Why Quest Diagnostics Holdings Stock Dropped Today
Key Points
Medicare and Medicaid have been overpaying Quest Diagnostics for years, says the government.
Starting next year, they plan to cut reimbursement of lab testing by 15%.
And they might keep cutting rates for two more years.
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Medical testing giant Quest Diagnostics (NYSE: DGX) stock slipped 5.1% through 11:30 a.m. Tuesday, after the Centers for Medicare & Medicaid Services (CMS) disclosed Monday that they've been paying about 16% more for lab work than private insurers pay.
No longer.
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Effective Jan. 1, 2027, CMS says it will cut reimbursement rates for lab costs by up to 15%.
Image source: Getty Images.
What this means for Quest Diagnostics (and for you)
CMS estimates the reduced reimbursement rates will save taxpayers $1 billion per year. Unfortunately for Quest Diagnostics, these savings will come directly out of its own revenue stream.
In its 10-K filing with the SEC, Quest highlighted a reduction in the rates it receives from Medicare and Medicaid as one key risk to investing in its stock, warning of "the impact upon our testing volume and collected revenue or general or administrative expenses resulting from compliance with policies and requirements imposed by Medicare, Medicaid."
The question is: how badly might Quest be hurt?
And the answer: According to this same 10-K filing, Quest got approximately 11% of its revenue from CMS reimbursement in 2025.
What's next for Quest Diagnostics?
And now we can do a little math. Shrinking an 11% revenue stream by 15% implies that if CMS reduces its rates by the full 15%, Quest Diagnostics' annual revenue would decrease by 1.65%. Now, Quest notes that successive 15% per year reductions are possible from 2027 through 2029. This still implies that the worst-case scenario for Quest is a reduction of slightly less than 5% in its business.
With Quest stock down 5.1%, that worst-case scenario is already more than priced into the stock today. From where I sit, that means there's little reason to expect Quest stock to keep going down after today.
It might even bounce back.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Quest Diagnostics. The Motley Fool has a disclosure policy.
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