laboratory services, which is before you can utilize, before you can do a procedure, you got to make sure that it meets the practice guidelines for performing that procedure.
Lisa Gill (Managing Director)
Okay. Great. Thank you.
David King (CEO)
We're at 10 past the hour here, and we're going to wrap it up in the next five minutes. I'd like to encourage you, if your question has already been answered, please don't ask it again, and let's try to limit ourselves to things that will be new.
Operator (participant)
As a reminder, ladies and gentlemen, if your question has been answered and you would like to be removed from the queue, please press star two. Your next question comes from the line of A.J. Rice with UBS. Please proceed.
A.J. Rice (Managing Director)
Hi, everybody. I just thought I might ask you about large payer contract renewals. We haven't talked about that in a while. How does 2014 shape up relative to the last year or two?
David King (CEO)
A.J., it's Dave. We don't have any significant renewals coming up this year, so nothing to report on that front.
A.J. Rice (Managing Director)
Okay. If I could slip in just real quick on the independents, you commented on the competition in the hospital outreach area. Anything to say about independents and regionals? I know Solstice just traded hands. Do you see more acquisition opportunities? Is the competitive environment easing in any way there?
David King (CEO)
I think there's going to be acquisition opportunities. The key questions are going to be, does it complement our geographic footprint? Does it complement our test venue? Is the valuation reasonable? We'll continue to look at those and try to select the ones that fit our model best.
A.J. Rice (Managing Director)
Okay. All right. Thanks a lot.
Operator (participant)
Your next question comes from the line of Brian Brockmeier with Maxim Group. Please proceed.
Bryan Brokmeier (Partner, VP, and Senior Equity Analyst)
Hi. Dave, you mentioned in your prepared remarks that you introduced 152 new tests in 2013, which is up from 123 in 2012 and consistent with a longer-term trend of adding an increasing number of new tests each year. Do you expect that the number of new tests introduced in 2014 to again increase? What impact does the current molecular pathology payment issues have on types of tests you introduce?
David King (CEO)
I would expect the number of test introductions to be about the same. I mean, it typically is in that 125-150 new tests. Look, as I think you can tell, I am extremely frustrated about the molecular pathology payment issues, but I will go back to the thing that I said before, which is we're here for the patients. We're here for the physicians. Our job is to get clinically relevant, valuable tests into the market. We're not going to stop doing it because we get resistance from payers. We're going to have to figure out how to make sure that we get paid for the innovation that we're doing. We're not going to stop in novating because we're getting resistance to reimbursement.
Bryan Brokmeier (Partner, VP, and Senior Equity Analyst)
To follow up, I think it was on Gary's questions on international. Canada, I believe, is about 6% of your total revenues. If you also include your U.K. forensics business and clinical trials and any other international revenues you have, what percent of revenues is international today? Where would you like to see those go in three years?
David King (CEO)
If I had to give you an off the, so first of all, we already do business in 40 countries. We are an international company, although we do not have sizable international presence anywhere other than Canada. If I had to give you a round number for our international business, I would say it is probably in the range of 8%-10% of revenue. Where would I like to see it be in five years? I would like to see it be 20% of revenue. I am not committing that it is going to be 20% of revenue. I am saying that is where we would like to see it be through taking advantage of the right opportunities and growing where the growing markets are.
Bryan Brokmeier (Partner, VP, and Senior Equity Analyst)
Okay. Thanks a lot.
Operator (participant)
Your next question comes from the line of Michael Cherney with ISI Group. Please proceed.
Michael Cherny (Managing Director and Research Analyst)
Hey, guys. Thanks for all the color this morning. I will keep this incredibly quick. Any thoughts on tax rates for the year?
David King (CEO)
No.
Michael Cherny (Managing Director and Research Analyst)
Perfect. Thanks.
Operator (participant)
Your next question comes from the line of Whit Mayo. Robert W. Baird. Please proceed.
Whit Mayo (Managing Director)
Hey, thanks. Just two quick ones. Would you be willing to share the implementation cost of ICD-10? You called that out as not being in your guidance, but is that really a cost risk that you see, or is it more an operational disruption risk? My second question is just on the investment income. The $7.2 million in the quarter looks just a little high. Anything unusual there?
David King (CEO)
With Dave, I'm going to let Brad do the investment income. On the ICD-10, I think there's a cost of implementation, and that's in the $5 million-$10 million range. But I want you to recognize that that cost has been an ongoing cost. We have spent an enormous amount of money already on ICD-10, so it's just the incremental cost in 2014 is in the $5 million-$10 million range. The risk that we've identified of ICD-10 is just that there's disruption. There's payer disruption. There's cash flow disruption. As you probably know, there's only one week to my knowledge, there's only one week or two weeks of government payer testing for ICD-10 before implementation.
I think if we look at the healthcare reform implementation experience, that's enough to cause me a lot of concern about whether the government's going to be ready from their side to receive ICD-10. That's a high-level sense of the cost and the risk. On the investment income line, nothing specific jumps out as a driver there.
Whit Mayo (Managing Director)
Okay. Thanks a lot. Appreciate it.
Operator (participant)
Your next question comes from the line of Jose Horesco with JMP Securities. Please proceed.
Jose Haresco (Managing Director and Senior Analyst)
Hi, guys. Good morning. Thanks for taking the question. Just as a follow-up on the BRCA questions, you said that the payers are requiring pre-authorization. How are you thinking, or what are you assuming about pricing over the next year or two, given from private payers, given that CMS has reduced, or at least looks like it's going to permanently reduce pricing for BRCA1?
David King (CEO)
It's too early to tell what pricing is going to be. So rather than make assumptions about it, we're going to perform some tests, get them authorized, see where pricing comes in, and then we'll be able to give you a better sense.
Jose Haresco (Managing Director and Senior Analyst)
Okay. To follow up, as you think about your entry into the market, do you have a sense, or do you have a sense from your early talks with physicians or your customers, what type of specialist groups do you think you're going to get the biggest traction with?
David King (CEO)
I think there's women's health. I think there's a relatively significant amount of this type of testing that's ordered from primary care. Those would probably be my two biggest hypotheses for where the demand's going to come from.
Jose Haresco (Managing Director and Senior Analyst)
Okay. Great. Thank you very much.
Operator (participant)
Your final question comes from the line of Will Bonello with Craig-Hallum. Please proceed.
Will Bonello (Senior Equity Research Analyst)
Hey, guys. Thanks a lot for letting me have a follow-up. Maybe this is a sort of sum everything up. Obviously, from everything you've talked about, Dave, you're going to be facing price pressure from CMS at the least over the next five years, probably, whether it's in a reasonable or unreasonable fashion. When you take that in mind or keep that in mind, do you think beyond 2014 that you can achieve operating income growth? If so, what's kind of an acceptable level of growth for you, even knowing that there's cuts, and what's key to get there?
David King (CEO)
I think we can achieve operating income growth. I'll give you four things that I think are critically important to doing that. We really are going to finish. One is share gain. Whether it's through acquisitions or whether it's through gaining share from hospitals or whether it's through better selling, we need to continue to gain share because it takes advantage of the scale in the business. Two is our test mix. The toxicology business drives great volume growth, but from a price and revenue per requisition perspective, it does not give us as many dollars of profit per test. We need to continue to work, as we've talked about throughout the call, on innovation, on new tests, on things that will give us the opportunity to improve mix, and that will help us to grow operating income.
Historically, we have benefited from the price driven by mix. If you look at this year, as we said, mix was a drag on price by 2% in the fourth quarter and by 1% for the full year. Normally, that goes the other way, and we got to change that dynamic. Three, diversification of our revenue base. We've talked about international on this call. We think there are many other opportunities around our data, around our genetic counseling to monetize things that currently we are not monetizing and to use those to gain greater share and greater attraction to customers. LBS is another area in which we've talked about on this call as a way to diversify our revenue base. That's the third point of how we're going to get back to operating income growth. The fourth point is the expense side.
We absolutely are going to have to take some actions to reduce expenses to right-size the business, given what we're seeing in terms of the demand and the environment. The answer to your question, Will, is absolutely we can grow operating income. We have a clear plan for how we're going to do that, and we got to execute it. I look forward to updating you on future calls on how we're doing that.
Will Bonello (Senior Equity Research Analyst)
Thanks very much.
Operator (participant)
At this time, we have no further questions. I will now turn the call over to Mr. David King for closing remarks.
David King (CEO)
Thank you very much for listening, and we appreciate your time this morning and hope you have a good day.
Operator (participant)
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a good day.