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Accretive Health, Inc. (NYSE:AH)

Credit Suisse Group AG Healthcare Conference

November 14, 2012 12:30 PM ET

Executives

Glen Santangelo – Analyst

Mary Tolan – CEO

John Staton – CFO

Atif Rahim – IR

Glen Santangelo

Okay. Thank you all for joining us. For our next presentation, we’re excited to have Accretive Healthcare with us. Obviously, it’s been a very interesting story the past couple of years with obviously some extremely volatility in the stock and we at Credit Suisse have been suggesting it represents a pretty attractive opportunity from our perspective.

So here to give us that view on the company today is the CEO, Mary Tolan; John Staton, the CFO and Atif Rahim who is the new head of the investor relations, so I think most of you know. He used to wear a JP Morgan jersey a little while back but now he’s seen the light. Now he’s working at Accretive.

So with that, let me turn it over to Mary. If we have some time, we will a question or two from the room otherwise, after that, we’ll move to the breakout down the hall. Mary?

Mary Tolan

Great. Thank you, Glen and it’s a pleasure to be here with you and have a chance to give you an update about our company and the progress that we’re making with a series of very powerful value propositions that we offer to the provider landscape. And we’ll talk a little bit about our revenue cycle of business which is the bulls of our current revenue but also about some growth platforms that are also adding to the growth platform of revenue cycle in quality and total cost of care and in physician advisory services.

Our mission is to help our health care clients strengthen their financial stability and deliver better care to the community that the serve thereby increasing access to health care for all. And we leverage our people processes and technology to achieve this mission. And many of our clients would actually say that what we represent is an executional DNA in terms of a partner that they really don’t have any other option that they have in their world.

We’re very focused on this notion of measured value. All of our value proposition are all about, not just taking the theory or potential of technology and talent, but really putting people, process, technology together and being accountable for measured economic value. And that’s what this ecosystem really values and what has really fueled our growth.

So in the health care environment, as you all know, and we don’t have to spend too much time, there are tremendous pressures and regulatory issues that are sort of in the landscape. And when we are coming to work with a health care provider, we’re able to actually address a series of these things and turn things that otherwise would be risk elements into opportunities for improvement and actually increasing financial strength.

Our revenue cycle management business is in a $50 billion domestic market. So we’re still in a very earliest days of really going after this market and people will ask, what do you see competitively? The single largest thing continues to be a do it in-house as opposed to any significant competitor on the scene. And we’ll talk later about how we have very significant differentiation in the revenue cycle management business.

The quality and total cost of care opportunity is really all about population health and really putting providers in position to be able to improve quality while reducing cost. And many people have talked about what the barriers are to this. But as we begin to see providers taking on capitation risks or global gain share payments and different types of value arrangements moving from a per click world to value world, they really do need then the infrastructure to help them actually execute.

So again that executional DNA to really make best practices is a very valuable capability. And we think the domestic market for that is about $100 billion and very earliest days. In our Accretive physician advisory services is a very important business as well and it’s got about $1 billion in domestic market opportunity.

In building our business up to this point, we very deliberately chosen to work with providers that have a great deal of respect amongst their peers. So if you were to take a look at the high-bond rated health systems the country, we have 100% market share of that. It happens to be just two that sit at that position right now and that’s [inaudible]. But they’re viewed as extremely high-caliber management teams that are constantly asking the question, it’s not a question of how good do we have to be but how good can we be and how do we take our efficiency in health care forward so that we can extend our mission.

And you can see on the page here, we have a number of other very well known and well respected clients in the academic space and the professional fee space. And we’ve added a really interesting new client which cancer clinics of excellence. And we’ll talk later about that as it relates to our quality and total cost of care business.

So in terms of our revenue cycle, just to give you the core essence of it, we have an opportunity to go to a provider, do an assessment on our nickel and identify that there is yield loss in the revenue cycle processing and that we can find them another 400 to 600 basis points of raw operating margin contribution. So all those episodes of care and the cost to deliver them are going to stay the same. What’s going to change is they’re going to achieve more of that net compliant revenue that were doing the first place.

And in so doing, we really partner with them. So this isn’t over-the-wall outsourcing and it’s expensive upfront consulting. It really is a hardworking partner, working shoulder to shoulder in the daily grind, really working to bring process excellence and disciplines to this very complex process. And a client who has $1 billion in revenue is actually going to be looking at $30 million net of fees and other aspects of this, a $30 million contribution to their P&L which if the typical hospital today is in the 2% to 5% operating margin range, it’s very, very material.

So to a material value proposition, how do this stack up against the competition? Once you’ve convinced somebody that they really do want to get more excellence in their revenue cycle, there is many different ways perhaps to achieve that. And how do we stack up? Well, we’ve really taken a look at that from the standpoint of both the value proposition and whether or not it’s comprehensive and the degree to which it truly is hard measured.

Ours is at the top here, but we actually have the full patient advocacy which is finding solutions for the uninsured. The full capability to address excellence in the patient-share component after insurance, the loss charges, compliance and then the payer follow-up. They can be so impactful.

If I were to look at our SaaS or technology solution, there are certainly solutions out there. Nobody actually comprises all of these. And even if you were to assemble best of breed solutions in many aspects of this value equation, you’d only get a partial solution. From a consulting standpoint, again, you’re more inclined to get a partial solution as opposed to a comprehensive one.

And even from the standpoint of other outsourcers and those who maybe came in with an IT outsourcing heritage who are now taking over the back office with the same. So they’re really only addressing a part of the equation.

So in terms of the value proposition, it tends to be very, very different. So 4% to 6% and measured in our model, whereas the next best alternative at the high end of the range is 1.5% and not measured. And we’ve actually had clients recently during this operating year go through a major process of diligence and take a look at the market and actually come to the conclusion that not only it was Accretive the best financial choice, but we also had the best fit for their culture.

Many of the other outsourcers, back office outsources want to have a pretty abrupt layoff at the client site and move all processing into their central processing centers. We’re actually much more amenable to meeting the client where they are and we can drive a lot of the list even if they choose not to move into our shared service centers. And we can afford to begin to get results with them to earn their respect, earn their trust, and then they can opt into our shared services overtime.

And we actually have now about 52% of all the revenue that we’re managing is in shared services. So, that opt-in rate becomes very, very high. But it’s not a barrier in the first instance.

This slide here is giving you a sense of where does that value come from and what do you do that’s really different? Now, I want to give you a couple of indications of that.

Believe it or not, when somebody is uninsured when it comes to one of our hospitals, 85% of the time, we will be able to uncover a hidden insurance if they didn’t realize that they qualify for. Ten to 20% of the time that will be cobra workers, motor vehicle, student, veterans. And those are actually really good payers for the hospital.

The rest of the time, it will be a Medicaid or disability application. But we are working within for the patient shoulder to shoulder, not dumping a paper-based bureaucratic burden on them, but really assisting them and work in the process all the way through the completion. That usually is going to provide 1% left right there or 100 basis points for the hospital. And it’s very synergistic with their mission for non-profit hospitals.

The next 1% is the patient yield. These are patients with insurance who have a patient share component. And a lot of times, there’s confusion coming out with all the billing and people weren’t really aware of what their coverages were. So we believe that an educated consumer is the best consumer. And by doing high quality education of the patient upfront on what to expect, then when they get a bill that has been simplified, it’s clear the propensity to pay actually climbs quite significantly.

So we’re able to get those yields. Most hospitals only collected $0.50 on the dollar, believe it or not, of what is due from patients with insurance. We get that up to about 85% by really demystifying it and doing this patient education and simplifying the billing.

The next 2% comes from the payer yield, and this is where all the payers governmental and managed care. On their end, they’re looking for utilization review. They want to make sure that unnecessary procedures aren’t taking place. Well, that means a lot of diligence on the provider side. And if you don’t do that, you’re going to get denials. And so we really execute that part of the process with excellence so that we can get another 2% lift on the payer side.

The last 1% is where it’s vital that everything about the care is absolutely accurately depicted in the medical record so that the full value of the care can be detected from a billing standpoint. And so, things like lost charges and so forth are the things that drive that last 1%.

So for a billion dollar hospital, we’re going to get 50 million at maturity of gross of value in terms of being able to get that net revenue achieved without extra cost associated with it. But we’re also taking over about $43 million in existing spend. That’s what the hospital is spending today to execute.

And just as we eliminate errors that give us more revenue lift, we’re also going to by eliminating errors reduce rework and labor. So we can also get a cost reduction. And it’s typical on that $43 million for us to get about $9 million in cost conversion, which we also share with the client so they get both sides of the equation.

I mentioned earlier that we are growing in our shared service networks. We do use domestic and blended shore operations. And we’re delivering a broad array of function; basically anything that can be centralized is something that we have put in to our shared service operation. And we see great scale advantages by being able to do that.

And they’ve been so attractive that about 52% of our revenue in terms of customers have actually opted in to shared services, which becomes a very sticky long-term relationship sort of platform even beyond what you have in a multiyear contract.

Our technology is highly differentiated as well. Why do I say that? At a very high level, many people will say, “Well, we have in front patient access,” or “We have a billing platform and workflow tool.” Our technology though is completely informed by where yield loss occurs. So because we are an operator and because we are an alert operator who's only getting paid for yield improvement, we’re constantly analyzing the causality of yield loss. What process defect is causing yield loss to occur?

And we have algorithms that actually can adjudicate every claim determined what the yield loss was and then correlate it to the attributes of the claim, who is the primary payer, the secondary payer, who is the physician, what kind of clinical services.

And all those algorithms then are what’s informing our technology. So underneath the hood, what we work on and what we work on process excellence in is what’s in our technology. And we wind up then having features and functions that other people, even working the exact same arena, don’t really focus on.

And so, if you think about it, it is like that iceberg. If you’re a software builder, developer and you’re not operating the revenue cycle for yield improvement, what you can see is what’s above the water and what users have articulated they would like to have.

If you are an operator who has to increase yield performance, you see that entire iceberg underneath the water in terms of what are the defects that are driving that yield loss and how do you then build technology to support the reduction of those areas.

Let me move on then to our quality and total cost of care offering. This is really groundbreaking. We are really the first to provide end to end infrastructure to assist the provider who wants to move in to population health and to begin to take on either capitation or to take on gain share arrangements with payers and really put themselves in the driver seat on managing population.

The full capability that you need here is the capability to enter into new types of contracts, and to that in a sophisticated way. And that’s not a small matter because money providers had a very bad experience with capitation in the past where that would tell you that they lost their shirt.

And so being able to have a very strong actuarial skills and contracting skills to get them into fair and good contracts is a key thing we provide. We didn’t have the data and the technology to be able to, in the algorithm, identify which patients, what 5% of the patient will drive 50% to 60% of next year’s cost.

That’s really vitally important because that means that a primary care doc who have seen 2,000 patients over the course of the year can be told upfront what hundred patients are going to drive the bolus of the expense so that we can begin to really give a different level of integrated care and attention to those patients. And to begin to understand whether or not the patient is really engaged in their care.

We then have to have the feedback loop to the docs. Most docs they do not have any visibility to what the cost consequences are of their care plans. And so being able to show them full visibility to cost and quality is incredibly important.

And then working on the patient engagement, we provide the team that can make sure that a complicated patient who has perhaps 19 different meds and several follow-up visits and orders to see different specialist is getting the assistance that they need.

And what do I mean by that? We actually will look to determine if the care plan is being adhered to. And we can see that in the data. And instead of having a Laissez-faire reaction to somebody who isn’t taking their meds or who hasn’t had the follow-up visit, we actually have outreach. And we’ll figure out if Mrs. Jones needs transportation or there’s a social worker who could be assigned to the case that could help so that we actually have a more proactive way of working with the patient to get them engaged in their care plan. And then it’s continuous R&D and predictive performance.

So in developing this, we scoured the country to find who had actually had the most success in bending the cost curve and improving quality. And we actually brought those individuals into our company. So one of the best success track records was actually in a Medicare Advantage business and they had about 225,000 lives in 21 states. And they were consistently getting a better 25% total cost of care reduction. We brought that entire team into the country, a company.

Recently, many members of the health care partners team have also been coming into our company. And they had a spectacular success in driving results in their provider organization.

So concentrating this know-how that has actually really accomplished it is a big thing. A lot of people are talking about population health but they really don’t have any results. So just like we were not the first to the revenue cycle business but ultimately became a leader because we are differentiated on our results, measured results. That’s going to be the same thing you see in the population health arena.

Cancer Clinics of Excellence is a recent deal that we signed with a leading group of oncologist. There’s only about 10,000 oncologist in the country and yet they drive about and they influence about 12% of the national health care spend. So the impact per clinician is actually very, very significant cancer. And they have partnered with us to actually take on accountability for the total cost of care for their patients. And so really use best practice protocols to be able to do that and so we’ll be able to standardize I’m the best medications and drugs will be able standardized, under best protocols for pain and symptom management that can avoid unnecessary admission.

And we’ll be standardized in share decision making that can actually really engage the patient and the family on decisions whether to take on that next course of chemotherapy and so forth. And we’ll also be able to get the oncologist to support palliative care decisions. So all those things taken together really begin to change the landscape in oncology in a very significant way.

I was talking Zeke Emanuel recently -- Zeke would be one of the most -- if not the most influential practicing oncologist from the country right now and here at the University of Pennsylvania. And Heath [ph], actually said to me unaided that this partnership that we are doing here and cancer is one of the two most promising things unfolding nationally in the field.

So we’re very excited about it. And the docks are very excited about it and it’s great to see them really engage in getting this kind of automation and data to support innovation.

In traditional advisory services, we are doing a very important thing and the compliance field which is to support practicing ER docs. So you have to make a determine about patient Y, whether or not, the patient really qualifies form an imputation status. And this is a process is complex and doc is in field. Really, prefer to be spending their time on delivery [inaudible].

. So, we have a central group of physicians who actually have all of the data and statistics at their fingertips and can support the doc in the field with that consultation and actually increase compliance accuracy along the way, which is something that people will very much value.

So the last thing that I want to mention here is a new area that we have also just had a new win and a new client announcement, which is an interesting quality. And if population health is about keeping population healthier, thereby avoiding episodes of care. Interest state quality says, “An episode of care that’s still going to unfold how do we make that really high quality, how do we get the best practices in terms of length of stay, right care setting, supply utilization and so forth to unfold.”

And so, we are partnering with the client. We’ve actually been able to, with this client, in the first 90 days of pilot reduce length of stay by 15%. We think we’re just scratching the surface. And if you think about it, a typical hospital has got about an average across all hospitals 5.27 days length of stay.

And if you can take a day or two out and begin to variabilize the cost on that, it’s the single most impactful way to really create financial strength and stability for an acute care hospital. So very, very exciting. We think this is one that’s going to have very strong demand and attachment rate with our CM [ph] clients.

And so with that, let me turn over to John to talk about some of the financials.

John Staton

Thanks, Mary. I’ll just cover a couple of highlights here. Obviously our business over the last five years or so had a strong topline growth of 36% accumulative average growth rate. And the bottom line, it has expanded to the CAGR of around 86%.

Key three focus points of why the bottom line has expanded so nicely. One is obviously contract maturity. As our contracts mature, we make more margin on them in the more mature years than we do in the early years.

Second key point is our newer clients as we’ve established ourselves, establish our brand, our pricing has improved, so we’re getting a higher gain share rates for example, less cost sharing within our contract. And the third area is obviously we’re able to grow the business, we’re able to scale some of our core cost centers both are huge management and huge technology that we leverage over a greater revenue base.

The only thing I want to touch base here in limited time we have left is to really talk about where our 2012 guidances and outlook. We do expect that PCARR, again, for those people new to Accretive Health, this is what we expect, the contracts we have in place today, what revenue they’ll generate over the next 12 months that we call PCARR.

That PCARR is going to be $930 million to $960 million. We’re going to exit the yearend. Our net services revenue will be at the low end of our guidance of 948 to 980. And our adjusted EBITDA is expected to be in the $50 million to $55 million range. But adjusted EBITDA does include one-time cost sort of impacted this year to the tune of 30 million to $33 million.

They are non-recurring. They are associated with one shift in seasonality from our new large contract with attention of moving some payment out of Q4 and Q1 still capture just the time and effect. And the other part of that is -- specially with our settlement in the state of Minnesota. And then lastly here, our adjusted EPS is expected to be $0.23 to $0.27 range for the year.

So I know we’re running short, Glen, on time, so I’ll try to make it short and sweep and...

Glen Santangelo

[Inaudible].

John Staton

Great. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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