Investors watching for rebound with R1 RCM's Friday earnings release
Chicago-based revenue-cycle management company R1 RCM has talked a big game in recent months, issuing news release after news release about its latest endeavors. But investors, and especially its biggest customer, Ascension, will pay close attention to the company's next earnings release, scheduled for March 9, to learn whether R1 RCM is truly recovering from its public downfall in 2012.
Outside of small contracts, R1 RCM has not publicly announced major revenue-cycle clients it didn't already have ties with since its 2011 partnership with Intermountain Healthcare.
Bringing on Chicago-based Presence Health will extend its longtime relationship with Ascension, which recently acquired Presence, although R1 says it began talks with Presence prior to the Ascension-Presence union. January's announcement that Intermountain Health would outsource 2,300 jobs to the company represented an expansion on a contract that's been in place since 2011. At the end of last month, R1 also said it plans to acquire Intermedix Corp. and expand its work with Ascension to include its physician practices.
The real test of whether Ascension's investments will pay off will be R1's financial performance, which in recent quarters has been bogged down by earlier investments, and whether the company can sign new clients.
The financial services firm Baird currently rates R1's stock as neutral, or hold. For that to improve, the company would need to announce more new clients, said Matthew Gillmor, a senior research analyst with Baird. "Getting new clients is obviously important for long-term growth, because there's only so much you can grow within an existing client," he said, "so I think we'd like to see more progress on that."
Maybe it shouldn't be surprising. R1 purposefully stayed under the radar from 2014 to 2016 during what its CEO, Joe Flanagan, says was a time of slow, mindful rebuilding, capped by a public relaunch in January 2017 that included the name change to R1 RCM, a relisting on Nasdaq and a fresh mission and values.
At the time, the company was still recovering from a highly publicized legal battle with Minnesota's attorney general that had tarnished its reputation, cost it clients and prompted its stock price to plummet. R1, under its previous name, Accretive Health, paid $2.5 million to settle allegations it violated debt collection, consumer protection and privacy laws
Through the ups and downs, R1 has relied heavily on its biggest customer, St. Louis-based Ascension, since they first signed a contract in 2005, when R1 was called Accretive Health. Ascension hospitals accounted for 91% of R1's net services revenue in the third quarter of 2017, a percentage that's fluctuated up and down over the years, and was just 18% in the same quarter of 2016, according to company financial filings.
A decade after the initial contract, Ascension—the nation's largest not-for-profit health system—brought Accretive back from the brink by teaming with a private equity firm to buy a roughly 45% stake together for $200 million, giving Ascension about 20%. It also signed a 10-year agreement to use the company as its sole revenue-cycle provider, adding new hospitals that represented more than $8 billion in new net patient revenue. Earlier that year, Ascension had tried to buy the company, but Accretive declined, saying the offer was too low.
The health system's chief financial officer, Anthony Speranzo said in an emailed statement that R1 has been a good fit to handle the complexities of a large, faith-based healthcare organization. "They continue to bring advanced technology, talent and robust revenue cycle processes, but even more importantly, they have remained a good partner because they realize the important role they play in our relationships with the individuals who seek care from us," he said.
R1's financial filings prior to 2012 show a steadily growing company. That all came crashing down in 2012, however, when the company suffered a net loss of $120 million on only $72 million in revenue amid the high-profile Minnesota lawsuit. The losses persisted in 2014, when Accretive posted a net loss of $79.6 million, followed by an $84.3 million loss the following year.
After Flanagan was promoted in May 2016 to CEO—the company's fourth in as many years—he said he made a series of significant, intentional investments that year in the company's global infrastructure, facilities, organizational capacity, technology and other areas. That year it reported $177 million in net income.
"I think 2016 was a really, really pivotal year in the fact that we committed to those investments," Flanagan said. "Now we can see them playing through in 2017."
That spending weighed on the company's bottom line during the first three quarters of 2017, but Baird's Gillmor said that's to be expected before new deals have had time to mature and yield higher margins.
Flanagan also made a clean sweep of the company's executive leaders when he took over, replacing them with people he hand-picked to lead the embattled company in a new direction. He said he has tried to create a workplace where R1's defects are not only exposed, but celebrated. No one is perfect every day, especially in an industry this complex, but being open about its issues will help R1 operate better than its competitors, he said.
"I like to say our greatest asset is all the mistakes we've made," Flanagan said. "In a more positive way, it's all the learning we've had in those experiences."
R1 isn't out of the woods. It's still fighting a lawsuit from a former emergency department employee in one of R1's client hospitals, who says the company and several client hospitals billed government healthcare programs for unnecessary admissions.
In October 2017, a judge ordered R1 to pay $1.3 million to settle a separate class-action lawsuit in Michigan accusing the company of violating the Fair Debt Collection Practices Act.
The Minnesota attorney general issued a scathing report in 2012 detailing alleged aggressive collection practices in hospitals and later calling them illegal. Accretive's then-CEO dismissed the allegations as "either baseless or exaggerated."
Gary Johnson, R1's senior vice president of marketing, said his company's clients don't focus much on those "rear-view mirror" issues; they're too busy battling their own problems. He cited analysts like Moody's Investors Service and bond underwriters who predict a difficult financial outlook for health systems in the coming years. Moody's, for example, recently adjusted its 2018 outlook for the not-for-profit healthcare sector to negative.
"They're looking for business partners to handle much bigger problems," he said. "So that really hasn't been part of our branding and our building awareness and image challenge."
Baird's Gillmor said despite earlier damage from the Minnesota lawsuit, the company seems to have stabilized within the past two years. Its fresh re-entry into the market helped.
"I don't think that stigma is still with the company today," he said.
Gillmor, who's been watching the company for years, has a positive outlook for R1's future.
In an era of declining reimbursement, rising expenses and flat volumes, R1 provides a service—outsourced, end-to-end revenue-cycle management—that is increasingly attractive to health systems, many of whom still do that work in-house. And R1 is one of only four major players in the end-to-end revenue-cycle space, making it well-positioned for growth in the coming years, Gillmor said.
"It's not a very penetrated market at all," he said.
An edited version of this story can also be found in Modern Healthcare's March 12 print edition.
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