Q4 2020 R1 RCM Inc Earnings Call

To participate and that value generation.

And that's a.

And that's an additional factor that.

It gives us some.

Confidence.

As we look at the.

Margin targets that we laid out in January and we've seen nice margin progressions and probably the final thing I'll say is as we've talked about speed to value with interoperability and the other thing and we're seeing this play out and life point is with our automation bundles that we've already built and think about all of the <unk>.

Emmanuel interaction that occurs with payers that says you know a big portion of what we do.

We now have automation and bundles with most of the state driven payers, either commercial or government and what that means is when we go into new customers and we're seeing this with life point, we're able to turn those automation bundles on because they are already built and they're already built with the state based routines and Thats just <unk>.

<unk> too.

Faster progression.

Progression of margin so my hope.

And is on future calls, we can kind of start to think about updating the cycle time to profitability and the models we've had out.

For the better part of three or four years now and the different ways, we characterize the phases and timeframes to achieve steady state profitability on our and on contracts.

That's really helpful and if I could just follow up though Joe since you've been at the company right.

The business has transformed dramatically.

Not only just in terms of.

Execution and performance, but right.

A lot of people and you think back and maybe some people still do right. They think.

R. One has more bto right.

And you are taking.

Our back office from a hospital, you're centralizing and so there is efficiencies as you move to sort of a centralized call center, but.

We think about what youre doing with.

The automation and now more AI and machine learning.

Talk about these millions of manual transactions.

Obviously as new clients come on and maybe that changes a bit but when you think down the road here.

Can we envision a.

Our system and where.

I don't have to touch the claim at all.

Sure.

And that it will all be fully automated or what would be the mix because I think a lot of people.

People might think that there is still a lot of hands doing a lot of stuff here, but in.

And the reality when you look at sort of performance and would suggest otherwise and just and it seems like you are moving towards that state where manual process will be.

Less and less required.

In Rev cycle management, and maybe maybe if you could just kind of lay that out a little bit.

Yes, the best way I can characterize that and we talk a lot along these lines inside of the company.

If you think about this process today.

And just kind of directionally use some numbers, but maybe we could see to NAV trillion of revenue broadly flowing through the providers.

The cost the administrative cost thats being spent by providers to convert that to cash, let's just call it nominally 4% to 5%.

And it's it's resulting in 90, 192% yield so youre, losing a lot of economic value on that conversion and the patient satisfaction is a bismol.

For those patients and providers that have to interface and that process and so you've got basically $100 billion of spend and if I don't include the EHR. Our estimates is still today, 80% of that spend is labor and only 20% of it is third party or bolt on technology and our.

Fundamental view is that that's just not going to be sustainable and so I don't know what the end state will be but let's pick a number and the future that technology spend should be probably 40 50, 60% at a minimum there will still be a labor.

And attributed to it.

But that should be yielding 90, 899 100 cents on the dollar and it should be resulting in a patient satisfaction score of north of 75 now.

And now we we fundamentally believe we can play a leading role solving that problem and we're going to play a leading role solving that problem with technology not with brute force, but what we also know is a big component of getting to that outcome is the blocking and tackling.

And that's why we stress and our model the benefit we have and operational control because with great technology, you have to complement that with change management and a commitment to <unk>.

Using the technology to the fullest extent and that's really.

Where we feel we can differentiate but.

But we do fundamentally see the company today and increasingly going forward being a technology first company and we think we have all of the capacity human capital capability.

And current assets to realize and to.

And to play a leading role in solving that problem and and we think we will get rewarded.

Very well.

And we as we progress on.

On that journey.

Thanks, and just one last follow up and where do you think RCM is on that continuum.

Relative to that starting point, you talked about and and what are you seeing and think that could be.

We're.

Think about it we're well above the market average on conversion or yield.

And I commented, where we have our patient experience solution installed for just think about it this way Charles Thats about a third of that.

<unk>.

Conversion cost sits and those access operations.

Where we have our solution fully installed we have 62% of all registrations occurring on a digital self service basis No manual intervention.

That process, yielding 75.

With a 75 NPS score and as I commented and increasingly we're starting to see yield move as a result of.

Better experienced the patient is having and the ability to present.

Financial options financial obligations et cetera, So I think that's a good proxy in terms of.

Where we're out on this journey and.

And again.

And we.

And we really feel like we have good underlying momentum.

And we just continue to play to our strengths, we're very focused on this space.

And we don't intend to.

Dilute.

Our expertise because we think there is a huge market opportunity and the.

And the area that we operate.

Great. Thank you.

Your next question comes from the line of Sean Dodge with RBC capital markets.

Thanks, Ed.

Good morning, and I'll add my congratulations on the.

This quarter.

Joe maybe following on to the comment you just made about the fundamental belief.

That technology is going to become a bigger part of the profit.

And the key priorities for this year, you mentioned M&A being increasingly a core component of the growth strategy. When we look at what you've done so far it's been it makes them cutting and capabilities.

And then with <unk> tucking in some market share.

Is that how we should be thinking about M&A going forward and you kind of drive towards that.

Kind of.

And this idea that technology and can be a bigger part of the service delivery or is there something someplace and tend to focus on a little bit more specifically and then and then maybe size should we expect more tuck in.

Or are there some bigger deals or opportunities out there so something more along the lines of that.

Potentially transformational.

Yes, I think.

<unk>.

The way, we think about it first off.

With the scale, we have we will always be opportunistic. So so so if there is some.

If there is an opportunity that presents itself at very attractive valuation, we understand very clearly.

How to integrate that it's almost.

Analogous to Rob works.

That looks like a deployment to us that integration.

And valuation made a lot of sense and so those types of things, we will always monitor and and.

I would characterize ourselves as being reactive there as opposed to proactive along those lines some of the larger.

Potential transactions, we don't sit today and feel like we're missing.

A particular component of course, we always want to get better, but we've got good scale, we've got a leading position.

We're very focused.

Im really really pleased with.

The teamwork across the company and the alignment that the team has on serving our customers.

So again and that and that area.

As you would expect us to be we will be in the flow of discussions.

And again I would characterize that as.

Somewhat neutral.

Position, where we would like to be offensive is on.

Differentiating technologies again to my comment on the prior question if they meaningfully move our use cases, or we see an opportunity to drive real innovation.

And and and real strategic value and being strategically relevant over a 10 year contracts to our customers, that's where we really would like to be proactive and offensive and theres a number of areas that we have growth thesis is around.

But I would say in general they are oriented towards differentiating capabilities that have technology at the core of the value prop to drive scale leverage.

And we feel.

And we have captive synergies that can help underwrite and synergize down valuation and those areas and.

And we have a very good relationship with our current customer base that is helpful and how we think about evaluating those.

And validating.

The potential opportunity and if you look at Sci, it's right in line with that.

And I would say, it's been a while but if you look at Intermedics.

And that that transaction really anchored our physician offering and.

And as I said in my prepared comments, we're delighted that our physician platform is one scaled it's performing and its recognized and the recent class.

Rankings and so that's a good example of the impact.

That's some of those those very focused.

M&A.

Vince will drive and so final comment I would say is those will tend to be smaller and those tend to be.

Where we have outsized.

Relative impact and they drive real strategic value to our customers.

Okay, Great and then on the revenue outlook goes to add 4 billion of NPR This year.

Excuse me and just just to clarify light point included and that and can you give us a sense of the visibility you have on the remaining any.

<unk> share about sales pipeline and I know before you said you were involved and a handful of larger rfps and.

Anything you can share on how those are progressing.

Yes life point.

And as you think about that 4 billion and we don't really think about life point in that context, our focus right now on with life point is just really really high quality.

Onboarding deployment.

Performance to life point, and so long as some.

And stay focused there we feel like we have a really good value prop to them and.

And we intend to build a great relationship with life point, the right way.

On the heels of our performance so we don't necessarily.

Consider life point per se and that $4 billion target and as you think about.

The objectives and Gary long share with me and the conference from and Chicago, Our Chief Commercial Officer, Gary and his team.

And have objectives that that.

Support that external commitment around net new growth and net new growth outside of our R contracted book of business and.

So that's the way, we think about internally our growth objectives.

And unpacking that a little bit the good thing right now as we see demand and activity.

<unk> and broad based and what I mean by that is our qualified.

Pipeline, we've got a healthy mix with idms, but we've also got a very healthy mix with very very large independent medical groups.

And relative to RFP activity, it's really situational some.

Some pursuits, we see RFP driven.

Good thing is and those RFP driven pursuits.

Generally our early and the process and in many cases, helping shape.

That RFP process.

Process, but others are more.

And.

Non RFP driven and.

And.

Born out of relationship that relationships that Gary and the team have built over time.

So we're generally encouraged along those lines and.

Sean that's how we think about.

The targets on our sales team.

Alright. Thanks.

Thanks.

Congratulations again.

Thanks.

Donald Hooker with Keybanc Your line is open.

Great Good morning.

Wanted to ask maybe a more of them start off with a more mundane accounting question.

Just trying to understand the income fees and some of the components for the revenue base.

And a huge recovery and incentive fees I'm trying to sort of think about that going forward was there any kind of because there's always moving parts of COVID-19 and patient volume, having and flowing what is kind of a normal rate there going forward for that that line. So we don't.

Get surprised us a little bit higher than I thought.

And how do we think about that line going forward.

Yes, I think.

<unk>.

One other things youre seeing with incentive fees you saw it in Q3 as well.

For us just a little bit of overhang of that.

And that's and you saw the offset to that and Q2, if you remember Don this COVID-19 because because some.

<unk> revenues shifted so fast down and then shifted so fast offer and that cohort and the trailing 12 month period.

Of our Kpis Calix R. In the index off of it and average daily revenue and ADR.

And so what you see is a bit of the numerator denominator and some of those Kpis calix.

Just just getting a bit.

A bit volatile not driven by performance just driven by.

The demand environment of our provider customers, which we've talked about but.

I would expect and and I think this is a.

A real opportunity for us we've got a big focus on it inside the company and inside our operating teams that.

<unk> liner that incentive fee line continues to grow again as we.

Gained traction and get the full value of automation and not on the dimension of cost, but increasingly on the dimension of revenue yield performance and.

And.

And that's something I don't think we've necessarily fully factored into our projections we want to.

Want to run through a few more use cases, but I am encouraged with the potential that that that component of our of our revenue.

<unk> to us and that generally flows at almost 100% flow through margin because there's not a lot of marginal cost.

Associated with moving that performance.

Got you, Okay and then another.

Just one other quick.

And final question, and then Michael and Paul.

High level question and sort of on free cash flow.

And as another line item Thats tough for outsiders to model you have tax assets I think you are still working through.

This quarter was probably a little bit lower habits, and there's a lot of things going on but as we think about over the next year kind of what and with all the moving parts with tax assets consider and consideration of what is a good free cash flow baseline assumption, but we could do.

Yes, youre right on the tax and the cash.

The effective tax rate and 1% TV and for that cabinet.

And again on the talent and the Capex.

And a little bit differently, we actually get a benefit and then also for.

And then share based compensation net probably the biggest factor and that is drinking from a effective tax rate and agree on.

And the tax line.

We're looking for.

For other here in particular.

But again kind.

We have a.

Well, our capex and it kind of similar.

And slightly higher than last year.

When you think about our business.

<unk> focus on that EBITDA net income.

And for cash given our modest debt and where our capex is relative and Penn.

Frankly lack thereof.

Other industry that really and key driver and when you think about our free cash flow.

Okay and then last question, maybe just higher level question in terms of the ownership structure.

And RCM.

I always think R. R.

RCM.

101, one from one perspective, you guys are somewhat agnostic and so youre not captive to a health plan and Youre not captive.

To a health care provider system.

And those sort of there's a lot of Astro there, but that's kind of like there's a little bit of a connection to the ascension and I wonder if being more independent from essentially and help you in any way kind of as you talk to maybe health care providers that are competitors to the attention and I don't know if thats true.

True or not but how is how does the ownership.

Impacted your sales of your services.

It Hasnt really been.

And impact.

At all if anything I would say, it's a net positive.

The ownership position of Ascension now Don if you book and the commercial discussions we were having in 2017 compared to the commercial discussions and <unk>.

And in 'twenty, and 2017 with such a high percentage of the company.

And dedicated to essentially meaning the percent of our revenue and back in 2017, we still had materially material onboarding activities with ascension.

There were discussions not so much around concerns with ascension being an owner, but more discussions around what real capacity did we have outside of ascension to to onboard new customers now if you compare that to 2020 that's completely.

And not a discussion.

As we think about last year and as we continue looking at this year just with the growth of the company the diversity of the customer base were serving.

And if anything.

There are some.

Sure.

Very often a desire of potential customers to talk with ascension because again.

And essentially can talk from the standpoint of our performance to them, but they can also talk to the standpoint of what strategically led them to the conclusion that they wanted to have a model on their revenue cycle via a partnership with us as opposed to try to do it themselves and.

And essentially net.

Well north of $20 billion and NPR has all of the scale internally to do this themselves and so its a very credible.

A reference point for.

For systems that are thinking about changing their model on how to manage revenue cycle and so if anything I would say it's a positive.

And.

And the discussions we're having and 17. So my comments are really nonexistent right now along the lines of capacity.

Okay. Thanks for the perspective, thank you.

Thanks, Doug.

Stephanie Davis with SBB Leerink your line is open.

Hey, guys I Echo my congratulations on the Court Inc.

They have one for Rachel.

I understand there were a lot of moving pieces with incentive fees and without a path for automation, but is there any way to tease out the margin benefits at this footprint rationalization this year.

And as a follow up that how should we think about the impact here longer term margin or is it a permanent step up or will kind of be absorbed base and the other initiatives.

Yes, I think your first day at the highest level and we have had that EBITDA progression and I think it's worth kind of a reminder of <unk>.

We look back and 2019, we are at 14, 1% in ERCOT and the midpoint.

And our guidance.

And then and we landed at 14 point, you ultimately 18 nine.

Thanks for 'twenty and in 'twenty, one and midpoint of our guidance and slide 22, 5% and you're really seeing that fundamental margin improvement and you kind of say what are some of the key initiatives that we're looking at and Thats driving that.

And we're really getting towards that.

Terminix journey, and nothing really felt the confidence and expand our long term and call.

3% and echo.

They're the key driver here and Canada.

And our ticket link on through and really do you believe.

And then automation effort, that's our key driver and the very near term and if we look at this year are there some additional cash cost savings as well and some cost coming back frankly.

I think think about our funnel and K health cost that we are banking into our budget and the answer is yes.

And within that if anything the payment date workplace at the senior care and.

All of that gets baked into our assumptions and analysis, but I think we feel very confident in that long term trajectory and also the steps and have demonstrated pathway that we've had and reaching that yes.

Yes, definitely I would think about on the corporate cost savings nominally.

Around $5 million that we may see and in 2021, but to Rachel's comments.

And that cost savings is going to be offset with investment employees and some of the things that on various programs that and.

And the Covid environment.

<unk>.

And we trimmed.

In terms of navigating and 2020, so I kind of view that as a net neutral.

The thing that I would say more strategically we are very committed to our business model ratios. So.

G&A is below 5% that's an important thing that we talk a lot about internally as we grow the company, we want to be very disciplined and in line with that if you look at some the investment we're making to support the $5 billion target.

SG&A is not a component of that so.

Seeing some of the leverage it's it's spread across our onboard and capacity and it's spread across our technology infrastructure spend.

So I think the real the real margin expansion is coming from.

Primarily the influx of technology on our on our contracted book of business.

On that same COVID-19 impact vein, how should we think about the acceleration of some of your prior initiatives that may be a little bit more top of mind like consumer payment and value based models given the independent Inc.

And I would say I would say, we're very focused.

And whether it's or whether it ends up being organic or inorganic.

We're very focused on.

Patient payments consumer payment and staff whole ecosystem, we've done a lot of work on us.

We control a lot of patient payment activities and we we managed a lot of patient cash so we think.

<unk>.

Our role we can play and we intend to we.

And we intended that to continue to be on offense.

And then the consumer experience at large as we as we've talked about is going to be a significant focus so.

To your point coming out of Covid.

That that only intensifies, especially as we think about the out of pocket yields.

And on payments and the correlation of that out of pocket yield to their front end experience and the and the.

Registering and financially clearing all of those activities as well as their payment experience and their payment innovation. If you will so.

There was a question prior on.

And M&A focus and.

As I said, we're very focused on capabilities and those are some of the areas that you are highlighting that we.

We think we can play a meaningful role and.

Super helpful. Thank you guys.

Thanks, Stephanie.

Steve Halper with Cantor Fitzgerald Your line is open.

Hi.

Just going back to the other cash flow question previously obviously 2020 was.

And was a down year.

Could you sort of provide a bridge for us maybe from 2019.

And what.

What items don't repeat for for next year.

Yes.

For 2021, I should say.

Okay some of the elements.

And even see it as you look at the balance sheet versus the cash flow and think about accounts receivable and <unk>.

You'll see our accounts receivable teams and the cash flow is higher.

And then on the balance sheet and a big piece of that frankly and E&S.

And that <unk>.

$18 million.

And as you think about what some of the change and we go through.

Net income and this acquisition.

Divestiture and changes being kind of a key factor in that and.

The other piece.

With that we can have.

And more significant.

That thing, where we had $64 million and tax withholding and Kevin can disproportionately large set of rewards and that's it.

And 2020, and Eric nothing similar magnitude expected and if for example, future. So I think those are the elements. There that we can really drive that and then the other one I would say Steve as is <unk>.

Transaction costs will be fluid for.

From from that standpoint, obviously.

With the conversion and some of those things.

Hi, and us.

And a relatively heavy year, I would say and M&A and in 2020 with three transactions over the course of the year.

And then finally.

And we can we can model this on follow up the Rev works.

Acquisition.

We have a number of.

Efforts in place.

And to bring that cash conversion down and Thats thats not operational that's more contractual the way the way the the contractual relationships sit and the transition between us and Cerner and <unk> customers. It just add some some cycle time.

And again I want to stress it has nothing to do operationally it's more.

Contractually and.

Got it.

And as that integration occurs that will that will compress to a more normal flow.

Great and then just going back to your other comment about adjusted EBITDA conversion.

Yes.

Would you give us sort of a range that you're thinking about there for 'twenty one.

Okay.

And we would expect R.

And as I said, the primary driver and when you think about it.

And really as we go back for the primary component for knee.

And we're not expecting significant change and Nicky normalized for the divestiture.

Again, we're not expecting any and be more significant element and inherent as I described we had the tax and holding that had pretty significant element that we're not expecting again and.

And it should be managed from a reflective of our historic pattern.

Great. Thank you.

Thanks, Steve.

Manheimer with <unk> Securities. Your line is open.

Thanks, Good morning, and congrats on a great year.

Joe you touched on it just a moment ago, but I just wanted to ask on.

And <unk> works.

Those the deal six months ago how.

How would you characterize it relative to your expectations are you able to quantify the contribution from <unk>. This year and I know that might be more difficult given the integration there.

Yes, no I think I will.

Don't quantify it and specific numbers, but I'll directionally give.

Give color on it and that business, we bought it it was a breakeven business as we think about <unk>.

Contribution in 'twenty.

'twenty one.

I would characterize that is ahead of our plan.

On the EBITDA.

Basis, and we fully expect to see that.

Contributing at the.

At the targeted.

EBIT contribution rate of 30%.

And sitting 21 going into 'twenty, two which is which is in line if not a little bit ahead of our plan. So.

So thats.

Yes.

And I would say.

That should be the case, because that's a.

And on boarding and and integration.

Right in line with.

And kind of what we do every day for for customers I think more importantly is is how do we capitalize the growth opportunity off that installed base and the.

And the Cerner channel and large and I am encouraged by progression of activity and that area and that.

That continues to be a focus for both and to end offerings, but also as you as you remember we have a relationship with cerner on some of our.

Our PX technology capabilities, as well, which the pipelines and both of those areas are growing well and and Gary is very focused on.

Progressing and starting to get.

And are positioned to convert some of that looking late in 'twenty one probably.

And so.

That's a really key focus area for us as well and partnership with <unk>.

Great and that's very helpful. Joe and finally, what is how should we think about the fully diluted shares with options dilution and warrant exercises. Following the conversion of the Ascension Tower Brook preferred.

Sure I'll take that.

Yes.

Turkey is obviously the preferred conversion happened after a year so.

When you look at the front cover.

The 10-K, you'll see that our basic shares outstanding and material that and 20 161, one and that will look different than obviously, what youre going to see and his statements given the timing there and you.

Think about the dilutive effect.

Warren.

Yes, if you think about it from a treasury method, that's going to be sensitive to the share price.

And if you take a $30 share price and that's about 54.

Thank you right now in terms of net Mark dilution and then there'll be another impact for the employee stock awards. So.

If you think about it on a fully diluted shares outstanding post transaction.

And yes, probably about a $322 eight depending on share price.

Okay very helpful. Thanks again.

Yes.

There are no further questions at this time I would now like to turn the call back over to CEO, Joe Flanagan for closing comments.

Jack Thanks, so much for your help moderating the call and thank you everybody for joining us today and.

I'd like to close by thanking our team.

Very complicated year and their continued focus on delivering strong performance in 2020 was a great result, we look forward to executing on the growth opportunity and the technology opportunity in front of us and updating all of you importantly on future calls. Thank you again for your participation.

This concludes today's call. We thank you for your participation you may now disconnect.

Yeah.