R1 RCM Inc
NASDAQ:RCM
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R1 RCM Inc
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Ladies and gentlemen, thank you for standing by and welcome to the R1 RCM Q1 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Atif Rahim, Head of Investor Relations. Thank you. Please go ahead, sir.
Good morning, everyone and welcome to the call. We will start today’s call with prepared comments by Joe Flanagan, our CEO followed by Rick Evans, Interim CFO. 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 strategic and cost saving initiatives, our liquidity position, our growth opportunities and our financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, designed, may, plan, project, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to the potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our Annual Report on our latest Form 10-K, annual or quarterly report on Form 10-Q for the quarter ended 31, 2020.
Now I would like to turn the call over to Joe.
Thank you, Atif. Good morning, everyone and thank you for joining us. We hope everyone is doing well and staying safe during this unprecedented time, I will give Q1 results in a few minutes, but first, I would like to update you on our response to the COVID-19 pandemic and the actions we are taking to mitigate its impact on our business.
Let me start by saying how grateful I am to all our employees for their positive attitude and efforts in the current environment. I especially want to thank our 5,000 plus registration and hospital-based personnel who are on the frontlines of this pandemic ensuring patients have access to care in a safe and expeditious manner. I am extremely proud of our team’s quick response to the crisis and how we have helped our customers as true partners. Our actions in response to COVID-19 are centered around three key areas: first, the health and safety of our workforce; second, supporting our customers and the patients and communities they serve; and third, financial navigation of the crisis in a way that ensures our continued success.
Starting with the health and safety of our workforce, at the onset of this crisis, we have restricted all nonessential travel, initiated plans to transition to a work from home environment and ensured personal protective equipment, or PPE and other precautionary measures were in place for our frontline employees. Across our service delivery settings, we activated contingency plans and I am pleased to report that more than 15,000 employees globally have been working from home at satisfactory productivity levels. We have implemented appreciation bonuses for our frontline employees, enabled pre-COVID testing and expanded paid time off for employees affected by low volumes. Our leaders have done a tremendous job reassigning and retraining associates to areas most in need of support. Collectively, the team has come together and mobilized exceptionally well. As a result, we continue to serve our customers without any disruption to our operations.
As I mentioned in the intro, the next major focus area for us has been to provide maximum support to our customers, as their operating partner to help them navigate the challenges they face. Our value proposition clearly stands out during times like these when providers face multiple headways. We view this as an opportunity to demonstrate our deep commitment and the cultural mindset we have across the company to be a long-term partner to our customers.
Let me provide a few examples. First, we have raised the performance targets with respect to the conversion of billings to cash across our operations with a goal of helping our customers generate cash faster in order to pay for supplies and other expenses. This is a financial driver for us too since our top line is tied to cash collections. In addition to the increased operating targets, we are also providing advanced analytical support to the teams within our customers who interact with managed care organizations. The streamline claim processing and negotiate policy adjustments when necessary and coordinate interfaces with payers. In March, we launched a new Remote Registration Mobile Solution to minimize contact between patients and registrars and help our clients conserve PPE. This solution has been deployed quickly and requires minimal client IT resources to bring online. We have been able to reduce up to two-thirds of patient interactions with registrars, while realizing around a 40% improvement in productivity.
Our fully integrated patient registration solution also continues to expand, while navigating COVID-19. Our teams are working to increase utilization, overall productivity, and expansion of the solution to additional clients and use cases. Through a combination of our in-house capability and external advisors, we have helped our customers navigate complex compliance and regulatory changes within that analysis, guidance materials and webinars to address key provisions of the CARES Act and various CMS, HHS and state-specific updates.
With the increased use of technology-enabled clinical visits during the pandemic, we have ramped up telehealth resources for our customers. Our goal is to ensure providers have the administrative Information to implement telehealth services in an expedited and compliant manner. We have created a specialized telehealth denials program led by our performance management organization to isolate denials trending on telehealth claims to monitor payer behavior and identify any claims that need to be changed to allow for payment. Our revenue integrity team is helping identify claims that may have been paid incorrectly or are eligible for billing recording changes based on regulations that can be applied retrospectively. With our capabilities now tested and proven, we feel very well positioned to help clients attract patients and build for telehealth business at scale moving forward.
Finally and potentially most importantly, by leveraging the capabilities we have acquired via the SCI acquisition, we are assisting our customers with the restart or reboot processes for elective procedures, now more than ever it is critical for health systems to forecast demand, systematically and smartly match that demand to appropriately resource capacity, measure and optimize the utilization of that capacity and enable digital, patient and provider interactions from ordering and scheduling through on-boarding. SCI’s platform has proven to be very effective in enabling customers to navigate these four areas and quickly respond to different scheduling scenarios. This is a highly strategic capability both on its own and as part of our and value proposition. The actions we are taking are strengthening our customer relationships. We have received broad positive feedback to this effect. This is also established in very credible proof points as good examples of our stewardship to prospective customers in our pipeline. Long-term, we believe the approach we have taken will contribute to our growth trajectory. The major challenge brought about by pandemic and widespread lockdowns is a falloff in patient volumes.
Starting in mid-March, we saw deterioration in patient volumes across our customer base, which accelerated into late March. These volume declines started to stabilize in mid-April and over the last couple of weeks we have started to see elective procedures being scheduled in states that are easing restrictions or were not severely impacted by COVID-19. While it is difficult to forecast with precision, when volumes will return to normal, we are prepared to successfully navigate a variety of scenarios while simultaneously ensuring the company is positioned for long-term growth.
Let me walk you through some of the factors guiding our decision-making over the coming months. As a starting point, it’s important to understand that because of the structure of our customer contracts, the vast majority of our net operating fees lag cash collections at our customers by roughly 4 months. Consequently, as of today, we have a high degree of visibility into net operating fees through early September. Revenue from modular engagements, smaller physician customers and incentive fees are generated based on intra-quarter metrics. The revenue visibility inherent in our model gives us time to plan our capacity needs. Today, we have taken action to control costs and cash spend via freezing hiring for non-critical roles, reducing CapEx, eliminating discretionary spending and suspending our 401(k) match as well as nonessential travel for the remainder of 2020.
We have also accelerated the corporate cost savings initiative that was originally planned for the fourth quarter. The goal of this program is to maintain a competitive corporate cost structure and ensure we continue to get margin expansion via SG&A leverage as we grow the business. Accelerating these savings to the start of the third quarter results are being net cash flow positive in 2020 and locking in a full year benefit for 2021. Long-term, we remained very bullish on the significant growth opportunity in our target markets and we are seeing emerging signs that health systems are seeing new advantages in using a service such as ours for the revenue cycle needs. It’s critical for us to balance this long-term opportunity with near-term factors. We have therefore completed a comprehensive review of the cost structure and CapEx needs across the company to itemize and quantify all potential levers available to us to further reduce our cost structure and preserve liquidity without constraining our ability to grow. A good example of this dynamic is that we continue to employ our workforce that is idled due to lower patient volumes because it is important to have that capacity available to serve our customers as volumes return.
From a liquidity standpoint, we are well prepared to navigate a variety of scenarios with our current cash position and availability under the revolver. We do not currently anticipate requiring additional financing and with the net leverage ratio of less than 2.75x as per our credit agreement we have ample capacity for additional borrowings should the need arise. The combination of this borrowing capacity and ability to further reduce our cost structure gives us a high degree of confidence in our liquidity position. Given our end-to-end coverage of the revenue cycle and broad customer base, R1 is in a unique position to view data and trends at a very granular level. We are monitoring key metrics related to scheduling, admissions, charges posted in cash collections in real-time. Current trends in healthcare utilization are very dynamic provider cash collections are challenging to forecast accurately due to a number of factors.
Including the timing of when local and state restrictions will be lifted, patient behavior when restrictions are lifted, and clinical capacity on our customers. In light of all of this uncertainty, R1’s financial performance for the rest of the year could fall in a wide range notwithstanding our strong basis for believing that our growth trajectory is fundamentally intact and perhaps improved over the long-term. Therefore, we feel the prudent thing to do at this stage is to acknowledge the broad uncertainty in healthcare and suspend our previously issued guidance. We will continue to provide expected revenue trends for the upcoming quarters to the extent possible and expect to provide updated 2020 guidance when we have improved visibility on our second-half revenue.
Looking out to 2021, given the cost reduction actions we have taken as well as the sharpen focus on operational excellence across the company. We see favorability to our previous 2021 adjusted EBITDA guidance if patient volumes return to normal by the fall of this year. Now I’d like to turn our attention away from COVID for a few minutes and discuss our ongoing business. Q1 revenue of $320.5 million and adjusted EBITDA of $61.6 million, we are ahead of the expectations we set on the last earnings call driven by continued strong operational execution and lower employee expenses.
Our ongoing deployments continue to progress notwithstanding local and state COVID-19 restrictions. We started to onboard Rush in January with no significant delays in the on-boarding to-date. Both the Rush and R1 teams have moved to a virtual model to continue collaboration and execution of the on-boarding work streams. Continued COVID-19 restrictions may impact the pace at which operational initiatives are implemented, particularly those related to patient access functions. However, we are optimistic that we will complete the on-boarding of the Rush by the end of the year. For the $700 million NPR physician contract we signed in the third quarter of 2019, we are halfway through our deployment plan. On May 1, we just went live in four regional markets for this customer and are on track for completion early in the fourth quarter. Deployment activities at Quorum are largely complete with the remainder to be completed over the coming months.
On April 1, we completed the acquisition of SCI Solutions. Our plan with this acquisition is to digitally transform the pre-service processes for our clients and create high performing digital marketplaces for healthcare. As we integrate SCI, we will focus on client outreach and engagement, integrating the commercial function and, launching detailed plans to achieve targeted operational and growth synergies. We have made good progress in these areas in the five weeks since we closed the acquisition. Customer receptivity has been very positive and the timing could not have been better. SCI positions us extremely well to make the four critical scheduling functions as I mentioned earlier, a competitive advantage for our customers. And the COVID crisis which has accelerated the rollout of SCI’s capabilities gives us improved visibility to the synergy targets we laid out when we announced the acquisition.
On the commercial front, last week we signed a 5-year co-managed agreement with Penn State Health covering their end-to-end processes in the acute and ambulatory settings. Penn State has approximately $2.2 billion in NPR, and it is one of the most well-known academic health systems in the country. We are delighted and honored that Penn State selected us to support them for the revenue cycle and patient experience needs. Notably, we worked through a substantive portion of this negotiation during the COVID-19 crisis.
We are encouraged with the amount of activity and signings for our modular offerings as well. One deal in particular, I want to highlight is Lakeland Regional Health Medical Center, which we signed on for our Revenue Integrity Services module along with comprehensive patient collection services. Additionally, given our rapid operational response to the crisis, we have received inbound requests from providers whose operations have been disruptive and we are pleased to be able to extend our modular capacity to these providers. Overall, commercial activity continues to progress despite the current backdrop. In addition to signing Penn State in the modular activity, I mentioned we are very encouraged by the progression of our end-to-end deals. Today, these opportunities are progressing at a normal pace and customers continue to allocate time and capacity to assess relationships.
Looking forward, we believe this event has the potential to accelerate providers’ inclination to enter into end-to-end agreements. Some of the emerging themes we are hearing from prospects are as follows. There is a higher inclination to variabilize the cost structure. They are questioning the need to leverage their own balance sheet for Revenue Cycle infrastructure. The inefficiency associated with multiple third-party vendors is coming to light and the business continuity and infrastructure resiliency we have been able to demonstrate through this crisis is viewed favorably. They are seeking partners who are economically aligned and a holistic solution to drive patient engagement and coverage for uninsured patients is increasingly important. Some of these things are not new, we have discussed them on prior calls and we are encouraged to see discussions intensify along these lines. We believe the current environment increases the propensity of providers to use a technology-enabled service like ours.
In closing, I would like to say once again how proud I am to be part of the R1 team. There are many learnings from this crisis, which will make R1 a stronger company as the situation normalizes. The team has mobilized quickly, demonstrating a steadfast commitment to the success of our customers in the patients and the communities they serve. The challenges presented by this crisis have brought us closer to our customers, to drive innovative new solutions.
As a company, we have become more agile and learn that we can collaborate in new ways. We expect to emerge from this crisis stronger and we believe our long-term growth prospects maybe catalyzed by some of the challenges providers are facing. Lastly, I’d like to thank Rick for his leadership over the past seven plus months. Rick has done a tremendous job leading the finance team and driving continued strong financial performance and navigating us through an unprecedented time in recent weeks.
The entire leadership team and our Board is very appreciative of Rick’s work and I would like to say a big thank you on everyone’s behalf. Rick will continue with R1 in his prior role as Corporate Controller and Chief Accounting Officer. As you saw in the press release we issued yesterday, Rachel Wilson will be joining us as CFO effective June 1. Rachel brings 25 years of experience across a number of finance roles including Financial Planning and Analysis, Investor Relations and Treasury Operations. We are excited to have Rachel joined us and look forward to her contribution to R1’s continued growth.
Now, I would like to turn the call over to Rick.
Thank you, Joe. These last 7 months have been a tremendous experience for me and I am extremely proud of the way that finance team came together during this time. Thank you all for joining us. I will begin with a short recap of our first quarter results. I would like to remind everyone that we will be referencing non-GAAP metrics on today’s call. For a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our press release.
First quarter revenues came in at $320.5 million, up $44.6 million or 16% year-over-year driven by $21.4 million increase in net operating fees from new customers on-boarded over the course of 2019, $4.6 million increase in incentive fees as well as organic growth across our customer base. From a cost standpoint, non-GAAP cost of services in Q1 were $237.6 million compared to $246.3 million last quarter and $223.5 million a year ago. The sequential decline was driven by continued productivity improvements and lower employee expenses while the year-over-year increase was largely driven by the on-boarding of new customers.
Non-GAAP SG&A expenses in Q1 were $21.3 million, down $1.3 million sequentially primarily due to lower travel and employee expenses, compared to a year ago non-GAAP SG&A expenses were up $2.3 million primarily due to investments in our sales and marketing and HR capabilities. Adjusted EBITDA for the first quarter was $61.6 million compared to $45.1 million last quarter and $33.4 million a year ago. The sequential growth was driven by a continued ramp up in profitability at on-boarded customers as well as lower employee expenses. Year-over-year growth was driven by continued progression of operating partner customers along the profitability curve offset partly by on-boarding costs for new customers. Lastly, we incurred $8.7 million in other costs in Q1 compared to $9.3 million last quarter due to $3.2 million in strategic initiative costs and $2.6 million in expenses pertaining to appreciation bonuses for the company’s frontline employees, mobilization efforts and other costs related to the COVID-19 pandemic.
Turning to the balance sheet and liquidity, net debt at the end of the first quarter inclusive of restricted cash was $275.8 million up from $254.4 million at the end of 2019. The primary driver of the increase was a use of cash related to the timing of annual incentive compensation which was paid in the first quarter. At the onset of the COVID crisis, we drew down a portion of our revolver in order to maintain more cash on our balance sheet that we normally do. We also increased our borrowing at the close of the SCI acquisition to preserve cash on the balance sheet.
Taking into account the additional debt from the SCI acquisition, which closed on April 1, our current gross debt is just under $580 million. We have just under $20 million in mandatory debt repayments over the remainder of 2020. We are also differing our payroll tax remittances to the federal government as allowed under the CARES Act. We expect this deferral to provide approximately $15 million to $20 million in additional liquidity in 2020. We believe this action, combined with our current cash balance and revolver availability, along with additional borrowing capacity under our current credit agreement and the cost containment actions we are taking will provide us with sufficient liquidity to withstand a wide range of scenarios stemming from the COVID crisis.
Turning to our financial outlook, as Joe noted, we will continue to provide a directional revenue view during the interim period and have suspended our previously issued guidance. For the second quarter, we expect revenue to decline $10 million to $20 million sequentially, driven by lower volumes for our smaller physician customers and lower modular revenue.
In closing, I am proud of how quickly the team mobilized to respond to the COVID crisis. We expect to emerge from this crisis as a leaner more efficient company that is well-positioned to drive continued strong performance for our customers as well as our shareholders.
Now, I will turn the call over to the operator for Q&A. Operator?
[Operator instructions] Your first question comes from Charles Rhyee with Cowen.
Yes. Hey, good morning, guys and thanks for taking the questions. And Joe, maybe I can start here I understand here that you talked about a range of scenarios in terms of how volumes are going to come back here. Despite the fact that you pulled the guidance, what is sort of maybe then the main assumption you have in terms of what you expect for utilization to come back. You talked about number of scenarios, but if you look, it looks like a number of companies have already reported so far have all tended to give some estimation for obviously a weak 2Q in terms of volume, but starting to bounce back in 3Q and 4Q, maybe start there and just get your sense on how you see the ramp in terms of a return to normalization? Thanks.
Yes. Thanks, Charles. And maybe to break that question down or to provide some additional context, Charles, both near-term and then looking to the second half of the year from what are we seeing and kind of directionally what we may think is a likely progression. For us, as you know, cash collections is really the highest correlating factor as it relates to the bulk of our business, which is those relationships that sit in operating partnerships. And so if you look at April, well, if you look at March we are basically on our plan for cash collections, not really material change. April was down about 17% and we anticipate May to be down circa 25%. Now our view is that May should be the low point and we have a fair degree of visibility in the sense that the last 10 days or so of April and that has progressed into the first couple of days in May, we are seeing restart, reboot activities in a number of our markets and we’re seeing that show-up both in transactional activity, meaning the signals for scheduling and the signals for registration and financial clearance, we are also seeing it on the leading indicators of billings and volume flowing through the various rev cycle process. So that’s – we have visibility around that and kind of that’s what we are seeing and I would say we have a fair degree of confidence again based on the past two to three weeks activity that we would expect May to be a low point and June to be higher.
And so the real thing that creates the breadth of range of scenarios is the slope of the return to normal and any secondary events that may occur late summer, early fall. That’s the one thing that we just don’t have a great ability and I think our view is pretty consistent for sure in the discussions we’ve had with our provider customers, pretty consistent with their views. So directionally we would expect progression back to normal coming out of May and as I said, we are seeing that as we speak. I would characterize it as about a third of our markets. I would highlight Texas, Oklahoma, Kansas, Alabama, Tennessee, Florida, Utah as some examples of those markets where we are definitely seeing and have been seeing for the past couple of weeks, mobilization and restart, reboot. We would expect that to continue as we progress through May and head into the summer. The real question for us is just again not the direction, but it’s with any degree of specificity what does that slope look like heading through the balance of the year.
Okay. If I could just ask a couple of follow-ups, can you give, what is the key aspects of your business that allows you to see like what gives you the visibility on sort of near real-time activity? Is it really the SCI scheduling capabilities that you can see people kind of rolling in or what are the solutions in your suite of portfolio solutions that will allow you to see when that gives you the sense like always seem that we are kind of sloping here in a little bit in May?
Yes, what we see – what we see because we are truly and meaning for most of our contracts, we cover scheduling, all the way through the patient collection process. In the front-end processes, in most cases we are running the scheduling function as part of our relationship with the customers and so we are seeing real-time and in fact we are interfacing with the clinical decision making forums on how that restart should be planned and what are the algorithms, so to speak, to start to signal the schedulers to be rebooking and filling capacity. So I would say that function gives us and the fact that function gives us and the fact that we operate that function in most cases, gives us a fair amount of early indicators and that’s what I’m referring to. In some markets we have SCI installed already, in other markets we’re rapidly getting it installed because it absolutely provides that technology platform provides an ability for the providers and the clinicians and their triage decision making teams as well as in partnership with our scheduling teams to run a multitude of scenarios real-time, that technology definitely provides an advantage along those lines. And as I mentioned in my prepared comments, one of the tangential benefits looking out to 2021 and beyond, is that this event has highlighted the capability that SCI brings above and beyond what typically sits in the host system, a Cerner or Epic or the host system functionality. And as a result of that demonstration of value we are locking in and in many cases accelerating the broad-based deployment of that platform across our contracted book of business, which really fuels the bulk of the synergies that we highlighted, when we announced that deal. So I couldn’t comment enough on the scheduling as an early indicator. Pre-registration, which is basically working off that feed from scheduling and that team is doing outbound calls and outreach to patients to prepare them to comment. And that function, we’re starting to get a real sense of what is the mindset of the patients and what is their propensity to actually agree to comment. And then as you flow-through that we see charges posted and we see billings and we see collections as traditional measures. So, as noted in my comments, Charles, we feel relatively well positioned to respond in real-time based on these indicators and my hope, and as I said right now, my expectation, but that’ll be determined by kind of how we see progression through May is that when we’re on our Q2 call, we’re able to provide a bit more specificity. And I think it’s literally seeing May and June flow through and getting again a sense of how this progression back to normal hopefully is shaping out.
Thanks. And just one last follow-up, you talked about your views in terms of what you expect in terms of a rebound as you kind of come out of May, June, you know you said it’s kind of in line with how your clients are thinking. Would you also expect that we’re going to have a catch-up to, are you expecting a catch-up period for elective, so basically running greater than 100% of sort of normal procedure volume as of the year and I guess more specifically, is this sort of the anticipation from your clients as you speak to them and how they are preparing for the back half of the year? Thanks.
I don’t think we’ve assumed a necessarily a material catch-up period. In the range of outcomes that could occur, it definitely could occur. I think, this is where we get into, we, for sure from our vantage point. And I would say even the provider or customers some of the most sophisticated providers in the industry. I don’t think they necessarily have a great amount of visibility on this is a wide range of scenarios that could play through. I would say, our general planning assumption is as you would expect is a prudent return to normal profile and there definitely is scenarios that could surprise us to the upside or scenarios that equally could surprise us to the downside, we just don’t know.
Okay. Thanks a lot guys.
Your next question comes from Matthew Gillmor with Baird.
Hey, thanks for the question and thanks for what you guys are doing on the front lines here. I guess, Joe I wanted to ask about some of the emerging themes you talked about with COVID that could be driving sales activity. From a pipeline perspective, is that driving more outreach from sort of new clients to R1 to start a conversation or are those themes, things that are sort of sustaining the current conversation in the current pipeline activity?
I would say it’s both. It definitely is not solely sustaining and keeping current pipeline activities progressing, although I would say that these events in our approach to this event on current active pipeline opportunities is definitely contributing to their continued progression, but we absolutely are seeing new opportunities come into the pipeline, as we’re progressing through this COVID crisis. And I think it’s utterly logical. I mean, when you think about it. We have invested heavily. We have taken our role very seriously. In terms of building world-class infrastructure that’s resilient and can, in essence, extend real meaningful scale leverage to our customers in a compliant and reliable way and I think this event is bringing to light. If you look at how quickly we mobilized 15,000 people into a work-from-home environment did not have any material disruption to our operations and in fact have extended via modular agreements to non-current or non-pre-COVID customers. Our services in the midst of this I think is a real testament to all the hard work and all the investments that we have made over the past 3 to 4 years. If you look at our hospital-based employees whether it via technology on the mobile REG, whether it be just rapid segmentation where physical interface does have to occur being very rapid on mobilizing that, always in lockstep with our customers. I think it’s demonstrated and it’s given us some very compelling proof points to sell off, that we operate like an owner we are an extension of our customer’s organization and really that is the question mark. I don’t think the question mark never has been on value prop such as ours. Are we deeper from the RCM expertise standpoint, given that’s what we do all day long, I think we have been able to credibly answer that, this has helped us to again build on that, but I think much more importantly, it’s given us an opportunity to demonstrate our strong partnership and that is really important as current or potential customers are thinking about a transition of control. So my hope, or my expectation is that we definitely coming out of this and even real-time are seeing increased activity of new opportunities, new discussions in the pipeline and continued progression of active discussions. I also think looking more long term that, whether it be operating, co-managed agreements that we have in place or pipeline opportunities that are out trying to decide, between the trade-offs in the eyes of the customer of a co-managed or operating partnership. I think this event in the approach we’ve taken has given us a very compelling proof point, that we are good stewards when we have control of the operation. And I can’t emphasize how important that is long-term for the company and for the value creation of all stakeholders within the company.
Got it. That’s helpful. And then as a follow-up, I did want to ask about the CARES Act emergency grant money that’s been distributed to providers, does R1 through your contracts technically have access to that money and even if you did, are you, we are growing that to support providers. Just give us some sense for how that’s getting treated?
Yes. Let me answer that across a couple of comments I should have. I should have characterized when I answered Charles question and I provided the March, April and anticipated May cash collections that those numbers include no benefit of the Medicare prepayment that acceleration of funds. Those funds, we will incur our fees when CARE is delivered. So I should highlight that just for avoidance of doubt. Relative to CARES Act, we are not participating in that. And I would say furthermore, as you heard from Rick’s comments, we’re investing in capacity to make sure that we are ready to serve our customers as they navigate those puts, but that is, that’s not something that we’ve availed ourselves too and it’s not something we’ve ever even thought to talk with our customers about.
Got it. Fair enough. Thank you.
Your next question comes from Donald Hooker with KeyBanc. Donald, your line is open.
Hi, I am sorry. Can you hear me?
We can, Don.
Okay, super, hey. So obviously, there was some unfortunate news in the press around Quorum having some financial difficulties. And I am sure that’s – I am sure folks are hearing that as well in the press around different provider groups and hospital struggling. How are your contract structured to protect you if things get worse, perhaps or their contractual protections in terms of incentive fees, In terms of, can you just walk through kind of how you structure the contracts. So you’re not left standing if the music stops at a particular client?
Yes. I don’t think necessarily, I mean we have talked about. Don, we have talked a lot with Quorum or we’ve talked a lot, excuse me, in past calls in Q&A just on our preparedness to navigate kind of Quorum as a specific proxy and I think we’ve always said this, and we continue to view this. We have a, we have a fair amount of visibility, just given the relationship we have cut with customers. What we do is super critical to their ongoing sustainability, meaning the conversion of billings to cash. The variability of our cost structure is quite significant. When you think about the percent of our cost, that’s labor and the labor that sits at the hourly workforce, I don’t take this lightly and but there is an amount of attrition in a fair amount of variability in that, cost structure. And then from just a fee basis we typically get base fees in advance of service. Now depending on the relationship, it depends on how far in advance that is and so there is a myriad of factors outside of the contract just on a normal operating basis that give us a high degree of confidence. Should a situation arise that we’re able to navigate it and I think Quorum is a good example of that and you may have seen in the filings, but we were deemed essential vendor as it relates to Quorum and all of our ongoing expenses have been fully approved by the courts. And so, I think that’s just an additional proof point or example of the criticality of what we do and the intimacy we have with the operations of our customers.
Super. Yes, just one of the – it’s nice to hear that reassurance. And then maybe another separate question, you guys had good success despite the pandemic with some co-managed relationships with Penn, with a couple of others. Are there conversations or is there a potential progression of these relationships from sort of modular and co-managed deals to full operating relationships, for outsourcing relationships over time. Is that kind of how we should think about these? Are they sort of like, if you take the Penn deal win, are they sort of are we sort of testing the waters and then maybe that progresses into a full outsourcing relationship or how those discussions likely to evolve?
Yes. I mean Penn was just announced so I don’t want to get ahead of myself. Our focus on with Penn State is just a world-class deployment and really demonstrating the capability of our human capital, our technology and how that technology brings value above and beyond the whole system and then our central infrastructure. So our focus right now with Penn State is just a great, great deployment and we are honored and delighted that they selected us to be their partner. So what I would say, Don, is we have a very good track record. If you look at Ascension and Intermountain as two most recent examples of progression from operating partner, or from co-managed into operating partnership, and without a doubt, as you think about current end-to-end agreements we have in co-managed relationships. Our objective and we think there is significant value creation for the customers and strategic rationale is to progress those into operating partnerships. And one of the reasons, we are so focused on serving our customers in this COVID event, it’s a great opportunity for us to demonstrate again that we are very good stewards when given control of the operation as a partner. And I think, I think coming out of this, I feel very good and I’m proud of the team and the way they’ve approached those relationships that will bode well as we look to progress over time those co-managed relationships, we currently have. And as we think about our pipeline in those discussions, we have some very real-time, very compelling examples of how we operate as a partner. And I think I can’t emphasize how important that is to the long-term value of the franchiser of the company given what in our opinion is the very early innings of a structural progression revenue cycle. I would absolutely be remiss if I didn’t comment that while we have an event here if you take a step back, there is a very big market, it’s not well organized. And there is a lot of value to be delivered to the providers by rationalization of the revenue cycle infrastructure at large over time.
Thank you for that. Thanks.
[Operator instructions] And your next question comes from Sean Dodge with RBC Capital Markets.
Yes, thanks. Good morning. So Joe, on the cost actions you are taking, can you give us a sense of how meaningful those are going to be? Is it going to total in the tens of millions of dollars or more or less? And then on timing you mentioned accelerating some planned for the fourth quarter ended the third quarter, the others like new travel, the 401(k) match, imagine those show up pretty quickly?
Yes, Sean. Thanks. From a cost standpoint, I would say the cost actions we are taking are in the tens of millions of dollars in terms of – in terms of those that we referenced we’ve put in, put in place, and are executing against. When we talk about the cost, the corporate cost action that we had originally planned for Q4 that we’ve pulled in to the start of July from an execution standpoint or the start of Q3 that planned cost action that was sitting in Q4 was not dependent on COVID. We had always been monitoring and we have always known that there was opportunity for us to assess on from our corporate standpoint, everything we’re spending money on and to gain some efficiency. And really strategically we want to be diligent on always maintaining that corporate efficiency because we do expect over time, and I would say this is a longer aperture then just 2021 to get scale leverage on our corporate costs as we grow the business. And so essentially what we are doing is pulling that in, to July, as opposed to a Q4 execution that ensures two things. One, we are cash flow positive in the year on those actions and it ensures we lock in a full 12 months of benefit in 2021. And so it’s not a reaction to COVID, the pull-in, to some degree is from just making sure we are cash flow positive on it in the year, but it’s really a proactive strategic intention of ours to maintain the efficiency from a corporate standpoint as we drive significant growth on the business. And so, that’s kind of a bit of color on that specific action.
Okay, that’s very helpful. Thanks. And then maybe going back to Quorum for just another moment, your payments there that are outlined in the court filings, the interim operating budget that Quorum had filed as part of its profit, are they in line with your initial contract terms or you had to make any adjustments to the contract or any concessions over the course of all of that?
In line with our operating assumptions and no commercial adjustments that we made.
Great. Thanks again.
I am showing no further questions at this time. I will now hand the call back to Joe Flanagan for closing remarks.
Great. To close the call, I would like to just thank everybody for joining us today and sincerely hope everyone is and their families stay healthy and try to get through this period as best as possible. We know we will eventually get through this and we look forward to updating everyone on our future calls. Actually, thanks for all your help and we can close the call.
You are welcome. That concludes today’s conference. Thank you for your participation. You may now disconnect.