Yet Another Value Podcast - Voss Capital's Jon Hook thesis on outsourced revenue cycle management company, R1 RCM $RCM

Episode Date: January 25, 2024

Jon Hook, CFA, Senior Analyst at Voss Capital, joins the podcast to discuss his thesis on R1 RCM Inc. (NASDAQ: RCM), a leading provider of technology-driven solutions that transform the patient experience and financial performance of healthcare providers. For more information about Voss Capital, please visit: https://www.vosscap.com/ Chapters: [0:00] Introduction + Episode sponsor: Alphasense [1:30] What is $RCM and why are they interesting to Jon Hook [3:47] Why tax is 4-6% (vs. 2% or 20%) [6:20] Jon Hook's background [8:50] $RCM elevator pitch [15:43] $RCM going concerns: addressing short reports, challenging 2022, management change [22:36] Sutter roll-out [27:37] Network effects / competitive landscape [32:32] Addressing add-backs, adjusted EBITDA [37:10] Addressing stickiness of the business [40:53] Providence acquisition and capital allocation strategy [48:22] Final thoughts on $RCM short report [52:11] Coder shortage [54:31] Optum ($RCM largest competitor) [58:33] $RCM final thoughts Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need, to provide better analysis for you and your clients. As yet another value podcast listener,

visit alpha-sense.com slash fs today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash fs. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker, also the founder of yet another value blog.com. If you like this podcast, I mean a lot, if you could rate, subscribe, review it wherever you're watching or listening to it.

With me today, I'm happy to have on from Boss Capital, John Hook. John, how's it going? Good, good, Andrew. How's it going? Great to be here. Great to have you. As I told you before, I've been trying to, I know Travis a little bit. I've been trying to get him on for over two years now. So super excited to have someone from Boss on. We'll try and get Travis on at some point. But you've done huge work on the name we're going to cover today. So super excited. Before we get there, I know you've got compliance. I've got compliance. A quick reminder to everyone. Nothing on this podcast, investing advice. Please consult a financial advisor. Do your own work. Just remember this isn't financial advice. that out the way, I just want to flip straight to the stock we're going to talk about today. John, the stock is RCM, and I guess I'll just stop there and ask you, what is RCM and why are they so interesting? Yeah, great. Well, again, thanks for having me on. That's a new experience for me in the podcast world, but I'm, you know, exciting to try it out here. So, yeah, so let's talk revenue cycle management. So R1 does revenue cycle management for

health care entities, so whether that's hospitals or physician groups. And like kind of the crazy thing that I was first reading about is like basically there's like a four to six percent tax for every dollar that a hospital tries to get reimbursed for. And so there's a pretty consistent like four to six percent that you have to spend just to get the money that you think you're owed from a hospital. And so that's at the crux of the revenue cycle management is trying to get the highest possible reimbursement and get the fastest reimbursement to keep kind of your cash collection cycles in balance. And so R1 does that from an outsource perspective. They're working to collect from everyone. They collect from insurance companies. They collect from Medicare. They collect from

patients. They also do what we call like the full cycle of revenue cycle management. And that's everything from the front office where they're doing registration and insurance checks. Kind of the meat and potatoes is the middle office, which is the coding and the billing. And then the back office, which is more of the processing and interacting with the entity you're trying to get the money back from. And so they have what they call end-to-end revenue cycle management, and then they have a large modular business, which tackles kind of specific pain points the hospitals and physician groups have and getting their bills collected. And that primarily is generated from a large acquisition they did in 2022 called CloudMed. And so it's

everything from denials recovery to AR recovery, charging optimization. So things like that. And so that's sold more as like a modular basis, whereas the end-to-end, they're literally like ripping out the employees, rebadging them, firing some of them, moving some of them offshore. And so they're basically like taking over the whole revenue cycle process. So it's kind of a different dynamic. I guess I'll just kind of go into like kind of the elevator pitch on why we like the stock or should I stop there? Yeah, let me stop there and just ask one quick question, right?

I think anyone who's dealt with the healthcare system before heard anything about it, they know they're not surprised to hear that there's some. you know, difference between what a hospital bill is and what they're collecting. But you mentioned the four to six percent tax. I just want to ask, like, I would guess higher, to be honest with you. So I just want to guess, what is that four to six percent tax? And why is it four to six percent? Why isn't it 20 percent? Why isn't it two percent? Well, honestly, that's that's a good question. I think it is higher for, I think the smaller the organization is, the higher it's going to be. And the, you know, the more organized and the more

you know, streamlined, maybe in bigger, the less it's going to be. But a lot of it's just like administrative. The reason it's been rising is the complexity of collecting, you know, there's 15,000 ICD-9 codes, went to 60,000 ICD-10 codes. And so the complexity of it has gotten really high, but you're saying like why 2% versus 6%? You know, honestly, like a part of it is like if it went much higher, all these hospitals would go out of business.

And so, like, they run on pretty low margins and actually have been losing money recently. And so I think to some degree, it's like what the insurance companies can bear. Or like, the insurance companies are doing quite well, if you look at their stock prices. And so they don't want to put their customers out of business, right? And so I think to some degree, they're like squeezing them as much as possible to the point where they don't want to put them in bankruptcy. But beyond that, like, I don't really know, like, you know, why it's, you know, 2% or 8% or. It's not like an explicit tax, right? It's more like an average that's kind of generally recognized.

And it's the basis for the contracts that are on-one signs that are end-to-end, they're going to collect some percentage of the net patient revenues. And so, you know, maybe if the hospital was paying 5%, R1 signs a deal and says, well, we're going to do 4%, and we're going to, you know, you're going to save all this money, right? And so that's just a 1% increase in operating margin will be a big deal for them. Oh, yeah. I wish I had a better answer in terms of like exactly what that 5% is. But it's, you know, it's the people process.

There's the complexity of, you know, patient stays can have like thousands of little line items that, you know, everyone is being scrutinized in detail. And so you can kind of understand like why it would cost a lot. Why doesn't it cost more? Again, I think like it just is kind of a natural balance to what's, you know, what's allowable. no it makes total sense i just you know i i just had peck surgery as a lot of listeners will know and i was looking at my hospital claims and it's you know one of the bills is a ten thousand dollar bill and i look at the insurance and they end up paying a hundred dollars so like and obviously that that's like apples to orange is what versus what you're talking about but when i see that i'm like wow

four to six percent i i would have just guessed way higher all right before we hit the elevator pitch just real quickly uh do you want to go quickly just 15 seconds into your background because i think it's actually important here as well. Sure. Yeah. So I'm actually kind of a late bloomer. And maybe what you're referring to is out of college, I worked at a company called Epic Systems, which is an electronic medical record company. And they're actually private. So you may not know them that well. But basically, if you're in healthcare IT, you know very well. If you're a doctor, if you're in healthcare, you know, all my friends are like, pull up that epic, you know that this is one of the giants in health care. Like if you have a my chart, for instance, that's Epic. Yep. And

And so, like, they're actually pretty dominant now. Them and Cernor, which was acquired by Oracle, are kind of the two dominant electronic healthcare record players in the country. And so I guess I think working for them for four years, I got to fly out to a bunch of different, you know, installations from, you know, Hawaii to Minnesota to Indiana to California. And I kind of saw this company, like, go from nowhere and then win this Kaiser Permanente deal and become this, you know, kind of this snowball.

kept rolling for them. And so that was, I think not that that, like, makes me a super expert or anything, but I think that it kind of informs, like, I kind of understand how hospitals think a little bit. There's a lot of herd mentality. There's a lot of, like, when they're making a decision on who to go with, a lot of us just looking at who's done it before at that, you know, at that size and the scale. So, yeah, I wasn't saying that, I wasn't saying that to hold you up as like, this is the greatest healthcare expert of all time, but I thought, I thought that background was really useful. And later, I should let you get to elevator pitch, but you were there at Epic and I loved you to the analogy of, hey, Epic, they won the Kaiser deal and then they started snowballing

because, you know, hospitals kind of follow on and you get the scale benefits and people like prove you can outsource this to someone. And I think later in the elevator pitch, you'll mention like, hey, RCM, they're kind of hitting the proof point with all these deals. It makes it easier to accelerate the kind of transition, the outsourcing and just continue rolling the industry up. And all of a sudden, as you said, 20 years ago, everyone like, Epic? And today, you know, I know Epic and I'm not even in healthcare. So, all right, let's go to the elevator pitch for RCM. Yeah, so RCM, we kind of like it both from kind of a macro, like top-down perspective

and then also more of an idiosyncratic. And I should say boss is kind of, you know, people say like boss, it's value-oriented, special situations. Like, that's like a, not our official acronym, but like kind of a good description of what we do. We're looking for names that are kind of going through some kind of transition. whether that's, you know, change in management, change in work, financial transition, business model transition. And so I'll get back to that in a second. But we like it from a top down and kind of an idiosyncratic perspective. And so from a top down perspective, it kind of

has what we call like a triple play where we like the industry, we like the sub-industry, and we think the company is the best position. So healthcare spending, which is directly tied to R1's revenue levels, like as a percentage of healthcare spending, has been rising at a pretty consistent 4 to 6% Kager a year and all forecasts are will continue to rise you know 5% 4% or 6% level you can certainly debate that but we think you know even with some of these new treatments coming out we think there's still plenty of people who are going to be sick and needing health care within health care currently 70% of revenue cycle management is insourced meaning the hospitals and physician groups are doing it themselves 30% is outsourced that's a rough

number that we've kind of tried to corroborate from a few different sources. But there's a thesis that that percentage will grow, and we can get into that a little bit later, mostly because of wage inflation and complexity, like kind of about what I was alluded to earlier, that it's a good financial decision to outsource your revenue cycle management. And so we think within a sub-industry level, you've got a company that can grow, you know, eight to, you know, industry level can grow eight to ten percent, like roughly, like say, four to five percent from a health care perspective and then you maybe double it as more moves outsourced. So you've got kind of a good foundation there and a good backdrop. And then we believe this is kind of an oligopoly structure

where there's only a few players who can actually, who have taken on the size of customers that R1 is taking on and who could do it. And we think R1 is actually unique amongst those four or five companies and we can get into that more later. So it's kind of like from a top down perspective, it's got like good healthcare spending transition to outsourced and like a unique company within that group okay so at the micro level kind of more idiosyncratic we believe they have really good strong growth visibility they have multiple signed contracts that are large contracts that haven't even started to roll out yet that provide a lot of visibility and so it's one of those rare companies we don't normally like to look at like 2026 27 numbers but we feel

pretty good, given the consistency of the business, being it pretty countercyclical, acyclable, and pretty, you know, hospital spending doesn't really offolate that much, except maybe, you know, during COVID. And so you've got pretty good visibility, and you've got good reasons to believe that, you know, margins can expand as they continue to add scale and do other things. I think the second thing that maybe we're a little bit different from the sentiment now is that we actually think their management team is good. We think they're forward thinking. We think they're tech focused. We think their long-term I'm thinking. They're not just like catering to the quarterly limbs of Wall Street. And we think

they're just generally sharp. And we've done some checks on that. And we think it's a risk, because they're not quite proven at a public company level. But we think they'll figure it out and find their operational groove. And so that's point two. Point three is trading at what we think is around six times 26 EBITDA based on kind of that high visibility of growth. And what we believe this fairly conservative margin expansion and fairly conservative ongoing customer wins, like just kind of rolling out, just having their modular growth keep on going, you know, 10% and then not really winning a lot of new and end customers, just rolling out the ones they haven't rolled out yet. And from our research, like once the company kind of gets on its

footing and some of the hair falls out of it, we think a 12 times multiple is actually quite fair for a company like that. So we think a path from 6 to 12 is reasonably straightforward. And given and they have some leverage, that's like a pretty good upside. Finally, maybe most importantly, and maybe like what really got us really interested is like buy-size sentiment is just horrendous for the stock. There's multiple short reports. There's high short interest. There's been a stream of bad macro news on the company.

And there are some good reasons for that. But we think most of those reasons are pretty short-term focused. Like, oh, Sutter's going to be delayed three months. Like, it doesn't really change the intrinsic value of the company, like in the law. run, right? Oh, they haven't signed a customer, you know, three customers in 2023 yet. So like, but they have a big pipeline. So like most of them are short term in nature. And so we think, I think what we try to do at boss is think about what is the narrative on the stock right now and then what could it become in like, you know, 12 to 18 months. And so right now

we think the narrative on the stock is this is a levered company, four-tenth leverage, unproven management, low-quality earnings. They have high cap-ex, high heba dot adbacks. pretty high human capital intensive business. I think there's a skepticism around how fast they can grow, how fast they can expand margins, what the ultimate margin will be. And so all that stuff is negative, right? But we think there's a legitimate chance that in 12 to 18 months, that narrative becomes, hey, this is a really high visibility growth story, if not like super high growth, like not 20%, but teens, right? This is a deleverging story as they generate cash and pay down debt. We think this is a forward-thinking technology-focused management team. We think the quality

of the earnings are going to significantly improve. And then, like, kind of cherry on top, like, bull case. The company has legitimate reasons to kind of talk about AI, machine learning, you know, robotic process automation. And so we think at the end of 24, entering 25, this company actually has a characteristic that, you know, it's not like mindling. We call it boss sauce, which is accelerating revenue growth and rising margins concurrently. And what usually that means is a rising epitaph multiple or a rising free cash flow multiple. So I guess I'll stop there.

And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-Sense.com f s today to beat fomo and move faster than the market that's alpha dash sense dot com slash fs so look anybody who googles this is going to see the short reports and they're going to ask and we can address them some of the things specifically in a second but i did have some questions that like kind of are asked into the short report so i'll ask them first and then we can hit on them i guess the first

thing is so this is a little bit of a multi-part question but they merge with uh sorry it's cloud med they do their acquisition and then a few months later they basically fire the old management team and the cloud med team takes over and cloud med you know it was kind of VCP backed and they take over and they seem good but they come in and I saw at a conference recently a direct quote is the current CEO says hey we had a challenging 2022 I needed to stabilize the customer base they were really stressed out they lost the pediatrics customer from they lost the customer they lost another customer to bankruptcy. And I guess just in my head, I've, again, I told you before, I've been kind of like loosely following this company since 2016, friend of the show,

Ryan O'Connor, who I think you guys know has been picking me since like two on it. So he's been but I've been followed since then. And just the reason I asked that is, A, I thought the old management team was pretty good, right? They went from two to 10 and they did these acquisitions. So I was a little surprised. And the short reports talk about the CEO change as a downside as well. It's like the whole C-suite change. So I want to wrap that question into also, I just thought this was a super sticky business. And when I see pediatrics leaves, I see challenging 2022, we have to stabilize the customer base. And that's the CEO saying it. I was like, oh, as you said, like, I thought this was really sticky.

You took it. You took the employees in. Like, I was surprised to see, I mean, any one customer can leave, especially through bankruptcy, but just hearing challenging 2022, customer stressed out. Like, that was just surprising. It kind of altered my view of the company. So I threw five minutes We're really in at you, but let me just toss that overarching concerns to you. Yeah, those are all good concerns. I think maybe starting with the stressed out customers, I think if you were to survey the industry, you would find that the whole industry was pretty stressed out. And part of that was payers kind of delaying, like kind of having a backlog.

I don't know the exact dynamics of how this was working, but something kind of COVID-related, maybe they fired too many people on the health on the insurance side and across the industry there was very there was kind of a slow slowdown in processing times and so that's really important for hospitals that are relying on this cash flow coming back to them right and so i think r1 maybe got put in the middle of that because they're the only pure play revenue cycle management company and they also had their most upset customer who ultimately left them is also a public company who's really struggling, right? And so I think, let's put it into perspective. That company was about, I think, a billion NPR versus, like, you know, there are like 60 billion

of total NPR. And so it's like, you know, not a huge customer in the grand in the grand scheme of things. But I think that particular customer was an outlier. You can certainly debate that and say, okay, maybe they're going to lose other customers. But that customer had been called out as a challenge customer for like the previous 12 months before. And they don't really have any other customers that they're calling out now as, you know, challenging customers. And the reason it was challenging is they had, what I understand to be, dozens of different EMRs that they had to integrate with. And so all these different clinics that had used different EMRs. And so every EMR that you have you have to set up an integration with, right? And so I think they were going to be challenged

no matter who was trying to work with them. I think R1 would say, hey, you know, we need to be, when new management came in, they're like, we need to be a little bit more selective, actually, about who we add to our, you know, what kind of customers we add, because we don't want to get these smaller customers who are incredibly complex, who, you know, may not be in our sweet spot, may not be in our bread and butter, which is actually like the larger, more streamlined customers. Like, so for instance, like Sutter, who they used as a reference customer to win Providence, which we, we can talk about, Sutter is all on Epic systems, right? Like, so Epic is same EMR across the whole thing.

I believe Providence is similar. And so they rolled out Sutter phase one. And by all accounts, it's doing quite well. Like they're using Sutter as a reference customer, even though there's been massive management turnover at Sutter, which is like mudded things a little bit. And so I guess getting back to that point on, you know, the lost customer, the bankrupt customer,

that gets it to kind of like what we view is the micro negative news flow. like the series of micro negative news flows that kind of fed the bear case because you know that also when the customer went bankrupt um ironically because of like the increasing complexity right like exactly what we're saying is like a strength of r1 and what they can do to why they should win more businesses high complexity customers but you don't want the you don't want it to be so complex that it puts customers out of business so like when the no surprises that came out in 2022 um i think that was kind of the final straw for this physician group that that went bankrupt so you had this kind of unique bankrupt customer. We think there's maybe one more customer they have

that the short report brings up that is struggling a little bit. That's quorum. But again, that's like a one to one and a half billion NPR customer. If you look at kind of their core building block customers now, Ascension, Intermountain, Providence, and Sutter, which is like, you know, those four customers are pretty, from our research, pretty financially stable, have pretty good, you know, cash flow turnaround times, have very long-term contracts. like I think the next contract up for renewal is five years from now with Intermountain. And so, and I think that if you were to survey those customers, or at least the ones that are live now, you'd get a different story than some of like the small complex customers.

And so I think they're pivoting their message a little bit with this new management team. I think probably what you'll see going forward, and they've actually said this, is like, we don't need to start doing end-to-end. Like we can take your middle, middle office, or your back office, or your front office, if that's the most simple, and that's the one that'll drive the greatest synergies for you off the bat, and there will be most likely to success, let's start with that one. We don't have to sign an end-to-end contract. And that's, in some ways, that's kind of what they did with this Providence win that they recently announced. And so I think you'll see a little more of that where the new CEO is going to be looking at contracts that he's very, very sure are going to be successful contracts. And like being a little bit. little bit more selective because they have that embedded growth already in them. They don't need to win a ton more contracts to grow 10% for the next few years. So I'm sorry. I don't know if I answered all questions. It was just in the middle there, you mentioned that Sutter, they had some management changes and RCM had to deal with that. And I just want to ask because I've got another

quote here that the RCMC new CEO said that was both really interesting and a little concerns to me. So the quote is, I'm roughly paraphrasing, but it says, look, when we when a hospital chooses us, basically what we're asking them is you're going to the hospital system and the executives and you say, hey, you're giving up the cash generative arm of your business to a third party, right? Like the actual collections, that's the actual cash. You're giving that up. So there has to be a high level of trust. And then what he went on to say was at a lot of our customers, there had been management changes in the past year or two. So like the management, the old management that trusted us with this was gone. And then the new management comes in and we had to like kind

to go reassure them. And on one side, like, again, when I view this business, like the bull case, the boss says, hey, this is growing, like the industry grows four to six percent, outsourcing grows four to six percent. You combine those two. You get almost double digit growth. And it's super sticky, right? So that makes sense to me. But when I hear, hey, we had to go resell to these new managements, like, you know, to me, if I don't have to go resell Visa to McDonald's, like, yeah, that's the cashier and it's the arm, but it's just like so sticking there. I don't have to resell Microsoft office a lot of these things. Like it just kind of surprised me and made me wonder, am I really thinking about this business correctly where, you know, they're improving on collections, improving the cash

generally. But when a new management team comes in there, they have to like go resell it. Does that question make sense? Absolutely makes sense. Absolutely a risk factor. And it's been actually probably since we've started the position, my biggest disappointment is that we haven't gotten so there's like a just a level set. They've already rolled at Sutter phase one. Yep. which is like, you know, half the project, a little more than half the project. And then there's a Sutter phase two. And like one of the big questions surrounding the company was, when is Sutter phase going to, but is two going to start?

Because that's going to drive a lot of the end-to-end growth. And originally it was supposed to start mid-2020, I think, was kind of like when most people were like penciling it in. Now they had like massive management turnover at Sutter. So they still don't have a head of revenue cycle of management. They just hired a CFO. and the CEO is also relatively new, like new since the deal was signed. And so, you know, I think people are saying like, oh, the delay in Sutter phase two.

What does that mean? Does that mean that, you know, they're not happy with how things are going? I don't think that's necessarily the case. I think there is, there is some risk there. But from my understanding, phase one went really well. They've been using Sutter at the reference customer and that, you know, help them when the Providence deal. And so, like, you know, that is a similar. dollarly sized deal and you know help help I think I think uh when you have that kind of management

change it probably does take a little bit longer to so it is kind of like a bad luck type type scenario where you would have been nice if um you know they wouldn't have to resell it I think the risk of them pulling the plug on phase one um is extremely low right now like it just the amount of effort and uplift and just the fact that I think it's running relatively smoothly now is, would make it very surprising. And there's like a huge, huge opt-out clause in the contract as well. And so I think, I think they're happy with phase one. I think it'll take just a little more time for phase two.

And then to your broader question, yeah, but again, like these, these customers are on very long-term contracts and they're very hard to replace. Like I said, like they're literally like moving a lot of the employees, offsowing a lot of the employees, like putting it back together would be. an incredible cost. And the only reason I think that that one customer left is they were relatively early in the process and they hadn't really boldly rolled out yet. And so like they think they can maybe unwind it because that just wasn't working. But, you know, I think the idea of them losing any of these large customers is fairly unlikely. The only thing you might worry about a little

bit is if somehow one of these larger ones were acquired by an even larger player who was running on a different revenue cycle management product. And there are some things going on there. right. So Ascension acquired Henry Ford. And so like, oh, could Henry Ford, you know, whatever they use for revenue cycle management? Could they take over Ascension? I think, honestly, the opposite is more likely to happen that Ascension would take over, sorry, R1 would take over the Do you know what Henry Ford uses? But there is some risk there. Do you know what I say? But it just seems really unlikely the next five years, right? Because the vast majority of their business is locked in contractually with high opt-out clauses.

So it's possible, but I think you'll get clues about it well ahead of time. And so, John, you heard pediatrics like complaining about it, right? John, do you know what Henry Ford uses for their RCM? I don't. That is a follow-up. No, no worries, no reason. So I have two more questions, and then we can maybe start addressing the short report. So the first and it will bleed nicely into the second is, look, I just want to talk about the winner-take-most dynamics here, right? And I guess a nice way to start.

There's this quote from Evercore that when I was reading, I was like, oh, my God, this is like the stuff Bulls dreams are made. And the quote is from the CEO. And he says, look, with our largest customers, there's a realization that this is almost impossible for them to manage without our help. And you hear that as a bull, and you're like, oh, my God, this is the thickiest business is great. But then the more interesting thing to me is, or maybe just as interesting is, the second half is, we deliver. better unit economics, better revenue yield, and then when it gets really interesting is we have a macro view of payer behavior across the country across all care settings. That gives them visibility to say, oh, here's what's happening across my market.

And that's an interesting piece of the quote there because it's not just, hey, this is complex and like it's nice for people to outsource things that are complex and out there for competency. It's also, hey, you outsource this and they can say, oh, well, you know, you guys have two hospitals in California, like here's the payer trends in California because we don't just have two. We have 20. We can tell you what's going on and stuff. So I obviously that's just like a ball softball question there. I mean, you have to get into the business. But I just want to toss it to you if you want to talk about the winner take most dynamics there that that quote kind of sets up. Yeah. Yeah. I think there is potentially kind of a network effect that

is kind of our thesis that will ultimately take hold that will make it less likely for customers to leave and make renegotiating, you know, when contracts ultimately come up for renewal, make it likely that they'll stay with R1. So I think one thing to point out is they spend about, they're outspending their competitors. We haven't really talked about their competitors, but they're outspending their competitors on R&D. So yeah, we'll talk about them in a second. Yeah. Well, yeah, Optum is probably the exception. It's kind of a unique exception, I would say. But yeah, so anyway, that's the one they're probably not outspending.

So they're spending about $75 million in capitalized software development a year. Most of that is going towards algorithms, models, automation. And so they claim to have something like 14,000 proprietary rules and algorithms. They have 500 million annual patient encounters. With the cloud vet acquisition, they cover 97 of the top 100 health organizations. So they actually have better and more data than almost anyone out there, I would say. And they're also not tied to an insurance carrier. So like the willingness maybe of these companies to share more of the data and use it

for worry of being kind of like undermined as less, like as kind of a pure play, right? And in the revenue cycle management field. And so, you know, they're working on all kinds of things that I think they'll take some of that and give help their own margins. But they'll also be able to share some of the savings with the customers. And so they can use it as a kind of a competitive dynamic as well. And so like all this money. that they're spending, you know, I think right now 15% of their total, what they call shared service work has been automated, but they think they can take that to 25%, 40%, 50%.

It's like all these human process tasks that are very manual intensive, like, you know, creating claim forms. Could AI, you know, they recently launched a partnership with Microsoft to take all their data, put it into the large language models and start playing around with that, could start generating claims letters automatically um could like even down in the future could you help with the clinical process could you help predict based on you know what what was ordered previously what should be ordered like in follow-up appointments that would also lead to strong reimbursement on the revenue cycle side um you know it helped i think it helps the current workers um kind of prioritize their queue of work like what they can identify what's the largest reimbursement

possibilities. You know, they can, so they have like a queue and then like the models will tell them like what's the highest hanging fruit or sorry, lowest hanging fruit. And so like there's all this mix of stuff, right? You can replace workers to become robot workers. You can help the existing workers be more productive. You can help maximize reimbursements by looking at what's getting reimbursed in different regions or by different carriers. And so they have all this this really broad data set that I think they're spending a lot of money on, like some would argue in the shortboard that's a negative we think it's a positive that can

build the lead so if you look at some of their competitors like conifer or carillon we don't think they're spending that kind of money we think they're kind of you know just working with their existing customer base and not nearly spending the level of investment that r1 is and you look at like another one ensemble who's private was recently valued of five billion we think they outsource a lot of the software stuff that um that r1 is using to build this competitive mode. So I hope that does that help? No, that was great.

That was great. I guess we've mentioned the short report a few times. So let me go to some of the things in the short report. And I think we already addressed the whole C suite changing. So that's kind of what they lead off with. I don't think we need to go with that. The next thing they go to that I think anybody who looks at this is going to pretty quickly pick up on is you touch on a little bit at the start, but the ad backs here, right?

So the short reports talk a lot about market model revenue, but I think just anyone who looks at this is going to go look at the adjusted EBITA and they're going to see the adbacks to get to adjusted EBITA and they're going to go, oh, I've seen this story before, like big rollups with enormous, enormous ad backs. I've seen that story before and a lot of times it doesn't end well. So what would you say to kind of the accounting aggressive adjusted EBITA and we can talk about the revenue adjustments as well? Yeah, yeah. So we first looked at this stock right when they kind of blew up, right? Like in the end of 2022, I believe. Like you're talking with customer stress, but they also had just acquired CloudNet. And the financials looked ridiculous, right?

Like, there was this gigantic change in working capital. There was this massive, like $80 million ad back on like integration and transaction costs. And I basically at that time said, wow, I can't. I have no idea. Did they just make like a really disastrous acquisition that like is going to destroy the company? Either that or they're really like spending a ton of money to position themselves to be a much larger company over the next over the next two years. And so that was that debate was going on my head. And what I noticed now I was actually surprised at the timing of the short report because every quarter since then things have gotten incrementally better. There's not great. Let's be clear. Like they're still doing like 30 million a quarter and, you know, EBDA, ADVACs, but he was getting better. And then in the most recent quarter, like cash flow conversion, like shot up, getting close to back to where they were before they bought CloudMed, like, you know, 13, 14 percent pre-catch flow margins.

And so that's starting to give me, and then I think based on their Q4 pre-results, like pretty strong EBITDA and cash flow is what they've said, like a continuation in Q3 and Q4. So I think, you know, I think they can easily get back to where they were. I think the ad backs are going to come down substantially. And I think actually the sell side is currently mismodeling that. If you look at JP Morgan's model, they have these ad backs like growing every year from like, you know, 110 to 130. They're basically using it as a percentage of sales in their models.

And what they've messaged pretty consistently is that the ad backs were 120 million this year. They're going to go down to 55 to 60 next year and then exiting 2024 being at a 10 million run rate. Do they go down even with the Providence Acquisition? Well, the Providence does add 20 to 25 million. So my expectation for when they provide guidance is that it'll be 55 to 60 for the core ongoing cloud med integration work that's supposed to drive 80 million in cost synergies. And then another 20 to 25 million of Clara synergies. That's going to drive, you know, the EBITDA from like 26 million to eventually they can get that to like 80, 70, 80 million. The other business is that. Oh, go ahead. What was that? Go ahead. Go ahead.

I'm sorry. I didn't mean to interrupt. No, so I think the thesis is, and that is that one year from now, you're going to look at them and say, oh, they're converting cash closer to 50% now, even with some of the headwinds of, like, onboarding this new large Providence customer and, you know, I think exiting 24 and 25, you can get closer and closer to that, you know, 50% free cash flow conversion, even with higher interest rate expense. And, you know, I guess, I think people, a lot of.

of people are kind of waiting and seeing. I think we've already seen the numbers come down. I think they would have come down even more, except they did another 12 million restructuring. And then I think they were spending some money on the Eclara Providence kind of transaction. And so even with that, like, things have come down. And so I think our court thesis is that the quality of their earnings were going to significantly improve and that they've messaged that. And that a focus, a key focus for that is cash flow generation and debt pay down. And so, you know, I think when they come out with guidance, I kind of expect them to kind of say, hey, we're going to generate at least this much cash flow.

And then you can kind of say, oh, okay, well, they're going to do this much, even with Providence probably costing them like 40, 50 million in year one of the implementation. And then you can kind of say, okay, well, you know, what's the kind of, you know, three-year-out cash flow with Providence kind of fully rolled out and get to a pretty strong number, even without other underlying growth. Just another piece of the short thesis. And this is one that resonated with me because I remember, again, Ryan O'Connor, tell me all the time to look at it. And I remember they did a deal and the deal, the stock went

from like six to 14 in a day on a deal. But I always struggled with this. And the short report says, hey, the business model is reflexive, right? When they're going to acquire customers, and you can even see this in the Providence deal. When they're going to acquire customers, a lot of times the issue shares to customers. So the business model requires a high price to go win customers. The customers require a high price. And, you know, the history of requiring a high price to win deals is not great. I mean, I would push back on that in some areas, but at the same time, I see what they're saying. And I would say, they say, hey, look, you know, all these agreements are 10-year agreements. And if the business was so sticky at the end of 10 years, you should have all the negotiating leverage.

But we've seen they need to give out more stock to companies at the end of the 10-year agreement in order to incentivize them to stay on the platform. So I think they would say, hey, it's like an aggressive, try to boost the stock price to keep the deals going thing is on one hand and on the other. it's not as sticky as you guys think because they have to keep issuing stock to keep these customers around. Yeah. I think, yeah, I think there is, there's like, again, with this short report, there's a kernel of truth that's like kind of grossly overstated. So one of the points he tried to make was for Ascension, Ascension signed a new 10-year deal a couple years after they originally kind of injected capital and got this giant preferred and the company was in a really rough place. Yep.

they claim that they use this thing called an inducement dividend to buy off and resign. It's like, oh, this $592 million just to resign and re-up with ascension. But if you actually look at it, it was removing the preferred offering, and it was basically taking the par value of that, and then adding an amount of foregone dividends that they were going to get, or giant dividends that they were going to get over the next few years. And so you can debate whether that was the exact right number to pay. I think, you know, you could argue whether it was like 30, 40 million too high or too low. Like by my analysis, I think it was relatively fair given the kind of cash flow they were going to, the kind of dividends they're going to have to pay ascension.

And so in my mind, in my mind, it was a major positive to like. The stock was way up on that day, too, if I remember correctly. Yeah. And so like just that was like kind of his major point, I think around that. I think he completely misinterpreted what. what that actually was. He was claiming it was just like, hey, hey, guys, take this $592 million and you know,

you win our business. So he was actually adding like amortization expense divided a $592 divided by 10, where it was really just taking out a big piece of the big overhang of the capital structure. I do think, you know, I do think unfortunately like the Providence of Clara deal in some ways that that bare case that they have to buy deals.

And I think there's a couple things to keep in mind. like, they've only had to give some incentives to, like, the largest customers, right? These large healthcare systems. So, like, Sutter, for instance, they had a Sutter put, which allowed Sutter to, like, sell them an additional asset, which actually Sutter decided not to do. So, like, Sutter was actually relatively clean, you know, though the short report insisted that Sutter would obviously exercise their put option. And, you know, I think with a clarion and in Providence, like, they advertise it as,

hey, we're spending $750 million on this modular, a cleric asset that with full synergies over five-year period is like a nine-times-debut-double, right? Let me just pause. That seems like they paid way too much for that, right? Just on the Providence, right? So this is the most recent deal. They announced it in December, mid-December, 2003. From memory, they spend about $700 million in cash, plus they give the company some warrants.

You can correct me on any of that if I'm around. But when I tell you that, right, like, I guess just what are they buying with Providence? Because my thought is like, hey, you're doing revenue cycle management, right? Like, you're, I understand they're probably taking some internal team members on and stuff, but it's kind of like RCM's bringing the systems. So what specifically are they buying? Is this all just inducement to come into the RCM system and let RCM? Or is there something else that they're actually buying here?

Well, Clara is actually a modular business within Providence that, from my understanding, was basically trying to do what R1 did. They were trying to build, Providence was trying to build out this full end-to-end platform that they could sell the other healthcare organizations, similar to R1, similar to kind of like, you know, the Ascension, R1 initial agreement, similar to Conifer that, you know,

works with Tad Healthcare and Parillon, works with HCA health care. Some of these businesses kind of start within a hospital system. And so similarly, Providence had this a Clara asset that's a modular business. But what they realize is they can either expand aggressively and try to scale it, or they could sell it off to someone and let them roll it into their modular business. That's my understanding too, but I guess it's like R1, they're buying these guys,

but basically they're kind of, they're just buying the book of business and they're going to shut it down and use the R1 systems and processes and everything. Am I kind of thinking about that correctly? No, I don't think that's accurate. I think they'll continue to use. they may do some of that because there is some duplicative functionality, but I think they do have some unique modules that, you know, the R1 does not have. But to some degree, you're right, they're buying, it's kind of a roll-up. Like, if you look at it just as a clear app and forget about

Providence for a second, if they just bought that asset, you'd be viewed as kind of rolling up the modular industry, right? So like buying up an asset and like plugging it into your system, how much of you, how much of it you kind of convert to your tech versus theirs, I'm not exactly sure. You know, they say they're going to spend 20, 25 million on integration costs. They say it's run really inefficiently, and they say, like, I can, you know, offshore a lot of the work and, you know, take the EBIT off from, like, you know, $26 million to $80 million, off of the $300 million revenue. So, but let's, let's be clear here. Like, they would not have done this for what we believe is like 70 if you add the warrants in like roughly a 750 million

deal there's no way they would have bought that for 750 million if it was just the eclara asset does that make sense they need the 10 years from providence on the so in addition they then get a 10 year deal to run providence's revenue cycle management and so the way that feeds the bear case is it's like oh so you have to you have to spend this money to buy the business right and you need to win new business And so I think if you talk to the CEO, you'll say this was a deal that had been percolating for four to five years. It was a very competitive process.

Anyone who did this was going to have to buy the Eflare business. It wasn't like this was an R1, like, unique structure to the deal. And the rest of the pipeline, he would say looks completely different from this. You know, so like he's targeting this is, he now has his four, he now has his four like beachheads, I guess, of business. And now he wants to add, I think what I'm hoping you'll see is more singles and doubles, right? Like $2 billion, $3 billion, $4 billion, or NPR businesses, even if they're like not full end to end, even if they're like, you know, we're doing mid cycle for this, you know, this hospital system with the hope of like adding, you know, back end later on or front end later on. And so I think he's trying to get into like kind of a more consistent growth cadence and signing deals that he can start when he wants to start them.

Like, this doesn't have a phase one or a phase two. And so I don't expect that you'll see any other deals like this. I think this is a unique deal. I think it does feed the bear case in the short term because it looks like they had to buy it. But if you look at it as purely an acquisition and you believe that they can do what they say they're going to do, they pay it four times EBITDA between a Clara and Providence, right? I think you hit the nail on the head, though, like, what I think from an outsider or somebody who, you've followed this for years I've done I got really excited so I did you know a day's worth plus

I've loosely followed it for years but which strange is hey I buy this asset right and then I also get a 10 year guarantee from this customer who I'm giving stock and you know giving cash for the asset but then they will I will profit from it not that that's unheard of but just the combination it's a little weird because I'm kind of like oh like providence like in an ideal world all the ones and two billions that you're talking about was how the providence deal looks where they say, oh, we're doing this in-house right now. RCM's way better. We're going to collect more money.

Like, this is, yes, we give them money, but because our tax goes from 5% to 3%. They keep 1%. We make a lot more money with that. And that's the ideal world. All the money goes to RCM over time. And because RCM, like, they're buying the asset, cash out the door, warrants out the door, and then it's just, it is a little bit strange and a little bit different. Well, yeah, it is.

I agree. I think it's a little more common in healthcare IT with these large health systems and how they interact. It's not, you know, there's some other names like Premier and Avalon that have done things kind of similar where there's perception they have to like give a little bit to win the customer base. But it is, and then, you know, they have a big board. They're adding like some of these guys to their board. And so there's like that perception that they're like, you know, doing that as well. I think I think the board actually is large, but there's a pretty good mix of like private equity on there and customers. And so I don't share the same concern that that short report had with their board.

I, again, like, I expect this to be, like, the one big deal they do. I expect them to completely focus on execution. I expect them to announce cleaner deals going forward that are, you know, either in full or part of an end-to-end system. And I think, you know, I think with the goal being to, like, not focus people so much, them like when a new large deal is going to start, but have like kind of that flexibility to ramp up, they can now ramp up providence at any pace they want, basically. And so if they want to do it faster than five years, they probably can. If they have other customers that they sign, they can slow down Providence and like do additional customers. So I think

the way that the current CEO is structuring the deals and maybe the old CEO wasn't is it's providing more flexibility and should ultimately be a little more consistent growth. If not, like, you may not get like a 25% revenue growth year, right? Like it'll be a little, it's a little more of a garb story than maybe some of the previous investor base was looking at. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients.

As yet another value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha dash sense.com slash FS. That's great. There were, I have a few other questions, but as you say, this is like a 91 page short report that, 95 page short report that drops.

You know, anybody who Googles this, it's the first thing they're going to see. Were there any other things in the short report, which again, you know, people can disagree. It's very well researched at least, but is there anything else in the short report that kind of jumped out to you that you kind of wanted to address? I do have a few other question I want to do,

but this is what people are going to be. I think one of the, it was kind of a meandering short report, in my opinion, but one common thread was... You don't get to 95 pages without a little bit of bandering, man. It was one, one common theme was the aggressive accounting. And when I've looked at it, I just don't see it. Like, I, like, they're talking about rising kind of like days receivable and then including the contract asset. So, like, I agree like contract asset is like a lower quality form of revenue, because you're have to go to receivable, then you have to go to, then you get the cash. But it's a pretty small

percentage of the overall revenue base. And honestly, like, if you look at kind of days receivable, and if you even include the contract asset in that, it jumped when they bought cloud med, but it's been like sliding down ever since then. And if there was like doubtful accounts or ongoing games being played, I think you might expect that to be going the other way, right? You had a little discussion on why the days receivable jumped when they bought cloud med. And I think you talked to some people who had prior previously sold to CloudMed about like how the accounting transition from really small firm to larger firm went. I don't know if you. Yeah, yeah.

I don't know how much want to get into the details of it. But basically they had to integrate all these modular players cloud med did before before they got by it. And that's one of the reasons we like Lee is we got really good feedback on him that he took all these disparate assets and integrated them culturally and financially really quickly. And part of that was figuring out a common accounting system. And they hired Deloitte and other like McKinsey, I think, to like figure out when we're either a public company or when we're going to get bought out what this accounting is going to look like. And they came up with this, you know, contract asset system that they felt was the most appropriate way to do it and based on how other companies were reporting it. And so the feedback we got is like they spent years and lots and lots of money working on this with high reputable accounting firms. Lee did a great job integrating all the assets.

And from an accounting standpoint, it was actually pretty airtight. It's slightly more aggressive than some of the other individual players. So I think when you got the quotes about how they were uncomfortable with the changes, I think that was more just them not really understanding, like, what the bigger vision was of the company, that they're trying to get all these assets onto a common accounting platform, get it all under contract, you know, get, where we're needed, make a contract assets and recognizing it based on kind of like recognized gap accounting. And so I think, you know, they wanted to get that all done before the acquisition. And so if they did it, like after the acquisition, you'd see

this big, you know, spike. And that would look really, really bad. And so you didn't see that, though, right? And so like the shorter part talks about like the cookie jar running, running dry. And we're just not seeing that. We're seeing good. good solid growth from CloudMed, good solid growth from the overall modular business. And the DSAs are ticking down, right? So the Ds are taken down. Yeah. So that's the only other like point. You know, we'll see. I guess maybe, you know, I think they had had a couple of like, you know, they had the bankrupt customer. So there was some bad debt there. And they had a little bit last quarter like six, seven million of bad dead. And so you need to

watch that as well. But we don't think it's like this like he's talking about it being like a Credit storm brewing, and it's just doesn't match reality in our view point. There were two other quotes in your report that I wanted to hit on real quick. The first was, I thought it was really interesting. You talked about, hey, RCM, one of their advantages, there's a coder shortage out there. And the largest players have advantages in getting coders. And, you know, I thought that was a real thing. Like, if you talk to a lot of just companies in general, you know, it's not quite as bad,

but if you were looking for software engineers and you were, you know, a 50-person industrial, it would be kind of tough to find a competent software engineer. You might just have to outsource that. I thought the code or shortage angle is really interesting. Do you want to just expand a little bit on what I'm throwing out there? Sure. So we had the good fortune of talking to the previous Sutter CFO, or actually the CFO, one of the hospital, like one of the major systems. And he talked about how coding has become far more important than it was 10, 15 years ago.

And it's just really hard to find local talent there. And so the outsourcing, you can find guys who are not only cheaper, like a guy working in Nebraska, for instance, like little on like, you know, offshore, but like a guy working in Nebraska isn't going to cost as much as a guy who's working directly in California, right, where it's where Sutter is located. And so, and then having kind of that like be your specialty of finding that talent and knowing what the talent is, it does lead you to believe that outsourcing should be a more cost-effective. I think the hurdle is, I think one of the Twitter questioners was asking about like, some CFOs just really don't like it. They don't want to give up the keys to the castle, right? And so I think it's just one of those things that not everyone will do, but customers, if a CFO is being honest,

they're going to run the dollars, the numbers, and if they can find someone who's done it for other customers successfully, you know, it's not like a lose-your-job type proposition, most likely. right if you if you go ahead and do it it goes back to that quote i said at the earlier where our rcmco said hey look you're going to the executives and you're asking them to give up the cast generating arm of the business that's always going to be a tough ask it gets easier and easier as you get more and more examples you can point out of like hey here's this giant company you know five times the size of you that didn't and they love it and they're so they're like it's really

sticky and they're increasing it it gets easier as you can points more of this okay just one more because it's such a great quote you can't not include this quote on a podcast uh you've got a quote in there about Optum who is probably their largest competitor. You can agree with I'm wrong there, but the quote is hiring Optum is like hiring the IRS to do your taxes. Do you just want to expand on that real quick? Well, that was actually the quote from the Sutter CFO, not mine. So, yeah, I mean, Optum is a part of United Healthcare and that, you know, they bought change healthcare, which brought over a big revenue cycle management component and plugged it into their Optum network. And several customers, several industry participants we've taught, I think

they have a pretty good product. And I think they're probably the one that would be the most technologically in line with R1 and have the resources to invest behind it because they have this big insurance business. But when you think about like, do you want to trust this company, there's just kind of like in the back of your head, are you like, I'm sending all my, all my data to, you know, it's like a fox in the henhouse, right? Like, I'm sending all this data to the person that's evaluating me, right? Like, I'm sure they have, like, claim they have, like, firewalls and things like that and they're not using it against them.

But that would be a – if I were the CEO of a healthcare organization, that would be a concern I would have is, like, I want to hand this data over to the ones who are deciding how much I'm going to get paid for it. So, again, like, yeah, it's like the IRS doing your taxes. Like, I think there's a lot of people who would dispute that notion. I think Optum will do fine. I think they have, like, an even more integrated offer. that goes to like pharmacy benefit managers and and so like if you want to go with the whole

integrated system maybe you go with optum but if you don't you know if you want to outsource even more right um but if you want to you know if you not are not comfortable of that it's our belief that r1 is you know in the best position to win additional like mid-sized to large deals going forward and that's like the least conflicts of interest um the only other independent competitor or his ensemble who hasn't on boarded anyone anywhere near the size that R1 has. So I think they're a good competitor and they'll win a lot of like the two to four billion dollar business. But I think R1 will win their fair share and can, you know, grow double digits. And like in a whole case, like, you know, 15, 17 percent with expanding margins and

you know, be a pretty good compounder. Yeah. Just on optimum, like maybe I'm just too much of too naive, but I'm always like, oh, you know, they're, they're hived off, their separate businesses. It's fine. It's fine to go with them. They've got lots of resources. But I know, like, I was looking at a company that did car dealership software over the summer. And I talked to a few people, and they were owned by a car dealership. And I talked to a few people, and they're like, look, we know that that company has the best car dealership software. Like, there is absolutely no doubt about it. They're the best. We'd love to use them. We're not going to sign up for a competitor. And that's car dealerships. Right. Like it's not like, you know, if the car dealership is in Houston, it's not like it's competing with the car dealership in Northern Jersey. But they were still like, we don't go with the competitor. And here it's, you're going to them, you're like, hey, the majority of revenue comes from United Health Care, you know, going from 3% outstanding bills to 2% outstanding bills. You operate a very small margin. That could be a huge increase in your profit. Why don't you buy your revenue cycle management from United Health Care, the person who you're going to be testing a lot of these things with? And, you know, if you're a hospital CEO,

probably rightly you're like are you insane yeah absolutely not we're going to do that so i can see that well i think it's even debatable whether they have a better offering like the uh one of the customers uh light point light point said that they did our RFP and opt and optim finished fourth at a four with them and r1 had the best technology roadmap and um so i don't think it's a get i think they have a lot of like they have a lot of like products that haven't been integrated that well it's You're going to go with them if you want to go with, like, this massive integrated solution that goes beyond just revenue cycle management, I think. Cool.

We have talked about, I mean, we've hit most of my questions here. I think we've done a ton. We've talked about the short report. We've talked about the stickiness of the business, your vision for it. The only thing we didn't really talk about it, and I think we kind of hit it, is the long-term 30% margin target. I don't know if we really need to spend any time there. But anything else you think we should have hit or anything you wish we had hit before we wrap it up? I guess I would just point out to some transaction comps that I think supports the overall

valuation. So like change healthcare was bought by United for $13 billion, which is 13 times forward EBAA, pretty heavily adjusted like R1, 20 times forward free cash flow, pretty highly levered, and it was pretty low growth when they acquired them. So like when I talk about a 12 times multiple and then they have a table of transaction comps, since 2016, no company was bought out, no, no, no, no, no, no, no, no, no healthcare IT company of any size was bought up for less than 10 times EBADA. Do you think buyouts the end game here?

Yeah, I think that's certainly a possibility with, you know, I think it's pretty heavily owned by private equity still. And so at some point, they're going to want to exit. And I think do you think a health insurer or who do you think is the most likely kind of buyout here? You know, I just ain't health insurance because you're not as optimum. Do you think like Cigna decides? Well, that would completely kind of blow up the what I just said about them being an independent player. You always go and you say, hey, we were independent, we're integrated, but now we're getting bought out. You're going to get all the recesses of the big player, but we'll still be on your side, right? Well, I mean, I think certainly private equity, a new private equity player could buy them out.

But, you know, you look at who's been buying these companies like Oracle Bot Cerner, right? Like, would they want, you know, would a tech company be interested in all this data that they have? Yeah, time will tell, I guess. but I think that that would that would keep them kind of an independent player without to some a little more degree than like you know the change health care with United deal yeah right private equity I think you know I think if they need to deliver a little bit but then they could you know relever and do a do an LVO um private equity is interested in this space right they in 2022 they put up by war work pinkis and one other group invested in ensemble and put a

five billion dollar valuation on ensemble yep um which was run running at 200 million EBITDA. So, you know, you look at R1, which is three times, more than three times the size. I was going to say you want a 22x multiple would put R1, R1 head. Well, I don't, we don't have up to date adjusted EBITDA data, but at the same time, we haven't heard about big wins that ensemble has been getting particularly. So, you know, maybe 200 has grown to 250. And so 5 billion on 250 on like decent growth, kind of like R1. And then one other thing is Conifer, which is part of Tenet, tried to do a spin-off at 14 times EBITDA. So you can look at this as a negative or positive. They thought they were

worth 14 times EBITDA. They couldn't get it done. They're actually negative growth right now, like slightly declining growth. And kind of, in my view, kind of like one of the losing players probably over time. But like the fact that they tried to go spin-off at a 14 times multiple, like, you know, they couldn't get it done, but I would think that R1 would be consider larger and, you know, potentially higher quality and a better outlook. And so again, we're trying to put a 12 times multiple on, you know, a couple years out to get like a double. So I think that that's, that's covered pretty much everything. You know, I think it's one that you really do have to have. I think there's probably a couple more bumps in the road, like

short term, but probably happen at some point. And so you have to decide if that damages the long-term thesis, or if that's kind of a, you know, a little more short-term noise because I do think this management team is like taking this company by the horns and like trying to make it their own now after like a year of kind of observing and trying to execute. And, you know, that can come with difference, like you've already seen it, like a slight pivot and strategy to not focus quite as much on the massive end-to-end deals going forward and trying to like build off of their modular success and, you know, meet, I think the CEO says meet the customer where their needs are, essentially, right? And so, you know, I think that's a, are there going to

be a couple more bumps? I think they'll do an investor day in the couple of the next couple quarters to kind of really lay out their vision for the company. And so, you know, I think if you take a multi-year view, I think, you know, over time, some of these, this bearishness will kind of subside. And they'll realize this is a pretty solid asset of a non-cyclical industry with good growth prospects. Well, that was great. That was great. This has been awesome. I'm glad I could finally get you on the podcast. We'll have to have you on for a second time, but John Hook, thanks so much for coming on. Thanks for having me, Andrew. Appreciate it. Anytime. A quick disclaimer. Nothing on this podcast should be considered an investment advice.

Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.