R1 RCM Inc (RCM) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2012 Accretive Health Inc. earnings conference call. My name is Stephanie and I will be your coordinator today. At this time all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Mr. Gary Rubin, Investor Relations Officer. Please proceed.

Good morning and thank you for joining us. With me on the call today are Mary Tolan, Accretive Health's Founder and Chief Executive Officer, and John Staton, our Chief Financial Officer. Earlier this morning we issued a press release announcing Accretive Health's second-quarter 2012 results. A copy of that release is available in the investor relations section of our website at www.AccretiveHealth.com.

Please note that 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 or future financial and operational performance, expected growth, new services, profitability, or business outlook, are forward-looking statements. Investors are cautioned not to place undue reliance on such forward-looking statements. No assurance that the matters contained in such statements will occur since these statements involve various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. These risks and uncertainties include those listed under the heading risk factors in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2012, filed on May 9, 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, August 8, 2012 only, and should not 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 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 a reconciliation to the appropriate GAAP measures. After the conclusion of Mary and John's prepared remarks they will be available to answer your questions. At this time I would like to turn the call over to Mary Tolan, Accretive Health's CEO. Mary, please go ahead.

Thank you Gary. Good morning, everyone. Thank you for joining today's call. Despite a challenging quarter, we have a number of promising updates to share with you. We recently signed our five-year renewal with Ascension Health with a total contract value of $1.6 billion to $1.7 billion. As you know, Ascension Health is the nation's largest Catholic and nonprofit health care system. We are proud of the strong working partnership that we formed with Ascension and we believe that this is a leading indicator of the sound and growing relationships we establish with our clients. We look forward to the next productive chapter of our partnership, and with this contract we will be providing expanding value.

Our intra-stay quality program continues to move forward and we are now in final contracting with a multi-hospital rollout. This is a great opportunity to establish the value of intra-stay with one of our largest clients and to promote this offering to other hospital systems. Regarding quality and total cost of care we are now in final contracting with a leading national cancer physician network. This organization has identified Accretive as the right partner to help their practice group members to provide and monitor care through a coordinated and integrated approach that delivers better outcomes for patients, while controlling costs. As far as the pipeline, we're very pleased that our pipeline and final contracting remains a robust $100 million to $120 million in annual PCARR and we see an even greater book of business beyond the final contracting stage.

To give you some more insight in how we view our pipeline, we're going to explain the stage right before final contracting which we call solutioned. In the solutioned portion of our pipeline, these prospects have already gained executive sponsorship behind the decision to engage Accretive as a partner. We've completed the long vetting process and the top decision makers have decided to move forward, but we have not yet started the actual legal contracting. We estimate the potential PCARR in the solutioned stage is another $100 million to $120 million in addition to the $100 million to $120 million in final contracting. So this gives us line of sight to $200 million to $240 million in PCARR growth.

Our dedication to process excellence requires us to carefully examine our own practices to ensure that we are setting very high standards for our own performance in achieving the best possible outcomes for hospitals, patients, and communities. To that end, we're committed to achieving the high standards in confidentiality of patient health information through actively pursuing the high-trust certification of our data security practices and procedures. We are targeting the end of October for being able to achieve this high-trust certification.

Further, we took a leadership role in the formation of an independent blue ribbon committee whose purpose is to develop objective standards and practices for addressing patient financial obligations for the care they receive. It's chaired by Michael Leavitt, the former Secretary of the Department of Health and Human Services, and committee members include some of our nation's top experts in government and health care. We will seek full certification under the new standards when they are issued.

On the talent front we recently filled key positions with incredibly talented people who recognize the impact of the work we do and want to be part of the innovation. Over the last few months Doctor Scott Nicholson joined us as our Chief Data Scientist, and Todd Frech as our Chief Information Officer. Scott comes to us from LinkedIn where he was the Senior Data Scientist and is assembling a team at Accretive to pursue big data insights in building predictive models and solutions. Todd was formerly a leading technology partner at Accenture who led engagements for fortune 100 clients and is a great addition to our leadership team. We continue to recruit world class experts to take our business to higher levels of performance.

Before I turn the call over to John Staton, I want to say a few remarks on our settlement with the Minnesota Attorney General. We believe the allegations against our Company were unfounded and politically motivated. While we strongly believe that we would have prevailed in court, the reality of the litigation and political process today unfortunately makes settling this dispute the wiser course. We strive everyday to be a constructive and positive contributor to the American healthcare system and we are extremely proud of our record in helping hospitals find all available coverage for patients, and ensuring that insurance companies and government programs pay their clients what is due for the care they provide. In end there was some fallout and due to the regulatory environment we chose to remove our operations in the state. The distraction is behind us now and it's time to get back to business. Now our Chief Financial Officer, John Staton will review our second-quarter results and outlook for 2012. John?

Thanks Mary. Good morning, everyone and thanks for joining our call today. Beginning with net services quarter, our results grew by 29% to $236 million in revenue, an increase of $53 million over the second quarter of 2011. The revenue breaks down as follows. Net base fee revenue was $195 million, an increase of $45.6 million over the second quarter of 2011. And incentive revenue which is our share of the benefit we generate for our clients was $27.5 million, an increase of $1.6 million over the second quarter of 2011. Other services revenue, which was driven by the continued strong performance of our physician advisory services offering was $14.4 million, an increase of $6 million over the same period 2011. PCARR, projected contracted annual run rate of revenue that represents the expected total revenues for the coming 12 months for all of our clients under contract. We are estimating that PCARR as of today will be in the range of $867 million to $884 million. The change from May 9 predominantly reflects the impact of the Minnesota litigation and resulting contract terminations.

For the second quarter, there were two key factors that had a total negative impact of $14.6 million on our financial performance. First, lost operating margin and stranded personnel costs arising from the Minnesota litigation and resulting contract terminations aggregated $12.7 million. Direct legal defense in crisis management costs associated with litigation aggregated $1.9 million net of estimated insurance recoveries. Our operating margin for the second quarter was $45.3 million, compared with $47.1 million in the second quarter 2011. The contraction in operating margin reflects the negative impacts previously identified.

Moving down the income statement, infused management technology expense for the second quarter of 2012 was $25.9 million, or 10.9% of net services revenues, compared with $21.2 million or 11.6% of net services revenues for the second quarter of 2011. Selling, general, and administrative expenses were $20.6 million for the second quarter of 2012 or 8.7% of net services revenue, compared with $12.6 million or 6.9% of net services revenue for the second quarter 2011. The increase in SG&A includes $1.9 million in crisis costs, ongoing investments in our business development team, and cost associated with our high-trust certification process and other investments.

Turning to adjusted EBITDA, our non-GAAP measure, for the second quarter 2012 adjusted EBITDA was $7.3 million, compared with $20.7 million for the second quarter of 2011. Again this reflects negative impacts I reviewed earlier. For the first two quarters of 2012, operating cash flow totaled $6.2 million, compared with negative operating cash flow of $28.5 million for the same period of 2011, primarily due to the timing of payments from customers and to vendors. For similar reasons, free cash flow defined as operating cash flow less capital expenditures and the acquisition of software was a negative $4 million for the first two quarters of 2012, compared with a negative free cash flow of $35.1 million for the same period of 2011.

At June 30, 2012 our balance sheet remains strong with a total cash balance of $200.9 million, compared with $196.7 million at the December 31, 2011. Our accounts receivable totaled $124.9 million at the end of June, an increase of $32.9 million from the second quarter of 2011. Our second quarter DSOs are 48 days. However, if Fairview's outstanding AR had been paid on time, DSOs would have been 38 days, in line with our objective of maintaining DSOs at 40 days or less.

Now turning to the fiscal 2012 guidance. We are revising the guidance issued on May 9, 2012 for the fiscal year 2012. First, we are reaffirming our guidance that PCARR at year end will be in the range of $960 million to $1.005 billion. Our revised guidance for 2012 net services revenue will be in the range of $948 million to $980 million, reflecting the wind down of the remaining Minnesota clients. Fiscal year 2012 non-GAAP adjusted EBITDA will be in the rage of $50 million to $55 million.

The following factors impacting 2012 non-GAAP adjusted reflect an additional $15 million to $19 million of anticipated drag for the remainder of 2012, based on three factors. First, lost operating margin and stranded personnel cost arised in the Minnesota litigation result in contract terminations. These are non-recurrent costs and will primarily impact Q3. Direct legal defense and crisis management costs resulting for the Minnesota litigation. This will primarily again, impact Q3 and is also nonrecurring. A one-time $4 million to $6 million of seasonal incentive revenues that are anticipated to record in the first quarter of 2013, instead of the fourth quarter of 2012, due to the elimination of seasonal effects in the incentive revenue measure provisions of the new Ascension contract. We estimate that our existing contracts would have a run rate adjusted EBITDA of $78 million to $82 million for 2013. New contracts signed between now and the end of the year would be additive.

Finally, we're revising our guidance for non-GAAP adjusted diluted earnings per share for the year ending 2012 to be in the range of $0.23 to $0.27 a share. We continue to actively pursue new business opportunities and we'll provide updates as appropriate. Now I'd like to open the call to Q&A.

(Operator Instructions)

Atif Rahim, JPMorgan.

First question is on the updated guidance that you're issuing. John, if I heard you correctly towards the end, you said $78 million to $82 million is for 2013. Would that -- I guess first is that correct or the way I read in the press release was perhaps the next 12 months, just a clarification on that. And then in terms of the pipeline that you have, what is the time line around that converting?

In terms of the $78 million to $82 million, Atif we are really looking at that in terms of what our core business under contract today would deliver for us in 2013. Obviously new contracts would be additive to that number.

Okay. Got it. And then the second question, the conversion pipeline, and then I had another one on Ascension, the $1.6 billion to $1.7 billion that you are referring to over a five year period, the run rate there is not very much different from the $335 million or so that you generated in 2011. What are the puts and takes there that we should be thinking about? If you can comment at all on how the margin structure is for that going forward.

In terms of the puts and takes on the projection, we didn't add in the optional new areas of services at this stage. As those come on that would affect any PCARR for Ascension. So that's basically a conservative based on the current contracted scope and expected growth in that.

And in terms of your second question was on the margin. So the margin in the contract is a function of both base fees and gain share. The base fees actually are going to go up now in a predictable fashion as actual cash or net services revenue goes up. And then we will be giving them a guaranteed cost reduction in the first three years, where we will then be able to harvest all of the additional cost reduction that we actually drive. So it essentially allows for more risk, more reward and to the extent that we actually are extremely effective in the cost reduction, and the plans that we have we would actually be able to do better than the historic 50/50 sharing on cost reduction.

On the gain share side, we actually have an ability if we had good performance and we actually are able to produce the additional value that we expect, to be able to maintain or even improve our margins.

Okay. Understood. Thanks very much.

Glen Santangelo, Credit Suisse.

Just two quick questions. Mary, if I take a look at the PCARR that you guys projected six months ago, on December quarter the PCARR was $1.027 billion, and now your PCARR using the midpoint in your range is $876 million. Your PCARR is now down over $150 million using the midpoint of your new guidance. Is that all just strictly Minnesota? Was there anything else in there because I didn't think they were that big.

Well, it's really the full effects of all of Fairview including quality and total cost of care and all of North Memorial. So is it actually primarily just Minnesota.

Maple Grove and our physician advisory services and other lines of business that we also had in the state.

Okay. And then if I look at your adjusted EBITDA that you reported this quarter, $7.3 million, was that $14.6 million that you called out in the press release all -- did that all impact you in this current quarter because it seems to suggest you are expecting there's going to be some additional impact coming in Q3.

Yes, $14.6 million absolutely impacted us all in this quarter.

There is going to be a -- the aggregate impact is going to increase next quarter as you incur some additional charges? Or whatever -- however you want to characterize them?

Yes.

In the release we, Glen, we have the $15 million to $19 million of anticipated impact for the remainder of 2012.

Yup. Okay. And then lastly maybe could you comment on what you saw with respect to your incentive payments this quarter? As I look at that run rate $27.5 million, I mean, it was up sequentially but up only slightly versus four quarters ago. I would have thought the growth would have been a little bit bigger. I'm not sure if some of the gain share was impacted by Minnesota or could you give us any additional color on that?

Yes, the expense was associated with the Minnesota and the wind down there, particularly in our quality business as well as the RCM business that we had associated with that, and we have taken an conservative stance relative to the contract terminations that are result of the Minnesota litigation as well.

Okay, all right. Thank you.

Ryan Daniels, William Blair.

Quick follow-up on your commentary about the EBITDA run rate. If we go back to last quarter, I know you guided $80 million to $95 million in EBITDA for this year, which obviously has to come down given the expenses with Fairview in Minnesota in general. But looking at the run rate of $72 million to $80 million, I'm surprised it's below that number which incorporated already the Fairview wind down and some legal costs. I'm curious, what's pressuring the EBITDA above and beyond the run rate last quarter?

First of all, it was $78 million to $82 million is the range that we are providing for the adjusted EBITDA. And I think if we think about the business here again, this is what we have under contract today. Two factors with the additional reduction in our business associated with our voluntary leaving the state of Minnesota. That is impacted and what's not also in there is we continue to sign new physician advisory services clients, and we continue to sign new business in the back half this year that would be additive to that run rate of adjusted EBITDA.

So we spoke about what is in the pipeline and any of those deals that are closing that are in contracting or in the solutioned phase between now and the end of year are not in that number.

I appreciate that, maybe I'm looking at it wrong. When you guys have the $80 million to $95 million guidance before and now you are saying $72 million to $80 million is the run rate still kind of --

In that guidance it had the first four months of the year of the Fairview contribution. So that would be your primary delta.

Got you, Okay, that makes sense. I wasn't considering that. You talked a little about the solutioned pipeline which is a metric that's helpful and that we hadn't heard. I'm trying to get a flavor on what that maybe looked like in the prior quarter or the year-ago period just to see how that compares to what you've seen in the past. Do you have that data?

I do. It was at roughly 50% the size it is right now. It was running more like $50 million to $60 million. And really if you look at the two pieces combined, what is in contracting and what's in solutioned, the two together are up about $50 million to $60 million.

Okay, perfect. One last one. Just when you look at pipeline, obviously you have a much broader service offering today with the core revenue cycle. You have the intra-stay quality. You have the quality total cost of care, physician advisory, a big portfolio. If you look at that pipeline, is it delineated or skewed towards one of them more than others or is it as balanced as it has been in the past?

That's a great question. I would say it is in PCARR right now still skewed towards the base revenue cycle business. As we mentioned, we've got the two new contracts in quality now in contracting. But if they come on, they are a relatively small contributor to PCARR in the near term. And then physician advisory is at a run rate right now of about $55 million and it's growing very rapidly. But it would not be at the same level as the core revenue cycle PCARR. Not even close.

Okay. Great. Thanks for the color.

Charles Rhyee, Cowen.

Maybe circling back to the Ascension renewal and just trying to understand a little bit more about how we should think the pricing here works and just understanding maybe some changes relative to the prior contract. First on the base fee, you're talking about giving a guaranteed cost savings to Ascension for the first three years but you keep all the savings. How can we -- can you help us box the magnitude of that change and how does that John, does that run through our income statement? If I recall you used to say over the first four to five years we're going to save roughly 20% and we keep two-thirds and give one-third back and that ramps up over time. If we think about the first three years, are we talking about an average of 7%, 8% savings and we give some of that straight to Ascension first? Can you help us frame how big we should think about it?

I think two key points to consider here, Charles, first of all good morning. Is that we have a base fee structure that is based on where our run rate was coming into the new contract. And so that mechanism is basically the same as we go forward. What has really happened here is a transfer of the risk to execution to us. So to the extent that we continue to execute in a very strong way, we will continue to get very similar economics for Accretive Health. What has happened here is that there's guaranteed savings now for Ascension versus before they participated in a share of what we were able to deliver. To the extent that we can execute better and continue to improve our gain, we will be able to make margin or equivalent margins if not more resulting from our base fee.

I see. So it's not like you are shifting out any of the base fee savings. It's more that if you were expected to save two, they're going to automatically get one, but if you did three that year, you keep 2? Is that the right way to think about it?

Exactly. And I think to be clear I think the way we structured it is it used to be a 50/50. So we took what would have been expected and their 50% portion of the expected has now been guaranteed. To the extent that we actually perform any better than expected that's where the upside is to us.

Can you give us any historical flavor on how you've actually performed on the past on the base fee?

On the base fee we have been able to hit or exceed our cost reduction targets. And remember, a lot of this is now mature, and so the targets once you get to the mature end are not very significant sequentially year on year.

Okay. It shouldn't really be that big at this point.

Exactly.

Okay. Maybe a question then on the incentive fee. If I read the language in the 8-K that you put out, you talk about now as an improvement on cash collections relative to standard operating metrics. If I recall from the prior that was a little bit of a change because I think it used to be a gross yield improvement. Can you talk about how we should think about how that affects incentive payments and what does that really entail at this point?

What really has happened is there has been an addition of metrics that go beyond yield into balance sheet, and then also some operating metrics that would relate to let's say something like credit balances, which is actually an operating metric. So what we now have is the ability to earn the incentives fees on more than just yield improvement by actually improving balance sheet strength and operating metrics as well.

Is then the waiting now before used to be 100% yield improvement and now it's I don't know 60% yield improvement, 40% operating metrics, something like that?

Exactly.

Is that a function more that because yield improvement itself can be a little bit of -- I don't know what's the right word. It's not like necessarily a solid figure like a balance sheet metric is. Or is that really not the issue here?

It's a really great process of involving a broad constituency of CFOs within Ascension. And as they thought about all of the things that were important to them and what they wanted to make sure that the partnership is incentivized to achieve, they wanted to add some more traditional metrics. And so it was really about getting everybody's good thinking and how they wanted to build the balance score card.

When you look at what the balance score card should drive in incentive fees for you based on historical performance, how would that compare to what you actually reported?

We think it's a very comparable mechanism. As we look at what our projected performance is, if we are able to hit that performance we should be able to maintain our margins, and if we are able to do better we should be able to improve them.

Great. Thanks.

Bret Jones, Oppenheimer.

I just wanted to follow up on Ascension. You've talked about how you should be able to at least maintain the margin and potentially exceed it. I was just wondering if we think about 2013 as you look at the margin profile of Ascension, would you expect the base fee margin to be at least the same as what you expect in 2012? Or is there a decrement in the first year and then work your way back up?

I think the base fee would be comparable. That's basically what we've been saying is that we projected what kind of cost savings that would have been typical, and took a look at what the 50/50 sharing would have been, and then just locked in the 50% that would have been there for our partner.

And the same can be said for incentive fee as you look at what you expect in 2013 versus 2012?

Yes, with the expected performance that we are planning to drive, we believe that we should be -- which will create more value for them and we'll be able to maintain our margins, and if we can do better, we can improve our margins.

Then I just wanted to also touch on the decline in PCARR in the current quarter. It looked like it came down by $45 million over what you reported at the end of last quarter, and we talked about Minnesota being about I think $23 million to $25 million of that. Would the balance essentially be the change in the base fee structure with Ascension?

There is a component. No, it's basically driven by Maple Grove which was something that happened before the voluntary departure from the state. As well as some other lines of business that were associated with that. But if the drop is substantially all or substantially component of that is tied to the Minnesota voluntary departure, and the Minnesota litigation.

Then just the last question, I just wanted to touch on the final contracting in terms of the time line of when this should come on-line, you've talked about 90 days historically, and then after the last quarter with the whole issue with Minnesota, you talked about that lengthening out. As you've now got a settlement and you go back to some of the customers within final contracting, what's the new time line when you would expect some of that to move into PCARR?

With the intra-stay and the quality and total cost of care deals, I think they are actually moving along very well and maybe within 30 days of completion. And we have pieces of the rev cycle, PCARR as well, that would be in that time frame. And so I think that the 90 days for the contracting pipeline is probably at this stage a good way of thinking about it.

Okay, great. Thank you.

Jamie Sultan, Wells Fargo.

Maybe just a follow-up on one of Bret's. It sounds with your PCARR goal by the end of the year that you are assuming that essentially all of what's currently in the final contracting phase closes by the end of the year. Is that the right way to look at it?

Yes. I think so.

Did you have any new business that closed in the June quarter?

We had the Catholic Health East business that we mentioned that was closed prior to our earnings announcement on May 9.

Okay. And then maybe going back to Ascension, could you just give us an update on how penetrated within their system you are today?

Today on the basically a two tier hospital revenue we are about two-thirds penetrated, like 67%.

Okay. And then lastly you talked about how with the Ascension renewal you guys are moving toward a little more of a guaranteed savings with the potential of more upside for you if you can exceed your savings targets or what you've agreed upon with them as far as the base fees are concerned. Would you anticipate that more of your incremental contracts would move in that direction?

I think it actually could be a very good approach. We haven't had anyone else talk about it, but the advantage to the customer is that they have plannable cost structure and they have a partner who is just making it happen, as opposed to reconciliations that say here is what did happen in terms of our gain share and here is how we split it. It becomes very plannable and predictable. I think a lot of people in the market are looking for that given all of the challenges that our hospital clients are facing.

And so getting that as an attractive thing to the extent that we can create something that's attractive to the customer and creates more upside for us, I think could be a very good evolution. But we don't actually have any other contracts right now that we are actively talking about doing it this way. But it could be a good evolution.

Okay, thank you very much.

Stephen Shankman, UBS.

So I did want to dig into the intra-stay quality offering a little bit. First thing, I was hoping to clarify whether the intra-stay quality pilot that you've mentioned on past calls whether that was at Ascension or another client.

It is at Ascension.

Okay. And can you remind us how the economics work for intra-stay, whether it requires a big investment up front. Just trying to get a sense of the margin impact if this offering is rolled out to a bunch of additional hospitals next year.

It is an offering that actually does not require significant upfront investment. The way that the results are actually measured are based on charges and how charges are being reduced per DRG. And so it's actually something that is based on our pilot results, you really begin to bend the cost curve very quickly, and the measurement is very clear so there is no trailing or measurement learning curve. It really occurs based on existing systems and existing data that the hospitals have.

So it actually is cash flow break even pretty rapidly within even the first quarter. And it might run at cash flow break even for another quarter and then begin to throw off margins.

Okay. That's helpful. Did you recognize any intra-stay quality revenue so far in 2012?

We didn't. We were in a pilot mode and investment mode.

Okay. So you wouldn't expect to generate any of that revenue for the rest of the year either?

No. I think as we move beyond final contracting into a contracted state we would be generating revenue.

Got it. Got it. And then switching gears a little bit. I was curious what you are seeing from clients as it relates to ICD-10?

Well, ICD-10 is an area that everybody really wants to make sure that they are very prepared for, and so we have been making significant investments. We've brought in national experts on to our team to lead that effort. And one of the big things that people are looking for is to the extent that your technology and your advanced training of the work force can help ameliorate what others are projecting to be an increased cost hit of ICD-10 of 25%, that's a great value.

So we're actually gearing up for ICD-10 in advance and being able to prove how that 25% cost hit that everybody is expecting does not have to be the case. And to the extent that we are able to prove that, that's going to be great incremental value proposition. Because everybody out there is literally thinking of this as something that is going to be a 25% cost increase.

Okay. So that kind of leads into my next question was whether you would expect ICD-10 next year 2013 to be a net headwind or a net tailwind. It sounds like it's maybe a net headwind but probably not as much as some of your competitors might see?

Well, for our business we will get adjustors for the actual cost increases to ICD-10 and so that -- from that standpoint it's not a headwind. To the extent that we can do better than benchmarks for both our clients and ourselves that would be a positive contributor to margin. First there is an adjustment to cost based on benchmarks and then there is how do you actually produce against that.

Okay. That's it for me. Thank you.

Sean Wieland, Piper Jaffray.

If you exclude the one-time adjustment for $4 million to $6 million of seasonal revenues under the Ascension renewal. Is the contribution to your 2013 EBITDA from Ascension higher or lower than it was in 2012?

We expect it to be at this point the ability to earn back to the levels we had in 2012 by getting to greater operating performance and expand that operating performance against the new operating metrics that are part of the new contracts.

It's expected to be comparable. If we can do better than expected on cost reduction, there would be upside.

Okay, what's baked into the $78 million to $82 million is comparable. Now given that you've been working so hard there for five years or so, what is the -- what are the functional areas or operational areas where you would see being able to drive further improvements in efficiencies? I tend to think about a lot of the low hanging fruit is picked earlier on in the contract. After all this time what is left there to continue to drive efficiencies?

There is always opportunity to drive efficiencies but process excellence is constantly identifying the source of defects. And what you have in your cost structure I think as you know pretty well Sean, is a lot of costs that are really trying to take a defect that's been created earlier in the process and make sure that it doesn't turn into actual yield loss. So a lot of activities that are happening in the business office in terms of claims follow-up is actually trying to fix a defect. So what we're constantly looking at is the causality of those defects and how to actually reduce their being originated in the first place.

We actually have first-time clean claim rates that are continuing to go up, and that's one of the key determiners of our total cost structure. As we look what we are doing in the future, what we've planned is continual process excellence and improving first-time clean claim rates.

Okay, so as it's all ready been noted, the new preliminary 2013 EBITDA guidance is back to where you were in 2011. I would think that Intermountain Healthcare and some the other large deals that you have signed since then would more than offset your exit from Minnesota. So can you help me understand that a little bit?

Well I think the way we really want to think about the $78 million to $82 million is first of all it does not include any other business that's going to be signed between now and the end of the year, and we've talked about the pipeline and what's in final contracting, so that would all be additive. The first thing I want to correct is that's not the guidance for 2013.

The second thing is that you are right. All those contracts continue to mature but one of the things that people were comparing against was a number that had four quarters of a mature contract of Fairview, as well as a lot of quality contribution in that number. So that's the puts and takes on it.

Okay, I see. Thank you very much.

Eric Coldwell, Robert W Baird.

My strategic questions have been covered. But maybe just some housekeeping items here. Can we get the hospitals under contract at the end of the quarter? Think it was 90 last quarter?

John is looking for it. Do you have that, John? Ask your next one while he's looking for it.

While you are looking at that, also contracts under management. And then sorry if I missed it but could we get the Ascension-related revenue for the quarter?

Sure, the number of clients under contract as of June 30 were 32. The number of hospital sites was 85.

85. Okay. And then Ascension-related revenue?

Give me just a second.

We have a fact checker here looking for you. Do you have another question while they're looking?

Last one Mary, is I know that you had the stranded personnel costs in Minnesota and you kept a lot of staff on board until you got through this resolution process and obviously there is a wind down period. How many heads will ultimately be removed from Minnesota in total? And then maybe give us a sense on how many of those today are for lack of a better word, unproductive?

I would say a total of about 150 FTEs, Eric, and help me understand what do you mean by unproductive? I would say that right now there is excess capacity because we haven't had a material add in the meantime to absorb it.

Okay, so we'll call it excess capacity. I'm curious -- I guess it's a hard question to answer because I know you haven't been growing the business there, while you have been working through this resolution process and you probably could have been more proactive in cutting heads if you weren't dealing with this situation. If you just had a natural contract loss you could have been more aggressive in your cost reduction.

I think that's fair to say. I think that's fair. I think there was a desire not to be creating any other foot faults on labor laws or anything else in the state.

Right, right. And if you have that Ascension number either now or maybe you can come back to it later.

I do Eric. It's $81 million in the quarter.

Okay. Thanks very much.

(Operator Instructions)

Charles Rhyee, Cowen.

I just want a follow-up question. When you look across the rest of your client book does anyone else maybe like at Intermountain have any favorite nations status in their contract that would allow them to piggy back off the Ascension contract?

Nope, nobody has anything that allows them to piggy back off of Ascension.

Okay. That was it. Great, thanks.

(Operator Instructions)

We have no further questions in queue, I would like to turn the conference over to Ms. Mary Tolan for any closing remarks. Please proceed.

Thank you. I would like to thank everyone for participating in today's call. I want to assure you that we are back to business with incredible energy and industriousness. We have a winning franchise and winning people. And in closing I want to let you know that we are planning an invest summit on October 30 in New York City. Invitations will go out shortly and I look forward to seeing many of you then. Thanks and have a great day.

Thank you for your participation in today's conference, this concludes the presentation. You may now disconnect and have a great day.