QUEST DIAGNOSTICS INCORPORATED Our Company
Diagnostic Information Services
Quest Diagnostics empowers people to take action to improve health outcomes. We use our extensive database of clinical lab results to derive diagnostic insights that reveal new avenues to identify and treat disease, inspire healthy behaviors and improve healthcare management. Our diagnostic information services business ("DIS") provides information and insights based on the industry-leading menu of routine, non-routine and advanced clinical testing and anatomic pathology testing, and other diagnostic information services. We provide services to a broad range of customers, including patients, clinicians, hospitals, independent delivery networks ("IDNs"), health plans, employers and accountable care organizations ("ACOs"). We offer the broadest access inthe United States to diagnostic information services through our nationwide network of laboratories, patient service centers and phlebotomists in physician offices and our connectivity resources, including call centers and mobile paramedics, nurses and other health and wellness professionals. We are the world's leading provider of diagnostic information services. We provide interpretive consultation with one of the largest medical and scientific staffs in the industry. Our DIS business makes up over 95% of our consolidated net revenues.
We assess our revenue performance for the DIS business based upon, among other factors, volume (measured by test requisitions) and revenue per requisition.
Each requisition accompanies patient specimens, indicating the test(s) to be performed and the party to be billed for the test(s). Management utilizes requisition data to assist with assessing the growth of the business. Therefore, we believe that the change in the number of requisitions from period to period is useful information for investors as it allows them to assess our growth. Revenue per requisition is impacted by various factors, including, among other items, the impact of fee schedule changes (i.e. unit price), test mix, payer mix, and the number of tests per requisition. Management utilizes revenue per requisition data in order to assist with assessing various factors impacting the performance of the business, including pricing and trends impacting mix. Therefore, we believe that the change in this metric from period to period is useful information for investors as it allows them to assess such factors, which are relevant to assessing the revenue performance of the business.
Diagnostic Solutions
In our Diagnostic Solutions ("DS") businesses, which represents the balance of
our consolidated net revenues, we are the leading provider of risk assessment
services for the life insurance industry and we offer healthcare organizations
and clinicians robust information technology solutions.
Third Quarter Highlights
•Our total net revenues of$2.79 billion were up 42.5% from the prior year period. •In DIS: •Revenues of$2.71 billion increased by 44.3% compared to the prior year period, driven by demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing). •Volume, measured by the number of requisitions, increased by 19.7% compared to the prior year period, with organic growth (which excludes the impact of recent acquisitions) and acquisitions contributing approximately 16.6% and 3.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volumes in the base business. Testing volumes in the base business were negatively impacted by the COVID-19 pandemic and declined by 5% compared to the prior year period. •Revenue per requisition increased by 20.9% compared to the prior year period driven, in large part, by COVID-19 molecular testing. •DS revenues of$77 million decreased by 1.9% compared to the prior year period. •Income from continuing operations attributable toQuest Diagnostics' stockholders was$568 million , or$4.14 per diluted share, in 2020, compared to$215 million , or$1.56 per diluted share, in the prior year period. •For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$1,464 million , compared to$895 million in the prior year period. 30
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Impact of COVID - 19
As a novel strain of coronavirus ("COVID-19") continues to spread and severely
impact the economy of the United States and other countries around the world, we
are committed to being a part of the coordinated public and private sector
response to this unprecedented challenge. We have made substantial investments
to expand the amount of COVID-19 testing available to the country and are
currently capable of performing more than 200,000 COVID-19 molecular diagnostic
tests per day to aid in the diagnosis of COVID-19 and approximately 200,000
COVID-19 antibody tests per day to aid in the detection of immune response. We
have been effectively managing challenges in the global supply chain; and, at
this point, we have sufficient supplies to conduct our business.
We have put preparedness plans in place at our facilities to maintain
continuity of operations, while also taking steps to keep colleagues and
customers healthy and safe. In line with recommendations to reduce large
gatherings and increase social distancing, many of our office-based colleagues
are working in a remote environment. We are evaluating the best way to bring
them back into the office.
During January and February 2020 , we experienced growth in DIS revenues and
volumes compared to the prior year period. However, in March and April 2020 , we
experienced a material decline in testing volumes due to the COVID-19 pandemic.
During the last two weeks of March, volumes declined in excess of 40% compared
to the prior year period, inclusive of COVID-19 testing, which continued in
April with volume declines in the range of 50 to 60% compared to the prior year
period as government policies were implemented to reduce the transmission of
COVID-19. During May and June 2020 , we began to experience a recovery in base
testing volumes (which excludes COVID-19 molecular and antibody testing), which
continued in the third quarter of 2020. Additionally, beginning during the
second quarter, we experienced growing demand for COVID-19 testing services and
have expanded our capacity in order to satisfy such demand. Volumes in our base
business for the second and third quarters of 2020 decreased approximately 34%
and 5%, respectively, compared to the prior year periods.
The decrease in base testing volumes was driven by federal, state and local
governmental policies and initiatives designed to reduce the transmission of
COVID-19 which have resulted in, among other things, a significant reduction in
physician office visits, the cancellation of elective medical procedures,
customers closing or severely curtailing their operations (voluntarily or in
response to government orders), and the adoption of work-from-home policies, all
of which have had, and we believe will continue to have, an impact on our
operating results, financial position and cash flows, including continued
declines in base testing volumes. It is also possible that we will experience an
impact on cash collections as a result of the impact of the COVID-19 pandemic.
During the second quarter of 2020, the decrease in base testing volumes was
partially offset by COVID-19 molecular and antibody testing, including an
increase in revenue per requisition driven in large part by COVID-19 molecular
testing. During the third quarter of 2020, the decrease in base testing volumes
was more than offset by the impact of the COVID-19 testing.
In April 2020 the Centers for Medicare and Medicaid Services ("CMS") announced
that it would increase the reimbursement for certain COVID-19 molecular tests
making use of high-throughput technologies developed by the private sector that
allow for increased testing capacity, faster results, and more effective means
of combating the spread of the virus to $100 per test, effective April 14, 2020 .
In October 2020 , CMS announced that, beginning January 1, 2021 , Medicare will
change the base reimbursement rate for COVID-19 diagnostic tests run on
high-throughput technologies to $75 per test with an additional payment of $25
per test if certain additional requirements are met. In conjunction with our
trade association, we are currently reviewing how this reimbursement policy will
impact laboratories and the patients we serve.
In order to mitigate the impact that the COVID-19 pandemic had on our
business, we implemented a series of temporary actions in April 2020 to manage
our workforce costs and preserve cash including temporary salary reductions;
suspension of certain benefits; reduced hours for employees whose work has
significantly declined; and approved furloughs for employees with diminished
work requirements who expressed an interest. As our testing volumes started to
recover, we recalled the vast majority of employees from furlough and reinstated
full working hours for almost all employees who were asked to work reduced
hours. By the end of the third quarter of 2020, salaries were restored for all
exempt employees that had temporary salary reductions.
We believe the COVID-19 pandemic's impact on our consolidated results of
operations, financial position and cash flows will be primarily driven by: the
severity and duration of the COVID-19 pandemic; the COVID-19 pandemic's impact
on the U.S. healthcare system and the U.S. economy; and the timing, scope and
effectiveness of federal, state and local
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governmental responses to the COVID-19 pandemic. We may also be impacted by
changes in the severity of the COVID-19 pandemic at different times in the
various cities and regions where we operate and offer services. Even after the
COVID-19 pandemic has moderated and the business and social distancing
restrictions have eased, we may continue to experience similar effects to our
businesses, consolidated results of operations, financial position and cash
flows resulting from a recessionary economic environment that may persist. In
the longer term, given the many challenges that hospitals will face, we may have
more opportunities to partner with hospitals to help achieve their laboratory
strategies, and the COVID-19 pandemic may also be a further catalyst for
consolidation in the laboratory testing industry.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
InMarch 2020 , in response to the COVID-19 pandemic, the CARES Act was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees. Beginning in the second quarter of 2020, we started taking advantage of the temporary suspension of payment requirements for the employer portion ofSocial Security taxes.
The CARES Act also includes a number of benefits that are applicable to us and other healthcare providers including, but not limited to:
•providing coverage for COVID-19 testing at no out-of-pocket cost to nearly all
patients;
•providing clinical laboratories a one-year reprieve from the reporting
requirements under the Protecting Access to Medicare Act ("PAMA") as well as a
one-year delay of reimbursement rate reductions for clinical laboratory services
provided under Medicare that were scheduled to take place in 2021. Further
revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2021
will be based on future surveys of market rates. Reimbursement reduction from
2022-2024 is capped by PAMA at 15% annually;
•appropriating $100 billion to health care providers for related expenses or
lost revenues that are attributable to the COVID-19 pandemic. In April 2020 and
August 2020 , we received approximately $65 million and $73 million ,
respectively, of funds that were distributed to healthcare providers for related
expenses or lost revenues that are attributable to the COVID-19 pandemic under
the CARES Act. In October 2020 , we announced that we plan to return the entire
$138 million of funds received. During the three months ended June 30, 2020 , we
recognized $65 million in other operating expense (income), net related to the
first tranche of funds. During the three months ended September 30, 2020 , we
reversed the $65 million of funds that had previously been recognized in other
operating expense (income), net. As of September 30, 2020 , no amounts are
recorded in our year-to-date consolidated statement of operations and the entire
$138 million of funds that we intend to return are recorded in accounts payable
and accrued expenses on our consolidated balance sheet; and
•suspending Medicare sequestration from May 2020 to December 2020 . The
suspension of the Medicare sequestration has resulted in a small benefit to us
in the form of higher reimbursement rates for diagnostic testing services
performed on behalf of Medicare beneficiaries.
Retirement of Debt
DuringJanuary 2020 , we redeemed in full the outstanding indebtedness under our senior notes dueJanuary 2020 and senior notes dueMarch 2020 using proceeds from the issuance, inDecember 2019 , of the 2.95% senior notes dueJune 2030 , along with cash on hand. For the nine months endedSeptember 30, 2020 , we recorded a loss on retirement of debt, principally comprised of premiums paid, of$1 million in other income, net.
Senior Notes Offering
DuringMay 2020 , we completed a senior notes offering, consisting of$550 million aggregate principal amount of 2.80% senior notes dueJune 2031 (the "2031 Senior Notes"), which were issued at an original issue discount of$1 million . InOctober 2020 , we issued a redemption notice to the holders of our$550 million aggregate principal amount of 4.70% senior notes dueApril 2021 , to redeem such notes inNovember 2020 . We intend to use the net proceeds from the 2031 Senior Notes, along with cash on hand, to satisfy the redemption.
For further details regarding our debt, see Notes 8 and 18 to the interim unaudited consolidated financial statements.
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Acquisition of
OnJanuary 21, 2020 , we completed the acquisition ofBlueprint Genetics Oy ("Blueprint Genetics"), in an all cash transaction for$108 million , net of$3 million cash acquired. Blueprint Genetics is a leading specialty genetic testing company with deep expertise in gene variant interpretation based on next generation sequencing and proprietary bioinformatics. Through the acquisition, we acquired all of Blueprint Genetics' operations. The acquired business is included in our DIS business.
Acquisition of the Outreach Laboratory Services Business of
OnApril 6, 2020 , we completed the acquisition of select assets which constitute substantially all of the operations ofMemorial Hermann Diagnostic Laboratories , the outreach laboratory division ofMemorial Hermann Health System ("Memorial Hermann") in an all cash transaction for$120 million . Memorial Hermann is a not-for-profit health system inSoutheast Texas . The acquired business is included in our DIS business.
Acquisition of the Remaining 56% Interest in
OnAugust 1, 2020 , we completed the acquisition of the remaining 56% interest inMid America Clinical Laboratories, LLC ("MACL") from our joint venture partners in an all cash transaction for$93 million , net of$18 million cash acquired. MACL is the largest independent clinical laboratory provider inIndiana . Prior to the acquisition, we accounted for our 44% interest in MACL as an equity method investment which was remeasured to its fair value of$87 million on the acquisition date, resulting in a gain of$70 million that was recognized in other income, net in the consolidated statements of operations. As a result of the acquisition, MACL became our wholly owned subsidiary. The acquired business is included in our DIS business.
For further details regarding our acquisitions, see Note 5 to the interim unaudited consolidated financial statements and Note 6 to the audited consolidated financial statements in our 2019 Annual Report on Form 10-K.
Invigorate Program
We are engaged in a multi-year program called Invigorate, which is designed to reduce our cost structure and improve our performance. We currently aim annually to save approximately 3% of our costs. We are assessing whether the COVID-19 pandemic will impact our ability to achieve that objective in 2020. Invigorate has consisted of several flagship programs, with structured plans in each, to drive savings and improve performance across the customer value chain. These flagship programs include: organization excellence; information technology excellence; procurement excellence; field and customer service excellence; lab excellence; and revenue services excellence. In addition to these programs, we identified key themes to change how we operate including reducing denials and patient concessions; further digitizing our business; standardization and automation; and optimization initiatives in our lab network and patient service center network. We believe that our efforts to standardize our information technology systems, equipment and data also foster our efforts to strengthen our foundation for growth and support the value creation initiatives of our clinical franchises by enhancing our operational flexibility, empowering and enhancing the customer experience, facilitating the delivery of actionable insights and bolstering our large data platform.
For the nine months ended
For further details of the Invigorate program and associated costs, see Note 4 to the interim unaudited consolidated financial statements.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies from those disclosed in our 2019 Annual Report on Form 10-K except for the adoption of new accounting standards as described in Note 2 to the interim unaudited consolidated financial statements.
Revenues and accounts receivable associated with DIS
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The process for estimating revenues and the ultimate collection of receivables associated with our DIS business involves significant assumptions and judgments. We recognize as revenue the amount of consideration to which we expect to be entitled primarily upon completion of the testing process, when results are reported, or when services have been rendered. We estimate the amount of consideration we expect to be entitled to receive from customer groups, using the portfolio approach, in exchange for providing services. These estimates include the impact of contractual allowances, including payer denials, and price concessions. The portfolios determined using the portfolio approach consist of the following customers: •Healthcare Insurers •Government Payers (Medicare and Medicaid programs) •Client Payers •Patients We have a standardized approach to estimate the amount of consideration that we expect to be entitled to; this standardized approach considers, among other things, the impact of contractual allowances, including payer denials, and price concessions. Historical collection and payer reimbursement experience (along with the period the receivables have been outstanding), as well as other factors including current market conditions, are integral parts of the estimation process related to revenues and receivables. Adjustments to our estimated contractual allowances and implicit price concessions are recorded in the current period as changes in estimates. Further adjustments, based on actual receipts, may be recorded upon settlement. Although we believe that our estimates for contractual allowances and patient price concessions as well as our allowance for credit losses are appropriate, it is possible that we will experience an impact on cash collections as a result of the impact of the COVID-19 pandemic. For further details on revenue and receivables, see Note 15 to the interim unaudited consolidated financial statements.
Accounting for and recoverability of goodwill
We do not amortize goodwill, but evaluate the recoverability and measure the potential impairment of our goodwill annually, or more frequently, in the case of other events that indicate a potential impairment.Goodwill is evaluated for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value; the qualitative analysis may be performed prior to, or as an alternative to, performing a quantitative goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, we assess relevant events and circumstances, such as: (a) macroeconomic conditions; (b) industry and market considerations; (c) cost factors; (d) overall financial performance; (e) other relevant entity-specific events; (f) events affecting a reporting unit; and (g) a sustained decrease in share price. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we are required to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required. On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If such events or changes in circumstances were deemed to have occurred, we would perform an impairment test of goodwill and record any noted impairment loss. In conjunction with the preparation of ourSeptember 30, 2020 financial statements, we performed such review and concluded that no impairment test was necessary. However, should the impact of the COVID-19 pandemic be significantly worse than currently expected, it is possible that we could incur impairment charges in the future. Impact of New Accounting Standards
The adoption of new accounting standards is discussed in Note 2 to the interim unaudited consolidated financial statements.
The impact of recent accounting pronouncements not yet effective on our consolidated financial statements is discussed in Note 2 to the interim unaudited consolidated financial statements.
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Results of Operations
The following tables set forth certain results of operations data for the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 $ Change % Change 2020 2019 $ Change % Change
(dollars in millions, except per share amounts)
Net revenues:
DIS business $ 2,709 $ 1,877 $ 832 44.3 % $ 6,217 $ 5,561 $ 656 11.8 %
DS businesses 77 79 (2) (1.9) 218 239 (21) (8.6)
Total net revenues $ 2,786 $ 1,956 $ 830 42.5 % $ 6,435 $ 5,800 $ 635 11.0 %
Operating costs and
expenses and other
operating income:
Cost of services $ 1,580 $ 1,264 $ 316 25.0 % $ 4,071 $ 3,773 $ 298 7.9 %
Selling, general and
administrative 396 362 34 9.5 1,103 1,108 (5) (0.4)
Amortization of
intangible assets 27 23 4 12.8 77 72 5 5.9
Other operating expense
(income), net 65 (6) 71 NM 8 (21) 29 NM
Total operating costs
and expenses, net $ 2,068 $ 1,643 $ 425 25.9 % $ 5,259 $ 4,932 $ 327 6.6 %
Operating income $ 718 $ 313 $ 405 129.5 % $ 1,176 $ 868 $ 308 35.5 %
Other income (expense):
Interest expense, net $ (42) $ (44) $ 2 (3.3) % $ (124) $ (133) $ 9 (6.6) %
Other income, net 77 1 76 NM 74 13 61 NM
Total non-operating
income (expense), net $ 35 $ (43) $ 78 NM $ (50) $ (120) $ 70 NM
Income tax expense $ (177) $ (62) $ (115) 187.2 % $ (269) $ (175) $ (94) 54.0 %
Effective income tax
rate 23.7 % 22.9 % 23.9 % 23.4 %
Equity in earnings of
equity method investees,
net of taxes $ 15 $ 18 $ (3) (9.1) % $ 33 $ 48 $ (15) (29.9) %
Amounts attributable to
Quest Diagnostics'
common stockholders:
Income from continuing
operations $ 568 $ 215 $ 353 164.7 % $ 852 $ 585 $ 267 45.6 %
Income from discontinued
operations, net of taxes $ - $ - $ - NM $ - $ 20 $ (20) NM
Diluted earnings per
common share from
continuing operations
attributable to Quest
Diagnostics' common
stockholders $ 4.14 $ 1.56 $ 2.58 164.6 % $ 6.25 $ 4.27 $ 1.98 46.0 %
NM - Not Meaningful
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The following table sets forth certain results of operations data as a percentage of net revenues for the periods presented:
Nine Months Ended
Three Months Ended September 30, September 30,
2020 2019 2020 2019
Net revenues:
DIS business 97.2 % 96.0 % 96.6 % 95.9 %
DS businesses 2.8 4.0 3.4 4.1
Total net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating costs and expenses and other operating
income:
Cost of services 56.7 % 64.6 % 63.3 % 65.1 %
Selling, general and administrative 14.2 18.5 17.1 19.1
Amortization of intangible assets 1.0 1.2 1.2 1.2
Other operating expense (income), net 2.3 (0.3) 0.1 (0.4)
Total operating costs and expenses, net 74.2 % 84.0 % 81.7 % 85.0 %
Operating income 25.8 % 16.0 % 18.3 % 15.0 %
Operating Results
Results for the three months ended
•net pre-tax charges of$69 million (charges of$65 million in other operating expense (income), net,$3 million in cost of services and$1 million in equity in earnings of equity method investees, net of taxes), or$0.39 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, including the reversal of$65 million of income previously recognized during the second quarter of 2020 attributable to the receipt of funds from the government that were appropriated to healthcare providers under the CARES Act and, to a lesser extent, incremental costs incurred primarily to protect the health and safety of our employees and customers; •pre-tax amortization expense of$30 million ($27 million in amortization of intangible assets and$3 million in equity in earnings of equity method investees, net of taxes) or$0.16 per diluted share; and •pre-tax charges of$18 million ($11 million in cost of services and$7 million in selling, general and administrative expenses), or$0.10 per diluted share, representing costs primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a pre-tax gain of$70 million , or$0.46 per diluted share, recognized in other income, net based on the difference between the fair value and the carrying value of an equity interest; and •excess tax benefits associated with stock-based compensation arrangements of$3 million , or$0.02 per diluted share, recorded in income tax expense.
Results for the nine months ended
•pre-tax amortization expense of$86 million ($77 million in amortization of intangible assets and$9 million in equity in earnings of equity method investees, net of taxes) or$0.47 per diluted share; •pre-tax charges of$52 million ($38 million of charges in cost of services,$8 million of charges in selling, general and administrative expenses and$8 million of charges in other operating expense (income), net, partially offset by a$2 million gain in equity in earnings of equity method investees, net of taxes), or$0.29 per diluted share, representing the impact of certain items resulting from the COVID-19 pandemic, principally including expense associated with a one-time payment to eligible employees to help offset expenses they incurred as a result of COVID-19, certain asset impairment charges, and incremental costs incurred primarily to protect the health and safety of our employees and customers; and •pre-tax charges of$43 million ($21 million in cost of services and$22 million in selling, general and administrative expenses), or$0.25 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a pre-tax gain of$70 million , or$0.46 per diluted share, recognized in other income, net based on the difference between the fair value and the carrying value of an equity interest; and 36 -------------------------------------------------------------------------------- Table of Contents •excess tax benefits associated with stock-based compensation arrangements of$15 million , or$0.11 per diluted share, recorded in income tax expense.
Results for the three months ended
•pre-tax amortization expense of$25 million ($23 million in amortization of intangible assets and$2 million in equity in earnings of equity method investees, net of taxes) or$0.14 per diluted share; and •pre-tax charges of$16 million ($7 million in cost of services and$9 million in selling, general and administrative expenses), or$0.09 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a net pre-tax gain of$3 million (a$7 million gain in other operating expense (income), net partially offset by a$4 million charge in selling, general and administrative expenses), or$0.01 per diluted share, primarily due to a gain associated with the decrease in the fair value of the contingent consideration accrual associated with a previous acquisition partially offset by costs incurred related to a data security incident, and •excess tax benefits associated with stock-based compensation arrangements of$3 million , or$0.02 per diluted share, recorded in income tax expense.
Results for the nine months ended
•pre-tax amortization expense of$84 million ($72 million in amortization of intangible assets and$12 million in equity in earnings of equity method investees, net of taxes) or$0.46 per diluted share; and •pre-tax charges of$64 million ($29 million in cost of services and$35 million in selling, general and administrative expenses), or$0.35 per diluted share, primarily associated with systems conversions and integration incurred in connection with further restructuring and integrating our business; partially offset by •a net pre-tax gain of$17 million (a$22 million gain in other operating expense (income), net partially offset by a$5 million charge in selling, general and administrative expenses), or$0.11 per diluted share, primarily due to a gain associated with an insurance claim for hurricane related losses, and a gain associated with the decrease in the fair value of the contingent consideration accruals associated with previous acquisitions, partially offset by non-cash asset impairment charges, and costs incurred related to a data security incident, and •excess tax benefits associated with stock-based compensation arrangements of$11 million , or$0.08 per diluted share, recorded in income tax expense.
Net Revenues
Net revenues for the three months ended
DIS revenues for the three months endedSeptember 30, 2020 increased by 44.3% compared to the prior year period driven by demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business (which excludes COVID-19 molecular and antibody testing). For the three months endedSeptember 30, 2020 : •Organic revenue and acquisitions contributed approximately 41.8% and 2.5%, respectively, to DIS revenue growth compared to the prior year period. •DIS volume increased by 19.7% with organic volume and acquisitions contributing approximately 16.6% and 3.1%, respectively. Organic volume growth was driven by demand for COVID-19 molecular testing, partially offset by declines in testing volumes in the base business. Testing volumes in the base business were negatively impacted by the COVID-19 pandemic and declined by 5% compared to the prior year period. •Revenue per requisition increased by 20.9% compared to the prior year period primarily due to favorable mix, driven in large part by COVID-19 molecular testing; partially offset by reimbursement pressure, including unit price reductions associated with PAMA and all other sources, of approximately 1.7%.
Net revenues for the nine months ended
DIS revenues for the nine months endedSeptember 30, 2020 increased by 11.8% compared to the prior year period driven by demand for COVID-19 molecular and antibody testing, and, to a lesser extent, the impact of recent acquisitions, partially offset by a decline in testing volume in our base business. For the nine months endedSeptember 30, 2020 :
•Organic revenue and acquisitions contributed approximately 10.5% and 1.3%, respectively, to DIS revenue growth compared to the prior year period.
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•DIS volume decreased by 0.1%, with organic volume down approximately 1.4%,
partially offset by volume associated with recent acquisitions of 1.3%. Organic
volume was negatively impacted by declines in testing volumes in the base
business due to the COVID-19 pandemic, partially offset by COVID-19 molecular
and antibody testing and, to a lesser extent, the impact of an extra business
day in 2020 and the impact of weather in the prior year period, both of which
favorably impacted the comparison by approximately 1.0%. Testing volumes in the
base business declined approximately 14.4% for the nine months ended
September 30, 2020 compared to the prior year period.
•Revenue per requisition increased by 12.4% compared to the prior year period
primarily due to favorable mix, driven in large part by COVID-19 molecular
testing; partially offset by reimbursement pressure, including unit price
reductions associated with PAMA and all other sources, of approximately 1.8%.
Cost of Services
Cost of services consists principally of costs for obtaining, transporting and testing specimens as well as facility costs used for the delivery of our services.
For the three months endedSeptember 30, 2020 , cost of services increased by$316 million compared to the prior year period. The increase was primarily driven by higher variable expenses related to increased testing volumes as well as test mix and a higher supply cost associated with COVID-19 testing, and higher performance-based compensation. For the nine months endedSeptember 30, 2020 , cost of services increased by$298 million compared to the prior year period. The increase was primarily driven by higher variable expenses related to test mix and a higher supply cost associated with COVID-19 testing, higher performance-based compensation, and incremental costs incurred related to the COVID-19 pandemic including expense associated with a one-time payment to eligible employees to help offset expenses they incurred as a result of COVID-19. These increases were partially offset by lower compensation and benefit costs as a result of a series of temporary actions implemented to manage our workforce costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A consist principally of the costs associated with our sales and marketing efforts, billing operations, credit loss expense and general management and administrative support as well as administrative facility costs.
SG&A increased by$34 million for the three months endedSeptember 30, 2020 , compared to the prior year period, primarily driven by higher performance-based compensation costs, and higher costs associated with changes in the value of our deferred compensation obligations, partially offset by lower travel related costs. SG&A decreased by$5 million for the nine months endedSeptember 30, 2020 , compared to the prior year period primarily driven by lower compensation and benefit costs as a result of a series of temporary actions implemented to manage our workforce costs, lower travel related costs, lower costs associated with our Invigorate program, and lower costs associated with changes in the value of our deferred compensation obligations, partially offset by higher performance-based compensation costs.
The change in the value of our deferred compensation obligations is largely offset by gains or losses due to the changes in the value of the associated investments, which are recorded in other income, net. For further details regarding our deferred compensation plans, see Note 17 to the audited consolidated financial statements in our 2019 Annual Report on Form 10-K.
Amortization Expense
For the three and nine months endedSeptember 30, 2020 , amortization expense increased by$4 million and$5 million , respectively, compared to the prior year periods as a result of recent acquisitions.
Other Operating Expense (Income), Net
Other operating expense (income), net includes miscellaneous income and expense items and other charges related to operating activities.
For the three months endedSeptember 30, 2020 , other operating expense (income), net primarily represents the reversal of$65 million of income that was previously recognized during the three months endedJune 30, 2020 relating to the receipt of funds that were appropriated to healthcare providers under the CARES Act (see Note 11 to the interim unaudited consolidated financial statements). 38
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For the nine months ended
For the three months ended
For the nine months endedSeptember 30, 2019 , other operating expense (income), net includes a$12 million gain associated with an insurance claim for hurricane related losses and a$12 million gain associated with the decrease in the fair value of the contingent consideration accruals associated with previous acquisitions, partially offset by non-cash asset impairment charges of$2 million .
Interest Expense, Net
Interest expense, net decreased for both the three and nine months endedSeptember 30, 2020 compared to the prior year periods, primarily driven by lower interest rates associated with our variable rate indebtedness, partially offset by higher average outstanding indebtedness.
Other Income, Net
Other income, net represents miscellaneous income and expense items related to non-operating activities, such as gains and losses associated with investments and other non-operating assets. For the three and nine months endedSeptember 30, 2020 , other income, net increased by$76 million and$61 million , respectively, compared to the prior year periods. For the three months endedSeptember 30, 2020 , the increase was primarily due to a$70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value (see Note 5 to the interim unaudited consolidated financial statements) and higher gains associated with investments in our deferred compensation plans compared to the prior year period. For the nine months endedSeptember 30, 2020 , the increase was primarily due to a$70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value (see Note 5 to the interim unaudited consolidated financial statements), partially offset by lower gains associated with investments in our deferred compensation plans compared to the prior year period. Income Tax Expense Income tax expense for the three months endedSeptember 30, 2020 and 2019 was$177 million and$62 million , respectively. Income tax expense for the nine months endedSeptember 30, 2020 and 2019 was$269 million and$175 million , respectively. The increase in income tax expense for both the three and nine months endedSeptember 30, 2020 compared to the prior year period was primarily driven by an increase in income from continuing operations before income taxes and equity in earnings of equity method investees. For the three months endedSeptember 30, 2020 and 2019, the effective income tax rate was 23.7% and 22.9%, respectively. The effective income tax rate for the three months endedSeptember 30, 2020 , benefited from a lower effective income tax rate associated with a$70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value; and$3 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the three months endedSeptember 30, 2019 benefited from a$6 million income tax benefit due to the release of a valuation allowance associated with net operating loss carryforwards; and$3 million of excess tax benefits associated with stock-based compensation arrangements. For the nine months endedSeptember 30, 2020 and 2019, the effective income tax rate was 23.9% and 23.4%, respectively. The effective income tax rate for the nine months endedSeptember 30, 2020 , benefited from a lower effective income tax rate associated with a$70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value; and$15 million of excess tax benefits associated with stock-based compensation arrangements. The effective income tax rate for the nine months endedSeptember 30, 2019 benefited from$11 million of excess tax benefits associated with stock-based compensation arrangements; and a$10 million income tax benefit due to the release of valuation allowances associated with net operating loss carryforwards. The effective income tax rate associated with the$70 million gain recognized as a result of the remeasurement of our previously held equity interest in MACL to fair value was 11.8% due to a permanent difference in the financial reporting and tax basis of goodwill. 39
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For both the three and nine months endedSeptember 30, 2020 , we utilized the most likely estimate of our annual income before taxes to determine the annual effective income tax rate for 2020. As a result of uncertainty associated with the impact of the COVID-19 pandemic, it is possible that we will experience variability in the annual projections and, as a result, the annual effective income tax rate.
Equity in Earnings of Equity Method Investees, Net of Taxes
Equity in earnings of equity method investees, net of taxes decreased for the three and nine months endedSeptember 30, 2020 by$3 million and$15 million , respectively, compared to the prior year periods primarily due to the impact of the COVID-19 pandemic on our equity method investees.
Discontinued Operations
During the third quarter of 2006, we completed the wind down ofNichols Institute Diagnostics ("NID"), a test kit manufacturing subsidiary, which has been classified as discontinued operations for the nine months endedSeptember 30, 2019 . Income from discontinued operations, net of taxes, for the nine months endedSeptember 30, 2019 includes discrete tax benefits of$20 million associated with the favorable resolution of certain tax contingencies related to NID.
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