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R1 RCM Inc. (NASDAQ:RCM)
Q4 2020 Earnings Call
Feb 18, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the R1 RCM Fourth Quarter 2020 Earnings Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to hand the conference over to Atif Rahim, Head of Investor Relations. Mr. Rahim, please go ahead.

Atif Rahim -- Senior Vice President, Investor Relations & Business Development

Good morning, everyone, and welcome to the call. Certain statements made during this call may be considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth, plans and performance, including statements about our strategic and cost-saving initiatives, our liquidity position, our growth opportunities and our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, expect, intend, designed, may, plan, project, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so, except to the extent required by applicable law. Our actual results and outcomes could differ materially from those included in these forward-looking statements as a result of various factors, including, but not limited to, the potential impacts of the COVID-19 pandemic and the factors discussed under the heading Risk Factors in our Annual Report on our latest Form 10-K and in our latest report on Form 10-Q.

We would also be referencing non-GAAP metrics on this call. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Now, I'd like to turn the call over to Joe.

Joseph Flanagan -- President & Chief Executive Officer

Thanks, Atif. Good morning, everyone, and thank you for joining us. I'm pleased to report, we closed 2020 on a strong note. Fourth quarter revenue of $328.4 million was ahead of the expectations we communicated on the third quarter call, driven by strong execution on cash collection and KPI performance. This revenue upside, along with cost management actions taken in 2020, helped deliver adjusted EBITDA of $62.7 million for the quarter, at the high end of our guidance range. These results were, once again, driven by the tremendous dedication of our team. Our 20,000 plus employees continue to perform extremely well, given the circumstances. And I'd like to extend a big thank you to the team for their continued outstanding work.

Despite challenges presented by the pandemic, we made strong progress on multiple fronts in 2020. First, we added a cumulative $5 billion in new end-to-end NPR, well ahead of the $3 billion target we set at the start of the year. With the addition of Penn State Health and LifePoint Health, we more than doubled our footprint in the academic and for-profit segments of the market. Importantly, our deployment teams were able to pivot quickly to a virtual environment and I'm pleased to report that on-boarding activities that Penn State Health as well as Rush Health and the $700 million NPR Physician customer we signed on in 2019 have concluded. At LifePoint, we commenced the first phase of on-boarding in January and are on track to begin the second and larger phase in early April. In addition to Penn State Health and LifePoint, we signed 100 non end-to-end agreements with some notable customers, including Lakeland Health, Pinnacle Dermatology and Integrated Care Physicians. The launch of our physician-focused solution, R1 Professional, was also well received in the market. And we are pleased to have been recently recognized as Best in KLAS for Ambulatory RCM Services in the 2021 Best in KLAS Software and Services Report. Second, we successfully completed the acquisitions of SCI, Tonic and RevWorks as well as the divestiture of the EMS business. SCI and Tonic's capabilities have now been integrated into a single platform, alongside R1's historical capabilities. Third, we deployed the automation routines we had started developing in 2019 across our customer base. And despite lower patient volumes, we were able to deliver savings at the high end of our $15 million to $20 million target. Fourth, we accelerated the corporate cost savings initiative that was originally planned for the late 2020/early 2021 timeframe into mid 2020. This initiative included streamlining corporate functions and rationalizing our real estate footprint. In 2020 alone, we closed 12 locations, representing 250,000 square feet or 25% of our US real estate portfolio. Over the next several quarters, we're reviewing plans to potentially rationalize an additional 200,000 square feet. Given the ongoing pandemic, most of our employees continue to work from home. However, as a result of this optimization, we intend to emerge with a refreshed footprint of employee resource centers to foster innovation and collaboration with scalable capacity to absorb growth. Lastly, we made significant progress in the simplification of our capital structure and announced the conversion of our preferred shares in the common shares in early January. We believe this simplification and alignment of our capital structure is highly beneficial for R1 and our shareholders, as it affords us enhanced flexibility to pursue the many growth avenues available to us. Overall, we are pleased with our progress in 2020 and we enter 2021 with strong momentum across the business.

Our priorities for the year can be dimensioned along three key areas. First, generate growth via organic and inorganic efforts. Second, continue to advance our technology-driven innovation agenda and fully realize the opportunity presented by automation. And third, prepare our operations to scale for the next phase of growth and drive margin expansion through improved KPI performance at existing customers.

Starting with growth. We continue to see strong market demand for our solutions. The significant challenges facing healthcare providers, ranging from financial pressure to increased revenue cycle complexity and evolving demands from patients and physicians, continue to increase in intensity. This coupled with the challenging operating environment over the past year caused by the pandemic has led providers to recognize to a greater degree the value we can deliver as a strategic partner. The actions we took last year, including accelerating cash collections, rapidly rolling out mobile registration solutions and dedicating additional resources for Telehealth, allowed our customers to focus their core efforts on patient care. These proof points, along with positive feedback from our customers, have helped generate new opportunities in our end-to-end pipeline, which currently has a healthy mix of IDNs as well as large independent medical groups. The tone and quality of discussions are highly encouraging, and we have established a goal of adding $4 billion in new NPR under management over the course of 2021. With the addition of LifePoint and Penn State Health, we have a mix of business across key segments of the IDN market, including not for profit, for profit and academic centers, as well as the full spectrum of care settings, acute ambulatory and post-acute. On the heels of this continued commercial success and diversity of business, we believe we are well positioned to catalyze further growth of our end-to-end offerings. Additionally, with the organic growth in our installed base and addition of new customers through recent acquisitions, we also see a significant opportunity to cross sell our technology-enabled solutions into this captive base. Increasingly, we view M&A to be a core component of our growth strategy. We have a proven track record with the deals we've announced and successfully integrated over the past three years. We also have a strong cash generation profile and balance sheet position that provides the capacity to invest. And with $40 billion of NPR under management, we're able to underwrite and amplify meaningful operational synergies across our contracted book of business.

Next, I'd like to discuss technology and innovation. We see a significant opportunity for technology to fundamentally transform our customers' non-clinical operations and drive improved yield, lower cost and a substantially better experience for patients and providers. Our business model is uniquely suited to drive this transformation. Operational control over Revenue Cycle processes allows us to benefit from a quick feedback loop and prioritize investments accordingly, driving rapid innovation. Our substantive IP and PX and automation increasingly sets us apart from our competition and we continue to invest heavily in these areas. In the fourth quarter, we made substantive progress on numerous fronts in our PX platform. With the integration of SCI, Tonic and R1 functionality, we've redesigned the user experience for the patient, making it possible to seamlessly search, schedule and on-board for an employment in a single modern and user-friendly application. Additionally, we initiated a deep user experience research and redesign partnership with a leading design firm and are now in the midst of a recreation of the referring provider, UX journey, which we increasingly believe is a strategic differentiator for our platform. Additionally, we added a market-leading physician directory search-and-match capability to our portfolio. We believe this enhances our value proposition to IDNs looking to digitize both their ambulatory and acute scheduling and on-boarding processes, building on the foundation we acquired with SCI. Lastly, one of our latest innovations for our PX platform is order-based financial clearance automation, which can significantly reduce the time and manual steps between when a physician orders a test and when the patient completes the test. By integrating the order facilitator capability with our financial clearance, on-boarding and price estimation tools, we have automated the completion of these gating processes prior to scheduling an appointment. We believe this is very strategic for our clients, because we can help reduce anxiety, waiting and wasted activity from the patients' journey in healthcare, while improving price transparency in the process.

On the automation front, we continue to advance our roadmap and uncover additional opportunities for automation. Based on the additional automation routines in our portfolio, we are now on track to automate 30 million manual tasks annually and have another 45 million slated for development. During 2020, we were able to double the number of tasks automated through our platform and see this trend continuing in 2021. As we have grown and matured our automation capability, we have learned that to digitize the wide range of complex processes found in provider organizations, more than just Robotic Process Automation is requirement. We have extended this core technology component with a set of capabilities, which expand the universe of automatable processes. These additional capabilities include optical character recognition, natural language processing, expert rules and machine learning, workflow integration and analytics that can be leveraged independently or collectively to solve automation challenges and manage the digital workforce.

Machine learning presents a significant opportunity to improve productivity and reduce financial leakage. Our first machine-learning model that was deployed into production in the third quarter of 2020 focused on predicting when a denied claim is likely unrecoverable based on our standard processes and flagging that account for specialized intervention. Thus far, this process has exceeded our original expectations for accounts flagged for special intervention. We continue to pilot and refine several additional proof-of-concept models in the charge capture and denials domains. These have continue to confirm applicability of this technology to our processes and we are looking forward to this being a meaningful contributor to our performance in the medium term. Collectively, our digitization efforts are expected to result in approximately $40 million of bottom-line savings in 2022, up from $20 million in 2020. This does not include the benefits from KPI improvement or incremental business we may win, driven by this digitization capability.

As discussed on our last call, technology integration and interoperability is another key area of focus and investment. As you may recall, one of our biggest hurdles to speed to value has been the complexity, latency and cost of integrating with customers' EHR systems. We are pleased to share that our development efforts with Cerner are complete and we expect future Cerner implementations to be reduced to 30 to 45 days, representing a 60% reduction. A similar effort has been completed with Athena as well. Additionally, as we seek to improve our interoperability, the integrated SCI, Tonic and R1 platform is built on an API-first architecture, which will enable our core functionalities like provider search, schedule, financial clearance and patient estimates to be callable APIs from our customers' digital front-door solutions or integrate our solution into their environment. To further extend our integration efforts, in 2021, we plan on establishing API interoperability for key workflows with a broader set of leading EHR vendors.

Next, let me turn to how we are scaling our business for the next phase of growth and driving margin expansion via improved KPI performance. Our efforts are focused across three areas. First, we want to ensure that our operations and deployment teams are fully resourced to successfully absorb $5 billion in new NPR annually as we exit 2021. To enable this, we are adding capacity in our central delivery infrastructure to ensure we can begin transitioning work as close as possible to contract signing. We are also investing in data integration tools to accelerate the deployment of our core Revenue Cycle technology at new customers. Additionally, we are implementing processes to drive earlier adoption of our automation tools to improve our speed to value. Second, as we've deployed our PX solution to customers, adoption rates and patient satisfaction scores are now dramatically ahead of our initial expectations. We handle 62% of patient registration encounters on a self-served basis, NPS scores are above 75, and we have cut time on administrative tasks in half. We have not only created an alternative digital pathway to our traditional operations; we believe we are positioned to create a consolidated, truly digitally transformed patient access of the future entirely. Third, while we have historically characterized our digital automation efforts in the context of cost reduction, we increasingly see an opportunity to improve our KPIs metrics. For example, by automating the prior authorization process, we can not only reduce cost but also reduce denials and thereby drive improved cash performance and lower AR days. Additionally, by leveraging our contract-based price estimation in digital pre-service interactions, we have demonstrated that we can materially improve patient collection yield, while improving satisfaction. These select examples generate higher incentive fees for us and more importantly, deliver improved value to our customers.

Before I turn the call over to Rachel, I'd like to mention that we will be publishing our inaugural ESG report in the coming weeks. In this inaugural report, we will highlight how we are enhancing the interests of all stakeholders through our ESG commitments that are centered on innovation, integrity and inclusion. I'm particularly proud of our team for actively embracing and enhancing inclusion and diversity initiatives. In a difficult year, marked by COVID-19 and social unrest, we promoted a more inclusive workplace through R1's I&D program, where our employees can bring their whole subs to work every day. I encourage you to review a copy on our website when we publish that.

In closing, I'd like to once again acknowledge the remarkable effort by everyone at R1. Our actions since the onset of the pandemic have solidified our customer relationships and translated to a positive momentum in our ongoing commercial discussions. We are very excited about the journey ahead of us. The investments we are making in expanding our functionality and capabilities continue to improve our competitive position and extend our lead in the market. With $40 billion in NPR under management, we have a highly skilled platform to manage providers' revenue cycle operations. We believe this contract book of business and our focus on operational execution give us a high degree of visibility to our $315 million to $330 million in adjusted EBITDA guidance for 2021.

Now, I'd like to turn the call over to Rachel.

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Thank you, Joe, and good morning, everyone. We're pleased to report solid fourth quarter results with revenue up 4.6% year-over-year to $328.4 million and adjusted EBITDA up 39% to $62.7 million. For the full year, revenue grew 7.1% to $1.27 billion and adjusted EBITDA grew 43% to $240 million. Adjusted EBITDA margin for the year was 18.9%, up 470 basis points from 14.2% in 2019, driven by our digitization efforts and progression of customers on-boarded two to three years ago as they approach steady state margin.

Reviewing the fourth quarter results in more detail. Net operating fees of $271.4 million declined $5.2 million year-over-year, primarily driven by COVID-related volume decline. On a sequential basis, net operating fees increased $17.7 million, driven by a recovery in volume. As a reminder, the national lock-down impacted our Q2 and Q3 revenues and we started to see some recovery in volumes come through in our Q4 results. Incentive fees of $27.4 million were up $13.1 million over the prior year and up $2.3 million sequentially, driven by strong operational execution. Other revenue, which consists largely of modular services, was $29.6 million of $6.5 million over the prior year and up $1.2 million sequentially, driven by the contribution from SCI. The non-GAAP cost of services in Q4 was $242.9 million, down $3.4 million year-over-year, thanks largely to our automation and digitization efforts, which more than offset incremental costs associated with on-boarding new customers. On a sequential basis, cost of services grew $6.7 million, primarily due to some recovery in patient volumes. Non-GAAP SG&A expenses of $22.8 million were relatively flat year-over-year due to lower travel and marketing costs and corporate cost control actions. On a sequential basis, SG&A costs increased $2.2 million, largely due to $1.6 million payroll taxes related to the vesting of employee stock awards and higher health claims. Adjusted EBITDA for the quarter was $62.7 million, up $17.6 million year-over-year and $12.3 million sequentially. The year-over-year increase was largely a function of the increase in revenue due to the factors discussed earlier, coupled with lower cost resulting mainly from automation and digitization. The sequential increase in EBITDA was primarily driven by a partial rebound in patient volumes, as well as continued benefits from automation. Lastly, we incurred $24.9 million in other costs in Q4 related to rationalization of our real estate footprint, ongoing COVID-related expenses and costs associated with the capital structure simplification transaction, as Joe noted and as we announced in early January 2021.

Turning to the balance sheet. Cash and cash equivalents at the end of December were $173.8 million compared to $106.3 million at the end of September, driven by proceeds from the EMS divestiture, partially offset by $64.4 million for tax withholdings related to the vesting of employee stock awards, $7 million for capex and $6.5 million for debt pay-down. Net debt at the end of December, inclusive of restricted cash, was $379.8 million compared to $453.7 million at the end of September. The decrease in net debt was largely driven by a higher cash balance, resulting from the EMS divestiture. With the completion of the capital structure transaction in mid January, our cash position will decrease but our liquidity position remains very strong overall. Our cash on hand and availability under the revolver pro forma for the capital structure transaction exceed the $130 million, which we believe provides sufficient flexibility to invest in the business and navigate a wide range of scenarios in the current environment.

Turning to our financial outlook. Earlier this year, we provided guidance for 2021, which includes revenue of $1.41 billion to $1.46 billion and adjusted EBITDA of $315 million to $330 million. Our guidance assumes that patient volumes remain at 90% to 95% of pre-COVID levels over the course of 2021. Our experience to date across our customer base is trending in line with this range. In light of volume fluctuations over the past year, we want to provide some guidance on the shape and progression of revenue-adjusted EBITDA over the year. Consistent with prior years, we expect revenue in adjusted EBITDA to be weighted more toward the second half of 2021. For Q1 and Q2, we expect revenue in the range of $335 million to $345 million and adjusted EBITDA of $65 million to $75 million. Given the on-boarding activities surrounding the LifePoint contract, particularly those in April, we expect our upfront cost to ramp up in Q2, and consequently expect Q2 EBITDA to modestly decline from Q1, but within the same $65 million to $75 million range, as I just mentioned. We will continue to provide additional color on a quarterly progression on future earnings calls.

In closing, I am proud of how the team navigated the challenging environment last year and delivered on our customer commitments. We entered 2021 with strong momentum and we look forward to updating you on our continued growth.

Now, I'll turn the call over to the operator for Q&A. Operator?

Questions and Answers:

Operator

Certainly. [Operator Instructions] Charles Rhyee with Cowen, your line is open.

Charles Rhyee -- Cowen & Company -- Analyst

Yeah. Hey, thanks guys, and congrats on the quarter. I want to talk there about EBITDA. Obviously, a very strong quarter here. I think last month, you guys provided long-term targets for EBITDA greater than 30% with automation and AI expected to be significant drivers. And I know you laid out a pretty detailed roadmap around that. But can you provide us with some details on sort of where you're at in terms of your machine-learning initiatives, and as well as when we could start to see contribution from this part toward your margins?

Joseph Flanagan -- President & Chief Executive Officer

Yeah, Charles, this is Joe. So what I would say is, relative to where we're at in this journey on the broad set of tools that sit under the moniker of automation, we're well through proof of concept, both in terms of translating the use cases to bottom line impact. And we saw that as an important proof point in 2020 on reduced volumes vis-a-vis our going into the year expectations. We were still able to generate at the high end of the benefit, the EBITDA benefit, from that initial set of automation routines that we put into production coming out of '19, into '20. The second thing I would say is, we feel very comfortable with the medium-range targets that we laid out in January presentations that basically has that $20 million doubling by 2022. And it's important to note that's an in-year number. That's not a run rate number, Charles, as you think about that progression.

Now underneath that, a couple of things I would highlight that continue to be encouraging signs for us. The first thing is, we have historically, and I'll reference the Q3 earnings call, we referenced our estimations that we have roughly 400 million manual transactions occurring every year in our central operations. With the growth of our business and the growth of our contracted set, we now estimate that to be at 500 million manual transactions. So as that grows, the already deployed routines are directly applicable to that. And so, I think that's an important proof point.

And then finally what I would say is, as we start to move out of RPA and we start to move into machine learning and more advanced use cases, we feel there is an incremental benefit that we will gain. We have not fully quantified that, but it really sits around my comments on KPI performance. And when you roll up all of our contracts and as we perform and as we drive value to our customers, there's an opportunity for us to participate in that value generation. And that's an additional factor that gives us confidence as we look at the margin targets that we laid out in January. And we've seen nice margin progressions.

And probably the final thing I'll say is, as we talked about speed to value with interoperability, the other thing, and we're seeing this play out in LifePoint, is with our automation bundles that we've already built. And think about all of the manual interaction that occurs with payers. That's, as you know, a big portion of what we do. We now have automation bundles with most of the state-driven payers, either commercial or government. And what that means is when we go into new customers, and we're seeing this with LifePoint, we're able to turn those automation bundles on because they're already built and they're already built with the state-based routines and that's just translating to faster progression of margins. So my hope is on future calls, we can kind of start to think about updating the cycle time to profitability in the models we've had out for the better part of three or four years now and the different ways we characterize the phases and timeframes to achieve steady state profitability on our end-to-end contracts.

Charles Rhyee -- Cowen & Company -- Analyst

That's really helpful. And if I can just follow up though, Joe, since you've been at the company, right, the business has transformed dramatically; not only just in terms of execution and performance, but... Right? I think a lot of people when they think back, and maybe some people still do, right, they think of R1 as more BPO. Right? You're taking a back office from a hospital, you're centralizing it. So, there's efficiencies as you move to sort of a centralized kind of call center. But if we think about what you're doing with automation and now more AI machine learning, you talk about these millions of manual transactions. Obviously, as new clients come on, maybe that changes a bit, but when you think down the road here, do you -- can we envision a system where hands don't have to touch the claim at all, where it will all be fully automated, or what will be the mix? Because I think a lot of people might think that there's still a lot of hands doing a lot of stuff here, but in reality, when you look at sort of performance, it would suggest otherwise. I'm just -- And it seems like you're moving toward that state where manual process will be less and less required in rev cycle management. Maybe if you could just kind of lay that out a little bit?

Joseph Flanagan -- President & Chief Executive Officer

Yeah. The best way I can characterize that, and we talk a lot along these lines inside of the company. If you think about this process today, I mean, I'm just going to directionally use some numbers, but maybe we could see $2.5 trillion of revenue broadly flowing through the providers. The cost -- the administrative cost that's being spent by providers to convert that to cash, let's just call it nominally 4% to 5%, and it's resulting in a 91%, 92% yield. So, you're losing a lot of economic value on that conversion. And the patient satisfaction is abysmal for those patients and providers that have to interface in that process. And so, you've got basically a $100 billion of spend and if I don't include the EHR, our estimate is still today 80% of that spend is labor and only 20% of it is third-party or bolt-on technology. And our fundamental view is that that's just not going to be sustainable. And so, I don't know what the end state will be, but let's pick a number. In the future, that technology spend should be probably 40%, 50%, 60% at a minimum. There will still be a labor component attributed to it, but that should be yielding $0.98, $0.99, $1 on the dollar. And it should be resulting in a patient satisfaction score of north of 75. Now, we fundamentally believe we can play a leading role solving that problem and we're going to play a leading role solving that problem with technology, not with brute force. But what we also know is, a big component of getting to that outcome is the blocking and tackling. And that's why we stress in our model the benefit we have in operational control because with great technology, you have to complement that with change management and a commitment to using the technology to the fullest extent. And that's really where we feel we can differentiate. But we do fundamentally see the company today and increasingly going forward being a technology-first company. And we think we have all of the capacity, human capital capability and current assets to realize and to play a leading role solving that problem. And we think we'll get rewarded very well as we progress on that journey.

Charles Rhyee -- Cowen & Company -- Analyst

Thanks. And just one last follow-up. Where do you think RCM is on that continuum, relative to that starting point you talked about? And where do you think that end goal could be?

Joseph Flanagan -- President & Chief Executive Officer

Well, what we're -- If you think about it, we're well above the market average on conversion or yield, I commented, where we have our patient experience solution installed. So, just think about it this way, Charles; that's about a third of that conversion cost sits in those access operations. Where we have our solution fully installed, we have 62% of all registrations occurring on a digital self-service basis. No manual intervention. We have that process yielding 75 -- north of 75 NPS score. And as I commented, increasingly, we're starting to see yield move as a result of better experience the patient is having and the ability to present financial options, financial obligations, etc. So, I think that's a good proxy in terms of where we're at on this journey. And again, we really feel like we have good underlying momentum and we just continue to play to our strengths. We're very focused on this space. We don't intend to dilute our expertise because we think there is a huge market opportunity in the area that we operate.

Charles Rhyee -- Cowen & Company -- Analyst

Great. Thank you.

Operator

Your next question comes from the line of Sean Dodge with RBC Capital Markets.

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks. Good morning, and I'll add my congratulations on the performance this quarter. Joe, maybe following on the comment you just made about the fundamental belief being that technology is going to become a bigger part of the process. In the key priorities for this year, you mentioned M&A being increasingly a core component of the growth strategy. When we look at what you've done so far, it's been a mix of tucking in capabilities. And then with RevWorks, tucking in some market share. Is that how we should be thinking about M&A going forward as you kind of drive toward this kind of this idea that technology is going to be a bigger part of the service delivery, or is there something -- some place you intend to focus on a little bit more specifically? And then maybe size, should we expect it being more tuck-ins or are there some bigger deals or opportunities out there, so something more along the lines of potentially transformational?

Joseph Flanagan -- President & Chief Executive Officer

Yeah. I think the way we think about it. First off, with the scale we have, we'll always be opportunistic. So if there is an opportunity that presents itself at very attractive valuation, we understand very clearly how to integrate that. It's almost analogous to RevWorks. That looks like a deployment to us, that integration, and valuation made a lot of sense. So, those types of things we will always monitor and I would characterize ourselves being reactive there, as opposed to proactive, along those lines. Some of the larger potential transactions, we don't sit today and feel like we're missing a particular component. Of course, we always want to get better, but we've got good scale, we've got a leading position, we're very focused. I'm really, really pleased with the team work across the company and the alignment that the team has on serving our customers. So, again, in that area, as you would expect us to be, we will be in the flow of discussions, but again, I would characterize that as somewhat neutral position. Where we would like to be offensive is on differentiating technologies. Again, to my comment on the prior question, if they meaningfully move our use cases or we see an opportunity to drive real innovation and real strategic value and being strategically relevant over a 10-year contract to our customers, that's where we really would like to be proactive and offensive. And there's a number of areas that we have growth theses around, but I would say, in general, they're oriented toward differentiating capabilities that have technology at the core of the value prop to drive scale leverage. And we feel, again, we have captive synergies that can help underwrite and synergize down valuation in those areas and we have a very good relationship with our current customer base that's helpful in how we think about evaluating those and validating the potential opportunity. And if you look at SCI, it's right in line with that. And I would say it's been a while, but if you look at Intermedix, that transaction really anchored our physician offering. And as I said in my prepared comments, we're delighted that our physician platform is one-scaled, it's performing and it's recognized in the recent KLAS rankings. And so, that's a good example of the impact that some of those very focused M&A events would drive in.

So final comment I would say is, those will tend to be smaller and they'll tend to be where we have outsized relative impact and they drive real strategic value to our customers.

Sean Dodge -- RBC Capital Markets -- Analyst

Okay, great. And then on the revenue outlook, your goal to add $4 billion of NPR this year. Just to clarify, is LifePoint included in that? And can you give us a sense of the visibility you have on the remaining? Anything you can share about sales pipeline? And I know, before you said you were involved in a handful of larger RFPs. Anything you can share on how those are progressing?

Joseph Flanagan -- President & Chief Executive Officer

Yeah. LifePoint -- As you think about that $4 billion, we don't really think about LifePoint in that context. Our focus right now with LifePoint is just really, really high-quality on-boarding and deployment performance to LifePoint. And so long as we stay focused there, we feel like we have a really good value prop to them and we intend to build a great relationship with LifePoint the right way, on the heels of our performance. So, we don't necessarily consider LifePoint per se in that $4 billion target. And as you think about the objectives, and Gary Long is here with me in the conference room in Chicago, our Chief Commercial Officer, Gary and his team have objectives that support that external commitment around net new growth. Okay? Net new growth outside of our contracted book of business. And so, that's the way we think about internally our growth objectives.

And unpacking that a little bit, the good thing right now is we see demand and activity balanced and broad-based. And what I mean by that is our qualified pipeline. We've got a healthy mix with IDNs, but we've also got a very healthy mix with very, very large independent medical groups. And relative to RFP activity, it's really situational. Some pursuits, we see RFP driven. The good thing is, in those RFP-driven pursuits, we generally are early in the process and in many cases, helping shape that RFP process. But others are more just non-RFP driven and born out of relationships that Gary and the team have built over time. So, we're generally encouraged along those lines and... Sean, that's how we think about the targets on our sales team.

Sean Dodge -- RBC Capital Markets -- Analyst

All right. Thanks, and congratulations again.

Joseph Flanagan -- President & Chief Executive Officer

Thanks.

Operator

Donald Hooker with KeyBanc, your line is open.

Donald Hooker -- KeyBank Capital Markets -- Analyst

Great. Good morning. I wanted to ask maybe more of a -- start off with a more mundane accounting question. Just trying to understand the incentive fees and some of the sort of the components for the revenue base. Obviously, a huge recovery on incentive fees. I'm trying to sort of think about that going forward. Was there any kind of -- these is always moving parts of COVID and patient volumes ebbing and flowing. What is kind of a normal rate there going forward for that line so we don't get surprised, that's a little bit higher than I thought? And how do we think about that line going forward?

Joseph Flanagan -- President & Chief Executive Officer

Yeah. I think one of the things you're seeing with incentive fees, you saw it in Q3 as well, Q4 is just a little bit of overhang of that, that's -- and you saw the offsets of that in Q2, if you remember, Don. This COVID -- Because revenue shifted so fast down and then shifted so fast up in that COVID in the trailing 12-month period, some of our KPIs Calix are in the index off of an average daily revenue in ADR. And so, what you see is a bit of the numerator/denominator and some of those KPI Calix just getting a bit volatile, not driven by performance, just driven by the demand environment of our provider customers, which we've talked about. But I would expect, and I think this is a real opportunity for us, we've got a big focus on that inside the company and inside our operating teams, that that KPI line or that incentive fee line continues to grow, again, as we gain traction and get the full value of automation, not on the dimension of cost, but increasingly on the dimension of revenue yield performance. And that's something I don't think we've necessarily fully factored into our projections. We want to run through a few more use cases. But I am encouraged with the potential that that component of our revenue presents to us. And that generally flows at almost 100% flow-through margin, because there's not a lot of marginal cost associated with moving that performance.

Donald Hooker -- KeyBank Capital Markets -- Analyst

Got you. Okay. And then another -- just one other quick accounting question and then like a more thoughtful kind of high-level question. Sort of on free cash flow. That's another line item that's tough for outsiders like us to model. You have tax assets, I think you are still working through. This quarter was probably a little bit lower. Obviously, there's a lot of things going on. But as we think about over the next year, kind of what is -- with all the moving parts with tax assets in consideration, what is a good free cash flow baseline assumption that we should use?

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Yeah, you're right on the tax. And you'll see on the K, the effective tax rate is like 1%. And the key reason for that, too, is some of the gain on the sale and so, the taxpayers -- it works a little bit differently to actually get a benefit. And then also for share-based compensation. That's probably the biggest factor that is reducing effective tax rates. I agree, the tax line is -- we're looking at the footnote for this year in particular. But again, as we go through -- we have a lower capex [Indecipherable] will be slightly higher than last year. But it's -- when you think about our business, we really focus on the EBITDA conversion to cash given our modest debt and where our capex is and the relative intensive, frankly, lack thereof compared to some other industries. That really is the key driver as we think about our free cash flow.

Donald Hooker -- KeyBank Capital Markets -- Analyst

Okay. And then last question, maybe just higher-level question in terms of the ownership structure of R1 RCM. I would think of RCM, there's a one -- from one perspective, you guys are somewhat agnostic and so you're not captive to a health plan, you're not captive to a healthcare provider system, even though sort of there's lot of asterisk there because I felt like there's a little bit of a connection to Ascension. And I wonder if being more independent from Ascension helps you in any way, kind of as you talk to maybe healthcare providers that are competitors to Ascension? I don't know if that's true or not, but how has the ownership impacted your -- the sales of your services?

Joseph Flanagan -- President & Chief Executive Officer

It hasn't really been an impact at all. If anything, I would say it's a net positive, the ownership position of Ascension. Now, Don, if you book out into the commercial discussions we were having in 2017 compared to the commercial discussions in 2020, in 2017, with such a high percentage of the company dedicated to Ascension, meaning the percent of our revenue and back in 2017 we still had materially -- material on-boarding activities with Ascension, there were discussions not so much around concerns with Ascension being an owner, but more discussions around what real capacity did we have outside of Ascension to on-board new customers. Now, if you compare that to 2020, that's completely not a discussion as we think about last year and as we continue looking at this year; just with the growth of the company, the diversity of the customer base we're serving. And if anything, there is very often a desire of potential customers to talk with Ascension because, again, one, Ascension can talk from the standpoint of our performance to them, but they can also talk to the standpoint of what strategically led them to the conclusion that they wanted to have a model on their revenue cycle via a partnership with us as opposed to try to do it themselves. And Ascension at well north of $20 billion in NPR has all the scale internally to do this themselves. And so, it's a very credible reference point for systems that are thinking about changing their model on how to manage revenue cycle. And so, if anything, I would say it's a positive. And the discussions we were having in '17, to my comments, are really non-existent right now, along the lines of capacity.

Donald Hooker -- KeyBank Capital Markets -- Analyst

Okay, thanks for the perspective. Thank you.

Joseph Flanagan -- President & Chief Executive Officer

Thanks, Don.

Operator

Stephanie Davis with SVB Leerink, your line is open.

Stephanie Davis -- SVB Leerink -- Analyst

Hey, guys. I echo my congratulations on the quarter.

Joseph Flanagan -- President & Chief Executive Officer

Thanks.

Stephanie Davis -- SVB Leerink -- Analyst

So, I actually have one for Rachel first. I understand there are a lot of moving patients with incentive fees and Robotic Process Automation, but is there any way to tease out the margin benefits of a footprint rationalization this year? And as a follow-up to that, how should we think about the impact to your longer-term margin arc? Is it a permanent step-up, or will it kind of be absorbed by some of the other initiatives?

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Yeah. I think the first thing, for the highest level. We have had that EBITDA progress that I think is worth kind of a reminder of as we look back. In 2019, we were at 14.1% in our guidance -- in the midpoint to their guidance. And then, we landed at 14.2%, ultimately 18.9% for '20. And in '21, the midpoint of our guidance implies 22.5%. So, you're really seeing that fundamental margin improvement. As you can say, what are some of the key initiatives that we're looking at and that's driving that? As we can see, we're really getting toward that mid-term maturity. And that's -- we really felt the confidence to expand our long-term goal of [Indecipherable] and that's echoed there. The key driver here, as I think you've particularly gone through, we really do believe a lot in this digitization and automation efforts. That's our key driver. In the very near term, as we look at this year, are there also some additional cost savings as well as some costs coming back frankly? If we think about our 401k health costs that we are banking into our budget, the answer is yes. So within that, if there's -- the real estate workplace of the future, all of that does bake into our assumptions and analysis. But I think we feel very confident in that long-term trajectory and also the steps in the demonstrated pathway that we had in reaching that.

Joseph Flanagan -- President & Chief Executive Officer

Yes. Stephanie, I would think about, on the corporate cost savings, nominally around $5 million that we may see in 2021. But to Rachel's comments, that cost savings is going to be offset with investment employees and some of the things that on various programs that in the COVID environment we trimmed, just in terms of navigating 2020. So, I kind of view that as a net neutral. The thing that I would say more strategically, we are very committed to our business model ratios. So, SG&A is below 5%. That's an important thing that we talk a lot about internally. As we grow the company, we want to be very disciplined. And in line with that, if you look at the investment we're making to support the $5 billion target, SG&A is not a component of that. So, you're seeing some of the leverage. It's spread across our on-boarding capacity and it's spread across our technology infrastructure spend. So, that -- I think the real margin expansion is coming from primarily the influx of technology on our contracted book of business.

Stephanie Davis -- SVB Leerink -- Analyst

On that same COVID impact vein, how should we think about the acceleration of some of your prior initiatives that may be a little bit more top of mind, like consumer payment there or value-based models, given the pandemic?

Joseph Flanagan -- President & Chief Executive Officer

I would say, we're very focused. And whether it's -- whether that is being organic or inorganic, we are very focused on patient payments, consumer payments. That whole ecosystem, we've done a lot of work on it. We control a lot of patient payment activities and we manage a lot of patient cash. So, we think there is a role we can play and we intend of that to continue to be an offense. And then the consumer experience at large, as we talked about, is going to be a significant focus. So to your point, coming out of COVID, that only intensifies, especially as we think about the out-of-pocket yields on payments and the correlation of that out-of-pocket yield to their front-end experience in the registering, financially clearing, all of those activities as well as their payment experience and their payment innovation, if you will. So, there was a question prior on M&A focus. And as I said, we're very focused on capabilities and those are some of the areas that you're highlighting that we think we can play a meaningful role in.

Stephanie Davis -- SVB Leerink -- Analyst

Super helpful. Thank you, guys.

Joseph Flanagan -- President & Chief Executive Officer

Thanks, Stephanie.

Operator

Steve Halper with Cantor Fitzgerald, your line is open.

Steven Halper -- Cantor Fitzgerald -- Analyst

Hi, just going back to the cash flow question previously. Obviously, 2020 was a down year. Could you sort of provide a bridge for us maybe from 2019, and what items don't repeat for next year?

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Yeah. I mean, some of the...

Steven Halper -- Cantor Fitzgerald -- Analyst

For 2021, I should say.

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Okay. Some of the elements, you even see it as you look at the balance sheet versus the cash flow and think about accounts receivable, you will see our accounts receivable change in the cash flow is higher than on the balance sheet and a big piece of that frankly is EMS. That's about $18 million plus. So, that's -- Now, as you think about what some of those changes are as we go through, you will note some of those acquisition and divestiture changes being kind of the key factor in that. The other piece. With that, we did have a more significant vesting where we had $64 million of tax withholding. So, that was a disproportionately large set of awards that vest at the end of 2020. And there's nothing of similar magnitude expected in the foreseeable future. So, I think those are the elements there that would really drive that.

Joseph Flanagan -- President & Chief Executive Officer

And then the other one, I would say, Steve, is transaction costs will be fluid from that standpoint, obviously, with the conversion and some of those things behind us and a relatively heavy year, I would say, in M&A, in 2020, with three transactions over the course of the year. And then finally, and we can model this on follow-up, the RevWorks acquisition. W have a number of efforts in place to bring that cash conversion down. And that's not operational; that's more contractual. The way the contractual relationships sit in the transition between us and Cerner and RevWorks customers. It just adds some cycle time. It's -- And again, I want to stress, it's nothing to do operationally; it's more contractually. And we've got -- as that integration occurs, that will compress to a more normal flow.

Steven Halper -- Cantor Fitzgerald -- Analyst

Great. And then just going back to your other comment about adjusted EBITDA conversion. Would you give us sort of a range that you're thinking about there for '21?

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

We would expect our, as I said, the kind of primary drivers as we think about it, really if go back through the primary components with the ARIP, we're not expecting the significant changes, if you normalize for the divestitures. So again, we're not expecting any of the more significant elements. I mean, here, as I described, we had the tax withholding that's a pretty significant element that we're not expecting again. So, it should be much more reflective our historic patterns.

Steven Halper -- Cantor Fitzgerald -- Analyst

Great, thank you.

Joseph Flanagan -- President & Chief Executive Officer

Thanks, Steve.

Operator

Gene Mannheimer with Colliers Securities, your line is open.

Gene Manheimer -- Colliers Securities -- Analyst

Thanks, good morning and congrats on a great year. Joe, you touched on it just a moment ago, but I just wanted to ask on RevWorks. You closed the deal six months ago. How would you characterize it relative to your expectations? Are you able to quantify the contribution from RevWorks this year? I know that might be more difficult given the integration there.

Joseph Flanagan -- President & Chief Executive Officer

Yeah. No, I think I won't quantify it in specific numbers, but I'll directionally give color on it. That business, we bought it. It was a breakeven business. As we think about contribution in 2021, I would characterize that as ahead of our plan on an EBITDA basis. And we fully expect to see that contributing at the targeted EBITDA contribution rate of 30%, exiting '21, going into '22, which is in line, if not a little bit ahead of, our plan. So, that's -- And I would say that should be the case, because that's an on-boarding and integration that's right in line with kind of what we do every day for customers. I think more importantly is how do we catalyze the growth opportunity of that installed base and the Cerner channel at large. And I am encouraged by progression of activity in that area and that continues to be a focus for both end-to-end offerings, but also, as you remember, we have a bar relationship with Cerner on some of our PX technology capabilities as well, which the pipelines in both of those areas are growing well and Gary is very focused on progressing and starting to get in a position to convert some of that, looking late in '21 probably. So, that's a really key focus area for us as well in partnership with Cerner.

Gene Manheimer -- Colliers Securities -- Analyst

Great. That's very helpful, Joe. And finally, what is -- how should we think about the fully diluted shares with options, dilution and warrant exercises following the conversion of the Ascension and TowerBrook preferred?

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Sure, I'll take that. What's tricky is that obviously the preferred conversion happened after the year. So when you will look at the front cover of the 10-K, you'll see that our basic shares outstanding as of 02/11/21 are 261.1 and that will look different than obviously what you're going to see in the statements given the timing there. If you think about the dilutive effect of the warrants, obviously that is -- if you think about it from a treasury method, that's going to be sensitive to the share price. So if you take a $30 share price, that's about 54.2 right now in terms of the warrant dilution. And then there will be another impact for the employee stock awards. So if you think about it on a fully diluted shares outstanding post transaction, probably 322.8 is depending on share price.

Gene Manheimer -- Colliers Securities -- Analyst

Okay, very helpful. Thanks again.

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Sure.

Operator

There are no further questions at this time. I'd now like to turn the call back over to CEO, Joe Flanagan, for closing comments.

Joseph Flanagan -- President & Chief Executive Officer

Great. Jack, thanks so much for your help moderating the call, and thank you, everybody, for joining us today. And I'd like to close by thanking our team; a very complicated year and their continued focus on delivering strong performance in 2020 was a great result. We look forward to executing on the growth opportunity and the technology opportunity in front of us and updating all of you importantly on future calls. Thank you again for your participation.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Atif Rahim -- Senior Vice President, Investor Relations & Business Development

Joseph Flanagan -- President & Chief Executive Officer

Rachel Wilson -- Executive Vice President, Chief Finance Officer & Treasurer

Charles Rhyee -- Cowen & Company -- Analyst

Sean Dodge -- RBC Capital Markets -- Analyst

Donald Hooker -- KeyBank Capital Markets -- Analyst

Stephanie Davis -- SVB Leerink -- Analyst

Steven Halper -- Cantor Fitzgerald -- Analyst

Gene Manheimer -- Colliers Securities -- Analyst

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