R1 RCM Inc (RCM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter Accretive Health Earnings Conference Call. My name is Katie and I'll be your coordinator for today.

(Operator Instructions)

We will be conducting a Q&A session towards the end of the conference. I would like to hand the call over to your host for today, Francesca Luthi, SVP of Corporate Communications. Please proceed.

Thank you, Operator, and thanks everyone for joining up today for Accretive Health's Third Quarter 2011 earnings call. With me today are Mary Tolan, our founder and Chief Executive Officer, and John Staton, our Chief Financial Officer.

I hope you've had the opportunity to review the news release we issued earlier this morning. A copy of that release is also available in the investor relations section of our website at www.accretivehealth.com.

As a reminder, certain statements contained in the conference call may be consider forward looking as defined by the Private Securities Litigation Reform Act of 1995. In particularly, any statements made about Accretive Health's expectations for future financial and operational performance, expected growth, new services, profitability or business outlook are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements.

No assurance that the matters contained in such statements will occur, since these statements involve various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.

These risks and uncertainties include those listed under the heading Risk Factors in the Company's Annual Report on Form 10-K for the year ending December 31, 2010, filed on March 18, 2011, which is available on our website as well as the SEC website.

The forward-looking statements made on today's call are based on Accretive Health's beliefs and expectations as of today, November 9, 2011 only and should not be relied upon as representing the Company views as of any subsequent date. While the Company may elect to update these forward-looking statements at some point in the future, Accretive Health specifically disclaims any obligations in details, even if our view changed.

Please note that today's discussion will include references to certain non-GAAP financial measures. Please refer to today's earnings release for more information on these non-GAAP measures and reconciliation to the appropriate GAAP measures.

After the conclusion of Mary and John's prepared remarks, they will be available to answer your questions. At this time, I would like to turn the call over to Mary Tolan, Accretive Health's CEO. Mary, please go ahead.

Thank you, Francesca, and good morning everyone. I'd like to start by recapping the key highlights for the quarter. We grew net services revenue by 38% year-over-year, adjusted EBITDA by 87% and adjusted EPS by 83%. Last week we signed a significant agreement with Intermountain Health, advancing our leadership position and our revenue cycle business and we continue to make operational progress in quality and total cost of care, which we hope will serve as a model for operational excellence for population health management.

We also turned in another record quarter in physician advisory services so we're pleased with the underlying performance of our business and the progress we're making in signing new customers.

As you know, the most important metric by which we gauge our business momentum and future growth is our projected contracted annual run rate or PCARR, and I am pleased to report that as of today PCARR stands at $960 million to $990 million, a year-over-year increase of $313 million, or 47% at the mid-point of the range, which represents the largest absolute dollar gain in our history.

This underscores the fact that demand for our services strong and that the investments we've been making in our people and our sales capabilities are continuing to yield significant results and will continue to make these strategic investments to ensure our future growth trajectory.

I'd like to provide an update on each of our three offerings, starting with revenue cycle -- with our revenue cycle management business which was an important contributor to PCARR. Just last week we entered into a long-term, strategic relationship with Intermountain Health, a leading health system based in Salt Lake City with a network of 23 hospitals. This engagement represents the second largest customer win in our history and is groundbreaking in several key areas.

First, as many of you know, Intermountain is a wide regarded leader for both clinical and financial excellence and has garnered praise by several (inaudible) leaders in the industry. In fact, Dr. Jack Weinberg at Dartmouth cited Intermountain as, "The best model in the country as to how you can actually change healthcare." That's the kind of recognition they have from their peers in the industry.

We continuously strive to attract prestigious healthcare institutions as partners and to build long term relationships with them, with other examples as you know such as Ascension, Beaumont, Dartmouth, Fairview, Henry Ford and now with this example, at Intermountain Health.

With Intermountain -- while they've already invested heavily in optimizing their revenue cycle and are viewed by many as Best in Class, one of the most efficient operations in the country, not just in revenue cycle but throughout their practices, they recognize that a benefit of our unique end-to-end approach would be to really take their capabilities to the next level and to continue to strive for further enhancements in operating efficiencies as well as in patient satisfaction.

Second, as part of this collaboration we will be establishing a shared services center of excellence in the West, from which we will support Intermountain's revenue cycle operations from the onset, so Intermountain has made the decision to move directly into our shared services options, which we think is -- again -- a really terrific bell weather of the way the market is responding to the investments we have been making. We will then leverage our combined scale to create a robust platform for other participating providers to achieve greater revenue capture and operational efficiencies.

With Intermountain as an anchored customer in the last week, we expect to expand our presence in an area where we see significant opportunities for long-term growth, with an addressable market opportunity of over $200 billion of net patient review.

Now, more importantly, the Center of Excellence will serve as a vehicle for innovation and knowledge sharing and we will focus on developing new capabilities as well a providing educational content to revenue cycle associates nationwide and we're going to be providing this educational support, not just for people who are current customers, but for all revenue cycle professionals who seek this educational experience and we will be helping to set new standards for professionalism in the industry.

Finally, we expect this agreement to serve as the basis for further collaboration across many other fronts in terms of where we are innovating in our product and services. And, we've decided to accelerate our investment to capitalize on the strategic collaboration. We've been recruiting in Utah to support this engagement and the broader objectives of the Center of Excellence. So, I'm very excited about our direction and future opportunities created through our collaboration with Intermountain Healthcare.

Now, as you look at our overall revenue cycle management portfolio our strategy remains to target opportunities to target opportunities with leading, high-performing new customers as well as to extend our relationships with existing ones. In 2011, we have expanded our relationship with Ascension Health and we look forward to signing additional affiliates in the future.

We view this extended collaboration with Ascension not only as affirmation of the value we deliver, but also as a model of how we build relationships within the healthcare system. We are also moving more Ascension industries into our shared services model with an additional $2.8 billion of net patient revenue moving into our shared care business model in 2011.

Customers are increasingly recognizing shared care services is a win-win proposition, leading to improved margins for both them and Accretive. We except the adoption rate to expand in the face of this compelling economic situation as evidenced by Intermountain's own decision to move immediately into shared services. As a result, we've increased our investments in our shared services centers to capture this growing demand, both in terms of building our Center for Excellence in the West, but also in the Southeast and also to add capacity to our other centers.

Next, I'd like to turn to our quality and total cost of care business, which we anticipate will contribute meaningfully to revenues and profitability in the coming years. We estimate that this is a $100 billion domestic market and we are providing a pioneering and comprehensive infrastructure, enabling hospitals, physicians and payers to effectively manage the health of defined patient populations.

Our inaugural program with Fairview Health continued to show strong, demonstrable results including lower inpatient admissions, reduced readmissions for high-risk patients, and lower overall population costs.

For example, when we collaborated with our client we had seen a 51% year-over-year reduction in asthma management costs and a 28% reduction in chronic obstructive pulmonary disease, to cite a few examples.

So, our operating metrics are trending above where we expected. We have been closely working with our client and the associated payers to validate the data necessary to book incentive revenue. While this has been a time consuming exercise, we believe the results will support the significant reductions in the total cost of care achieved through our efforts to date and we recorded an initial amount of revenue this quarter.

We believe that we are uniquely positioned to expand this offering. We are in advanced discussions with other prestigious healthcare institutions around quality and total cost of care and anticipate these prospects moving into the final contracting phase in the near future.

As you know, the final contracting phase we have is a very tight definition where all terms have been agreed and everything has been signed off by governance, and we are now simply in the legal contracting and papering phase.

So, we're very optimistic about the future for a number of our existing -- sorry -- we're moving forward here. We believe that this capability is really applicable to all hospitals in the sense that we are also finding breakthroughs in intra-stay quality and this is something that you don't need to have a population health incentive to be able to advantage of, so we see great expansion there.

And finally, our physician advisory services offering -- where we help hospitals manage their compliant revenue associated with critical care visits -- continues to grow at a rapid pace as hospitals face increased regulatory pressures and intensifying audits. In 2011 alone we added well over 100 new customers to our physician advisory services network and expect to close a notable number of hospitals before year end, so there is continued momentum.

From a customer adoption perspective, physician advisory services now support almost one-third of our revenue cycle customers and we see additional opportunities, not only for cross selling our capabilities but also capturing market share. Our focus on compliance, service quality, rapid response time, superior analytics and measurable continuous improvement are cited by clients as key differentiators, that have enabled us to win far more than our fair share in competitive arenas.

I am pleased that we continue to execute a gainful strategy of delivering tangible value for healthcare providers, their patients, physicians and staff. We have built a world-class portfolio of customers to ensure sustainable long-term growth, industry leadership and market innovation. Now, I'll turn the call over to our CFO, John Staton, to review our third quarter results and outlook.

Thanks, Mary. Good morning everyone and thanks for joining our call today. Let me review the highlights from the third quarter of 2011.

As you recall, PCARR -- that sounds for Projected Contracted Annual Revenue Run Rate -- is a measure of our expected, really total net revenue, over the next twelve months for customers under contract.

As Mary reported earlier, as of today, PCARR is in the range of $960 million to $990 million, which represents a 47% year-over-year increase, and a 9% increase from our last earnings call, reflecting significant new wins. This robust growth demonstrates our success in generating new business on the strength of our service offerings, our compelling customer value propositions, and the talent of our people.

As expected, PCARR in the final stage contracting now stands between $40 million and $50 million, reflecting our success in selling new customers, including Intermountain and Beaumont earlier this year. This range reflects only those opportunities for which we are looking to sign over the next few quarters and does not reflect the totality of the market opportunities we are pursuing in any point at any time.

In fact, we have a number of exciting opportunities which we expect to move into final contracting shortly, as well as a number of expansion opportunities with existing clients that will go from pipeline directly to PCARR, bypassing the final contracting phase. We continue to feel positive about the overall momentum in our business and the continued expansion of our total pipeline.

Now, turning to our income statement. Total net services to revenue in third quarter grew year-over-year 38%, to $218.9 million. Looking at our revenue breakdown for the third quarter, net-based e-revenues were $177.3 million, an increase of $41.2 million over the third quarter of 2010. Incentive revenue -- which is our share of the benefits we generate for our customers -- was $29.7 million for the third quarter, an increase of $10.6 million over 2010.

Other services revenue was $11.9 million for the third quarter of 2011, an increase of $8.6 million over the third quarter of 2010, largely driven by the robust growth in our physician advisory services business. In addition, our numbers for the quarter reflect a small amount of quality and total cost of care revenue.

Our operating margin for the third quarter increased by 52% to $49 million. Operating margin as a percent of net services revenue for the quarter was 22.4%, an increase of 210 basis points year over year. This was driven by the increase profitability of our maturing contracts, where both incentive revenue and greater cost efficiencies, includes shared services adoption, contributed to the margin expansion.

Moving down the income statement -- our infused management and technology expense in the third quarter was $21.3 million, or 9.7% of net services revenue, compared to $15.8 million, or 9.9% of net services revenue last year. The $5.5 year-over-year increase includes among other things management and personal hires and training in anticipation of the deployment to Intermountain Healthcare and other engagements.

Selling, general and administrative costs were $15.5 million for the quarter, or 7.1% of net services revenue, compared with $11.9 million, or 7.5% of net services revenue for the prior year's third quarter. The $3.6 million year-over-year in S,G&A reflected among other things a $1.6 million in sales and marketing costs associated with bringing on board senior level sales executives who are starting to drive substantial new business activity. While S,G&A may fluctuate quarter to quarter, we expect continued scale efficiencies in S,G&A and infused management as we grow our business.

We believe adjusted EBITDA, a non-GAAP measure, is the most constructive metric for measuring the underlying profitability of our company. For the third quarter of 2011, adjusted EBITDA was $21.7 million, an increase of $10.1 million or 87% over the third quarter of 2010. This excludes stock comp expense of $7.3 million, and $5.3 million in the third quarter of 2011 and 2010, respectively. This quarter our adjusted EBITDA margin increased by 260 basis points year over year to 9.9% of net services revenue.

As we have discussed, we believe there is meaningful offering leverage in our business model and I'd like to take a moment to explain that in greater detail. As our contracts mature, we are able to realize greater revenue lift for our customers, which in turn enables us to recognize incentive revenue in later years. This incentive revenue falls directly to the bottom line. So, while we will still have to absorb the dilutive effect of new contracts, we expect our EBITDA margin to gradually increase over time. Based on our strong reputation in the marketplace and track record for driving results, we have been able to expand our share of customer benefits delivered.

Also, as we move more customers into our shared service model we expect to benefits from the resultant cost efficiencies. Finally, as our book for business grows, we are able to allocate our fixed costs over a large base of revenues and gain economies of scale. Therefore, we continue to expect margins to gradually increase each year as our portfolio matures and our business is able to absorb new customer wins.

Our effective tax rate for the third quarter is 40.6%, compared with 36.1% in the third quarter of last year. Last year's third quarter was affected by a one-time change in gross receipts state taxes in one of the states in which we operate. Therefore, we continue to model an effective tax rate in the 40% to 41% range for this fiscal year and beyond.

Net income for the third quarter of 2011 was $7.3 million, as compared to $2.9 million for the third quarter of 2010.

Non-GAAP adjusted net income was up $11.7 million in the third quarter of 2011, compared with $6 million for the third quarter of 2010. Non-GAAP adjusted EBITDA was $0.11 for the third quarter of 2011, compared with $0.06 for the prior year's quarter.

Now, turning to our balance sheet. Our balance sheet remains solid with $182.1 million in cash and equivalents and no debt. This represents an increase of $31.8 million over the second quarter of 2011, and $26.1 million over December 2010.

Accounts receivable for the quarter totaled $106.7 million, which represents a DSO of 45 days. This is an increase of $14.7 million from the end of June, and an increase of $52.8 million over the end of the last year. I would like to spend a minute discussing our receivables.

The majority of the $52.8 million year-to-date increase in accounts receivable occurred in the first half of 2011. We experienced growth in that services revenue associated with both our revenue cycle and physician advisory services offerings. As we were on-boarding these new customer relationships it took us longer to collect our base fee than expected, which temporarily inflated our accounts receivable. We are confident in the collectability of these receivables. In fact, looking our operating history from 2006 to 2010, we have written off less than 0.1% -- again, we have written off less than 0.1% of net services revenue over that period.

So, we view this increase as a constant coincidence of our high growth. In fact, looking at the third quarter our DSO had actually decreased by one day sequentially, from 46 days in Q2 to 45 days as of September 30. We are committed to reducing DSOs further, and are targeting DSOs to be in the range of 35 to 38 days by year end. We have already made progress.

By the way, as we expected, we are receiving full payment of the $7.7 million outstanding receivable in the fourth quarter. This AR was disclosed in our second quarter 10-Q.

Looking at our cash flow. Our cash from operations is $31.1 million for the third quarter, as compared to $9.3 million in the third quarter of 2010. Our free cash flow is defined as operating cash flow minus capital expenditures and the acquisition of software was $28.9 million in the third quarter, as compared to $4.7 million for the third quarter of 2010.

I'd now like to turn to our outlook for the full year. As outlined in our press release we are revising our guidance for the full fiscal year of 2011. We are increasing our year-end PCARR estimate to be in the range of $970 million to $1 billion for the year ending December 31, 2011. This PCARR reflects a year-over-year increase of 40% at the mid-point of the range and provides us with a robust book of business for 2012.

Net services revenue is now expected to be in the range of $820 million to $835 million, which at the mid-point of the range represents strong growth of 36% over 2010. Let me walk through the primary factor for the revised range.

As we have previously explained, our base fee revenues are affected by the timing of contract signing in any given quarter. While we already exceeded our original PCARR target for the year, several large deals included in our PCARR were signed later in the year than expected. As a result, we will recognize lower than anticipated base fee revenues from our revenue cycle management business in 2011. This is a timing issue only and we believe these contracts will draw significant growth and profitability in the future.

We now expect Fiscal Year 2011 adjusted EBITDA of $78 million to $82 million. The revised range reflects the investments we are making to capitalize on the momentum we are seeing in our business right now. In light of the strong year-to-date signings and expansion of our pipeline we are investing executive talent to ensure we have the depth and breadth of resources to execute to a high standard. Furthermore, we are making strategic investments to enhance our industry leadership prediction and to expand our geographic reach with our recently announced center of excellence in the West.

Furthermore, we look to incubate new offerings, including initiatives such as intrastate quality as well as explore international opportunities. As a result of these factors, we now expect (projections) diluted on these per share of $0.42 to $0.44 for the Fiscal Year 2011.

We feel positive about 2012. A robust, year-to-date PCARR position has to deliver continued, strong growth and we will continue to manage our business to expand our margins in the long run, while absorbing the short-term impact of new customer (inaudible) investments. As always, we look forward to providing our full Fiscal Year 2012 guidance in our fourth quarter earnings call in February. Mary.

Thank you, John. And I'd like to thank everyone for participating in our call today and for your interest in Accretive Health. We're confident in our ability to achieve our objectives and are even ore excited about the great growth opportunities we see ahead, and we look forward to keeping you updated on our progress.

Before concluding our call, we'd like to go ahead and open up the call here for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Atif Rahim of JPMorgan. Please proceed.

Hi, thanks and good morning. A quick question on the PCARR, to start off with. It looks like the PCARR as of September 30 was down versus what you had reported on the prior call, and then obviously went up after the Intermountain announcement, so anything that happened between your last call and September 30, or any dynamics going on there that might have resulted in that decline in PCARR?

Yes, (inaudible) this morning. Our PCARR, obviously as you know, is twice what we expect our existing contract for the next twelve months. It includes both marketing expansion and new client wins, any transitions we might have within our client portfolio.

Good. So, there is one that's been widely speculated -- I don't know if you can discuss it though specifically -- but characterizes one, I think in the market, is widely speculated to potentially go away. Would that be the one that's potentially falling out of your PCARR here?

Okay, I think, again this reinforced. We do reflect all of our current client contracts without PCARR, and we do not disclose contract -- specific client situations.

Okay. Okay. Understood. Secondly, on the additions to PCARR -- are the 23 hospitals at Intermountain coming on at once or is this going to be some kind of slight progression as we look out to 2012, on the on-boarding?

There's a little bit of ramping up. Generally what we do is we take on the largest hospitals from a volume standpoint, with a sort of speed-to-value mentality, and then sort of pick up the smaller and more remote locations. This is actually a very opportune group of hospitals in the sense that they're very geographically cohesive but there are a few outlier hospitals that we'll be -- we'll really be turning our attention to as a bit of a learn.

Okay. Okay. Got it. And then on the center of excellence that you've set up there, have you initiated any conversations with any of the other regional providers in the West, anything that's not in your contract or buy plan perhaps, but potentially falling into that contracting pattern in the near future, and also -- Mary, could you elaborate on the intra-stay quality of care that you discussed? What's the business model there? Do you have clients live on it? How should we be thinking about it?

Okay. Two great questions. First of all, as it relates to the pipeline, yes -- both in the West as well as elsewhere in the country. The quality of our pipeline just above the contracting phase, is better than it's ever been and we're really excited about our investments and our strategic deal executives have been filing that pipeline, both with quality and with quantity of business. So, we feel very good about that.

I do think that Intermountain -- you could not select a more influential partner in the region there than we have with Intermountain, and I think we've been just receiving a tremendous of market interest as word began to get out about this partnership. As it relates to intra-stay quality -- this is a really exciting opportunity in the sense that our background in population health really led us to take a look at breakthroughs -- breakthroughs in the cost of care are going to come in two primary areas -- or at least there's two ways we can look at them.

We can look at them as utilization breakthroughs and we can look at them as unit cost breakthroughs. And, intra-stay quality is an area where we say when somebody is going to be coming into an episode of care in a hospital or in an ambulatory setting, what kind of breakthroughs can we have that can reduce our costs for that episode of care? So, it's not the avoidance of the episode of care that you would get in utilization breakthroughs, but it is actually executing the care better.

In intra-stay quality, this is basically an opportunity active that every single hospital has because you don't have to be with population health incentives. As you know, the whole Medicare population and the vast majority of commercial payers for inpatient stays have contracted with DRG reimbursement, meaning there is one reimbursement that's been negotiated for the stay. So, if a provider can execute that stay with higher quality and lower costs, all of that opportunity or incentives then to capture that additional margin exists.

So, what we're excited about is how innovation in one area of our business in the population health arena actually has opened up a very large opportunity to serve a much even bigger market hospitals who have not yet gotten into population health incentives. So, we're very excited about it. It's also something where a collaboration with Intermountain is going to be instrumental. So, for instance, at Intermountain they have found unbelievable breakthroughs. I'll give you one example. Mortality rates for people with a sepsis infection in the United States in a typical acute hospital will have an average of about 27%.

In Intermountain, they've been able to get that down to about 8%, and they believe they are saving 100 years a year with this breakthrough. Just as importantly -- well, not as importantly, but they are also saving about $79 million in cost because those stays would have gone on longer, even though they were going to get only one reimbursement for them.

So, that's the kind of breakthrough that we are working on with regard to intra-stay quality and making that available, and disseminating it to as many of our customers as possible and, again, the big barrier that it does not have is it does not need population health incentives to be negotiated with payers.

Got it. That's excellent and clear. How should we be saying about the pipeline on that front?

We are under way right now with our first pilot and I think that as we get the results here, I think it's going to be one of those things where we're chasing and running hard to satisfy the demand and it's certainly the reaction that we're getting with our customers. We're already test marketing the receptivity to these ideas with existing customers and they're just waiting for proof points and bring it home.

That's good. Thanks very much.

Your next question comes from the line of Bret Jones from Oppenheimer.

Thank you. If I could just piggyback on that last question there on intra-stay quality. I was just wondering -- who owns the clinical breakthrough? I was just thinking -- would customers be accepting of the fact that you may be rolling out their improved clinical practices throughout your entire customer base, since this is still a competitive environment?

Well, I think the first thing that happens is anyone has intellectual property actually has to agree to wanting to see it get its sort of maximum use and impact in the market, so that's step number one. But I gave you that one example. There are other breakthroughs that are happening. One of the things that we know is that if people have historically found length of stay to be a challenge -- we know that they've been heavily influenced by the Medicare data.

Now, the Medicare data goes with something called the geometric mean. What that geometric mean includes, though, is all of the significant outliers and so heretofore a lot of efforts to improve have waited for a patient to exceed the geometric mean before some sort of response effort was launched, and that actually was a way that had not proven fruitful for reacting to length of stay or to try and drive improvement.

So, what we could see in our dataset -- and this is where our datasets are particularly helpful -- we now have 450 million claims that we are analyzing. What we could see is that there was a huge difference between the geometric mean and actually the median, and even more importantly there was a very achievable cluster around the top quartile. And so, when we could find a very achievable top quartile we could begin to change the mindset that we're going to be able, in a way, proactively plan for a very efficient discharge and stay for a patient that does not have unexpected problems.

So, we actually can improve the situation of intra-stay quality -- both by resolving outliers like the one I mentioned with sepsis infection, but also by gearing up to make every non-problematic stay much more efficient and more able to hit a top quartile performance.

Now, this also has the positive knock-on effect of creating a very high-quality, planned discharge process which then reduces readmission problems, which is a defect. So there's just a lot of different ways that you surround this, both with regard to taking the non-problematic stay and making it more efficient as well as the causes of outlash.

All right. Thank you. That's helpful. If I could turn to the PCARR for a second. If I look at the mid-point of $975 million -- if I were to just simply divide that by 4, I'd be looking at a revenue for the full year of $810 million, and just comparing that to the low end of your guidance as you've fallen below that -- so, I would think that obviously fourth quarter has higher incentive fees, and there's a seasonality effect of that, but I would also expect your base fees to ramp throughout the year and so your base needs to be in higher in Q1, Q2 and Q3 of next year -- I'm just trying to reconcile how we should think about what are the moving parts to get you to the bottom end of your revenue guidance?

Yes, sure, Bret. Here are the key aspects. As you know, from our historical trend lines we have a lot of seasonality in our incentive payments, and they're always larger in the fourth quarter than they are any other quarter. Secondly, as we've discussed, we expect our quality revenue back-end loaded into the fourth quarter. That will be coming through during the quarter.

And then additionally, we continue to see growth in our physician advisory services and how that continues to go. That's not all in PCARR but that will ramp as we continue to go through the end of the year, which will also be additive, and then we also have things still in our pipeline that would give us an add revenue to this year -- we expect -- that would be positive contributors as well.

All right. Great. And then one more, and then I'll jump back into queue. You did lower the mid-point of your EBITDA guidance and I can understand late contract starts really having an impact on the revenue side of it, but when I think about the EBITDA, generally new starts don't have too much of a near term impact. I was just wondering -- the lower EBITDA guidance -- is that attributable to higher investments, lower Fairview contribution in 2011, and then on the offset the shared services seems to be higher than what I would have been expecting. I think Mary talked about $2.8 billion of NTR shifting over to shared services. Is that a plus to your EBITDA this year, or is that in line with what you were expecting?

That's a great question and I think the two things that you mentioned that I would really emphasize here is the amount of investment that we are putting in to land these high-quality deals and to really go after this pipeline of interest that we see and then the second thing is that we're building out a new shared service center, both in the West as well as in the Southeast, and I think also that the conversion to shared services has conversion costs in the early period, so ultimately it's a wonderful unlocker -- or unleasher -- of incremental value but you do have to swallow the conversion costs.

Thank you. Thank you very much.

Your next question comes from the line of Jamie Stockton of Morgan Keegan. Please proceed.

Yes, good morning. Thanks for taking my questions. I guess the first one, John -- you mentioned that you've got a sublevel [Q-top level] revenue during the quarter but it sounded like you're still negotiating or talking about exactly what would drive the incentive fees, so should we take away from that it was mostly base fees that that impacted during the quarter?

No, I don't think that we're trying to convey that. I think one thing is that we have one payer that has determined with us that the data that they have provided has some inaccuracies so we have to get that sort of agreed set of accurate information. But, as we go through this, each one of the payers in that sense is giving us data and then we are agreeing as to the accuracy of the data, and then moving it through in terms of evaluating the benchmarks. So I think that's just the process that we're under way with.

So, the revenue was both base and incentive fees?

Yes.

Okay. And then a couple of other questions -- one was one on the PCARR -- obviously a very nice increase there, both sequentially and year over year. Could you give us any color on whether or not you're seeing any incremental Ascension ministries that are rolling into that? I know that I don't think you include that generally in your contracting pipeline since it's an existing customer. Any color around that would be great.

Yes, we have added one this year -- actually in the third quarter, and secondly we have a couple of other significant ones that we're in the process of working through that are kind of in our pipeline but, again, will bypass right from pipeline to PCARR, and not go through the contracting phase.

Okay. And then my last question, real quick -- John, I don't know if you have a number of facilities handy that you guys ended the quarter as servicing.

Yes, the facilities at quarter end were 79.

Okay. Thank you very much.

Your next question comes form the line of Doug Simpson of Morgan Stanley. Please proceed.

Good morning everyone. I was just wondering -- just to talk a little bit about the PCARR dip in the quarter. I understand you don't want to go into detail on any one client but just trying to think through -- how does that dip sort of factor into your confidence, or how should we think about the persistency of the remaining PCARR? Is there a way to think maybe about the number of contracts -- whether there's some sort of renegotiation potential in the next six months, or should we be thinking about this as one of a sort of one-of type of situation you wouldn't expect to recur?

Well, if you look at our history, we have a high degree of client retention, substantial renewal track record. We would expect that to continue into the future.

Yes.

And I think the other thing is -- we'll elicit our own planning assumptions that we originally put together in our five year forecast.

Okay. And then maybe just a little bit more on the Intermountain win and sort of the brand equity of that deal, and how that could be helpful in getting others to the table -- how important is that to you?

You know, I think it is actually really quite an important opportunity. Here's a really interesting fact -- with Ascension and Intermountain -- those two customers are the only two healthcare systems in the country at the highest bond rating in the country, so very, very high regard to (inaudible) teams -- not just for their clinical capabilities but also their operating and financial capabilities.

And I was taking to Burt Zimmerli, the CFO of Intermountain, last evening and he shared with me that he has been down at a CFO platform actually the day after our deal was announced. He said it was unbelievable -- the interest -- and I said, well what were the questions you were getting and what was the interest?

And he said, well a lot of people were saying to me, "Gee, I thought you guys had a best-in-class revenue cycle operation. I'm just really surprised about this," and Burt said, "You know, I think we do have a best-in-class revenue cycle operation. We're very proud of our leadership that's been leading this effort. We think they're terrific, but they're also strivers, and we're strivers and we want to take our game to the next level." And I think that was a very interesting signal to the other CFO's that were present.

So, anyway, he was nothing but feeding back a great deal of optimism that we're going to find a lot of like-minded people and we're going to want to keep taking advantage of innovation and scale in these complex business processes in healthcare.

Okay. Great. And then just one technical question on the A.R. issue in the Q2 10-Q -- did you say that's already been collected, or it's expected to be collected soon?

It will be collected in the fourth quarter -- the majority of it has been paid.

Okay.

Just (inaudible) in the fourth quarter.

And then any sort of -- with that out of the way now -- any impact on the relationship with the customer in question, and then should we be expecting with the Q3 10-Q on that front, and that's my last question.

No, I don't think there's really -- nothing there to disclose on the 10-Q for Q3 and I think the relationship is where it's always been. It's on track.

Okay. Thanks.

Your next question comes from the line of Sebastian Paquette from Goldman Sachs. Please proceed.

Good morning. Just a little bit more about the hospitals -- are the systems and master agreements in place -- and bypassing backlog and hitting PCARR directly -- so is this jump with Ascension or would it also be with Fairview, Henry Ford, and maybe Intermountain as well?

That's a great questions. It exists with really all of our major health systems, that they will have a master services agreement and so therefore when an affiliate or a component of their system come on there will not be a contracting phase. It will move -- just as John was describing -- from pipeline to PCARR.

Okay. And the pipeline activity that you currently have with Ascension -- clearly Ascension's administrative hospitals are of pretty different sizes, and I'm wondering if you could just help us qualitatively maybe just talk about those two opportunities that you had mentioned. Are they are on the large side of Ascension's list of hospitals, or how should we think about that?

There's one that's on the larger side, and there's one that's in the medium range so -- they're larger sized ones get north of $800 million and the medium sized ones are in the $300 to $500 million in terms of net patient revenue.

Okay. And then could you quantify the quality revenues booked this quarter?

We have booked some quality revenue. It was a small amount but again, we don't share specific client revenue numbers.

Okay. But going forward when this business becomes more sizable becomes more sizable, will you be breaking that out separately?

Yes, as it becomes more sizable and these requirements report segmentally, we would, but we obviously want multiple clients in that group.

Okay. And then just qualitatively, now that we've had the new ACO regulations out -- how have your conversations with your customers changed since the preliminary regulations?

Well, I think that people now are increasingly getting to the point where they realize that there's going to be more tweaks to the regulations but the whole notion that providers can either seize their own destiny and begin to figure out how to create breakthroughs or they can wait for regulatory pressures to do so. In either event, there is going to be a search for cost reduction and for productivity improvement, and I think what providers who are really very, very focused on patient care and quality want to do is take advantage now of the time to make sure that it isn't sort of thoughtless or clumsy cost reduction, but the kind of cost reduction that can come coincident with quality improvement.

So, we're seeing a lot of providers really now believing that this (burning) platform is creating maybe an opportunity to really get to a game changing era with their clinical staff and with their patient population. So, I think there's no longer sort of a debate around can we just ignore regulation? Is it going to be business as usual? Should we just ride this horse until it drops?

Yes.

It's really more people thinking about what is the best method to try to get to some innovative breakthroughs and try to drive quality improvement and at the same with reduced costs.

Okay. And then my final question is just on the patient data security breaches -- could you provide any updates, maybe on just what you're doing in light of that to prevent future breaches, and then also any update on your relationships with Fairview and North Memorial, if you think those relationships are intact, or if you don't. Thanks.

Sure, I think that the data security issue is one that is of utmost importance and concern. We have taken a series of steps to ensure that we never have another breach in our future. Importantly, this was the first one we've ever had in our eight years of operating history but it was one too many, and so we have done a series of things. First, as you may know that it was our policy to have all of our laptops have encryption software and it was a human error that in this particular case the software had not been successfully installed.

We have now moved to sort of belts and suspenders. All of our laptops will have a hard drive that is encrypted and that is technology that has only been available in the last 120 days in the market so we're moving to that technology on all of our laptops. Belts and suspenders on tops of the hardware encryption will also be the software encryption, and thirdly, we have hired statistical experts to help up achieve what the regulatory requirement for de-identification of data so that to the extent of any data that would ever have to be on a laptop, would go through a de-identification process.

And, lastly, we have reinforced our company-wide training on PHI security to make sure that all of our professionals understand our policies. So, this is something we take very, very seriously. We had partnered with our two clients that were affected here. This has been painful for all of us and nobody wants to minimize that but I think we have collaborated together to respond and we are working very successfully with these patients -- I'm sorry -- with these customers on a go-forward basis.

And then just any comments on your around relationships with your customers going forwards?

I think the relationship is intact and while, again, everybody regrets it and really is mindful about how to make sure this doesn't happen again, they're please with the response we have taken and believe that the actions that we have in place now and the strategies we have in place are the right ones.

Great. Thanks a lot.

Your next question comes from the line of [Jeff Scarrow] from William Blair. Please proceed.

Good morning, guys.

Good morning.

Just a few questions, so regarding your revised guidance, it looks like the EBITDA decrease was more substantial than the narrowing of the adjusted EPS range. So, can you given some color on any below-the-line items that caused this impact?

There's a little bit in terms of the rounding of the curve around the pain, because probably the biggest part of it -- I mean the low end went from $80 million to $78 million, and we dropped that by a penny; the high end did go down by $4 million, however, there was a bit of rounding and after-tax impact.

All right, and then my next question is do you guys still expect the Fairview quality total cost of care program to break even for 2011?

We have a number of scenarios that we've laid out -- break even is one of those, though there is some uncertainty at this point, whether we'll be able to recognize all three quarters of results that we've achieved in 2011 or just two quarters and it may vary by payer. We know for one payer we've got three quarters to be able to recognize, but the other ones we're still working through the data to be able to get to that point. So, that has a little bit of variability but we factor that into our guidance here -- there's other puts and takes that we're around -- that we'll be able to manage it successfully within that range.

Great. That's helpful. Then another question on the QCOC program -- for future clients in that program, are there pre-requisites that you have in terms of advanced HER implementation or a history of including performance measure and payer contracting that is really necessary for you to move forward and succeed with future clients?

I think in terms of the number one condition that we would look for is whether or not the leadership of the health system and the clinical leadership was really excited about pursuing the strategy. We have been so pleased with the Fairview leadership team -- the doc leadership has been phenomenal -- and any time you're trying to fundamentally change tier you really want to win the hearts and minds of the physicians. This group has been led exceptionally well. They're very data driven and we couldn't be happier with the progress that we're making, but that's probably the key determiner that we would look at.

So, if for instance a health system didn't have a strong relationship with its clinical staff and it was much more dispersed, and it was hard to influence, that would make it more challenging. And, it doesn't mean, by the way, that the clinical staff has to be employed. We're finding exceptional response and collaboration with the affiliated physicians in Fairview as well. It really has to do with what the leadership sort of beliefs are and whether or not they're really committed to making this work.

Great, and then --

One of the specific aspects of your question -- a particular advancement in electronic medical records is not really a key pre-requisite. The kind of data and data mining that we use really is the key difference maker here. Electronic medical records are very helpful but they are not in anyway a roadblock.

Understood. And one last, if I could, and I'll jump back in the queue, can you provide some thoughts on hitting your longer-term margin goals -- that I think you talked you talked about exceeding 14% -- and how can we assess your progress towards the goal and just kind of how steep is the slope of those last few points of margin expansion as more and more of your customers hit the mature stage?

Yes. We continue to see over 200 basis point sequential growth -- year-over-year -- I mean, not sequential but year-over-year growth in our margin expansion. Clearly the ramp up in our physicians advisory service will continue to add margin as well as the quality of the business as it continues to mature so we feel very comfortable with the continued EBITDA expansion over the coming years.

I think the other thing is that what we have -- what we're saying is that everything that has been a known in our business is progressing as expected but as we get into new innovations, like intra-stay quality, that hasn't been factored in at all so the thing that we're comfortable with is the actual observed performance of the things that we've been projecting and then future innovations or [latent] innovations have not been factored in yet.

Great. Thanks again guys.

Your next question comes from the line of Steven Shankman from UBS. Please proceed.

Great. Thanks for taking the question. I was hoping you could talk a little bit about your preparations for the ICD-10 conversion and possibly your roadmap there, in addition to where you think payers are in terms of the preparation for ICD-10?

That's a great question. ICD-10 is a conversion process that is fraught with a lot of risk so providers who don't manage the process well will experience both revenue leakage as well as a significant escalation in their coding labor costs, and also a significant cycle time reduction in their cash flows as coding backlogs will increase. So, there's a lot of pain that can come out of not being prepared for this. This is something that all of our customers are very concerned about and so we really have stepped up in our capabilities to make sure that our customers do not experience those problems.

And what does that include? It includes technology and so we've made sure that all of our technology is actually ICD-10 compliant. It also means that we have to skill-up the coding population in advance of the conversion and actually test that their quality and their through-put is at the needed levels before the conversion takes place. So, really be prepared here -- like in anything else, you really have to prepare in advance and then test to make sure that you adhere to your standards before the conversion takes place.

So that's what we're doing and we -- I think that all of our plans for our operating year 2012 and so forth are including all of this activity. We already have the training capabilities. We've already been moving populations through them. We've been testing their time to actually assimilate the new skills. We've been testing their improvement in quality as well as in through put and we have already made sure that all of our technology has been remediated.

Great, thank you.

Your next question comes from the line of Sean Wieland from Piper Jaffray.

And this will be our last question. Oh, sorry -- one or two more?

One or two more.

Okay.

Go ahead, Sean.

Okay. Am I on?

yes.

Okay. Great. So, thanks for taking the question. Can you quantify some of the investments that are being made in the business as you ramp up for your west coast presence in Intermountain Healthcare and in the center of excellence conversion costs? Can you just break any of that out for us?

I could tell you more what the buckets are. I mean, we've been adding these (inaudible) of announcements of senior leadership talent, and you know there's been a build out of the teams underneath those leaders with more abrupt and (inaudible) in our sales capacity as well as in our operating leadership. And then we have basically whatever we can see in our pipeline that we have confidence in deals closing.

What you don't do is hire a bunch of newbies and spring them on the client. You basically have to build those work forces in advance and then the new client gets a combination of people that have been with our company for a long time as well as people who have been through revenue cycle academies, and so forth. So, we've had to do general hiring and development of people through our revenue cycle academy, and lastly, we've had the expansion of space and facilities.

So, we've had senior leadership and their teams. We've had basic workforce expansion and training, and we've had space and facilities.

Okay. And specifically on Intermountain, can you tell us when you expect that to begin to contribute to EBITDA?

As typical with most lower revenue cycle contracts, they are breakeven through the first year, slightly better more current ones, and we would expect that to fall within pattern with kind of a contract margins that are negative in the first quarter or two, reverting to positive contract margins in the third and fourth quarter of the contract.

Okay. So, it's pretty much standard.

Yes.

Okay. And last question is --

Sorry. This is actually question that we can take.

Go ahead, Sean.

Any specific reasons why some of these deals check into the later portion of the year?

Well I think the only thing that we find is that when you're going through a very large deal, we see typically there's a lot of governance and they're very high quality organizations. So, they make sure that everything has been done from a standpoint of bringing on board -- let's say in the case of Intermountain -- their H.R. team, their compliance team, their legal team, as well as their own board and their own governance structure.

So, the good news is it sets the table in a very quality fashion for the partnership at launch that that much pre-work was done but the higher quality the organization -- the bigger it is -- generally the more prep work that they like to do to get their whole organization behind a new deal like this.

Sure. Well said. Thank you very much.

Thanks, Sean.

And your final question comes from the line of Eric Coldwell from Baird. Please proceed.

Thank you. First off, I don't know if you can quantify the total opportunity with Intermountain as you see it today, but could you give us a sense on how much of that opportunity went into PCARR this quarter?

Well, there was the initial work the hospitals. Are you talking about what we currently have under contract, or what we have in our pipeline also with Intermountain?

I guess what I'm trying to get to is once you have an existing customer, and future expansions -- my understanding is go straight -- they don't move into contracting phase opportunity, they go straight into PCARR.

Exactly.

My sense on this one is that maybe you're not -- when you look over the next twelve months, you won't have all of those hospitals implemented here in the next quarter, so there could be a stream of incremental revenue from Intermountain that we don't see move into CPO over the next couple of quarters. Is that fair?

That is fair, and it is also fair with regard to the physician prophy revenue.

Right. Right. So, I guess what I'm looking at is when I see the consensus revenue estimates for the next twelve months, and I look at your PCARR today, you're effectively at a 93% or a little over 93% of consensus estimates, which I think is the highest since you came public, so it suggests that there's a lot of positive bias in the revenue growth over the next twelve months compared to where the street's looking is basically what I'm thinking of. Would you agree with that comment?

We see a lot of momentum in our business, Eric, clearly and we're very happy that we're able to exceed our guidance on PCARR for this year. You know, we see it now hovering and we're projecting it will be in the $970 million to $1 billion. It does set us up for strong growth in 2012, however, we will provide guidance for revenue and margins in EBITDA on our earnings call for the fourth quarter in February.

Okay. And then just a housekeeping item. You gave the number of hospitals under management. Could you give the number of contracts, or could you give the number of contracts?

Yes, revenue cycle contracts as of September 30 were 32.

Eric Coldwell. 32. Great. Thanks very much guys.

Thank you.

At this time, I would like to turn the call over to management for closing remarks.

Okay. Well, thank you everyone for participating in our call and before concluding our call, I'd like to encourage you to reach out to Francesca Luthi, who recently joined us, to head our communications and investor relations efforts. We're very excited to have Francesca on board and we look forward to building our world class I.R. program. Thanks, and have a great day.

Ladies and gentlemen, thank you very much for your participating today's conference call. You may now disconnect. Have a wonderful day.