Q3 2022 R1 RCM Holdco Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
My name is Brent and I will be here.
Conference operator today.
This time I would like to welcome everyone to the.
Hershey M Inc.
Third quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press Star one.
It is now my pleasure to turn today's call over to Mr. Chief Rahim head of Investor Relations. Sir. Please go ahead.
Thank you Brent good morning, everyone and welcome to the call certain statements made during this call maybe considered forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 in particular any statements about our future growth plans and performance, including statements about our cost saving initiatives our liquidity.
The position.
Growth opportunities and future financial performance are forward looking statements. These statements are often identified by the use of words, such as anticipate believe estimate expect intend design plan project would and similar expressions or variations investors are cautioned not to place undue reliance on such forward looking statements. All statements made on today's call.
[noise] involve risks and uncertainties, while we may elect to update these statements in the future. We have no current intention of doing so except to the extent required by applicable law.
Our actual results and outcomes may differ materially football was included in this forward looking statements as a result of various factors, including not limited to geopolitical economic market conditions had inflation slower growth or recession and other risk factors are discussed under the risk factors, adding you know most annual report on Form 10-K and our.
Only report on Form 10-Q.
We will also be referencing non-GAAP metrics on this call for a reconciliation of non-GAAP amounts mentioned to the equivalent GAAP amounts. Please refer to our press release.
I'll turn the call over to Joe.
Thank you all and thank you all for joining us today I'd like to start today's call by reviewing our Q3 results and business outlook and then discuss the leadership succession plan, We announced this morning, I'll then turn the call over to Lee for additional comments, followed by Rachel to cover financials in more detail.
Starting with Q3 results, we made progress on our strategic priorities, including integrating cloud mad advancing our technology roadmap and Onboarding, new customers, all of which all of which keep us on our long term growth and profitability trajectory. However, our results fell short of our expectations for three main reasons.
First the largest impact to Q3 revenue and adjusted EBITDA was lower incentive fee revenue two factors affecting incentive fees, we experienced an elongation in payer reimbursement turnaround times, which in turn impacted several key performance metrics that our incentive fees are tied to we have initiated a detailed plan to reduce these turnaround times include.
The following.
<unk>, our operating standards for frequency of follow up engaging with payers. We are provider customers to ensure accounts receivable are handled in a timely matter and via cloud now expanding our capacity to respond to a marked increase in clinical review requests from payers.
We are confident that pair turnaround times will improve we currently anticipate continued impact on our performance into 2023 and.
Incentive fee revenue was also lower than we expected due to volatility in K P. Kpis and metrics at two operating partner customers, where we commenced onboarding in 2021. These customers have unique complexities, which is resulting in us taking longer to achieve our expected performance goals, we have implemented remediation plans and have lineup.
Sites are returning to our financial performance targets. When these customers are in the steady state phase.
Most importantly, our long term earnings potential from both of these customers remains unchanged.
Second net operating fees were lower than expected, primarily due to weaker volumes and consolidation that was unfavorable to us in the emergency department physician space.
Third we increased our allowance for credit losses by $9 5 million to account for financial challenges facing one of our large merchants each department aggregator customers, which directly impacted adjusted EBITDA in the quarter.
Cloud met performed well in the quarter with revenue of $120 2 million and strong year over year growth revenue from our ones legacy modular solutions was flat year over year. As a reminder, one of the key growth and profit drivers underpinning our strategic rationale for the cloud Med acquisition is the ability to accelerate growth for our ones like <unk>.
See modular solutions via cloud Mets World Class commercial organization, we've consolidated accountability for modular and the teams have made significant process progress preparing and launching legacy are one modules, including entry pay and physician advisory services via the cloud Med commercial channel early indication.
From this activity are encouraging with a number of large idms inactive discussions based on the positive customer feedback and momentum we're seeing within cloud Mets core offerings. We're excited about the progress being made to fully unlock the growth potential of these combined.
Offerings over time.
Let me now provide an update on our customer onboarding activities Onboarding at Sutter is progressing on schedule and we have welcomed 800 employees to our one to date with roughly 700 employees transitioning just this past weekend. Our teams are focused on operational and technological readiness. We have also added 250 employees.
To provide incremental near term capacity and respond to ongoing payer dynamics and position us for a smooth transition.
<unk> training for slack leaders and change management activities have been completed on plan and we continue to work through deployment baseline activities.
Deployment activities at Saint Clara Health are underway and progressing on plan with employees scheduled to transition later in the fourth quarter.
One thing I would like to note is that the final scope of work definition at our end to end and customers can vary Intel based linings complete geographic dynamics also affect the cost to collect of percentage rates due to differences in payer reimbursement rates are local labor costs to account for this variation were updating the illustrative contract.
The economics for our end to end idea on operating partner contracts.
Most notable changes moving the midpoint of revenue generated per billion of NPR from IDM customers to 4% from four 5% importantly margins remain unchanged across key phases of Onboarding, new customers and we continue to expect 30% contribution margin at steady state.
Onboarding of the physician customers, we announced earlier this year Kepler vision, Samsung clinic and EPA are also progressing on schedule with Samsung due for completion by the end of the year collectively we are in the process of onboarding more than $8 billion of new NPR and I'm pleased to say the deployment teams have been focused on meeting their deliverables as planned.
Preparing us for successful long term relationships with our new customers.
In light of our third quarter results as we look out to the fourth quarter. We expect the factors I discussed earlier to continue to pressure our financial performance, while we expect modest recovery in incentive fees from Q3 levels, our expenses will be higher because we will incur incremental costs to respond to the challenges I highlighted above we also expect net operating fees to be impact.
<unk> buy lower volumes than we had forecasted across both acute and physician customers.
We are therefore, lowering our 2022 revenue guidance to a range of $1 79 to $1 8 billion and adjusted EBIT guidance range to $420 million to $425 million.
As we turn to 2023, while we're in the budgeting process and we will not be providing formal guidance until January . Our current view is that 2023, EBITDA is expected to be 10% to 15% below consensus estimates.
Several key drivers for this updated view are as follows we will be increasing our investment to ensure execution on our operating partner contracts exceeds our and our customers' performance goals. We expect this approach to maximize the long term earnings potential of these contracts.
We are assuming a longer ramp to higher growth for legacy are one modular solutions than previously expected.
However, as mentioned that the cloud med commercial engine is exceeding growth expectations and early indications from customers around the legacy modular solutions is very encouraging.
We continue to believe there is meaningful future growth to unlock in these offerings.
We expect higher technology investments to support our long term growth strategy around a consolidated platform and data architecture.
Finally, we are taking a cautious view in our budget assumptions for 2023 on a couple of environmental factors, namely the effect of inflation as well as consumer payments for patient out of pocket expenses.
Given that we now expect a lower lower results in the near term it's important to emphasize our continued confidence in the four key drivers that underpin our long term growth and earnings trajectory.
First we believe we have the best value proposition in the industry with a strong competitive position as shown by the 13 billion plus in new NPR signed onto our end to end platform in 2022 <unk>.
<unk> industry, leading revenue intelligence platform as unparalleled scale, serving 40% of the provider MPR across the country.
Second end market dynamics also remains strong we believe our one is better positioned to address ongoing macro challenges as a result of our technology coverage global scale and investment in automation. This is evidenced by our continued pipeline growth at our end to end offerings.
Our end to end pipeline is up more than 50% in Q3 compared to Q2. We also remain on track to commence onboarding of at least 9 billion <unk>.
New NPR in 2023 inclusive of phase II, etc.
Third we have a compelling financial model with high recurring revenue a long runway for margin expansion via our automation efforts and a strong balance sheet to fund future growth.
Fourth the integration with cloud met is going very well and we continued to be positive about the strategic rationale for the combination.
We are seeing early signs of customer benefits, including additional revenue yield opportunities for our end to end customers associated with cloud managed solutions and benefits to our modular channel from best in class commercial engine.
And the ability to leverage cloud technology and data platform across our infrastructure.
Before I turn it over to Lee, let me discuss the leadership succession. This morning.
To provide some background our board regularly discusses succession planning from a corporate governance standpoint, and given my tenure at the company I have been actively involved in these discussions.
As I approached 10 years with the company, including nearly seven in my current role the board and I determined. This is the right time to execute an orderly succession plan and turn the helm to new leaders at the company.
I am very pleased that Lee Reavis President of the company will succeed me as CEO effective January one.
John <unk> <unk>, Chief operating officer will succeed Lee as President also effective January one Lee.
Lee will immediately assume the seal elect title to facilitate his transition into the new role. Following the transition I will continue to serve on <unk> board of directors and serve as an executive advisor to Lee and the board to assist in the transition.
He has extensive data and technology experience strong leadership experience and a deep understanding of the revenue cycle industry as part of the cloud met transaction process I could see that Lee was the right person to succeed me as CEO .
His appointment as president we have been working together to ensure as broad based engagement within the organization.
Meeting customers and learning our business I could not I could not be more excited about the impact of Lee will have in the coming years, given his demonstrated track record of business performance technology expertise and proven ability to build high performing teams. The board the board and I are confident that he is the right person to lead our company forward.
No our one will be in capable hands under his care and stewardship.
In closing I'm very proud of what we've accomplished at our one over the last seven years from overhauling, our operational infrastructure to advancing our technology roadmap and adding some of the leading health systems in the country onto our platform. It's been an exciting and fulfilling journey, our accomplishments would not have been possible without the tremendous efforts of thousands of our one team members.
Across the globe.
I want to end by saying a heartfelt. Thank you to everyone for their help and dedication alongside now I'll turn the call over to Lee.
Thank you Joe first I wanted to thank you personally for your support over the last several months and express my gratitude to our board of directors for this opportunity.
I am excited to lead an amazing group of more than 26000 associates, who are working with our customer system qualified health care.
What I'm most passionate about is that our business starts with an incredibly important mission.
Cal providers solve a complex problem, managing revenues and enabling them to prioritize what they do best carrying for patients.
This mission is important to our customers and to our team members.
Second I believe in our team members and I am humbled to lead a group of professionals, who have deep expertise in technology revenue management and delivering for our customers at scale.
Having run technology data and growth businesses for the last 20 plus years my fundamental belief is that a strong mission coupled with an experienced dedicated team is key to creating long term value.
Third I want to emphasize that Joe and the team have created a very strong foundation are one has a long track record of successfully delivering both end to end revenue management and technology led modular solution for some of the top health systems and physician groups in the country and has the capacity to scale, even further through technology and data to.
Our end to end modular solutions touch over 800 billion of net patient revenue.
I am confident that with our continued investment in technology and people, we will continue to deliver incredible results for our customers and team members.
Next I'd like to briefly discuss a couple of areas I've been leading at our <unk> President.
First the legacy cloud Med business, which is part of our modular offering. This business is mission is to help solve a $100 billion revenue leakage problem through the use of advanced data and analytics and a team of revenue cycle experts working closely with our clients to ensure that revenue is captured.
I am pleased to say that climate continued to deliver strong results and is tracking the hydro expectations coming into the year demand overall for cloud med remains strong given our unique capabilities and the ongoing labor driven challenges that providers are facing.
Second integration. The two teams is progressing well the team has completed several key components of our integration, including establishing our modular commercial organization.
Completing the backups office integration of HR systems, and consolidating our product and technology groups. The focus for 2023 will be on leveraging our modern technology platform across the <unk> enterprise and further consolidating parts of our organization to drive efficiency and scale.
Third we continue to advance our technology agenda with an overarching goal of creating a revenue intelligence platform on a single database powered by our immense data assets at legacy cloud med touching over 40% of the provider market.
Our strategy, we'd be focused on leveraging the cloud based architecture deploying our clinical and payment data assets across our one and building a best in class technology team I am very excited about this part of the journey and I'm confident that the application of technology will be a key enabler to drive even higher customer satisfaction growth and margin expansion in <unk>.
Loathing I'd like to emphasize the value Joe and the team have created over the last decade and the role. He has played in creating a company I'm now proud to lead.
Joe for your dedication your leadership and your revision that helped create an amazing company I look forward to working with you over the next several months as I transition into my new role now.
Now I'd like to turn the call over to Rachel.
Thank you Lee I'm going to start by thanking gel for his leadership and transforming the company since joining in 2013.
Great pleasure to work together I'd also like to congratulate Lee and I look.
Look forward to continuing to work closely with you as we enter our next chapter one.
Turning to our third quarter results.
Now, let's cover the key trends and inbox on Q3 performance I will focus my discussion on year over year.
Clara comparison.
Revenue of $196 million was up 36% year over year and adjusted EBITDA of 125 million was up 38, 9% year over year driven by the contribution from the acquisition.
Starting with the detailed breakdown of revenue.
Net operating fees at $325 million grew $15 7 million year over year, and $5 9 million compared to Q2, primarily driven by contribution from new antenna customers.
Our production volumes came in below our expectation.
<unk> at $28 million declined by $9 1 million compared to the prior quarter each payer dynamics, just discussed as well as our.
Execution to reaching customers on.
On a year over year basis incentive fees declined by $27 million due to a combination of these factors as well as a shift in Easter net operating fees, our customer contract as discussed on previous calls.
Other revenue of $151 million was up $121 3 million over the prior year and $107 3 million over the prior quarter driven by $122 million contribution from the closet.
Excluding the contribution from <unk>.
Other revenue was relatively flat year over year due to slower than anticipated Greg anticipate.
The non-GAAP cost of services in Q3 was $326 9 million up $59 4 million year over year, and $46 4 million relative to last quarter, driven by the cabinet acquisition expansion planning capacity and Onboarding of new customers.
Our automation and Digitization efforts continued to offset the increase in cost of services and we remain on track to generate $45 million in cumulative cost savings or three year period exiting 2022.
non-GAAP SG&A expenses at $45 1 million were up 28.
Year over year to $20 9 million relative to Q2 due to cloud nine acquisition and a $9 5 million increase in allowance for credit losses related to a physician customer adjust.
Adjusted EBITDA for the quarter was $124 million up $34 7 million year over year and up $36 8 million compared to Q2, driven by contribution from cloud man and partly offset by lower incentive fees in the quarter.
Lastly, we incurred $30 $9 million of other costs, primarily related to establishing our new business service center in the Philippines and integration expenses related to <unk>.
Turning to the balance sheet cash and cash equivalents at the end of September were $131 1 million compared to $163 5 million at the end of June .
Our cash balance declined by $32 4 million quarter over quarter as cash generated from operations of $26 million, which more than offset by cash use of $31 9 million for capital expenditures, our teen dollars 3 million for debt Paydown and $12 6 million for share repurchases.
We repaid $14 $3 million of our debt in the quarter, including a $10 million voluntary pay down on our revolver.
However, net debt at the end of Q3 increased by $18 million quarter over quarter to 167 billion due to the $32 4 million decline in cash balance for the reasons I just described.
Our net leverage ratio as calculated under our credit agreement was 290 times and we expect it to remain below three times in the coming quarters, given continued debt paydown and growth in EBITDA.
500 million or approximately 30% of our floating rate exposure is currently hedged at a rate three point in tier 1% at current silver rates. The average interest expense across our debt portfolio is at a six to six 5% range.
Credit position remains strong with over $650 million of available liquidity.
We intend to remain opportunistic with regard to share repurchases.
Would be responsive to market conditions and other factors applying a balanced approach towards capital allocation.
Turning to our financial outlook.
Given the factors discussed under Paul we are updating our 2022 revenue guidance to a range of $1 79 billion to $1 8 billion and updating our adjusted EBITDA guidance to a range of 420 million to $425 million.
This includes the incremental allowance for credit losses recorded in Q3 <unk>.
This range implies Q4 revenue guidance of $516 $526 million and adjusted EBITDA guidance of $120 million to $125 million.
Looking to 2023 as Joe mentioned, we anticipate providing formal guidance in January after completing our budgeting process.
Demand for our solutions remain robust and we are focused on successfully onboarding the new passengers that earlier this year.
<unk> performed strongly in the quarter and while we saw pressure on our incentive fees, we remain confident that factors affecting performance should improve in the coming quarters.
It's hard to continuing to update you on our progress towards our financial goals.
Now ill turn call over to the operator for Q&A.
Yes.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Charles <unk> with Cowen Your line is open.
Yeah. Thanks, Thanks for taking the questions and Joe Congrats on.
10 years here and good luck with everything.
Congratulations on the.
On the new position here and look forward to working with you.
Yeah.
Wanted to.
Jumping to is obviously lots of impact here, but maybe if I could ask about this issue with the payer elongation turnaround times.
You've had a long track record of nothing like this seems to have come up before maybe maybe can you go into.
A little bit more about this and just trying to understand you're saying, it's going to go into 2023.
Is this something that can be fixed with increased use of automation or is this really a people issue that you need to.
Step up more.
I think Charles Thanks.
And.
What some.
What I would say on this is and we're in active discussions with all of our customers in a coordinated way just to work together.
To respond to this dynamic in the short term and the short term Charles as I mentioned in my commentary.
We are going to increase capacity.
Because.
That's the main lever that we have and so that capacity increase is really in two areas one.
And it's driven by changing our operating standards on frequency of follow up and the.
A number of times.
And on what cycle time, we set that standard.
To work the the receivable or the claim in the billing and follow up process.
Ill follow up touches are about are up about 17% in the trailing four weeks. So we continue to expect to hold at that capacity through Q3 and into Q4. We've also added capacity in our physician advisory services in partnership with the cloud Med team that has capabilities in that area.
As well and that's to respond to increases.
In clinical requests in the billing and follow up process. So in the short term.
That's the response that we're going to we are in the in the.
Midst of putting in place and.
Yes, we do expect that to yield results over the long term we.
We expect two things to happen Mr. Normalize we don't think this is.
Our structural change per se.
We expect this to normalize in <unk>.
Get back to the.
Normal response times that we're used to.
And then automation, we will absolutely continue to evolve in this area. This is an area where most of our cost sets and this function of our operating partner contracts. So it's a high priority for us from an always on an ongoing basis from an automation standpoint.
And if I could just follow up obviously looking at the pre market here.
Shares are looking to open up down.
<unk> again, and obviously the stock's been weak for a while.
You reiterated the long term growth outlook.
The capacity you're building the new business, we're bringing on August sounds that cloud is doing well.
I know that you.
You have a bit of debt on the balance sheet, but what is the capacity here for the board authorized.
Share repurchase or.
Something that the statements or investors too.
See that obviously the board also has confidence and it looks at the shares it feels maybe that it's undervalued or not reflecting obviously, what we're facing is a short term issue versus.
Versus the long term outlook.
Hi, Charles it's Rachel.
Greg had a balanced approach towards our capital allocation.
We had $478 million left on our repurchase authorization of $500 million total because we get is in the quarter that $12 million.
Any thoughts to accelerate that.
Given given where shares are.
And this is obviously an interesting time, we'll see how we have and that is clearly an opportunity and again.
<unk> discussed I think on the long term as we look at the factors when we look at where we are with the business and where we're heading we remain very confident there's nothing different in our model and margin profile, the longevity and durability of our contract.
So, yes, I would expect that it will be a nice opportunity.
Great. Thank you.
Your next question is from the line of Sean Dodge with RBC capital markets. Your line is open.
Yes, Thanks, good morning, and Joe I'll add my congratulations are certainly certainly going to Miss you and Lee.
Graduations as well to you.
Joe the customers you mentioned implementing right now with unique complexities.
We all know transitioning an entire revenue cycle is big and complicated that theyre going to be bumpy I guess in a bigger scheme of things how unusual are the issues.
We're facing there compared to all the other implementations you've completed in the past and then the additional resources you're committing.
You said it shouldnt affect our long run economic, but maybe can you kind of parse out how much.
Of an impact those will have any interim versus some of these other macro.
Factors that you've talked about.
Yes, I think.
Let me just first talk about some.
The underlying drivers of the complexity in these two in these two engagements that I referenced.
And I will talk about.
Kind of on a named basis, just because they've also publicly talked about.
Our partnership which is pediatrics.
So so in that area.
Yes.
Just to put in context, we've got about 1300 employees are one employees that are managing that pediatrics operation.
And one of the biggest drivers of complexity there for US is that we are interfacing those employees into <unk>.
400 different hospital systems Okay.
And.
And that interface and the complexity that sits there.
Credentialing the technology integration et cetera is very very high okay.
The second driver of complexity is pediatrics has had a change in their host system strategy.
Which initially.
Put us in a position not to deploy our technology we have.
We've gotten clarity on that host system strategy.
And we're largely through deploying our technology, which is critical for us to drive our operating standards et cetera. So as we sit right now.
Our trailing three quarter cash collection, there is the highest that we know going back to 2020 data.
We've got.
We mobilized our recovery plans starting in Q2 that cover recovery plan has good momentum.
We expect to be back to target performance.
In early 'twenty three if not as we end. This year are now we are disconnected or we don't fully understand always pediatrics reserve model as a general matter that reserve model will lag our operating performance a bit.
But thats really.
That's really the dynamic on that partnership now given some of their public public commentary.
We have.
Proactively provided our customer facing teams.
With the right talking points around this engagement, we've had one inbound call.
From a.
Our current customer and contracting.
We talked with that customer they understood fully the complexity and not contracting is proceeding as planned I think the big takeaway for us is one.
When we see this complexity, we really have to.
Incorporate into our deployment plans the right.
Schedules of dependencies. The second thing I'll say is we have a long track record of managing some of the most complicated deployments. This is one of them.
As we are.
Recover.
<unk>.
And drive the partnership forward.
This will turn into a positive as we talk about future customers just our learnings how we went through this process our commitment to the customer and the journey et cetera.
The other contract is not that dissimilar however, it's out of more traditional idea.
Where there's where.
<unk> 27, 27 different CBO is.
Grading our technology into <unk>.
<unk> 15 different host systems, so really again, a common theme around the technology architecture and the fragmented footprint.
But we've got a full plan in place we are seeing progression of progress and we're confident that as two things. We're confident on will be fully recovered on knees heading into 'twenty three and as I said in my comments that long term earnings potential.
It will take us a little bit longer than we normally model to get two remains unchanged on these contracts.
Okay.
That's very helpful. Thank you and then just quickly you mentioned collecting directly from patients certainly can get a little bit more difficult.
In a recessionary environment.
Can you give us an idea of what proportion of your collections right now where from.
The patient self paced portion.
Roughly 20%.
Okay.
Again.
Thanks, Sean.
Operator. Your next question comes from the line of Scott Tilghman House with Keybanc capital markets. Your.
Line is open.
Hi team.
Wanted to touch on your comments on 2023, if I could.
You said, you expect EBITDA adjusted EBITDA to be 10% to 15% lower versus current consensus cloud meant I believe it was running around $200 million and adjusted EBITDA. This one.
Apply only modest declines on your legacy business can you help us with what.
Bridge, what's baked into these assumptions or is it just cloud met growth is expected to be more outsize next year. Thanks.
Yes.
As I commented theirs.
There's a couple of things that.
Are incorporated into our current view on 2023, one is we are going to increase our investments.
To ensure execution on our operating partner contracts exceeds our and our customers' performance goals and inside of that increased investment. That's so the comments earlier discussions that we've just had.
Whether it be kind of.
The payer interface and making sure that.
We are controlling our destiny so to speak in terms of that cycle time.
The contracts that were that I referenced that we are.
Working on right now in terms of complexity or the new deployments that we've got ongoing.
I commented around Sutter, specifically, we're adding 250.
People.
Now onto that engagement and as Sutter comes and we're also seeing the same thing in their operation that were absorbing.
Around elevated AR days.
Sure.
And Theyre seeing the same trends that we're seeing so to account for that.
And as a general matter one big driver is increase of investment in.
In those core and we feel strongly that making that investment in 'twenty three.
We'll ensure these contracts.
Maximize their long term earnings potential.
Which we're very very excited about the second thing is we are making the assumption that that ramp to higher growth for the legacy mortgage module solutions will be longer than we had originally planned now.
We think thats appropriate just to account for the sales cycle and the mobilization afterwards, but to be very clear.
We don't see any changes to our view in terms of the potential to unlock significant growth cross selling those solutions into the modular or into the commercial engine of cloud Med cloud managed commercial engines performing ahead of expectations and early signs are encouraging around that.
The third thing is higher technology investments.
That we're going to be making and thats really to continue to expand on our value prop and take advantage of the technology scale and coverage, we have as well as provide the foundation for <unk>.
Data innovation over time, and then finally.
We're going to take a cautious view on some of our environmental assumptions in the budget, namely.
The potential impact of inflation.
To consumer payments for patient out of pocket expenses, just given unknowns in the economic environment on a macro basis going into 2023.
Okay. That's very helpful and just as a follow up I just wanted to talk about your executions and you know what.
You guys are doing to avoid these issues with the new contracts you mentioned the capacity per center with the increase of 250 additions I just want to be clear not moving resources away from current contracts to fixed challenges.
These are all new capacity and you have it up and running.
Yes.
To be clear, we are not just shifting resources from other contracts, we are adding incremental capacity. That's why we are incurring that kind of in our going forward views on financial.
Plans.
And.
We think we think making that the priority to address some some short term execution challenges.
Yield significant benefit looking forward and it's really in a couple of areas I talked about it.
In terms of just increasing operational capacity the second area is in our technology deployment.
And that was a key.
Kind of contributing factor in some of these.
Contracts I talked about.
Making sure we've got the rights.
The right oversight on.
Driving our standards and driving our deployment models.
Your next question is from the line of Michael Cherny with Bank of America. Your line is open.
Good morning, and thanks for all the color so far.
Maybe a question either for Joe or Lee when you talked about the changing modeling expectations on the take rate on your operating partner customers from four 5% to 4% is that just for new customers or was there. Some type of contract renegotiation you went through with your existing customers.
No no contract renegotiation with our existing customers it's primarily.
It's a model.
The current the current contracts, we have in deployment and really what we're seeing in.
What we're seeing in <unk>.
Our sales pipeline late stage sales pipeline activity, where we do.
Baselines and impact assessment to give initial pricing targets.
We do have changes from time to time in scope.
That we add scope, where we made change scope.
In prior contracts, but I would not characterize those as.
Material or significant changes to our current contracted book.
And then thinking through some of the incremental hiring youre doing in the staffing up as you think about.
Call. It Bandaid call. It filling a gap is this expected to be over time, the new elevated level of deployment capabilities that youre going to have in place. Obviously, a good problem to have on winning a lot of new business. But then the flip side is you have to make sure that you're servicing that business. So should we think about now going forward a different level of investment in terms of.
Permanent baseline for your own employee base.
No I don't think so so the first thing is.
The short term.
Execution increase.
Increase in investment to make sure we're executing ahead of our expectations and our customers.
We would view that as has as just that something that we have to make.
And and and.
And it will.
We expect to recover we have line of sight to the profile on that recovery and then we would expect that capacity to either.
Be shifted to the new growth in the new deployments that are occurring or to just normalize over time and as a reminder.
Our operations, we have a fair amount of churn in the employee base that is not unique to us that's just.
It's something that's part of this type of operation. So we have an ability to flex our resourcing often down longer term.
Don't see any change to the contract modeling from a cost to serve basis on our side, nor do we see any change from a.
Impact of automation.
<unk>.
And that's why we're making those investments that I referenced in a consolidated platform and we think that accelerates some of the opportunities along those lines.
Got it thank you.
Your next question is from the line of George Hill with Deutsche Bank. Your line is open.
Good morning, guys and thanks for taking the question I guess, Joe one of the things I would probably come back to this topic of kind of the payer elongation.
Can you talk about whether this is.
I think we talked about or is this more of an <unk> issue from an execution perspective or is this payer specific and then I'd ask if we're talking about any specific payer buckets either by carrier by payer type kind of trying to get to the core of what's driving the elongation here.
Yes.
Listen.
From from the best we can tell this is this is not one specific issue.
And the reason I say that is we're able to see.
Kind of in our in our footprint, we're able to see the kind of.
Captive operations within our customers were able to see books of business that are coming into us.
What are those.
What are the dynamics in this area and we see a lot of consistency.
The first point the second point is.
For most of our customers, we've got active discussions with managed care organizations.
The provider interface to the payors around and really working through that so so as best we can tell.
The majority of this.
Is is environmental however, what I'll say is my expectations of the team.
Is that we control that operation and so what I don't want to leave you with is that there is no response that we have with us.
Absolutely.
Are making very specific changes too.
To drive this on behalf of our customers.
And so when.
When I look at it I can call it environment or I can call. It execution I would tend to say George.
That.
My comments to our team is that.
We just need to execute at a higher level to respond to that and that's that's really how I think about it but we are seeing this and we are having active discussions with our customers on a broader basis no specific to payer to highlight in and listen our sensors. This is just driven by.
The labor constraints that are in the market at large.
As those labor constraints, we have them payers have them et cetera. So we don't.
We don't see this as something that's long term or structural.
That's helpful. And then another question I would ask is I want to make sure I heard you correctly, where you said that the growth ramp of the legacy modular solutions appears to be slower than expected. So I. Just first I just want to make sure I heard you right second I wanted to know if you could talk about like how big are those legacy modular solutions. When we think about that inside the context of the business and then my step back.
Question is given the macroeconomic environment or are we just seeing an elongation of sales cycles generally speaking.
Like I know you said that the cloud med pipeline is strong the pipeline is strong but are we seeing sales cycles elongated and are we seeing close times elongate as kind of where I'm going with that line of questioning.
Yes.
Let me do this George let me answer the first question and then I'm going to turn it over to Lee to answer the second question because.
He's got a great perspective, given cloud meds.
Our business model and commercial engine.
The first thing is our annual spend on legacy modular solutions about $120 million a year.
<unk> revenue.
And.
What we're what we're targeting is a 20% growth rate on that revenue base.
And I think one of the things.
As we look at 2023 is our assumptions in 2023 on how fast we would mobilize.
Getting close to that target, we're a bit aggressive and so we're going to reduce those assumptions power.
However.
As I said in my comments.
The cloud.
Business is already running at well above 20% growth rates.
They've got a demonstrated ability to cross sell and incorporate new solutions into that channel.
We've got the teams.
Consolidated under one leadership organization.
They have already identified the first two modules to launch and so while it's going to take us a little bit longer than we had previously planned.
We are very very.
Encouraged and excited about the long term growth to unlock nothing's changed in terms of that thesis. Let me, let me turn it over to Lee now just to comment on what he's seeing on close rates and the cycle times of selling these types of offerings.
Thanks, Joe George Let me touch on cloud Med and then address the other part of your question cloud Med plus the legacy are one modular solutions. So just to hit the headline upfront. We year to date are actually ahead of plan on cloud bed full year in line and what's happening there is there mark.
<unk> demand actually created by some of these later labor shortages across the board from on the provider side and payer side. So we are seeing significant demand.
Very strong pipeline for the underlying cloud med business and so that's the market side.
Competitive differentiation side, just to remind you. We believe climate is a unique platform that covers 800 billion of NPR, but that allows this business to do is see across all 50 states all payer types, our clinical denials all payment types and allows us to identify revenue for our customers and.
This $100 billion market opportunity and that's part of the reason why we're seeing so much traction on our pipeline and growth.
Just to touch that second 0.1 of the points. Joe mentioned earlier is leveraging the cloud med commercial channel I just want to go a little deeper than that we over the last five plus years felt best in class commercial channel and this is an industry. As you know that that is very tight talk to each other we have 93 of the top one.
<unk> systems, and a lot of reference ability.
Part of what's happening is our sales team our commercial teams are introducing some of the new our one module solutions to our current base of customers and so we feel very strongly about the future growth prospects of the R. One modular solutions, but as Joe said some of the ramp up will take that.
Okay.
Okay. That's that's helpful. I'll hop back in the queue I appreciate the color.
Your next question is from the line of Elizabeth Anderson with Evercore ISI. Your line is open.
So I'm answering the question guys.
I have a question regarding some of the underlying assumptions.
Overall like health care utilization as we think about the fourth quarter can you talk about sort of what youre thinking about in terms of the underpinnings of that.
And the broader macro trend and then if you could extend that into yesterday.
For 2023 that would be helpful.
Yes.
Sure.
As we look at it maybe to answer the fourth quarter I'll just put in perspective, the progression we've seen over the course of the year.
And essentially.
Against our expectations.
So just to provide that reference point.
We were on if not a little bit of ahead of kind of our internal modeling assumptions on.
Customer volumes and underpinning customer volumes as utilization.
In Q1 and Q2.
Q3 and Q4.
We're below our plans and so as we as we look to 2023.
Incorporated into our thinking on that.
The budget assumptions, we're taking a conservative approach.
To utilization as we think about 2023.
And what.
What drives that is just coming out of coming out of Covid.
And really trying to establish.
The baseline to forecast office is a challenge for us and we think that.
That's that informs the view, we're taking for 2023.
Got it and is there anything you can say now in terms of what you're assuming for underlying interest expense for 2023, I mean, I know, there's a lot of interest rates I would tell you, but maybe given current rates.
Yes, I think we would say about 70% is probably fair teams right now at 30% ish of our debt is hedged.
I'll take a blended average would be about that okay. Thank you.
Your next question is from the line of Jay lenders, saying with <unk> Securities. Your line is open.
Thank you and good morning, and thanks for taking my questions. Joe Thanks, and good luck, congrats and best wishes for your new role.
I'll start with a follow up related to John's question earlier on longer turnaround times why do you think it is not just a bit of normalization given payer so not really deploying installation management and payment integrity. During the pandemic for the last couple of years and is it just a timing issue in terms of collection or are you also seeing a pickup in.
Denial rates than what you were experiencing the recent quarters.
Yes, we're not seeing any change in.
Denial rates, but but we are having to.
Due more to your point to two two.
To.
Make sure.
We drive the right payment for the services provided.
My sense is when we when we look at when we look at some.
Kind of where the elongation sets.
The two areas that are highlighted for us in that elongation. One is on the high dollar accounts.
So those those accounts normally need a manual review before they get released on the payer side and so are our current view is that tied up in this labor market shortage environment, we have and Thats why we feel that will be transitory over time.
We're navigating a challenging labor market as our payers and so.
We know that that's what leads us to that conclusion on the increased clinical requests.
That may be.
Yes.
There's a potential that that's elevated and it stays elevated.
But what our teams are working through is is really how do we use automation and how do we use technology.
To respond if that were to occur.
In the short term, we're responding to it on a.
On a on a manual basis, but we just don't know and we think and what we've seen over time is there.
Requests for things that are not required they tend to normalize back in so.
We see these ebbs and flows in our and our experience over over many years.
Okay and then on my follow up I was wondering if you guys can take a step back and maybe share your thoughts around how much of these operational challenges could have been driven by the fact that you guys have seen some significant expansion in the NPR in recent years, while you were still working through deployment capacity and if we should read anything into.
So if you're a willingness to explore near term new RFP opportunities and pipeline should we expect a pause here in terms of you guys announcing new contracts until these issues are taken care off.
Well, let me let me let me let me take the question in two parts.
And the first one as I said and as I said in my commentary.
In the opening.
In the formal remarks, we do think it's important for us to invest in.
And invest above what we had planned planned going into 2023.
To make sure.
We exceed our customers' expectations and exceed our expectations for performance and financial.
Potential on these contracts over the long term.
We're in the process of doing that we have good good progress on all of those fronts.
And I expect.
That too.
Hum.
Pay significant benefits in the first half of 2023.
Given that we're already mobilizing along those lines.
Over the course of Q3 into Q4 ended in the first half.
Right now we don't see any.
Changes.
Two our ability to onboard new new opportunities and in fact as I comment that our pipeline is up.
And and we've got good progression in that pipeline. So we have good line of sight.
Around our NPR growth targets for 2023, but I will emphasize we are taking a conscious priority to invest.
And to make sure.
We have execution in order.
And I think that will set us up to serve 2023 growth opportunities.
Yes.
I think as you think about root causes of that.
That dynamic the team has been absorbing a lot of growth and I think the complexity in some of these engagements has contributed to the need for us to make.
It may come.
<unk> this a.
Our priority in the short term.
But I think the other thing to point to is.
The earnings potential that we see.
Longer term. These are these are long term partnerships, they're very complicated to deploy it's not uncommon that we see variation in the early stages of deployment.
We have to address that and we are but what I would emphasize is long term. We're excited encouraged about.
About the growth potential that we're going to unlock as a direct result of taken this approach and so that's.
That's our thinking as we.
Look to finalize our budget for 2023.
Yes.
Your final question comes from the line of Stephanie Davis with SBB Securities. Your line is open.
Hey, guys congrats on the new Raleigh, and Charlotte, It's sad to see you go.
Now often run since the accretive days.
Let me before we ended the quarter I was hoping to hear a little bit more about your goals for this fee.
As we think of the Joe Flanagan years as characterized by an operational turnaround how should we think about the way this years going forward.
Yeah, Stephanie Great question, let me start by saying I I'll reiterate what I said in the comments earlier first of all I'm very excited.
Cited about this being such a mission driven business I have a fundamental belief that that mission drives incredible.
Inspires employees and allows us to do great things for our customers. The other thing I would say is I am very confident Ed.
The combination of the two businesses and the underlying business model for our wine and just to reiterate my own words. Stephanie. This is a business with long term contracts great earnings power and high visibility in our revenues and EBITDA. The global scale is a unique differentiator and Joe and team have already invested at <unk>.
And technology investment the other thing I'd say is the addition of cloud Med is is it is an even more unique differentiator.
We already have a very modern cloud based <unk>.
Technology platform that can be extended to our one data footprint that actually is an incredible differentiator seeing all clinical codes payment types.
The country allows us to help our one end to end customers.
And a very diversified customer base with 400 customers one solution sold into 93 of the top 100 system. So so with that as a backdrop just my fundamental belief in the strength of the underlying business I'll give you the kind of quick headlines on the plan.
One continue integration this is going very well it can go in and plenty of detail. There later, but this is something we and the team take pride in making sure. The integration goes well as Joe mentioned, leveraging the cloud Med modular channel is a very important value driver. The two things that mentioned Stephanie just to give you a bit of a sense.
On the vision going forward without going too far given that ive been here post closed only a few months the things I'd say is given my experience. Stephanie is it is both and in data and technology businesses and also businesses have that service components I'm very familiar with this kind of business and the.
<unk> of technology. So the first thing I'd say is you all hear me talk more about and you're really just extend what Joe just said, which is the application of automation to resolve what we all know are super inefficient processes crops and operation of hospital systems physician groups and you'll hear me talk not just about automation.
But the application of a data platform that can be extended across all workflows for our internal operators that are won and to our customers. The.
The other piece for me is on the <unk> side, clearly, we need a lot of focus on delivery.
Team has a track record of delivering and to Joe's point. This is we have incredible earnings power in spite of any any short term issues. So I will be very focused on delivery I will be very focused on our pipeline pursuits. As Joe mentioned, we have an increase in pipeline from Q2 to Q3 and personally engaging with customers. It's definitely I have already met.
Our largest customers the top five and it will be on the road. The next few weeks I don't expect a major change in strategy Stephanie.
Strategy is sound the combination of end to end global scale combined with <unk> already started investing in technology. This is as much about an execution story with with some refinements on how we apply technology.
I understand <unk> got together in the future.
Thanks, Stephanie.
At this time I would like to turn the call back over to Mr. Joe Flanagan.
Well first thank you for all your help moderate moderating the call today.
And thanks for everybody for joining the call as we end the call I'd like to emphasize a few things.
We are maniacally focused on addressing our short term operational challenges.
We've got very detailed plans already mobilized and we're starting to see progression along those lines.
As you think about 2023 I'm really.
Excited for two things one I feel like we're building a plan that is going to set ourselves up.
For future success.
And maximizing the potential that the market affords and that our commercial arrangements afford and the second thing is.
I've had the opportunity to work with Lee since we started the discussions on cloud Matt.
And Lee and I have engaged in.
Many many facets of our business.
Talked with all of our customers met with all of our employees.
And I could not be more proud to transition my responsibilities to Lee and more excited about the impact he's going to have on the company looking forward.
His focus on driving transformation through a technology agenda.
Is what is really going to differentiate us looking forward and he's got a long track record along those lines and we're lucky to have him leading the company.
Starting January <unk> and so on.
I just wanted to emphasize that from my perspective.
So thanks again for your participation and look forward to.
Further discussions going forward.
Ladies and gentlemen, thank you for participating on today's call. This concludes today's conference you may now disconnect.
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Yes.
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Okay.
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