Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM 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. [Operator Instructions] Thank you. It is now my pleasure to turn today’s call over to Mr. Atif 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 may be 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 position, growth opportunities and our 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 involve risks and uncertainties.

While we may elect to update these [forward-looking] [ph] 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 from those included in these forward-looking statements as a result of various factors, including, but not limited to, geopolitical and economic market conditions, heightened inflation, slower growth or recession, and other risk factors discussed under the Risk Factors heading in our most annual report on Form 10-K, and our latest quarterly report on Form 10-Q.

We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. Now, I'll turn the call over to Joe..

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 R1 modular solutions than previously expected.

However, as mentioned, the Cloudmed 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 unlocking 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 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. Cloudmed’s industry leading revenue intelligence platform has unparalleled scale serving 40% of the provider NPR across the country.

Second, end market dynamics also remain strong. We believe R1 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.

In fact, 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 in new NPR in 2023 inclusive of Phase 2, etcetera.

Third, we have a compelling financial model with high recurring revenue along the runway for margin expansion via our automation efforts and a strong balance sheet to fund future growth. Fourth, the integration with Cloudmed is going very well and we continue to be positive about the strategic rationale for the combination.

We're seeing early signs of customer benefits, including additional revenue yield opportunities for our end-to-end customers associated with Cloudmed solutions and benefits to our modular channel from best-in-class commercial engine, and the ability to leverage Cloudmed’s technology and data platform across our infrastructure.

Before I turn it over to Lee, let me discuss the leadership succession with us 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 approach 10 years with the company, including nearly seven in my current role, the Board and I determine this is the right time to execute an orderly succession plan and turn the helm to new leaders at the company. I'm very pleased that Lee Rivas, President of the company will succeed me as CEO effective January 1.

John Sparby, Chief Operating Officer will succeed Lee as President also effective January 1. Lee will immediately assume the CEO elect title to facilitate his transition into the new role. Following the transition, I will continue to serve on R1's Board of Directors and serve as an executive advisor to Lee and the Board to assist in the transition.

Lee has extensive data and technology experience, strong leadership experience, and a deep understanding of the revenue cycle industry. As part of the Cloudmed transaction process, I could see that Lee was the right person to succeed me as CEO.

Since 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 be more excited about the impact 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 and I are confident that he is the right person to lead our company forward.

I know R1 will be in capable hands under his care and stewardship. In closing, I'm very proud of what we've accomplished at R1 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 thoughtful without the tremendous efforts of thousands of R1 team members across the globe, And 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 want 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'm excited to lead an amazing group of more than 26,000 associates who are working with our customers to simplify healthcare.

What I'm most passionate about is that our business starts with an incredibly important mission to help providers solve a complex problem managing revenues and enabling them to prioritize what they do best, caring 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 a customer 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.

R1 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.

Together, our end-to-end and 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 R1 as President.

First, the legacy Cloudmed business, which is part of our modular offering. This business' 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 Cloudmed continues to deliver strong results and is tracking ahead of expectations coming into the year. Demand overall for Cloudmed remains strong given our unique capabilities and the ongoing labor driven challenges that providers are facing. Second, integration of the two teams is progressing well.

The team has completed several key components of our integration, including establishing our modular commercial organization completing the back office integration of HR systems, and consolidating our products and technology groups.

The focus for 2023 will be on leveraging our modern technology platform across the R1 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 Cloudmed touching over 40% to the provider market.

Our strategy will be focused on leveraging the cloud-based architecture, deploying our clinical and payment data assets across R1, and building a best-in-class technology team.

I'm 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 closing, 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. Thank you, Joe, for your dedication, your leadership, and your vision 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, I'd like to turn the call over to Rachel..

Thank you, Lee. I want to start by thanking Joe for his leadership and transforming the company since joining in 2013. It's been a true pleasure to work together. I'd also like to congratulate Lee and I look forward to continuing to work closely with you as we enter our next chapter at R1.

Turning to our third quarter results, as Joe has covered the key trends and impacts on Q3 performance, I will focus my discussion on year-over-year and quarter-over-quarter comparison.

Q3 revenue of 466 million was up 30.6% year-over-year and adjusted EBITDA of 124 million was up [38.9%] [ph] year-over-year driven by the contribution from the Cloudmed acquisition, starting with a detailed breakdown of revenue.

Net operating fees of 324.2 million grew 15.7 million year-over-year and 5.9 million compared to Q2, primarily driven by contribution from new end-to-end customers. However, physician volumes came in below our expectations.

Incentive fees of 20.8 million declined by 9.1 million, compared to the prior quarter due to the payer dynamics Joe discussed, as well as our execution at two recent customers.

On a year-over-year basis, incentive fees declined by 20.7 million, due to a combination of these factors, as well as a shift in incentive fees to net operating fees for one of our customer contracts as discussed on previous calls.

Modular and other revenue of 151 million was up 121.3 million over the prior year and 107.3 million over the prior quarter, driven by 120.2 million contribution from Cloudmed. Excluding the contribution from Cloudmed, Modular and other revenue was relatively flat year-over-year, due to slower than anticipated growth of VisitPay.

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 Cloudmed acquisition, expansion of deployment capacity, and onboarding of new customers.

Our automation and digitization efforts continue to offset the increase in cost of services and we remain on track to generate 45 million in cumulative cost savings over a three-year period exiting 2022.

Non-GAAP SG&A expenses of 45.1 million were up 22.2 million year-over-year 20.9 million relative to Q2, due to the Cloudmed acquisition and a 9.5 million increase in allowance for credit losses related to a physician customer.

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 contributions from Cloudmed and partly offset by lower incentive fees in the quarter.

Lastly, we incurred 30.1 million in other costs, primarily related to establishing our new business service center in the Philippines and integration expenses related to Cloudmed. 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 was more than offset by cash use of 31.9 million for capital expenditures, 14.3 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 in our revolver. However, net debt at the end of Q3 increased by 18 million quarter-over-quarter to 1.67 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 2.92x and we expect it to remain below 3x 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 of 3.01%.

At current SOFR rates, the average interest expense across our debt portfolio is in the 6% to 6.5% range. Our liquidity position remains strong with over 650 million of available liquidity.

We intend to remain opportunistic with regards to share repurchases as will be responsive to market conditions and other factors applying a balanced approach towards capital allocation. Turning to our financial outlook.

Given the factors discussed on the call, 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, reported in Q3.

This range implies Q4 revenue guidance of 516 million to 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.

In closing, demand for our [solutions] [ph] remain robust and we are focused on successfully onboarding the new customers [we had] [ph] earlier this year. Cloudmed 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.

I look forward to continuing to update you on our progress towards our financial goals. Now, I'll turn the call over to the operator for Q&A.

Operator?.

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

Yes. Thanks for taking the questions. And Joe, congrats on the 10 years here and good luck with everything. And Lee, congratulations on the new position here and look forward to working with you.

I want to jump into, obviously, lots of unpacks here, but maybe if I could ask about this issue with the payer elongation turnaround times, you know, you've had a long track record of nothing like this seems to have come up before. 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 could be fixed with increased use of automation or is this really a people issue that you need to staff up more?.

I think Charles thanks. And 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 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 number of times, and on what cycle time we set that standard to work the receivable or the claim in the billing and follow-up process? Our follow-up touches are up about 17% in the trailing four-weeks and 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 Cloudmed 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 midst of putting in place and we do expect that to yield results. Over the long-term, we expect two things to happen. This to normalize, we don't think this is a structural change per se.

We expect this to normalize and get back to the normal response times that we're used to. And then automation will absolutely continue to evolve in this area. This is an area where most of our cost sits in this function of our operating partner contracts.

And so, it's 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 significantly again and obviously the stocks have been weak for a while. You reiterated, sort of the long-term growth outlook and in the capacity building, the new business we're bringing on, obviously, sounds like Cloudmed is doing well.

You know, I know that you know, have a bit of debt on the balance sheet, but what is the capacity here for the board to authorize a share repurchase or, you know, something is the statement for investors to see that obviously the Board also has confidence and looks at the shares and feels maybe that it's undervalued or not reflecting obviously what we're facing as a short-term issue versus the long-term outlook? Thanks..

Hi, Charles. It's Rachel. We've had a balanced approach towards our capital allocation. And as you know, we had 478 million left in our repurchase authorization of 500 million total because we did use in the quarter about 12 million..

Any thoughts to accelerate that given where shares are?.

Yeah. This is obviously an interesting time. [We'll see] [ph] how we open, but it’s clearly an opportunity.

And again, as we've discussed, I think on the long-term as we look at the factors and we look at where we are with the business and where we're heading, remains very confident there's nothing different in our models, the margin profile, the longevity and durability of our contract. So, yes, I would expect this to 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. We're certainly going to miss you and Lee congratulations as well to you. Joe, the customers you mentioned implementing right now with unique complexities.

We all know transitioning entire revenue cycle big and complicated that they're going to be bumpy, I guess on a bigger scheme of things, how unusual are the issues you'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 shouldn't affect the long-run economics, but maybe can you, kind of parse-out how much of an impact those will have in the interim versus some of these other macro factors that you've talked about?.

Yes. I think, let me just first talk about the underlying drivers of the complexity in these two engagements that I referenced. And one, I'll talk about, kind of on a named basis just because they've also publicly talked about our partnership, which is pediatrics.

So, in that area, just to put in context, we've got about 1,300 employees, R1 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 400 different hospital systems, okay.

And in that interface and the complexity that sits there, the credentialing, the technology integration, etcetera, 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'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, etcetera. 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 a recovery plan starting in Q2 that recovery plan has good momentum. We expect to be back to target performance in early 2023, if not, as we end this year. 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 that's really the dynamic on that partnership. Now, given some of their public commentary, we have proactively provided our customer facing teams with the right talking points around this engagement. We've had one in-bound call from a current customer in contracting.

We talked with that customer. They understood fully the complexity and that 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, and 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. And as we recover 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 in the journey, etcetera. The other contract is not that dissimilar however, it's had a more traditional IDN where there's – we're consolidating 27 different CBOs and integrating our technology into 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 we – two things we're confident on, we'll be fully recovered on these heading into 2023.

And as I said in my comments, the long-term earnings potential, while it will take us a little bit longer than we normally model to get to remains unchanged on these contracts..

Okay. That's very helpful. Thank you. And then just quickly, you mentioned collecting directly from patients certainly get a little bit more difficult in a recessionary environment.

Can you give us an idea of what proportion of your collections right now are from the patient's self-paced portion?.

Roughly 20%..

Okay. Thanks again..

Thanks Sean.

Operator?.

Your next question comes from the line of Scott Schoenhaus with KeyBanc Capital Markets. Your line is open..

Hi, team. Just 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, Cloudmed I believe, was running around 200 million in adjusted EBITDA.

This would imply only modest declines on your legacy business, can you help us what bridge, what's baked into these assumptions or is it just Cloudmed growth is expected to be more outsized next year? Thanks..

Yes. As I commented, 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 increase in investment, that's to the commentary discussions that we've just had around 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 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 where we're adding 250 people onto that engagement.

And as Sutter comes in, we're also seeing the same thing in their operation that we're absorbing around elevated AR days and they're 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 those core.

And we feel strongly that making that investment in 2023 will ensure these contracts maximize their long-term earnings potential, which we're very, very excited about. The second thing is, we are making an assumption that the ramp to higher growth for the legacy margin modular solutions will be longer than we had originally planned.

Now, we think that's appropriate just to account for the sales cycle and the mobilization efforts, 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 Cloudmed.

Cloudmed's commercial engine is 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 that's 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 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, and two consumer payments for patient out of pocket expenses just given unknowns in the economic environment on a macro basis going into 2023..

That's very helpful. And just as a follow-up, I just want to talk about your executions. What you guys are doing to avoid these issues with the new contracts, you mentioned the capacity for Sutter with the increase of 250 additions.

I just want to be clear, you're not moving resources away from current contracts to fixed challenges that these are all new capacity and you have it up and running? Thanks..

Yes. No, we are – to be clear, we are not just shifting resources from other contracts, we are adding incremental capacity. That's why we're incurring that kind of in our going forward views on financial plans. And we think making that the priority to address some short-term execution challenges will yield significant benefit looking forward.

And it's really in a couple 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. And then making sure we've got the right oversight on driving our standards and driving our deployment models..

Your next question is from the line of Michael Cherney 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 4.5% to 4%, is that just for new customers or was there some type of contract renegotiation you went through with your existing customers?.

No contract renegotiation with our existing customers. It's primarily to model the current contracts we have in deployment and really what we're seeing in – what we're seeing in our sales pipeline, late stage sales pipeline activity where we do base finding an impact assessment to give initial pricing targets.

We do have changes from time-to-time in scope that we add scope or we may change scope in prior contracts, but I would not characterize those as material or significant in changes to our current contracted book..

And then thinking through some of the incremental hiring you're doing in the staffing up, as you think about call it [band-aid] [ph], call it filling a gap, is this expected to be over time the new elevated level of deployment capabilities that you're 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 a permanent baseline for your own employee base?.

No, I don't think so. So, the first thing is, the short-term execution increase in investment to make sure we're executing ahead of our expectations and our customers we would view that as just that, something that we have to make and it'll – 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 and the new deployments that are occurring or to just normalize over time. And as a reminder, in our operations, we have a fair amount of churn in the employee base that's not unique to us, that's just something that's part of this type of operation.

So, we have an ability to flex are resourcing up and down.

Longer-term, we don't see any change to the contract modeling from cost to serve basis on our side, nor do we see any change from an impact of automation, 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..

Yes, good morning guys and thanks taking the question.

I guess, Joe, one of the things I'd probably come back to this, the topic of, kind of the payer elongation, and can you talk about whether this is an – I think we talked about it, is this more of an R1 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 or by payer type, kind of trying to get to the core of what's driving the elongation here?.

Yes. Listen, from the best we can tell, this is not an R1 specific issue. And the reason I say that is, we're able to see, kind of in our footprint, we're able to see, kind of captive operations within our customers, we're 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 that's the first point. The second point is, for most of our customers, we've got active discussions with their managed care organizations the provider interface to the payers around really working through that.

So, as best we can tell, the majority of this 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's no response that we have to this. And we absolutely are making very specific changes to drive this on behalf of our customers.

And so, 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 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 specifics to payer to highlight. And listen, our sense is this is just driven by the labor constraints that are in the market at large. And as those labor constraints, we have them, payers have them, etcetera. So, we don't see this as something that's long-term or structural..

Okay. 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, are we just seeing an elongation of sales cycles generally speaking? And like I know, you said the Cloudmed pipeline is strong, the pipeline is strong, but are we seeing sales cycles elongating and are we seeing close times elongate? Is 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 over to Lee to answer the second question because he's got a great perspective giving Cloudmed's business model and commercial engine. The first thing is, our annual spend on legacy modular solutions is about 120 million a year of revenue.

And 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.

However, as I said in my comments, the Cloudmed business is already running at well above 20% growth rates. They've got to demonstrate your ability to cross-sell and incorporate new solutions into that channel. We've got the teams consolidated under one leadership organization. They've 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 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 Cloudmed and then address the other part of your question Cloudmed plus the legacy R1 modular solutions.

So, just to hit the headline upfront, we, you know year to date are actually ahead of plan on Cloudmed full-year in-line, and what's happening, there's market demand actually created by some of these later labor shortages across the board from – on the provider side and payers side.

So, we are seeing significant demand, very strong pipeline for the underlying Cloudmed business. And so, that's the market side. From a competitive differentiation side, just to remind you, we believe Cloudmed is a unique platform that covers 800 billion of NPR.

What that allows this business to do is, see across all 50 states, all payer types, all clinical denials, all payment types, and allows us to identify revenue for our customers and address this $100 billion market opportunity. And that's part of the reason why we're seeing so much traction on a pipeline and growth.

Just to touch the second point, one of the points Joe mentioned earlier is leveraging the Cloudmed commercial channel. I just want to go a little deeper in that. We over the last five plus years built a best-in-class commercial channel. And this is an industry as you know that is very tight, talks to each other.

We have 93 of the top 100 systems and a lot of referenceability. So, part of what's happening is our sales team, our commercial teams are introducing some of the new R1 modular solutions to our current base of customers.

And so, we feel very strongly about the future growth prospects of the R1 modular solutions, but as Joe said, some of the ramp ups will take time..

Okay. 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..

Thanks so much for the question, guys. I had a question regarding, sort of the underlying assumptions in the utilization – overall, like healthcare utilization is we think about the fourth quarter.

Can you talk about, sort of what you're thinking about in terms of the underpinnings of that from a, sort of broader macro trend? And then if you could extend that into your, sort of thinking for 2023, that would be helpful..

Yes. We've – as we look at it, maybe the answer to 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 ahead of kind of our internal modeling assumptions on customer volumes and underpinning customer volumes is utilization in Q1 and Q2. Q3 and Q4 were below our plans.

And so, as we look to 2023, incorporated into our thinking on the budget assumptions, we're taking a conservative approach to utilization as we think about 2023.

And what drives that is just coming out of COVID and really trying to establish the baseline to forecast office is a challenge for us and we think 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 your underlying interest expense for 2023? I mean, I know there's a lot of interest rate volatility, but sort of maybe given current rates..

Yes. I think we'd say about 7% is probably fair to use right now. As you know, 30%-ish of our debt is hedged. It feels like a blended average to be about that..

Okay. Thank you..

Your next question is from the line of Jailendra Singh with Truist Securities. Your line is open..

Thank you. Good morning and thanks for taking my questions. Joe, thanks and good luck. Lee, congrats and best wishes for your new role.

Let me start with a follow-up related to George's question earlier on longer payer turnaround times, why do you think it is not just a bit of normalization given payers who are not really deploying utilization management and payment integrity during the pandemic for the last couple of years? And is it just a timing issues in terms of collection or are you also seeing a pickup in payer denial rates than what you were experiencing in the recent quarters?.

One is high dollar accounts. And so, those accounts normally need a manual review before they get released on the payer side. And so, our current view is that's tied up in this labor market shortage environment we have. And that's why we feel that will be transitory over time and we're navigating a challenging labor market as are our payers.

And so, that's what leads us to that conclusion. On the increased clinical requests that may – there's a potential that that's elevated and it stays elevated, but what our teams are working through is really how do we use automation and how do we use technology to respond if that were to occur.

And in the short-term, we're responding to it on a manual basis. But we just don't know and we think and what we've seen over time is, as there's requests for things that are not required, they tend to normalize back. And so, we see these ebbs and flows in our experience over many years..

Okay.

And then 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 to deployment capacity? And if we should read anything in terms of your 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 of?.

Well, let me take the question in two parts. And the first one, as I said in my commentary, in the opening or in the formal remarks, we do think it's important for us to invest and invest above what we had 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 progress on all of those fronts. And I expect that to 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 and into the first half, right now, we don't see any changes to our ability to onboard new opportunities. And in fact, as I commented, our pipeline is up 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 and some of these engagements has contributed to the need for us to make this a priority in the short-term, but I think that the other thing to point to it is the earnings potential that we see longer-term.

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 the growth potential that we're going to unlock as a direct result of taking this approach.

And so, that's our thinking as we look to finalize our budget for 2023..

Your final question comes from the line of Stephanie Davis with SVB Securities. Your line is open..

Hey, guys. Congrats on the new role Lee and Joe, it's sad to see you go [indiscernible] accretive days.

Lee, before we get into the quarter, I was hoping to hear a little bit more about your goals for the [indiscernible]? As we think of the Joe Flanagan years as characterized by an operations turnaround, how should we think about the [indiscernible] years going forward?.

Yes, Stephanie, great question. Let me start by saying, I'll reiterate what I said in the comments earlier. First of all, I'm very excited 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 customers.

The other thing I would say is, I am very confident in the combination of the two businesses, and the underlying business model for R1. And just to reiterate my own words, Stephanie, this is a business with long-term contracts, great earnings power and high visibility into revenues and EBITDA. The global scale is a unique differentiator.

And Joe and team have already invested at scale and technology investment. The other thing I'd say is, the addition of Cloudmed is an even more unique differentiator.

We already have a very modern cloud-based technology platform that can be extended to R1 data footprint that actually is an incredible differentiator seeing all clinical codes, payment types across the country allows us to help R1 end-to-end customers.

And a very diversified customer base with 400 customers, one solution sold into 93 of the top 100 systems. 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.

I can go into 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 Cloudmed modular channel is a very important value driver.

The two things I'd mentioned, Stephanie, just to give you a bit of sense on the vision going forward without going too far given that I've been here post only a few months. The things I'd say is, given my experience, Stephanie is both in data and technology businesses and also businesses have a service component.

So, I'm very familiar with this kind of business and the application of technology.

So, the first thing I'd say is, you will hear me talk more about and to really just extend what Joe just said, which is the application of automation to resolve what we all know are super inefficient processes across an operation of hospital systems and 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 internal operators at R1 and to our customers. The other piece for me is, on the end-to-end side, clearly we need a lot of focus on delivery.

This team has a track record of delivering and to Joe's point, this is, we have incredible earnings power in-spite of 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.

Stephanie, I've already met our largest customers, the top five and will be on the road the next few weeks. I don't expect a major change in strategy, Stephanie. The strategy is sound, the combination of end-to-end global scale combined with Cloudmed already started investing in technology.

This is as much about an execution story with some refinements on how we apply technology..

Understood. Looking forward to seeing what you guys put together in the future..

Thanks, Stephanie..

At this time, I would like to turn the call back over to Mr. Joe Flanagan..

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 Cloudmed.

And Lee and I have engaged in many, many facets of our business. We've talked with all of our customers, met with all of our employees. And I could not be more proud to transition my responsibility 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 1. And so, I just want 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..