R1 RCM Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Mar 2018

[Operator:]

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Atif Rahim, Senior Vice President of Investor Relations, you may begin your conference.

[Atif Rahim:]

Thank you, operator. Good morning, everyone, and welcome to the call. We'll start with prepared remarks by Joe Flanagan, R1's President and CEO; and Chris Ricaurte, CFO and Treasurer. We'll then turn it over to Q&A. Today's conference call is being recorded. And as a reminder, certain statements made on this conference call may be considered forward-looking statements pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our forecast for 2018, are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would and similar expressions or variations. The forward-looking statements made on today's call are based on R1's current expectations and projections about our future events as of today only and should not be relied upon as representing the company's views as of any subsequent date. Subsequent events and developments, including actual results or changes in our assumptions, may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risks and uncertainties. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to the factors discussed under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2017. Now I'd like to call over to Joe.

[Joseph Flanagan:]

Thank you, Atif. Good morning, everyone. Thank you for joining us. I'd like to start by reviewing highlights from the fourth quarter, as well as our accomplishments in 2017. I'm pleased to say that we delivered on the milestones we laid out last year, particularly important was the return to positive adjusted EBITDA and free cash flow in the second half of the year. For the fourth quarter of 2017, we generated revenue of $140.3 million and adjusted EBITDA of $5.7 million. For the full year, we generated revenue of $449.8 million and adjusted EBITDA of $4.1 million at the high-end of the guidance ranges we have provided. Our Q4 EBITDA would have been higher if we had not incurred $0.5 million in legal cost, primarily related to the Intermountain contract, which came through a little earlier than we had expected. From a cash standpoint, we generated $33 million in free cash flow in the second half of 2017, which is a meaningful improvement from the use of cash in 2016 and the first half of 2017. Let me highlight some of our key accomplishments in 2017. In the first quarter, we rebranded the company to reflect our vision to be the one revenue cycle partner to healthcare providers. The R1 brand has a resonated well with industry participants, and we are establishing a strong identity in the RCM market. We also listed our shares on the NASDAQ in the first quarter and early adopted the new accounting standard, ASC 606, which simplified our financial reporting. In the second quarter, we expanded our relationship with Ascension in the Wisconsin market to increase both the size and scope of our contracted business. One of the important milestones here was the addition of physician RCM services for all Ascension ministries in Wisconsin. This paved the way for us to win the rest of the Ascension Medical Group, which we are currently in the process of contracting. Also, in the second quarter, we announced the expansion of our portfolio of Modular Solutions. These are designs that will allow an easier entry point for potential customers vis-à-vis our end-to-end offering, while leveraging our extensive operating experience, proven methods, performance analytics, broad infrastructure and proprietary technology. Shortly after the launch of our Modular Solutions, we appointed Gary Long as our Chief Commercial Officer to drive our customer growth initiatives. In the third quarter, we announced a strategic partnership with Phreesia to improve the patient experience across both ambulatory and inpatient settings. We launched this effort at three pilot sites in the third quarter, and earlier this week, we rolled it out to our broader customer base. In the fourth quarter, we completed the buildout of our commercial leadership team with the goal of increasing market awareness of our value proposition and exiting the year with a robust qualified pipeline of new leads. Over the course of 2017, we onboarded $8.5 billion in NPR and increased our headcount by 4,700. We also made substantial progress with respect to vendor rationalization. For Ascension Phases 1 and 2, we rationalized 72% of targeted vendor spend. Vendor rationalization for Wisconsin is also well underway. We currently have less then $1 billion in NPR from Ascension remaining to be onboarded as part of Phase-3. We expect to on board this business in summer of 2018 as scheduled. With the bulk of previously contracted Ascension business onboarded, we are in a good position to turn our attention to new growth. We've made a few announcements to date in 2018, so let me cover each of these in more detail. Starting with our expanded relationship with Intermountain Healthcare, which we announced in late January. Intermountain has been a customer for 6-plus years and our expanded agreement transitions our relationships to an operating partner model. From a scope standpoint, it covers both the inpatient and physician settings and brings into scope news settings, which we did not manage historically, such as hospice, home health and palliative care. The newly added scope increased our NPR under management by approximately $800 million. Our technology suite, R1 Hub, which includes R1 Access, R1 Link, contract management and R1 Decision, is fully deployed across Intermountain's 23 acute facilities. We are fully integrated with the Cerner host system and R1 Hub is the core revenue cycle platform for workflow, data validation and analytics at Intermountain. We are currently also in the process of deploying our technology suite in the physician environment and started after the host system was converted to Cerner last year. The next steps at Intermountain include the following. Onboarding of more than 2,300 employees. We've extended offer letters and are scheduled to begin the onboarding process in April. Third-party rationalization, the bulk of which is expected to occur in Q2 and Q3. Integration of work into a new Salt Lake City shared services center in Q3, Q4 time frame. The expansion of the Salt Lake City shared services center in Q4 '18 to early 2019 time frame to become a multidisciplinary center of excellence, with our first focus being the addition of technology development. We are pleased to have earned Intermountain's trust to service their exclusive RCM partner for the next 10 years. It's an honor to partner with one of the countries leading healthcare organizations with a track record of transformative initiatives in healthcare. Next, in early February, we announced that Presence Health selected us to provide end-to-end RCM services under an operating partner relationship. Presence is a Chicago-based health system with $2.2 billion in NPR, including $100 million in physician revenue. 1,000 employees are expected to transition to R1 as we onboard the business. Presence has more than 150 locations in Illinois, including 10 hospitals. We expect contract signing in the second quarter and deployment to begin shortly thereafter. Last week, we announced the acquisition of Intermedix. We covered the transaction in detail on the investor call, so let me head on the key points here. This is a highly strategic transaction, which adds deep capabilities to serve non-acute markets at scale and allows us to address many of the challenges faced by large health systems. It expands our target addressable market by approximately $40 billion and diversifies our revenue mix by customer as well as by end market. It accelerates the onboarding of more than $3 billion of physician NPR, including $2 billion of the NPR from Ascension Medical Group, which is a closing condition of the transaction. Our expansion into Ascension Medical Group builds on the work we've began with in the Wisconsin market last year. As a reminder, we are driving cost reduction and performance improvement in Wisconsin in a highly complex operating environment. There are a variety of EMR and practice management systems in place, including Cerner, Epic, athenahealth, Envision, MEDITECH and Centricity. The agnostic nature of our technology, which is a key strength in our view, allows us to interface across multiple host systems and generate demonstrable value for our customers. The gaps required to optimize performance at Ascension Medical Group are relatively consistent with what we see across other large health systems. These include the inability to integrate data and processes across the acute and physician environments, suboptimal eligibility rule engines in the physician setting, resulting in a large number of denials from demographics and insurance verification issues, lack of a single point of contact for customer service, creating unnecessary administrative burden on patients, no standardized methods for charge optimization, underpayments or contract modeling and challenges with credentialing, to name a few. These gaps ultimately result in lower collections, higher cost and a poor patient experience. Our end-to-end RCM services platform addresses these challenges. When we look at the anticipated new business from Ascension, the lessons learned to date in Wisconsin, combined with the capacity and capability that Intermedix adds, should allow for an easier deployment and faster value creation. We expect onboarding to begin in the third or fourth quarter of this year. The cumulative effect of these announcements results in an increase in our 2018 guidance from revenue of $675 million to $725 million and adjusted EBITDA of $40 million to $50 million, which we have provided at the start of the year to a preliminary view of $850 million to $900 million in revenue and $50 million to $55 million in adjusted EBITDA, after the close of the Intermedix transaction. Our 2020 revenue guidance increases from $800 million to $900 million to $1.2 billion to $1.3 billion and adjusted EBITDA guidance increases from $120 million to $135 million to $225 million to $250 million. Now let me highlight some of the key technology initiatives we have underway. At the HIMSS Conference earlier this week, we announced the general availability of our R1 patient experience platform. This builds on the pilots we launched in Q3 of 2017. The pilots included two key capabilities

[Christopher Ricaurte:]

Thank you, Joe, and thank you, all, for joining us. I'd like to remind everyone that following the early adoption of ASC 606 at the start of 2017, our GAAP revenue is more aligned with the economics of the business, but year-over-year GAAP comparisons are not meaningful. To allow for apples-to-apples comparison, the year-over-year percentages I will discuss on today's call will compare the following

[Operator:]

[Operator Instructions] Our first question comes from the line of Charles Rhyee from Cowen and Company. Your line is open.

[Charles Rhyee:]

Hey. Thanks, guys for taking the questions. Congrats on the year. Want to start out, just talking a little bit Intermedix as it relates to Ascension and the rest of the physician business. I might have missed it back on the Intermedix call, but does Intermedix already serve the Ascension physician business?

[Joseph Flanagan:]

No. Charles, this is Joe. Intermedix doesn't currently serve the Ascension business that we're aware of.

[Charles Rhyee:]

Okay. Because you're saying that there is - can you just remind me what you said early about the closing conditions that it's got to help in onboarding Ascension, is that what you had said? Just because that is what you just said. Thanks.

[Joseph Flanagan:]

Yes. No problem. Let me parse that in two separate ways, Charles. The first as it relates the closing condition. As part of the closure of Intermedix, the completion of the contract with Ascension Medical Group is a closing condition for that transaction. So that's that piece of it. Now stepping back a bit and I would say, much more strategically, part of the rational as we think about Intermedix is this broad theme that it definitely accelerates our growth trajectory. One part of that is it expands our market, $60 billion to $100 billion. The second part of that and at the heart of my comment vis-à-vis Ascension deployment is the capacity that Intermedix comes with will help us accelerate the onboarding of the Ascension Medical Group contract. And so they've got infrastructure, human capital, transactional capacity at a different level as it relates to the physician platform than we do today. And so that's the strategic logic or the threat, if you will, along those lines.

[Charles Rhyee:]

Okay. That's helpful. And can -- you talked about the funnels growing. Can you give us a sense on what the pipeline currently looks like? How -- what the activity level is, either both at -- obviously -- at the core business and then also any kind of qualitative information around the Intermedix pipeline currently?

[Joseph Flanagan:]

Charles, let me start with just our core offerings as they exist today. And what I would generally say is, we're very encouraged with the pipeline. And breaking that down -- we're very encouraged with the size of the pipeline and the progression of those opportunities through the commercial discussion process. The second thing I would say is, the amount of activity, both us pushing as well as interested parties pulling on discussions, is increasing, which we're encouraged with. And then the final thing, as I commented, there is a healthy and increasing amount of activity as it relates to our enterprise offering or operating partner relationship. Those are hard for us to predict. They take time. But that is definitely a dynamic we are encouraged by, but equally encouraging is the pipeline for our modular solutions. And one thing I would comment on, as we've build out our commercial organization, starting with Gary Long, and then he's done a very nice job at -- in the Q4 time to complete the buildout of his core team. They've been doing quite a bit of activity on our PAS business. Now our PAS business doubled going from '16 to '17, and we expect it to increase again from '17 to '18. So we're encouraged with that business. That is a modular offering. It is indicative of what we think we can do with some of the other modular capabilities we put it into the market in the second half of '17. And I'm encouraged with the activity there because it really complements our operating partner offering nicely. It complements it from a margin profile, it complements it from a progression of profitability, meaning that it progresses much, much faster to terminal profitability rates. And from a capacity standpoint, it also complements from an allocation of capacity, et cetera. So we're quite encouraged on that. Now as you would expect, it's hard for me to comment in a lot of specificity as it relates to the Intermedix commercial activities just given normal constraints, and we'll provide much more detail post close. But what we are encouraged with is the combined value prop, not only to our existing customers, but we are very encouraged with the combined value prop into some of Intermedix' core markets. And we're excited to get the transaction closed. And one of the first orders of business will be for Gary to go deep and build a comprehensive go-to-market strategy that includes, what we think will be a more compelling value prop into their end markets.

[Charles Rhyee:]

Okay. That's helpful. So then maybe Chris -- maybe and I segue, but Chris can you -- or Joe, now that we've kind of hitting the ground running more and things are sort of or operating more in a normal basis and things are kind of heading on the right direction. Can you -- and clearly, you've given us the guidance here. Can you give us a sense on where do you think the longer-term profitability targets are reasonable for this business? And you can exclude Intermedix for now, if that's easier in terms of, let's say, sort of gross margin profile for the business, EBITDA margin profile for the business. Anything around the physician if you can add. But just as we kind of think about beyond this year and as we continue to grow the business, can you talk about kind of the leverage potential here? And what we kind of expect in the long run?

[Joseph Flanagan:]

Thanks, Charles. Let me start, and then I'll turn it over to Chris to add some additional color to my comments. And as I answer your question, I'll index off of the 2020 view that we provided with the Intermedix announcement. The first thing I would say is -- and this isn't incorporated in our prior investor communications where we've laid out the phases of progression for our operating partner relationship over time and kind of where we see those model contracts achieving terminal profitability. What I would say is, in 2020, just given we're launching 8.8 -- roughly $8.8 billion of additional NPR over the course of this year, in 2020, the business will not be matured in that terminal profitability, in line with our prior communications. And we would direct the specificities to some of those communications, and we still feel comfortable with those projections. So we still see off of committed business in line with our models margin growth coming out of 2020. That's the first comment, I would say. The second comment I would say is, why are we so focused on automation? And really for us, we see that as an additive lever that has some very compelling potential impacts on our models, both in terms of cost, but also in terms of the accuracy and the velocity, which directly impacts our income statement and balance sheet metrics, which is another lever on how we earn money. We earn money two ways. We either improve the revenue performance for our customers, and we also earn money by reducing the cost to collect. And we think that automation lever is potentially transformative and additive to some of our models. And that's why in my comments I mentioned, we've injected, Chris and I, a high degree of emphasis in terms of the objectives we put on our operating and technology teams to really use 2018 as a year to significantly expand. And we think there is plenty of opportunity to do that. Let me turn it over to Chris just to provide additional color.

[Christopher Ricaurte:]

Yes. I mean, if you just take our base business and excluding Intermedix and you talk -- you think about adding AMG, you think about adding Presence, you think about adding Intermountain, that base business now, we see once it's stabilized -- and as Joe mentioned, 2020, we still won't have optimized IMH and AMG. So if you look past 2020, there is still margin expansion there. We're now in closer to the -- on the high end of the mid-teens on that base business and then you add the Intermedix business, which has an actually higher-margin rate. Now you're getting close to the high-teens in terms of exiting in terms of stabilized margin rate. And as we said, we've got -- as we look at '18, we've got about $25 million of onboarding cost. So '18 really is in a good proxy for with the margin rates just because of all of that onboarding cost that we have.

[Joseph Flanagan:]

And maybe the final...

[Charles Rhyee:]

And -- I'm sorry. You just made clear. You're talking about EBITDA margin, you're talking about gross margin?

[Joseph Flanagan:]

EBITDA.

[Christopher Ricaurte:]

EBITDA.

[Joseph Flanagan:]

And may be the final thing, Charles. I should emphasize when you look at 2020 guidance, that does not assume any new operating partner relationships outside of what we've already communicated. And as it relates to Intermedix, it largely assumes that attrition -- customer attrition is offset by growth. Now we think the market and our intention is to continue, as I said, to drive that Intermedix platform as well as drive the modular offerings, which are really in the early stages outside of our PAS business, which is growing very, very nicely.

[Charles Rhyee:]

Great. I’ll stop there. Thanks a lot of guys.

[Operator:]

Our next question comes from the line of Matthew Gillmor of Robert Baird. Your line is open.

[Matthew Gillmor:]

Hey, thanks for the question. I wanted to pick up on the R1 Automate comments. And I think I understand conceptually sort of what this is. But maybe Joe, I was hoping if you give us an example or two, for where the R1 Automate would -- to have the most impact on the business just so we understand it a little bit better?

[Joseph Flanagan:]

Yes. There -- I mean, there is many examples, but let me -- and I'm just going to quickly try to think of one that's easily digestible. So one example that's pretty basic, but hopefully, it can convey or visualize the opportunity we see. In our preregistration process, this is when we have a central team reaching out to schedule patients. And we're pre-registering them in advance of their visit, financial clearance, demographics, there is clinical protocols that are included in that preregistration process. For us to set that up, somebody has to go in and create a shell account for that patient in the EMR. And they're pulling information of the scheduling system, and they're manually creating a shell account, so they can then load information into that as part of the registration process. Just one very small example. We've been able to fully automate the routine to create that shell account. And so that as you can imagine, reduces all the manual keystrokes and labor costs and inaccuracies that come with just human variability of doing that. Now from our vantage point, we've catalogued all of our processes. We've stratified those processes in a 2-by-2 matrix, basically, high cost or low cost, easy to automate, hard to automate. And we've got a backlog of processes that we're in the process of working through and just getting automated. And so I'm encouraged with the potential, and I'm also encouraged with the approach and framework that we have. I would say, it's utterly practical and driven by our operators, which I think is a positive thing. And gives me confidence that it'll translate to the ledger, meaning, we'll see the efficiency come with that in addition to some of that marketing trends that we're hearing a lot of rhetoric on appropriately so in the marketplace given the potential impact.

[Matthew Gillmor:]

Got it. That's helpful. And I also wanted to get an update on the front-end transformation pilots. And if I heard you correctly, I thought you mentioned that you're going to start to roll that out to the client base. And I know there is some connection here with the Phreesia tablets and the new patient experience platform that you announced. But can you give us a sense for how those pilots are going and maybe if the premise of my question was off, but how it compares to sort of a traditional front-end process and what it means ultimately for your clients?

[Joseph Flanagan:]

Right. So let me step back a little bit and just give the audience a quick overview of exactly what are we -- what is that solution architecture when we say the patient experience platform. Essentially, what we've done is, we've taken our registration rules engine, which we think is leading technology and leading logic. It encapsulates all of the insurance verification, eligibility checks, demographics, residual estimates, calculated off of our contract modeling software and inputs. And it's got a very comprehensive workflow that ensures those things are being validated either in preregistration or in point of service. So we're taking that engine which we own, we developed and it's our IP. We are connecting that engine to 2 different platforms via technological links

[Matthew Gillmor:]

And then last question for me. I know you have lots of opportunity in the hospital side and on the physician side now with Intermedix. You're onboarding some post-acute NPR with Intermountain. And I was just wanted to get sort of your perspective on, is there a larger opportunity in the post-acute market? Or should we expect you all to stay within the hospital and physician side, just given that opportunity in front of you?

[Joseph Flanagan:]

No. I think it's important -- we intend to take advantage of Intermedix experience as well as if you look at the Intermountain scope of services, which includes post acute as well as the Ascension Medical Group. We intend to build a capability that competes very, very well serving that post-acute market. We think it's important just given strategically where our customers need us to be, and we also think it's right in line with our brand commitment of being the one of the revenue cycle partner regardless of setting of care. And we think -- the best way to build that competitive capability is on experience, and we've got a lot of committed business to work through that, we think, will only add to the experience that Intermedix is also bringing to the table.

[Matthew Gillmor:]

Great. Thanks very much.

[Joseph Flanagan:]

Thanks, Matt.

[Operator:]

We have no further questions in queue. I'd like to turn the call back to Joe Flanagan.

[Joseph Flanagan:]

Thank you, operator, and thank you, everybody, for joining us. To close out the call, I'd like to say we're excited about the year ahead. We've been building the company to scale up to what we have ahead of us and feel very well positioned to execute along those lines. And the final thing, I would say as we close the call, we are really excited to update you on an ongoing basis as we progress through 2018. Thank you very much, and operator, we can close the call.

[Operator:]

This concludes today's conference call. You may now disconnect.