R1 RCM has struck a deal with the leading electronic health record vendor Cerner to buy its revenue cycle outsourcing business for $30 million.
Chicago-based R1, which specializes in end-to-end revenue-cycle outsourcing, said Wednesday it plans to hire Cerner RevWorks employees once the deal closes in the third quarter of 2020.
R1, which just acquired SCI Solutions in April, saw its stock jump as much as 12% Wednesday morning on the news. Despite the global pandemic, R1's revenue jumped 16.2% year-over-year to $320.5 million in the first quarter of 2020, which ended March 31. Profit soared to $18.2 million in that time.
R1 will likely generate a much larger return from RevWorks than Cerner has been able to, said Matthew Gillmor, a senior research analyst with Baird. RevWorks generates $80 million in annual revenue across 150 clients, including hospitals and ambulatory providers, Gillmor said.
"I don't think this is generating meaningful earnings for Cerner," he said, "but it has the potential to generate meaningful earnings for R1, because R1 has the scale to generate more attractive margins on this particular service line."
The $30 million acquisition price will be paid in three installments, Gillmor said.
Cerner, whose stock was mostly flat on Wednesday, scored the lowest of all revenue-cycle outsourcing firms in a 2019 KLAS report on client satisfaction that measured things like executive involvement, value and whether timelines were met. Just 30% of clients said they would choose Cerner again.
Marc Naughton, Cerner's chief financial officer, hinted at the possibility of divesting RevWorks on the company's fourth quarter 2019 earnings call. He said such a deal did not factor into Cerner's 2020 guidance.
Cerner said in a statement it remains committed to and heavily invested in its revenue cycle solutions to help its clients combine clinical, financial and operational health information.
"Our new relationship with R1 will bring our commercial, non-federal clients a total solution that pairs Cerner's advanced technology with R1's world-class revenue services, ultimately optimizing financial performance for health systems," the company said.
Cerner took a financial hit when it lost Roseville, Calif.-based Adventist Health as a RevWorks client. The organizations announced in October 2019 they were calling off their revenue-cycle outsourcing contract, resulting in Cerner taking a $60 million impairment charge in its third quarter. Adventist has since transitioned to Huron Consulting Group for revenue-cycle services, which Cerner disclosed on an earnings call in October meant nearly 1,700 of its employees were rebadged back to Adventist and then to Huron.
Adventist had been RevWorks' largest client, so that was a major loss for the company, which previously had a $200 million book of business, Gillmor said. After that, Cerner's leadership pegged RevWorks as a business Cerner could potentially get out of, he said.
Outsourcing business functions like revenue cycle is an increasingly popular way for hospitals to save money, but it takes a toll on the thousands of employees who are rebadged and can hurt company culture, according to a recent Modern Healthcare analysis.
As it stands currently, 88% of hospitals either have outsourced or plan to outsource their inpatient revenue cycle management, accounts receivable and collections in 2020, Black Book Market Research said in a report this year.
It's not clear whether R1 will hire all of RevWorks' employees, or whether they'll get the same or substantially similar pay, benefits and hours. Cerner directed that question to R1, which did not respond to a request for comment.
The deal does not include RevWorks' federal clients, just its business and commercial, non-federal relationships, the companies said.
Gary Long, R1's chief commercial officer, said in a news release that the company looks forward to working collaboratively with Cerner to deliver superior results for healthcare providers.
"With our interoperable technology and end-to-end platform, we are well-positioned to serve Cerner's customers, as well as other healthcare organizations across the country," he said.