R1 RCM Inc

NASDAQ:RCM

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Q2 2022 R1 RCM Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Atif Rahim, you may begin your conference.

[Atif Rahim, Head, Investor Relations]

Good morning, everyone, and welcome to the call. Certain statements made during this call may be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, in particular any statements about our future growth, plans and performance including statements about the expected benefits of the Cloudmed acquisition, our strategic and cost-saving initiatives, our liquidity position, growth opportunities and our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, 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, geopolitical and economic market conditions, our ability to realize the expected benefits of the Cloudmed acquisition, our growth strategy, the ongoing impacts of the COVID-19 pandemic and factors discussed under the heading Risk Factors in our most recent annual report on Form 10-K, our latest quarterly report on Form 10-Q, and our proxy statement and prospectus related to the Cloudmed acquisition and other SEC filings.

We will also be referencing non-GAAP metrics and certain key performance metrics on this call. For a reconciliation of the non-GAAP amounts and more information on non-GAAP metrics mentioned to their equivalent GAAP amounts, please refer to our press release and the investor presentation.

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

[Joseph Flanagan, President & Chief Executive Officer]

Thanks, Atif. Good morning, everyone, and thank you for joining us. I'm pleased to report our second quarter results were at the high end of the ranges we communicated on our guidance update call in June. Revenue of $391.9 million and adjusted EBITDA of $87.2 million reflect strong operational execution while absorbing costs to onboard new business and expand our deployment capacity. Patient volumes in the second quarter and year-to-date have been in line with our expectations and slightly above 2019 levels.

With inpatient admissions and outpatient surgeries trending ahead of emergency visits and office-based visits.

With the completion of the Cloudmed acquisition on June 21, we're ready to embark on our next phase of growth. We expect Cloudmed to accelerate our growth in three primary ways. First, Cloudmed's deep focus on revenue intelligence, significantly enhances our capabilities in this area and positions us to expand our value proposition and extend our competitive advantage. Second, Cloudmed's blue chip installed base serves as an excellent reference base for potential new end-to-end wins. And finally, Cloudmed's world-class modular sales engine unlocks meaningful growth synergies for R1's historical modular solutions.

We're very excited to bring the two platforms together and deliver even better results to health care providers. Since close, our teams have been actively engaged in executing on our integration priorities. I'll let Lee comment on this, given his leadership role in integration and as President of the combined company. But first, I'd like to cover two important topics: Commercial activity and the current macro environment; and second, our continued investments in technology and how we're leveraging our combined technology to fuel our value proposition.

Starting with commercial activity. We're pleased to assign Sutter Health as our newest end-to-end operating partner customer with $10 billion in net patient revenue under our scope for a 10-year term, this win presents meaningful growth and expansion on the West Coast. Sutter is one of the largest health systems in the country, serving more than 3 million Californians across 22 counties. We are honored to have been selected by Sutter and look forward to delivering meaningful financial benefits to the organization and an exceptional experience to the patients they serve.

Onboarding activities are fully underway and expected to occur in two main phases, starting with a wave of employee transitions this coming fall and concluding in the first half of 2024. Technology was once again a critical driver in the selection process. The investments we made in automation and patient experience allow providers to access these capabilities without any upfront capital investments. Having these capabilities [Audio Gap] significant competitive differentiator.

Wage inflation and tight labor market conditions were also decision drivers for Sutter. From a broader lens, labor dynamics have become a predominant concern for health care providers and are driving increased activity into our end-to-end pipeline. Relative to providers, we are better positioned to navigate current labor-related challenges given our significant scale, global shared services footprint and comprehensive technology coverage, particularly our investments in automation and patient experience capabilities.

As a company, we are not immune to inflationary pressures. However, we are distinctly positioned to offset inflationary pressures given the disproportionate amount of manual work currently performed in our industry. Our global delivery infrastructure and technology investments are two drivers that position us well in the current environment. We continue to invest aggressively in both of these areas in 2022.

In the second quarter, we opened a new shared services center in the Philippines to expand our global operating capacity and further solidify our business resiliency options. We will be offering a range of services from this center, including customer service, patient outreach and utilization management. We chose the Philippines for its known availability of specialized health care talent, which will help us further scale our PAS and clinical denial offerings. We are already seeing excellent results with over 500 current employees. We plan to expand this operation to over 3,000 employees in the next three years.

Our automation effort, which is now in its fourth year, has reduced our reliance on manual labor by approximately 15% relative to our baseline or in-house provider operations. We see significant runway ahead to further automate and digitize our operations.

Overall, macro trends in the economy are creating favorable dynamics for us. Providers recognize that these levers available to us are not readily available to them and certainly not at the same price points. As a result, commercial activity remains very robust across our end-to-end and modular channels.

Our active pipeline for new end-to-end opportunities grew sufficiently in the first half of the year to replace the signing of Sutter. We anticipate an elevated level of activity in the coming years, and therefore, are investing to expand our deployment capacity.

We are on track to increase our capacity to $9 billion in NPR annually as we exit 2022.

On the modular side, we signed 14 modular agreements in the second quarter for R1 on a stand-alone basis. The macro trends I discussed earlier are also driving strong interest in Cloudmed's revenue integrity solutions, and we continue to make progress selling more solutions into current customers as well as expanding our market share with new customers.

And lastly, with the Cloudmed acquisition now complete, we've started to see early signs of commercial activity that point to our thesis on revenue synergies playing out as expected.

Turning next to technology. With approximately $55 billion in NPR under management in end-to-end relationships and $800 billion of NPR touched by Cloudmed, we have significant scale and are distinctly positioned to automate the numerous manual tasks performed in the revenue cycle process.

The building blocks for this automation effort in our end-to-end business were laid several years ago when we reinsured the revenue cycle process by systematically standardizing subprocesses and integrating our core technology across workflows and care settings. As a result, we've been able to effectively automate manual processes at scale. In the second quarter, we automated more than 15 million additional tasks.

Combined with Cloudmed's automation capabilities, we have automated more than 110 million annual tasks and expect to exit 2022 with 140 million tasks automated, up from 100 million for R1 on a stand-alone basis.

The combination with Cloudmed positions R1 to be a clear leader in revenue cycle automation. Immediately after close, we began the integration of our automation solutions with the goal of combining R1's breadth of coverage with Cloudmed's top-ranked class capabilities. I am excited to announce that we launched a new modular automation solution shortly after close based on five automation use cases that have been productized and implemented at scale including prior authorization, AR follow-up and denial management. The response from health systems has been very encouraging, and we have already signed our first three customers with another handful of prospects in late-stage negotiations.

These customers have highlighted rapid implementation, the domain expertise of our team and our robust monitoring and support capability as key differentiators. This is one example of how we are leveraging our combined technology in an area that we expect to grow significantly in the years ahead.

Before I turn it over to Lee for more detail, I'd like to share a few high-level thoughts on our integration efforts. I'm very pleased with how the two organizations are coming together. It's been a pleasure partnering with Lee over the past few months, and it's very clear that the Cloudmed's teams successful experience with integrations is a significant asset for us. As a result, integration is off to a strong start with organizational integration of our commercial teams completed. By leveraging Cloudmed's best-in-class modular commercial engine, we are starting to unlock the revenue and cost synergies embedded in our acquisition thesis.

The positive feedback we've received from customers reinforces our view that the combined entity can deliver superior value to providers as well to all stakeholders at large.

In closing, I remain very optimistic about the prospects for our business. Market dynamics present a favorable backdrop. We have a strong, competitively differentiated platform, our teams are highly engaged and motivated, and we see long-term opportunity for margin expansion in addition to strong top line growth. These are all critical components for long-term growth, and we look forward to executing on the opportunity ahead of us.

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

[Lee Rivas, President]

Thank you, Joe. I'd like to now cover Cloudmed's performance. I'd like to expand on how our combined businesses are positioned for the future with some focus on our technology platform. And last, we'll cover progress on our integration.

Regarding performance, I'm pleased to report that modular solutions at R1 had a very strong first half with our revenues and EBITDA tracking ahead of our full year goals. Cloudmed is the largest portion of our modular solutions, but I'm personally and the team are equally excited about our opportunities to help customers with our patient experience, physician advisory services and automation solutions.

I'll first talk to our modular solutions in the first half with a focus on Cloudmed's performance. As a reminder, Cloudmed's mission is to help providers get paid for services they provide. Our team members are very connected to this mission, and it is fundamental to focusing on helping our provider customers.

We help solve a $100 billion large-scale data problem driven by reimbursement complexity, regulatory changes and hospital system challenges hiring deep revenue cycle expertise directly leading to loss revenues. We help providers recover revenues that go towards patient care, buying medical equipment, hiring medical professionals and more.

Part of our success year-to-date and longer term is driven by a data and analytics-centric approach centered around our technology platform. This starts with our customer scale and related data footprint. As Joe mentioned, we touched $800 billion of NPR and have over 400 hospital system customers and over 90 of the top 100 systems. We help our customers analyze medical records, payment data and complex insurance models, which vary by program, state and by system.

Our technology platform is purpose-built to identify and deliver outcomes on a myriad of policies governing how a hospital system receive payment for services. Our platform is at the core of how we deliver superior results to our customers. Our platform combines revenue intelligence automation and domain expertise to analyze large volumes of clinical and financial data.

I'd like to go in just a bit of detail on the components of our platform given the importance to our customer base and to our mission. The first component is our cloud-based data infrastructure. Our applications are built using the latest cloud computing technologies to be flexible and scalable. Our systems elastically expand to ingest and query large quantities and formats of data daily.

Our cloud-based architecture is structured as a single remotely hosted data stack to minimize customer implementation and costs. This architecture allows us to onboard some customers in a matter of weeks or even days.

The second component is intelligent automation and AI. We have built thousands of proprietary algorithms and models to link and analyze highly variable data sets. Our machine learning identifies anomalies and the data that we use to create additional rules. We then leverage automation to retrieve information from our customer and payer systems without the need for employees to perform time-consuming repetitive tasks.

The last component of our platform is revenue intelligence expertise. Our deep domain expertise in health care payments is a critical capability, which enables us to deliver premium results to our customers. Our data scientists and role of experts use that domain expertise to enhance our platform and deliver the network effects that make our platform so powerful.

Now let me shift and talk about how the Cloudmed platform helps R1 and our combined current and future customers. First, we can deliver additional incremental value to our customers by leveraging the model and AI, the Cloudmed platform provides. This not only improves our value proposition to the customer, but also differentiates us in the market. In addition, over time, we believe the platform will accelerate our technology innovation cycle. Revenue cycle processes are inherently interconnected with worked on early in the patient journey, dictating optimal workflow later.

Having a single technology and data platform which supports the end-to-end process, unlocks the ability to run more sophisticated algorithms to optimize the manual work in automation routines to eliminate it. Our platform leverages extendable core components such as workflow and rules engines and a common data model, drastically reducing the time to develop new functionality or even entirely new products.

Finally, due to being built in a cloud-native architecture, the platform provides the necessary scale and performance to support the combined company's rapid growth while also driving efficiency. In R1's end-to-end model, our operational control over all these process steps allows us to optimize the system as a whole, particularly when compared to point solutions.

The last topic I'd like to discuss is integration and how our businesses are coming together. The first point, I'd like to make is Cloudmed's strong modular commercial engine as a significant asset and one that we will be leveraging to drive growth at the combined company. This engine is one of the key drivers of over 20% revenue growth in the first half of 2022 as well as very strong bookings track record that has led to us serving over 400-plus customers.

We see significant opportunity to leverage this engine and cross-sell R1's modular solutions into Cloudmed's customer base, and our commercial team is excited to have R1's patient-facing solutions such as VisitPay in our portfolio. We also believe we have an opportunity with net new health systems and physician groups we do not serve today as the $800 billion covered NPR implies another $1.2 trillion of customer NPR we can sell into.

By leveraging this commercial engine via our frequent interactions with heads of revenue cycle and health system CFOs, we believe we can accelerate uptick of R1's end-to-end solutions. In the few weeks since close, we have already had several highly strategic discussions with large systems who are struggling to manage the complexity of the revenue cycle given a challenging higher environment and are asking our teams how we can help them.

Integration of our commercial teams is underway with the modular sales teams led by Cloudmed's Chief Revenue Officer. We have started to see some immediate results with the expansion of our pipeline. Over the next 6 months, we'll focus on CRM integration, cross-selling patient solutions in the Cloudmed customer base and creating one modular marketing message.

The second key component of integration we are focused on is operational delivery and related customer value. A key driver of our value to customers and over $1.8 billion in revenue delivered to customers in 2021 is our high-quality operational delivery structure and ecosystem of customer-facing team members who consult with our customers to ensure our analytics are implemented effectively. We deliver analytics on our results for our customers through our technology platform and people. The same platform is also used by our operations team members to engage directly with our customers to consult on how to drive the most ROI from the results we deliver.

Through the integration with R1, we are leveraging the subject matter expertise of the revenue integrity premium services to further strengthen our Cloudmed AI rule sets and machine learning opportunities. Additionally, R1's offshore resources enable us to realize cost synergies as well as deliver even more value faster for our customers by helping us work more inventory and reduce backlogs faster.

Last, I would like to talk about the third and most important component of our integration, people. The most important driver of customer value, in our view, having been part of several large-scale integrations is retaining and developing key people. As an example, I'm pleased to say Cloudmed's, Chief Operating Officer, Chief Revenue Officer, Chief Product Officer, all have key leadership roles in the combined organization and the theme of getting people expanded roles in the new organization holds true throughout all levels of R1. Among the key focus areas for people integration is system integration to resolve duplicate systems, office rationalization, and we are also putting significant work in the culture integration.

In summary, we are pleased with our modular solutions and Cloudmed performance for the first half of the year. Integration of these organizations is off to a strong start, and we are excited about the opportunities to leverage what both organizations do best to add incremental value to our customers.

Now I'll turn the call over to Rachel.

[Rachel Wilson]

Thank you, Lee, and good morning, everyone. We're pleased to report another solid quarter with revenue up 10.9% year-over-year to $391.9 million and adjusted EBITDA up 10.7% to $87.2 million. As discussed on our guidance update call on June 27, we expected revenue of $390 million to $392 million, and adjusted EBITDA of $85 million to $87 million for the second quarter. And we're pleased to report results at the high end of these ranges.

Net operating fees of $318.3 million, grew $33.1 million year-over-year, primarily driven by the onboarding of new end-to-end customers and improved patient volumes across our customer base.

On a quarterly sequential basis, there was one less billing day in the applicable period for our large end-to-end customers, thus net operating fees decreased modestly by $4.5 million.

Incentive fees of $29.9 million, declined by $7.6 million compared to 2Q '21 due to a shift in incentive fees to net operating fees for one of our customers' contracts as previously discussed, partly offset by positive performance excluding this contractual change. On a quarterly sequential basis, incentive fees were relatively flat.

Other revenue, which now includes revenue from Cloudmed since completion of the acquisition, was $43.7 million, up $13 million over the prior year and $11 million over the prior quarter, driven by a $13.3 million contribution from Cloudmed, partly offset by a delay in revenue from the VA contract and planned customer attrition related to RevWorks. Non-GAAP cost of services in Q2 was $280.5 million, up $26 million year-over-year driven by costs associated with the onboarding of new customers and recent acquisitions. Relative to Q1, non-GAAP cost of services increased $6.9 million, primarily due to costs associated with onboarding Scion Health and Sutter. Our automation and digitization efforts continued to offset the increase in cost of services, and we remain on track to generate $45 million in cumulative cost savings over a 3-year period exiting 2022.

Non-GAAP SG&A expenses of $24.2 million, were up $4.1 million year-over-year and $1.4 million relative to Q1 of 2022, driven by costs related to recent acquisitions, sales and marketing spend to support business growth and increased travel expenses as COVID-19-related restrictions are lifted.

Adjusted EBITDA for the quarter was $87.2 million, up $8.4 million year-over-year. This increase was driven by strong operational execution, contribution from Cloudmed as well as lower costs as a result of our automation and digitization initiatives. On a quarterly sequential basis, adjusted EBITDA declined by $2.1 million due to onboarding costs associated with the Scion and Sutter contracts.

Lastly, we incurred $88.9 million in other costs, primarily due to costs associated with the Cloudmed transaction.

Turning to the balance sheet. As we close Cloudmed on June 21, 2Q represents a consolidated balance sheet, inclusive of Cloudmed despite the fact that the income statement and cash flow fully reflect 10 days of combined activity in the calendar quarter. Accounts receivable and other balance sheet items are shown on a consolidated basis, whereas other metrics such as revenue capture the limited combined activity.

Cash and cash equivalents at the end of June were $163.5 million compared to $123.9 million at the end of March. We used $96.4 million in cash from operations in the quarter, primarily related to transaction costs related to the Cloudmed acquisition. Net debt at the end of June was $1.65 billion, up approximately $1 billion from March due to debt incurred as part of the Cloudmed acquisition. Net debt leverage for credit agreement purposes was 3.1x immediately post close as previously indicated in the guidance update call. We expect net debt leverage to decline as previously stated by the end of the year.

The vast majority of our debt post close was floating rate debt tied to SOFR. In early July, we entered into a swap arrangement to fix $500 million of our exposure at a rate of 3.01%. At current SOFR rates, we expect the average interest expense across our debt portfolio to be in the 5% to 5.5% range.

Our liquidity position remains strong with over $670 million of available liquidity. We did not conduct any share repurchase activity in the quarter.

Turning to our financial outlook. Consistent with the outlook provided on our guidance update call in late June, we expect to generate revenue of $1.85 billion to $1.87 billion, and adjusted EBITDA of $470 million to $480 million in 2022. This guidance accounts for the partial year contribution from Cloudmed, investments related to expansion of our deployment capacity and upfront costs to onboard more than $8 billion of new NPR in 2022.

We expect adjusted EBITDA to ramp higher in Q3 and Q4, accounting for approximately 30% and 33% of our full year EBITDA, respectively. This reflects contribution from Cloudmed and the typical ramp in R1's performance in the second half.

In closing, I'm proud of our team's continued strong operational execution and the results delivered in the first half. With the Cloudmed acquisition now complete, we're focused on a successful integration to deliver superior long-term value to our customers and shareholders. I look forward to updating you on our progress in the future.

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

[Operator]

[Operator Instructions] Your first question come from Charles Rhyee from Cowen.

[Charles Rhyee, Cowen]

Congrats on the results here. Just two questions really. First, Joe, on the Sutter agreement, if you could just remind us how we should think about the onboarding of that client? I know you talked about costs in the fourth quarter. How much of the NPR should we be kind of factoring in as part of that within the guidance that you gave? Or should we consider most of that into next year? That's the first question.

[Joseph Flanagan, President & Chief Executive Officer]

Yes. If you think about Charles, on the Sutter deployment, as we've characterized on prior calls, we expect that to occur over two major phases. And looking in the near term, Charles, as you think about drivers on onboarding and conversion to contract economics. The thing I would highlight is we expect the first wave of employee transitions to occur in November of this year. That's no change from our prior views, very consistent.

And a lot of the onboarding activity is fully underway. Obviously, costs being incurred and all the mobilization of that deployment work stream, so to speak, in this year for that first phase.

And it's not perfect, but directionally, I would say, we'll have a little bit of waiting on revenue in the second phase, but directionally, we basically characterized that. It's consistent with how we view it, right now is kind of -- if I was to convert it to NPR kind of the 50% in the first phase and 50% in the second phase from that standpoint.

[Charles Rhyee, Cowen]

And when you say the first phase, though, part of -- it sounds like it will hit more in the end of the fourth quarter. So from a modelling standpoint, we wouldn't want to get -- yes.

[Joseph Flanagan, President & Chief Executive Officer]

That's correct, Charles. That -- yes, that will start in November, and so you'll basically have seven to eight weeks of that activity this year and then kind of in full going into '23.

[Charles Rhyee, Cowen]

Okay. Great. And then secondly, you talked about Cloudmed really tracking ahead of plan at the start of this call. Was that captured in the guidance that you guys gave at the end of the quarter or that potential for additional upside as we think through the rest of the year?

[Lee Rivas, President]

Charles, Thanks for the question. It was captured in the guidance. Just to reiterate what we've said, we feel very strong about what we're doing with modular solutions, and obviously, Cloudmed is a big part of that. We solve -- as I said earlier, we solve a complex problem for our customers. And what we're seeing is both in our current customer base, significant opportunity, and also making progress with net new customers and physician groups and customers we don't touch today. So we feel very good about prospects for the rest of the year and into next year.

[Operator]

Your next question comes from Glen Santangelo from Jefferies.

[Glen Santangelo, Jefferies]

I also want to follow up on sort of the NPR question. Rachel, if I heard you correctly, you said that you're -- now the expectation is for $8 billion of NPR in 2022. I was just curious if you could just sort of give us a sense for what the NPR, the rate will be at the end of 2022? And Joe, I think what we're trying to figure out is how much is already in the funnel for fiscal '23 as we sort of reconcile that to some of your June 27 comments that you expected 12% to 14% NPR growth post 2022?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. So why don't I ask Rachel just to cover kind of the NPR exiting 2022. I think that's your question, Glen. And then I'll come back to how we're looking at '23 and '24.

[Rachel Wilson]

Sorry. So we had in our original guidance that $4.5 billion to $5 billion that we had planned for NPR. And that was part of our very original -- initial guidance, Sutter being, that $5 billion thought is taking that away. So the question is, what have we landed since? And the answer to that is the Scion that we've talked about.

We talked about $500 million for physician and it's $500 million under contracting. So that's about 3.25 additional NPR that we have incurred for the year in total. And so that's something that we are addressing.

[Joseph Flanagan, President & Chief Executive Officer]

Yes. Just one quick update there on the physician. So Q1, we have Scion plus $750 million in physician, just no problem, Rachel. And then as Rachel said, and one thing that might be helpful for context, nothing's changed from our June 27 commentary, Glen as it relates to the end-to-end system we have in contract, and that's still in contracting, and we expect to communicate that in due course over what I would characterize as short term. So when you look at that exiting the year, just accounting for the first half or the first phase that's kind of what bookends that exit rate.

Now the second part of your question, as you look at '23, and I want to normalize for -- and I'll comment, Glen, on '23 and actually '24 because I think it's relevant, I'll normalize for Sutter Phase 2, okay? That's a contracted activity and deployment that will be occurring in '23. The net new portion of that, we're very, very comfortable with our end-to-end revenue guide independent of Sutter as you look at '23. And when you look at that, that essentially covers the deployment capacity kind of we're entering '23 with.

And then as you look at '24, and this gets into a little bit of revenue synergies on the Cloudmed combination, we really see $4 billion of end-to-end NPR coming out of the Cloudmed installed base, at least by '24. We would be delighted if it occurred earlier, but we're very, very comfortable kind of with that view based on Lee and I's triangulation of installed base discussions, characterization of systems, et cetera.

So that's really the backdrop for us that gave us the confidence to make the investments we are right now and get us really excited about the long-term growth prospects that the market is presenting.

[Glen Santangelo, Jefferies]

That's super helpful, Joe. I really appreciate all that detail. Maybe if I just ask one quick follow-up on the profitability side. And it's again, it's something we may be touched on, on the June 27 call. I think on that call, you said you were -- and I'm not trying to get you to give '23 guidance. It's not what one’s thinking here. But I think you said at that point in time, you were kind of very comfortable with those numbers that you all laid out in the proxy at the time the Cloudmed deal was announced. And then I think even on that call, you said that maybe Cloudmed was running a little bit faster and some of the synergies were coming in maybe earlier than you had anticipated, that may be above and beyond kind of some of the amounts that you had in the proxy. And I just was wondering if you could just clarify any comments around that? And then I'll stop there.

[Joseph Flanagan, President & Chief Executive Officer]

Yes. No problem, Glen. So just to recap the 27th call, we basically said we're not going to give '23 guidance on this call, but we do think, given all the moving parts, it makes sense to provide color and directional context. So to start with the stand-alone businesses. We feel good about the stand-alone businesses kind of as we characterized '23 in the proxy.

And then the second thing we said on the 27th call is right now, we see converting $15 million to $30 million of synergies in '23 in that range. Now what I'll say about the synergies, and I'm really pleased with the work the finance team's been doing with our functions. When you look at that synergy range right now, we've been working in earnest on some of the fully controllable categories that you would expect us to. Corporate cost structure, footprint rationalization and third-party vendor rationalization. And I'm not going to discretely give exactly what those numbers are on a bottoms-up basis coming to.

The only thing I'll say is we feel good about the trajectory on synergies that we laid out on that call. And the thing that Lee and I are working on, and you heard Lee comment on this, and I'm very excited about this, between now and the end of the year, in addition to the work our finance teams will do on budgeting, et cetera, from a business standpoint, Lee and I are very focused on mobilizing the revenue synergy opportunity. And the channel that's most exciting for us just because it converts quicker, and we have a very, very active commercial team with the Cloudmed sales engine is that modular book of business.

And so we're -- we just closed the transaction. Until closed, we haven't been able to have our collective sales teams working. And so I'm excited to really sink our teeth into that opportunity area, and we'll see what that yields, but I think that's an opportunity from Lee and I's perspective. And really, it's building on the great momentum Cloudmed has in that channel on a stand-alone basis.

[Operator]

Your next question comes from Michael Cherny from Bank of America.

[Unidentified Analyst]

This is [Charlotte Kobe] on for Mike. You kind of outlined some of the macro pressures you noted customers are seeing, whether it's inflation or the pandemic or just a potential recessionary environment. Could you talk a little bit more about how those pressures could change demand in the near to medium term? And any changes that would have on your contracting process?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. I think the biggest macro or environmental theme that we see impacting demand is really the labor market and the correlating inflationary dynamics driven off kind of supply and demand in the labor market. Now as you break that down, we have seen, and we do think that will continue to create robust demand for the holistic solution that we can provide. And we think with our scale and commitment to digitization, that is, from our standpoint, a long-term driver of growth for us. And I think if you look at other services businesses that have achieved scale and committed early to digitization, the return on that has been meaningful over a multiyear period, and we're excited about that.

Now that same macro environment impacts us on our cost structure. And so it's very important, and I commented on this, Lee commented on this, that we have a maniacal commitment to automating the manual processes. And so long as we do that and we generate the returns and the leverage on our cost structure, and we can convey that scale and technology leverage to customers, I think it will -- and our strong view is that will net-net result in a multiyear growth trajectory for the business. And that's probably the biggest thing.

Now year-to-year, as we've talked about before, we do have to watch provider revenues. As I said in my formal comments, we feel good about the assumptions we've made in '22. And as we always do every year, part of our budgeting process is really to do the best job we can to triangulate what is acuity doing, what's provider revenue doing because that flows through, and it's probably the biggest driver on our end-to-end contract economics.

[Unidentified Analyst]

Great. And then just going off of that, when you think about the competitive landscape and again, factoring in those macro factors, how do you think you're differentiating versus competitors, especially given the recent acquisition of Cloudmed?

[Joseph Flanagan, President & Chief Executive Officer]

Well, let me talk about first standalone and then on Cloudmed. And what I'd like to do is actually have Lee comment as well on Cloudmed's impact on R1 because I think that's the most interesting external perspective from my standpoint. But on a stand-alone basis, what I would highlight in terms of competitive differentiators, first is just global scale. At the size we are, there are very real scale benefits that we're in a position to convey to the providers.

We're very sophisticated operators of global delivery. A good example of that is most recently, we committed to delivery capability out of the Philippines. We made that formal decision in our August Board meeting last year. We established a legal entity in Q1 of this year. And as we sit right now, we have 550 people delivering services out of the Philippines and expect to have 1,000 people delivering services by the end of the year.

When you look at that, that's a relatively rapid deployment in addition to the sophisticated operation we run in other geographies. So first thing is global scale.

The second thing is comprehensive coverage of the process with our technology. And because of that comprehensive coverage of the process with our technology, we're in a position to automate at a higher penetration rate than we think competitors and other market participants are.

And then finally, a commitment four or five years ago to digitizing and enabling self-service on patient engagement. So those are things I would highlight R1 stand-alone.

Now one of the things we fully recognized is our middle offering, revenue intelligence, clinical interfaces, those are very, very valuable areas for us. And so with the Cloudmed combination, I am extremely excited about that capability. And what I'd like to do is have Lee comment on from his perspective, how they can impact and how they've impacted the end-to-end provider space at large with their incremental technology and domain expertise.

[Lee Rivas, President]

Thanks, Joe. [Charlotte] , just a few points I'd like to make about R1 and Cloudmed just building off Joe's point. The first point I would make is just adding on to what Joe said is in the revenue integrity space, we have coverage, both pre and post claim along the middle revenue cycle as you've heard Joe say, in previous calls. And this is us helping customers solve a $100 billion problem of revenue leakage either identifying clinical code errors, all the way to when claims are filed and identifying underpayments or helping them manage denials. So we have a leadership position, and as Joe already, has mentioned, with over 90 of the top 100 health systems and $800 billion of NPR covered.

I just want to touch on this point. The second point I'd make is data at scale. So why do we keep mentioning $800 billion touched with only one solution sold into 90 of the top 100 systems. The reason is the data -- the scale of the data matters. So when we see clinical codes across all 50 states, across all payer types, across 450 customers what we get is an ability to develop models that can predict and identify trends that help our customers.

And just kind of backing up into the customer problem, hospitals only see their own data. So they're seeing limited data sets. They're not getting visibility across the country, across payer types, across different types of systems. We see data across the country on clinical codes, reimbursement, episodes of care and so on. We're then able to apply those models to our customers and identify areas where there is revenue leakage.

I want to touch on how that helps R1. We can do the same thing for R1's current existing customer base. We can also apply this data across the entire platform of R1 and Cloudmed combined customers.

So the third point I want to make is a bit on the platform. I mentioned it in the prepared comments, but the scale of the platform, the cloud infrastructure, the architecture we built at Cloudmed very much applies to R1 more broadly. I won't cover in much detail because I talked about in the prepared remarks but that is a key component of the Cloudmed value proposition to R1, and the R1 and Cloudmed value proposition to our customers.

The last point I'd make is on the commercial model. We talked about it a bit, but maybe just anecdotally give you a bit of thoughts on how we engage with our customers. Our primary customer is the head of revenue cycle, and we've been very intentional about being true to the value proposition of Cloudmed and focusing on revenue integrity. But because of some of the issues that Joe highlighted, linger challenges, hospital's inability to invest in technology and their inability to solve some of the most complex data problems. In some cases, even over the last 60 days, those conversations have evolved in can you help us more broadly?

And so that, over time, leads into what Joe mentioned the $4 billion of NPR and why we have confidence that Cloudmed enables R1 to solve much larger problems on behalf of our customers. Hopefully, that helps, [Charlotte].

[Operator]

Your next question comes from Stephanie Davis from SVB Leerink.

[Stephanie Davis, SVB Leerink]

Congrats on the quarter. I've got two questions, one for Joe, one for Lee. Joe, let's start with you. [Thought] the biggest surprise is the Sutter Health, was that your first day Epic system win versus your more Cerner leaning roots. So I was hoping you can give us some color around how that factored into your initial win process? And what, if any, impact that could have on your onboarding and ramp-up process? If there's more integrations or anything like that, that could go faster, require more lifting on your end?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. No, thanks, Stephanie. And what I would start to say is even before the Sutter win, we -- and one of the things we pride ourselves on is given -- before Sutter, 44 or nominally $1 billion of end-to-end business that we contract into, we have a sizable book of business with all the EMRs. And we would make the statement or argue that a competitive differentiator for us is the diversity of the EMR ecosystems that we interface into both on the acute side and on the ambulatory side.

Now because of some of the M&A activity, obviously, we have a relationship with Cerner. We have an understanding of their system, but we understand the other systems and have prior experience integrating into. But as you say, the installed base with Sutter is epic. We're excited about that partnership with Sutter and Epic to deliver significant value. And we're actively working on the deployment around that.

I don't necessarily -- I wouldn't necessarily, Stephanie, highlight any anomalies in deployment as it relates to that because as I mentioned before, we do have significant experience. And then as you look at the Cloudmed organization coming in, they have significant experience integrating into all that host systems as well. So we're excited about that domain expertise, especially on technology deployment and data interfaces. So we're generally very encouraged. And as I said, Stephanie, we're excited with the EMR footprint and kind of the credibility that comes with that Sutter contract.

[Stephanie Davis, SVB Leerink]

Hope it means more Epic wins to come. And Lee, on your end, I just saw that there's a lot of modular wins in the quarter. So I was curious if that is a par for the course with the Cloudmed team, and we should expect more wins in this cadence? Or b, how you swung that given that it looks like you really guys started printing ever since joining?

[Lee Rivas, President]

Yes. So let me just frame how we think about our commercial model and wins so far this year. So the answer to your question is we feel very good about the 14 modular wins and what we've done first half.

Stephanie, just backing up into how we approach the market. I mentioned this in our first call. We have a very high-end commercial model that is a more classic solution selling approach with geographic pods, we call them, grouping with subject matter experts. That third component of the platform I mentioned, revenue intelligence expertise, those experts fits in the field engaging directly with customers. And our strategy is to approach our current customer base, which is really less than 50% penetrated with our kind of 8-plus solutions and engage with those customers and help them solve problems across revenue integrity, and we've had a lot of success.

I won't give kind of specific booking numbers, but if you think about the business, as we've outlined, we're over 20% growth. A lot of that growth is coming from current customers but we're also seeing a lot of success with net new customers, the 50% of health systems that we don't touch today, plus physician groups outside of the health system area. So we feel very good about what's happening. And just to answer your question, bookings have been strong so far this year.

The other thing I would add as related to R1 is we feel very good about solutions that R1 already has on the modular side. So things I would highlight, Stephanie, that it's only been a couple of weeks since close, but we've had a little bit of a head start to say. There's clearly opportunities to sell physician advisory services into our base. There's clearly opportunities to sell patient experience solutions into our base. These are things that we've started to have discussions with, with our customers, but we feel very good about the future prospects this year and into next year about those R1 modular solution.

[Operator]

Your next question comes from Anne Samuel from JPMorgan.

[Anne Samuel, JPMorgan]

I was hoping maybe you could talk about the opportunity to automate more at Cloudmed to drive some of these expense synergies, and how we should be thinking about the cadence and timing of that?

[Lee Rivas, President]

Yes. So Anne, this is Lee. Let me just touch on automation a bit. So at the highest level, this applies to R1. We believe there's a huge opportunity to apply the technology platform and automation across R1 and Cloudmed customers.

So let me just give you a few examples. Hospitals struggle with process management and revenue cycle. And just -- I don't want to go into too much detail. But as an example, there are many repetitive tasks, such as retrieving a claim, retrieving a medical record, dealing with the nuances of prior authorization that are repetitive tasks whereby you can apply technology. So R1 has already invested as you've heard Joe say, over the last couple of years, significantly into automating current customer processes, interestingly so, has Cloudmed over the last five years.

So the first thing I'd say is automation, and that is both applying a platform approach, so collecting, ingesting, analyzing data across our customer base, that's kind of how I define the broad scale platform, plus RPA automation helps automate across R1's.

The other thing I would say is more specifically the content, I can speak to this because I have obviously a personal history here. We think there's an opportunity to help our customers not just on an end-to-end basis, but also on what we would call a modular basis. In cases where they say they're not ready to move to an end-to-end approach, we've been able to help our customers with what we call automation as a service. And this is directly addressing specific use cases that customers have or having problems such as the ones I mentioned and specifically tackling those on behalf of our customers. So we see a huge opportunity here, and it's very consistent with what Joe has said over the last couple of years to apply automation.

What Cloudmed brings to the table is a technology platform plus additional incremental automation use cases.

[Operator]

Your next question comes from Steven Valiquette from Barclays.

[Unidentified Analyst]

This is [Tiffany] on for Steve. Joe, you mentioned earlier that, like high levels of activity in the sales type is warranting continued investments and expanding capacity. I think over the past couple of years in sort of the '22 exit rate, each capacity increase has been by about $2 billion in NPR. Could you give us an idea if you expect expansion to sort of continue at this rate going forward? Is there any potential for maybe some degree of efficiency is increasing the rate of expansion in out years?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. Yes. I think without a doubt, we expect to get efficiency on the cost of increasing capacity looking forward. We saw that in the most recent capacity adds, and we would expect that to continue. It's a combination of just process improvement on the human capital part of that investment and then increasingly using technology to cover that capacity. So we would for sure expect that trend to continue.

[Rachel Wilson]

Yes, that's consistent with our guidance.

[Joseph Flanagan, President & Chief Executive Officer]

Yes.

[Unidentified Analyst]

Okay. Great. And then kind of on the same topic, I was wondering if you could maybe talk through strategies you're implementing to just speed up the overall onboarding time line. Are you seeing any maybe transferability in Cloudmed's onboarding technology to RCM to potentially speed up the overall process?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. The biggest area of opportunity that I'm excited about is just continuing to kind of innovate in data ingestion and Lee's commented a lot about it. And without a doubt, the Cloudmed data platform, we're excited for that to play a big role in us accelerating the cycle time to onboard and to get to contract economics, frankly, because it's very -- we're very tied to the implementation of technology to do that. So that's the thing I would highlight along those lines.

[Operator]

Your next question comes from Jack Wallace from Guggenheim Securities.

[Jack Wallace, Guggenheim Securities]

Just want to kind of zoom out here and as a refresher or as a reminder for investors, just the broader value proposition, putting some numbers around that. So thinking about when you're going through the contracting process, you're looking at what your customers typically spend as a percentage of NPR. What is a delta between what your customers spend before engagement versus after? And then we've talked about the labor issue as being a big driver in cost, but also just thinking about the changes in the reimbursement environment and just how much more of a cost burden that might be for your potential customers going forward, if they haven't chosen an end-to-end provider such as R1?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. Thanks, Jack. What we feel very, very comfortable with in terms of our value prop, is a double-digit cost reduction that we can contractually underwrite. Now I would say, as we grow and as technology has a greater impact, we only see that cost advantage that we have, and we can convey to customers and, frankly, to the owners of the business expanding. We're excited about that.

And then the second thing is revenue lift. Now at the heart of revenue lift is the Cloudmed platform, Lee's commented on that. So we are very, very excited to be in a position to rerate on our value prop revenue lift up as a direct impact of the revenue intelligence platform, and that's very meaningful.

Now to the earlier question, Jack, one of the things that we're increasingly seeing with health systems is they are changing kind of their pro forma inflationary assumptions on labor. What that does is that translates to a greater value prop that we can give to them. So over a 10-year period or even over a 5-year pro forma planning period, they are accreting their labor expense at a higher rate based on inflation. And the ability for us to kind of underwrite execution on that -- lock that in contractually. And we are in a position to responsibly do that.

That is manifesting itself in a higher value prop directly related to this macro environment. But -- and then the third component of the value prop is improving patient experience. And Lee, I think we're unique in the sense that on some of our mature end-to-end customers, we have been in a position to include patient experience improvement as a contractual KPI. And that's the only reason we're comfortable to do that is a direct result of the technology architecture that we've been investing in for some years.

[Operator]

And the last question for today comes from Sean Dodge from RBC Capital Markets.

[Sean Dodge, RBC Capital Markets]

Yes. Maybe going back to the $10 billion contract, Joe, you said no impact to deployment costs because it’s Epic. But is there anything else regarding scope of that deal or your commitment to keeping a portion of that labor locally in California that alter the long-term economics of that deal, or long-term expected margins versus what you've laid out historically for your other end-to-end partnership?

[Joseph Flanagan, President & Chief Executive Officer]

No, nothing that comes to my mind that I would highlight. It's not uncommon for us to work with the health system on local labor dynamics and have a balance there. Attrition is very high. And we've got a very big footprint. And so there's -- we're in a unique position where we have a lot of flexibility. And so there's nothing that I would highlight, Sean, along those lines.

[Sean Dodge, RBC Capital Markets]

Okay. And then the new center in the Philippines, is there any quantification you can provide around how much you think that can generate in terms of savings as you scale the 3,000 employees? I guess maybe anything you can share around, maybe something with the cost differential of doing work in that local market versus with the cost in India or in the U.S. would be?

[Joseph Flanagan, President & Chief Executive Officer]

Yes. We've been -- the cost points have been favorable to kind of our business plans when we made that investment. Now we'll have to see how that -- it's still early in our journey there. So we have to see how dynamics play out locally. But we would see that in line with other global delivery centers that you referenced in terms of cost advantage.

And Sean, just a quick reminder, you'll remember when we renewed the Ascension contract, very important for us for the 10-year economics, and we characterize those 10-year economics cumulatively as favorable to our prior contract. A big driver was that was patient interface interactions out of global delivery centers. And so that's really the anchor mobilization activity, and we're encouraged with the price points along that basis of comparison as well.

[Operator]

And I will now turn the call back over to Joe Flanagan for closing remarks.

[Joseph Flanagan, President & Chief Executive Officer]

First, thanks, Julie, for all your help today moderating the call. And thank you, everybody, for joining us. As we commented, we're excited to embark on this next chapter of growth. I'm incredibly excited to partner with Lee and his team, and we look forward to updating all of you on progress on our future calls. And just thanks again for participation this morning. I know it's very busy.

[Operator]

This concludes today's conference call. You may now disconnect.