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Executives

Robert P. Borchert - Senior Vice President of Investor & Corporate Communications

John A. Bardis - Founder, Chairman, Chief Executive Officer and President

Michael Patrick Nolte - Chief Operating Officer and Executive Vice President

Amy Dellamora Amick - President of Revenue Cycle Management Segment

Charles O. Garner - Chief Financial Officer and Executive Vice President

Analysts

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Michael Cherny - ISI Group Inc., Research Division

Jeffrey Garro - William Blair & Company L.L.C., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Sean Dodge - Jefferies LLC, Research Division

Leo F. Carpio - HM Global Capital LLC, Research Division

Chris Abbott - Leerink Swann LLC, Research Division

George Hill

MedAssets (MDAS) Q3 2013 Earnings Call October 30, 2013 5:00 PM ET

Operator

Welcome to the MedAssets 2013 Third Quarter Earnings Call. My name is Leslie, and I'll be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Mr. Robert Borchert. Mr. Borchert, you may begin.

Robert P. Borchert

Thank you, Leslie, and good afternoon, everyone. With me today are John Bardis, our Chairman, President and CEO; Mike Nolte, our Chief Operating Officer; Chuck Garner, our Chief Financial Officer; Rand Ballard, our Chief Customer Officer; and Amy Amick, who recently joined MedAssets as President of our Revenue Cycle Management segment.

A slide presentation that accompanies our formal comments and webcast is posted in the Investor Relations section of medassets.com, under Events & Presentations. We will be making forward-looking statements on today's conference call regarding our expected financial and operating performance, which may be affected by risk factors that are described in detail in our periodic filings with the Securities and Exchange Commission. There are also risk factors not presently known to us or which we consider to be immaterial that may adversely impact our performance. Therefore, actual results may differ materially from our forward-looking statements discussed today or in the future. MedAssets assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Today, we'll also discuss certain non-GAAP financial measures. For more information, please refer to the reconciliation schedules and footnotes in today's earnings press release and presentation materials, which are posted in the Investor Relations section of medassets.com.

[Operator Instructions]

I'll now hand the call over to John Bardis.

John A. Bardis

Thank you, Robert, and good afternoon, everyone. We reported another solid quarter of financial performance in Q3. Total net revenue of $166.4 million was up 1.8% from last year's third quarter and grew 4.7%, if you exclude performance-related fees in both periods. Adjusted EBITDA of $53.9 million was towards the high end of our guidance and adjusted earnings of $0.31 per share was slightly above our expectations for the third quarter.

Our year-to-date earnings of $1.02 per share increased 21.4% over 2012. We also continue to generate significant cash flow from operations. Free cash flow through September 30 of this year was $63.4 million, which enabled us to lower our outstanding indebtedness by more than $28 million in this period of time and by more than $91 million year-to-date.

Our operating stability, financial strength and breadth of price, process and payment solutions places MedAssets in an excellent position to help health care providers transform beneath the evolving market challenges ahead. The extent of market change is dramatic. Medicare rates are lower and were further reduced by sequestration, reimbursement from state and federal insurance exchanges will vary widely for participants in their own provider networks. ICD-10 closing in compliance will be highly complex and the move to value-based reimbursement models will be challenging. These are just a few of those challenges.

Like many in the industry, we expect patient census to increase, as newly insured are enrolled and begin accessing the health care system. This should be favorable to our business, not only because patient utilization and rising medical acuity drive GPO purchasing volume, but also because the reform initiatives are creating greater financial and operating pressure on health care organizations to standardize processes, reduce costs and improve patient care.

Over the long term, health care insurance reform will add more than 25 million newly insured individuals, who are expected to begin to actively utilize the health care delivery system over the next 2 to 3 years. However, the timing and relative impact of these changes are creating some uncertainty, both for organizations and MedAssets going into 2014.

While hospital census growth has been flat to down in 2013 versus 2012, this is true for many providers, we are now just beginning to see and hear of anecdotal evidence of a bounce in hospital censuses in certain regions in the United States. This likely -- this is likely a combination of pent-up demand from a weak economic recovery and changed individual behavior as part of consumer-directed health plans. In fact, recent research shows that surgeries, both inpatient and outpatient, are now beginning to rise again. However, with good reason, we will take a temperate view of this for now.

While our administrative fees continue to maintain steady growth, given the 3- to 6-month lag in timing between hospital purchases and our administrative fee revenue recognition, the census trend could limit our GPO same-store growth for the next few quarters. In the meantime, our focus on improving contract compliance and portfolio coverage of purchased services is allowing us to address provider costs not previously on our radar. It also provides us with confidence that our same-store growth could improve prior to the Affordable Care Act expected effect on patient census.

Approximately 75% of U.S. hospitals are private, not-for-profit community organizations, and we expect that there will be winners and losers in this sector. Hospitals must enhance productivity and efficiency to maintain positive margins.

Now while the national debate over health care reform continues, health care organizations must act to address their own unique, local and regional market challenges. Each health care provider has distinct needs. But all of them, without exception, must calibrate their operating capabilities to align price, process, payment and patient care to succeed in this evolving market. Best-practice performance improvement strategies will be even more critical, as patient utilization accelerates over the next 2 to 3 years. MedAssets was purposely built for this time, and providers utilize us as a strategic resource for our industry expertise, our innovative analytics and insight.

In fact, we are seeing the early implications of the ACA beginning to manifest itself in the momentum of our enterprise sales pipeline for our total performance management solutions, which have expanded substantially since the year end of 2012. This includes our Clinical Resource Management, Lean performance improvement and cost and revenue management program. We work with our clients' executive teams to manage the execution of integrated change initiatives, including the cultural transformation needed to enable improved efficiency, clinical variation reductions and improvement in patient satisfaction and outcome.

One interesting highlight is that our Lean performance improvement business, Healthcare Performance Partners, is collaborating with Denver Health's Lean Academy to enhance their course offering, as well as to supplement the organization's repeatable lean management systems to improve Denver Health operational efficiency, patient safety, quality and reliability.

As part of our ongoing commitment to help drive sustainable performance improvement for our clients, we are continuing to further align our value proposition and comprehensive capabilities with providers' essential business needs.

The industry is inundated with data. And MedAssets has long provided data-driven insights to help execute and sustaining providers' financial and operating improvement and to drive them toward optimal performance to change management. We believe that our big differentiator is and has been our execution. Providers are increasingly susceptible to the promises made about big data, but data has limited value without the ability to execute on improved processes and performance.

We understand what best practice is, and we have the analytics, visibility and expertise to execute courses of action to reduce total cost of care, enhance operational efficiency, align clinical delivery and improve revenue performance.

This slide is a snapshot of our total performance management approach. We help clients reduce the total cost of care by analyzing the principal drivers of expense and utilization, while leveraging our industry-leading contract portfolio and broad service expertise to achieve best-in-class cost management.

MedAssets also assists our clients in enhancing operational efficiencies. Our team of performance and organizational experts provides full operational assessments and implements best-practice resource management strategy. These collaborative assets also include our revenue cycle consulting and track supply chain service professionals, as we reengineer processes and implement cloud-based software applications to maximize utilization of clinical, operational, as well as financial resources.

In addition, we help clients align clinical delivery with this variation and drive behavior change. This is a critical element in the new era of reimbursement penalties tied to patient readmissions, population health management and bundled payments.

Recent studies have found that providers are beginning to generate a higher percentage of their revenue from risk-based methods, such as episode of care-based reimbursement. MedAssets experts help define the model -- the model provider and payer reimbursement allocation to quantify the potential financial effects of bundled reimbursements in our -- on our client organization, helping providers redefine and surpass the standards in clinical performance to improve patient outcome. In turn, physicians now can succeed in risk-sharing contracts.

MedAssets also helps our clients improve revenue performance by analyzing the revenue cycle of patient access, the case management, clinical documentation and coding, to charge and billing compliance, as well as payment and collection. We understand how to balance all payment models, as providers manage both fee-for-service and fee-for-value contracts, and we help clients make adjustments in resource utilization to align incentive for risk-based and performance-based models. We all win when care resources become more affordable and efficient, and MedAssets helps thousands of hospitals and health care systems achieve financial and operational improvements, so they can continue to serve the communities that they're in and improve the lives of the people that they're responsible for.

Now let me ask Mike Nolte to provide some operational insight. Mike?

Michael Patrick Nolte

Thank you, John. We continue to make progress building on the foundation of our organization to deliver consistent, measurable performance. This always begins with building great teams. So before I provide a business update, I'd like to first introduce Amy Amick as our new President of Revenue Cycle Management. Amy joined us on September 30 and oversees the day-to-day operations of our Revenue Cycle Management segment, including client service, product development, product management and sales. She most recently served as Chief Operating Officer for M*Modal, and from 2009 to 2012, she was the General Manager of Worldwide Services for Microsoft Health Solutions Group. Prior to that, she also held professional service leadership roles with Allscripts and Cerner. Amy brings a proven track record to our company. She has a deep understanding of process and operational alignment, a passion for client service and a deep understanding of complex software and technology-enabled services in a highly competitive health care market.

On behalf of our entire management team, we welcome Amy, and look forward to her leadership, as we deliver on our client commitments and strategic goals.

Amy, would you like to take a few minutes to say a few words?

Amy Dellamora Amick

Sure, Mike. Thank you. It's a pleasure to be a part of the MedAssets team. Our Revenue Cycle Management team has accomplished much throughout 2012 and thus far in 2013. We have a tremendous asset in our loyal customer base and we have a material opportunity in front of us to deploy more of our cloud-based applications and RCM service offerings across the current client base, while also adding in new clients.

The breadth of our RCM solution portfolio offers an excellent opportunity to scale and grow. But we also need to continue to further align our operating procedures and to improve overall execution and performance. This is a journey, and there is still much work to do. I'm in the midst of assessing all aspects of our RCM business segment, evaluating product and service capabilities, reviewing and identifying growth opportunities and challenges, understanding areas for investment, engaging the alignment and capabilities of our client-facing team. I also have been meeting directly with clients, listening to their perspective on what we do well, where we are investing and their ideas for improvement.

In addition to these areas of focus, there remain external factors, including the run up to ICD-10, which could both be an opportunity and a challenge to our near-term ability to reach our full growth potential. We need to continue to invest in product scalability and client service and also make the right decisions that enable our growth trajectory. This is, frankly, the ongoing nature of the dynamic revenue cycle industry, and we expect any business choices or prudent investments in our RCM business going forward will better position us for long-term growth.

We will take deliberate steps to ensure our team invests the time and the energy on systematically improving our organization's performance. We have tremendous opportunities to achieve positive, profitable long-term growth. And I'm excited to be here with an industry leader like MedAssets.

Michael Patrick Nolte

Thanks, Amy. We've already built positive momentum during this leadership transition, as we continue to refine our commercial strategy, with a balanced alignment between our core and emerging Revenue Cycle Solutions and Services.

Our total revenue cycle segment sales pipeline, based on total contract value, was up 5% sequentially from the second quarter and bookings were up 5.5%. Revenue Cycle Technology bookings continue to be driven by our claims management, contract management, chargemaster and CarePricer patient bill estimation tools. And Revenue Cycle Services bookings are also showing solid momentum. However, our year-to-date bookings trend for this cloud-based applications and services is below our initial expectations for the year, which is reflected in our expected Revenue Cycle Management segment revenue growth for full year 2013.

Amy also referenced ICD-10, and there is expected to be significant coding challenges and complexity as providers prepare for the upcoming conversion and compliance requirements. MedAssets' clinical documentation improvement, or CDI services, include advanced workflow technology, consulting and training and help to increase compliance to existing and complex new codes and to prepare providers for ICD-10. We believe this will ultimately have a positive impact for our Revenue Cycle segment.

While the market opportunity is apparent, the question is how fast will demand accelerate. Because of the near-term market uncertainty, we will continue to restrain our optimism until we see it begin to materially benefit our financial performance.

In our Spend and Clinical Resource Management segment, our third quarter SCM sales pipeline was up more than 20% sequentially from Q2 of 2013, as we are gaining traction with our total performance management offerings. This includes our Lean performance and Clinical Resource Management solutions, as well as our cost and revenue management capabilities that improve operational efficiency, alignment of clinical delivery and pricing transparency. The market is moving toward us, and we believe the difference between our short-term outlook and pipeline momentum is timing related.

Total supply chain management bookings are slightly behind our initial expectations. They were up almost 90% from Q1 to Q2 this year, but bookings were down 10% to 15% from Q2 to Q3, as we refilled the pipeline and continue a solid bookings trend year-to-date. The supply-chain industry continues to be highly competitive, and MedAssets has had its share of new client wins. We've also renewed a number of large clients over the last few months, including CHRISTUS Health and Texas Purchasing Coalition.

Our same-store net administrative fee growth has benefited from our contract integration process over the last 2-plus years, and we continue to execute on our substantial opportunity to increase GPO contract utilization and contract coverage of other expense categories. This will enable us to sustain growth in spite of the census trends. And our systems, processes and expertise should enable us to grow our administrative fees over time.

While weak patient census is likely now impacting our current growth trends, as John mentioned earlier, the expectation of increased health care utilization from the Affordable Care Act should be a long-term positive tailwind for our business.

Additionally, we have already seen market momentum resulting from our core investments in a number of innovative new solutions, including Revenue Cycle analytics, procure-to-pay and our episodic care technologies and services. We expect this next tier of growth to drive additional upside over our core business offerings.

As we look ahead, we believe that our core market remains strong but is entering a period of change. As we close the year, we will focus on the most attractive growth opportunities and also ensure that we make prudent use of resources, continue to improve core process and drive scale with efficient, productive execution.

Now I'd like to spend a couple of minutes to review our contracted revenue estimates. Our rolling 12-month total contracted revenue estimate at September 30, 2013, was $625.1 million, which was a 3.6% increase from the third quarter of 2012. On a sequential basis, total contracted revenue increased 1.3% when compared to the second quarter of 2013.

In the SCM segment, our contracted revenue increased 5.5% year-over-year, driven by the new wins and renewals, I mentioned earlier. Our RCM contracted revenue estimate increased 0.6% year-over-year but declined 1.8% sequentially from Q2. A breakdown of RCM shows that contracted revenue and Revenue Cycle Technology was down 1.2% sequentially from the second quarter of 2013, due primarily to timing of bookings and expected revenue recognition. While Revenue Cycle Services contracted revenue declined 3.4% sequentially, due to lower projected client volume, timing of contract renewals and lower expected performance-related fees.

In addition, last quarter, we mentioned signing a significant Revenue Cycle Technology agreement. Given the updated timing of the implementation in revenue recognition schedule, it is expected to have minimal impact on our RCM contracted revenue estimate over the next few quarters.

Our updated outlook also reflects Q4 performance-related fees that are below our initial expectations, as we revise a significant Revenue Cycle Services agreement that may adversely impact Q4 revenue by as much as $1.5 million. We feel good about our performance, but we've taken a realistic view of our outlook for both Q4 and for contracted revenue.

The continued evolution in the health care industry will require hospitals to be aggressive in managing the discrete costs of an episode of care, continue to improve revenue capture and implement a bottom-up plan to preserve profitability. MedAssets expects to be an essential partner with health care providers in this effort. So we are optimistic about our long-term growth while remaining cautious near-term, given the uncertainty of the evolving health care market in 2014.

Now I'll pass this call to Chuck to provide details of our financial results and outlook.

Charles O. Garner

Thanks, Mike. As with past quarters, please refer to our financial and other non-GAAP reconciliation schedules in today's press release and on our website for additional details on comparative year-over-year performance.

On a consolidated basis, our third quarter total net revenue increased 1.8% to $166.4 million when compared to the third quarter of 2012. We generated total adjusted EBITDA of $53.9 million or a margin of 32.4%, a 5.4% decrease over third quarter 2012 adjusted EBITDA. This 246 basis point margin decline was driven by an expected year-over-year decrease in performance-related fees and a higher proportion of revenue from SCM Consulting, as well as approximately $1.5 million in onetime or nonrecurring revenue in our RCM segment in the third quarter last year.

In our third quarter, we booked $111,000 in acquisition and integration-related expenses on a net basis, as we incurred cost for an executive departure, of which the majority was offset by a lease termination settlement related to the completion of our facility consolidation in Texas.

We reported adjusted earnings of $0.31 per share, which was above our expectations for the quarter due to higher-than-forecast performance-related fees and lower-than-projected taxes.

Turning now to our revenue detail, which breaks out our performance-related fees. Net revenue in the Spend and Clinical Resource Management segment increased 4.2% versus the third quarter of 2012. Excluding performance-related fees from both periods, our SCM segment net revenue grew 8.9% over the third quarter of 2012.

In our Revenue Cycle Management segment, net revenue decreased 1.8% over Q3 last year, as expected. As I noted earlier, the third quarter of 2012 included approximately $1.5 million in onetime or nonrecurring RCM revenue.

Consolidated net revenue included a total of $3.7 million of performance-related fees compared to $8.1 million in the third quarter of 2012. Approximately 90% of the performance-related fees were in our SCM segment. Excluding these fees from both periods, total net revenue grew 4.7% over the third quarter of 2012.

As we look at our segment level financial results, our SCM segment adjusted EBITDA margin of 45.9% decreased 85 basis points from Q3 of 2012, due primarily to an expected lower year-over-year performance-related fees, as well as the higher proportion of revenue from SCM Consulting.

Revenue Cycle Technology comprised approximately 71% of third quarter RCM segment revenue and grew 5.3% year-over-year.

Revenue Cycle Services revenue decreased 15.8% from the third quarter of 2012 due to the onetime revenue last year, as well as the impact of the 2 departed services clients we've referenced in prior quarters.

Third quarter adjusted EBITDA margin in our RCM segment was 24.3%, a 341 basis point decline from 2012, due to the factors I just noted.

Our overall business, and specifically our GPO and supply chain services, continue to generate substantial cash flow from MedAssets. Year-to-date, operating cash flow was $109.8 million, up 2% from the same period last year. Free cash flow for the first 9 months of 2013 was $63.4 million, down 2.3% from the same period last year due to incremental technology investments, as we've previously discussed.

Our adjusted EBITDA conversion to free cash flow was 37.7% year-to-date. And we continue to expect our free cash flow conversion to be approximately 35% to 40% of adjusted EBITDA for full year 2013.

Our September 30 balance sheet reflects $793.4 million in total bank and bond debt net of cash. During the third quarter, we prepaid an additional $25 million of our term loan B, along with the scheduled principal payments. Net debt outstanding was approximately 3.6x our trailing 12-month adjusted EBITDA.

Over the last 11 quarters, we have lowered our net debt-to-EBITDA leverage ratio by approximately 2.5 turns. We feel very comfortable with our current capital structure, and we'll continue to use free cash flow to pay down debt in the near term.

Turning now to our financial outlook. Today, we're updating our 2013 guidance as summarized on Slide 14 of our presentation. We're tightening each of our guidance ranges to coincide with our detailed fourth quarter guidance. We are also slightly lowering our RCM segment revenue guidance range, commensurate with our performance trend and are confirming and maintaining the midpoint of our adjusted EPS guidance for the full year.

Our other assumptions for 2013 full year guidance are listed on Slide #15, and reflect minor tweaks to our estimated free cash flow, interest expense and performance-related fees. Importantly, we now expect to generate free cash flow of between $85 million and $90 million this year, which includes approximately $15 million to $20 million of cash taxes.

In addition, we continue to make technology-related capital investments. And over the last 3 years, our capital expenditures have grown from $49 million in 2011 to $66.4 million in 2012 to an estimated $55 million to $65 million this year. These assets are depreciate over 3 to 5 years and are the primary driver of our increase in depreciation expense in this year's third quarter and expected future quarters.

Performance-related fees were $3.7 million or 2.2% of third quarter total net revenue and $16.9 million year-to-date. We now expect these fees to be in the range of $18 million and $20 million this year or approximately 2.8% of total net revenue in 2013. We expect fourth quarter 2013 net revenue in our Spend and Clinical Resource Management segment to be flat to up 4% from net revenue of $99.1 million in the fourth quarter of 2012, which included $4.4 million of performance-related fees in last year's quarter.

If you exclude performance-related fees from both periods, then we expect our core SCM segment growth to be in the 1% to 5% range. This assumes some impact from weak census trends that Mike alluded to earlier.

In our Revenue Cycle Management segment, we expect fourth quarter revenue to be down 5.6% to up 0.6% when compared to the fourth quarter 2012 revenue of $64.7 million.

The fourth quarter of 2012 benefited from the timing of Revenue Cycle Services and Consulting revenue. On a sequential basis, we expect incremental growth in Revenue Cycle Technology, with Revenue Cycle Services revenue down slightly from the third quarter.

Consolidated net revenue is expected to be down 1.7% to up 2.0% over the $163.8 million reported in the fourth quarter of 2012.

We expect fourth quarter total adjusted EBITDA margin to be in the 29.2% to 32.9% range. This will be down 70 to 440 basis points from the fourth quarter a year ago, as we expect to recognize less performance-related fees than a year ago and also incur higher expenses related to IT, infrastructure and other related investments.

We expect GAAP EPS to be in the range of $0.07 to $0.11 per share compared with a loss of $0.25 per share a year ago.

And finally, our adjusted EPS is expected to be down 11% to up 4% from fourth quarter 2012 adjusted EPS of $0.27.

In summary, we delivered another solid quarter of performance, and we will continue to maintain a level of expectations that are both realistic and achievable. As John, Mike and Amy mentioned, we believe we are well positioned to help our clients address many of the challenges of this evolving health care market. And while we cannot control the market factors, we'll remain focused on improving execution, delivering on our innovation agenda and delevering our balance sheet.

With that, we would now like to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Greg Bolan with Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

So John and Chuck, I guess, if you could maybe weight -- just your revised outlook for the remainder of this year, if you could possibly just maybe weight how much of this is kind of external versus internal factors that are kind of driving this slightly revised guidance.

John A. Bardis

Chuck and I are in 2 different places. Chuck, why don't you take that.

Charles O. Garner

Yes, sure. I think what we've tried to do is reflect what we think is a fair balance of both external factors, as well as trends around our business. I think we, at this point, obviously have some level of forward visibility, particularly around bookings, contracted revenue pipeline, et cetera. There are some elements, which are, frankly, beyond our control and have a little less visibility to as it relates to things like patient census and patient volumes. So given the macro trends we've seen across our customer base, as well as other publicly reported information with the combination of those factors, I think our fourth quarter reflects a balanced estimate of what we think is a realistic, achievable outlook for the fourth quarter of this year.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

That's fair. And then just -- can I -- if I can get an update on the upsell conditions right now within Revenue Cycle. I think the last time we talked about this, it was something on the magnitude of 2.6 modules on average that are used by the installed base on Revenue Cycle Management. Of the 10 to 12 core modules, where are we today? And that to me presents what looks like a pretty significant opportunity. And just wanted to kind of see where we're at today and kind of what's the goal going forward.

Michael Patrick Nolte

Yes. I mean, it's not a specific metric that we report. What I can tell you is that the shift with ICD-10, as it creates some potential market opportunity, puts momentum behind some solutions that I think provide some tailwinds around additional products to be sold into the existing customer base. We talked a little bit about some of that around clinical documentation, which is, I think with some of the things going on with both health care reform, as well as the pressure on making sure that our health care customers get pricing right, if you've sort of followed the press around chargemaster activity, for example, there's a lot of emphasis on integrity around pricing. And I think that creates the ability to do some additional sales work within our existing customer base. But I see it as a positive, but it's not a specific metric that we report.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Okay, great. And then just lastly on the revenue share obligation, kind of been ticking up a little bit. Is that just more a function of mix of the larger versus smaller hospitals that you guys are conducting GPO services for?

Michael Patrick Nolte

Yes. You'll -- go ahead, John.

John A. Bardis

Yes. I was going to mention that. So Greg, the more sophisticated systems that are really good at this and go deep into compliance, in, say, for example, Tenet. The average hospital system out there today is compliant at a rate of about 60% for their contract utilization. So there's a tremendous upside opportunity through that additional penetration, and that's before you get into purchased services. For example, Tenet is so good at this. They're over 90% compliant. And I bring that forward because that remains, even in the face of declining census, meaningful upside. But when -- you asked a question a minute ago about external, internal fee. A census situation for us in which census is down 2%, right, will impact us at least 2% of that 3% same-store growth. Because of the ongoing effort to penetrate further on per patient per case on product utilization. So we're seeing very good results in our bigger clients. What happens is because their share backs are a little larger than the average, you're also seeing that percentage increase. I don't know if that make sense to you. But when you have the big systems further penetrate and utilize, if their share back is greater than the average, their acceleration moves that forward.

Operator

Our next question comes from Michael Cherny from ISI Group.

Michael Cherny - ISI Group Inc., Research Division

So I want to dig a little bit more into some of the outlooks you have around the macro environment. Obviously, this is not the point where you guys are giving guidance at this point. But talking about the challenge you're facing, particularly at least in the first half of '14. As you think about the outlook and maybe for ease sake, we'll keep this on the spend and clinical management side. How do you think about -- John, you just mentioned 200 basis points of challenge related to utilization. How do you think about utilization environment relative to how much of that you can offset from share gains? You talked about the renewals and the new deal wins. But just in general, as we think about bridging into next year, how much of a magnitude or rough directionally do you think this -- some of these census issues will have on the growth, especially given what the guidance looks like at the end of this year?

John A. Bardis

Well, I think, Michael, they're material in the sense that what we're seeing is meaningful. 1.5 to 2.5 point, 6 months behind us that shows up today. But what we're also finding is that our teams, our same-store growth teams and our client services group is having a meaningful effect in terms of growth. And the only to our [ph] view is that more than half of those regions are growing same store of greater than double-digit, just because of utilization. So it's very hard to predict where census on the decline in combination with our deeper penetration ultimately leaves us. And that is a cause for not alarming uncertainty, but at least a little bit of a level of it. We continue and will continue to grow, and I think that growth is robust in the sense that in our spend and clinical resource management business, it tends to really generate positive earnings and free cash flow because of the weight of the business levers. But some of it is hard to put a pencil to just because you're looking backward, not forward.

Michael Cherny - ISI Group Inc., Research Division

No, at least color on the same-store sales magnitude is definitely helpful. I'll hop back in the queue.

Operator

The next question comes from Jeff Garro with William Blair.

Jeffrey Garro - William Blair & Company L.L.C., Research Division

So there seems to be some volatility on the performance of the Revenue Cycle Services segment, both over time and currently, given the revenue outlook but better pipeline trend. So I was hoping you could discuss what initiatives you might have to deliver smoother performance going forward and how you view the growth outlook for that part of RCM overall?

Michael Patrick Nolte

Yes. I mean, I think we'll certainly talk about the longer term and 2014 outlook for that part of the business as we get into next year. In terms of what we're doing to drive consistency and take variability out of the performance, I think a lot of it has to do with operational discipline and making sure we have the right leaders in place, which we've continued to do in terms of just building momentum and consistency around both process and scale, which are the 2 things that are critical for that kind of a direct outsourcing business, particularly around the more central business office-type work. As I said, we feel really good about the bookings and the pipeline momentum. But you're absolutely right, it's about execution, and making sure that we can smooth out what historically has been a little bit of a variable delivery in terms of hitting performance bonuses.

Jeffrey Garro - William Blair & Company L.L.C., Research Division

Great. And then just to drill down a little bit, could you give any more commentary on the revision to the RCS contract that's going to impact Q4? And just more broadly, what drove kind of the change in scope of this contract?

Michael Patrick Nolte

Yes. I mean, I think -- I don't want to get into too much of the weeds of sort of the driving force between the scope. What I can tell you is around that particular agreement, we feel really good about the performance there and the relationship. And it really has to do with a revision to clarify how we determine the performance incentive associated with the existing agreement. And right now as we work through that, we've taken a more balanced approach to make sure that we're being clear and deliberate about our Q4 projections and our contracted revenue numbers associated with it.

Operator

The next question is from Jamie Stockton with Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

I guess, Mike, you talked about a 20% sequential increase in pipeline for the SCM segment. And it sounds like advisory and kind of consulting is contributing to that. But could you get any more granular? I mean, are we -- or are these transformational-type deals, where hospitals are looking to really streamline their cost structure and they're bringing you in from a consulting standpoint that's driving the real growth and the opportunity? Are you seeing more traction on the procurement outsourcing front? If you could just give us a little more color, that would be great.

Michael Patrick Nolte

Yes. They're not typically outsourcing arrangements nor are they intended to be. Really, it is about an effort and it's something we've been talking about, at least since I joined MedAssets, which is putting muscle behind our advisory business and becoming more of a trusted partner within C-suite relationships. It's -- as we talk about it with customers, it's really around total performance management. Not that it doesn't lead to other product or service benefits. It's not uncommon as we get into those arrangements that it may lead to a technology relationship or other pieces of that work, but that is not the primary focus of the business. The focus of the business is really to be a partner around the kind of 4 pivot points that John talked through total performance management, which is a focus on total costs, helping to drive great process within health care systems, ensuring that we're moving more and more towards alignment with great clinical delivery and driving every dollar back into the health care businesses that we partner with through revenue performance.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

And just as a follow-up on that, can you talk about when these dollars ultimately flow through, from a revenue standpoint, for what you're able to sign contracts on, are those revenues going to be more performance oriented? Are they going to be contracts that will generate more recurring revenue from some of these advisory services? Can you just give us some feel for that?

Michael Patrick Nolte

Yes. I mean it's a little bit of both. Some of them tend to be multiyear relationships. There are others that are targeted specific opportunities. So there's a bit of variability in the way the contracts work. I would say, on average, they tend to hit our contracted revenue and our revenue performance faster than other kinds of agreements. But that's not to say that they're not necessarily multiyear agreements because we have many examples of agreements that are 3, 4 years, depending on what it is we're doing for a particular client.

John A. Bardis

Let me -- if maybe I can just add, if I may, just one point to that. Many of the solutions that we leave behind do include data that points the organization, including our people working with that organization, toward a road map of very specific behavior changes, and that does include managing the cost and price and utilization of items. So naturally, our -- we have businesses that are benefited through the use of which current data tools, as well as our GPO business, that come as a result of the professional services and engagement being successful, because they continue to advance the cause and according to the road map we feel [ph]. So we do routinely get, in many of these cases, ongoing repeat revenue.

Operator

The next question is from Donald Hooker with KeyBanc.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

So thinking about some of your comments about bookings maybe being a little bit below expectations year-to-date, I think I picked that up from your comments. And in prior quarters, and in periods, I think you talked about kind of growth ramping up to maybe 10% or so in 2016 and '17. Is that kind of -- is that still sort of -- are things playing out like that -- like you had expected on that front? Or maybe from a long-term growth standpoint, we should be more conservative.

John A. Bardis

I'll take the first part and then [indiscernible]. So I'll toss the remainder of it to Mike, as well as Chuck. Our goal remains the same, and that is to be a consistent top line 10% growth company revenue by 2016 and a 15% EPS driver. What we're finding -- and we've already described some of the elements in the marketplace, but what we're finding is that the pipeline of these larger transactions, which drives, as I mentioned a moment ago, other parts of our business that have repeat revenue characteristics, that these transformational and large professional services transactions have those pieces. So I'm actually encouraged. It's too early to tell at what pace we're going to get to that. But I feel that the size of these transactions and also the scope of the work is revealing to us that the market is there. And as an example, in 1 health system, they've asked us to help them participate in taking out over $450 million in costs and the target that they asked us to think carefully about is over $100 million, about $106 million, just to give you some sense of scope, if that makes sense.

Donald Hooker - KeyBanc Capital Markets Inc., Research Division

Got you. And then, I guess, you guys do a lot of different things, obviously, in Revenue Cycle Management. But -- and I don't want to read too much in the -- your press releases. But it seems like the past few press releases, you've highlighted some services you're providing to hospitals as they're transitioning their patient -- underlying patient accounting systems and revenue cycle systems. Is that a trend that is there? Or are those just one-off?

Michael Patrick Nolte

Yes. I mean, I think what I'd say is it's in part our ability to reshape some business lines towards a different opportunity. So I can't comment necessarily on whether it's an increasing trend or something that's driving market or broader business growth. I do think -- I'd say 2 things: One is, it's in part our capability to take some of our Lean and process capability and apply it to a slightly different problem than we've historically done. And I'd say the second piece of it, I do believe there is, largely due to the financial pressure that some of our health care customers are seeing, a renewed emphasis on revenue cycle generally. Now that's damped a little bit, I think, as a result of at least some uncertainty that, as we head into the ICD-10 transition next year, it's not obvious to us that everybody is going to want to be in the middle of a major patient accounting system transition. So it certainly is true that you want to have every dollar in the door that you can when you're under financial pressure. The flip side of that is you may not want to be changing out a major system in the midst of a major change like ICD-10.

Operator

The next question is from Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just wanted to talk a little bit about the pipeline and the bookings and the dynamics there. I know you -- we've talked a little bit about it on the call. But the growth in the pipeline versus the execution on the bookings, is that more just a function of the larger contracts, the larger potential deals? Or is it -- is something else playing a role in there in terms of the decision-making process for the hospitals?

Michael Patrick Nolte

Yes. I think it really depends on how you answer the question. What I'd say is we are seeing an enormous amount of momentum around many of our solutions and services being combined into one total performance effort. And so if you disaggregated that to products and services, you can argue that it's marginal benefit to a lot of different activities, services and solutions that we provide. But when you look at what's really driving the bookings trend, it's that we're able to bring together, both of our major segments, a comprehensive approach that we described earlier in the conversation and really a trusted partner relationship and make a difference for a health care system that's under financial pressure for lots of reasons. And so it's -- like I said, it depends on how you want to chunk it up, but it's, in some ways, both, I guess, is the answer.

Operator

The next question is from Bret Jones with Oppenheimer.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I don't want to beat a dead horse on the utilization front but I just wanted to touch on the supply chain management piece. We've been talking about a weak census for quite some time, and I'm just curious as to why you think you're hitting utilization -- why utilization is hitting you now? Previously, same-store sales has been able to outpace that and if you could touch on that, that would be helpful.

John A. Bardis

Yes. This as John. I think we've done a really good job of a couple of things: One is the Broadlane integration and contract consolidation allowed us to drive greater volume, as well as improve pricing and improve the administrative fees for a period of time. That momentum continues but not at the same pace. So we spent roughly 2.5 years on that calendar, right, to integrate the entire portfolio. So I think we were getting benefits from the acquisition and the merger of agreements that accelerated our administrative fees, even when -- as census was declining for U.S. hospitals. The majority of that integration were by no means done, but the majority of the big items in that space have been addressed. And so I think we're seeing a more raw view of the actual impact of census on our administrative fees. We continue to penetrate. We continue to grow. By no means am I implying that we're not growing, we are. But I think we've undressed to some degree and separated the difference between the merger synergies and consolidation of contract and actual penetration.

Michael Patrick Nolte

The other piece of it is that there's -- as we discussed earlier, there's a bit of a lag somewhere on the order of probably 2 quarters in terms of when we start to see the impact of census changes, and so that has a bit to do with it as well.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

And then I just wanted to ask Chuck a quick question on the level of investments. I know you were talking about delayed investments in the first half of the year that were going to hit in the second half. We're really not seeing those hit the P&L. So I'm just wondering are those things that are being delayed to protect profitability or do you still expect those to hit starting for 4Q.

Charles O. Garner

We're continuing to invest, and it's a combination of both capital expenditures, so we're still committing to our overall guidance of $55 million to $65 million of CapEx. Most of that investment is technology related. As well as there are additional operating expense-related investments that we're continuing to make for the full year. So that hasn't changed our outlook in investment. The only additional point that we highlighted was just also highlight the fact that over the last several years, we've been increasing the level of capital expenditures and investments. And also that, of course, has a related depreciation effect that tends to lag that period given the 3- to 5-year depreciation lives of those assets.

Operator

Next question is from Sandy Draper with Raymond James.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

My questions actually both have been asked and answered.

Operator

Next question, Sean Dodge with Jefferies.

Sean Dodge - Jefferies LLC, Research Division

Following up on Don's earlier questions. In those situations where you're being brought in to help a client transition from one platform -- RCM platform to another, how successful have you guys been, or I guess, do you expect to be in retaining that client after transition is complete? And so far, have you been able to use those engagements as an opportunity to cross-sell and expand your footprint within that part of the client base?

Michael Patrick Nolte

Yes. I mean, I'd say, so first of all, there's a lot of situations where they are already a client. So the -- in the surrounding technology that we have in place -- I guess, the best way to say it is it lives through the patient accounting transition. And so it's -- there's a lot of situations where we're providing an additional service for an existing book of business. And as you can imagine, when you have that existing client relationship, it's easier to be in the conversation to begin with. I'd say that the second thing is that it depends in part on what the transition looks like. And so I think there generally are opportunities to identify gaps in patient accounting systems and ways that we can help a client through a combination of things, whether that's consulting services or additional technology sales. But I don't know that it's extraordinary or out of the norm just because we've helped them with a patient accounting transition.

Operator

The next question is from Leo Carpio with HM Global.

Leo F. Carpio - HM Global Capital LLC, Research Division

Starting with a question here on the competitive environment, what have you seen in terms of competition? Especially on the GPO side, it's very concentrated within the top 6 players, the market share. Are you seeing any opportunities in terms share capture going forward? And on the RCM side, same question on competition. Are you seeing more competitors coming in and making it tougher to win some of these deals?

John A. Bardis

Let me -- maybe I'll take the GPO side. In the group purchasing business, many of our competitors are also owned by their hospital partners who are their client. So -- But what's happening right now is more and more of these institutions are finding themselves having to lean into much more difficult financial times and really think differently around how to reduce costs. And therefore, many of these client relations are now being reviewed. And we're seeing bids and other opportunities emerge. And I think -- I feel good about what our capabilities are in comparison to our competitors in order to compete and take share. Having said that, we're not relying solely on the value of the GPO, for example, to -- at the tip of the spear, to have those conversations. There are many other reasons why we are in the hospital -- the hospitals that we're in today. And so for example, we provide total performance management solutions around spend, where we have a competitive GPO in place. And so I -- in many of these cases, it has afforded us and given us opportunities to gain trust for all the right reasons and then ultimately be a contender for the GPO business. So I feel very good about where we are. But we have always had, historically, the cost ownership issue of we're purchasing organizations and hospitals to contend with. And I think we're seeing more and more of that loosen up just because the circumstances are different.

Michael Patrick Nolte

Yes. And then just to kind of complete the question in terms of the Revenue Cycle side of the business. I don't know that I've seen anything that would suggest that competition is increasing. What I would say is as we expand our offerings into markets where we're kind of trying to build growth on top of the existing book of business, things like analytics, as we get into more complex risk-sharing agreements with what we're trying to accomplish with episode of care technology or even things like patient liability estimation, we're bumping into new competitors occasionally. Some of that -- because those parts of the market tend to be hotter, right. And so you find more startups and more interest in that particular space. In some cases, it's maybe unforeseen competitors. So if you're talking about trying to estimate the obligation of a patient, you start to bug -- bump into competitors like commercial banks, for example, who are starting to get into different parts of patient financial services.

Leo F. Carpio - HM Global Capital LLC, Research Division

Okay. And then just last follow-up question. Did you mention something about a tax benefit in the quarter? And was it significant on the EPS?

Charles O. Garner

No, it was -- overall, I would say it's around about $0.01 impact. If you think about where our guidance had been, the midpoint of our guidance, we came out about $0.02 ahead. About $0.01 of that was related to some performance fees that we achieved ahead of schedule, and then the other $0.01 largely had to do with some benefits from tax, basically lower rate.

Operator

The next question is from David Larsen with Leerink Swann.

Chris Abbott - Leerink Swann LLC, Research Division

It's Chris Abbott in for David. Just first maybe a quick clarifier. For the Revenue Cycle Service customer you referenced, I guess, had a contract revision, was that -- is that pushing out the timing of the performance fee? Or was that an actual contract value reduction?

Michael Patrick Nolte

Could you repeat the question, maybe if you could just, I don't know, get closer to the phone or speak up. It's a little hard to hear the question. I apologize.

Chris Abbott - Leerink Swann LLC, Research Division

So you had just commented, I guess, a little bit already about the Revenue Cycle Service customer that had a contract revision. I guess, I'm just trying to understand, was that a pushing out of the performance fee timing-wise? Or is that an actual reduction of the contract value?

Michael Patrick Nolte

It's an estimate of sort of a probability-weighted view of the achievement of the performance fee, is the way I would suggest it. So it's not a pushout, it's still expected to occur in the timeframes we discussed, both from a contracted revenue perspective, as well as in the Q4 number.

Chris Abbott - Leerink Swann LLC, Research Division

Okay. And then I guess just briefly another comment around -- or question around utilization and how you're kind of thinking of the insurance exchanges playing into or impacting utilization as we head into 2014, is that kind of contemplated in your comments around some of the utilization headwinds?

John A. Bardis

Yes. I think as far as the Affordable Care Act and exchanges are concerned, what we really don't know is when those newly-covered lives will begin to utilize. But I will say this, and this was very surprising to me, but we had a meeting last week with a very large insurer, who would be well known to all of you. And what they said was in this particular MSA, which was an enormous MSA and many millions of lives, that the early read on the exchange pricing was -- as opposed to being somewhere north of cost and just below, say, private pay, that their view, at least in that market, that exchange pricing was coming in much closer to Medicare. That was intriguing to us because we felt for some period of time that exchange pricing would be above cost but well below private pay rates. And as a result of this information, it's our belief is that when these patients start utilizing, they will -- their payments and the way that payment is produced will be substantially below what we see in private pay. We think that's going to be a forcing function for additional cost reductions, but we don't know when it's going to happen. We don't know the timing of how these patients swell in. But the data and the information that we have from the Massachusetts experience shows that the early signers tend to be the sicker and tend to have pent-up demand for utilization. It's purely a guess on our part. But we think about a year from now, utilization in those states that have had the exchange adaptation is going to rise.

Operator

Our last question comes from George Hill with Deutsche Bank.

George Hill

I'm going to hit the utilization thing one more time from a different angle. John, I figure, you look at this and you guys probably do a little bit of homework on this. I kind of want to ask a question about have you guys looked at changes in benefits design and how that's impacting utilization? And I might challenge the conventional wisdom that reform is going to drive greater volume because I might argue that the headwind of changes in benefit design are going to keep people from utilizing the health care system. Given your client base and the work that you guys do on the RCM side and the planning said, I was wondering if you guys have looked at this. And kind of what are you hearing from the client base about -- for anybody who's bearing risk, what changes are they seeing in benefit design? And how do they expect that to impact utilization?

John A. Bardis

By the way, that's an incredibly insightful comment. We believe that benefit design and high deductibles are a factor today in a very sort of slowly improving economy and in terms of consumer health care choices. We think many people are being much more thoughtful about when and what they go to get medical care for. So I think what you're talking about is actually happening right now. We also believe that what you're talking about is going to continue to happen, which will cause those who are currently in high-deductible programs and getting more and more of the premium responsibility from their corporation or who is sharing their insurance responsibility, we think it's making them a much tougher and harder buyer, right? It's not as simple for them to just make the choice to go into a clinic or go to a hospital and get an elective procedure. So I think what you pointed out, we believe, firmly is actually happening right now. And it will be very interesting, we believe for some time that the 800 pound gorilla in all of this is the corporation and the employee, both on benefit design and then what ultimately occurs relative to decision on exchanges. But for sure, the narrower networks with fewer choices and higher deductibles will be an influencing factor as we shift the existing insured population, and will be an influencing factor as the exchanges emerge and people have a competitive alternative to exchanges with narrow networks with high deductibility. So I think you're all over it. I think that's part and parcel for the uncertainty and the timing of the effect.

George Hill

Okay. And then I guess, I'm trying to figure if there's anybody who's found a way to measure that yet. I guess, it sounds like you guys haven't found a way to measure that yet, but you're keeping a close eye on it.

John A. Bardis

Yes, that's exactly right. I mean, what we are -- there are some very interesting startup companies that are out there today, for example, who are providing market-based insight on pricing and cost to both corporations and then now individuals who are buying their -- or directly responsible for buying their own coverage. And what we're seeing in all these patients is that the transparent leveling of pricing and cost data for consumers to buy health care is, once again, driving the industrial cost-reduction initiatives much more and even more aggressively market by market. So I really -- I've got to give you a lot of credit. I think you're onto something that's pretty big. It's very hard outside looking at hospital census to predict exactly who's choosing not to or to limit their health care based on their benefit of plan design, but we think it's a major factor.

George Hill

Okay. I appreciate the color. And a less mundane one, and then I'll let everybody go home. Leverage ratio has come down pretty far. I guess, how are we thinking about the deal environment? And do you guys think you're in the market again for assets any time soon? And would you be comfortable levering up to kind of -- to build the company inorganically given where interest rates are? Then I'll hop off.

John A. Bardis

I'll let Chuck answer the interest rate and leverage question. My -- we have limited interest in levering the company up to the point to where we were 3 years ago. But I would say that we now, due to excellent management by the team and Chuck financially, we've got options in terms of looking at businesses that could make sense. We're always paying careful attention, but we're not in a market for big deals, if that's what the question was.

Charles O. Garner

George, just to echo John's point, I think we're very comfortable leverage ratio, where we are, at 3.6x. We'll continue to pay down debt for the balance of this year. And over time, we'll continue it up, to look at ways in which we can drive shareholder value through just our financing strategy. But we feel very comfortable where we are today. And with about 5.2% weighted average rate interest expense, cash interest expense, we feel comfortable with that, as well as the risk that we would see potentially in the next year or so as it relates to a potential rising rate environment.

Robert P. Borchert

Okay. With that, I think we'll conclude our call. Thanks, everyone, for your time. We look forward to speaking with you in a couple more months here.

John A. Bardis

Thanks, everybody.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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