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Quest Diagnostics expects reimbursement cuts to hurt in 2013

(Reuters) - Laboratory tests provider Quest Diagnostics Inc's fourth-quarter profit missed analysts' recently cut estimates, and the company forecast 2013 results below market expectations, citing pricing and reimbursement pressures.

Quest, the No. 1 U.S. laboratory testing company, and its peer Laboratory Corp of America Holdings face falling test volumes as hospitals buy physician groups, which order tests to be conducted inhouse.

Shares of Quest, which conducts tests under brands such as AmeriPath and Athena Diagnostics, were down 5 percent at $58.54 in late-morning trading on the New York Stock Exchange.

William Blair & Co analyst Amanda Murphy said Quest results reflected a difficult reimbursement environment, from both a public and private payer standpoint.

Pricing issues, along with cuts in Medicare and pathology service reimbursement, will result in a 3 percent fall in reimbursement revenue in 2013, Quest Chief Executive Steve Rusckowski said on a conference call.

"(Pathology) is a sizeable piece of our business and some of those (services) are facing reimbursement cuts in excess of 50 percent," Quest Chief Financial Officer Robert Hagemann said.

The company said it expects reimbursements to reduce by an average of 1 percent to 2 percent through 2015.

"We have disclosed that our Medicare revenue is in the range of a billion dollars or so, so a 5 percent cut on that is $50 million that drops right down to the bottomline," Hagemann said.

Quest cut its 2012 earnings forecast last week, citing damage from superstorm Sandy and charges related to the sale of two businesses, HemoCue and OralDNA.

It had also said it will restate its 2011 and 2012 results to remove the impact of HemoCue and OralDNA businesses from continuing operations.

"During the fourth quarter, continued strong progress in our Invigorate cost-reduction initiative enabled us to mitigate some of the impact of revenue softness, which was exacerbated by the impact of Hurricane Sandy," CEO Rusckowski said in a statement.

The Madison, New Jersey-based company expects its cost initiatives to help it save up to $500 million by 2014 end.

"We believe the challenging testing environment continues to weigh on results as (Quest's) cost-cutting initiatives were not enough to offset margin contraction in fourth quarter as a result of weak testing growth," Piper Jaffray analyst Kevin Ellich said in a note.

FORECASTS WEAK 2013

Quest forecast a profit of $4.35 to $4.55 per share for 2013. It said it expected revenue to stay flat or grow up to 1 percent - implying revenue of about $7.46 billion at the top end of the range.

Analysts on average were expecting a profit of $4.81 per share on revenue of $7.53 billion, according to Thomson Reuters I/B/E/S.

Excluding items, the company earned $1.01 per share from continuing operations in the fourth quarter, slightly below expectations of $1.02.

Revenue fell 4 percent to $1.8 billion, in line with market estimates.

(Reporting By Pallavi Ail in Bangalore; Editing by Roshni Menon, Maju Samuel)

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