R1 RCM Inc (RCM) 2011 Q4 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the Accretive Health 2011 Earnings Conference Call. My name is Stephanie and I will be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question and answer session toward the end of today's call.

(Operator Instructions)

I would like to now turn the presentation over to the host for today, Ms. Francesca Luthi, SVP Investor Relations. Please proceed.

Thank you, Stephanie. And thanks everyone for joining us today for Accretive Health's fourth quarter and fiscal year 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 this conference call may be considered forward-looking as defined by the Private Securities Litigation Reform Act of 1995, in particular 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 in the heading Risk Factors in the Company's Annual Report on Form 10K 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, February 29, 2012, and should only be relied upon as representing the Company's 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 obligation to do so, even if our view changes.

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 the reconciliation to the appropriate GAAP measures.

After the conclusion of Mary's 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 and thank you for joining today's call. We had an outstanding year in 2011. And I'm very proud that our team delivered on our very ambitious growth and innovation objectives for the year. I'm particularly delighted at our results in the fourth quarter demonstrated not only robust growth but also continued momentum across our core offerings.

Here's a few of our highlights. In 2011 we grew net services revenue by 36% to $826 million. Adjusted EBITDA increased by 81% to $82 million; and adjusted earnings per share increased by 83% to $0.44. All of these metrics were at the mid to high end of our expected guidance range.

And we also significantly exceeded our original target for projected contracted annual run rate, or PCARRR. At year end, the mid point of this important gauge of business momentum surpassed the $1 billion mark, exceeding our initial target for the year by more than $100 million. We had originally set out and said that we would exceed $900 million, and surpassing the $1 billion mark was really gratifying.

At the same time, we believe our pipeline remains as rich and strong as ever, reflecting new opportunities across all of our offerings and across the country. Not only are we pursuing more opportunities, but we are also benefiting from greater inbound interest given our growing reputation as a partner of choice for leading providers.

Our win rate has increased as our track record and our commitment to results continue to open new doors. And, importantly, our progress towards closing new agreements is on pace with our expectations. So, even after a strong year end, our PCARR right now in final contracting has doubled from last earnings call to $100 million to $120 million. As you know, that final stage of contracting is where everything has already been agreed, all governance has decided to move forward, and we are in the final stages of Ts and Cs from a contracting standpoint.

The value that we are delivering to our customers directly drives our economics to outcomes as well. It's a key part of our business model. So, in 2011 we delivered over $400 million of measured economic value to our revenue cycle clients, and expanded our value proposition by providing a solution to one of our country's and health care's most pressing issues, delivering better quality care at more affordable cost. In 2011, we made substantial headway in all of our core offerings. And I'm even more excited about prospects for 2012, based on what we're seeing in the marketplace.

Starting with our revenue cycle management offering. During the course of 2011, we successfully executed our strategy to increase market penetration by signing long term partnership agreements with prestigious institutions such as Intermountain and Beaumont. Today, we are a leading revenue cycle player in the market, and we continue to gain market share in what is still a large and vastly interpenetrated $50 billion addressable market domestically. Our scale is now giving us greater expertise to a wider cross section of customers. And in turn, we're leveraging the insights that we're gaining from our broader base of engagements to deliver even more value to our customers and to their patients.

To that end, we recently achieved an important milestone in the Company's history. We have now helped over 250,000 patients in our country achieve financial assistance through insurance coverage that they didn't have when they came into the hospital. We were able to help them find a paying solution, supporting the mission of our not-for-profit customers to assist those patients who are most vulnerable and in need. In fact, we have now attained a benchmark that for every 100 uninsured patients who are seeking care at one of our hospitals that we serve, we can find a paying solution for 85 of them who are going to wind up with inpatient care. Not only are we able to help them secure coverage for their immediate care, but this insurance often actually continues to assist through healthcare needs that require care after the episode.

The advantage of scale has also enhanced our processes and technology to such a degree that we develop a strategy now to raise our 4% to 6% average revenue lift by another 200 basis points through applying advanced best practices and analytics. This lift improvement would expand our value proposition in a very meaningful way. And as you've heard us say, we are in a continuous learning organization and always looking to take process excellence to the next level.

In that vein, we expanded our network of shared service centers in response to the growing demand for greater efficiencies. This year we launched our center in Chicago, which is now processing $3 billion in net patient revenue. And as part of our mission to create value within our local community, we entered into a partnership with Chicago Career Tech. With this organization, we identified an opportunity to support our local community and meet our hiring goals for the Shared Services Center. Through this collaboration, we've successfully trained and hired over 80 formerly unemployed professionals who now have employment and benefits and are making a meaningful contribution to the customers we serve.

Our Shared Services strategy is not only about driving operational excellence; it's also a vehicle to stimulate innovation and disseminate best practices. Through our Plan Center of Excellence in the west we are looking to develop new capabilities directly aimed at addressing key issues facing healthcare today, and ultimately helping to drive new standards.

We're currently laying the foundation for our 2020 vision around four critical areas of innovation - patient engagement, process excellence, compliance and human capital. For example, we want to improve the access and timeliness of the patient-physician interface by leveraging next generation technologies and telemedicine. With regards to compliance, we're investing in artificial intelligence to scan transactions to identify atypical patterns and provide solutions to enhance compliance. And finally, as part of our goal to disseminate these learnings, we're in the process of launching our Open Revenue Cycle Academy program to provide professional education development content to healthcare providers nationally, and to help raise the bar. We call it an Open Revenue Cycle Academy because it's open to all professionals beyond our customer base.

Now turning to quality and total cost of care during the course of 2011, we created the first turnkey population health management infrastructure solution that enables provider organizations to both improve quality and deliver care more efficiently. In partnership with Fairview we've worked with several hundred physicians using technology and information to create a comprehensive solution geared in improving quality of care, enhancing access of that care for those in need and most vulnerable, and driving efficiencies to make that care more affordable and sustainable.

Conventional thinking has always been that we couldn't increase quality, access and drive efficiencies in care at the same time. In fact, that maybe we could, at best, improve two of the three. One of the leading thinkers nationally, Dr. Brent James, the Chief Quality Officer at Intermountain Healthcare, disagrees with that conventional thinking, and argues that we can deliver better care to more people at the most appropriate cost. Based on the initial results that we've seen with Fairview, enabled through our partnership and through our end-to-end people, process and technology solutions, we would agree that better quality care, greater access and more efficiencies are possible.

At Fairview in its inaugural year, our partnership has already yielded significant improvements in quality of care delivered. Looking at the Minnesota Community Measurement scores, a recognized independent assessment of quality, since January of 2011, Fairview recorded a 73% improvement to comprehensive asthma management, a 39% improvement to chronic obstructive pulmonary disease, and an 18% improvement to vascular care. During this same period, we've successfully reduced medical admission. What that really means is that people were healthy and didn't require going to the hospital. Re-admissions, which is a high gauge of quality of care, and increased the use of generic medications. These results are attracting great interest in our offering and leading to productive discussions with other providers that want to be leaders in the transition to an accountable care method.

We are very proud of these operational results, which were in line with our expectations. Fairview's success was recognized by CMS when it selected them as a pioneer ACO, citing Fairview's significant experience in providing high quality coordinated care. Their selection is a testament to the potential of our partnership and places us at the forefront of the positive transformative change underway in healthcare in the US

Our pioneering work in this field has attracted market-leading talent to Accretive. Notably, at the physician level. Most recently, we are privileged to have Dr. Walt Ettinger who served as the president of U. Mass Memorial Medical Center join us. Walt has a prominent track record in advancing the quality and safety of care delivered at affordable cost. In fact, under his leadership U. Mass Memorial received national recognition for clinical innovation and quality. His experience managing complex patient populations and engaging physician leaders in both community and academic settings will play a key leadership role and continued development of our offerings as we expand to new customers.

Walt joins Dr. Clive Fields, our Chief Medical Officer, who has been recognized as probably the best family physician in the city of Houston and who really leads all of our chief medical officer efforts inside the company. And Dr. Thomas Hinkamp, a cardiovascular and thoracic surgeon in our physician advisory practice who was recently named to the nation's 2011 top doc's list in US News and World Report.

Looking at our goal within intra-stay quality, the ways in which we really focus on quality of care within an episode in a hospital. We recently launched a new initiative here, as we've discussed before, which is focused on improving the patient experience during the hospital stay by enhancing quality while reducing unnecessary cost. While still in beta testing at our initial sites, the preliminary results are very encouraging. Our team is working closely with the chief medical officer and physicians to test and validate our operating model. And we're also talking more broadly to a number of customers who are interested in sharing their best practices in an effort to reduce practice variation and ultimately improve intra-stay quality across the industry. This kind of dissemination of best practices is exactly what many in the industry really believe will make a big difference.

And moving to Physician Advisory Services, 2011 was a year of impressive growth where we emerged as a real competitive force with over 50 million of PCARR at year end, we've established ourselves as a highly differentiated alternative in this growing market. We've also expanded our service offering from proactively helping hospitals maximize their compliance revenues to assisting them with appeals management. The pipeline for Physician Advisory Services remains exceptionally strong and we continue to see significant cross-selling opportunities.

In summary, I'm pleased with our accomplishments in 2011. We executed against our strategy of delivery tangible value for providers, their patients, physicians and staff across all of our offerings, while also positioning Accretive Health for the next phase of growth in innovation. Now, I'll turn this call over to our CFO, John Staton, to review our fourth quarter and full year 2011 results and outlook for 2012.

Thanks, Mary. Good morning, everyone, and thanks for joining our call today. Let me recap the highlights from the fourth quarter and full year of 2011 by first starting with PCARR. As Mary mentioned, we closed 2011 with PCARR in the range of $991 million to slightly over $1 billion, exceeding our target for the year. This robust growth demonstrates our success in generating new business on the strength of our service offerings, our compelling customer value proposition and the talent of our people. As of today, PCARR is in the range of $1.017 billion to $1.037 billion which represents a 43% increase from March 2, 2011. This clearly points to continued momentum in our business.

Turning to our income statement, total net services revenue in the fourth quarter grew year-over-year by 53% to $260.1 million. Looking at our revenue breakdown for the fourth quarter, net base fee revenues were $203.8 million, an increase of $61.2 million over the fourth quarter of 2012. Incentive revenue, which is our share of the benefits we generate for our customers, was $41.5 million, reflecting the seasonality of incentive payments and the better-than-expected revenue cycle performance. Other services revenue was $14.8 million for the fourth quarter of 2011, an increase of $10.6 million over the same period of 2012. This was driven by a continued outperformance of our Physician Advisory Services offering. For the full year, net services revenue totaled $826.3 million, an increase of 36% over 2010 and in line with our revised expectations.

Moving down the income statement, our infuse management technology expense for the fourth quarter was $23.5 million, or 9% of net services revenue, compared with $17.2 million, or 10.1% of net services revenue in the prior fourth quarter. For the full year, infused management technology expense was $85.5 million, or 10.4% of net services revenue, compared with $64 million, or 10.6% of net services revenue last year.

We succeeded in lowering infused management technology expense as a percent of our net services revenue due to scale efficiencies in our revenue cycle business, which delivered more than 100 basis points reduction in cost, partially offset by the increased cost associated with ramping up our quality and total cost of care efforts.

Selling, general administrative costs were $19.9 million for the quarter, compared with $11.9 million for the prior year's fourth quarter. For the full year SG&A totaled $62.2 million, or 7.5% of net services revenue, compared with $41.7 million in 2010, or 6.9% of net services revenue.

The increase in SG&A in 2011 reflects our investments for growth that Mary discussed earlier, as well as additional costs associated with our secondary offering last year and incremental costs associated with being a public company. Excluding these items, SG&A would have decreased as a percent of net services revenue by 51 basis points year-over-year.

We believe that the investments we are making to better position us for growth going forward, and we are pleased that they have already yielded significant results as evidenced by our strong PCARRR growth to date. As we have stated earlier, while SG&A may fluctuate quarter-to-quarter, we will focus on obtaining scale efficiencies in SG&A and infused management as we continue to grow our business.

Turning to adjusted EBITDA, a non-GAAP measure, which we believe is the most instructive metric for measuring the underlying profitability of our company. For the fourth quarter of 2011 adjusted EBITDA was $30.7 million, an increase of 84% over the fourth quarter of 2010. This excludes stock comp expenses, $6.5 million and $5.7 million in the fourth quarter of 2011 and 2010, respectively. This quarter our adjusted EBITDA margin increased by 200 basis points year-over-year to 11.8% of net services revenue.

For the full year, adjusted EBITDA increased by 81% to $81.6 million at the high end of our revised guidance range. Our adjusted EBITDA margin expanded 250 basis points to 9.9% of net services revenue in 2011, even with the investments in our business cited earlier. This expansion in our adjusted EBITDA margin illustrates the potential operating leverage in our business model. As more customers move into our shared services model, we expect to benefit from the resulting cost efficiencies. At year end 45% of net patient revenue under management was in our shared services model, an encouraging statistic reflecting Intermountain's decision to transition immediately to shared services.

Finally, our book of business growth. We are able to allocate our fixed costs over a larger base of revenues and gain economies of scale. Therefore, we expect margins to gradually increase each year as a result. Our effective tax rate for the fourth quarter and full year was 40.6% and 39.3%, respectively. As we stated in our last call, we continue to model an effective tax rate of 40% for 2012 and beyond.

Net income for the fourth quarter of 2011 was $13.2 million, as compared to $5.5 million for the fourth quarter of 2010. For the full year, net income was $29.2 million, an increase of 131% over 2010. Non-GAAP adjusted net income for the fourth quarter and full 2011 was $17.1 mullioned $44.3 million, respectively. Non-GAAP adjusted EPS was $0.17 for the fourth quarter of 2011, compared with $0.09 in the prior year's quarter. For the full year, our adjusted EPS was $0.44, at the high end of our revised guidance for the year.

The balance sheet. Let me spend some time on that. Our balance sheet remains solid with $197 million in cash and equivalents, and no debt. This represents an increase of $41 million over 2010. At year end, our DSO stood at 33 days, ahead of our target of 35 to 38 days, and a 12 day improvement over the third quarter. While we may have some quarterly fluctuation due to other variables, such as the timing of payments, especially with our customers year end, ramp in new contracts, or growth in service lines like our Physician Advisory Services, which itself has a higher average DSO. We remain committed to maintaining DSOs below 40 days in 2012.

Turning to cash flow. In the fourth quarter, our cash flow from operations was $13.7 million, compared with $25 million for the same period last year. Our free cash flow defined as operating cash flow minus capital expenditures and the acquisition of software was $9.4 million in the fourth quarter of 2011, compared with $19.6 million for the period last year. For the full year, operating cash flow was $16.4 million, compared to $32 million in 2010. Free cash flow for 2011 and 2010 was $3 million and $17 million, respectively.

The year-over-year decline in cash flow is largely due to the increase in working capital for our company including substantially greater incentive revenue in Q4, rapid expansion of our Physician Advisory Services business, and the associated increased DSO requirement, and certain base fee payments due in Q4 that were made in early January. In addition, the sum of accounts payable and accrued service costs declined $4.6 million from 2010, and a reduction was primarily due to a larger than expected balance in 2010. Moving forward, we expect accrued expenses and accounts payable to grow with our revenues.

Turning to outlook. And I'd like to describe what we're looking for for the full year of 2012. As outlined in our press release, we expect PCARR to exceed $1.25 billion at December 31, 2012. We have confidence in our sales momentum due to our strong pipeline, which as Mary mentioned, includes between $100 million to $120 million of PCARR file contracts. As always, we will update you on our progress as the year advances.

We expect net services revenue to be in the range of $1.09 billion to $1.12 billion, which is at the midpoint of the range, would represent strong growth of 34% over 2011, and well above our long term target growth of 25% to 30%.

Our revenue guidance for 2012 reflects the expected contributions of several large wins signed in the back half of 2011. We expect fiscal year 2012 adjusted EBITDA of $114 million to $122 million. This would represent year-over-year growth of 45% and margin expansion of 80 basis points at the mid-point of the range.

We see tremendous growth opportunities in the market which are broader and greater than we anticipated at the time of our IPO two years ago. Our adjusted EBITDA range for 2012 reflects our plan to capitalize on these opportunities to enhance our customer value proposition and develop new offerings, while at the same time ramping up large new contracts we signed in the back half of 2011, which typically have a depressive effect on margin in the initial quarters.

Specifically in 2012, we plan to invest in the innovation by deploying leading edge technology to enhance our proprietary technology platform and establishing our centers of excellence as industry models. We plan to roll out new offerings, including strengthening our quality into our cost of care and developing our intra-stay quality and delivering these to more customers in an effort to truly improve quality across the care continuum.

Finally, we expect to continue to welcome top talent to creative health team as we look to accelerate the growth of our existing offerings and bring new and innovative offerings to our customers. We believe that our continued investment in innovation will position us to deliver on our long term targets of 25% to 30% revenue growth, and expand our adjusted EBITDA margin to 14% to 18%.

It is important to note that there's inherent seasonality to our business associated with the typical flow of incentive payments, which are lowest I the first quarter and highest in the fourth quarter. Over the past two years as a public company, first quarter revenue and adjusted EBITDA have averaged 20% and 10% of the full year totals, respectively. And we expect this pattern to continue.

Finally, we expect adjusted diluted earnings per share of $0.61 to $0.65 for fiscal year 2012. In closing, we are proud of our achievements in 2011 from a customer, operational, financial perspective. We had a strong fourth quarter and closed the year right where we expected with clear momentum going into 2012. With that, let's open up the call for questions. Francesca?

Thanks, John. I would ask of you to keep your questions limited to one question and one follow-up to allow as many participants as possible to ask questions. Stephanie, if you can please provide the instructions for those on the call.

(Operator Instructions)

Your first question comes from the line of Atif Rahim with JPMorgan. Please proceed.

Hi. Thank you. I guess, Mary and John, could you provide some more color on the investments you're making? You mentioned, I think, $4 million in the fourth quarter. How should we think about that in 2012, if you can give us an absolute number? And also what are some of the payoffs we can expect from those investments?

In 2012, we really continue to see investments across these fronts that John mentioned in his most recent piece [he authored]. So, in really capitalizing on what we see in intra-stay quality, which is really just in beta testing, and also taking the population health offering into new customers. And also building up the team and the guts of the bench strength in those areas. And advancing in our revenue cycle offering where, again, we're only after another 200 basis points of improvement in value that we can deliver for customers. And that requires specific new technologies and capabilities. And then also in our revenue cycle we have the centers of excellence. So those are the four big fronts that require a lot of additional investment.

Our PAS offering is one that is really just growing now and scaling and not requiring a lot of additional investment.

I guess in terms of the magnitude of the investments, we'll have a follow up on the cost quality initiative?

As we kind of discussed prior, given we have the one contract at this point on the quality business that we won't be providing specifics in and around the dynamics and performance of that singular contract.

In terms of the investments, to give you a ballpark figure, I'm not counting the kind of constant renewal that we have in our technology offerings. So, let's say if you separate out the technology investment we put into ongoing innovation from what is really substantial discreet investment, it's really in the $20 million to $25 million range.

Atif Rahim. Perfect. That's helpful. Thank you.

The next question comes from the line of Glen Santangelo with Credit Suisse. Please proceed.

First, if I could just follow up on quality and total cost of care business. You know, John, a couple of quarters ago we were looking for the Fairview deal to be break-even in 2011. And I understand there were some issues, clearly, with revenue recognition that we discussed on last quarter's call. Could you maybe give us an update in terms of how the progress of revenue recognition has occurred there and any sort of quantification will be helpful.

Certainly, Glen. I think the key thing there as we look at our operating results we continue to see very strong performance in line with management expectations, as Mary mentioned in discussion with re-admissions down, initial admissions down. So, we are having a tremendous impact in the marketplace. That said, we did recognize a modicum or a modest amount of revenue in quality in 2011, but it did fall short of our expectations and we did not break even during 2011.

As we look to 2012, we have a line of sight on how we're going to be able to address the revenue recognition; and expect to have that primarily addressed in the first half of 2012.

And based on kind of your experience at Fairview, do you think it's been an issue in terms of signing additional quality business? Or, Mary, do you feel like you're getting enough inbound interest where - I guess I'm a little bit surprised based on the comments last quarter. We were sort of hoping for another quality deal by the end of 2011 or early 2012. And now it kind of looks like it's being pushed out to the end of the first quarter maybe. Is that - Am I my thinking about the timing correctly.

The timing of these big deals, because they're so substantial and they're five-year partnerships - and I think I've mentioned this to you before. Our approach here is never to artificially rush a contract for a quarter announcement because they really have long term consequences. And so we like to make sure that the alignment is very good and set this up for long term success. And the quality of the conversations that we're having with the incredibly high caliber of institutions just says to us that we're not going to be short sighted to try to push something through and in some ways sort of capitulate on key elements of the contracting phase. So, I think that we've seen in the past in our revenue cycle business. And I think sticking to the strategy of being measured and working through a very high quality agreement that both parties are happy with for the long term is a strategy that has worked for us and that we're going to continue with.

In terms of the inbound interest, it's extremely strong. The revenue recognition is really an accounting issue relative to Accretive Health. The results for the customer is not an issue. And to a certain extent, we, as you know, are going through the first time process. So we're wanting to make sure that we have very conservative revenue recognition approaches and that we're working very closely with our auditing firm so that we're setting things up for long term success. And I think that's just what we're doing here. If anything, I think it means that there are some additional results in the bag that should be helpful to 2012.

And if I could just ask you one more question and then I'll hop off. Just to follow up on some comments you just made. I appreciate the elaboration in terms of the areas you plan to invest on in 2012. Did you say - did I hear you correctly saying that you think that's an incremental $20 million to $25 million that you expect to spend in 2012 relative to maybe what you were thinking three or six months ago? Is that --

It's not incremental to what we were thinking three or six months ago, but certainly during the course of the year, given the opportunity that we see, we have increased. So, we're always planning on having strong investments in this year. But we have increased probably by the tune of another $10 to $15 million over what we were thinking.

Very helpful. Thank you.

Your next question comes from the line of Ryan Daniels with William Blair. Please proceed.

Yes. Mary, I was hoping you could talk a little bit more about the intra-stay quality of care initiative. You've highlighted that now for a few quarters, and I'm curious when we may see that come out of beta testing and start to roll out to the broader provider base. And number two, if you could just offer a little bit more color now that it's more advanced on some of the type of things you're doing. Is that really clinical decision support? Is it consulting to drive best practices? You know, putting hospitalists in the hospital to manage care. Any color on what that is would be helpful as well.

Sure. Intra-stay quality is really, I think, promising in the sense that all providers who are currently being paid on a DRG basis or who are even contemplating bundled payments in the future will be able, in essence, improve their operations and actually see that help them as opposed to hurt them from an economic standpoint. So, in intra-stay quality, what we're essentially doing is really seeing inside the very large data sets what are the best practices for a given DRG, and how can we at a given institution migrate to best practices. What we all know right now, and it's been chronicled in all kinds of places, is that there's tons of practice variation in medicine. And to the extent that we can help illuminate what is the best practice and how can we then get to it, it's extremely beneficial.

Now, in terms of how we actually do it inside the hospital, it really is a lot more proactive gearing up for a process. So, identifying for specific patients what would be the best path of care while they're in-house? How do we orchestrate the various specialties and consults and in-house testing and so forth so that it all flows in a way that doesn't have unexpected bottlenecks and doesn't have sort of unexpected wait times in between. And so, really making that in-house or intra-stay experience flow, have information that is getting to all the care team members and really hit a best practice approach is what it's all about.

And again, it's going to be people, processing and technology. Technology alone and just illuminating best practice isn't sufficient. We have to really help the new operating practices and protocols get into place. And it's really sort of moving from what sometimes be a more reactive environment to something that, again, is more planful and really trying to get each episode of care more closely emulating a best practice standard.

Any thoughts on when that might actually launch or move out of beta testing to a broader availability?

I think that what we see is that in the first half of this year we should be really perfecting the process. I think what we're trying to do is also say what are the particular types of innovations that are more easily accessible to the workforce and to their ability to adapt. Because any time you're really teaching a whole set of capabilities to a workforce you want to seed it with early success. So I think a big part of the observation and the testing that's going on is to make sure that we're introducing things in a way that doesn't overwhelm a workforce an that actually they start out of the gate saying, "Yep. That was successful. I'm building a can-do attitude. Give me the next piece of this expertise." And we can take them through a glide path of learning that creates success.

So, that's a key part of the learning that's going on right now. And why we don't sort of want to rush things. Again, there's been a lot of learned inability. There's been a lot of false starts in different efforts. There's been a lot of efforts nationally where people have improved things temporarily, but have slid back. And we're really interested in perfecting techniques that work very successfully with the workforce so that we can really sustain improvement.

Got you. That's real helpful. Maybe one quick follow up to that. Any thoughts on moving into the post-acute discharge market? Obviously with the re-admission penalties coming up, it seems like it would be a perfect best practices technology process re-engineering on discharge to help hospitals avoid re-admissions as well?

Absolutely. That discharge process is key and fundament to the whole intra-stay experience. And what we find is to get a very high quality discharge process, again, it's important to be planful and to make sure that whoever is quarterbacking the discharge actually is getting the integration of the different specialties and the different clinical perspectives so that that discharge plan is really being done very successfully.

Another key part of it is the patient engagement. And really one of the key things that we're working on is how do we make sure that those discharge instructions truly are being understood by the patient and the family members. And so, key things like teach back methods and really making sure that the patient has absorbed the critical information are things that are in the beta test as well.

Perfect. Thanks for all the color.

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

Great and thanks. Good morning. First off, you might be limited in what you can say, but just in terms of the Fairview dormant collections suspension, could you discuss about next steps and when we could possibly hear a resolution?

Well, we are working very cooperatively and constructively, and are very interested in trying to get to a fast resolution. But to a certain extent, this is litigation pending and we really can't speak more than that. But our whole posture here is to really, again, be fully cooperative and constructive and try to get this behind us. As you may know, this is actually a pretty small part of our business. But, by the same token, we do want to get this thing wrapped up.

Got you. And then any discussions around how you see the relationship with Fairview going forward?

Our relationship with Fairview is one that's very focused on key aspects of the strategy and working together. And that continues.

Got you. And then, John, on SG&A, we've seen in increasing, the percentage of sales kind of for the past years. And I'm just wondering you mentioned excluding some of the additional costs for secondary offerings, et cetera. It would decrease by about 51 base points this year. I'm just wondering as you look into 2012, you mentioned some additional spending. But do you expect SG&A to increase or decrease as a percentage of net revenue in 2012?

I expect the percent to have a modest decrease, Sebastian. There's a couple of drivers in there. Our high growth Physician Advisory Services business has a higher SG&A given the sales and marketing costs relative to its revenue. So that will offset what will be our core business, which will be driving efficiencies and scale in the SG&A line. But we do project a modest decrease year-over-year as a percent of revenue.

Great. Thanks a lot.

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

Hi. Thanks. My question is on the free cash flow. Do you have any thoughts on what that could be for 2012? And help me understand how I could go from adjusted EBITDA to free cash flow? What are the needs on investing activities?

Our investment activities would be from a capital requirement. It's going to be slightly above what we spent in 2011. So there will be a modest growth in that; probably a little less, obviously, than our revenue growth for the year. As we look forward on how that capital and expend is going to be in translating to free cash flow, the key levers there were we had AR that grew. And part of that growth, or half of that growth, was tied to we had an $18 million a year-over-year increase in our incentive fees. It was all good. All goodness there, but certainly added to our AR balance and our physician advisory system business has structural DSOs within it that added almost another $10 million year-over-year.

So that has added an increase to our working capital requirements. At the same time, which is an anomaly in 2011, was the fact that our 2010 (inaudible) payables and approved costs were a little higher than what we would expect them o be. And those were actually sequentially down year-over-year versus we expect those to grow with revenue as we go forward. So we would expect free cash flow to get much closer to tracking with EBITDA growth over time.

Do you care to put a number down on the page for free cash flow? OK. OK. Thanks very much.

Thanks.

The last question comes from the line of Bret Johns with Oppenheimer. Please proceed.

Good morning. Thank you for taking the questions. John, I just wanted to circle back on the DSOs for a minute. If you could give us a sense of what the DSOs look like in each of the business lines, the Physician Advisory Services and fees on the bases?

We haven't really broken it down. But the DSOs that sit primarily in the - what we have there is a chunk of that - probably for the total company - that sits with our Physician Advisory Service, which was a new add this year, was up about $10 million year-over-year. The rest of that mix is consistent with prior years and we'd expect it to continue to move that direction.

But is it right to think of the DSOs on the base fees as - since you're taking over the, essentially, the payroll for the hospitals, people - that would turn approximately every two to three weeks?

Payroll turns every two to three weeks. It really depends on the base fees which are paid typically a quarter in advance, and/or typically in some of those we have off-cycles. And they sometimes can slide from quarter to quarter. It's a big driver of the DSOs.

For example, this past quarter we had collected over $10 million of base fees in the first week of January that were actually due in the fourth quarter of 2011.

All right. Thank you. That's helpful. And then I wanted to go back to the 200 basis points improvement at least in the targeted goal for NPR improvement and sort of where that's coming from? And do you have any hospitals achieving the high end of that?

You're talking about the 200 basis point improvement in the actual yield left. We do actually have some hospitals that are at the 8% or even higher. Now, sometimes that's because they started out with just a more opportune environment. So, what we're talking about is trying to get our averages to that level. And actually when we peg it we say 7% by 2014. So, when we're looking at that, it is averages, and averages are what will drive our business. But we absolutely have customers already that have exceeded 8%.

Okay. And since I was the last question, I'll push for one more. I was just wondering if you could give us a sense for the investments on the $20 million to $25 million of investment above the maintenance level. How much of that is going toward RCM versus quality and total cost of care or intra-stay quality?

I would say it's about 50-50. If I were to take a look at the total revenue cycle business, including centers of excellence and new technology and expanding the value prop versus the whole quality side of the business - intra-stay and population health.

Great. Thank you very much.

Ladies and gentlemen, that concludes the question and answer session. I would now like to turn the call over to Ms. Mary Tolan for any closing remarks. Please proceed.

Sure. Thank you, everyone, for participating in our call today and for your interest in Accretive Health. Our distinctive business model and strong execution by our people has resulted in compounded annual growth rate of 36% in revenue and 86% in EBITDA over the last four years. Looking ahead, we're better positioned for the future than at any time in our history and we're confident in our ability to achieve our financial objectives for 2012. We look forward to keeping you updated on our progress. Thanks. And have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Great day.