R1 RCM (RCM) - 2023 Q4 - Annual Report

Part I Business R1 RCM provides technology-driven revenue cycle management solutions, offering comprehensive and modular services to healthcare providers - R1 RCM provides technology-driven RCM solutions to over 3,700 hospitals, including 93 of the top 100 health systems, and over 30,000 physicians, covering over $1 trillion of Net Patient Revenue (NPR) as of December 31, 2023[17] - The company's technology platform, R1 Intelligent Automation, automates over 200 million tasks annually, which is equivalent to the capacity of more than 5,000 full-time employees[18] - R1 offers two primary partnership models: comprehensive End-to-End Operating Partnerships (typically 7-10 year contracts) and flexible Modular Solutions (typically up to 3-year contracts) to address specific RCM challenges[20][21][23] Revenue Concentration from Ascension | Fiscal Year | Percentage of Total Net Services Revenue from Ascension | | :--- | :--- | | 2023 | 40% | | 2022 | 49% | | 2021 | 61% | - As of December 31, 2023, the company employed approximately 30,000 people, with about 12,300 in the U.S. and 17,600 internationally (primarily in India and the Philippines)[79] Risk Factors The company faces substantial risks from intense competition, cybersecurity threats, significant revenue concentration, high indebtedness, and complex healthcare regulations - The company operates in a highly competitive industry, facing pressure from healthcare systems' internal RCM departments and various external competitors, which could adversely affect operating results and market share[88] - A significant risk is the concentration of revenue from healthcare providers affiliated with Ascension, which represented 40% of total net services revenue in 2023 The early termination of their agreement would materially harm the business[114] - Cybersecurity threats, including ransomware attacks, are a major risk A breach could lead to unauthorized access to sensitive patient data, resulting in contract penalties, loss of customers, and significant liabilities[100][103] - The company's business is impacted by macroeconomic conditions like inflation and high interest rates, which could affect customer financial health and increase the company's allowance for credit losses[120][123] - As of December 31, 2023, the company had approximately $1.7 billion in consolidated indebtedness This increased by $655.0 million in January 2024 to finance the Acclara Acquisition, which could decrease business flexibility[128] - The healthcare industry is heavily regulated Failure to comply with laws like HIPAA, the False Claims Act (FCA), and the Stark Law could result in significant liability, adverse publicity, and negative business impact[132][140] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[152] Cybersecurity R1's cybersecurity program, based on the NIST framework, protects sensitive information and is overseen by the Board, with no material threats identified in 2023 - The company's cybersecurity program is designed using the National Institute of Standards Technology (NIST) framework to protect Protected Health Information (PHI), Personally Identifiable Information (PII), and payment card information (PCI)[153] - The program undergoes annual independent audits, including SOC 2 Type 2, HIPAA Security Rule risk assessments, PCI-DSS attestations, and HITRUST certification[155] - Oversight is provided by the Board's Compliance & Risk Management Committee and the Audit Committee, with operational management led by the Chief Information Security Officer, Cecil Pineda[159][160][161] - In 2023, the company did not identify any risks from cybersecurity threats that materially affected or are reasonably likely to materially affect its business strategy, results of operations, or financial condition[158] Properties R1 RCM leases all its facilities, including its principal executive office in Murray, Utah, with sufficient domestic and international office space - The company leases all its facilities, with its principal executive office located in Murray, Utah[162][163] - Total leased office space includes approximately 240,000 sq. ft. in the U.S. and 640,000 sq. ft. internationally[163] Legal Proceedings The company is not a party to any material litigation or regulatory proceeding that would have a material adverse effect on its business - The company reports no material litigation or regulatory proceedings, except as described in Note 18 to the consolidated financial statements[165] Mine Safety Disclosures This item is not applicable to the company - Not applicable[166] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities R1 RCM's common stock trades on NASDAQ, with no dividends paid, and the company has an active share repurchase program, showing volatile stock performance - The company's common stock is listed on the NASDAQ under the symbol "RCM"[169] - No dividends were paid on common stock in 2023, 2022, or 2021, and the company intends to retain future earnings for business growth[170] - As of December 31, 2023, approximately $453.2 million remained available for share repurchases under the company's authorized stock repurchase program[172] Cumulative Total Return Comparison (2018-2023) | | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | R1 RCM Inc. | $100.00 | $163.27 | $302.14 | $320.63 | $137.74 | $132.96 | | NYSE Composite Index | $100.00 | $122.32 | $127.70 | $150.90 | $133.50 | $148.17 | | NASDAQ Health Care Index | $100.00 | $125.83 | $163.63 | $157.82 | $125.58 | $133.80 | Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved significant revenue and Adjusted EBITDA growth in 2023, improved net income, and completed the Acclara acquisition, maintaining strong liquidity - On January 17, 2024, the company completed the acquisition of Acclara from Providence for $675.0 million in cash and a warrant The acquisition was funded with cash on hand and additional debt[183] 2023 vs. 2022 Key Financial Results (in millions) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total net services revenue | $2,254.2 | $1,806.4 | 24.8% | | Income (loss) from operations | $147.9 | $(2.8) | 5,382.1% | | Net income (loss) | $3.3 | $(63.3) | 105.2% | | Adjusted EBITDA (Non-GAAP) | $614.3 | $423.8 | 45.0% | - The 24.8% increase in net services revenue in 2023 was primarily driven by a full year of revenue from the Cloudmed acquisition and increased revenue from end-to-end customers onboarded in 2022[208] - Selling, general and administrative expenses increased by 27.5% in 2023, driven by a $22.9 million increase in bad debt expense and a $10.9 million increase in compensation expense[210] - As of December 31, 2023, the company had total liquidity of $772.4 million, consisting of cash and cash equivalents and remaining availability under its Senior Revolver[218] Cash Flow Summary (in millions) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $340.1 | $(9.9) | $256.5 | | Net cash used in investing activities | $(102.8) | $(949.5) | $(332.1) | | Net cash (used in) provided by financing activities | $(173.9) | $943.0 | $31.4 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations on variable-rate debt and foreign currency exchange rates, which it partially mitigates through hedging - The company is exposed to interest rate risk on its variable-rate debt Of its $1.7 billion in debt, $1.2 billion is subject to variable rates A 1% change in rates would alter annual interest expense by about $11.6 million[243] - The company has hedged $500.0 million of its floating-rate debt to a fixed rate of 3.01% plus an applicable spread[243] - The company is exposed to foreign currency risk, primarily from the Indian rupee and Philippine peso, as 9% of its expenses in 2023 were denominated in foreign currencies It uses derivative contracts to hedge this exposure[245][246] Financial Statements and Supplementary Data This section indicates that the required financial statements are located starting on page F-1 of the report - The financial statements required by this Item are located beginning on page F-1 of this report[250] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[251] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with a previously reported material weakness remediated - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[254] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[255] - A previously reported material weakness in internal control over financial reporting related to business combination accounting was remediated as of December 31, 2023[257] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified opinion on the company's internal control over financial reporting as of December 31, 2023[262] Other Information During the fourth quarter of 2023, none of the company's directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023[270] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[274][275] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[276] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the company's equity compensation plans, with information on security ownership incorporated by reference from the 2024 Proxy Statement Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Number of Securities to be Issued Upon Exercise/Vesting (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 12,580,339 | $3.41 | 7,456,142 | | Equity compensation plans not approved by stockholders | 5,654,741 | $ — | 519,830 | | Total | 18,235,080 | | 7,975,972 | - The company maintains a Fourth Amended and Restated 2010 Stock Incentive Plan and a 2022 Inducement Plan for equity grants[277][278] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[282] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 Proxy Statement - Required information is incorporated by reference from the company's 2024 Proxy Statement[283] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report - This section contains a list of all documents filed with the report, including financial statements and various legal and corporate exhibits[285][286] Form 10-K Summary The company reports that there is no Form 10-K summary - None[292] Financial Statements and Notes Consolidated Financial Statements The consolidated financial statements provide a comprehensive overview of the company's financial position, operational results, and cash flows Consolidated Balance Sheet Data (in millions) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $633.3 | $564.5 | | Total assets | $4,960.2 | $5,121.8 | | Total current liabilities | $346.2 | $349.7 | | Total liabilities | $2,208.8 | $2,419.3 | | Total stockholders' equity | $2,751.4 | $2,702.5 | Consolidated Statement of Operations Data (in millions) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net services revenue | $2,254.2 | $1,806.4 | $1,474.6 | | Income (loss) from operations | $147.9 | $(2.8) | $136.2 | | Net income (loss) | $3.3 | $(63.3) | $87.3 | | Diluted EPS | $0.01 | $(0.18) | $(1.90) | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies, business combinations, debt, customer concentrations, and legal proceedings supporting the financial statements - The company recognizes revenue from end-to-end operating partnerships (net operating fees and incentive fees) and modular solutions For certain modular services, revenue is estimated as a contract asset based on expected collections by customers[330][331][337] - The measurement period for the Cloudmed acquisition closed in Q2 2023, with final purchase price allocation resulting in $2.085 billion of goodwill and $1.367 billion of intangible assets[380][381] Customer Revenue Concentration | Customer Name | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Ascension and its affiliates | 40% | 49% | 61% | | Intermountain Healthcare | 11% | 12% | 14% | - As of Dec 31, 2023, total debt was $1.638 billion, primarily under Senior Secured Credit Facilities In January 2024, the company borrowed an additional $575.0 million in Term B Loans and $80 million from its revolver to fund the Acclara acquisition[426][518][519] - The company is defending a False Claims Act (FCA) lawsuit (U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.) related to its Physician Advisory Services (PAS) business The company believes it has meritorious defenses[506]