R1 RCM Inc (RCM) 2012 Q1 法說會逐字稿

(Operator Instructions). Good day, ladies and gentlemen and welcome to the Accretive Health, first quarter 2012 earnings call. (Operator Instructions). I would now like to turn the conference over to your host for today, Francesca Luthi, from Investor Relations. Please proceed.

Thank you, Laura and thanks, everyone for joining us today for Accretive Health's first quarter, 2012 earnings call. With me today or Mary Tolan, our Founder and Chief Executive Officer and John Staton, our Chief Financial Officer. I hope you 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 and 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, business outlook and a lawsuit filed by Minnesota Attorney General against the Company and related matters are forward-looking statements.

Investors or cautioned not to place undue re means on such forward-looking statements. There is no assurance that the matters contained in such will occur since these involve various risks and uncertainties that could cause actual ruts 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 31st, 2011 filed on February, 2012, which is available on our website as well as the SEC's website.

The forward-looking statements made on today's call are based on Accretive Health's beliefs and expectations as of today, May 9, 2012 only, and should not be relied upon as representing the Company's views 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 views change.

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 reconciliations 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, CEO of Accretive Health. Please go ahead.

Good morning, everyone, and thank you for joining today's call, I am pleased that our operating results for the first quarter were in line with our expectations. Despite being our seasonally slowest quarter. We posted strong growth.

Net services revenue increased by 55%, adjusted EBITDA by 54% and adjusted earnings per share by 50%. We believe that our performance, not only this quarter but since our inception, reinforces the value of our fundamental mission of providing critical services to healthcare providers to help them strengthen their financial stability, and there by contribute to increased healthcare access for all. To demonstrate the success of our mission, we continue to attract new clients.

We recently signed a long term partnership agreement with one largest healthcare systems in the United States, that recognized our collaborative approach and willingness to invest in their capabilities for the ultimate benefit of their patients, staff and physicians. We successfully launched our first site, and we look forward to partnering with other affiliated hospitals that choose over time to enroll in our services.

The strong collaborative and shared mission that we have our clients, is a fundamental driver in forming these new partnerships. With that, I would like to take a moment to address the situation with the Minnesota Attorney General. I want to assure you that we have been working actively for some time, and are continuing to do so, to resolve the issue and to put matter behind us.

Despite our good faith efforts, the Attorney General launched a public campaign with inaccuracies, innuendo and unfounded speculation. On April 30th we filed a Motion in Federal District Court in Minnesota to dismiss the Attorney General brought against our Company in a complaint filed in January. Simply stated, based on our ongoing review, we believe that we have strong legal and factual defences to the allegations in the complaint, which do not reflect the essence of our Company.

We refer you to our public filings on this matter for greater detail. The Company intends to vigorously defend itself in court, while continuing as noted to look for reasonable solutions, if possible. As the situation in Minnesota has evolved, we have been in continuous contact with all of our key stakeholders, and we are gratified by the support we have received from our Clients who understand and value the critical work we do.

Our people have continued their hard work and are as dedicated as ever to serving our Clients, and we have spoken with Legislators over the past week to share with them our point of view and why we believe that we are a positive contributor to their constituents. We remain focused on what matters most. Accretive Health was founded with a single mission, to help our Healthcare Client's strengthen their financial stability and deliver better care to the local communities, there by increasing healthcare access for all.

We carry that mission throughout the work we do in revenue cycle, in quality and in sufficient advisory services. In revenue cycle, we help hospitals navigate some of the Healthcare Industry's most pressing challenges, we invest in their success by providing tools, people and processes to better manage their recourses across the entire revenue cycle.

With our help and collaboration, our healthcare partners significantly increase the percentage of collective that was contractually owed to them from third party payers. In fact, it is important to remember that 95% or more of the revenue collected is received from insurance companies and government payers and that requires accuracy, diligence and advance processes and technology to fully achieve. The remaining 5% comes from Patients typically insured and employed, with an ability to pay the necessary co-pays.

In addition, every hospital we work with has a significant charity program for Patient's who have no way to pay for their care, and we help the hospital's get that program in place for those in need, with accuracy and compassion. Furthermore, working with our Hospital Partners we have helped over 250,000 uninsured Patients find a paying solution that they often didn't realize they could qualify for, often extending beyond their initial episode of care, and this is in total alignment with the mission of our not for-profit Hospital Clients.

We focus on ensuring that the that financial portion that the patient experiences is compassionate, efficient, clear and achieved without errors or confusion for the patient. Our objective is that this happens 100% of the time when a Patient comes into one of our Clients hospitals. We are always striving for continuous learning in collaboration with our Clients, Patients and Industry Association Groups to take our processes and procedures to the best possible level.

As you have heard me say before, if even a single Patient feels that their experience was not what they needed and deserved, we are committed to looking closely at ourselves and fixing the issue. Looking at our quality offerings, this offering provides the necessary information and tools so that Physicians can help those Patients most in need of care, which can lead to improved out comes. Over the past year our work with Fairview yields continued improvement in quality of care delivered to Patients.

I know that I speak for the hundred plus people on our Minnesota Quality Team, that we are deeply disappointed that despite these results, Fairview decided to terminate our work, seemingly because of the pressures exerted by the Attorney General. We will continue to invest in this important area and other Industry and Political Leaders also believe that this is important. We think that it's the future direction of Healthcare in America.

We continue to see interest in our Quality and Total Cost of Care offering among new and existing Clients, and in addition, our pilot efforts in Intra-stay Quality, which is focused on improving the Patient experience during hospital stays by enhancing quality while reducing unnecessary costs, continue to show progress and our goal is to launch additional hospital sites over the course the year. In summary, we are staying focused on serving our Clients and delivering value to them, we are actively working to resolve outstanding matters and ensuring our story is told accurately.

In a fact based way. We have totals confidence in our mission, our leading innovation and our people. Recent events have focused us even more on growing our Company by attracting new partners and deepening our relationships with our current Clients. Now I would like to turn the call over to our CFO, John Staton to review our first quarter results and outlook for 2012.

Thanks, Mary, and good morning, everyone and thanks for joining our call today. Let me first recap the highlights from the first quarter starting with PCARR, our projected contracted annual run rate of revenue for PCARR represents the expected total net services revenue for the coming 12 months for all Clients under contract. As of today PCARR, is estimated to be in the range of $910 million to $930 million, a 19% year-over-year increase, and a 10% reduction from our last earnings call, at the mid-point of the range.

This sequential decline reflects our decision with Fairview to transition revenue cycle operations back to Fairview Leadership, and the recent termination of our Quality and Total Cost of Care by Fairview, offset in part by the new contract win that Mary referenced earlier. Despite Fairview's actions, we are encouraged by the support we have received from our existing Clients. We are also in active negotiations with our other potential new customers, and have between $85 million and $105 million of PCARR in final contracting.

However, we recognize that there could be delays in signing until there is some resolution of the issues raised by the Minnesota Attorney General. Turning to our income statement, total net services revenue in the first quarter grew year-over-year by 55% or $254 million. Looking at our revenue breakdown for the first quarter.

Net based fee revenues from $215 million, an increase of $73 million over the first quarter of 2011, and incentive revenue, which is our share of the benefit we generate for our Client's increased to $24 million. Other services revenue was $15 million for the first quarter of 2012, and increase of $10 million over the same period of 2011. Driven by the continued strong performance of our Physician Advisory Services offering.

Our operating margin was $44.7 million or 17.6% of net services revenue, compared with $34.2 million or 20.9% of net services revenue, in the first quarter of 2011. This contraction in operating margin, as a percent of net services revenue, was expected, and reflects the impact of several large contracts signed in the latter part of 2011, which as is typical, do not contribute to margin in the initial quarters.

We expect that these will contribute to our margins going forward as these contracts mature. Moving down the income statement, our Infused Management and Technology expense for the first quarter was $25.1 million or 9.9% of net services revenue, compared with $19.5 million or 11.9% of net services revenue for the first quarter of 2011.

Selling, General Administrative costs were $17.3 million for the quarter or 6.8% of net services revenue, compared with $14.2 million or 8.7% of net services revenue for the prior year's first quarter. Turning to adjusted EBITDA. A non-GAAP measure, which we believe is the most constructive metric of measuring the underlying profitability of our Company.

For the first quarter of 2012, adjusted EBITDA was $12.9 million, an increase of 54% over the first quarter of 2011. This excludes stock comp expense of $8.1 million in the first quarter of 2012.

Our adjusted EBITDA margin was flat year-over-year, as the decline in operating margin due to the new contract more than offset efficiencies in our Infused Management Technology and SG&A . Our effective tax rate for the first quarter of 2012 and 2011 was 36.3% and 61% respectively. Net income for the first quarter of 2012 was $1.5 million, as compared to $2.2 million for the first quarter of 2011. Non-GAAP adjusted net income for the first quarter was $6.3 million.

An increase of 69% from the same period in 2011. Non-GAAP adjusted diluted EPS was $0.06 for the first quarter of 2012, compared with $0.04 in the prior year's first quarter. Now turning to our balance heat. Our balance sheet remains solid with $214 million in cash and equivalents and no debt.

This represents an increase of $17 million since December 2011. Our accounts receivables total $111 million at the end of the March, a minor increase from the end of 2011. Included in these receivables is a $24 million outstanding balance were Fairview, which is less than 180 days old, and reflects our contract terms. We expect to collect the Fairview receivable or if necessary, seek payment through arbitration.

We were pleased that at the quarter ending March 31, 2012 our DSOs remain low at 40 days, compared with 52 days for the same period of 2011. This is in line with our objectives to maintain DSOs at or below 40 days in 2012. In the first quarter our cash from operations was $14.5 million, compared with negative operating cash flow of $45.3 million for the same period of 2011.

Largely reflecting the timing of vendor payments, for the same reason our free cash flow defined as an operating cash flow minus capital expenditures and the acquisition of software was $9.9 million in the first quarter of 2012, compared with negative free cash flow of $47.3 million for the period last year. Now turning to outlook. As outlined in our Press Release, we have revised our guidance to take into account recent developments and related uncertainties to reflect what we believe is our most current view of the business.

We now estimate PCARR to be in the range of $960 million to $1.005 billion at December 31, 2012. Largely reflecting Fairview's termination of our Quality and Total Cost of Care contract. Our joint decision with Fairview to transition revenue cycle operations back to Fairview Leadership and our assessment of the current situation and related uncertainties.

We are actively pursuing new customer relationships, but at the same time we are cognizant that there may be delays in closing new business, given the situation in Minnesota. We have factored these elongated sales cycles into our outlook. For those same reasons, we now expect net services revenue for 2012 to be in the range of $960 million to $992 million, which at the mid-point of the range would represent growth of 16% over 2011.

We now expect fiscal year 2012 adjusted EBITDA to be in the range of $80 million to $95 million. This would represent a year-over-year growth of 7% at the mid-point. This range reflects not only the factors cited above, but also significant additional costs we expect to incur as a result of the lawsuit filed by the Minnesota Attorney General and related matters.

Finally, we expect our adjusted diluted earning per share of $0.42 to $0.50 for the fiscal year 2012. In summary, we have a resilient business model that provides demonstrated benefits to healthcare providers that are essentially to all of us. We want you to know that we are actively working to resolve the situation in Minnesota and related matters, and to put these matters behind us as quickly as possible.

We recognize that we have a lot of work ahead of us to maintain the confidence of our Clients and their Patients. Every day we work to do just that, and we are gratified by the positive response from our clients. We now turn to the Q&A portion of the call.

We look forward to answering your questions, and we will do our best to address them understanding that our responses may be limited by pending litigation and our visibility into the current situation. Operator. Can you please provide instructions for the Q&A portion of the call,

Yes, sir. Thank you. (Operator Instructions). Your first question comes from the line of Glen Santangelo from Credit Suisse. Please proceed.

Thanks very much. Hey, good morning, Mary and John. Listen, I just wanted to follow up regarding, John, the PCARR guidance. It kind of, it appears that you basically just removed Fairview, both the Revenue Cycle Management and the Quality portion out of your PCARR, but nothing else has come out of PCARR. Is that correct.

That is correct.

Okay. And so I'm guessing you have had conversations with all your existing Clients and, Mary, I'm guessing you feel pretty good that those clients are being to support you and those contracts are sticking and you don't anticipate any additional defections.

We've had very good conversations and I would say what, I would say absolutely along the lines of what you've just said and we are really gratified even about the reactions of some of our prospects.

Okay. And so, John, in the Late Stage contracting piece, obviously it's come down from last quarter. Does that merely just reflect Catholic Healthcare East.

It reflects that deal and another deal that we also have recently closed. A small one.

Okay. So you seem to suggest that maybe some of that Late State contracting revenues could push a little bit depending upon the ebb and flow of the AG situation so embedded within your PCARR guidance, you are not assuming that you are going to sign that Late Stage revenue in the next quarter or so, is that fair.

There's a lot of uncertainties given the situation we have right now, our prospects and our Clients I think are still working with us and in a very positive and constructive way. I think there is certainly some things they would like to see resolved in the coming month or so, but we do believe that we will continue to see growth in our pipeline although it may be somewhat deferred.

And, John, how much of the legal cost did you account for this year? I'm just trying to reconciliation the EPS guidance.

We are continuing to approximate that. There's a degree of uncertainty in and around that, but as we get greater visibility we will update you through our guidance in future quarters or if necessary between our quarterly calls.

And maybe if I could just ask one final and I will jump off. Mary, could you just give us an assessment of kind of how your conversations with prospective clients, you know, is progressing and I'm sure it comes up obviously within your meetings, and so I'm kind of curious as to the tone that potential clients are taking with respect to the situation? Thanks very much.

Sure. There's been a range of reaction, we've had everything from a major health system say we don't care what's going on in Minnesota, you know, they're from a different state, to people saying tell us, boy, this is really not at all what we hear from any of your references, and what we hear is that you're going to follow our policies and procedures, and can you assure us of that. Absolutely.

And in fact that is exactly what it says in our Partnership Agreement. And I think the whole focus is on our Client's policies and procedures are what we adhere to and what we work to and that's what gives them sort of comfort. And I think in general, what they want to do is really focus on the beef and the value, and they're very influenced by other customers who have been very, very supportive from the standpoint of references.

Okay. Thank you.

Your next question comes from the line of Charles Rhyee from Cowen and Company. Please proceed.

Yes. Thanks guys for taking the questions here. John, maybe I could follow up with you, you made the comment in terms of the PCARR guidance that, you know, that there could be delays here and you made a reference that prospects want to see some type of resolution hopefully in the coming months.

Is that kind of saying that we need a resolution of the Minnesota A G before we could probably sign some of these prospects, and is that a function of whether, you know, they might not think it's a big issue, but at least from a perception issue in their home states they want to see something resolved first.

I think actually what I'm seeing is that that is not necessarily what is a sort a check point for them. What they do want to see is that we're continuing to get all the support that we are from our Clients and good references, and that we are very focused on their policies an procedures, and that is definitely coming up in the conversations to make sure they feel it's really strong in the way that we put our contracts together. But just last week we signed new customers and so we, you know, we think it really is about focusing on the principle, which is that we honor their policies an procedures in the way that we actually collaborate with them and perform the work together.

That's helpful. So when we think about, when you read through the (inaudible) Compliance Review, and I know you are probably limited in what you can say, but obviously there is a lot of allegations here and I understand that you feel that there are a lot of inaccuracies, but you see some of sort of the quotes and references to documents, you know, obviously it's not a reflection the Company. Can you talk about sort of then what maybe the retraining that you have undertaken with staff to make sure they understand what the Company's policies are.

Sure. I mean first of all, we believe that we have very strong legal and factual defences to the allegations in the complaint, and we're going to be having a very strong fact based set of answers that are coming forward on Friday that will be available, and I think that our training is always focused on our Clients' policies and procedures, and really one of the things that we've done recently is make sure that there is a reconfirm, that is exactly what every site is operating to, and that's the thing that gives our Clients comfort is knowing that we can reconfirm to them here's the policies and procedures that affect your revenue cycle, and here's the reconfirm on the adherence to your policies an procedures.

One of the things that we don't want to do is to in any way try to say that there's one size fits all and that, you know, we're the authors of that. Again, we actually sit underneath the policies and procedures of our Clients.

You know, that's helpful and, you know, maybe if I could just, in the backlog guidance, John, I think last quarter you guys talked about a Quality contract that was in contracting. Is that still in that backlog.

That contract is, we have Intra-stay Quality pilot is what we worked through, and are in the process of that. We hope to have Intra-stay Quality expanded to additional hospitals, or additional Clients, we should say, so in the part of the Quality business is certainly moving strong and we continue to expect to have Quality prospects, we do think that this is and important offering for the Industry, and we continue to have prospects that are highly interested in gauging with us and understanding more of how we can help them and deliver value.

As I recall, maybe not last quarter but two quarters ago, you guys talked about you had two, when you still had Fairview, you had two other Quality prospects, you were saying one was the Intra-stay one and is the other one still a prospect then?

Yes, it is. Our Quality population health offering continues to have very strong interest, and we have some parties that are very interested in working through how we can work together on that, as well as on the Intra-stay Pilot, which we think is moving along very nicely. So we're very committed to both these offering. They are right on in terms of what all kind of leading thinkers believe is going to be necessary innovation in healthcare to drive that triple aim, of higher quality out comes, improved patient satisfaction or experience at the same time making healthcare more affordable.

Great. Thanks maybe I could just ask one last question. You guys have talked about that the patient collection portion of your business is very small piece, and the vast majority comes from payers directly.

You know, is that then, is it possible for the patient collection part of the business just to be sort of cut off and in the core operating then remain, is it sort of a necessary function in how you drive yield, and I guess the follow-up really to that is if you were to cut it off could you still achieve your yield targets with clients? Just trying to get an understanding how material that part of the business is even at the front end.

Very good question. One of the things that we have looked at is the consumer collection area is one that is very political and litigious, on a national basis and we have taken a look at can we get the same value by bringing the technology insights to the process, but actually having a third-party debt collector actually do that process work, and that's something that would not have a significant impact on our margins or our business model, and it is a viable strategic option which we will be looking at in the weeks to come.

Great. Thanks a lot.

Your next question comes from the line of Atif Rahim from JP Morgan. Please proceed.

Hey. Thanks. I want to press a little bit on the legal costs that you have embedded in the guidance for the year, just because it's important for us to understand what the real earnings power of the Company is at this point. Could you give us a ball park range of what's in your 2012 guidance.

One thing I want to say is that we went through a lot of scenario planning, there is a lots of different puts and takes and in putting together this range particularly the low end of the range it does sort of put together a series of different things. So it's really a combination of elements, but having said that, you know, there is a lot of the costs that will be covered by insurance and yet we don't know sort of the final answer on that. So in terms of any specific numbers, John, maybe you can answer.

Yes. Atif, there's too much uncertainty to tell you exactly what that's going to be. We are still working through both our legal strategy and what that response and timeline would be. Obviously there is a number of things from a PR front we're investing in doing differently than we would have done two months ago, so in both of those regards there's just too much uncertainties you will see the wide range in our adjusted EBITDA that reflects numbers that are going to be fairly significant range in the $80 million to $85 million.

So we think we have adequately reflected the number of the low end scenarios into that low end of the guidance.

Help us for the first quarter, what have your legal expenses been.

Legal expenses there were in line, and predominately associated with this situation covered by our insurance. They were a pitons.

Okay. Okay. Understood. And then what's your best estimate of how long this could take to get resolved.

I don't think we can speculate on that. Wear optimistic, and we want to move as quickly as possible to get this behind us and get back to building our business and our Client value and strengthen our relations with our Client's, which is what we do every single day as we operate our business.

Okay. Understood. And then, Mary, you mentioned you signed on I guess at least more than one Client in the last few weeks. Could you elaborate a little bit on that? Was that a straight forward revenue cycle client or something, Physician Advisory or other services or Intra-stay Quality.

In this past week they were in Physician Advisory Services.

Okay. Understood. And any other signing's on the rev cycle side since Catholic Health.

No. Not since Catholic Health.

Okay, okay. Got it. And then I guess.

That was very recently too, so.

Right right. Understood. And then somewhat related to Charles' question on the upfront collections portion since it seams to becoming a National issue. Have any of your Clients asked you to bare back your collection efforts proactively.

Our Clients have really wanted to do what I was talking about earlier, which is to get a reconfirm that all their policies and procedures are what we are working to and so that's what we have done.

Got it. Okay. And then in terms.

As you may know, I mean the policies an procedures that our Clients have and that we also think are quite good are (inaudible) you know best practices so people just want to make sure that that is in fact what is being operated to or operationalized on the ground every day. That's the key.

Okay. And in terms of the Company's growth prospects, etc., as you're looking out, what is headcount at the end of March? How is that going to change, are you still hiring mode, are you just holding back.

In terms of headcount are we in hiring mode. We actually had this very significant addition, and we had some other growth within existing customers that we were planning for, and so between transitioning some personnel in Quality to Fairview and then absorbing other people into the growth that was already in the plan, we think the headcount is actually probably fairly right-sized at the moment and we don't anticipate any layoffs or anything significant of that sort.

We did have a little bit of growth in our headcount but it's really tied to our Shared Service Centers and as we are moving out of what we call leased employees, or contract employees that are Clients into our Shared Service Operating Centers, particularly in Chicago, we did have a growth of a little over 150 people since the last quarter. So that was almost all operating people within our Shared Services Centers.

Okay. Understood. And then last question on the contracting pipeline, John, you say you're expecting deals to take longer to close. What's the new realistic timeline that you're building in.

There is a lot of uncertainty so we do believe that this news is not going to accelerate the pipeline. We don't know how much it is. We are taking more conservative view.

Yes. I think what we wanted do is just be conservative in our PCARR guidance, and it's good and instructive to see that the late stage contracting has not changed, other than those that have graduated to actually becoming business, but we're just building in some necessary sort of caution the way we think it's going to follow through to completion.

Okay. Perfect. Thanks very much.

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

Good morning, thanks for taking the questions. First off, could you just walk us through the next steps with regards to legal process in the Minnesota A G lawsuit.

Well, we have filed our Motion to Dismiss and, again, one of the finest litigation firms, if not the finest in the Country, Kirkland & Ellis, has filed it as a Motion to Dismiss, and we believe that we have very strong factual and legal defenses and now it moves, you know, through a court system and we think that the facts and the truth will come out. So we can't speculate on exactly how long something like that will take, but we think that it's going to move now in a rationale process.

Okay. And any thoughts on potential settlement.

Well, we're always open to a reasonable resolution, and we have not changed on that posture from day one. We've always been working in good faith and very open to that.

Got you. And then with regards to the $85 million to $105 million in backlog, how recently have you just checked in with these customers and received their continued commitment of intent.

We are always in contact with the people who are in that Late Stage contracting, we actually hosted some site visits last week, and so that as you might imagine is a very close collaborative process.

Okay. And then given the move in the stock price and has that changed your thoughts around uses or allocation of the $250 million in cash you have in your balance sheet.

Sebastion, we continue to examine and our Board continue to examine what is the best use of that capital for the interest of our shareholders, we will continue to do that and evaluate what is the appropriate use of that cash.

Great. And then just finally, do you still expect to have an Analyst day on the May 30th.

We're actually taking a look at whether or not that is the best timing, and we will be getting back it people with that probably in the next week to try to confirm or to establish an even better time.

Great. Thanks a lot.

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

Good morning, and thanks for taking the call. I wanted to circle back on the Q2 COC business, and I think Atif's line of questioning. First can you help us understand what happens to personnel there, the Doctors and Nurses who are working at Fairview, are these people that can be transitioned to say a new Quality or Intra-stay deal, and how should we expect the wind down on the Fairview Quality agreement to impact the P&L I guess for the next few quarters and potentially into 2013.

Well, we are actually working with Fairview on that transition, and our objective there is to actually support them since they continue to carry forward with all the good work that's been accomplished, and at the same time we have a lot of excellent people that is you say we can move into our Intra-stay Quality pilots which we think are really going to be a moving forward here this year.

So we're looking at each of these as individuals. Some have an appetite for travel, and some don't, and we're working to find good solutions for all of them and actuality it looks quite good in terms of the plans that we have been reviewing.

Okay. Are they on a contractual agreement I guess based on the Fairview quality agreement or is this a contract with Accretive directly that runs through the end the year.

Most of the employees are on a contract with Accretive and the transition that we're working through would be going through the end of I think another two months of transition, I'm not entirely sure, but the transition plans are being sort of finalized, and I think one of the things for people who don't want to travel, they might very well find that they are going to be invited to be part of the Fairview Team going forward.

Okay. That's helpful. And then I guess I will touch on Physician Advisory Services, as it doesn't seam to be too much focus on that segment this call. I'm curious what the overlap looks like with PAS and your existing RCM business, and if you can help us kind of understand the cross-sell opportunity and how we should think about the future growth from that segment, you know, is it going to be driven primarily through existing customers or new customers is there.

That's a great question.

The Physician Advisory business has many more customers than our revenue cycle business, in the sense that it is an offering that is much easier to sort of get adopted and has a much faster implementation time frames. So there's probably about a 50% overlap in our existing rev cycle customers and room to grow within there, but there's also a series of new customers that our offering is actually first introduction that those clients have to Accretive Health, and we do have situations where that introduction leads to further exploration of revenue cycle.

So we do see those cross-sell opportunities. Great. And then just one quick one. You know, I have picked up from other areas of headcount that Medicare audits have increased, especially around the beginning of this year. Is that something that you guys are seeing in your business as well.

I don't know if we have seen a big increase in Medicare audits, but we could look into that, there's nothing that has sort of gotten to a level of being able to see anything transparently like that. It's normal activity.

Okay. Fair enough. Thanks very much.

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

Thank you for taking the questions. The first question I had is to Mary. You've talked repeatedly about how you follow the hospital's policies and procedures, and I'm just wondering if some of your customers feel like their policies are under attack, and whether you have been in contact with HFMA since you said those policies are in alignment with best practices from HFMA, what kind of Industry support are you receiving and like I said, are any of your customer's, do you expect them to become more vocal in terms of defending some of these practices.

Well, I think actually a very positive development that we're working on is the establishment of a Blue Ribbon Commission with very prominent people Nationally coming together in an independent way, with some good cross representation of different constituent's to develop a gold standard for patients interactions around the financial side of care, and in so doing actually begin to create that bold standard with really good detailed operationalized levels of debt that can create a Safe Harbor for really all the good providers who are out there and really all the ones I have ever met are really quite good and really want to be doing the right thing.

They're trying to preserve their mission, their ability to serve the communities that they are in, while at the same time have very respectful patient interaction but to the extent that those who the ability to pay have not been able to get a correct bill, or for whatever reason haven't paid, that's jeopardizing their mission and I think trying to put together all of those objectives in a way that very thoughtful people agree is wise and consistent with the value of respect and compassion for patient is a very good thing.

So I think the positive that can come out of all of this is a really interesting National Blue Ribbon Commission with very prominent Leadership. I think we're close to seeing that be something that will be announced, and I think it's going to be very beneficial and everybody seems to be excited about that.

Is that something you think HFMA might partake in.

I would think that the industry groups would be interested. It's likely that it will be something that whether it be the American National Standards Institute or HFMA, but various appropriate standards groups will be invited for their representation.

Alright. Thank you. That's helpful. I wanted to circle back on, I think it was Glen who asked the question about final contracting, whether the decline was simply SCHE and you said something else also signed. I just wanted to make sure that nothing actually dropped out of final contract.

That's correct. Nothing dropped out and there was one thing that actually graduated to one small other deal.

Okay. Great. And then in terms of additional A G inquiries have you received request for information from other A G's and is there any feedback from the meeting you had last week I believe last Friday with Congressman Waxman.

Actually we have not received any other inquiries from other Attorney Generals, and the meeting actually was with Senator Franken's staff, and it was a good, thoughtful, polite exchange. People seeking to understand better and to get to a factual understanding.

Okay and then just lastly, John, you talked about, I believe you said $24 million of A R was tied to Fairview and that could potentially go into arbitration. I I was wondering, have they disputed the outstanding balance and is that primarily base fee.

It's a combination of incentive payments and base fee, and we are working through that in our transition agreement for how that would go through. Obviously, we are working through the end of the period and deal with obviously our yield measurements so we are continuing to let that mature and work those items through on the gain share side.

But is there an open dispute.

They are obviously, as all of our clients do, are auditing and evaluating the results of our score cards that tie to our yield benefit.

Okay, great. Thank you.

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

Hi. Thank you. Mary, can you speak to some of the more important factual inaccuracies in the Minnesota Attorney General report.

Well, there's a great deal of them, and I think the best thing will be when the Report has been delivered to Senator Franken. I think that will be very clear.

You know, there's so many of them and we said in our statement, you know, a simple example of a father who was in the emergency room with a child and he was requesting information and after having been called in to help and give that father the information completely consistent with all guidelines and the father thanking us for that that was completely mischaracterized. So there's things of that ilk and I think there will be a pretty comprehensive in terms of the fact based, documented responses that will be going forward on Friday.

Okay, and that's going to be, we will see that as well in a filing or something.

Yes. I mean I think that will be a public disclosure, and the other thing that you can take a look at is the Public Motion to Dismiss the Case.

Okay. So, you know, historically you talked about and written in why you are filings, that one of the key value propositions of Accretive Health is implementing standard operating procedures. So is it just that, you know, now as you're talking about how you adhere to all of the policies of every individual client. So just help us understand that balance of your ability to implement standard operating procedures that are the Accretive way, versus adhering to the policies and procedures of your individual clients.

That's a great question, Sean. I think it really comes down to this collaboration, so what we do is we'll able to share with our Clients what we have sort ever learned overtime in working with clients is a best practice, and at the same time best practices often are at a higher level and how you actually operationalize them in a given health system will depend on things as mondain as how many registration physical locations do they have , and whether or not they have a centralized scheduling unit and so forth.

And so when you look to operationalize a best practice, the Client and their policies an procedures have always taken things into more of a day to day detailed sense, and that's where you bring the best of those minds together and so its collaborative. We share what we think are the best practices. They at the end of the day have the ultimate say and that's what our contracts say. It's the Client's policies and procedures that we adhere

Okay. That's helpful. And quick one for John. On your revenue guidance, can you give us some sense of the mix of base revenue in shared services and incentive fees.

Oh, I will, the transition to the shared services range I don't have the specific number. We continue to migrate folks over. Give me just a second. We have about 45% of our current base fees using shared services today.

Okay. And your revenue guidance, what percentage of that total is based and then what is incentive.

Oh, in terms of the base we typically run the base fees right around 80% to 83% of what our target. Again we'll be adding more base fee as we add new clients because the incentive fees ramp up through the life of the contract.

Okay. Thanks. Thanks very much.

Your next question comes from the (inaudible) of William Blair. Please proceed.

Good morning, guys and thanks for taking the question. So given the revenue concentration for Ascension, I think it's important to ask what show of support have you received specifically from Ascension and whether that be from specific sites or from the parent organization.

We are very close with Ascension, both at the site level as well as at the parent organization, and we are working very well together on our contract renewal and that process is going very well.

Great. That's helpful. And then a follow-up on your discussion on kind of Quality and Total Cost of Care prospects at this point. I was curious if you have results from Fairview at this point that kind of prove out your solution an you will be able to use going forward with prospects.

That's a great point and we absolutely do. We have results that are both with regard to the quality indicators as well as the affordability or cost side.

Great. I guess the follow-up given you have talked about kind of the working relationship to it to transition that contract there is, you know, is this a possibility that Fairview will be a reference account for Quality and Total Cost of Care products going forward.

They have told us yes.

Okay. Good and, then just one final one. Given the nice base fee increase in the quarter, I was hoping you could give us kind of a progress update on your inter mound, and implementations and how much more you have to do there, how many more sites and also just kind of the status of investments in your Center of Excellence in Utah.

Great questions. You know, we're completely on track with no change to what we have been working on in Utah.

The same plan was always to get the large hospitals up and running, and then to move to the ones that are a little bit more rural or remote and so that's exactly as we have described, and then with regard to the Center of Excellence, we have also been pressing forward on that and have had some great collaborative sessions around the designs there where we think we can take some of the key investments to absolute new industry standard levels and actually what processes we're going to be bringing up first there and what business we can be bringing into that. So all of that planning and sort of detailed design effort has been proceeding very well.

Great, then just a final follow-up on that, maybe more for John. Is there, has the exact kind of range of dollar amounts for that investment changed at all.

No. It's consistent with what we had forecast and talked about in our fourth quarter call the kind of investment we're making. We are continuing to invest obviously in the business and longer-term prospects.

Great, thanks guys.

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

Hey. A quick question on the fundamental backdrop. You know, as you all have success in improving the hospital's revenue collection yield, what types of competitive response have you seen, or may you see down the road from payers on the contracting side? Do you find that that moves the needle at all or is it still flying below the radar screen.

Well, you know, actually that's a really great question, Doug, because what actually happens when you're improving yield is you are avoiding a denial.

Mm-hmm.

One of the primary ways a denial would occur it would be if they scheduled service, was deemed not medically necessary, but nobody knew about it until it went forward. By actually performing with Excellence that process of getting the necessary prior authorization, only those procedures that are medically necessary and are approved move forward, and with what that means is not necessarily, the fact that there isn't a denial isn't a loss for the payer.

Mm-hmm.

It's a good for both side of the equation and it just means that the appropriate steps in terms of checking for authorizations an so forth are taking place. So it's not a win lose, and because it's not a win lose for the most part it actually is processed excellence which leads also to fewer administrative cost on the payer side. So the ultimate answer is that we have not seen any of that sort of reflected as far as a payer saying okay, let me try to get it pack on price.

Okay. And there's been a lot talk today about client decision process and obviously the regulatory, you know, questions or issues may delay some of that under a you have talked a lot about that.

Maybe just a little bit of a different angle on that front, just with the ongoing Supreme Court review of Health Reform and the uncertainty around that, but then also thinking about the impact of Reform should it go through, what are you hearing from Clients or prospective clients on that front? How is that impacting their thought process one way or another? You seeing some cases where it spurs them to action and in other cases where maybe it pushes the pause button for them. What are you seeing from them on that issue.

I think what it is saying in general is that people anticipate that the ability to run their organizations and meet their mission in their community is going to be under more financial stress net net and so, therefore, it means that they're looking for ways to improve, to get more efficient to buttress their financial strength so they can continue with their mission an they're also looking for ways to figure out the quality side of things.

And how we can help them with reducing costs an in an episode care and also some of the leading ones are thinking beyond that how they really can play a role in keeping populations healthier an reducing overall cost of care. So I think, I've never seen the mindset and the dialogue so constructive around what's possible, and I think it actually creates a much more open, much more open current dynamic to ideas and how to improve efficiency and quality.

Okay. And then maybe just to sneak one final one in. Just on the PCARR, the outlook, if we try to bridge the prior guidance with the new guidance, John, maybe just help us out here with the, I think Fairview's number around $100 million, the Late Stage pipeline about $90 million and are we right in our math that says that there's about another $60 million or so delta between the two and should we think about that as conservatism, or just how would you characterize that remaining piece.

I think it's fair to say that at this juncture conservatism was sort of the theme of how we were putting together projections.

Okay. So that's not a specific thing. It's just taking a slightly more conservative view.

Yes.

Yes. Okay. Great. Thank you.

Operator, if there is one more question before we conclude the call.

Your next question comes from the line of Charles Rhyee from Cowen and Company.

Yes. Thanks. Sorry, I would one follow-up question. Thanks for squeezing me in here. You know, as we think about the process with the Minnesota A G, and I know you made references here that you would like to find some type of resolution.

You know, is there a difference between settling and then going ahead with litigating because clearly, you know, serious acquisitions were leveled and you have come out and said there is a lot of inaccuracies here. Obviously we will get your response it sounds like on Friday, but when you see some of these typical settlements, you know, it usually comes out with something language like you know neither confirms nor so no whatever, you know, confirms or denies wrong doing and we just, here's a resolution and we move on, but is that enough you think for your client base and your potential client to potentially say alright this is behind us, we can move on, or is this something that perhaps you want to litigate because you want to demonstrate hey, we did nothing wrong here and these accusations are flatly false.

Charles, you have really synthesized a lot of important considerations. We think that by responding with some of the stuff that's going to be coming out an Friday and so forth that, you know, the truth is going to be out and we will support any inquiries that our customers have on getting the truth out and, our customers can talk to our other clients and hear that and I think that, you know, it was instructive.

We had clients that came out and said we have seen nothing like the allegations in Minnesota. We have found our partners with Accretive to be nothing but respectful of our patients, our policies and our procedures.

They are very gratified by the work that we do to find solutions for the uninsured. I think also from a factual standpoint, the legal process does begin to make sure that everything is working with evidence, facts and with the rule of law. So there is a lot of benefit that comes from that. Having said that, you know, we love to focus on our business and if we could get the litigation wrapped up quickly, we would be happy to do that, too.

Great, thanks so much, guys.

Alright. Well thank you. John and I would like to thank everyone for participating in our call today. We look forward to keeping you updated on our progress. Thanks, and have a great day.