R1 RCM Inc. (RCM) CEO Joe Flanagan on Q3 2021 Results - Earnings Call Transcript

R1 RCM Inc. (NASDAQ:RCM) Q3 2021 Earnings Conference Call November 2, 2021 8:00 AM ET

Company Participants

Atif Rahim - Investor Relations

Joe Flanagan - President and Chief Executive Officer

Rachel Wilson - Executive Vice President and Chief Financial Office

Conference Call Participants

Michael Cherny - Bank of America

Donald Hooker - KeyBanc

Vikram Kesavabhotla - Baird

Steven Valiquette - Barclays

Anne Samuel - JPMorgan Chase

Joy Zhang - SVB

Sean Dodge - RBC Capital Markets

Operator

Good morning. My name is Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the R1 RCM Q3 2021 Earnings Conference Call. Thank you. Atif, Investor Relations, you may begin your conference.

Atif Rahim

Good morning, everyone and welcome to the call. Certain statements made during this call may be considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our strategic and cost saving initiatives, our liquidity position, our growth opportunities and our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, design, may, plan, project, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today’s call involve risks and uncertainties.

While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to the potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our annual report on our latest Form 10-K and our latest report on Form 10-Q. We will also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Now, I would like to turn the call over to Joe.

Joe Flanagan

Thanks, Atif. Good morning, everyone and thank you for joining us. I am pleased to report another solid quarter, with revenue of $379.7 million and adjusted EBITDA of $89.3 million, driven by strong operational execution, contribution from our technology investments, and a recovery in patient volumes.

Our team continues to perform exceptionally well and delivered excellent results for our customers. With our strong performance in the third quarter, we are updating our adjusted EBITDA guidance for the year to $337 million to $343 million. While COVID-19 continues to present some uncertainty, volumes have generally recovered to pre-COVID levels across our customer base. Providers are much better prepared and have managed well through recent flare-ups in COVID cases in some parts of the country. Our value proposition is resonating well as it addresses many longstanding revenue cycle challenges. Recent conversations with prospective customers have been increasingly focused on our ability to address tighter labor market conditions and wage inflation. We believe our significant scale, technology investments and global shared services footprint give us a structural advantage versus our competitors and in-house revenue cycle operations.

I will discuss this in more detail in a few minutes, but I’d like to first provide an update on our commercial activity. Our end-to-end pipeline remains very active and grew almost 50% over Q2. We are in the contracting stage with prospective customers and expect to exceed our $4 billion NPR target for 2021, if these contracts are signed by year end. In addition to activity in our end-to-end pipeline, we are seeing strong traction across our full spectrum of offerings. One of the areas we have strategically invested in over the past several quarters is infrastructure to enable providers to manage value-based contracts. Fundamentally, there are direct parallels from the core operations that we perform daily for customers under our fee-for-service contracts, with those needed to serve value-based arrangements. For example, patient engagement, referral management, and intake activities translate to preventative care metric compliance and site-of-service management for value-based arrangements.

Our clinical documentation and acuity capturing capabilities are relevant to clinical quality data capture and risk adjustment accuracy. And finally, member eligibility reconciliation and claims administration under value-based arrangements are analogous to activities we perform related to revenue integrity and payment administration. We have leveraged these capabilities and added new functionality to serve the needs of value-based providers.

With this backdrop, I am very pleased to announce that VillageMD, a leading provider of value-based primary care services, has selected us to drive revenue cycle performance across their rapidly growing footprint. Under this end-to-end operating partner agreement, we will interface with VillageMD’s Athena Health EMR system to drive improvements in revenue cycle performance, while supporting VillageMD’s efforts to scale from their current 145 locations to an expected 700 locations over the next 5 years. By partnering with us to reengineer and scale their revenue cycle workflows across fee-for-service and fee-for-value payment models, VillageMD can focus on delivering high-quality clinical care to patients, while ensuring accurate revenue for the care they provide. The capabilities we have developed position us very well to serve the needs of emerging, high growth value-based providers and further build on the $1.7 billion of value-based payments we currently manage today. One additional example is a new revenue cycle partnership with ArchWell Health, an innovative healthcare provider specializing in value-based senior care.

Next, with the launch of our entry platform over the summer, we have seen increased interest from health systems seeking comprehensive digitized patient-facing capabilities ranging from scheduling the payment. While our deployment efforts with Entri are primarily focused on our end-to-end operating partner customers over the next 18 to 24 months, we are pleased with two recent notable wins. Memorial Sloan Kettering Cancer Care Center, the world’s largest private cancer care center, selected us to implement a personalized digital financial experience for patients and via our partnership with Cerner, the Veterans Administration selected us to provide our digital patient intake solution across to at least 14 and up to all 18 of the VA integrated service networks. Over the next couple of years, we expect this contract to ramp to approximately $10 million in annual revenue, with high flow-through to EBITDA after the implementation phase, given the SaaS nature of the contract.

On the physician front, last week, we announced a 10-year extension of our agreement with American Physician Partners, or APP, a leader in hospital-based emergency medicine, with annual NPR approaching $1 billion. Since the inception of the relationship in 2019, we have generated significant improvement in APP’s collections per visit via our built-for-purpose emergency department billing system, which now leverages robotic process automation to automate more than 20% of all back office tasks. We have also simplified the patient experience via mobile functionality and predictive outreach solutions. Given our track record of strong performance and APP’s growth, the extension and simplification of the contract is a win-win for us as well for APP. Overall, our expertise and scale in the emergency care setting, along with our technology investments, position us well to serve the needs of providers in this segment of the market.

Now, let me provide an update on our ongoing onboarding activity. Onboarding activities at LifePoint and Mednax are progressing on schedule. Phase 1 of LifePoint is expected to conclude by the end of November and Phase 2 is scheduled to be completed in early 2022. Phase 3, which commenced in July, is more than 50% complete and on track to be fully onboarded by mid-2022. Overall, our relationship is very collaborative and we are pleased with the pace of progress at LifePoint. At Mednax, onboarding activities commenced immediately after contract announcement in May and are progressing on schedule. We welcome the first wave of Mednax leaders to R1 in mid-October and are in the process of welcoming an additional 250 associates in November. We are on track to complete Mednax onboarding activities in the second quarter of 2022.

Next, I’d like to provide an update on our automation and patient experience technology. As I mentioned earlier, current labor market conditions are presenting new challenges to providers. These challenges are evidenced by higher vacancy rates, longer time to fill open roles and wage inflation. Our significant scale, global shared services footprint and technology, particularly our recent investments in automation and patient experience capabilities present us with unique levers to sustainably address labor-related challenges, with 80% of providers in-house revenue cycle costs typically spent on labor, we believe there is a substantial opportunity for technology-driven productivity improvement in the industry. Our intelligent automation capability which is an extension of our core technology platform positions us to digitize the wide range of complex processes found in the revenue cycle and thereby reduced the reliance on manual labor. Our automation center of excellence is dedicated to uncovering opportunities for automation and developing innovative solutions that improve revenue cycle performance for our customers.

Since 2018, we have systematically automated more than 16 million manual tasks in our operations, including approximately 10 million additional tasks in the third quarter. One of the guiding principles of our automation center of excellence is to develop solutions in a modular manner, which allows complicated workflows to be automated, reusing and combining various modules. Our library of modules now stretches across customers in all 50 states as well as all major host systems, providing us with a strong foundation of building blocks to drive further automation from. The vast coverage of processes is also important when we conduct new customer assessments, as it allows us to confidently underwrite the financial performance we can deliver for customers at our desired profitability goals.

We are extremely bullish on the value we can create for providers via our intelligent automation solution and continue to invest heavily in this area. From an internal talent standpoint, the ability to redeploy existing team members from lower complexity work, which can be readily automated to other tasks, provided us with immediate capacity. Additionally, this shift to more complex rewarding work nicely positions us to differentiate R1 as an employer of choice for top revenue cycle talent. It also allows us to rapidly deploy automation, which is particularly important in the current environment.

In addition to intelligent automation, our Entri platform, which empowers consumers to access and plan for care quickly and simply via digital self-service, also reduces many of the manual and redundant activities performed by revenue cycle employees. We believe Entri’s market leading capabilities across scheduling registration, financial clearance and payment, are a game changer for the industry. We have seen some transformative results as we have rolled out Entri to our customers. More than 60% of patient registration encounters are performed on a self-service basis. NPS scores are above 75 and that we have cut patient time spent on administrative tasks in half. These results are fueling further innovation. Two recent advancements to our Entri platform include the integration of financial clearance and authorization into the scheduling processes and the ability for providers to schedule their patients across care settings.

With the uptake we have seen on our recent health system deployments, we believe Entri is effectively one of the leading digital front door platforms on the market. Since our formal launch of Entri in August, we have received significant interest from health systems. Our near-term priority is to deploy Entri across our base of end-to-end IDN customers to unlock the significant operational, financial and experiential efficiencies presented by Entri. In Q3, we went live with Entri at 3 large health systems and anticipate 4 go-lives in Q4, with further acceleration as we look out to 2022. As we deploy Entri across our base, we have seen our unit economics improve with each new installation, giving us incremental confidence in our 30% long-term adjusted EBITDA margin target.

Additionally, the acquisition of VisitPay presents us with new opportunities to further differentiate our offering. Since the completion of the acquisition on July 1, we have been focused on three near-term priorities. First, support the VisitPay team and fuel strong momentum they are seeing in the market. Second, integrate and deploy the VisitPay platform across our IDN customer base to achieve targeted synergies. And third, drive further innovation in the healthcare payments arena. We see a large, unmet opportunity in the market to deliver innovative financial products that improve healthcare affordability for consumers, alleviate friction in the financing of medical costs, and simplify financial interactions between large providers and their patients. Overall, the integration of VisitPay is progressing well and the team has maintained strong momentum in the market. We look forward to updating you on activity on the innovation front in the future.

In closing, we remain very optimistic about our growth prospects. With the investments we have made in technology in recent years, we believe R1 is distinctly positioned to deliver superior financial outcomes for healthcare providers and an exceptional experience for their patients. Prospective customers are recognizing our differentiated technology-driven value proposition and selection decisions are increasingly driven by appreciation for our technological capabilities. These attributes, along with current labor dynamics in the macro environment, position us well for future growth.

Now, I would like to turn the call over to Rachel.

Rachel Wilson

Thank you, Joe and good morning everyone. We are pleased to report another strong quarter, with revenue of $379.7 million, up 23.6% year-over-year and adjusted EBITDA of $89.3 million, up 77.2% year-over-year. Adjusted EBITDA margin for the quarter was 23.5%, up 710 basis points from 16.4% in Q3 2020, driven by continued strong execution by the team and recovery in patient volumes.

Reviewing the results in more detail net operating fees of $308.5 million increased 21.6% year-over-year and 8.2% sequentially with growth primarily due to a recovery in patient volumes. As a reminder, we experienced the peak of COVID-related pressure on our net operating fees in Q3 2020 and Q3 2021 net operating fees reflect volumes effectively at pre-COVID level. In addition to the recovery in patient volumes, revenue from new customers, mainly LifePoint, also contributed to the growth in Q3 net operating fees.

Incentive fees of $41.5 million were up $16.4 million over the prior year and $4 million sequentially driven by strong operational execution. As Joe mentioned, we are pleased to have extended and simplified our contract with APP. Under the new agreement, we expect economics associated with incentive fees under the prior agreement to shift to net operating fees and out of incentive fees on a go-forward basis. Other revenue of $29.7 million increased $1.3 million year-over-year, driven by a recovery in physician advisory services volume and contribution from VisitPay partially offset by the EMS divestiture. On a sequential basis, other revenue was down $1 million as revenue from the EMS transitional services agreement tapers off, positively offset by revenue from the VisitPay acquisition.

The non-GAAP cost of services in Q3 was $267.5 million compared to $236.2 million last year, up 13.3%, driven by the onboarding of LifePoint, the VisitPay acquisition and our automation efforts. Our non-GAAP cost of services as a percentage of revenue continues to decline, improving by approximately 640 basis points year-over-year driven by a recovery in volumes and productivity improvement.

Non-GAAP SG&A expenses of $22.9 million were up $2.3 million year-over-year, primarily driven by the VisitPay acquisition and higher healthcare claims and compensation costs versus 2020. Adjusted EBITDA for the quarter was $89.3 million, up $38.9 million or 77.2% year-over-year. This increase was driven by recovery in patient volumes, higher incentive fees and productivity improvements accentuated by our automation efforts. Lastly, we incurred $11.4 million in other costs in Q3, down $4.3 million year-over-year, with this reduction primarily due to lower expenses related to strategic initiatives and lower real estate rationalization charges.

Turning to the balance sheet, cash and cash equivalents, inclusive of restricted cash at the end of September were $159.2 million compared to $165.4 million at the end of June. We generated approximately $90 million in cash from operations in Q3 driven by adjusted EBITDA growth and working capital improvement. We remain focused on generating strong cash flow from operations but expect our cash from operations in Q4 to moderate slightly due to payments of deferred payroll taxes related to the CARES Act. Our balance sheet and liquidity positions remain strong, providing us with flexibility as we consider various opportunities to deploy capital.

Beyond maintaining adequate liquidity to run our operations, our primary use of capital is organic and inorganic investments to drive differentiated capability and long-term growth. We intend to use excess cash on our balance sheet to pay down debt or opportunistically repurchase shares. During the third quarter, we repaid $20 million of our revolver and repurchased $31.7 million worth of shares at an average price of $20.59, which equates to over 1.5 million shares. Subsequent to Q3, we completed our $50 million share repurchase program and today announced a newly authorized $200 million share repurchase program.

We intend to remain opportunistic with regards to share repurchases and will be responsive to market conditions and other macro factors. The combination of the recent VisitPay acquisition along with this quarter’s $20 million debt pay down and $31.7 million share repurchase demonstrates our balanced approach towards capital allocation. As of September 30, our total liquidity was in excess of $500 million, consisting of cash and cash equivalents and $350 million of capacity on our revolver. Our improved liquidity is a reflection of our strong EBITDA and cash generation supported by our refinanced revolver.

Turning to our financial outlook, given our strong performance in Q3, we now expect 2021 adjusted EBITDA of $337 million to $343 million. This equates to a $5 million increase at the midpoint relative to the midpoint of the prior range which we’d also raised on the Q2 call. We continue to expect revenue of $1.46 billion to $1.48 billion, likely closer to the midpoint in the range given the timing of employee transitions related to our newer customers.

In closing, I’m proud of our team’s strong execution reflected in our adjusted EBITDA and cash flow from operations this quarter. Our financial strength provides sufficient liquidity to not only run our operations, but also provides flexibility to pursue our growth initiatives and opportunistic return of capital to shareholders. We feel very confident about our long-term growth prospects and are pleased to be in a position to pursue multiple avenues for capital deployment.

Now I’ll turn the call over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from Charles Rhyee from Cowen. Please, go ahead.

Unidentified Analyst

Hey, guys. It’s James on for Charles. You’ve noted that the tighter labor market conditions and wage inflation, your prospective customers are seeing is driving greater activity in the sales pipeline. Can you talk about how these factors are impacting R1? Is it impacting your ability to increase deployment capacity to $5 billion by year-end at all? And do you see this constraining ability to flex up deployment capacity beyond ‘21?

Joe Flanagan

Thanks, James. I think – let me first cover kind of your question relative to tight labor market and how does that affect our deployment capacity? And then I want to answer it from a little bit different dimension, right now, the tightness in the labor market. No doubt, it’s making it harder for our HR teams and our operating leaders to get and fill roles across all of our profiled demand or profiled levels within the organization. But what I would say is it’s more acute. What we’re seeing is much more acute in the hourly workforce. In the professional workforce, we’ve been not as impacted. And I would say we’re carrying the capacity that we need to deploy $5 billion. And in fact, when you look at the deployments we have underway between LifePoint, Mednax, VillageMD and others, that capacity is in place and is primarily allocated to demand we have right now. Looking forward, we feel good about our deployment capacity and the plans we have around that. The labor markets are affecting us in the hourly workforce. And I’ve commented this on other calls. One of the very clear proof points from my standpoint of the impact of technology driven automation is, we’ve had to move wages up. We’ve had to work around the constraints in that hourly workforce. And even with absorbing that, let’s call it, a headwind we’ve been in a position to raise our guidance twice over the course of this year. And again, we feel very good on our ability to navigate this dynamic looking into ‘22. And that’s really the area of emphasis in a number of our discussions with prospective customers in the commercial pipeline and pursuit process. So again, it’s across the board, no doubt, but where we’re seeing it the most is in our hourly workforce. On the professional side, I would not emphasize that as much. And to the point on deployment, we feel good about the capacity we’ve added. We’re pleased we added that coming out of last year going into this year. And looking into ‘22, we feel good about deployment capacity and our projections around that.

Unidentified Analyst

Okay. And you’ve automated 10 million tasks per quarter each of three quarters this year. So it seems fair to say that, that level of incremental automation is sustainable. At this pace, you would have 110 million automated task by the end of ‘22 compared to the target of greater than 60 million. So how do we think about adjusted EBITDA contribution by ‘22? Could it be nearly double the expected 40 million from the targeted 60 million of automated tasks? Can you help us kind of unpack that?

Joe Flanagan

Yes. I don’t think it’s going to be nearly double. But based on the projections we have right now, to your point, we are ahead on tasks we’ve automated coming out of ‘21 going into ‘22. Our plan right now would be to reinvest that overage to fuel the future use cases and the future returns that we feel very, very confident in. So right now, we’re in the midst of finalizing all those things for our financial plan on 2022. And that’s our current posture. We will use a little bit of that overage to offset what we expect to be continued tightness in the labor markets, but primarily the strategic use of kind of excess short-term financial benefit, we will reinvest that into the platform. And a big area of emphasis for us is more advanced automation levers. We’ve talked about that a number of times. We’ve got pilots running right now, and we’re quite bullish on kind of the impact. Those techniques will have looking out to ‘23 and ‘24.

Unidentified Analyst

Okay, thank you.

Joe Flanagan

Thanks, James.

Operator

Your next question comes from Michael Cherny from Bank of America. Please, go ahead.

Michael Cherny

Good morning. Thanks for taking the question. Congratulations on the strong quarter. First, just a clarification, on the VillageMD agreement, will that be counted as your traditional end-to-end revenue or how should we think about that in terms of how it builds into the model?

Joe Flanagan

Yes. That is, in our definition, that will be an end-to-end operating partnership in line with other end-to-end agreements we have in our physician care setting. The second point, Michael, is relative to my comments that we’re in contracting and assuming we get those contracts done by the end of the year, which is the joint plan with our customers we would exceed our NPR target, not including VillageMD. So we haven’t really thought about how to include it. We’re just delighted to have that engagement, and we’re also delighted with where we sit right now vis-à-vis our advanced pipeline discussions. And one of the reasons we’re not including it is VillageMD is a private company. We’re not going to disclose their NPR. But what I would point to in the public domain is their growth projections. And so we do view VillageMD as a meaningful customer looking forward on a strategic dimension and then also just on a pure size dimension based on those projections.

Michael Cherny

Yes. I mean, given the amount of time the new partners spent highlighting that I can imagine that this is a very nice win given their growth characteristics. So congratulations on that one. And I guess just along that lines about the pipeline. Clearly, a lot of these prospects I’ve seen the world turn upside down tied to COVID. As you think about that potential to get to the finish line, whether it closes in November, December, January, February and some of these deals, are you seeing any other reasons that are different than historical as to the timing of some of these closures or what is that last gating factor that these prospects need to overcome prior to onboarding themselves a bit?

Joe Flanagan

No, we’re not seeing any real difference in the pipeline process. If you think about the major stages of our commercial pursuit, whether that be the initial discussions, whether that be impact assessments, more due diligence on post that impact assessment, whether that be reference checks and visits to sites and InfoSec processes. All of those things we’re seeing play through pretty consistently, no material change really as a result of COVID. I would just say, a lot of the pursuits we’re looking at right now are on the larger end of the spectrum. And that’s good. I mean there is a lot more calories when we get those over the finish line, but they are more complicated organizations. So just working through the various stakeholders in that sense, that’s not oriented to COVID, that’s more oriented to just a level of complexity of any particular IDN, which continues to be the primary focus for us in the market. So that’s really kind of some of the characteristics we’re seeing along those lines. And I am encouraged. Once we get to contracting, we generally have both sides investing meaningful allocation of their internal time as well as external advisers in that process.

Michael Cherny

Perfect, Joe. Thanks so much.

Joe Flanagan

Thanks, Michael.

Operator

Your next question comes from Donald Hooker from KeyBanc. Please, go ahead.

Donald Hooker

Great. Good morning. Thank you for the questions here. So I guess maybe first one for Rachel. From a modeling standpoint, you alluded to this new agreement APP resulting in some shifting fees. Is it possible maybe for you to dimensionalize that a little bit so we don’t get whipsawed because I guess the in our modeling here because, I guess, the incentive fees have really, really risen a lot over the past few quarters. What is that going to settle at going forward?

Rachel Wilson

Yes. So for the APP, the prior contract did have lower net operating fees. And we’re very pleased – and APP is really pleased with our performance to date. We’ve exceeded performance targets in recent quarters. So given the outperformance in APP’s rapid growth and potential changes related to surprise billing, we’re pleased with the terms of the new contract. So the magnitude of the incentive fee shift to net operating fees, we would expect incentive fees on a go-forward basis to build from Q1 ‘21 levels. So that’s a good way to think about that from your modeling perspective.

Donald Hooker

Okay, thank you for that. And I guess you just briefly touched on one of my follow-up questions around surprise billing and some of your relationships with stand-alone ER companies, I guess, like APP and I guess others. Can you talk about how outsurprised billing may or may not impact R1 RCM in 2022?

Joe Flanagan

Yes. I don’t – Don, this is Joe. I think surprise billing and kind of all the dynamics around that, I think we’re actually in a very, very strong position, just given the level of visibility we have on billing points in general to be a partner of choice as you look at ED physician companies that are not yet working with us. And so that’s the way I think about it. I think we’ve demonstrated that expertise on many, many dimensions. So that’s kind of the thought process along those lines.

Donald Hooker

And maybe one last one for me real quick and I’ll hop off, but you guys have some large health system clients that are certainly expanding, which is great for you. But I guess there were some recent news about Amida, that joint venture being potentially swat up, I guess, which, I guess, might be a headwind for you. You’re probably not going to want to give commentary around specific clients, but how do we think about sort of health system clients of R1 RCM expanding and contracting kind of when does that show up in revenues?

Joe Flanagan

Yes. I mean the first thing I would say is, if you look at our installed base and our customer footprint, we’re very, very encouraged. We have net consolidators and I think that’s played through with all the kind of announcements you’ve seen from our customers. And that is a consideration as we think about where we targeting in the market. The second thing is we’re not going to comment on M&A items from our customers. I think you would appreciate this until those are done and closed. And the main focus for us is just serving those customers and their strategies for continued growth as best we can. And then the final thing I would say, Don, along those lines is we have a very sticky relationship, when you look at our operating partner model and the transition of operational control that occurs there. And that definitely is a benefit and a positive attribute, I believe of our commercial relationships with customers. So, those are the three things that I would highlight as you look at acquisitions and divestitures across our customer base.

Donald Hooker

Great. Thank you so much.

Joe Flanagan

Thanks Don.

Operator

Your next question comes from Vikram Kesavabhotla from Baird. Please go ahead.

Vikram Kesavabhotla

Yes. Hi. Thank you for taking the question. I just wanted to start with a follow-up to one of the prior questions. I mean you mentioned that you are in the contracting phase with a number of prospective end-to-end customers to reach the $4 billion this year. I just want to understand, I mean how often do deals that are in the contracting phase fail to close, meaning is there any reason to think that there is risk to the $4 billion other than just timing at this point?

Joe Flanagan

Well, there is always risk until it’s done. I mean that’s just the reality. What I would say is once we are in contracting, and that’s normally on the heels of a significant amount of energy and time an organization has invested in evaluation. That’s a pretty strong marker for us. And we put a lot of priority and emphasis on getting into that phase. So, I would think it along those lines.

Vikram Kesavabhotla

Okay. Great. And then maybe just as a follow-up. You mentioned that the end-to-end pipeline is up by 50% since the second quarter. I just want to clarify first, is that in terms of the number of clients in the pipeline or in terms of NPR. And then I guess just based on the visibility that you have at this point, I am curious you can offer any early thoughts on what the magnitude of NPR wins could look like in ‘22 based on the pipeline right now? Thanks.

Joe Flanagan

It’s based on NPR. And we feel good about our NPR guidance, the models that we have put out. So, you look at that progression from ‘21 to ‘22, and we feel very good about the coverage that we have in the pipeline on an NPR basis to support kind of those growth projections kind of we have communicated.

Vikram Kesavabhotla

Okay. Great. Thank you.

Joe Flanagan

Thanks.

Operator

Your next question comes from Steven Valiquette from Barclays. Please go ahead.

Steven Valiquette

Thanks. Good morning everybody.

Joe Flanagan

Good morning Steve.

Steven Valiquette

One question I wanted to ask about was one that was just touched on a little bit just on the $4 billion target for this year. Without having just rigid deadlines on the calendar year, does it just make sense to think about it as $8 billion over 2 years between ‘21 and ‘22? Hypothetically, it did came in a touch below this year, let’s say, $3.5 billion, but if you target $4.5 billion next year, is $8 billion the right way to think about it over 2 years, just – you just have less focus on just hitting a number by the end of the calendar year? And then I have a separate follow-up question, I will let you address that one first. Thanks.

Joe Flanagan

Yes. That’s the right way to think about it. So, you have any myriad of scenarios we end up at $3.5 million. We have plenty of coverage in our pipeline to support on a 2-year basis, that $8 billion. And to my comment on the other question, I would just say, listen, we also have plenty of coverage to support the progression we have communicated on year-over-year NPR growth. The other scenario, if we sign a deal January 5th, as an example, from our standpoint and the way we think about the business, that fits into the same overall model. So right now, we have got a joint plan. We have got detailed schedules that support and in your kind of closure, so to speak. But in the same regard, and I think more importantly, we are just very, very encouraged with the commercial progression in the market and how that bodes for this year’s NPR target, but also for the NPR growth models we have laid out looking forward.

Steven Valiquette

Okay. Great. And then separately, just from some of our recent survey work when health systems state that they are not planning to outsource RCM, the number one most consistent reason is the high cost of outsourcing. I guess I am just curious if some of the changes taking place in the labor market in the back half of ‘21, how is this impacting the delta just on the cost of outsourcing versus providers keeping it in-house, if at all. Now, are you also having to change any of your own pricing dynamics in light of the current labor market dynamics? Thanks.

Joe Flanagan

Yes. One of the things that I would say absolutely accrues to our benefit is our commercial value prop or our financial value prop. So, because of our global scale, core technology and as well our intelligent automation investments, for the better part of the past 24 months, we have been in a strong position as part of our operating partner agreements to run a lower cost revenue cycle at a higher quality. And that’s been recognized in almost all of our commercial pursuits. So, I would start there. And that value prop is only emphasized looking at the current labor market, because most of our health systems are coming to the reality that the inflation on wages and their revenue cycle costs are going up on a year-over-year basis. And that only makes our value prop stronger in comparison to that status quo perspective that they have or a standalone perspective that the health systems have.

Steven Valiquette

Got it. Okay. Thanks.

Joe Flanagan

Thank you.

Operator

Your next question comes from Anne Samuel from JPMorgan Chase. Please go ahead.

Anne Samuel

Hi guys. Thanks for taking the question. You spoke to investing back some of your margin outperformance back into the business. And I was hoping you could provide some color on potential areas of investment that you see going forward.

Joe Flanagan

Yes. So, two big areas of investments that I would highlight. And I will start with intelligent automation. The big area investment there is going to be more predictive modeling on our operational activity. So, if you think about it, what we have really been focused on is starting with just using basic automation techniques to automate manual tasks. What we are starting to do and we have got pilots underway right now is start to think about the rich data set we have and how can we use that data set and machine learning techniques and predictive modeling techniques to predict work or predict work that doesn’t have to occur. So, that’s a big, big area of emphasis for us. And there is opportunities and use cases across the entire revenue cycle. So, that’s the first area of investment that we will redeploy favorable performance on. The second area is just making sure we are laser-focused on integration of our core technology. You have heard us talk about that as it relates to the patient experience, our recent VisitPay acquisition. We see a significant opportunity to integrate that code base into the entry platform at a deep level. And that overall guiding principle that integrated technology is very, very important across the process flows to get a differentiated outcome is the other core area of investment. The integration of that technology also allows us to uncover new use cases on automation just because we are seeing at the technology level, the process at a deeper level.

Anne Samuel

That’s great. Thanks. And then maybe just one more, I was hoping maybe you could speak to the integration of VisitPay, how that’s going so far? And does the cross-sell opportunity look any different now that you have had some more time with it?

Joe Flanagan

Yes. So, from a VisitPay standpoint, that’s going very, very well. We are three months into it. And I would say the cross-sell opportunity is greater than we assumed when we looked at the business. And what’s been encouraging for me is that the engagement within the provider organization that VisitPay has for this value prop is at the C-suite level. So, it’s either at the CFO level, at the Chief Digital Officer level, but it’s at the C-suite level. And I mentioned that because that’s very important for us as it relates to our broader value props. So, we have been encouraged with that dimension. The second thing I would say is I am very, very encouraged with the integration of that platform into our core operating partnerships. In a very short period of time, we have seen digital adoption up. We have seen patient statements down. And we have seen patient satisfaction and payment model adoption improving as well, which will bode well for our cost to collect as well for our yield or KPI incentive fees on this dimension. And that was a very, very important priority for us as I mentioned in my prepared remarks and looking forward. So, we are generally encouraged with where we sit right now vis-à-vis our original plans on that acquisition.

Anne Samuel

That’s great to hear. Thanks so much.

Joe Flanagan

Thank you.

Operator

Your next question comes from Stephanie Davis with SVB. Please go ahead.

Joy Zhang

Hi. This is Joy Zhang on for Stephanie. Thank you for taking my question. I was wondering if you saw any change in the tone of conversation with customers given that one of your large competitors was going through a go-public process. And did you see any benefits to competition since it added more to your competitors’ slate, or has it made for a tougher environment given the press around it?

Joe Flanagan

No change in our customers’ discussions as a result of the competitive process. And I continue to believe that this end market will support a number of high-performing players and revenue cycle partners. And again, we are just encouraged with the end market, the prospects for growth and how the competitive set could evolve and unlock further validation of this model, because that really is the priority when you look at the degree with which this process is still today managed by the providers. And we don’t think that makes a ton of sense looking out into the future.

Joy Zhang

Thank you. And as a follow-up, can you rehash your thoughts on what’s your differentiation versus your competitors since it’s been a recent focus for investors?

Joe Flanagan

Yes. So, I think if you look at our value prop, the first thing I would start with is the scale and technology investments that we have achieved and delivered on really manifest themselves in our ability to offer contract economics that are significantly favorable to their operation on a standalone basis. The second thing I would say is we have a very credible solution that is an area that’s a high priority for them to solve. And that’s everything related to the patient experience. And I would say the physician or the physician’s care team experience engaging in this process. And then finally, if you look at the alignment around the partnership and the percent of fees that we put at risk on performance and our demonstrated track record of executing against those projections. Those three things, I would say are at the heart of kind of a value prop that differentiates us to the peer set in the market right now.

Joy Zhang

Super helpful. Thank you.

Joe Flanagan

Thank you very much.

Operator

Your next question comes from Sean Dodge from RBC Capital Markets. Please go ahead.

Sean Dodge

Thanks. Good morning. Maybe Joe, staying on the competitive set, you have talked a lot about the investments you are making in technology. But as we look across the landscape, there are a lot of vendors making similar claims. Can you just give us maybe an overview or a layman’s explanation on how – what R1 is doing there? How your approach and the way you are using technology is differentiating you?

Joe Flanagan

Yes. I think there is three guiding principles that I would highlight on kind of why our technology investments have a higher relative impact on our customers’ performance than the general market. The first thing, I would say is we are pursuing an integrated technology strategy. If you look at any part of our technology, we just fundamentally believe to eradicate the friction, the unacceptable friction that exists in this process, it is not enough to build a great module of technology and compartmentalize this. We really believe strongly, and this is borne out of our view operating at significant scale and complexity that friction, cost, dissatisfaction originates at the interface points of this process. The second thing, I would say is operational enablement is just underappreciated by the broad universe of technology players. So, if you look at all of our solutions we, by and large do not sell technology on a standalone basis. We sell it on a solution basis. And we believe strongly that we have got to invest as much in our operating standards and our operating system, so to speak, to unlock the full potential of that technology. And the third thing and it’s just the reality that contractual control that we achieve in our partnerships does not make us beholden to the decision-making framework in an IDN. And I say that because a lot of capability does not see the light of day because change management is not able to be achieved. So, when you think about that, from our standpoint, we fundamentally believe the fact that we are pursuing an integrated technology strategy. We are investing as much in operational enablement to unlock the capability in that technology. And we have a degree of control. And in return for that control, we are underwriting performance that we are able to change the processes on behalf of the health systems. And so when you compare that to a traditional point solution technology vendor, we think over the long-term, that value proposition will emerge as the winner.

Sean Dodge

Okay. That’s really helpful. Thank you. And then on – going back to the EBITDA outlook, the latest presentation says you also have $16.5 billion of your $41 billion of NPR under management, that’s still in the margin ramp phase. Is there any way you can quantify. If we step back and say all else equal, you don’t add another new client, is that remaining $16.5 billion of NPR gets optimized? Can you put some bookends around how much incremental EBITDA that would be worth?

Joe Flanagan

Yes, we would see that very much in line with our the models we have put out, the models on year one, year two, year three of that progression, but also the models we have put out on the medium range and long-term range EBITDA guidance. So, the teams have done a good job in partnership with our finance organization to stay focused on those models and those projections as it relates to our commercial pursuits.

Sean Dodge

Okay. Thank you.

Joe Flanagan

Thanks Sean.

Operator

And there are no further questions at this time. I will turn the call back over to Joe Flanagan for closing remarks.

Joe Flanagan

Julie, first, thanks so much for your help today moderating the call, and thanks everybody, for joining us. As I mentioned before, we are pleased with execution and the momentum we are seeing in the business. We look forward to converting the opportunities in our pipeline as we go into the close of the year and updating you on our future calls regarding our ongoing process. Thanks so much for your participation.

Operator

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