R1 RCM Inc. (NASDAQ:RCM) is a leading provider of technology-driven solutions that transform the financial performance and patient experience for health systems, hospitals, and physician groups. The company's scalable operating models complement a healthcare organization's infrastructure, driving sustainable improvements to net patient revenue and cash flows while reducing operating costs and enhancing the patient experience.

R1 RCM reported annual revenue of $2,254.2 million and net income of $330.0 million in its most recent fiscal year. The company generated annual operating cash flow of $340.1 million and free cash flow of $237.6 million. In the first quarter of 2024, R1 RCM reported revenue of $603.9 million and adjusted EBITDA of $152.2 million.

Business Overview

R1 RCM operates as a single segment, providing revenue cycle management (RCM) services to healthcare providers. The company's scalable operating models complement a healthcare organization's infrastructure, driving sustainable improvements to net patient revenue and cash flows while reducing operating costs and enhancing the patient experience.

R1 RCM's technology-driven solutions leverage automation, artificial intelligence, and large-scale analytics to optimize the revenue cycle for its customers. The company's global service capabilities, with operations in India and the Philippines, enable it to deliver best-in-class unit economics and increased revenue yield to its customers.

R1 RCM serves over 90 of the top 100 health systems in the United States, providing a diverse range of RCM services, including end-to-end RCM, modular RCM solutions, and functional partnerships. The company's customer base spans large health systems, hospitals, and physician groups, with Ascension and Intermountain Healthcare being two of its largest customers, accounting for 36% and 10% of net services revenue in the first quarter of 2024, respectively.

Acclara Acquisition

In January 2024, R1 RCM completed the acquisition of Acclara, the revenue cycle management business of Providence Health & Services – Washington, for $786.0 million. The acquisition extends R1 RCM's ability to deploy advanced technology solutions and drive execution to improve customer and patient outcomes. Concurrently with the closing of the acquisition, R1 RCM issued a warrant to Providence to acquire up to 12,192,000 shares of the company's common stock.

The integration of Acclara is progressing well, with the company focusing on harmonizing certain lines of business and customer contracts to support its adjusted EBITDA outlook. In 2024, Acclara is expected to contribute approximately $275 million to $280 million in revenue and $25 million in adjusted EBITDA, which is consistent with R1 RCM's original guidance.

Financials

R1 RCM's first quarter 2024 revenue of $603.9 million represented an 11% increase compared to the same period in the prior year. This growth was driven by the addition of Acclara's revenue, which contributed $57.1 million since the acquisition close, as well as continued expansion of services to existing customers and new customer contracts.

Net operating fees, which account for the majority of the company's revenue, grew 6% year-over-year to $381.5 million, primarily due to the Acclara contribution. Incentive fees declined 34% to $15.6 million, primarily due to the impact of the Change Healthcare cyberattack on key performance metrics. Modular and other fees increased 28% to $206.8 million, driven by the Acclara acquisition and the expansion of services to existing customers.

Cost of services increased 14% to $497.6 million, largely due to the addition of Acclara's cost of services. Selling, general, and administrative expenses increased 37% to $64.4 million, also reflecting the Acclara acquisition. Other expenses, which include acquisition and integration costs, increased 12% to $33.9 million.

Adjusted EBITDA for the first quarter of 2024 was $152.2 million, in line with the company's internal expectations, despite the impact of the Change Healthcare cyberattack, which the company estimates reduced adjusted EBITDA by $9.5 million.

Liquidity

As of March 31, 2024, R1 RCM had $178.0 million in cash and cash equivalents and $697.0 million in total available liquidity, including $518.8 million in remaining availability under its $600.0 million senior secured revolving credit facility.

The company's net debt position increased to $2.1 billion as of March 31, 2024, up from $1.6 billion at the end of 2023, primarily due to the additional debt and term loans used to finance the Acclara acquisition.

Outlook

For the full year 2024, R1 RCM expects revenue of $2.6 billion to $2.64 billion, representing growth of 15% to 17% year-over-year. The company expects GAAP operating income of $85 million to $105 million and adjusted EBITDA of $625 million to $650 million.

The updated guidance reflects the expected impact of the Change Healthcare cyberattack, which the company estimates will reduce revenue by approximately $20 million and adjusted EBITDA by approximately $25 million for the full year. The guidance also includes the contribution from the Acclara acquisition and the new contract with Providence.

Risks and Challenges

R1 RCM faces several risks and challenges, including:

1. Disruptions in service or damage to its global business services centers and third-party data centers, which could adversely affect its operations.
2. Increased competition within the revenue cycle management market, which could put pressure on pricing and margins.
3. Reliance on a limited number of large customers, such as Ascension and Intermountain Healthcare, which accounted for 46% of net services revenue in the first quarter of 2024.
4. Potential impact of macroeconomic conditions, such as changes in fiscal and monetary policy, on healthcare volumes and customer collections.
5. Integration and execution risks associated with acquisitions, such as the Acclara acquisition.
6. Regulatory changes in the healthcare industry that could impact the company's customers and its own operations.

Conclusion

R1 RCM is a leading provider of technology-driven solutions that transform the financial performance and patient experience for healthcare providers. The company's scalable operating models, global service capabilities, and focus on automation and AI-driven solutions position it well to capitalize on the growing demand for revenue cycle management services in the healthcare industry.

The company's recent acquisition of Acclara and its strategic partnership with Providence further strengthen its market position and technological capabilities. While R1 RCM faces various risks and challenges, its strong financial performance, liquidity position, and updated guidance for 2024 suggest that the company is well-positioned to continue its growth trajectory and deliver value to its shareholders.