R1 RCM Inc

NASDAQ:RCM

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the R1 RCM Q1 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.

Atif Rahim Head of Investor Relations. You may begin.

[Atif Rahim, Head, Investor Relations]

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 the proposed acquisition of Cloudmed and its expected benefits our strategic and cost-saving initiatives, our liquidity position, our 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, may, plan, project, work, 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 as required by applicable laws. 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 acquisition of Cloudmed, which may not be completed on our anticipated time line or at all, our growth strategy, the impact of the COVID-19 pandemic and factors discussed under the heading Risk Factors in our most recent annual report on Form 10-K, our latest quarterly report on Form 10-Q and our proxy statement and prospectus for our upcoming annual meeting.

We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to the equivalent GAAP amounts, please refer to our press release. Information related to Cloudmed is based on data available to us and is subject to change.

Now I'd like to turn the call over to Joe.

[Joe Flanagan, President & Chief Executive Officer]

Thanks Atif. Good morning, everyone and thank you for joining us. I'm pleased to report 2022 is off to a strong start with revenue ahead of expectations and adjusted EBITDA at the high end of expectations for the quarter communicated on our last earnings call. Our team continues to perform well and deliver on our commitments to our customers. I'd like to extend a big thank you to all our team members for the tremendous dedication that goes into delivering our results every day.

On the call today I'd like to cover three topics; first, an update on commercial activity, followed by color on our ongoing operational performance and lastly I'll discuss our pending acquisition of Cloudmed.

On the commercial front, I'll start with an update on the $10 billion NPR contract we've discussed over the past few months. Negotiations with the customer are complete with the economic terms agreed to and we are through their internal governance process. One open item we are now focused on is the provisioning of user access for our employees with a third-party vendor used by the customer.

In our normal contract sequencing this provisioning process takes place post contract signing. However, this customer prefers this provisioning to be completed prior to signing. This is a change relative to what we have previously planned and therefore the process is admittedly taking longer than expected. We remain very confident in getting the deal completed and are working as expeditiously as possible towards signing.

This deal aside commercial activity in the quarter was very strong with new entrants coming into our pipeline, progression of deals in the pipeline and the conversion of activity into signed deals. We issued a press release this morning announcing a 10-year end-to-end agreement with ScionHealth. ScionHealth is a health system comprised of 61 long-term acute care hospitals or LTACHs and 18 short-term acute care community hospitals.

Our agreement encompasses approximately $2 billion in NPR across the 61 LTACHs. ScionHealth is our first win in the LTACH segment of the market, reinforcing our identity as the revenue cycle partner for providers across all care settings. We expect onboarding activities at Scion to commence next month with employee transitions expected to begin in August.

Additionally, we have roughly $500 million of health system NPR in the contracting stage under a full operating partner model. We are seeing strong demand from physician groups where our value proposition is resonating well amidst staffing challenges and an ability to rapidly scale with growth. In the first quarter, in addition to our normal physician flow business, we signed $750 million in end-to-end operating partner NPR, across three large independent physician groups: Keplr Vision, Sansum Clinic and Emergency Physicians Professional Association.

The physician space is strategically important to us. We believe we have a disruptive offering targeted at both IDN-affiliated physicians as well as large independent physician groups, who are underserved by the current vendor set focused on this segment of the market.

In 2020, we launched a physician-specific solution to the market, with a pricing structure aligned to performance and a robust offering based on our technology architecture, shared services infrastructure and analytics tools.

Collectively, these factors enable us to price below prevailing market pricing, and at the same time achieve 30%-plus EBITDA contribution margins at steady-state. This offering has been received very well in the market and ranked number one by class for the last two years.

With over $2.7 billion in operating partner NPR already signed in Q1 and $500 million in the contracting stage, in addition to the expected $10 billion NPR contract, we are reevaluating our investment and deployment capacity which I'll discuss later.

Activity for our modular offerings also remained strong, with 23 new deals signed across 12 new customers in the first quarter, including Hendrick Health, Rocky Mountain State Anesthesia Providers, BP Health and Liberty Hospital.

The largest of these new modular deals is to provide accounts receivable management for a major health care provider in California. These wins are reflective of our strong modular offering and competitive positioning in the market, which we expect to be enhanced by the pending Cloudmed acquisition.

Our purpose-built platform encompassing comprehensive technology, global delivery infrastructure and a best-in-class operating system to drive performance were common factors across all customer decisions in the quarter.

The investments we've made in these areas over the last several years have significantly enhanced our value proposition and are competitively differentiated. As we said today, we believe we have the highest-quality lowest-cost platform to manage provider revenue across all care settings.

We continue to build on this strong foundation with additional investments in automation, patient experience and most recently revenue intelligence, with the pending acquisition of Cloudmed.

Providers are increasingly recognizing the strength of our value proposition and this has resulted in a doubling of our end-to-end pipeline over the past two years, even after converting more than $13 billion of NPR across LifePoint Scion, Penn State, Rush Pediatrics, Quorum and American Physician Partners.

Ongoing discussions with prospective customers and market dynamics, point to a continued acceleration in demand over the next three to five years. In order to successfully onboard this accelerated activity we plan to increase our deployment capacity to a range of $9 billion to $10 billion NPR annually exiting 2022.

This is a meaningful increase from the $5 billion as we entered 2022, and is supported by the progression of deals in our pipeline. We first launched a dedicated deployment office in 2016, and it has proven to be a prudent investment in ensuring that new customers are onboarded as smoothly as possible.

We are in the process of finalizing the level of investment needed to increase our deployment capacity and anticipate being in a position to provide specifics when we update our guidance after completion of the Cloudmed acquisition.

Our early expectation, however, is to see meaningful scale and cost efficiencies relative to the $7 million to $8 million in incremental cost we saw when we increased capacity from $3 billion to $5 billion in 2021.

In addition to a dedicated deployment function we also bear upfront costs with onboarding a new customer. Some of these costs entail duplicative labor costs to hire and train new employees in advance of a transition to our shared service centers, IT integration costs and run-out of third-party vendor contracts.

These costs have typically averaged approximately $4 million per $1 billion of NPR. In the LTACH setting onboarding costs and contract economics are different compared to illustrative models we have provided for IDNs historically.

In the LTACH setting, onboarding costs and contract economics are different compared to illustrative models we have provided for IDNs historically. In the LTACH setting, there are lower needs for certain revenue cycle functions.

As an example, nearly all patients are transferred directly from an acute care facility, eliminating the need for traditional patient access registration at entry points, such as an emergency department or diagnostic imaging centers.

As it relates to the LTACH setting, we expect a revenue production rate of approximately 2.5%, with EBITDA contribution margin rates in line with the contract economics for operating partner customers. As a result of the lower personnel needs, upfront costs are lower. We expect to outcome costs in the LTACH setting to be approximately $2 million per $1 billion of NPR.

Next, I'd like to provide an update on our operational performance. Our team is performing well under the current backdrop, navigating a very complex operating environment and delivering sustained financial improvements and a better patient experience across our customer base.

Two dynamics we are closely watching are patient volumes and the labor environment. Patient volumes to date have trended in line with the expectations embedded in our 2022 guidance, which assumes volumes and cash collections at close to pre-pandemic levels.

Gross charges which are a leading indicator of cash collections are trending slightly above pre-pandemic levels, with stronger performance in the inpatient setting and outpatient surgery. Emergency visits and office-based visits are closer to flat versus pre-pandemic levels. From an operating capacity standpoint, we are adequately staffed to process current volumes and maintain a close watch on leading indicators such as scheduling data.

Turning to the labor environment. Current tight conditions present us with the same challenges many other companies are facing. Our 2022 guidance incorporates wage increases in select markets and we feel comfortable with our current wage levels.

Technology-driven productivity improvements presents a significant opportunity to reduce labor costs, which is why we continued to invest heavily in automation and digitization. In the first quarter, we automated more than 12 million additional tasks on an annualized basis and are on track to exceed 100 million manual tasks annually as we exit 2022. This automation capability is turning challenging labor market conditions into an opportunity for us as providers recognize it presents a superior alternative to their internal efforts.

Turning next to Cloudmed. We are on track to complete the acquisition by the end of June, subject to the completion of debt financing and satisfaction of the remaining closing conditions, including shareholder approval for the issuance of stock related to the transaction. We have announced the post-close senior leadership structure to both teams, bringing together the best commercial and operational acumen from both sides to accelerate growth across end-to-end and modular relationships.

While we cannot yet approach the market as a combined entity, feedback from customers on both sides has been positive along the lines of: breadth of payer coverage and geographic coverage, significant strengthening of our middle operations and the ability to meet providers where they are in their revenue cycle journey.

Our integration team is fully mobilized and resourced with the help of external advisers to launch our plans immediately post close. We've conducted extensive deep dive sessions across Cloudmed's product and technology, operations, commercial capabilities and human capital.

Coming out of this, we have established a road map for a cohesive market presence across all solutions a unified technology platform and integrated delivery capability. We've also completed capability mapping for customer solutions and technology applications to establish a detailed plan for technology rationalization, investment and time line, leveraging the best capabilities for both companies.

Our planning process to date has confirmed several of our deal thesis assumptions. One, our base case assumptions for revenue and cost synergies are achievable, given operating models and efficiency opportunities.

Two, Cloudmed's technology architecture and assets are extendable to establish R1 as the technology and data platform leader in the industry. Three, both companies' cultures are highly aligned and Cloudmed's talent base is very complementary to R1's base.

And finally, Cloudmed's modular commercial engine, in particular the combination of R1's comprehensive automation catalog, with Cloudmed's superior go-to-market capability has emerged as a significant opportunity for us.

We believe the capabilities Cloudmed adds to our portfolio will enhance R1's existing functionality and drive significant growth in the years ahead. We look forward to completing the transaction and launching our integration plans with the long-term goal of positioning R1 as the premier brand to serve health care providers' revenue management needs. For those of you, who may still be looking to come up to speed with Cloudmed and its offerings, we hosted a teach-in for investors on April 12 and a replay is available on the Investor Relations section of our website.

We are encouraged by Cloudmed's performance to date, with our understanding that top line results for Q1 were ahead of their plan, driven by a healthy mix of cross sales into the existing base as well as new customers. Cloudmed is also making progress in launching new products to drive organic growth and saw strong demand for its 340B tech solution, which enables lower-income consumers to access affordable prescription drugs.

Overall, we believe Cloudmed is solidly on track to meet or exceed the $446 million in revenue and $191 million in adjusted EBITDA targets, we expected when we announced the transaction in January. We plan to update 2022 guidance to reflect the contribution from Cloudmed and expansion of deployment capacity, following the completion of the acquisition.

In closing, I'm pleased with our performance in the quarter and we are well positioned to deliver on our 2022 goals. We remain focused on pursuing the commercial opportunities ahead of us and planning for a successful integration of Cloudmed, while maintaining our commitment to strong operational execution.

Now, I'd like to turn the call over to Rachel.

[Rachel Wilson]

Thank you, Joe and good morning everyone. We're pleased to report solid first quarter results, with revenue up 12.6% year-over-year to $385.7 million and adjusted EBITDA up 11.1% to $89.3 million. Net operating fees of $322.8 million grew $36.7 million year-over-year, primarily driven by the onboarding of new end-to-end customers such as LifePoint and Pediatrics signed over the past 12 months, as well as improved patient volumes across our customer base.

On a quarterly sequential basis, net operating fees decreased by $9.2 million due to a shorter cash collection period for our large end-to-end customers. Incentive fees of $30.2 million were up $1.2 million over the prior year, driven by strong operational execution and offset in part by a shift in incentive fees to net operating fees from one of our customer contracts as previously discussed. On a quarterly sequential basis, incentive fees declined by $5.6 million due to typical seasonality associated with patient obligations in the first quarter.

Other revenue, which consists largely of modular services, was $32.7 million up $5.2 million over the prior year and up $1.6 million over the prior quarter, driven primarily by contribution from VisitPay. The non-GAAP cost of services in Q1 was $273.6 million, up $30.8 million year-over-year, which is in line with revenue growth. Incremental cost to serve new customers and the addition of VisitPay's operating costs were offset in part by our automation and digitization efforts.

Non-GAAP SG&A expenses of $22.8 million were up $3.4 million year-over-year, driven by VisitPay-related costs, sales and marketing spend to support business growth and increased travel expenses. Relative to the fourth quarter of 2021, non-GAAP SG&A expenses declined $1.9 million due to lower marketing expenses.

Adjusted EBITDA for the quarter was $89.3 million, up $8.9 million year-over-year. This increase was driven by strong operational execution, contribution from new customers and VisitPay, as well as lower cost as a result of our automation and digitization initiatives. On a quarterly sequential basis, adjusted EBITDA declined by $5.8 million, primarily due to contracting costs associated with the $10 billion pending contract. Lastly, we incurred $17.1 million in other costs, up from $13 million in Q1 of 2021 and $11.9 million in Q4, primarily due to costs associated with the Cloudmed transaction.

Turning to the balance sheet. Cash and cash equivalents at the end of March were $123.9 million compared to $130.1 million at the end of December. We generated $30.9 million in cash from operations in the quarter and sequential decline in cash was driven by tax payments of $21.5 million related to Q1 vesting of employee equity awards, $10 million for capital expenditures and $4.4 million for debt repayment. Net debt at the end of March was $647.4 million, relatively flat compared to year-end 2021, which implies a net debt-to-adjusted EBITDA leverage ratio of 1.8 times versus 1.9 times at the end of 2021.

We did not conduct any meaningful share repurchase activity in the first quarter. Our liquidity position remained very strong overall with more than $490 million of availability under the revolver and cash on hand at the end of March.

Turning to our financial outlook. We remain on track to generate revenue of $1.66 billion to $1.7 billion and adjusted EBITDA of $385 million to $405 million in 2022. We plan to update our guidance after we close the Cloudmed acquisition to account for the partial year contribution from Cloudmed investments related to expansion of our deployment capacity and upfront costs to onboard NPR beyond the 10% to 12% growth $4.5 billion to $4.8 billion as originally budgeted for in 2022.

As Joe mentioned, we continue to expect Cloudmed to generate at least $191 million in adjusted EBITDA for the full year and we currently expect approximately a prorated contribution depending on the timing of the close, net of the start-up cost synergies and expected investments to harmonize our compliance and cybersecurity infrastructure.

Turning to the financing for the transaction. We are funding the retirement of existing Cloudmed debt and transaction-related expenses. These activities are in-market and are nearly complete. In February, we received commitments from our bank group for $500 million in incremental Term Loan A financing and $150 million increase to our revolving credit facility.

In late April, we received ratings from Moody's, S&P and Fitch, and we are waiting final commitments from lenders this week for $540 million in Term Loan B financing. Post close, we expect to have approximately $1.8 billion in gross debt and $600 million in revolver capacity. Interest expense is expected to be in a 3% to 4% range based on current SOFR rates.

For the second quarter the current range of potential adjusted EBITDA is wider than normal as it depends on the exact timing of Cloudmed's close and investments related to strong commercial activity. We look forward to providing Q2 guidance post close of the Cloudmed acquisition. We continue to expect adjusted EBITDA to ramp up in the second half as was the case pre-COVID.

In closing, I'm proud of our team's continued strong operational execution and the results delivered in the first quarter. We remain focused on disciplined execution and balancing near-term investments to support long-term growth. With a strong start to the year we are well positioned to deliver on our commitment. I look forward to updating you again on our progress in conjunction with the close of the Cloudmed transaction.

Now I'll turn the call over to the operator for Q&A. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question today comes from Stephanie Davis with SVB Securities. Your line is open.

[Stephanie Davis, SVB Securities]

Hey, guys. Thank you for taking my questions. Congratulations on the new LTACH win. I was wondering if you could give a little bit more color on the win just in terms of sizing and how to think about it flow through in the model given your existing capacity.

[Joe Flanagan, President & Chief Executive Officer]

Yes. So we're excited to serve Scion and excited to serve the LTACH care setting as I commented in my formal remarks. It's a pretty straightforward outside of the care setting being different than the traditional short-term acute care settings in some of our IDNs and the associated scope or cost to collect I referenced in my remarks, I would say it's a relatively straightforward from a deployment sequencing, time lines, order of operations, so to speak. And so we would expect to see a similar profile as it relates to contract economics as well as it relates to major deployment activities over the course of this year and into the following years.

[Stephanie Davis, SVB Securities]

And then in terms of contributing to net patient revenue should we assume that it's going to be balanced with the existing capacity and what is available are on the close to the $10 billion win which is why you reiterated the guidance?

[Joe Flanagan, President & Chief Executive Officer]

Yes. The way I would think about it in the short term the answer is yes, Stephanie so – because we're starting this deployment as we speak. And we're also in pre-deployment activities for the large contract that we mentioned. Really, when we think about our deployment capacity and what I'd comment on, raising deployment capacity that's really a view towards the medium term the next two to three years out and a couple of things along those lines. First, the demand environment is very robust. And just based on progression of contracts signed this year, and what we expect to sign as well as looking at our leading indicators in the pipeline activity, we just think it's prudent for us to start to raise our deployment capacity.

And that target, is to exit the year at $9 billion to $10 billion of onboarding that we could support on a given year on a repetitive basis. So what we're working through right now is, how's the phasing of that investment?. The real goal for us is, to have that in place entering 2023. In the short-term, we're going to stretch our resources and we've got good plans around this to serve the demand that we've contracted in the first quarter, which is above what we had expected to contract in the first quarter outside of the large contract that we have not yet signed, but we commented on where exactly we're at on that.

[Stephanie Davis, SVB Securities]

Got it. So you don't think of it as something that are causing delays given scale?

[Joe Flanagan, President & Chief Executive Officer]

No. I don't think it's going to cause us delays in the short term. And you'll remember Stephanie, from prior comments, we can flex our existing capacity to do more than we would nominally plan around. But we cannot do that for multiple years in a row. So really, what we're investing in is for the 2023 demand environment and 2024 demand environment, and it takes us some time to bring that capacity on board. And that's really, how we think about that longer-term planning signal in the short term we're going to leverage our existing resources.

[Stephanie Davis, SVB Securities]

Okay.

[Operator]

The next question is from Sean Dodge with RBC Capital Markets. Your line is open.

[Sean Dodge, RBC Capital Markets]

Yes. Thanks. Good morning. On the guidance, I just want to start there. So a lot of moving parts but Joe or Rachel just to clarify, the guidance you're reaffirming now, does that include the incremental cost to take the nominal deployment capacity in the $9 billion to $10 billion along with the ScionHealth implementation? And then maybe just kind of help us, think through how the $10 billion -- I know there's a lot of costs upfront that you've already spent ahead of that contract how does the $10 billion now tie into the guidance too?

[Joe Flanagan, President & Chief Executive Officer]

Yes. I would say, it started at a headline level, Sean. We do have a lot of moving parts, in the guidance between contracting activities and then M&A, so to speak. So when you break those things down, we will have some -- or we will incur some costs this year that we had not originally contemplated to raise our nominal deployment capacity to $9 billion to $10 billion. So that's something that we're working through. Like I said, our real target is to enter 2023 with that. So that's going to be a phased-in time line and something, we will incorporate when we close the Cloudmed transaction and update guidance. I don't think -- I don't expect it to be material.

And then the other thing is, just as we said before you can think -- Rachel referenced in her remarks, the technical number on a 10% to 12% NPR growth in 2022, call it nominally the mid-4s. I've commented along the lines just for simplicity $5 billion of NPR, being onboarded in our core guidance at the start of the year. When we look at the year right now, with the $2.7 billion contracted another $500 million in contracting and what we would expect is $5 billion of deployment starts in the year, associated with the large contract that puts us somewhere in the $7 billion to $8 billion range of new contracts that we're starting.

And so we will incorporate some of the year one economics with those contracts. And again we're just working through the phasing of that and we're working through the phasing of that more medium-range planning investment to support again the growth environment in 2023 and 2024 which we see at those elevated levels which we are very excited about and very encouraged around.

And then of course incorporating the Cloudmed guidance. So, our thought process was to close the Cloudmed transaction have an accurate kind of set of numbers that incorporates what will include in our guidance from that as well as some of the other moving parts in due course when we closed that Cloudmed transaction.

[Sean Dodge, RBC Capital Markets]

Okay. All right. That's very helpful. And then on the tech investments, Joe, I think you said you've automated an annualized 12 million tasks during Q1. You're on track to deliver something in the neighborhood of 100 million by the end of the year. Can you just put that in context of where do you stand now you think in terms of how much cumulative incremental EBITDA you've been able to generate from those? I guess where are you now? And how much more do you think you can generate by year-end?

[Joe Flanagan, President & Chief Executive Officer]

Yes, I think -- well let's start with just the activity level. We currently have 82 million tasks automated in production on an annualized basis and that's inclusive of the 12 million in the quarter. When we started the year we had targeted to exit the year nominally around 100 million. We will be above 100 million tasks exiting the year.

And since inception -- just to look at the numbers, since inception, we had targeted roughly $45 million of incremental EBITDA contribution since we launched this program exiting 2022. And we've seen a pretty good correlation between our progression on activity and progression on EBITDA. So, I would expect us to be well on our way to that EBITDA target.

And also I would expect us to have some favorability which is against that original target, which again is being reinvested and is also helping us to make sure we can navigate any dynamics relative to wages and whatnot that we tend to see more geographically concentrated than broad-based from our perspective right now or skill-set concentrated.

[Sean Dodge, RBC Capital Markets]

Okay, great. Thanks again.

[Joe Flanagan, President & Chief Executive Officer]

Thanks Sean.

[Operator]

Our next question is from Vikram Kesavabhotla with Baird. Your line is open.

[Vikram Kesavabhotla, Baird]

Hi thanks for taking the question. Firstly, I just wanted to clarify your comments around the $10 billion NPR customer. I know you said that the negotiations are complete. I guess at this point is there still any risk around this contract not being signed at all, or is it really just a matter of timing from here?

And what's your current expectation around when you can finish the remaining open items associated with that contract and what the cadence of onboarding is going to look like given a deal of this magnitude and everything else that you have going on? Thanks.

[Joe Flanagan, President & Chief Executive Officer]

Yes, I mean there's always risk until we're signed. But as I said in my comments we are very, very far advanced and we're down to one main activity which is around third-party access to some post-IT systems. So, that's -- and that's something that -- as I said in my comments we typically do post-contract signing. In this case, we're going to do a pre-contract signing. So, we would typically think about it as a deployment activity. And the fact that we're doing it ahead saves us some time and capacity around the deployment starts.

As it relates to timing it's near-term. It's hard for me to say discretely exactly a day or a week or whatnot, but I would characterize it as near term in nature based on typical -- typically how this process is run and we do it on every one of our operating partner contracts.

As it relates to capacity we have provisioned all of the capacity for this deployment and dedicated it and allocated it to this independent of our other contracting activities. So, I feel like we are well-positioned to support this. And obviously we've got a lot of time to plan just given some of the delays that we've seen in this. So, that in a way has helped the combination of that planning time as well as pulling some activities pre-contract that would be typically post-contract. The way I think about the deployment is we'll start about half of it this year and the remainder will run over the course of 2023 and maybe a little bit of deployment in 2024 based on current plans with the customer. And we think that works well and that gives us a lot of visibility going into 2023 as well around aggregate EBITDA or aggregate NPR to plan capacity around.

[Vikram Kesavabhotla, Baird]

Okay, great. And then, I appreciate all the other updates you gave around NPR. I guess based on what you're seeing right now in the late-stage pipeline how much additional NPR do you expect to sign during fiscal 2022? And then from a higher level when you think about everything that hospitals are going through right now whether it's labor and pandemic and inflation and everything, do you anticipate any changes around your sales cycles or just your ability to close deals as you think about the balance of this year? Thanks.

[Joe Flanagan, President & Chief Executive Officer]

I don't see a huge change in sales cycles. On the larger operating partner constructs, they're very variable. Sometimes they can move faster, sometimes they take much longer. It really depends on the DNA the culture the alignment of the counter-party or the provider that we're working with. As we think about, how much new contracting activity can we support, I mean we're going to be very disciplined along those lines. I think we've got good plans to -- as I commented on to cover the contracting or the contracts we signed in Q1 and we expect to sign in the near term. And we'll watch our capacity closely over the course of the year.

And as we bring some of that deployment capacity on board we'll marry that up with late-stage opportunities. I do expect us to see heavier modular activity as we head into a Cloudmed close and as we start to work on capturing what we think are some very exciting growth synergies. I know we haven't commented discretely on growth synergy numbers. But at a headline level, I would say that from the planning work the teams have done I'm very encouraged with that value creation lever, and I would expect that to be a big focus for us in the second half of the year as well.

[Vikram Kesavabhotla, Baird]

Okay. Thank you.

[Operator]

The next question is from Glen Santangelo with Jefferies. Your line is open.

[Glen Santangelo, Jefferies]

Yeah, thanks. Joe, I just want to clarify something you talked about with respect to the onboarding capacity. I think the way you described it is you're comfortable with kind of $7 billion to $8 billion of NPR starts this year. And then, as we think about next year, I know you're not going to guide on next year obviously, but it sounds like you plan to have the capacity up to $9 billion to $10 billion by the end of this year. So, is it reasonable -- all things sort of being considered, is it reasonable for us to assume that you can have $10 billion worth of contract starts in 2023?

[Joe Flanagan, President & Chief Executive Officer]

Yeah. I think so Glen. That's essentially what we're planning for. And breaking down that nominally $10 billion of contract starts in 2023, you've got $5 billion that will come from the call it the second wave of deployments on this large contract we've commented on, and then an incremental $5 billion from that. And that's just, the four corners of a planning horizon, but we generally see activity that would support that investment.

[Glen Santangelo, Jefferies]

Okay. And any sort of high-level commentary you can make around profitability on all this new business? I mean just given maybe some shifts in the competitive landscape. For example, one of your competitors, choosing to stay private, another one of your competitors choosing to stay part of the big hospital chain. I mean how should we think about profitability on all this new business kind of coming on at a very high level maybe?

[Joe Flanagan, President & Chief Executive Officer]

Yeah. I mean we think about the contract economics to be in line with what we previously shared how those contracts progress through the three stages of margin expansion. If we do sign different care settings as the case with LTACH, we'll make sure to highlight where there maybe variances to those economics. But, as it relates to the IDN environment or a health system environment, so to speak, we see contract economics generally in line. And the thing that's really, really important for us, and I think very, very important for the providers is our commitment to automation. Because that technology lever enables us to drive significant value that, the providers really need significant economic value to them to be very, very competitive on our value prop vis-à-vis the peers and have a return threshold that's in line with what we've communicated.

So that is really a huge priority. It has been a huge priority and it will continue to be a huge priority. And as I said before, our use cases should expand with the Cloudmed technology architecture and data footprint combined with our significant scale and capability and automation on a stand-alone basis.

[Glen Santangelo, Jefferies]

Okay. Thank you.

[Joe Flanagan, President & Chief Executive Officer]

Thanks, Glen.

[Operator]

The next question is from Charles Rhyee with Cowen. Your line is open.

[Charles Rhyee, Cowen]

Yeah. Hey, guys. Thanks for taking the question. Joe, wanted to go back to ScionHealth a little bit. Can you just give us a sense on maybe what the competitive process for that was in winning that deal? And maybe give us a sense for what does the market opportunity in the LTACH space look like maybe size the TAM there for us?

[Joe Flanagan, President & Chief Executive Officer]

The competitive environment, I would say, Charles was similar to other competitive processes, we've highlighted, historically. In this case, I would highlight, our value prop in addition to technology and some other things as factors. I don't have an exact LTACH market sizing only to say that, as care shifts out of the traditional short-term acute care setting, I feel really good about how diverse our book of business is.

And if you look at in the physician care setting the breadth of specialties, we have demonstrated scale coverage in combined with some of the alternative care settings in and around the acute care hospitals, I think our profile, we are well positioned to kind of serve the market where it's going. And that's been a consistent priority for us as opposed to being overly concentrated on short-term acute care facilities. So we'll follow-up on more descriptive market share sizing of those care settings in line with your question. But strategically and directionally that's what's encouraging for me I would say.

[Charles Rhyee, Cowen]

Well, that's helpful. I appreciate that. You mentioned earlier that, you kind of expect heavier modular sales around Cloudmed. Can you expand on that? Like is that a function of how Cloudmed is sold and maybe some of the synergistic modular products that you have that can go into – along with a Cloudmed sale, or is that let's focus on integrating Cloudmed, but in the short term maybe we'll just keep selling more modules maybe less emphasis on end-to-end sales as we pull on Cloudmed?

[Joe Flanagan, President & Chief Executive Officer]

Yeah, yeah. I want to make sure I'm clear and don't create any confusion. We are maintaining and we will continue to increase our focus on end-to-end sales. We see that market robust. We have a strong value prop. We love the visibility and the stickiness in those customer relationships. And so as you think about – that is in place and it's going to stay in place going into the second half of the year.

The only thing I would say, or what I wanted to highlight is one of the exciting value creation levers with Cloudmed is they have a world-class commercial engine to serve the modular channel. That's something, we don't have. We've always known, there are health systems that have demand for some of our capabilities on a modular basis. And historically, our commercial teams have just been fully committed from a capacity standpoint focusing on end-to-end coverage. And so as we look at the close of the Cloudmed transaction, I'm very excited to put some of our capabilities into that commercial channel.

And as we work with Cloudmed on integration planning, I just continue to be very, very impressed and excited to partner with that team. They have great relationships across all the major providers. They understand our core products very well. So I think that's just something we want to have a short-term focus on immediately following close to unlock value.

[Charles Rhyee, Cowen]

So just to be clear right we see this as an incremental opportunity here on top of, sort of, the $446 million, sort of, an annual revenue that you'd expect from Cloudmed. It's their ability to sell-through your modular products.

[Joe Flanagan, President & Chief Executive Officer]

That's exactly right. We feel -- as I commented on and Rachel commented on standalone Cloudmed based on what we know we're very encouraged on how they're doing and where their standalone performance will be or should be for 2022. What I'm commenting on is traditional revenue growth synergies above and beyond that.

[Charles Rhyee, Cowen]

That's great. Just one last clarification. The $5 billion on this new contract that you expect to start in the back half of the year does that come in stages, or should we be thinking of a step-up to that $5 billion range starting in the third quarter?

[Joe Flanagan, President & Chief Executive Officer]

Yes. It will – typically, we'll see employee transitions four months to five months post a contract signing Charles. And so that's when you'll start to see -- and that's a big component of the base fee if you will in our order of operations. So that's the timeline, if you will to plan around or to think around from a modeling basis.

[Charles Rhyee, Cowen]

Great. Appreciate it. Thanks, guys.

[Joe Flanagan, President & Chief Executive Officer]

Thanks, Charles.

[Operator]

And the next question is from Jack Wallace with Guggenheim Partners. Your line is open.

[Jack Wallace, Guggenheim Partners]

Hi. Good morning, guys. Great quarter. Thanks for taking my question. I just wanted to touch on the $9 million to $10 billion of capacity that's being planned to be added by the end of the year. I get the -- you're going to have $5 billion rolling on and extra associated with a large deal. Your normal plus about $4 billion to $5 billion of new business activity expected to generate in any given year. I'm thinking about the size of that team and if they combine the companies with yourself and Cloudmed.

Wanted to get your thoughts on how much of the incremental demand in the market you're seeing is from market conditions tight labor markets increased value prop versus the combined capabilities both yourself and Cloudmed as being a more persistent driving incremental demand on top of market conditions generally would indicate? Thank you.

[Joe Flanagan, President & Chief Executive Officer]

Yes. No thanks, Jack. I think in the short-term I think what we're seeing is demand from macro market conditions. When I say demand the acceleration if you will and the activity above and beyond what we would maybe typically expect I do think that's related to some of the macro conditions labor environment, volume -- patient volume volatility and the need for flexible operating systems, sort of, flexible partnerships if you will.

And then I would also emphasize, we still see or we are continuing to see an emphasis on providers needing comprehensive solutions to transform the patient experience. So that is a very key component of what we're hearing from customers. So I would say that's a short-term horizon.

When we look to 2023 and 2024, I fully expect following the close of the Cloudmed transaction that we should see incremental demand coming from the joint commercial teams and the combined value prop. As I've said before, not every customer will want to pursue an end-to-end partnerships and our focus is to be able to meet the providers where they are in what engagement model works for them. And I think we're really positioned well on a combined basis with Cloudmed.

However, given the size of Cloudmed's installed base and the relationships they have there will be some that no doubt we expect the teams to unlock and convert that will add to what we see as a strong pipeline, but will add to the 2023 and 2024 views. And we highlighted that Jack.

You'll remember when we announced the deal we raised our end-to-end NPR guidance. On a standalone basis, we had that model that 10% to 12% and we took that up to 12% to 14%, as a direct result of that Cloudmed transaction, and that is not yet in our pipeline activity and so it should be forthcoming.

[Jack Wallace, Guggenheim Partners]

Got you. That's helpful. And so just to sort of follow on this the incremental capacity that you're contemplating on within this year is you say equally related to the new deal pipeline you've had this year plus the rolling of the large contract into next year as well as say conversations you've had with -- or let's say, a dive into the client portfolio at Cloudmed into basically thinking okay there's more potential revenue synergies here so let's staff up to go get it. Is that accurate?

[Joe Flanagan, President & Chief Executive Officer]

Yes, yes. I think that's fair. And as you would think when we think about adding capacity, there are scenarios that we can get to that have higher than frankly $9 billion to $10 billion of demand environment, especially when we look at 2023. But we know we can flex capacity as well. So it's -- you'll hear me use the term nominal that means that's just -- it's a medium-range planning signal. We can flex that up and down, but there's a number of levers in the contribution to our views on end-to-end demand going forward.

[Jack Wallace, Guggenheim Partners]

Got you. That's helpful. Thank you.

[Joe Flanagan, President & Chief Executive Officer]

Thanks, Jack.

[Operator]

[Operator Instructions] Our next question is from George Hill with Deutsche Bank. Your line is open.

[George Hill, Deutsche Bank]

Good morning, gentlemen. I appreciate you guys taking the question. I have another kind of derivative question on the ScionHealth deal, Joe, which is, are you seeing any other provider sub-segments kind of open up to the outsourcing model the way you saw this LTACH opportunity open up? And then I have a follow-up please.

[Joe Flanagan, President & Chief Executive Officer]

I would say, ASCs we're starting to see that market -- activity in that market and different inquiries and different perspectives on how -- for those providers or health systems that are looking to scale that segment, how do they want to scale their infrastructure. So that's one that I would highlight George as an example.

[George Hill, Deutsche Bank]

Okay. And then my follow-up is quickly on the $10 billion in deployment capacity. I just want to be clear how much of that are we thinking about as focusing on the core business pre-Cloudmed versus focusing on the combined business post Cloudmed? The question I'm trying to get to is like are you expanding the capacity in anticipation of -- like basically are you investing in Cloudmed ahead of Cloudmed, or do you think of all the capacity expansion is focused on the core lift-out outsourcing business?

[Joe Flanagan, President & Chief Executive Officer]

Think about it this way George and this is somewhat titrating with Jack's question. If you look at 2023, I would still say that $10 billion mark on 2023, because you've still got $5 billion of starts from these new contracts that we expect to be consuming capacity in 2023 that the overarching $10 billion nominally in 2023, is primarily related to us. It has -- I don't see a lot of Cloudmed impact on that. And that's maybe a conservative planning signal. I would expect our teams to move quicker than maybe were necessarily underwriting so to speak. But when we look to 2024, where you've got a clean $10 billion and you've got a little bit of filling in that large contract that's already been deployed or substantively deployed, that's where we would expect to see meaningful contribution from Cloudmed joint commercial activities in their installed base et cetera. So that's really what gives us confidence to say, hey listen, let's go ahead and start the process to bring this capacity on board because we do see a pathway and a set of drivers for 2023 as well as 2024. And that's kind of the window we typically try to plan around.

[George Hill, Deutsche Bank]

That's super helpful. And maybe if I could sneak one more in. I know a lot of your provider organization partners are going to have multiyear arrangements with their payers. But given the labor environment, are you starting to see the front end yet of those provider organizations trying to push through increased labor costs and increased operating costs with the payer organization to deal with?

[Joe Flanagan, President & Chief Executive Officer]

Yes. Yes, we see a fair amount of activity with managed care contracting and the like.

[George Hill, Deutsche Bank]

Okay. That's helpful. Thank you.

[Joe Flanagan, President & Chief Executive Officer]

Thank you, Geroge.

[Operator]

We have no further questions at this time. I'll turn it over to Mr. Flanagan for any closing remarks.

[Joe Flanagan, President & Chief Executive Officer]

Well first Chris, I'd like to say thanks for your help moderating the call today. And thanks everybody for joining us. We remain very, very excited about the opportunities ahead and look forward to updating you on the outlook and our associated progress. Thanks again for everybody's participation today.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.