R1 RCM, Inc. (RCM) Q4 2022 Earnings Call Transcript

R1 RCM, Inc. (NASDAQ:RCM) Q4 2022 Earnings Conference Call February 16, 2023 8:00 AM ET

Company Participants

Atif Rahim - Head, IR

Lee Rivas - CEO

Jennifer Williams - EVP & CFO

Conference Call Participants

Charles Rhyee - Cowen

Michael Cherney - Bank of America

Glen Santangelo - Jefferies

Stephanie Davis - SVB

Scott Schoenhaus - KeyBanc

Jailendra Singh - Truist

Sean Dodge - RBC Capital Markets

Anne Samuel - J.P. Morgan

Sameer Patel - Evercore ISI

Craig Hettenbach - Morgan Stanley

Jack Wallace - Guggenheim

George Hill - Deutsche Bank

Richard Close - Canaccord

Operator

Good morning. My name is Kathy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q4 2022 R1 RCM Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

And at this time, I would like to turn the call over to Atif Rahim, Head of Investor Relations. Please go ahead.

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 and 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 may differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, geopolitical, economic and market conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, and other factors discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, which will be filed with the Securities and Exchange Commission after this call.

We will also be referencing non-GAAP metrics on this call. For a reconciliation of non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Now, I'll turn the call over to Lee.

Lee Rivas

Thank you, Atif. Good morning, everyone, and thank you for joining us.

On today's call, we will discuss four key topics. First, highlights from our fourth quarter results. Jennifer will provide additional detail. Next, our 2023 priorities, which are focused on operational execution, then provide insights on commercial activity. And lastly, I'd like to update you on our ongoing investments in technology and automation.

I am pleased to report we closed 2022 on a strong note, giving us momentum as we enter 2023. The contributions from our global team members drove fourth quarter revenue and adjusted EBITDA to the top end of the ranges provided on our last earnings call. Revenue for the quarter was $532.8 million and adjusted EBITDA was $125 million. We saw improvement in payer turnaround times, and I am very pleased with our operational performance for our end-to-end customers and over 500 modular customers. Our Q4 performance sets the stage for continued operational improvement and is one of the key factors behind our 2023 guidance announced a few weeks ago.

The completion of the Cloudmed acquisition in June 2022 created an extraordinary capability for us going forward. As we believe we're well-equipped to address multiple challenges facing providers. Providers are under incredible financial pressure now more than ever, and are evaluating options to reduce costs, so they can focus on what they do best, which is care for patients.

We operate in a $115 billion end market, which continues to grow roughly 10% annually, and where over 70% of providers still manage revenue cycle processes in-house. Given the current inflationary environment and labor challenges in the U.S., providers are often unable to solve this issue alone.

We believe we are distinctly positioned to address these challenges providers face on a daily basis through our operational capabilities, our commercial expertise, and our scaled, technology, and automation platform. What excites me most is the combination of these market needs and our purpose-built capabilities to solve these complex problems on behalf of our customers.

This morning, I want to go through each of these capabilities in more detail. First, let me cover our operation. Our global operation is a key component of the value proposition we deliver to our customers. We are particularly well-positioned to accomplish more for our customers for several reasons. First is our global scale and ability to flex resources. Next, our ability to invest where needed to resolve pain points through the claims process. And last, is the application of technology and automation to reduce reliance on labor to solve these problems longer-term.

What positions us well to service our end market is our ability to navigate the complexities of regulatory changes, our ability to adapt to changing reimbursement models, and our ability to proactively respond to recent payer dynamics. In the near-term, we are focused on operational execution against all cash collection metrics to enable our customers to generate more revenue, more efficiently than they would do on their own.

In Q4, we saw an improvement in our operational metrics, including modest improvement in AR days, which is the primary cash collection metric we focus on. This gives us increased visibility into our 2023 performance.

One of the areas in which we create significant value for providers is around the increased cycle time for claims, which we discussed on our earnings call in Q3. We have seen modest improvement in the last few months, and as claims cycle times have decreased, this is translated to an improvement in incentive fee revenues. This is a win-win for our customers and for R1. We are able to proactively address these deficiencies in a way that providers who do not leverage a global tech-enabled model would be able to accomplish on their own.

We are also applying automation to accelerate claim payment resolution. Our 2023 outlook assumes we will continue to see modest improvement in incentive fee revenues quarter-over-quarter across the rest of the year.

Another operational initiative I'd like to highlight as a significant value-add for our customers is our continued global expansion. In light of today's labor shortages and increasing cost of labor, providers are facing major challenges in hiring sufficient administrative staff. Our offshore operation creates an avenue to mitigate the inflationary environment in the U.S. by filling administrative labor gaps for our customers. Of note, we are expanding not only in our scaled India operation, but also in the Philippines where we now have over 1,000 associates.

Last I would like to highlight our KLAS recognition. We are proud to have been selected as number one in KLAS in three categories: Ambulatory RCM, Denials Management, and Robotic Process Automation or RPA. Each of these offerings addresses some of the most difficult challenges faced by the hospital and physician providers we serve. The KLAS recognition is a key win for R1 that represents our ability to serves the provider on multiple operational dimensions, whether they want an end-to-end solution or a modular offering to drive incremental revenue yields.

Next, I'd like to discuss our commercial activity. Our end-to-end customer footprint covers $55 billion of net patient revenue, and we have over 500 modular customers representing over $850 billion of NPR. Collectively, we touch over $900 billion of total NPR across our customer base. This includes 94 of the top 100 systems in the U.S.

Our end-to-end and modular offerings are built to deliver value in challenging settings. In 2022, our commercial team meaningfully exceeded targets with over $13 billion in new customer NPR, including Sutter, Scion, and St. Clair Health. We also signed 15 large physician groups and over 600 distinct bookings from modular solutions, while simultaneously creating a strong pipeline for continued 2023 growth.

The R1 and Cloudmed commercial teams are now integrated under Kyle Hicok as announced in January. Our end-to-end pipeline reflects future relationships within both acute physician and provider groups, and we see significant opportunity for long-term growth in our end-to-end footprint.

The modular pipeline continues to reflect a high demand for AR denials and revenue enhancement solutions with market conditions favoring several emerging solutions such as 340B and Entri Pay. We expect Cloudmed offerings alone will grow revenue by 20% in 2023. I am incredibly proud of the achievements our team has made to execute well and deliver meaningful value to our customers.

The last area I would like to discuss is technology and analytics. While our provider customers have made many investments in their own revenue cycle journey, the reality is that the process is still labor intensive and requires data collection and validation across multiple systems and individuals. The complexity of the revenue cycle, labor constraints and evolving regulatory and payment landscape mean that errors, delays, and difficulties are bound to happen unless technology is appropriately deployed. Our R1 platform and automation approach provides scale, intelligent automation, and standardization to solve complex revenue cycle scenarios.

In 2023, we will continue to advance our technology via investments focused on three primary goals. So let me cover the first. Our first goal is to automate tasks that are typically done manually in revenue cycle. R1 has been on a digital transformation journey and we are accelerating progress here as we leverage the Cloudmed capabilities in addition to those built as legacy R1. We ended 2022 with 150 million tasks automated up from 110 million in the first half of 2022.

Second, for work that cannot be fully automated, our goal is to make the work as efficient as possible, we call this optimal workflow. To do this, we leverage our deep revenue cycle expertise as well as more than 14,000 proprietary rules and algorithms to allow automated and human-centric workflows to operate seamlessly together. For example, our rules identify problems that happen in the revenue cycle, such as inaccurate coding, and automatically route the work to the best fit specialist, so our teams can work transactions on an exception basis versus a manual review of each claim. That specialist has the information they need at their fingertips to suggest necessary corrections leading to an accurate reimbursement. This leads to higher accuracy, fewer denials, faster turnaround times to payment, and ultimately increased revenue for our customers.

Our third and last goal is to leverage data and analytics to its fullest potential. With the breadth and depth of data, we see 500 million patient encounters annually covering $900 billion plus of NPR across our total customer base. We use data and analytics to identify patterns and trends. This allows us to continuously improve the customer experience and our performance.

Simply put, we believe our technology investments will enable us to find more revenue for our customers, accelerate cash collections, and mitigate inflationary pressures by reducing the reliance on manual labor to a level that health systems cannot achieve by themselves.

In closing, I'm very pleased with our team's performance in the fourth quarter and look forward to continued improvement in our operational results over the course of 2023. In light of our results, scaled global operations, and intelligent automation, we believe we're well-positioned to address the challenges providers are facing. I am excited about the long-term outlook for R1 and the earnings power of this company when current contracts are fully ramped. We look forward to executing on that opportunity as well as new wins to drive additional growth.

Now, I'd like to turn the call over to Jennifer to provide additional details on our financial performance.

Jennifer Williams

Thank you, Lee, and good morning, everyone.

We are pleased to report solid fourth quarter results with revenue of $532.8 million, up almost 34% year-over-year, and adjusted EBITDA of $125 million, up 31%. For the full-year, revenue grew 22.5% to $1.8 billion, and adjusted EBITDA grew nearly 24% to $425.5 million. These results include Cloudmed revenue of $126.5 million in Q4 and $260 million for the full-year after the acquisition closed in June 2022. Excluding Cloudmed, organic revenue growth was approximately 2% year-over-year in the fourth quarter, and 5% for the full-year. Growth was slower than prior years due to lower incentive fees and lower physician revenue.

Adjusted EBITDA margin for the year was 23.6%, up 25 basis points compared to the prior year.

Now, let's review the fourth quarter in a little more detail. Net operating fees of $344.4 million grew approximately 4% or $12.4 million year-over-year and $20.2 million on a sequential basis. The increase was driven by contributions from new end-to-end customers.

Incentive fees in Q4 totaled $25.9 million and declined $9.9 million on a year-over-year basis due to the impact of the payer timeline dynamics we discussed on the last earnings call. While down year-over-year compared to Q3, incentive fees increased $5.1 million. This is due to our operational efforts and response to the increased payer reimbursement timeline.

Other revenue, mostly revenue from our modular solutions, was $162.5 million. This revenue grew $131.4 million year-over-year, primarily due to the Cloudmed business. On a sequential basis, modular revenue was up $11.5 million due to Cloudmed's strong performance in the fourth quarter.

Moving to expenses. Non-GAAP cost of services in Q4 was $364.5 million, up $85.4 million year-over-year, driven by Cloudmed, costs related to the onboarding of new customers, and operational investments to support new growth. These increases were partially offset by savings across a few areas, including automation, incremental global transitions, and vendor rationalization. Compared to Q3, non-GAAP cost of services was up $37.6 million, primarily driven by new customer employee transitions that took place in Q4.

Next, non-GAAP SG&A expenses of $43.3 million were up $18.6 million year-over-year, primarily due to Cloudmed. Compared to Q3, non-GAAP SG&A was down $1.8 million due to the allowance for credit losses incurred in Q3 and partially offset by healthcare and other corporate costs.

Adjusted EBITDA for the quarter was $125 million, up almost $30 million year-over-year. The increase is a result of the Cloudmed acquisition, offset in part by investments to implement significant new customer wins in the year. Relative to Q3, adjusted EBITDA was up $1 million. This is due to higher incentive fees quarter-over-quarter and higher revenue from Cloudmed in Q4. These increases were offset by cost of onboarding new customers.

Lastly, in Q4, we incurred $47.4 million in other expenses. These expenses were primarily related to the Cloudmed integration costs and to completing the buildout of our new business services center in the Philippines.

Now, I'd like to comment on a few areas of the balance sheet. Cash and cash equivalents at the end of December were $110.1 million, compared to $131.1 million at the end of September. Cloudmed integration costs and higher AR balances due to timing of payments from certain customers drove the use of cash in Q4. These payments were subsequently received in early January.

Net debt at the end of December was $1.7 billion. Net debt leverage for credit agreement purposes was 3x, and we had liquidity of approximately $609 million at year-end. This liquidity includes cash and cash equivalents and availability under our revolver. We expect our net debt leverage to decline over the course of this year.

Now looking forward to 2023. As previously announced, we expect to generate revenue of $2.28 billion to $2.33 billion, and adjusted EBITDA of $595 million to $630 million. Embedded in our outlook are the following factors: one, an expectation of 20% year-over-year growth at Cloudmed; two, operational improvements, which should generate higher incentive fees quarter-over-quarter; three, operational cost improvements as our new business matures; and finally, a realization of cost synergy through the year as we continue the Cloudmed integration.

I would also like to provide an update on the overall Cloudmed integration, which is progressing very well. We have integrated our organization across each function. Our corporate systems, including core HR and finance systems are mostly consolidated. And last, the overall organization is working to transform its delivery model to best serve our customers.

We previously provided guidance that we expected to realize $15 million to $30 million of cost synergies in 2023. We now expect those savings to be towards the higher end of the range. We also remain confident in our ability to realize significant revenue and cost synergies longer-term.

In Q1 2023, we expect adjusted EBITDA growth of approximately 5% relative to Q4 as we continue executing against our priorities.

Overall, we are very pleased with our Q4 results and our operational performance. As Lee mentioned, 2023 will be a year of execution as we implement new end-to-end wins from 2022, continue to generate strong modular growth from Cloudmed and largely complete the integration of the Cloudmed acquisition.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And first we will go to Charles Rhyee of Cowen.

Charles Rhyee

Good morning. Thanks, Lee and Jennifer for all that. Hey, I just wanted Lee, just to follow-up on your comments that what you're seeing in the market here, it sounds like what you're saying is, you're seeing improvements in the AR days on the increased cycle times for claims has declined from last year. Is that coming from your end putting more resources in or is this -- are you seeing improvements on the payer end first?

Lee Rivas

Yes. Thanks, Charles. So we are seeing moderate improvements on the payer end and then our ability to impact it is very positive. So a couple of points here I'll make, Charles. We're seeing moderate improvement. We're seeing staffing slowly improving on the payer side around claims processing. We are deploying resources to your point against our customers on this dimension as well as automation. We expect the trend to continue in 2023, so really moderate improvement on the payer side. And our 2023 guidance assumes that.

The other thing I point out is, the reason we're applying relatively conservative assumptions in 2023, is our customers renegotiate with payers in the first half. So we see potentially positive impact in 2024.

Charles Rhyee

Okay. That's helpful. And as we think about the 1Q guidance, Jennifer, you said about 5% up sequentially. Related to incentive fees though, should we think about that the same? Because I know I think Lee, you said you kind of assume incentive fees themselves improve modestly through year, but from the -- from 4Q to 1Q, how should we think about that?

Jennifer Williams

From 4Q to 1Q, I would assume that incentive fees are fairly flat quarter-over-quarter starting at the beginning of the year, and then they will improve modestly quarter-over-quarter through the year.

Operator

And now we'll take a question from Michael Cherney of Bank of America.

Michael Cherney

Good morning, and thanks so much for taking the question. I want to talk about the pipeline. Clearly, 2022 was a record year. We all know the logos you put up as you think about into 2023 and maybe even building beyond that, how do you think about that, your ability now, especially Lee being in the CEO seat or I guess desire to continue to take on customers and is there any changes, especially given the activities on the payer side that you saw in the 2022 that are continuing, that give you pause or any changes in terms of the way that you want to work on phasing in new customers as they come to you?

Lee Rivas

Thanks Mike. Let me touch on the first part, just the state of the pipeline and then make sure I get to your -- the second part of your question around phasing. So the pipeline is very strong. And specifically, I'll talk about the end-to-end pipeline and maybe touch on the modular pipeline. I've personally been engaged along with Kyle on -- in several discussions the last few months. And anecdotally with systems that are considering outsourcing, we're hearing the same things. Significant financial pressure, lack of tech investment or the ability to invest in tech across their enterprise and then continued labor challenges. So anecdotally, we continue to see demand for end-to-end solutions.

The other thing I'd add that's unique relative to the integration of Cloudmed is we have even more avenues to drive the pipeline. So one is we have 94 of the top 100 systems within Cloudmed with at least one solution sold. That gives us close visibility with the head of revenue cycle of each of those organizations. And we're able to see where there's needs on the end-to-end space.

The other piece is, this is touching on the modular pipeline, which is also very strong predominantly Cloudmed, but also some of the R1 legacy modular solutions. We are able to cross-sell the R1 legacy modular solutions into the Cloudmed base of hundreds of customers. So those are things I'd point out.

Now to your second question on phasing, look, it's difficult to predict when we have demand and how that phases, but to the extent we can, our pipeline is pretty balanced between IDN large, IDNs and physician groups. So we feel very good about the capacity we've added and the ability to hit the $4 billion of new NPR in the back half of this year.

Michael Cherney

Got it. And then you know what, I'll leave it there for now. I'll let other people hop in. Thanks.

Lee Rivas

Okay. Thanks Mike.

Operator

And now we will go to Glen Santangelo of Jefferies.

Glen Santangelo

Hi, yes, thanks for taking my question. I also wanted to sort of follow-up on the pipeline, Lee. Last year the company signed $13 billion in new sort of end-to-end business and at the time, increased its onboarding capacity I think to $9 billion. Could you just sort of give us an update on sort of where you are in terms of onboarding capacity? How much of the $13 billion maybe you've already brought on? How much of that will come in, in 2013? And how we think -- how should we think about the setup as it relates to 2024?

Lee Rivas

Let me touch on just the operation components of your question and then I'll let Jennifer add in. So, just stepping back, we have on the end-to-end side $55 billion of NPR in our end-to-end space of which call it $19 million, $20 million is still in some phase of onboarding, right, which we've talked about before, it's why we're so confident in the earnings power of the business with essentially a 100% customer attention and ability to onboard that over time and drive to our EBITDA numbers.

The thing I'd point out the largest implementation obviously is Sutter, myself, the team, we're all very, very close to that. It's very much on track Phase 1, largely complete with centralized functions integrated. Phase 2 is a back half of this year with additional tech integration. So -- and then I would also add there's several other integrations happening that we're very close to. So operationally, we feel very good about keeping those implementations on track. Jennifer, do you want to mention capacity?

Jennifer Williams

Sure. So we publicly said that we had $13 billion in new business in 2022. We are currently onboarding $8 billion of that. And if you think about the remaining $5 billion, it will be late 2023 going into 2024. So you will really see the impact of that in 2024.

Glen Santangelo

Okay. Perfect. And Jennifer, I just wanted to follow-up on the 1Q guidance again. Based on sort of your target for call it roughly $131 million in EBITDA in Q1, that's only about 21% of your full-year guide if I use the mid-point. Now, I know there were a number of things that may be impacting that, that 1Q number, you call that maybe lower than normal incentive fees. Maybe there were some incremental onboarding costs. There's been some integration issues we've talked about in the past. Could you maybe just comment on that 1Q number and how we should think about the ramp as the year progresses? Just sort of given some of the embedded costs we knew from the past couple of quarters? Thanks.

Jennifer Williams

Sure. So embedded in Q1, as I said earlier on the KPIs relatively flat to Q4. We will some -- see some increases in base fees. Cloudmed is growing 20%. So we'll have some growth from that. As we -- so that's really what's embedded in Q1. As we move through the year to your point that it was 21% of full EBITDA, there are multiple drivers that are going to continue to increase EBITDA as we move across the year. So number one is new business. We've -- as I said, we're ramping the $8 billion. That margin will continue to mature as we get it in, and we onboard and ramp those customers and then begin to cost takeout on that to improve the margin.

Two is, all those incentive fees from Q4, Q1 will be relatively flat. We do expect modest growth quarter-over-quarter through the year on incentive fees. Cloudmed growth will continue. So if the strong bookings that we had in 2022 are implemented, we'll see continued growth as we move through the year.

And then the last piece we mentioned cost synergies. So $15 million to $30 million of cost synergies we expect to be on the higher end of that range, and those synergies will be realized through the year, and will drive incremental EBITDA quarter-over-quarter.

Operator

And now, we'll go to Stephanie Davis at SVB.

Stephanie Davis

Hey guys, congrats on the quarter, and thank you for taking my questions. I was hoping you'd give us an update on some of the internal turnaround initiatives on staffing and tech. Could you give us a quick highlight on what's been done so far since you've taken the range, Lee, what's still running thin and what's in the docket for 2023?

Lee Rivas

Sure. Let me just kind of Stephanie, just step back and just talk through priorities and then this will be addressed operational execution including tech. So as I step back, I am privileged to lead a great business that foundationally has a large market, $115 billion growing very well with an end market that meets us now more than ever. The things I'm personally focused on are very execution oriented.

So number one by a mile is customer engagement. I've personally been involved along with Kyle, John, our President, Jennifer's been engaged with our current and prospective customers. So that's very much top of mind for me the number one priority. Related to that is operational execution. That includes, to your point, staffing up to address any operational customer issues. That includes the point Jennifer made about executing on synergies.

The third piece for me is tech enablement. I believe that there's a huge opportunity for us, given that we are already deeply embedded in the customer workflow. I personally visited several facilities, and when you see the impact of once you're embedded, the ability to apply all the pieces I talked about, whether it's data and analytics, AI, machine learning, and what we call optimal workflow to prioritize task on behalf of our customers, whether that's front end, middle, or back is huge for us.

And the fourth thing Stephanie that I've personally been focused on is driving people and culture and creating an inspired organization, which in my mind is very easy to do given our mission, which is to help providers do what they do best. So those are the big pieces. I'm happy to go deeper Stephanie in any area.

Stephanie Davis

This is a weird area to go deeper in, but it feels like one of the biggest issues with kind of your staffing needs is that there are still a lot of -- there's tight labor markets. So with that in mind, would you ever want to utilize some of these new AI tools like ChatGPT as like a call center efficiency or assistance tool as part of this DTO strategy? It's like a crazy thing.

Lee Rivas

No, no, no. That's a good question. The short answer is yes. So just a step back, one of the areas we feel like we're uniquely positioned is to address a tight labor market and inflationary labor market because of our ability to deploy resources, not just in the U.S. but also in India and the Philippines.

Now that said, we're constantly looking for efficiencies. I was asking our operators about this very question because obviously this is in the news a lot. For sure, we're going to be a fast follower on applying those kinds of tools across our business including our operations center. The thing I'd point out on the whole concept of AI is we are uniquely positioned because of this underlying foundational piece, which is we already have the underlying data and what I would call models or we've previously called algorithms. So through Cloudmed and the end-to-end business, we see 500 million patient interactions a year. So therefore, we're able to see across all 50 states, all payer types, all care settings, and are able to apply or build models that can then automate processes. So when I talk about automation, or you've heard me talking about intelligent automation, that includes the concept of having the underlying data and models to drive repeatable process and then reduce the need for labor to your point.

Operator

And next we have Scott Schoenhaus of KeyBanc.

Scott Schoenhaus

Hi, Lee and Jennifer, I wanted to dig more in on the Cloudmed side of things. So you mentioned now you have 500 modular customers with $850 billion of NPR, strong pipeline and expect 20% growth this year in Cloudmed. It was up I think you said 11.5% sequentially in 4Q. How should we think about the cadence of this growth throughout the year? Is there any seasonality or timing of upselling that we should be thinking about?

Lee Rivas

Scott, let me start with just how things are going on Cloudmed and then hand off to Jennifer to talk about some of the sequential growth questions you had.

Here is what I'd say, just stepping back this is a business that is essentially a safety net for providers, identifying opportunities for incremental revenue yield through coding inaccuracies, lack of people or technology investment, so -- and with a frictionless implementation that is easy for customers to consume.

And when you add in that we already have the majority of the top 100 U.S. systems with at least one solution sold, a big part of our strategy is cross-selling our solutions into that customer base. So a couple things I'd point out just to directly answer your question. One is we're meeting our financial targets and feel very good about 2023. Second is, integration is going very well on the people side with the organization largely integrated, the commercial organization integrated, I mentioned the cross-sell opportunities there. The back office integrated and tech integration going very well.

So those are the pieces that a little bit of color I'd add here. The interesting thing what's happening in the market is with labor shortages, we are seeing significant demand for AR and denials management solutions, both on the clinical administrative side. So that's -- that is a distinct capability we have of deploying a repeatable process and identifying areas around AR and denials.

The other place we continue to see demand is a very tech-enabled solution around coding accuracy. So across our solutions we're seeing a lot of demand that supports the 20% growth assumption into 2023. Jennifer, do you want to talk about sequential?

Jennifer Williams

Yes, there's not really a lot of seasonality in the Cloudmed business. The growth comes from implementation of bookings. So it's really commercial expansion on new wins. And that happens, there may be some lumpiness in the timing of bookings through the year, but we haven't seen a lot of seasonality in the overall base business.

So -- and think about our implementation timelines are usually around, call it, three months. So from the time we win a deal until we get it implemented, it's roughly 90 days, and then it starts generating revenue.

Scott Schoenhaus

That's really helpful for all that color. Thank you. Just my follow-up is then what's the current EBITDA contribution or margin profile on this business currently? I remember when you bought -- when RCM bought Cloudmed legacy margins were running at 43%. If we assume a 20% growth on this business, this would imply some nice contribution this year considering the ongoing consolidation efforts you guys are doing?

Jennifer Williams

Yes. As we continue to integrate this business, we will not have a full margin profile for it. So as I mentioned, from a synergy perspective and integration update, we've already integrated a lot of the corporate functions. So those are getting pulled into the overall R1 functional areas.

But the way to think about and we haven't disclosed Cloudmed separately from an EBITDA perspective for a full-year, but the way I would think about it is those margins are in line with what we're seeing in 2022. And then obviously, as we continue to realize synergies in 2023, we would expect those margins to increase the savings we realized.

Operator

And next we have Jailendra Singh of Truist.

Jailendra Singh

Thank you, and good morning, everyone. So first, a quick clarification on the comment earlier around expectations for incentive fees being flat in Q1 versus Q4. Can you help us understand like given your investments in technology and some modest improvement from payer side as well, why are you not expecting any sequential step up there in Q1? And are there any sequential offsets on incentive fees that you should be aware of?

Jennifer Williams

Sure. Some of the incentive fees will build through the year, so there's some seasonality to the beginning of the year. We may have some of them reset their annual metrics, so they kind of build as you go through the year. So that would be one piece of it.

We have applied a lot of resources in labor to stabilize those incentive fees. But just given starting at the beginning of the year and we ended Q4 really strong on incentive fees that we do expect to start the year off flat. Lee, anything to add on technology that you want to add on just kind of in that?

Lee Rivas

Yes. The only thing I'd remind you, Jailendra is part of this is labor but part of this is also, especially with regard to some of the payer dynamics and high dollar claims, some of the more complicated clinical denials is not just applying labor but applying automation and more aggressively, more targeted for our customers in general, but also is applied to some of the KPIs, especially on AR days and so on. So for sure, we're also applying technology.

Jailendra Singh

Okay. And then my quick follow-up, I'm sorry if I missed it, but any update on the two clients you called out last earnings call, Mednax and LifePoint. I believe you previously expected trends to stabilize during the first half. Is that still the expectations? And how do you think about the margin ramp at least two clients in general for maybe this year and next?

Lee Rivas

Yes. So let me tackle the first part of the question. I think Jennifer; you can talk about the margin ramp. So no change, Jailendra, still very positive on progress on all the key cash conversion metrics on both customers. So I've been personally involved in both and very close to all the issues there.

And what I would say is similar theme. We're increasing capacity in the short-term at both customers. We're increasing automation capabilities of both customers. We're also closely engaged on making sure we are integrated with their respective technologies and still no change. I expect both to be at some level of normal, if you will, by the end of the first half. Do you want to touch on the points on margin?

Jennifer Williams

Yes. I would just say on the labor that we've applied against our operations, we continue to keep the same -- keep about the same rate through the first half of the year as we stabilize and make sure that the metrics are moving in the right direction and that we're performing and seeing signs of success. So first half of the year, we would have higher labor against that.

And then as you know, this will be part of our incentive fee improvement through the year, quarter -- this is part of what's baked into that modest improvement quarter-over-quarter through the year as we stabilize and then start to see the impact flow through the financials.

Operator

And next we have Sean Dodge of RBC Capital Markets.

Sean Dodge

Yes. Thanks, and good morning. So maybe staying on the incentive fees for just another moment. Jennifer, you said the expectation is those continue to improve modestly each quarter beginning after Q1. Just to put a little finer point on that. I guess, before Q3 last year, incentive fees were running in the neighborhood of $30 million per quarter. Is that the level we should think about being the target by year-end? Or with the completion of some more client implementations in the interim, is there the possibility there for something even higher as you execute towards that and exit the year?

Jennifer Williams

Yes, that's a good way to think about it with the modest improvement being in that $30 million range by the time we get to the fourth quarter. The other piece is as we onboard our new customers, those incentive fees will start to kick in the back half of the year. We've assumed modest incentive fees because it usually takes a few quarters after we go live, where we're still baselining all of the metrics, and then we start to measure the performance against those baselines. So those incentive fees will -- think about those kicking in slowly Q3 and Q4.

Sean Dodge

Okay. That's super helpful. And then in addition to the payer delays, you also mentioned some other market headwinds. And I think you've said before, patients self-pay is become a more meaningful portion of collections. I think the number on the last call if my memory is right was something like 20% of the collections you do is from patients. Are you seeing any changes in collectibility or any kind of difference in trends outside of these kind of payer dynamics or payer delays?

Lee Rivas

Sean, no change and we've assumed in our 2023 just no changes, continued moderate expectations. On the self-pay dynamics, this is actually a small part of our business. So call it less than 5% of our total business is actually self-pay. So it's -- what we've assumed in 2023 is continued same trend across the Board.

Sean Dodge

Okay. Great. Thanks again.

Jennifer Williams

And Sean, on the market -- Sean, I was just going to say on the market dynamics and the market headwinds, really that implies labor. So both at the payers, which is driving some of the elongated timelines as well as our customers.

Sean Dodge

Okay. That's a good clarification. Thank you.

Lee Rivas

Thanks, Sean.

Operator

And now we'll go to Anne Samuel of J.P. Morgan.

Anne Samuel

Thanks for taking the question. You have a lot of moving pieces in the gross margin this year with incentive fee volatility, Cloudmed integration and synergies. I was hoping maybe you could help us with just how to think about the underlying trend in the gross margin outside of all those pieces and just what the expansion opportunity looks like there. Thanks.

Lee Rivas

Anne, what I'd say is the main drivers touching on both parts of the business; tech is the biggest driver on this dimension on gross margin. So I'll just use, I mean as an example. Even though we are already high EBITDA margins, there's still an opportunity to play more automation, more technology around our workflow to that. And on the end-to-end side, it's the same thing. So you see, over the last couple of years, we have talked about our automation center of excellence. We're continuing that, if anything, doubling down on how we apply automation and AI. So that is really the biggest driver. Jennifer, anything to add?

Jennifer Williams

The only thing that I would add is we've had a significant amount of new business on Board this year. And as you know that the margin on that business is negative the first year as we make the early investment in those clients. And then it will ramp over three years to the target margin. So given the amount of new business that we've had, that's put a little bit of a damper on the gross margins, but we do expect that those will increase in the coming quarters.

Operator

And next we have Elizabeth Anderson of Evercore ISI.

Sameer Patel

Hi, this is Sameer Patel on for Elizabeth Anderson. Congrats on the quarter. I had a quick question just on your guidance. Are you embedding any additional credit allowances for the year? And related to that, have you been able to collect on any of that charge that you took in Q3?

Jennifer Williams

Sure. I'll take that one. No additional reserve taken on the allowance for credit losses specific to that customer. They do have a payment plan, and they are on track, making the payments and of course, that plan. So it's something we'll continue to monitor. But we are in close contact and stay in touch with that customer, and they're obviously still an active customer and making changes that they need to internally. But we -- all signs are positive right now. We don't -- our 2023 guidance does not assume that we take any additional reserves but we will continue to monitor.

Sameer Patel

Good. Thanks. And just, Jennifer, you mentioned quickly Cloudmed bookings. Can we expect any additional disclosures going forward on Cloudmed more on like a quarterly basis? Or is it sort of as is --

Jennifer Williams

Yes. We will probably continue to provide some -- yes, as we continue to integrate the business, obviously, just looking at the Cloudmed piece becomes more difficult. We're integrating the Cloudmed business into the more -- the broader modular business within R1. But if you think about the modular piece, which is really that other revenue, most of it is Cloudmed. So I don't know that we'll continue to disclose and callout Cloudmed specifically, but it's really most of that modular piece anyway.

Operator

And next we'll go to Craig Hettenbach of Morgan Stanley.

Craig Hettenbach

Yes. Thanks. A question for Lee, just around the opportunity to perhaps reaccelerate growth in some of the legacy R1 modules and like VisitPay and anything to note around under Kyle's leadership, things that you're doing from a cross-sell perspective and the module business more broadly?

Lee Rivas

Yes, Craig, great question. So I would just lead off with having worked with Kyle and seen the commercial model he built over the last five years at legacy Cloudmed, I'm very confident on this front. So he built a model of revenue cycle experts that can have very deep discussions with our customers coming from the same category of Kyle from early entrants into the end-to-end and in our case, in the Cloudmed side, the revenue integrity space. So the first thing I'd say is having seen lots of sales models in my career that he's built an incredible model that is geared towards a balance of cross-selling into our customer base as well as driving net new business in some markets we haven't been as focused on over the last couple of years.

The other thing I would say is we are excited about the legacy R1 modular solution. And just as an example, the patient payment business we built R1 bought a couple of years ago, VisitPay, we're actually very excited about that and the ability to have deep conversations with the customer base or the 94 of the top 100 that, in many cases, R1 hasn't accessed those and had been able to have those discussions. So we're very excited about the patient payments piece, also very positive on physician advisory solutions.

So there's just a lot of opportunity to take those R1 legacy modular solutions and start to have the discussions and build the pipeline. And just anecdotally, we've already had at least one key win up in the patient payment space selling into the Cloudmed base. We're also seeing the pipeline build across the Board.

Craig Hettenbach

That's helpful. And then just as a follow-up, any comments on what you saw just from a utilization perspective in the market in Q4 and how you were thinking about utilization as it influences your guidance for 2023?

Lee Rivas

Jennifer, you want to take that?

Jennifer Williams

Sure. We saw low-single-digit growth in the back half of and Q4 specifically and embedded in our guidance is roughly the same utilization rate going forward. So think about that as low-single-digit growth.

Operator

And now we'll take a question from Jack Wallace of Guggenheim.

Jack Wallace

Hey, good morning. Thanks for taking my questions. Congrats on the quarter. Most of mine have been asked and answered, but I want to touch on the pipeline comments that Lee, you made, about $4 billion of incremental NPR wins to be had on top of the $5 billion of Sutter expected in the back half of the year. Of that $4 billion of NPR, how much of that is a cross-sell from legacy Cloudmed customers? And how much of that is a de novo customer expectation? Thank you.

Lee Rivas

Jack, what I would say is that it's hard to tell like what materializes back half. But I would say anecdotally, what I'm seeing is I mean, just by definition, any large IDN is 94 of the top 100 are Cloudmed customers. So just -- I'll give you an example, Jennifer and I and Kyle were on a prospect meeting just the last few days. And this customer happens to use our DRG validation and our underpayment solutions. So there -- they already have a knowledge base of what we can do for them to drive incremental revenue yield.

So now whether that converts or not, there's -- look, there's a lot of steps involved in any of these complex negotiations. And that, by the way, is another example of we heard verbatim, the themes around financial pressure, inability to hire, inability to invest in technology. And part of our pitch, if you will is we are very well-positioned to resolve some of those issues. But the moral of the story, they already know Cloudmed.

And so the -- any IDN and really the six of the 100 are -- we're still trying to go get them. They tend to be academic medical centers; tend to be in the Northeast, so that's that.

On the other side, with the de novo, it tends to be a physician group customer, which just by definition, Cloudmed journey was very much focused on IDNs above call it $2 billion of NPR. We in the last 18 months made a push in the physician group space. So that's where you get a lot of net new customers if you will.

Jack Wallace

Got you. Thank you, Lee. That's really helpful. And then Jennifer, this one is for you. Just thinking about the incentive fee guidance for the year and just trying to extrapolate this going forward. Historically, some of the incentive fees got to about the 12% of base operating fees and thinking back in 2021, thinking about what is a reasonable expectation for a high watermark for that percentage once the book of business is at a mature level? And obviously, you're going to be adding new customers every year. So on a blended basis, you won't be fully mature. But on a mature contract, what is that kind of a reasonable high watermark?

Jennifer Williams

Yes. It's hard to give a specific percentage for individual contracts only because every deal is different. And so some customers want to minimize the variability in quarter-over-quarter that they would incur. And so by nature of the contract, it's going to be lower. So it will vary. But typically, in our contracts, we have some sort of incentive fee in all of them.

Now historically, the KPI revenue has actually been in the 5% range of total revenue. So a fairly small percentage of revenue as Cloudmed continues to grow, I would expect that that would decrease over time a bit if you're looking at it against total revenue. But specific to 2023, if you think about by the time we get to the end of the year, that $30 million in the quarter is what's reasonable.

Operator

And we will go to George Hill of Deutsche Bank.

George Hill

Yes. Good morning, guys, and thanks for taking the question. I'm going to take a shot at a few numbers questions here, which is firstly, Jen, have you guys quantified what the pipeline opportunity looks like for 2023? And then, Jen, it sounded like you were saying the synergy target might exceed the $85 million target prior. I just wanted to double check that. And then my last question would be kind of can you talk about CapEx expectations and cash flow outlook for 2023?

Lee Rivas

Yes. George thanks for the question. So we have quantified internally pipeline, but we haven't disclosed that publicly. What I would say, having looked at different models around pipeline and how those convert to new deals specifically Cloudmed, but I've also been involved in business with -- businesses with much larger deals. I would say I feel very comfortable with the model, the pipeline model and our ability to convert this year, but also in the long-term.

The only difference I'd point out is, George, that the end-to-end obviously are highly complex. These are very sophisticated negotiations who have longer sales cycles, whereas the Cloudmed deals tend to be super quick sales cycles, especially if you're talking about a new booking with a current customer. So I have to be cognizant of that as I assess the pipeline. But overall, we feel very positive about what I see. Jennifer?

Jennifer Williams

Sure. And specific to the synergy, the $15 million to $30 million range that we gave for realization in 2023, we believe we'll be on the high-end of that range. But we're still on track for the overall $85 million of synergies.

And then specifically CapEx and cash flow, on CapEx, think about it as a 5% to 6% range of revenue in 2023. And then on cash flow, we have lower cash flow conversion in 2022, primarily driven by transaction costs associated with the Cloudmed transaction.

In 2023, our cash flow will still be lower than what a normal steady state would be because we're spending investments to integrate the business. And part of that is cost to achieve the $85 million of cost synergies that we expect to get longer-term. So we'll still continue to have a fair amount of integration costs in 2023. But as we get into 2024 and beyond, I would expect that cash conversion to improve significantly.

Operator

And now we will go to Richard Close of Canaccord.

Richard Close

Great. Thanks. Congratulations. Jennifer, maybe looking at the guidance and to wrap a bow on everything that's been said here this morning, can you just like give us some thoughts and what gets you to the high end? What gets you to the low end? What has to happen on each of those?

Jennifer Williams

Sure. What gets us to the high end of the range, we've talked about base fees is the largest piece of our business. So there are a lot of moving pieces here, but we've assumed low-single-digit growth for utilization increases. And so to the extent that utilization is higher than that that could be one driver to being at the higher end of the range there.

The other is incentive fee. We've assumed modest improvement with higher labor costs to get those incentive fees. So to the extent that we see earlier wins on that, we see payer timelines coming down faster than what we've assumed, then that could be another large driver.

We feel really confident on the Cloudmed we’ve had high visibility into the 20% growth there. Obviously, bookings come in much higher first half of the year. We could see some incremental revenue there. And then we have a lot of visibility into the cost synergies, so I do think that they'll be in that range.

Operator

And with that, that does conclude today's question-and-answer session. I would like to turn things back to Lee for any additional or closing comments.

Lee Rivas

Thank you.

First of all, I want to say thank you, everyone, for your questions and just add a few closing comments. First thing is we are entering 2023 confident in our ability to deliver on our commitments for the upcoming year. You heard the themes today. We're very focused on operational delivery and execution. We believe we are well-positioned to address some of the end market dynamics we discussed today, which then creates significant commercial opportunities, both on the end-to-end and modular side. And we are very focused on advancing a technology agenda to drive cost efficiencies and value for our customers.

Thank you all for joining us today. We look forward to updating you on our progress on future calls.

Operator

And this does conclude today's conference call. We'd like to thank you again for your participation. You may now disconnect.