R1 RCM Inc

NASDAQ:RCM

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the R1 RCM First Quarter 2023 Earnings Call. I would now like to turn the call over to Atif Rahim, Head of Investor Relations. Please go ahead.

[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 our strategic and cost-saving initiatives, our liquidity position or 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, 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 may differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, economic downturns and market conditions beyond our control, including periods of inflation and other risk factors under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022. We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Now, I will turn the call over to Lee.

[Lee Rivas, Chief Executive Officer]

Thank you, Atif. Good morning, everyone, and thank you for joining us. I am pleased to report a strong start to 2023 with revenue of 545.6 million, and adjusted EBITDA of 142.2 million for the first quarter. Adjusted EBITDA was ahead of expectations due to solid operating performance and lower corporate costs. We are pleased with our results and are well positioned to deliver our 2023 guidance.

Let me cover three key topics, then we'll hand it over to Jennifer to cover our financials. First, operational performance and trends we are seeing in the business; second, our progress in technology and automation; and third, commercial activity. We are making good progress across our operation. We are making progress in an environment that is showing steady improvement, but still requires people and technology to proactively manage the impact of payer dynamics.

Our value proposition is clear. First, we have deep experience in managing the revenue cycle with end-to-end customers representing over 55 billion of NPR. Second, we have a global model, which allows our customers to achieve high-quality results, reduces their costs and focuses on what they do best, care for patients.

Third, we continue to deploy technology and automation as we are deeply embedded in our customers' workflow. This will allow us to reduce the dependency on labor over time. And last, with our Cloudmed acquisition, we have 500-plus customers and data on over 500 million patient interactions annually, which allow us to drive more predictability in our customers' operation.

Now, let me get in some detail on our operating metrics in the first quarter. We continue to see modest improvement in our operating metrics relative to the second half of last year. Our internal efforts, as well as engagement with payers both directly and via our customers are yielding positive results. One area to particularly note is payer reimbursement turnaround times.

While we have seen improvement in the last few months as evidenced in days payable improving on the payer side, we continue to work down a backlog of accounts receivable which, in many cases, requires increased resources to ensure conversion to cash for providers. Our focus on execution resonates well with our customers. I have had an opportunity to meet almost all of our end-to-end and many of our modular customers in-person since I stepped into the CEO role at the start of the year.

The feedback has been positive regarding the actions we've taken to address longer turnaround times. Our customers have found it helpful to deconstruct our performance by explaining environmental dynamics versus what's in R1's control. For example, our customers are highly appreciative of our work when presented with data on payer trends within their geographies. We will continue to refine these analytics to benchmark our performance versus broader trends in the market.

We are in a unique position to provide these analytics given our scale and the data available to us via the 900 billion of NPR and 500 million of patient encounters we touch annually. This will be part of our customer engagement strategy going forward. While we are seeing some improvements with payer dynamics in the industry and within our own operating metrics, our customers and the overall industry continue to be under incredible financial pressures. AR days are improving, but providers' costs are up year-over-year and still driving significant impact to their financials.

Our customers understand that our revenue cycle capabilities are not easily accessible independently and certainly not close to the unit economics of R1 given the combination of our global model and investments in technology. We believe we are very well positioned to address the challenges providers face through our operational capabilities, our industry expertise, our technology, and our skilled automation platform.

Now, I'd like to talk about our technology, automation, and data. In Q1, we continue to invest in automation and integrating the legacy Cloudmed automation capabilities into the R1 ecosystem. We expanded our net new automation used cases in several areas, including authorizations, rebilling, and small balance AR while scaling existing use cases across the business. [Indiscernible] our optimal workflow initiative in the first quarter.

As a reminder, this initiative is focused on efficiency for work that cannot be fully automated by leveraging our deep revenue cycle expertise, rules and algorithms to allow automated and human-centric workflows to operate seamlessly together. Our specialists have the information they need at their fingertips to suggest necessary corrections leading to an accurate reimbursement. This standard leads to higher accuracy, fewer denials, faster payment turnaround times and ultimately increase revenue for our customers. We enhanced our tools to accelerate new hire onboarding, increased team productivity, and interoperability between systems.

Lastly, on the data and analytics front, we deploy new machine learning-based models to better prioritize work and automatically map customer terms to R1 standards to uncover more missing charges. Collectively, these investments enhance our competitive advantage by enabling us to find more revenue for our customers.

Next, I would like to discuss commercial activity. We operate in a $115 billion end market growing at roughly 10% annually and where over 70% of providers still manage their revenue cycle processes in-house. This presents us with a sizable runway for long-term growth. Commercial activity remains robust across both end-to-end and modular deals.

On the end-to-end side, we saw progression of partnerships in the pipeline, as well as new entrants into the pipeline. And we continue to leverage the Cloudmed commercial engine and access to 95 of the top 100 systems to our customers to drive cross-sell opportunities across our end-to-end and modular businesses.

On the modular side, activity remains equally strong with ongoing payer challenges driving increased demand for AR and denials solutions. Cross-sell activity is also starting to pick up. We're seeing interest from end-to-end customers and modular solutions that meet our customers where they are in their revenue cycle journey. We have also seen an uptick in the legacy R1 modular offering sold into the Cloudmed base, particularly for physician advisory services in Q1.

In closing, our team is optimistic about our business. We have a great mission managing a highly complex part of our customers' operation. We have a large market opportunity ahead of us, a strong value proposition, a highly differentiated offering and most importantly, a highly dedicated team to grow the company. Health care providers need our services more than ever before, and we believe we have the best offering to serve them.

Now, I'd like to turn the call over to Jennifer to review the financials.

[Jennifer Williams, Chief Financial Officer]

Thank you, Lee, and good morning, everyone. We are pleased to report solid first quarter results with revenue of 545.6 million, up 41% year-over-year and adjusted EBITDA of 142.2 million, up 59% year-over-year. Cloudmed revenue in the quarter was $125.8 million. Organically, R1 revenue grew almost 9% year-over-year, and Cloudmed revenue grew 25%.

Adjusted EBITDA was ahead of expectations we outlined on our last earnings call, due to operational cost discipline and timing of some of our costs for benefits, which I will provide more color on shortly. Starting first with detail on revenue growth. Net operating fees of 361 million grew approximately 12% or 38.2 million year-over-year.

On a sequential basis, revenue was up 16.6 million. Onboarding of Sutter Health, which transitioned mid-Q4 of last year, was the primary driver combined with low single-digit growth year-over-year as expected at other end-to-end and physician customers. Incentive fees in Q1 totaled 23.6 million, down 6.6 million, compared to Q1 of last year and down 2.3 million compared to Q4. The year-over-year decline is driven by longer payer time lines we discussed on prior calls.

While modest, we are very encouraged by the recent improvements in payer reimbursement time lines in the last few months. However, aged AR for our customers continues to be higher than historical trends. This, along with the normal reset of certain KPI metrics at the start of the year resulted in a decline in the incentive fees relative to Q4 of 2022. Nonetheless, we continue to expect incentive fees for the balance of the year to ramp to 30 million per quarter by the end of 2023.

Modular and other revenue was 161 million in Q1, which is up 128.3 million year-over-year. Cloudmed contributed 125.8 million in revenue for the first quarter, which means the legacy R1 business grew low single digits. Demand for our denials, AR, and [DRGV] [ph] offering drove growth for Cloudmed, while growth of the legacy R1 solutions was driven by our physician advisory services.

Turning to expenses for the quarter. Non-GAAP cost of services in Q1 was $362.2 million, up $88.6 million year-over-year. This increase was driven by Cloudmed, costs related to onboarding of our new customers, and net operational investments to support our new growth. Savings from automation, vendor rationalization, and global workforce transitions, partially offset these increases.

On a sequential basis, non-GAAP cost of services declined $2.3 million, due to three reasons: number one, cost discipline and our operational functions; number two, realization of cost synergies; and finally, number three, timing of certain costs for health care benefits and paid time off accruals. Approximately half of the expense favorability compared to expectations in Q1 is timing related. We expect to incur these costs in year. Therefore, we do not expect the favorability will continue at the same rate in future quarters.

Non-GAAP SG&A expenses of $41.2 million were up $18.4 million year-over-year, primarily due to Cloudmed. Compared to last quarter, non-GAAP SG&A expenses were down 5% or 2.1 million. Cost synergies in our corporate functions and real estate savings as part of the integration efforts drove these reductions.

Adjusted EBITDA for the quarter was 142.2 million, up 52.9 million year-over-year, primarily due to the contribution from Cloudmed, which was offset in part by investments to implement new customers. On a sequential basis, adjusted EBITDA was up $17.2 million, driven by incremental revenue and lower cost.

Lastly, we incurred 30.2 million in other expenses. These expenses were primarily related to the integration of Cloudmed. As I mentioned on our last earnings call, we are still on track to achieve cost synergies towards the high end of the $15 million to $30 million range in 2023.

Turning to the balance sheet. Cash and cash equivalents at the end of March were $104.2 million, compared to $110.1 million at the end of 2022. We generated $54.7 million in cash from operations in the quarter. We used 23 million for CapEx, 22 million for debt pay down, and 13 million for cash taxes related to vesting of employee equity awards. We also voluntarily repaid 10 million of our revolver in Q1.

Net debt at the end of the quarter was 1.68 billion with net leverage improving in-line with our expectations. We expect net debt leverage to continue to decline over the course of the year. We also continue to maintain ample liquidity with approximately 613 million available at the end of March, both from cash and cash equivalents and availability on our revolver.

Now, turning to our financial outlook. We remain on track to generate revenue of 2.28 billion to 2.33 billion in 2023, and adjusted EBITDA of 595 million to 630 million. For the second quarter, we expect our cost structure to increase slightly, due to the timing of the favorable health care benefits from Q1 and annual merit increases awarded in April. Overall, we expect Q2 adjusted EBITDA to be roughly in-line with current consensus.

In closing, we are very pleased with our Q1 results. I will leave you with three comments: number one, we are encouraged with the progress we are making in operational execution; two, we're cautiously optimistic in the trends we're seeing in the industry and in our business; and three, we remain confident in our ability to execute on our plans for the remainder of the year. I look forward to updating you on our progress in future calls.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Charles Rhyee from TD Cowen. Please proceed.

[Charles Rhyee, TD Cowen]

Thanks for taking the questions and congrats on the quarter guys. Just wanted to start just maybe Lee and Jennifer, if you could help us walk through a little bit. I think there's a little bit of confusion on, sort of what we're seeing in the markets in terms of strong claims growth versus some of the results that you posted. My understanding, right, is that your operating fees are working off of a lagged timing, right?

You're really looking at last quarter's claims that's kind of showing up into this quarter's revenues. If you can kind of just walk through some of the mechanics there, both for base operating fees and what drives that? Where the recognition comes from for that as well as the incentive fees? That would be helpful to start.

And then secondly, when would we – because we've obviously seen very strong claims – rebound in claims growth sort of industry-wide here, how would we see that in your results moving forward? And then maybe lastly, just on the aged AR issue, is there any – can you walk through the dynamics where that might keep you from earning incentive fees? Thanks.

[Jennifer Williams, Chief Financial Officer]

Great. Thanks, Charles. As far as our base fee goes, you're right. So the way our base fee works is that it's based on cash collections, and the cash collections are a quarter in arrears. So, our Q1 base fee, there's net operating fees are based on cash from Q4. So, it is a bit of a lag. On the KPIs, it's in-quarter performance. So, it's metrics, depending on if it's balance sheet or income statement, those are metrics for the first quarter.

Some of those metrics are cumulative and so they reset at the beginning of the year. Obviously, income statement metrics reset at the beginning of the year. So, that's why we typically see a dip just a normal seasonality of KPIs at the beginning of the year, but we're comfortable with where they are. They were in-line with our expectations for the quarter.

As far as claims go, the volumes that we're seeing for some of the public providers that have released the volumes for Q1, we would expect to see those as those claims are paid and cash comes in, which would result in our – really our second half cash or base fees for our revenue. So that's the way that the claims would flow through. But remember, it's not just volumes for us, it’s ultimately cash, which means is a combination of volume growth and claims, but also acuity and then any kind of payer mix dynamics.

And then as far as aged AR goes, we're seeing improvement in our overall AR days and those time lines, but our aged AR is still higher than historical and has not come down as much as overall aged AR has. So that's just something we're continuing to watch. Typically, those are more complex items that we're working through anyway. So that is one metric that is still higher than historical trends and something that we're continuing to watch.

[Charles Rhyee, TD Cowen]

Is this current level already baked into the guidance that you've given to get [delta] [ph] the [30 million] [ph] year-end incentive fees? So in other words, if something improves on the aged AR, that would be upside?

[Jennifer Williams, Chief Financial Officer]

Yes.

[Charles Rhyee, TD Cowen]

Okay. Great. Thanks.

[Operator]

Our next question comes from the line of Sean Dodge from RBC Capital Markets. Please proceed.

[Sean Dodge, RBC Capital Markets]

Yes, thanks. Good morning. I'll add my congratulations on the progress in the quarter. I guess, maybe Lee or Jennifer, the added resources you all put in place to help address the payer time lines and these client issues that began to kind of ramp in earnest in Q3 of last year. As these issues are fixed and the time lines, Lee, you mentioned kind of looked to be normalizing. The headcount you added there, can that begin to be removed? Or is there an opportunity to allocate those individuals somewhere else in the organization? Maybe just help

us kind of size how much incremental spend you had to help – or add to help with those. And then once those begin to, kind of taper off, what happens to those costs?

[Lee Rivas, Chief Executive Officer]

Sean, I can take it. Jennifer, if you have any color. We would expect over time to need less headcount. However, what I'd say just building off at Jennifer's point and specifically addressing a few customers where we have added incremental headcount. We expect to continue to work down the aged AR, for example, continue to onboard the clients we have in onboarding phase through at least the next several months.

So, I would see the next 6 months or so as continued investment in those customers. And then after that, the combination of our teams getting more efficient, the combination of automation being applied. And the last thing is super important. We probably don't talk about it enough, but part of onboarding is not just our global scale, but it's the application of technology, and that takes a little longer in the course of our first year or two. Once we get our technology embedded, that's where we really drive a lot more efficiency, Sean.

[Jennifer Williams, Chief Financial Officer]

And Sean, one point to add there is that our guidance assumes that we would start to take down resources as those metrics stabilize. So, that's embedded in our 2023 guidance and part of what's driving EBITDA growth quarter-over-quarter.

[Sean Dodge, RBC Capital Markets]

Okay. Then anything you can kind of offer to help us size the extra resources you've added there?

[Jennifer Williams, Chief Financial Officer]

I mean we haven't given a number as far as investment there, but it's in the hundreds of resources that we've added to help stabilize.

[Sean Dodge, RBC Capital Markets]

Okay, great. Thanks again.

[Operator]

Our next question comes from the line of Michael Cherny from Bank of America. Please proceed.

[Michael Cherny, Bank of America]

Good morning. Thanks for taking the question. Appreciate the color, too, on the timing and flow relative to where you see utilization. Maybe to ask a similar type question, but in terms of what you're seeing from the modest improvement in payer turnaround times. As you see those improve, how much visibility does that give you on the incentive fee side, in particular? And any changes in terms of what you've seen so far in terms of what's embedded in the revenue guidance for incentive fees specifically? I know you don't break out incentive fees within the revenue guidance, but curious how that visibility that you get on payer turnaround times, some of which you're also helping the control with the work you're doing factors into the incentive fee visibility?

[Jennifer Williams, Chief Financial Officer]

Sure. So, in our 2023 guidance, we assumed that we would have quarter-over-quarter improvement and the payer time lines, which drives a lot of our metrics, aged AR, obviously, cash, AR days, depending on the customer, they all have a little bit different metrics, but they're all somewhat interrelated to this combination of AR and cash. So, we expect that the AR days will come down slowly.

We don't believe that there's going to be a magical shift that's going to be materially different quarter-over-quarter, but a slow stabilization and improvement over the year. And as such, our improvement fees are assumed to be modest growth quarter-over-quarter such that we get to that $30 million per quarter level by the end of the year.

[Michael Cherny, Bank of America]

Great. Thanks.

[Operator]

Our next question comes from the line of Stephanie Davis from SVB Securities. Please proceed.

[Stephanie Davis, SVB Securities]

Hey folks. Thanks for taking my question. Lee, you’ve touched on some tech investments in the prepared remarks. I was hoping you can go a little bit more in depth. Is this going to remain an outsourced automation project? Do you see an opportunity for this to come more in-house, just given the number of engineers out in the market now? And do you still want to kind of focus on this as an RPA project? Or do you want to [leapfrog] [ph] with maybe a more sophisticated AI function or something else?

[Lee Rivas, Chief Executive Officer]

Yes. Stephanie, thanks for the question. Let me just step back and just talk through our framework on our tech investments and where we're going. This, as you know, if you – when I laid out the priorities, at the highest level was operational improvement, make sure we deliver on customer metrics. It was technology to make sure we deliver on the integrated platform, and I'll come back to that. It was commercial progress to make sure we advance our pipeline, integrate the teams, both on the end-to-end and on the modular side and then it was ensure realization of our synergies.

So, those are the four things I've laid out for the team in my first four months. So, let me go deeper into tech. The main components of our plan this year are Cloudmed integration. So, this is integrating what is already a purpose-built revenue cycle platform through Cloudmed that we spent the last 5 years building. It's intelligent automation, and I'll go through the details of that. And it's – the overriding theme is preventing problems before they occur. So, the way to think about this is any process that has people and manual touch points embedded in our customers' health system, so let's just pick the EMR.

If there is a way to apply routine for repeatable processes through technology, that's exactly what we're doing. The other point I'd highlight, before I just dive in intelligent automation and answer your question around AI application, is the patient experience is at the forefront of our technology agenda.

So, you'll hear me and the team talk more and more about Entri Pay, which is a way that is super visible to our customers to apply technology to reduce the need for labor when it comes to the front end, i.e., registration, scheduling and patient intake. So, those are the big kind of themes around technology.

Let me touch on intelligent automation, which you've heard us talk about a few times. There's a couple of components to this, which directly answers your question. There's RPA, there's machine learning, there's AI. And I know you asked the question last time around ChatGPT, that is, for sure, at the forefront of some of our thinking, the application of large language models.

So, RPA has historically been the primary piece, which is apply Robotic Process Automation to reduce the need for incremental labor. That is still a major, major part of our agenda. The machine learning piece has also been part of the R1 priority – technology priorities for a while, accelerated with the application of the Cloudmed platform.

So, the way to think about this is when we have, as I've said in the early comments, access to 500-plus customers, that means we have access to data on all 50 states, all payer types, all care settings. And we mentioned the volume of patient interactions. We're then able to see data sets across the U.S. and be able to predict with more accuracy and build models that allow us to predict where there might be errors and claims, where there might be root cause issues and denials, for example, and then accelerate, that helps us accelerate cash conversion.

The last thing I'd point out is a question you asked on the last call around the application of the newest technologies, and there's obviously a lot of discussion around large language models. So, let me just close on that. We think that's a huge opportunity for our business to apply those tools. And the reason is, there's a couple of components, a couple of themes across our business that make this application very powerful potentially for internal operators and for our customers.

One is, in order to apply those models, you need data access. We at R1 across our end-to-end and across modular are embedded in our customers' workflow and have access to data. The second is in health care, different from some of the things you hear with more consumer-facing applications, there is a high, high bar for quality and accuracy. Just think about clinical codes and [indiscernible] there or anything related to an electronic medical record.

The third thing I'd say is privacy is key. There is zero room for error in health care. So, all these components make – our team's view is, this is a huge opportunity for our business to drive even more technology through our customers' workflow. So, let me stop there, Stephanie. I hope that answered your questions.

[Stephanie Davis, SVB Securities]

So, let's tie that then to the guidance. You had this massive EBITDA beat. It sounds like the margin expectation is in-line for 2Q. Is the read-through that you're taking some of these extra dollars to accelerate some of these tech investments? Or is there more of a de-risking of the year in this [read] [ph]?

[Jennifer Williams, Chief Financial Officer]

No, we're not assuming that we're going to accelerate or spend incrementally intact, compared to our original guidance. Part of the Q1 beat was timing of some of the – just – primarily health care and timing of PTO. So, that was about half of the favorability in the first quarter. And we're – it's early in the year. We're a quarter in. We feel really good about the first quarter results.

We feel good about the trends and we're cautiously optimistic, and we'll continue to monitor the volumes that we're seeing in claims and the providers, our customers are seeing in claim volume increases that will and should, assuming payer time lines, stay stable and continue to stabilize and improve that it will turn into increased cash, and we'll continue to monitor it and update throughout the year.

[Stephanie Davis, SVB Securities]

Helpful. Thank you.

[Operator]

Our next question comes from the line of Jack Wallace from Guggenheim Securities. Please proceed.

[Jack Wallace, Guggenheim Securities]

Hey, thanks for the question and great quarter. I just wanted to talk a little bit about pipeline visibility, specifically for the deals that were anticipated in guidance for the back half of this year. And then if you could comment on the activity as it pertains to potential deals for next year and beyond. Just what that activity has looked like relative to when you reported the last quarter, and the idea there is, trying to get an idea for how the macro conditions may have impacted that? Thank you.

[Lee Rivas, Chief Executive Officer]

Jack, I'll take that. This is Lee. A couple of things here. First, let me just reiterate the market opportunity for our business. And then let me just get into specifics on the pipeline. So, as you – as we've talked about, we operate in a $115 billion opportunity that is growing roughly 10% with 70% providers still handling the revenue cycle in-house. So, that's the backdrop. And Jack, I'd love to not just talk end-to-end, but also talk about modular. So, I'll touch on both.

On the end-to-end side, the pipeline is strong, and we have clear visibility into what we've articulated the last few months around the 4 billion of end-to-end NPR back half of this year. So, let me give you a couple of themes of what we're seeing. So, a couple of things. The conversations we and the team are having with providers, specifically CEOs, CFOs, heads of revenue cycle are the same across the board.

Continued financial pressure, continued cost pressure, continued complexity, and reimbursement that is putting pressure on their revenue cycle. And the – not so surprising, but having been in the end-to-end business for really the last year or so and before that, running the Cloudmed business on the revenue integrity side, the need for integrated technology has been a key theme.

So, providers today often purchase point solutions that may not be integrated with each other and with each component, this is the front, middle and back-end. And there's a real theme around the need for integrated technology across their operation. So, those are the themes which kind of build right into the R1 value proposition, which is a global scaled model that allows us to deliver the same quality or higher at a lower cost.

Our historic and continued investment in technology that allows us to embed technology with our customers and a team of revenue cycle experts that can go toe-to-toe with anyone in the industry and certainly with our providers that have the experience in any number of host systems through our experience of all sizes of end-to-end clients and all care settings. So, visibility is strong. The pipeline is balanced. We're seeing a lot of activity in the 4 billion to 5 billion NPR range and feel very good about achieving our target back half of this year.

I also want to talk about modular and just highlight a key theme that we've talked about, but I have even more conviction in the opportunity to cross-sell across our business. So, a couple of examples here. So, we have the Cloudmed business deployed across all geographies, across 500 customers with at least one solution sold into 95 of the top 100 systems. That allows that team to get visibility whenever there are opportunities with end-to-end potential clients.

So that's the first thing that we're seeing good progress on. The other place is the opportunity to cross-sell legacy R1 modular solutions into the Cloudmed base is a significant opportunity for our business. And the last is to deploy Cloudmed solutions into the legacy R1 end-to-end base. So, there's multiple avenues for cross-sell.

What we're seeing in the modular business is continued strong traction in the underlying Cloudmed business, as well as the R1 legacy modular business, where we're seeing a lot of traction, which would make sense as our customers are under pressure is the Cloudmed AR and denials solutions and continued traction in some of our clinical coding accurate solutions.

So, the team is very bullish on opportunities just broadly over the next several years and has very clear line of sight into end-to-end and modular targets this year.

[Jack Wallace, Guggenheim Securities]

Thank you. That's really helpful. And then Jennifer, one for you. The base fees were up pretty nicely quarter-over-quarter and 1Q had been a seasonally weaker quarter historically for the company. Was there any impact outside of, say, the Sutter ramping or some of the other new deals ramping, contributing to the base fee growth, you're thinking just in terms of whether it was better than expected, let's call it, same-store NPR or collections that would have had an extra benefit sequentially? Thank you.

[Jennifer Williams, Chief Financial Officer]

No, the largest impact quarter-over-quarter for base fees was driven by Sutter as it transitioned mid-Q4. So you've got a full quarter of the Sutter base fee revenue in Q1. Outside of that, it's a low single-digit growth for other end – collectively for our other end-to-end and physician customers.

[Jack Wallace, Guggenheim Securities]

Thank you.

[Operator]

Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Please proceed.

[Craig Hettenbach, Morgan Stanley]

Yes, thanks. Good to see the really robust growth in Cloudmed, 25% in Q1. I think you've talked about expectations for 20% for the full-year 2023. So, just curious in terms of how you think about the cadence as you go through the year and anything to note on, kind of year-on-year comps?

[Jennifer Williams, Chief Financial Officer]

We feel really good about the growth in Cloudmed in the first quarter, and we have given that 20% full-year growth. We're starting off the year strong. We're certainly excited about the performance that we're seeing in our modular business, and we're going to continue to monitor it. But we feel like there's good opportunity there, and we're excited about the start of the year for the Cloudmed modular business, specifically around that growth.

There may be some opportunity for a little bit higher growth, but we'll continue to monitor it and see what the remaining quarters look like. We're cautiously optimistic based on the first quarter results, though, and extremely excited about it.

[Lee Rivas, Chief Executive Officer]

The thing I'd add just, Craig, a reminder on the value proposition for the Cloudmed solutions. This is a model that – the way we've grown this business as fast as we have is a couple of reasons. One is, we're solving a very specific and needed problem for providers, which is to drive incremental revenue they would not otherwise have realized because of human error, errors in coding, for example, inability to hire resources either in coding or in the back-end.

And the way we go to market is we're essentially collecting – on the first solution sale, we're getting access to all of the data that is applied to cash collections for that customer, putting in one of our solutions, let's say, for example, one of our clinical coding solutions that drives incremental revenue pre or post claim filed. And then that allows us to be able to cross-sell into that customer the next time we go to the customer with any one of our nine total solutions.

And implementation is frictionless because we have the data on the first pass solution and can then show the customer where there are additional opportunities across the revenue cycle. So, just as a matter of value prop, it is a very strong value prop. And I would just add this point, I made earlier on technology. Once we see a system in a state with that same payer, we have that data in our data platform that allows us to apply models and then essentially predict where there are errors and charges in reimbursement in clinical codes across the country across any level of provider.

So, it's a very powerful model with extreme network effects that allow us to go to customers and cross-sell solutions. The last thing I'd say is, our customers talk to each other. There is a very positive reputational effect of the value of our solutions and another reason why we had such strong growth.

[Craig Hettenbach, Morgan Stanley]

Got it. And maybe just a follow-up for Jennifer. I appreciate the color on Q2 expectations for adjusted EBITDA. How are you thinking about the back half of the year, just kind of tailwinds or headwinds to, kind of keep in mind for the second half?

[Jennifer Williams, Chief Financial Officer]

Sure. So, we’ve said that EBITDA will grow sequentially quarter-over-quarter, really driven by four areas. One is base fees and margin maturity on new customers. So, as you think about cash collections, we have some seasonality in the back half of the year just based on posting days and the amount of cash. So that will drive growth or higher EBITDA in the second half of the year naturally.

With 13 billion of new wins that we won last year, those margins will continue to mature as we begin global transitions, vendor rationalization, and consolidation of vendor costs, et cetera, just that normal margin maturity of new business that will happen quarter-over-quarter.

The third is what we just talked about on Cloudmed growth that we'll see 20% growth in Cloudmed, which will drive as those new bookings and new wins come on board and are implemented, it will drive incremental revenue and therefore EBITDA quarter-over-quarter. And then the last is synergy realization.

So, as we continue to integrate the business and drive cost synergy realization, that will drive EBITDA growth quarter-over-quarter. So, it is more back half loaded for those reasons.

[Craig Hettenbach, Morgan Stanley]

Appreciate it. Thank you.

[Operator]

Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Please proceed.

[Elizabeth Anderson, Evercore ISI]

Hi, guys. Thanks so much for the question. I guess two questions for me. One is, I think, Jennifer, you mentioned in one of your prior questions, you're seeing low single-digit growth in the core customer base or already implemented customers. One, should that accelerate sort of as we think about getting the collections from 1Q forward on the one month like just given sort of rate increases that seen year-over-year on the payer side sort of independently of utilization?

And then two, can you give us an update on the patient pay or the patient self-pay portion? How is that trending? Are you seeing any, sort of indications of any kind of like consumer distressed or sort of changes in that area? Thanks.

[Jennifer Williams, Chief Financial Officer]

Sure. As far as the – maybe I'll take the patient self-pay. We aren't seeing any changes on distress there or any changes on the mix that would really drive the numbers. So, that's not something that we're seeing or something that we're concerned about as far as a financial impact. And then as far as the cash collections and the volumes, we're not really seeing any significant impact there, as far as the utilization and the volume growth quarter-over-quarter.

There is some slight growth just based on seasonality in the back half of the year, but overall, we've assumed that single-digit volume growth across the quarters. So, part of it, again, to your point on utilization or payer contracts to the extent that those kick in, it's likely more of a 2024 impact because of the lag in the cash collections and also the lag and the way our base fee works.

So, if payer pricing kicks in midyear, that really becomes a 2024 impact for us because if the pricing kicks in on claims by the time the cash comes in and we have a quarter lag, it's really pushed out to the beginning of next year.

[Elizabeth Anderson, Evercore ISI]

Got it. Thanks so much.

[Operator]

Our next question comes from the line of Scott Schoenhaus from KeyBanc. Please proceed.

[Scott Schoenhaus, KeyBanc]

Hi Lee and Jennifer, congrats on the execution and results. I wanted to follow up on your modular solutions commentary and cross-selling opportunities. So, I think you mentioned in the prepared comments that legacy RCM modular solutions grew low-single-digits, driven by physician advisory services. Did you see this accelerate throughout the quarter? And should we expect this growth to accelerate if we continue to see an improving environment for health care systems? Just any color on this near and longer-term growth opportunity would be helpful. Thanks.

[Lee Rivas, Chief Executive Officer]

Let me just touch on what I'm seeing just thematically and then Jennifer, if you want to answer the questions on just what we assume the rest of the year. So Scott, I'm personally very excited about the opportunity to cross-sell legacy R1 modular solutions into the Cloudmed base. This is a team of revenue cycle experts that have experience with customers. And the point I made before, our team has a reputation for delivering high-quality results as evidenced by our [Class 4s] [ph] in that area.

The comment we made on physician advisory services is applied to several areas of R1 modular solution. So, opportunities that our teams are excited about where we see traction in that modular book pipeline is physician advisory services, our ability to help that end market. The other place where we see an increased level of activity is in our VisitPay business, the patient payments piece.

And this is – look, the model is we have access to customers, heads of revenue cycle and technology departments. We're talking to them every day about delivering value and essentially introducing them to the teams that are the R1 legacy modular teams. So, overall, we see Cloudmed continuing to grow at a strong rate, specifically with some of the solutions that are at the forefront of customer needs, i.e., AR and denials business. And then on the R1 legacy side, we're having more and more conversations with what are essentially net new opportunities for the R1 legacy modular business. Jennifer?

[Jennifer Williams, Chief Financial Officer]

Sure. As far as growth in the modular – the legacy R1 modular business, we did assume, just based on bookings, cross-sell bookings through the year. We did assume some improvement as we go through the year on revenue growth there, but still expected to be single digits.

[Scott Schoenhaus, KeyBanc]

Thanks for the color. Appreciate it.

[Operator]

Our next question comes from the line of Jailendra Singh from Truist Securities. Please proceed.

[Jailendra Singh, Truist Securities]

Thanks and good morning. Thanks for taking my questions. I want to go back to your comment around payer reimbursement time lines improving. Just trying to better understand like how much of this is driven by like macro trends and you've talked about payers having labor shortage. Your tech initiatives, you have been helping your provider clients and provider clients themselves like pushing back MCOs. Trying to better understand the drivers like parse out what is likely permanent versus temporary? And would you say that the worst is behind us in terms of these payer claims time lines?

[Lee Rivas, Chief Executive Officer]

Let me give you the themes. And then, Jennifer, if you have anything to add. Jailendra, we don't know, but we can see what the trends are, which is, we see steady improvement. We assume hopefully, that this gets back to normal by the end of the year, but we see steady improvement. We're still seeing some trends around high dollar claims still being an issue. So – and then Jennifer already mentioned the aged AR.

So, between Aged AR and high dollar claims, there's still some challenges, which is why you hear us being thoughtful and conservative about how we're thinking about the back half of the year. The other point I'd make is, we're getting more and more insight from our Cloudmed data sets that has become very useful for our providers around what's happening with reimbursement time lines, payer by payer in those geographies.

So, it's allowing us to deliver more and more insight into what's happening. And therefore, as they enter negotiations with these payers, they're armed with more data and insight to be able to improve going forward. Jennifer, anything you'd add?

[Jennifer Williams, Chief Financial Officer]

Yes. I mean as far as the mix of just what's happening from a macro perspective versus the resources we've applied, it's a combination of both. If you look at the large public payers and their days claims payable, it's coming down slightly. So, I think there is some macro trends there that there's some improvement. But as Lee mentioned, some of the efforts we're putting against it from a resource perspective are also adding benefits as well.

It's the worst behind us. We believe it is, and we assumed in our guidance, and we expect that we'll see a slow and steady improvement through the year. We're one quarter into the year, so we want to make sure that, that trend continues. But we're cautiously optimistic about the trends that we're seeing.

[Jailendra Singh, Truist Securities]

Okay. One quick clarification question. Jennifer, earlier, you talked about the [10 million beat] [ph] in the quarter. Some – half was driven by some timing of health care benefits, and I believe you said the [PTO] [ph] getting pulled forward. Can you clarify what exactly you're referring there? And what was the remaining like 5 million beat versus like general cost management? Just maybe a little bit more color there.

[Jennifer Williams, Chief Financial Officer]

Sure. So, the timing-related items were primarily just timing of PTO accruals, when PTO is taken and how those balances work at the end of each of the quarters when we measure it, as well as health care claims. So, it's just about utilization. And at the beginning of the year, oftentimes, people still haven't hit their deductibles, and there's more of self-pay before the payments kick-in on our behalf.

So, it's really more of a timing. We don't expect our overall benefits expense to be favorable for the full-year. We just believe it's timing on when those claims are hitting. And so, those expenses we expect will come back in year – just later in the year. So, that's the timing piece of it. And then on the other expenses and the favorability there, it's really around labor and payroll costs are more favorable than what we expected.

Some of that is based on initiatives we had expected, and we were able to execute sooner than expected. And so, we were able to get some favorability there, but it's really driven by payroll.

[Jailendra Singh, Truist Securities]

Got it. Thanks a lot.

[Operator]

Our next question comes from the line of Glen Santangelo from Jefferies. Please proceed.

[Glen Santangelo, Jefferies]

Hi, thanks for taking my question. Jennifer, I actually want to follow-up on something you were just talking about, the more favorable labor and payroll costs. And I was just kind of curious about the macro environment. It certainly seems to be stabilizing. And so, I'm kind of curious if you guys are seeing any softening in overall outsourcing demand at this point in time? Because it seems like during the pandemic, it was pretty obvious that hospitals were struggling, but now that things are normalizing, is that outsourcing demand? Is it starting to diminish in any way?

[Lee Rivas, Chief Executive Officer]

Let me just touch on a piece of this, and Jennifer if you have anything to add. There's an interesting dynamic where why I believe that our pipeline has a good mix, but our sweet spot, if you will, is the kind of 4 billion to 5 billion system. The large systems with large-scale purchasing power, if you will, and power of negotiation with payers look very different from some of these midsized systems.

So, I'd start there that there's still pressure on systems, especially the ones that may be three hospitals in a geography that may not be market leaders in that geography. So that's the first point I'd make is there's an element of that. The other point I'd make is our pipeline is not just large systems. It's also Physician Group. So, that's the other point of why we feel confident in what we're doing back half. And then the other pieces of this, you've got the financial pressure, but also a recognition that what they're doing on the technology side may or may not be working. And in many cases, it's – look we don't have the capacity to be able to invest even if we are making a profit this year.

So, there's – I hear your point. I don't think we're out of the woods by any means just in terms of the financial pressure on systems, especially when it comes to some of those midsized systems.

[Glen Santangelo, Jefferies]

All right. Lee, I appreciate those comments. Thanks for that. Maybe if I could just follow-up. On the integration issues that we talked a lot about over the last several quarters, it seems like those issues are under control and maybe starting to fade into the background a little bit. And while you're comfortable with the pipeline, it seems – have those issues in any way spilled into your discussions with new potential clients or do you feel like maybe we on the Street maybe make too big of a deal with that? I'm just kind of curious if some of those integration issues have impacted your selling efforts really in any way?

[Lee Rivas, Chief Executive Officer]

Glen, my short answer is generally no. No, it hasn't impacted, but we are very cognizant of making sure we do what's right for those customers, making sure they're happy and that they're seeing good things in the market, especially for like-for-like customers in those same specialty areas. So, I would say, positive, not any impact, very little chatter, if you will. But we're also very focused on making sure those customers are happy.

[Glen Santangelo, Jefferies]

Okay. Thanks for the comments.

[Operator]

Our next question comes from the line of Vikram Kesavabhotla from Baird. Please proceed.

[Vikram Kesavabhotla, Baird]

Yes. Thanks for taking the question. I just wanted to follow up on some of those comments on NPR. So, I think you previously talked about adding another 4 billion of NPR in fiscal 2023. Is that still your expectation? And at what point in the year do you expect to sign those deals? And then separately, I think your onboarding capacity now is up to about $9 billion. Are you seeing enough activity in the pipeline to justify maintaining that level of capacity going forward or do you expect to normalize that at some point? Thanks.

[Lee Rivas, Chief Executive Officer]

So, a short answer, then Jennifer, you can add in on the capacity point, is we feel confident on the 4 billion. It's tough in any of these large end-to-end deals to predict timing, but we feel good about back half.

[Jennifer Williams, Chief Financial Officer]

And then as far as capacity, so as we announced for last year on 2022 wins, we had 13 billion of new NPR won in 2022. And of that 13 billion, we're currently onboarding 8 billion of it. The remaining 5 billion is the rest of Sutter and we expect to begin deploying that into 2023 and to 2024. So, as you think about onboarding capacity, the remaining 5 billion of Sutter plus the 4 billion we expect to win in the second half of the year will drive a need for onboarding capacity in that 8 billion to 9 billion range into 2024.

So, we have the capacity. We invested in that last year, and we expect to remain at those levels through 2024 based on the current wins that we've already won and still need to onboard in addition to what we expect to win based on our visibility into the pipeline. That's one of those that we'll continue to monitor, do we need to ramp and take an additional investment in onboarding? Do we – can we ramp down? So, it's something that we'll constantly monitor the right level of onboarding capacity we need for the future.

[Vikram Kesavabhotla, Baird]

Okay, thank you.

[Operator]

Our final question comes from the line of Jeff Garro from Stephens. Please proceed.

[Jeff Garro, Stephens]

Yeah, good morning and thanks for squeezing me in. I want to ask about the progress on the integration of Cloudmed capabilities into R1's ecosystem. And just curious to what extent the new capabilities are coming on incrementally versus in batches. Also, is any training needed? Or is it just kind of intuitive for the users? And then lastly, how should we think about the lag between deployment of these incremental capabilities and driving customer and R1 financial impact? Thanks.

[Lee Rivas, Chief Executive Officer]

Sure. Jeff, let me just give you the quick framework on how we think about the Cloudmed integration. And just as a backdrop, we – Jennifer and I have a lot of experience integrating businesses. I think you know this, we started working together 12 years ago and we're on a pretty similar integration path with the businesses we ran then. Here's what I'd say based on what we've learned and where we are today. We're very much on track on integration, including realization of synergies. The three big buckets, I would say, are technology, operations, and commercial.

On the technology front, we're well on the path to having a unified data platform based on the pre and purpose-build Cloudmed platform. But as with any technology integration, these things always take time, you have to be pretty methodical on how you go about that. On the operations side, there is an opportunity over time to apply some of the R1 capabilities in India, Philippines, to Cloudmed. So that is something that we will be working on back half of this year. And on the commercial side, the teams are very much integrated already.

So, the modular leader, the sales leader, for example, is running both the legacy R1 modular, as well as the Cloudmed commercial capabilities. And that's where we see a ton of cross-sell opportunities. So, the way I'd frame it is integration or the organizational piece, back office, all the big components are done. And by the end of this year, I would say, we're largely done with most, although there's always pieces like technology, culture and so on that just are ongoing through time. So, we feel very good about the integration in general.

[Operator]

I would now like to turn the call over to Lee Rivas for closing remarks.

[Lee Rivas, Chief Executive Officer]

Thank you, operator, and thank you, everyone, for joining us today. Just a few closing comments. First, we feel very good about our ability to deliver on our commitments for 2023. I think you heard that loud and clear from Jennifer and me. The second point is, we're very focused on operational delivery and execution for our customers.

The third theme, I think you heard on all the questions around our pipeline on both the end-to-end side and modular side as end market dynamics remain strong, we believe in the significant commercial opportunities, both on the end-to-end and modular side. The other theme today is on technology. We're very focused on advancing our technology agenda to drive cost efficiencies and value to our customers. So, thank you all for joining us today. We look forward to updating you on our progress on future calls.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now disconnect.