R1 RCM Inc

NASDAQ:RCM

Earnings Call Transcript 2021-Q2

[Operator]

Good day and thank you for standing by. Welcome to the R1 RCM Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Atif Rahim of Investor Relations. Please go ahead.

[Atif Rahim, Investor Relations]

Good morning, everyone and welcome to the call. Certain statements made during this call maybe considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our 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, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements.

All forward-looking statements made on today’s call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to the potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our Annual Report on our latest Form 10-K and our latest report on Form 10-Q. We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Now, I would like to turn the call over to Joe.

[Joe Flanagan, President and Chief Executive Officer]

Thanks, Atif. Good morning, everyone and thank you for joining us. I am pleased to report strong results for the second quarter, with revenue of $353.4 million and adjusted EBITDA of $78.8 million, driven by continued operational execution by our team as well as contribution from our technology investments. Over the past five quarters, our team’s remarkable commitment and engagement has helped our customers navigate unprecedented challenges and delivered outstanding results along the way. We’ve been able to demonstrate the strength of our value proposition and expanded recognition of R1’s brand with providers. I’d like to extend a big thank you to everyone on the team for their continued dedication in driving this performance.

Our investments in automation and digitization are also starting to yield meaningful sustainable results. We are exceeding our financial targets, driven in large part, by a contribution from cost savings generated by automation as well as higher incentive fees due to improvement in customer performance metrics such as denials and AR days. These technology investments are also resonating well with prospective customers, evidenced by continued growth in our sales pipeline.

Given the strong ongoing performance along with a steady recovery in patient volumes, we are raising our 2021 guidance. We now expect revenue for the year to range from $1.46 billion to $1.48 billion, up from our prior expectation of $1.41 billion to $1.46 billion, and we expect adjusted EBITDA of $330 million to $340 million, up from our prior range of $315 million to $330 million.

Technology is increasingly becoming a significant differentiator when it comes to our value proposition. I’d like to devote some time on today’s call to discuss automation and patient experience. We have been consistently focused on these two areas as we feel strongly they present an opportunity to fundamentally transform our industry by substantially reducing the process breakage that causes latency and inefficiency across revenue cycle operations today.

From our vantage point, there are over 100 breakpoints at the process interfaces between the patient, provider, payer and host system when interacting with the revenue cycle. For example, referring providers usually have no visibility into a rendering provider schedule, patients are provided with inaccurate estimates of out-of-pocket costs or not at all, billing statements are not delivered in a timely manner the list goes on and on. The friction at these breakpoints leads to patient frustration, higher administrative costs and yield loss for providers.

The complexity of this problem is routinely underestimated by point solutions and technology vendors with siloed views into a sub-process of the revenue cycle. And even when technology is deployed into sub-processes, it often never reaches its full potential because the accompanying operational change management is typically under resourced. Much of this friction is pervasive across both fee-for-service and value-based models. The only way to rectify these breakpoints at scale is by engineering an end-to-end process from the ground up with linkages into the various revenue cycle sub-processes. This is what we did in the period leading up to 2018. We systematically standardized processes at every point along the way. We integrated our core technology across workflows and care settings. We understood we could not afford to compartmentalize anything in order to drive transformational change. The results of our approach, is a scaled technology platform complemented by deep revenue cycle domain expertise.

Our track record is unparalleled in the industry. Over the last 5 years, we have onboarded more than $35 billion in NPR, implemented our technology at over 170 hospitals and 1,100 practice locations in clinics, rationalized over 600 third-party vendors, deployed 200-plus standard methods and a standardized tech-driven measurement system across the global footprint; developed, acquired and integrated technology to digitize virtually every patient touch point with the revenue cycle processes.

With technology integrated across workflows and processes standardized, in 2018, we launched an effort to systematically automate manual processes in our operations. Our automation center of excellence is dedicated to uncovering opportunities for automation and developing innovative solutions that improve revenue cycle performance for our customers. In less than 3 years, we have developed routines to automate more than 50 million manual tasks. We are very encouraged with the accelerated pace of developing new automations, equating to roughly 10 million new tasks per quarter in 2021. At the same time, our backlog of tasks, process map for future automation has grown to approximately 60 million from 45 million last quarter as we’ve uncovered new opportunities.

We are accomplishing this growth through the continued scaling of existing automations across new customers and delivering innovative new solutions. Our initial effort’s centered around robotic process automation, or RPA. However, to digitize the wide range of complex processes found in provider organizations, we realized we needed more than just RPA. We, therefore, started complementing our RPA effort with additional capabilities to expand the universe of automatable processes. These additional capabilities include optical character recognition, natural language processing, expert rules and machine learning, workflow integration and analytics that can be leveraged independently or collectively to solve automation challenges and manage a digital workforce.

Collectively, I would characterize this capability set as intelligent automation, which is significantly more advanced than RPA alone. The improved value proposition we can convey to customers and the margin benefit we retain from automation is profound. We’ve started to see it flow through to our numbers and we plan to continue to invest heavily in this area. The combination of our deep revenue cycle expertise, scaled footprint, control over the processes and cutting-edge technology are all critical in enabling the success we’ve had with automation. With workflow standardized and our automation foundation in place, the next step of our journey has been focused on empowering the patient experience by enabling self-service.

Revenue cycle is typically the first and last step of a healthcare episode, and patients can experience significant dissatisfaction in their revenue cycle touch points. To give you a sense of these manual and redundant activities at a typical $1 billion revenue health system before contracting with R1, there are approximately 750,000 phone calls and 700,000 paper statements sent out annually and more than 300 employees in local patient access functions. Even after adjusting for varying degrees of deployment maturity and rationalization across our customer base, we estimate the manual and redundant activities are as follows: 15 million annual phone calls, including an average of 3.5 calls per patient pre-service; 5,000 on-site patient access employees and 25 million annual paper statements. The magnitude of this inefficiency and administrative burden placed on the patient is massive and represents a significant opportunity for value creation going forward.

We fundamentally believe there are two primary reasons for the significant amount of redundant administrative tasks. First is the fragmentation of technology solutions currently deployed within the industry, second are the organizational silos that exist across key revenue cycle functions that result in duplicative activities and poor execution. R1 is at a distinct advantage to be positioned to deliver our current and future customers and exceptional patient experience due to our deep domain expertise, commitment to process and technology integration and an aligned contracting model. These unique attributes have fuel our conviction to invest and build the most comprehensive patient experience platform in the market.

Our platform is designed to empower consumers to access and afford care quickly and simply via digital self-service. For example, we can take an inbound order, the first signal of demand for a patient in need and in real time, automate authorization rules, clearance, price quoting, scheduling and onboarding. This can take days out of the cycle time, stressful phone calls out of the experience and wasted dollars out of the expense ledger. And at our scale, the potential impact to all stakeholders is enormous.

Just to provide one example. In our work with Memorial Hermann, we are working to deliver the first phase of a digital front-door capability, spanning their hospital-based own physician, affiliated and retail ambulatory care sites, with the focus of system-wide scheduling. Our commitment is to enable a seamless care journey for consumers as a big step forward for the organization. Our recent acquisition of VisitPay is a further proof point of our commitment to developing the most comprehensive patient-centric platform for the industry.

Let me recap some of the value drivers underpinning the acquisition. Integrating VisitPay establishes us as a leader in consumer payments. Healthcare consumer debt is arguably the largest and most inefficiently managed liability in our services economy. As we seek to solve high-value problems to create a competitive advantage for providers, we can think of a better space for disruptive innovation and believe we will be rewarded well for our investments on consumer payments. VisitPay also advances our technology platform with a robust AI-ready data set for digitizing and personalizing the patient experience, which will enable us to further reduce administrative expense and improve affordability of healthcare.

In addition to VisitPay’s impressive standalone growth trajectory, we are also already in detailed planning phases of a broader, more robust deployment and adoption of VisitPay technology across a broad share of our installed base for all the reasons stated previously. While it’s only been a few weeks since we completed the acquisition, we are very encouraged with the increased interest from our core target market IDNs, who are looking to create a best-in-class digital patient experience to fit the needs of the communities they serve. We expect to formally launch our comprehensive solution at HIMSS next week and plan to hold an investor event later this year to allow the investment community to get a firsthand look at the deep capabilities we have developed.

To round out our technology discussion, I would like to highlight our announcement yesterday appointing Jay Sreedharan as our new Chief Technology and Digital Officer. Jay brings a wealth of expertise in creating digital solutions that drive higher value experiences. He joins us from MGM Resorts, where he was Senior Vice President and Chief Technology Officer, responsible for setting the overall technology vision and executing upon all technology investments and M&A activity. Previously he developed the next generation of applications and cloud services that ultimately powered Starbucks’ Mobile Order and Pay offering. We are very excited to have Jay join the R1 team and his contributions will be instrumental in shaping our vision.

Now I would like to turn to our activity on the commercial front, where we continue to see strong demand for our solutions. Our messaging in value proposition are resonating well, and prospective customers are increasingly recognizing the superior outcomes we can deliver via our experience and technology. Our end-to-end pipeline remains very active and has grown over Q1, with a healthy progression of activities leading up to contracting. The type of health systems we are engaged with in active discussions won the spectrum of large for-profit and non-for-profit health systems as well as academic medical centers and hospital-based physician groups. The tone of our ongoing discussions is very encouraging and gives us a high degree of confidence in signing $4 billion in new end-to-end NPR under management in 2021.

In the second quarter, we made progress towards this goal with the addition of Mednax as an operating partner customer. Mednax is a national network of prenatal, neonatal and pediatric providers equating to approximately $1.5 billion in net patient revenue. We are honored to have been selected by Mednax after a competitive evaluation process and look forward to delivering value to their providers and customers. We believe the driving factors behind Mednax’s decision were similar to factors we have discussed in the past, comprehensive technology and integration with the host EHR, a dedicated deployment function, captively owned global shared services and a track record of results and value we have delivered for other customers. Onboarding activities at Mednax commenced immediately after contract announcement and we are well underway with our major onboarding work streams.

In addition to Mednax, onboarding activities are also progressing well at LifePoint. In July, we’ve commenced onboarding of Phase 3 of the LifePoint business we contracted last year. And to date, we have welcomed over 800 employees from LifePoint to R1. Phase 1, which we started onboarding in January is nearing completion, and we are more than 50% along the way for Phase 2, which commenced in April. We remain on track to complete all onboarding activities by mid-2022 and are pleased with the pace of progress and value we are delivering for LifePoint.

In closing, we are very optimistic about the prospects of our business and are on a strong footing to execute on the opportunity ahead of us. We strongly believe that our end-to-end offering, which brings together expert process knowledge, experience and technological differentiation, is a winning model for providers and difficult to replicate. With the investments we’ve made, we believe we have the highest quality, lowest-cost platform to manage provider revenue, and we continue to build on this strong foundation.

Now, I would like to turn the call over to Rachel.

[Rachel Wilson]

Thank you, Joe and good morning everyone. We are pleased to report another strong quarter with revenue of $353.4 million, up 12.3% year-over-year and adjusted EBITDA of $78.8 million, up 20.7% year-over-year. Adjusted EBITDA margin for the quarter was 22.3%, up 160 basis points from 20.7% in Q2 2020, driven largely by higher incentive fees.

Reviewing the results in more detail, net operating fees of $285.2 million declined 1% year-over-year, primarily due to COVID-related volume pressure, which was partially offset by revenue from new customers. We experienced our highest peak of COVID-related volume pressure on our net operating fees in Q3 2020. This pressure, however, is still reflected in our second quarter results. On a sequential quarterly basis, net operating fees were similarly flattish due to continued COVID-related volume pressure at some of our customers in the December 2020 to February 2021 timeframe.

Incentive fees of $37.5 million were up $36.2 million over the prior year and $8.5 million sequentially, driven by strong operational execution. Incentive fees, which are based on current quarter customer performance metrics and indexed to recent cash collections were thus more heavily impacted by COVID-related volume pressure in Q2 2020 and showed marked improvement in this quarter. Other revenue of $30.7 million increased $5.1 million year-over-year and $3.2 million sequentially, driven by growth from SCI and a recovery in physician advisory services volume. The non-GAAP cost of services in Q2 was $254.5 million compared to $229.8 million last year, up $24.7 million driven by incremental costs associated with RevWorks and the onboarding of LifePoint.

Our automation and digitization efforts continued to drive efficiencies. And despite the onboarding costs related to LifePoint, non-GAAP cost of services as a percentage of revenue declined by 100 basis points year-over-year. Non-GAAP SG&A expenses of $20.1 million were up 2.6% year-over-year, primarily driven by travel and support costs related to new commercial and contracting activity. Adjusted EBITDA for the quarter was $78.8 million, up $13.5 million or 20.7% year-over-year. This increase was largely due to higher incentive fees in our automation effort, which is driving productivity and enhancing our margin growth. Lastly, we incurred $9.8 million in other costs in Q2, down $8.2 million year-over-year, primarily due to a decline in M&A-related costs and lower real estate rationalization costs.

Turning to the balance sheet, cash and cash equivalents at the end of June were $164.9 million compared to $103.5 million at the end of March. We generated $82.5 million in cash from operations in Q2, driven by strong adjusted EBITDA and positive working capital during the quarter. We expect our free cash flow conversion profile measured as cash from operations less capital expenditures as a percentage of adjusted EBITDA, to improve in 2021 relative to 2020 due to focused working capital management and moderation in strategic and other expenses. These expenses were higher last year due to increased M&A activity, COVID-related costs and real estate rationalization.

With the completion of the VisitPay acquisition on July 1, we amended our senior credit facilities to fund a portion of the acquisition and to allow flexibility for future capital needs. Gross debt on July 1 was $820 million or $330 million of availability under the new revolving credit facility. Net debt was approximately $680 million after taking into account cash paid for a portion of the acquisition. Our liquidity position is significantly stronger following the refinancing with approximately $470 million in total liquidity as of July 1 versus $194 million before this refinancing.

Turning to our financial outlook, given our strong performance in the first half and recovery in patient volumes, we now expect 2021 revenue of $1.46 billion to $1.48 billion, up from our prior guidance range of $1.41 billion to $1.46 billion, representing a $35 million increase at the midpoint of the ranges. We are raising our adjusted EBITDA guidance to $330 million to $340 million, up from our prior range of $315 million to $330 million, representing a $12.5 million increase at the midpoint of the ranges.

Our updated revenue guidance reflects an expectation of patient volumes modestly above 95% relative to 2019 pre-COVID levels. We expect these stronger volumes to flow through more prominently in our Q4 net operating fees. We are narrowing our GAAP operating income guidance to a range of $135 million to $145 million due to higher depreciation and amortization expense following the VisitPay acquisition as well as higher stock-based compensation expense tied to employee share awards and the addition of new employees in VisitPay. We expect costs related to strategic initiatives, severance and other items to come in below the range of our previous guidance, partly offsetting the incremental VisitPay expenses.

Lastly, our updated guidance incorporates $10 million of VisitPay revenue contribution, but minimal 2H ‘21 VisitPay EBITDA contribution. To round out our guidance discussion, we expect revenue and adjusted EBITDA in Q3 and Q4 to trend higher sequentially, consistent with prior years, however, with a relatively stronger Q4 due to the recovery in COVID volumes discussed earlier.

In closing, I’m proud of our team’s continued strong execution, notably reflected in our incentive fee revenue delivery, adjusted EBITDA growth and strong cash flow from operations. With a solid start to the first half of the year and continued momentum in the business, we look forward to executing against our updated 2021 guidance of $1.46 billion to $1.48 billion in revenues and $330 million to $340 million in adjusted EBITDA.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Charles Rhyee. Please state company name. Your line is open.

[Unidentified Analyst]

Hey guys. It’s actually James on for Charles. Can we talk about patient volumes currently? I remember when we last spoke in late June, it was mentioned that patient volumes were above 95% pre-COVID. Obviously, guidance assumes greater than the 90% to 95% previously assumed. Can you talk about how patient volumes have trended recently? And any impact or anticipated impact from the delta variant to patient volumes?

[Joe Flanagan, President and Chief Executive Officer]

Yes, James, this is Joe. Thanks for your question. The first thing as we unpack a bit what we’re seeing on patient volumes, I just want to remind the way our business works. I’m going to comment on a leading indicator of patient volumes, what we’re seeing in actually – what we look at is what’s called gross charges posted, which is a future proxy for cash that we’re going to collect. Now as you know well, our base fee is indexed off the cash we collect. And there is about a 4 to 5-month lag depending on the payer dynamics and the customer dynamics in that cycle, so to speak. But indexing off that leading indicator in the past 60 days and looking forward, we are encouraged with patient volumes, and we see them above that 95% upper bound that we had previously referenced. Now that will show up in our net operating fees a little bit in Q3, but as we look to Q4 and even into 2022, we will see the flow-through of that volume. So, that’s the dynamic we’re seeing right now.

As referenced on the call, when you look at our Q2 results on net operating fees, that net operating fee is actually looking at volumes from the December, January, February time frame, billing volumes, if you will. And so that was a time period where we were in the second wave or a wave of COVID that had depressed volumes. So that’s a little bit of the dynamic. I think the most important thing is looking forward based on leading indicators on volumes that we’re seeing right now and have been seeing for the past couple of months, we are very encouraged, and that is trending above the 95% in aggregate level. We have some care settings that are above pre-COVID. I would say, ED is still lagging, albeit it is improving quite nicely from the start of the year. Relative to the delta variant, it’s really hard for me to have any concrete predictions. The only thing I would say is we aren’t seeing any material change in volume activity, and we’re looking at this as you would expect us to quite closely on a very frequent basis.

[Unidentified Analyst]

Okay. And also, you’ve reiterated the conviction in the $4 billion new NPR target this year with continued growth in the sales pipeline. Maybe you could characterize the opportunities in the later stages for us? And also, now the VisitPay serves some blue-chip health systems like Geisinger and Texas Health Resources. Have you started any dialogue with some of the VisitPay customers regarding serving them as their end-to-end rev cycle management partner?

[Joe Flanagan, President and Chief Executive Officer]

Yes. Let me comment first on our end-to-end pipeline and just some of the dynamics or some of the items that underpin our confidence and then I’ll go to VisitPay. So our end-to-end pipeline is up nicely in the quarter since last quarter. And as you’ll remember, it was up quite nicely year-to-date in our last update. So we’re encouraged by that pipeline and the activity in the market continuing to grow in aggregate. If you look at some of the later-stage opportunities, one of the things that is encouraging for me, it’s very balanced in terms of the RPA types of systems that we are in late-stage discussions with. We have a healthy amount of for-profit systems that continues to be an area we think we compete well into and we have a very material amount of non-for-profit and then on a smaller scale, but there is activity in the academic end market. So I think what we’re seeing is the applicability of our model and our value prop is resonating with the broader market. If you look at coverage, meaning what amount of pipeline activity do we have in late stages against what’s our remainder in terms of guidance, we are very, very pleased with the coverage ratio we have. And the final thing I would say, James, is we typically see a fair amount of activity in May, and we typically see a fair amount of activity or an acceleration in some of our late-stage items coming out of August. And I would expect that cadence to be similar this year. So again, both short-term, we’re very encouraged in line with the comments I provided. And then longer term, given the limited penetration, and I say that in a positive sense or the significant amount of market that is still captive, we’re very, very encouraged.

Separate from the end-to-end pipeline, we are seeing nice movement on our modular book of business and our physician offering. So as you saw in our other revenue, our modular revenue is up nicely, and we continue to see healthy progression in those discussions. And one of the things that’s encouraging for me is, it has a much more patient experience technology orientation to that along those lines. And then specific to VisitPay, listen, we’re only a few weeks since we’ve closed that acquisition, and we’ve been in a position to formally engage in partnership with Kent, the CEO of VisitPay and his team. In that short period of time, I am very encouraged by the opportunity for us to complement the strategic dialogue and further differentiate the VisitPay platform in their pipeline, which is very significant. And as you said, and one of the things we like about this business, it’s targeted at the large IDNs. And then we are equally excited about some of the discussions we’ve had along the lines of potential expansion into some of the broader capabilities that we offer together in their currently contracted base. It’s early. Those discussions, I wouldn’t characterize them as overly developed or overly advanced just given kind of the limited time since we’ve closed that deal. But nonetheless, it’s very encouraging from our vantage point.

[Unidentified Analyst]

Okay, thank you.

[Joe Flanagan, President and Chief Executive Officer]

Thanks, James.

[Operator]

Your next question is from Donald Hooker with KeyBanc. Your line is open.

[Donald Hooker, KeyBanc]

Hello? Hey, can you hear me?

[Joe Flanagan, President and Chief Executive Officer]

We can hear you, Don.

[Donald Hooker, KeyBanc]

Great. Wonderful. Yes. So there was a lot of conversation around incentive fees being higher than you had expected. It seems to be driven by a lot of the investments you made in automation and digitization, which you commented on. So going forward, is this going to be something that’s going to be different in your P&L? Is there a way to think about what that incentive fee revenue line should look like over the next four to eight quarters?

[Joe Flanagan, President and Chief Executive Officer]

Yes. We – the first thing I would say is our view is that incentive fee line item on revenue is earned and underwritable. What I mean by that is, so long as we don’t degrade in performance and the way our operation works, once we achieve certain performance levels, we feel confident we’re in a position to maintain and work on improving off of those. So I think it’s – that incentive fee revenue always for us has been a component of our value prop and a component of our economics that we plan around. That was a factor, if you remember at the start of the year in addition to automation and technology investments, and there is some inherent linkage between those in terms of us looking out over the long-term and having a degree of conviction on increasing our profitability targets that we communicated previously. And the other thing I would say is this has been a very conscious priority, as we’ve transitioned work, as we’ve optimized the footprint, as we’ve gotten our technology deployed, what you’re seeing is a very logical progression of our operating model and very conscious with intent by us. The next lever we look to pull on this journey is to see the benefits on performance. And I’m encouraged that we’re seeing that. That’s frankly the expectation we have of our operating team. And that team has put a lot of effort in planning and deploying accountability around those expectations. So that’s how we think about it. And I think over time, what I would expect is to continue this dialogue with investors and continue to see progression in this line item of our pricing.

[Donald Hooker, KeyBanc]

Okay. And then maybe my follow-up question, separate topic, LifePoint seems to be on track in terms of where you’re at in deployments. But there is a broader NPR opportunity at LifePoint. So I guess question number one would be, any update there when you might – if you do well in the first tranche with LifePoint to get a second tranche and obviously, there have been some media reports about LifePoint making an acquisition of Kindred and other things. What is – can RCM support behavioral health and post-acute care? I don’t know if I recall you talking about those areas of healthcare?

[Joe Flanagan, President and Chief Executive Officer]

Yes, let me start with the last question first. We absolutely have, in our current contracted book of business, all of those specialties post-acute behavioral, home health, etcetera. Those are all components of our large IDN customers. And so we have a referenceable demonstrated installed base that can contribute to any evaluation that is done, whether it be LifePoint or any other customer in the market. And if you look at our pipeline, we have other providers in those specialties that we’re actively engaging with. I am not going to comment specifically, and I think you can appreciate why on pending announced M&A activity by LifePoint. But what I will say and has been our strong focus is ensure that we deliver a high-quality deployment on Phase 1, and that’s what we can control and I am very encouraged with our progress there. And I would expect and I would hold our teams accountable that over time, that should evolve favorably for us in that relationship with LifePoint. But again, the most important thing for us is serving the contracted book of business very well, and I think we’re doing that. We’ve gotten good feedback from LifePoint. And I would say the other thing that we’re very focused on is just demonstrating our technologies flexibility in terms of the myriad amount of host systems that we are able to connect into. And that’s a key priority for us. And on that front, it’s also going very well.

[Donald Hooker, KeyBanc]

Great, thank you. Thank you so much.

[Joe Flanagan, President and Chief Executive Officer]

Thanks, Don.

[Operator]

Your next question is from Stephanie Davis with SVB Leerink. Your line is open.

[Stephanie Davis, SVB Leerink]

Hi guys. Congrats on the quarter, and I have a few questions on VisitPay. I’m sure you’re expecting. So first off, I just want to have a little bit more about the integration of the acquisition. What have you done so far? What is left to chop? Where are you in finding a merchant processing relationship?

[Joe Flanagan, President and Chief Executive Officer]

So let me – integration of the acquisition, now it’s relatively, as I said before, relative short amount of time, but that being said, the teams are fully spun off. And – well, let me take a step back. From an integration strategy standpoint, Kent Ivanoff, the CEO of VisitPay and founder of the company, is going to work directly for me. That team, I want to have a direct line into that team via Kent because I do think, to your point, Stephanie, there is some very interesting and disruptive moves we can make as we look at the payment ecosystem and merchant processing is definitely a component of that looking forward. And I just want to make sure we’ve got a lot of focus and empowering the VisitPay team to play offense from their area of domain expertise. So we’re going to have Kent work directly for me. We don’t want to disrupt the momentum he has in the market, and we also want to kind of empower him and give him a long leash to invest in what we think is a quite interesting opportunity to disrupt an inefficient process in healthcare payments today.

So with that being said, our primary focus has been in two areas. One is making sure in the commercial channel, we’re very coordinated. And I think it’s a positive is a lot of the discussions we’re having with prospective customers there is a parallel discussion that VisitPay is having with those same customers on a niche or a component of the technology architecture. So Gary Long, our Chief Commercial Officer, in partnership with Kent, they have gone through a very systematic planning exercise to optimize our joint commercial efforts. I’m encouraged with that. And then the other area is the full deployment of the VisitPay platform into our contracted book of business. And what I’ll remind you, Stephanie, is when you look at that, the reason that’s such a significant priority for us, it’s – it represents a high amount of synergy capture that we contractually control. And those synergy levers are in three areas. You heard me reference how many paper statements we have going out every year. We think we can get digital adoption on the payment process to 75%. And we think it’s almost a one-for-one offset in just eliminating that inefficiency and that cost.

The second thing is right after we get digital adoption at that level, we significantly reduced the amount of inbound phone calls by patients who don’t understand their bills, a significant amount of cost we carry today to manage that inefficiency. And the third thing is driving the patient yield and the incentive fees we earn when we improve patient yield. So when you think about those three levers applied across our $42 billion of contracted business, the synergies that we should control and we should have a high degree of confidence in executing are very significant. I estimate those at maturity to be well above the 2022 EBITDA we expect from VisitPay, which we had referenced previously at around $7 million to $8 million. So that’s the primary focus for us. What I would say, Stephanie is Kent is starting the process to really understand the payment ecosystem. He has a number of relationships with merchant processors as well as the other players in that ecosystem. We’re engaging with our customers to understand kind of what are the boundary conditions they would be comfortable with us operating in or changing? And at a headline level, we do think there is a significant amount of inefficiency and we can bring to market just given the integrated contracting nature that we have, a disruptive move on that payment ecosystem. But we don’t feel like we have to – that’s something that we can put a fair amount of thought into and execute with confidence looking forward.

[Stephanie Davis, SVB Leerink]

I want to follow-up to that then, the idea that merchant acquiring is basically just beyond the tech having a sales arm. Have you thought of leveraging your core sales force beyond the VisitPay sales force or do we sell that into clients or have it almost like an up-sell opportunity?

[Joe Flanagan, President and Chief Executive Officer]

I would say we haven’t yet, Stephanie, really started to think about that part of the process, the merchant acquisition. Right now, we have got so much commercial activity that we are trying to cover in our core offering that just a function of time and a function of capacity. We have had all hands on deck, so to speak, just to serve that portion of our business. But I would think over time, again, and I am going to really lean on the VisitPay expertise as they spend time unpacking the opportunity set and where can we really add value, have a right to play, be confident that we can do something better than the current market participants. If we see those factors play out, we absolutely would think about expanding capability sets or extending capability sets. But I think it’s a bit early right now for us.

[Stephanie Davis, SVB Leerink]

Understood. Thank you, Joe.

[Joe Flanagan, President and Chief Executive Officer]

Thanks Stephanie.

[Operator]

Your next question is from Michael Cherny from Bank of America. Your line is open.

[Michael Cherny, Bank of America]

Good morning. Thanks..

[Joe Flanagan, President and Chief Executive Officer]

Yes. It’s great to have you on Mike. Thank you.

[Michael Cherny, Bank of America]

I appreciate the color so far. Joe, I wanted to go back to some of the commentary you had made on the automation work that you have done so far and thinking through the accelerated spending that you have accelerated programming. As you think about taking almost a halftime break and looking at what you have accomplished versus what you have going forward, have there been any pitfalls that you have seen with clients as you have implemented some of these automation capabilities, all these automated tasks? And as you go, have clients as part of that mapping on a go-forward basis asked you to do more that you didn’t already have within your own roadmap?

[Joe Flanagan, President and Chief Executive Officer]

I think as we reflect on what have we learned along the way, I think one of the things that we have to understand that the potential of this technology. From my vantage point, if you think about the operation and the demographics of our operation, the applicability is massive of this technology and the long-term implications are really, really exciting for us and I think for the customers we serve. That being said, the monitoring maintenance management of the automation routines and the attention to detail on synchronization of systems, change management is a very important component. And I think that’s probably the biggest thing that in partnership with our customers we have learned and we have built capability around. So, that’s what I would highlight along those things, Michael. And I am pleased to report we have got a very, very sophisticated automation, monitoring and change management system of operation in place. And that’s probably been in place for probably about the past six quarters to eight quarters. So, pretty early in our journey, we have recognized that requirement. I don’t know so much if we have – for sure, we have collaboration with customers, and we jointly identify areas of opportunity. What I would say for us is more critical that gets fully resourced. It’s not actually – I mean, the technology development is key, very important and has to be in focus. But I would say equal, if not more important, is the business analysts, and this is the people that understand at a very detailed level, the current state process and are able to work hand-in-hand with our technologists to define a new and different way using automation to run that current state process. And it’s never as simple as, “Hey, I have a bot that is replacing one-for-one tasks that were done before.” These processes inevitably end up in some hybrid. There is – in the future state, there are some manual activities, there is different technology levers, whether it’s RPA or others that I referenced on the call that have to get strong together to really achieve the intended outcome. And so one of the things that I think has contributed to our acceleration is the fact that we have so much domain expertise because we operate the current state at scale today. And we have those resources readily available to sit down and map and define the opportunity side. And you see that, I am very, very encouraged that as we have increased our manual tasks that are automated, looking forward, our backlog is increasing of future opportunity to automate. And I think that’s a direct function of one, expanding the technology levers, but also just our operators being able to continue the progression of the manual analysis and continuing to identify ways to automate those. So, those are some of the things that I think for us have been key takeaways, and we are 3 years into this. So, we have a fair amount of experience we are working from.

[Michael Cherny, Bank of America]

That’s definitely helpful, Joe. And just one other question going back to Mednax, obviously, this is a strong deal win that you announced after the last quarter. You mentioned the competitive dynamics of the contract. As you think about this maybe as a precursor for the execution on the rest of the late-stage pipeline, has anything changed in terms of the competitive dynamics, the RFP process because of COVID? Is there anything else from a timing implementation perspective? You mentioned dynamic – the incentive fees, but anything else that you are seeing that’s different in terms of what prospects are asking you to bring to the table when you are pitching for new business?

[Joe Flanagan, President and Chief Executive Officer]

I don’t know if it’s necessarily different as a result of COVID. The only thing I guess I would highlight is if I open the time aperture up over the past 3 years, what we are seeing is a higher propensity for customers to be comfortable to engage in an operating partnership where there is a transition of control. And they are very focused on the cost-efficiency component of the value prop as part of that transition of control. We definitely are seeing that trend now. We feel great about our competitive position, global scale, significant investment of technology that started some time ago. All of those things contribute to our – what we think is a very strong competitive advantage on the cost of our platform and kind of how we are able to convey that in our value prop. The other thing I would say, Michael, is technology fragmentation, or said differently, the agility of the revenue cycle to respond to changes in the environment, coming out of COVID, that’s a theme that we are seeing playing through. And that manifests itself for us and, hey, listen, how can we simplify the vendor base, how can we simplify the technology architecture and the interfaces to the host systems which will allow better visibility and better agility to respond to market changes. And those market changes could be strategic changes our customers are making in terms of care settings or strategies on payment models or they could be environmental changes that are not really controllable such as COVID or other dynamics. So, those are the two things I would highlight as we look at activity today with customers.

[Michael Cherny, Bank of America]

Okay. Thanks so much Joe.

[Joe Flanagan, President and Chief Executive Officer]

Thanks Michael.

[Operator]

[Operator Instructions] We have a question from Sean Dodge with RBC Capital Markets. Your line is open.

[Sean Dodge, RBC Capital Markets]

Thanks. Good morning. Maybe on the PX solutions, Joe you mentioned that the three levers of value those can drive when deployed, can you help quantify a little more the white space that exists for those in your existing footprint? And maybe if we could bring it down to something as simply as, if you have a client that isn’t using PX solutions and you were to implement all of them including now what VisitPay brings, what would that do to the revenue and EBITDA profile of that contract? Would that be a – something like a 20% to 30% revenue enhancement and something much greater than that to EBITDA? Maybe if you can just kind of help dimension that a little bit more for us?

[Joe Flanagan, President and Chief Executive Officer]

Yes. So if you – let’s think about the PX levers in our currently contracted book of business. And we are very focused with our PX platform. We are very focused on the use case where providers want to partner with us. And they want to fully integrate from order referral through scheduling, through intake and clearance and through payment, okay. So, that – where we are directing our internal efforts are for use cases or customer personas that feel strongly for them to get a differentiated outcome. They need to work with a partner and do the heavy lifting to integrate those process flows and to integrate those process flows across the workflow or the process and fully integrated across all the care settings. When you look at that use case, what you are not going to see, Sean, we contract by and large, day one all the scope we can contract. As you know, we sit down with that customer and we strive to achieve the maximum day one scope definition we can get. So, we want scheduling. We want intake. We want the coding and HIM operations and all the way through payment. So, as you think about the applicability of this PX platform in that commercial model, we are not going to see a huge increase in revenue because the revenue is already contracted in scope. But what we are going to see is it flows through on the profitability and some things that I would throw out that are proxies for the impact that would have. We think 50% of – at least 50% of the inbound phone calls where patients are picking up a phone and calling a call center, now that could be a call center – a scheduling call center, that could be a preregistration call center, that could be a payment call center, a redundant, duplicative, not necessary. At a minimum, we think that should be an expectation we have on our teams who are using the technology solution we are building. We think the majority of pre-service encounters and scheduling operations should, over time, get to that 75% threshold on self-service enabled, where we are empowering the patient or we are empowering the referring physician’s office to schedule out of their technology and have a patient never leave a primary care visit without a scheduled appointment for their next episode of care in whatever care setting that may be. I talked about payment. We think 75% of statements going out today should be digitized and enabled on a self-service basis. So, when you roll all that up and you look at kind of the cost that sits today, in these various functions, we think the opportunity set is quite significant. And we think there is more than enough inefficiency to work with, where we can convey a very strong value prop to the providers. And at the same time, we can also earn an appropriate return for the technology investments we have made and we intend to make going forward.

[Sean Dodge, RBC Capital Markets]

Okay. That’s great. That’s very helpful. Thank you. And then on the – maybe going back to the guidance increase. If we exclude business pay from both the revenue and the EBITDA ranges, it implies margins on the incremental revenue would be very high. Can you just help frame for us, is this the benefit of operating leverage? Is this the bigger mix of incentive fees, you mentioned earlier, some lift from the tech investments. Are you delaying some spending on investments? Maybe just if you could talk of the drop-through?

[Joe Flanagan, President and Chief Executive Officer]

No, actually, we – if I unpack our year a bit, we have authorized increased tech investment over the course of this year above what we had originally budgeted. So, when you look at our raise on guidance, it’s net of us investing more than we had planned at the start of the year. So, none of it is related to a slowdown or a throttling of investment, so to speak. What you are really seeing through, I think, is two dynamics. One, the incentive fees are flowing through at very high margin because the marginal cost we invest to improve performance is not a one for one. There is very good leverage in that. And generally, when we are moving the needle on incentive fees, we are – as I said before, you are seeing the progression of us getting the improved outcomes following the deployment of our technology. And that’s what we expect from our operators. And I think – so I think it’s a very logical progression associated with our business model. And then the other thing you are seeing is in the other revenue line. As I mentioned before, some of those modular solution – or the modular solutions that are really driving that growth are more technology oriented. And so you are seeing that margin flow through as well.

[Sean Dodge, RBC Capital Markets]

Okay, great. Thank you again.

[Joe Flanagan, President and Chief Executive Officer]

Thanks Sean. And with that, we have got one more question from Baird, I think.

[Operator]

Yes. We have a question from Vikram Kesavabhotla with RW Baird. Your line is open

[Vikram Kesavabhotla, RW Baird]

Yes. Hi. Thank you for taking my questions. I guess first, I would be curious, just given the recent news flow around just COVID volumes and the delta variant, I am just curious if you think there is any potential for that to impact the sales cycles that prospective customers in your pipeline or the on-boarding time lines of your existing customers? I would be curious to hear about how you are thinking about that in the current environment?

[Joe Flanagan, President and Chief Executive Officer]

I don’t think it will impact the on-boarding time lines at current customers just given kind of the momentum those deployments have. And it’s hard for me to tell. What I would say is we are not seeing any correlation. And we would see that pretty real time if customers, whether we have site visits set up with prospective customers or we have meetings on the books, we would start to see those get pushed out or whatnot. And we are not seeing any of that. And based on the tone and the dialogue we are having with prospective customers in pipeline, I don’t get the sense that we are going to see a bunch of movement that’s correlated to delta. Now we are learning every day kind of – on how this evolves. And so that could change. But based on right now, no changes to our deployment, I would expect, again, just based on the inertia that’s in place behind those activities on our side and on the customer side. And we haven’t seen any indications that there could be delays in commercial discussions we are having.

[Vikram Kesavabhotla, RW Baird]

Okay, great. And then just a follow-up on your comments around automation, you talked about the increased backlog of tasks that are masked for future growth now. Just curious if there is any update to your expectation around the timing or magnitude of EBITDA contribution that can come from that automation process in the coming years?

[Joe Flanagan, President and Chief Executive Officer]

No updates right now. I think we feel very comfortable with some of the indications we have put out for 2022 around kind of the impact we expect on EBITDA from automation. And I would say the progression we are seeing and the uptick in backlog is very much aligned with what we expected and what underpinned our kind of future long-term view on kind of adjusted EBITDA margins on our business model, which we put out at the start of this year as well. So again, I think it just bodes well for kind of some of those reference points that we have communicated previously. But no updates to those reference points right now.

[Vikram Kesavabhotla, RW Baird]

Okay, great. Thank you.

[Joe Flanagan, President and Chief Executive Officer]

Thank you very much.

[Operator]

There are no further questions at this time. Now I will turn the call back over to Joe Flanagan.

[Joe Flanagan, President and Chief Executive Officer]

Big thank you, Mary, for all your help moderating the call, and thanks everybody for joining us today. As referenced, we are pleased with our performance in the first half and the continued momentum in the business. And we look forward to updating you on future calls and ongoing process. So, thanks again for all of your participation. And Mary, I think we can close the call now.

[Operator]

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.