© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the R1 RCM Q3 2020 Earnings Conference Call. [Operator Instructions]
I would now like to turn the call over to your speaker today, Atif Rahim, Head of Investor Relations. Please go ahead, sir.
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.
Thank you, Atif. Good morning, everyone, and thank you for joining us. I am pleased to report that our team continues to perform extremely well in the current environment. Our 20,000-plus employees have demonstrated incredible commitment and have made a tremendous effort to ensure our success and the success of our customers during this pandemic.
In addition to navigating the operational challenges presented by COVID-19, we have exceeded the new business targets we set at the start of the year and have successfully completed the acquisitions of SCI and RevWorks as well as the divestiture of the EMS business. Our customer relationships are stronger as a result of these efforts and the company is on solid footing for continued growth. I'd like to extend a big thank you to the team for the outstanding work this year.
Third quarter revenue of $307.2 million and adjusted EBITDA of $50.4 million were ahead of the expectations we communicated on the second quarter call. Revenue upside was driven by higher incentive fees as a result of strong execution and a focus on customer performance. This, along with prudent cost management from the actions we took earlier in the year, drove higher adjusted EBITDA.
As we look to the balance of the year, we are updating our revenue guidance to $1.25 billion to $1.26 billion and continue to expect adjusted EBITDA of $230 million to $240 million. While COVID-19 continues to present a degree of uncertainty, patient volumes across our customer base in aggregate have been relatively stable at 90% to 95% of pre-COVID levels in recent weeks. We remain prepared for a variety of scenarios and our working assumption at this time is that volumes will remain at current levels until there is a full rebound in the economic activity.
Overall, our business is performing well as we have demonstrated over the past few quarters. More importantly, our commercial pipeline continues to gain momentum, and we remain very bullish on our long-term prospects. Last week, we announced an end-to-end operating partner agreement for LifePoint Health, one of the nation's largest health systems with over $8 billion in annual net patient revenue or NPR. The agreement encompasses more than 1/3 of LifePoint hospitals and covers $2.8 billion in NPR for a 10-year term. We are honored to have been selected by LifePoint after an extensive evaluation process, and are excited to deliver meaningful financial benefits, as well as a better patient experience. We expect onboarding to begin in January in 3 phases and conclude in the summer of 2022. With economics in line with the operating partner Contract Economics, we have provided in the past.
In addition to currently contracted business, we look forward to expanding our relationship with LifePoint in the future to allow them to achieve greater operating efficiencies, freeing up resources to deliver high-quality patient care. LifePoint, like many health systems across the country, faces increased financial pressure, growing revenue cycle complexity and evolving demand from patients and physicians. Our tech-enabled service platform is built for purpose to address these needs. In fact, our technology was a critical driver in LifePoint selection process led by our PX platform and automation capabilities. The successful outcome of this process gives us increased confidence in our competitive positioning.
Taking into account Penn State Health, which we signed earlier this year, we have signed on $5 billion in NPR this year despite the backdrop of the pandemic, well ahead of the $3 billion target we set at the start of the year. On the heels of this and the $4.1 billion in NPR we signed in 2019, we have made the conscious decision to increase our nominal annual deployment capacity to $5 billion in end-to-end NPR. Our ongoing discussions with prospects indicate support for this level of deployment capacity as we look out over the next 3 to 5 years.
Beyond LifePoint, our pipeline remains active for all 3 of our go-to-market models. Interest in our end-to-end offerings continues to grow as IDNs are increasingly seeing the value of us as a strategic partner allowing them to focus their core efforts on patient care. We've also seen an uptick in demand from physician groups following the launch of our physician solution earlier this year. In the third quarter, we signed 11 deals with physician organizations across a diverse range of specialties. Modular activity also remained strong with 10 deals in the quarter across our revenue cycle and patient experience solutions.
Our partnership with Cerner is also off to a good start. Both of our teams are working closely to coordinate and communicate our value prop to Cerner's customer base and the interest we have received to date is very encouraging.
In addition to activity on the commercial front, there are 3 areas I'd like to discuss on today's call. First, technology and how we are extending our competitive lead. Second, an update on customer deployments and integration of our recent acquisitions. Third, COVID-19 and how we are adapting to the current environment.
Starting with technology. As I mentioned earlier, technology was a critical driver in LifePoint selection process and is increasingly becoming the deciding factor in many of our pipeline discussions. IDNs are recognizing that our comprehensive end-to-end solution is better positioned to achieve scale benefits from technology investments than the path work of in-house resources and point solutions predominantly in use today.
We see a significant opportunity for technology to fundamentally transform the revenue cycle 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 group and prioritize investments accordingly, driving rapid innovation. The investments we have made in recent years are clearly starting to pay dividends for us.
Let me highlight the areas we are currently prioritizing our efforts on. The first area is our patient experience or PX platform, which is a digital interface between patients and providers. PX enables providers to develop a digital front door strategy and benefit via higher order conversion rates, along with digitized scheduling, intake, referral and authorizations.
Net Promoter Scores for PX have consistently held above 75 and our customer locations with PX installed are now achieving a 60% patient self-service rate. With the acquisition of SCI earlier this year, we now have substantive IP to drive forward further innovation in this area and have developed an extensive roadmap to further advance and differentiate our capabilities.
During the third quarter, we launched our new analytics platform focused on scheduling related performance metrics such as orders management, time to schedule, digital self-service adoption and capacity utilization. This platform has been designed with best-in-class visualizations, wall aligned dashboards and in-process measures correlated to high-value outcomes.
Our partnership with Cerner is also helping advance our PX journey. Certain of our PX platform assets are now Cerner's preferred solutions, and Cerner is actively marketing these assets to its installed base. In addition to providing a valuable distribution channel, we expect our collaborative approach to deliver improved value to customers and enhance the overall patient experience.
Our second focus area is robotic process automation or RPA. As discussed on our last call, the original portfolio of routines we started developing in 2019 is generating results ahead of our expectations. We continue to see significant promise in this area and are devoting further investment to our RPA efforts. We have a team of over 100 employees fully dedicated to advancing our automation and machine-learning goals. In the third quarter, we developed 7 net new routines to a targeted group of customers.
One of the most impactful of these recently developed routines is the automated posting of adjustments to more than 10 different patient accounting systems in use across our customer base. We plan to roll out these new routines across other customers in the coming months. The current portfolio of routines in production are expected to automate approximately 30 million manual tasks out of an opportunity set of approximately 100 million manual tasks. Our backlog of opportunities also continues to be robust with 9 additional routines in various stages of development.
Third, we are just scratching the surface with machine-learning, which we believe presents a significant opportunity to improve productivity and reduce financial leakage. In the third quarter, we deployed our first machine learning model into production. This model uses historical claim patterns to predict that a denied claim is likely unrecoverable based on our standard processes and would therefore result in a write-off. This is a great example of a situation where our deep expertise and controller process allows us to iteratively refine our technology before deploying it at scale across our customer network.
Another area we are devoting resources to is technology integration in order to accelerate and streamline our onboarding process. Historically, one of our biggest hurdles to speed to value has been the complexity, latency and cost of integrating with customers EHR systems. Through our partnership with Cerner, we expect to reduce our normal 8- to 10-week technology integration window by up to 60%. In addition to reducing the integration time line, this will also reduce the lift required by our customers by facilitating direct standard integration.
Next, I'd like to update you on our deployment activities. We initiated onboarding activities at Penn State Health in May and are on track to conclude in the first quarter of 2021. Both the Penn State Health and R1 teams have been focused on maintaining strong momentum and have collaborated extremely well in a virtual deployment model. Early results are positive, and the teams are focused on maintaining the strong momentum established in the first few months of the relationship.
At Rush Health, all major work streams have been substantially completed, and we are on track to complete any remaining onboarding activities by the end of the year. The partnership and collaboration with Rush remains very strong and a comprehensive program of operational performance improvement initiatives is underway. The Rush and R1 teams continue to operate effectively in a virtual model to drive execution of these initiatives and work streams. For the $700 million NPR physician contract we signed in the third quarter of 2019, we are currently 90% through our deployment plan and expect to complete onboarding in the first quarter of 2021. Both the customer and R1 teams have moved to a virtual model to continue collaboration and execution of the onboarding work streams.
Turning to an update on recent M&A activities. The integration of SCI is on target, and we're delighted to report that customer and employee retention are both meaningfully ahead of our original forecast. This gives us increasing conviction in the differentiated value proposition for clients, excitement about the substantive IP we now own as well as confidence in the financial, operational and cultural synergies of these businesses.
As discussed earlier, we have an ambitious roadmap in place to be the most comprehensive platform for digital engagement with patients and providers, and we are generally at or ahead of targets for delivering this roadmap. The integration of RevWorks is also progressing well. We are tracking ahead of plan and consolidating work performed by third-party vendors to our shared services locations. This bodes well for us since rationalizing third-party spend is an important element in achieving steady-state adjusted EBITDA margins of 25% to 30% for this business.
Lastly, let me provide some thoughts related to COVID-19. The health and safety of our workforce remains our top priority. The vast majority of our employees continue to work from home, and we do not expect to revert to an in-office environment for the foreseeable future. Productivity, engagement and retention continue to remain at satisfactory levels. At a macro level, the operating environment remains very dynamic, given the recent rise in cases in many geographies and resulting regional restrictions.
Relative to the February time frame, we and our customers are generally much better prepared to navigate and mitigate the challenges presented by COVID-19. Patient volumes across our customer base have stabilized at 90% to 95% of pre-COVID levels in recent weeks with some variation as we look across care settings. In some physician and inpatient environments, volumes are back to normal, but ER volumes continue to lag at around 80% of prepaid levels. Our working assumption is that volumes remain at these levels until the economic activity reverts to normal. We remain vigilant and ready to adapt to changes in the operating environment in a way that balances the long-term opportunity we see in the market with near-term conditions.
In closing, I'd like to once again acknowledge the remarkable effort by everyone at R1. We remain focused on serving our customers as they fight this pandemic. The need for our services continues to grow, and we are very bullish on our long-term prospects. We continue to invest in advancing our technology to find better ways to serve our customers, which we are confident will deepen relationships with our existing customers and drive new business over time.
Now I'd like to turn the call over to Rachel.
Thank you, Joe, and good morning, everyone. I'm pleased to report another strong quarter despite challenges presented by the pandemic, demonstrating the strength of our business model and outstanding contributions from our team. Revenue for the third quarter was $307.2 million, up $6 million or 2% year-over-year driven by new customers onboarded over the past year and contribution from the SCI and RevWorks acquisitions, offset by COVID-related volume declines. Revenue was ahead of expectations provided on the Q2 call due to higher incentive fees.
Breaking down the components of revenue, net operating fees of $253.7 million declined $12.9 million year-over-year and $34.1 million sequentially, primarily due to COVID-related volume declines and somewhat offset by contribution from new customers and RevWorks.
As a reminder, the vast majority of our net operating fees lagged cash collections by approximately 4 months. So Q3 represents the peak impact from the national lockdown in the March through April time frame. Incentive fees of $25.1 million improved $12.8 million over the prior year and $23.8 million over last quarter due to strong execution and a recovery in 90-day average daily revenue which is a key component of the calculations that our incentive fees are tied to. Other revenue, which consists largely of modular services, was $28.4 million up $6.1 million over the prior year and up $2.8 million sequentially, driven by the contribution from SCI.
The non-GAAP cost of services in Q3 was $236.2 million, up $8.5 million year-over-year and $6.4 million sequentially due to costs associated with new customers as well as acquisitions, offset by actions we took to reduce our cost structure starting in late February. Corporate cost structure initiatives helped drive down non-GAAP SG&A expenses $4 million year-over-year to $20.6 million.
Relative to Q2, SG&A expenses increased slightly, and we expect these to continue an approximate 6.5% margin through the fourth quarter. Adjusted EBITDA for the quarter was $50.4 million, up slightly year-over-year and down $14.9 million from the $65.3 million reported last quarter. The sequential decline was primarily driven by the lagging effect of revenue related to our cost structure.
Lastly, we incurred $15.7 million in other costs in Q3, with almost half of these costs related to leased facility exit costs, corporate restructuring and COVID-related expenses.
Turning to the balance sheet. Cash and cash equivalents at the end of September were $106.3 million compared to $123.1 million at the end of June, driven by working capital changes, M&A-related spend, CapEx and debt pay down. Net debt at the end of September, inclusive of restricted cash, was $453.7 million compared to $443.4 million at the end of June. We repaid $6.5 million of our term loan at the end of Q3, and the increase in net debt was driven by lower cash balance due to the factors just discussed.
With the EMS divestiture now complete, we are in a strong liquidity position. Specifically, our current cash position, availability on the revolver and proceeds for the EMS divestiture equate to approximately $270 million in available cash. We thus believe we continue to have sufficient flexibility to withstand a wide range of scenarios, not only for the COVID crisis, but also for continued investments.
Turning to our financial outlook. With Q3 results behind us, we are updating our 2020 revenue guidance. We now expect revenue of $1.25 billion to $1.26 billion, which represents an approximately $20 million increase from our previous range. We continue to expect adjusted EBITDA of $230 million to $240 million as we continue to invest and prepare to onboard LifePoint.
Given the overpayment in new end-to-end NPR signings this year, we will be incurring higher onboarding costs than originally anticipated entering the year. These costs are factored into a refreshed $230 million to $240 million EBITDA outlook.
Looking at 2021, we are closely monitoring patient volumes and are preparing for a variety of scenarios. We remain confident in our core execution and our commercial prospects.
In closing, I'm proud of how the teams continued to help our customers and how we stay committed to our goals despite a challenging environment. The fundamentals of the business are very strong, and we look forward to our continued growth driven by a new business we have signed this year, our continued performance discipline and the strength of our team.
Now I'll turn the call over to the operator for Q&A. Operator?
And your first question comes from the line of Matthew Gillmor from Baird.
I guess the first question I wanted to follow up on, on the comments and then also some of the comments Joe and Rachel made around COVID dynamics. I think last call you said you'd see favorability to 2021 if volumes in the fall return to normal. It seems like we're in a situation where volumes are sort of 90% to 95% of pre-COVID, as you said, but maybe revenues have rebounded above that with higher acuity and then some of the acuity with COVID cases. But I was just kind of -- I know you're not in a position to be specific about 2021, but just sort of how the current revenue standpoint for hospitals sort of compares to what you were thinking last call and sort of what that implies for 2021?
Yes. Thanks, Matt. Just -- let me first start with what we're seeing in the current aggregate revenue trends across our customer base. And then we can -- I'll provide some commentary on how we're thinking about 2021 directionally. So what I would say at the headline level across our acute and physician revenues, we're running anywhere -- and this varies week to week, but call it, 90% to 95% of pre-COVID levels. Now when you break that down, if I start with acute, the one thing I would highlight is we're still seeing ED volumes down 15% to 20%.
Inpatient volumes in aggregate, and this is a combination of acuity and admissions, but in totality, inpatient volumes are essentially at pre-COVID levels, same-day surgery trends are oscillating from ads to down 5%. And the rest of outpatient is really kind of in that 90% of target. So when you roll all that up across our acute clients, that's what makes up the 90% to 95% aggregate revenue trends we're seeing.
Our physician business kind of follows that. We've got certain hospital-based physician specialties that follow those acute trends. And then our office-based physician business is essentially at pre-COVID levels. So as we think of -- that's what we're seeing right now, and that's the underlying assumption that we're incorporating into our current internal planning efforts on 2021. We are not through our full planning for 2021. But I would say -- what I would say directionally, inputs that I would characterize, one, we don't see that volume environment or we think it's prudent for us to not assume that volume environment is necessarily going to change until we see some strong indications from a macro COVID dynamic setting.
The second thing I would say is core execution is very strong. That is made up of conversion of cash. As we commented on the call, we are very encouraged with KPI performance in -- above our targets. And then we did a fair amount of structural restructuring, real estate, corporate spend, that will carry over into 2021.
And then the final variable we're working around is just net investment as we characterized, we intend to take our nominal deployment capacity from $3 billion to $5 billion. That net increase will be about a $7 million to $8 million investment for us phased over the next 6 months or so. And so we're just in the process, and Rachel's leading this across the company to finalize the planning around those inputs. But the environment notwithstanding, we're -- if you think about the other 2 components of that, execution is very strong on the things that we can control. And investment posture is indicative of our confidence in the growth visibility that we have.
Okay. Great. And then, you made some comments about technology being a deciding factor in some of these decisions. And I know you're oftentimes in positions where sometimes you're competing against other vendors, sometimes it's just a conversation between you and a prospect. I guess I was kind of curious if you -- are these decisions are they largely at the -- on the technology side, is the differentiation sort of at the very front end and the intake process? Or is it more about the efficiency that you all create? And additionally, is this more about being competitively better or just in a bake-off or more about -- these are the technologies we can bring that you don't have access to on standalone basis?
Yes, I think it's both. So if you take our patient experience solution and our automations suite, those two capabilities, I would characterize those as things that we can bring to the table that the peer group that we're seeing competitively is not in a stronger position or does not have an offering along those lines. So that's how I would characterize those two capabilities.
And then on the core technology, again, we carry a fair amounted effect. Our point of view is that we have the broadest coverage of the revenue cycle process with our proprietary technology suite. We compare very favorably on functionality. And then we're unique in the sense that our technology is fully integrated.
So what I mean by that is we're integrated at the database level and we're integrated at the code base level across the process. So the revenue cycle process, you will hear it sometimes broken down into front, middle and back, middle, incorporating the HIM, coding interfaces to the clinical operations and obviously, the back end, the billing and follow-up into payers and also the efforts we have working with patients on their responsibility. We have a comprehensive coverage of that process and we're integrated. And when we compete with other companies or we compete with the internal operations more often than not, that coverage -- that technology coverage is borne out of point solutions that by definition, don't have a common code base and don't have a common database.
And so we are able to provide visibility with our technology that's very unique and differentiated. So it's both of those things. And in some of our recent wins, we've competed with more technology-oriented companies. And on the dimension of technology, we've faired very well, which is encouraging for us.
And your next question comes from the line of Charles Rhyee with Cowen.
It's James on for Charles. So adjusted EBITDA in the quarter came in ahead of the 3Q guide, but you guys maintained the 2020 EBITDA guide. Are there any other factors aside from the onboarding costs associated with LifePoint that drove that implied downward provision in 4Q? Is there perhaps any level of conservatism baked in there?
No. We -- I think we have appropriate assumptions and the majority of that is attributed to investment for growth, primarily LifePoint.
Okay. And is there any update that you could give us regarding simplifying the cap structure? Obviously, in light of the recent filing, have discussions between the Board and TowerBrook Ascension begun? I so, like any progress towards eliminating the convertible preferreds?
Yes. So relative to cap structure, the first thing I would characterize from my perspective and Rachel's perspective is we're very pleased to see engagement and discussions occurring. So yes, in fact, James discussions are ongoing. The second thing I would state is they're structured and there's some -- the right organization, if you will, around those discussions, organization of our Board and engagement with the investor group as well as organization of respective advisers.
And so those 2 data points from my perspective are very, very encouraging. And we just have to let those discussions run their course. But it's -- I think it's in line with feedback we've received, discussions we've had with investors. And so from management's perspective, again, we're generally encouraged with the mode of operation right now and the alignment, if you will, in investing energy and time on this topic.
Our next question comes from the line of Donald Hooker with KeyBanc.
You're probably not going to want to answer this question, but I guess somebody probably should ask it anyhow. Obviously, there was news out that Intermountain Health is looking to potentially acquire or merge with Sanford Health. Can you maybe help us think about what kind of opportunity that might provide for you? Or maybe in another way, maybe can you talk about when you have health systems like Ascension and others make acquisitions or mergers, I mean, how typically does that play out for you in terms of extending your revenue opportunity?
Great, Don. No, I'll happily answer as best as I can, the question. I may broaden a bit as well because I think it's relevant. The first thing I would say is one of the growth factors that increasingly based on your progression of events over the past quarter, we feel is a key area for us to focus on is expansion within our current customers.
That could be expansion or evolution of co-managed partnerships into operating partnerships or it could be expansion, whether that be a LifePoint or our core customers that are consolidating and growing via M&A activity or partnership activity growing along those lines. So what we can control on that equation is being a great partner, serving those customers incredibly well.
And that's a big component of our investment bias that we've commented on the call. Our intentions are to absolutely exceed expectations and as a result of that, earn the right to growth.
Now more specifically to Intermountain, I'm not going to comment as you prefaced specifically on Sanford. There's a lot of things that have to get done and occur. But what I would say is that our partnership with Intermountain is very strong. And we've been a partner of theirs for a long time now and intend to continue to serve them incredibly well.
And as it relates to patterns on acquisitions, what I would say is the pattern has been for those acquisitions to be incorporated into our engagement. Now I want to qualify that, the acquisitions that we've been absorbing inside of current contracted customers have generally been smaller in nature and more regional type acquisitions.
But that is the general progression that we've seen, and it's not uncommon for us to provide support to providers as they assess potential diligence items. So again, we think increasingly on the heels of our growth, Rush, Penn State, LifePoint, et cetera. We think increasingly on the heels of our growth, our installed base represents a significant growth opportunity. And the other thing I would highlight that we haven't talked much about it, but we intend to make it a priority as we go into 2021. And it's a natural progression of our integration efforts on our M&A activities.
There's a very nice installed base that SCI historically has served as well as the recent acquisition of RevWorks. So when you roll all that up, we have our end to end customers that have growth opportunity. We have M&A activities that represent installed bases that there's a pre-existing relationship and a certain amount of established credibility that we can work from to expand on.
And then we also have our modular channels. So we're generally -- the activity we've had over the past 2 years as we look going forward, we generally are very encouraged by the different channels, if you will, to the provider base to go from.
Okay. And let me -- I'm going to pause my work and ask another one that you might not be able to answer or might not want to answer. But in the past, you gave sort of an outlook into 2021. And I think in a recent call, you all commented that your traction with some of the automation and AI investments kind of might put you towards the high end of that prior range. I don't know if you still bless that range going forward.
But now we have some new variables. We have obviously some more onboarding of new clients and whatnot. How do we -- is there a way to kind of maybe frame 2021 with some of the incremental expenses with the new capacity capabilities that you're adding? Any comment directionally around there would be helpful.
Yes. What I would say is, as we said before, the -- if we were at pre-COVID levels in totality, so in aggregate, if our revenue was at pre-COVID levels, we would still be primarily driven by strong core execution and the restructuring we did in 2020. We would still have line of sight to favorability within that range. Now you have to remember that we have M&A activity that we're absorbing in that the divestiture of EMS. And we're still not even a year into the integration of the RevWorks business. So there's some dynamics there that we're absorbing in that headline commentary.
Now as I said, we're not going to update guidance for 2021 on this call. We're in the middle of our planning cycle. But what I will tell you is we think it's prudent to have a planning assumption on revenue environment that's in line with what we're seeing right now, meaning we're not assuming a magical uptick in the revenue backdrop driven by the COVID pandemic.
And again, the investment that we're looking at, some of it will occur in the fourth quarter, some of it will occur in 2021 is $7 million to $8 million on that nominal capacity increase. So those are the factors that we're triangulating if you will, and in line with our normal post planning processes.
And your next question comes from the line of Stephanie Davis with Leerink.
And congrats on a solid quarter. Could you give us a refresh on your relationship with Phreesia, their recent investments in the hospital market? And as a follow-up to that, do your relationship extend is solely your wins or all hospital wins on their side as well? So does the new Phreesia hospital client give you better inroads into a new R1 RCM client?
No. I would say -- so a new Phreesia client that's on their standalone solution. I don't think we necessarily would -- I don't think -- that doesn't correlate necessarily to an expansion of business for us. Over time, maybe there was a cross-sell opportunity there. I would say, Stephanie, we haven't really focused on that channel just because to my earlier comments, we feel like we've got a lot of optionality on channels to market right now from M&A activities to current customers. And then modular business that's been growing over the past 3 years, that represents -- increasingly represents an opportunity.
We have a very good relationship with Phreesia relative to our PX solution. We -- with the acquisition of SCI and some of the capabilities that came with that acquisition, we feel like we're in a good position. And as I said on the call, our intentions are to comprehensively digitize the interface to patients on the revenue cycle across all care settings.
And I would say SCI was a very critical and very strategic acquisition for us to be able to bring that technology solution to life. And our strong point of view is the complexity and the value to unlock really lies in the complicated services, whether that be the order referral service or order management service, the scheduling service across all care settings, the authorization process, presenting an accurate residual balance, eligibility verification, demographic verification, all of those complex revenue cycle services, which we're very encouraged that we control the IP and the technology on those complicated services.
And in line with our end-to-end agreements implicit in that relationship is we control the process change.
So when we rebadge employees, and when we transition control of third-party vendors, we're actually in a position on behalf of the providers, to fully implement the solution and to deliver to the providers the maximum value the technology can bring.
So that's really where our focus is on fully automating and extending all of those services in all care settings to the patient because when we do that, what we see is utilization rates go up, when the patients can complete as many tasks as they need to or the majority of tasks they need to, their willingness to engage digitally goes up. And that's a strong driver for us to deliver financial benefit and our underlying financial performance.
So that leads you really perfectly to my follow-up question. As you invest in your technology suite, you talked a little bit about your SCI acquisition. Is there any part of the PX experience that you would consciously not in-house just to create a consistent PX environment with some of the ambulatory or other locations?
Yes. What we've worked really hard on the interface layer to the patients and to the different care settings. Our view is that digital front door that layer of technology, that's the actual interface that patients engage in. That's a layer of technology that we would like to be flexible on. Our view is to the extent we can focus on those complicated services and digitize those services with our technology and have a very modern architectural design so that we integrate our technology quickly and flexibly with whatever interface a provider may have, we think that's a line of demarcation that I would kind of, Stephanie, characterize your question around.
And the -- that's why we were so focused on SCI because we felt the scheduling process and the order referral process. One, they're very strategic to the providers. And two, those are processes that historically have not been fully transformed by technology. And as a result, they tend to have manual off-ramps that have to occur into a call center or into a complicated administrative process. And SCI, we feel strongly has the ability to extend those services in those process areas.
And your next question comes from line of Sean Dodge with RBC Capital Markets.
Yes. I guess, on the cost base, so I just want to make sure I understood your comments there. It looks like you have two incremental drags on EBITDA heading into next year. So you get the implementation of the LifePoint deal and it's kind of the historical rules of thumb [indiscernible] that should be like a $12-ish million headwind.
And then you've got the investments to increase the deployment capacity, and I think you said something like an incremental or 7 or 8 there. Should we be thinking about those or treating those 2 separate? Or is there some amount of overlap of the expanded deployment capacity that would be kind of captured in the initial drag you'd otherwise expect from ramping a big new client like LifePoint?
There's -- Sean, thanks for that question. There's overlap in that. It's always a little bit hard for us from a planning cycle. When you think about our original assumptions around 3 and kind of contracting 5 this year, but the 5 is coming at the -- in launching in the -- we're in an investment phase right now to prepare for the LifePoint deployment and then rolling that into next year. So there's overlap in that.
And what I would really directionally emphasize is the following: I think it's prudent to run with a 90 to 95. We'll figure out what that exact number is on aggregate revenue. We're going to be ahead of our core operating targets on execution, primarily in KPI performance. There's been a lot of progress on the working capital already. So there may be a bit for us to get, but we fully expect to outperform on KPI performance. We're going to absorb the M&A activity.
And then the other variable is just what is the exact overlap to use your terms or what is the exact net investment. It will not be the additive of 7 to 8 and 12. It will be something -- I would probably point it closer to the 7 to 8 number just because that's truly the nominal increase in capacity that we're planning for against the backdrop of historically a planning assumption of around $3 billion of net annuity a year. But I would say if we were at pre-COVID revenue levels, we would feel very encouraged with the trajectory against the original guidance from pre-COVID. We put that guidance out in January of 2020. And we would just be thinking about really what's the net-net impact of investment. And in the grand scheme of things, that would be relatively to minus.
Okay. That's very helpful. And then maybe on the partnership with Cerner, you said that was off to a good start. Can you give us a sense of the type of arrangements we should expect to come out of that channel? Are these mostly going to be co-managed deals? Or are these going to look more like operating partnerships? And then is or how is the selling process there different? Do they just generate leads and it's up to you to chase it down? Or it sounds like maybe there's a little bit of a tighter closer alignment there?
Yes. No, there's 2 channels that we're working on with Cerner. One is our PX solution. And as I commented in my opening comments, we are very encouraged by progress in that channel. That's a VAR relationship. That's a component of technology we have. It's an option that gets extended to their clients. Much more importantly and much more strategic is our efforts to work with them on -- and work with that -- work with Cerner as a very strong skills partner to extend the value prop into their installed base.
And so we've had a significant amount of planning effort between our commercial team, Gary Long, our Chief Commercial Officer, and the equivalent within Cerner against their installed base. There's roughly 500-plus clients that the teams have segmented. We've tiered those into 3 cohorts. And we're in the process. We've been through the training phase, and we're in the process of outbound engagement in line with the criteria we've established and those cohorts are in priority rankings. And so that's what underpins the encouragement. To your question on co-managed or operating partner agreements, it's really hard to determine. That is something that's really a local dynamic. It's very hard in our experience to segment the market and archetype who's going to go operating partner or who's going to go co-managed.
With the exception of my prior comments in the academic medical centers, we would generally see that channel always being a co-managed start, just given some of their decision-making processes and their propensities. But a rough planning would be a 50-50. And when you think about our confidence increasing the nominal capacity from $3 billion to $5 billion, when you break that down, we really think it's underpinned with a lot of support. So I just commented on the Cerner channel.
Again, we have existing customers that represent significant growth opportunities. We have acquisitions we've done that have their own installed bases that we transparently haven't really focused on unlocking opportunities installed bases. And we've been -- we launched our modular business 3 years ago. And as we sit today, we have modular relationships that are starting to show signs of expansion. So we think all those things combined give us a high degree of confidence that we really -- it's important for us to invest into that growth opportunity.
The other thing I would highlight with Cerner, again, we recently participated in their virtual health care conference. And then we also -- we're a very active participant in their recent revenue management conference, including giving a presentation to all the attendees jointly with Ascension on the PX solution and the impacts it's had on Ascension. So again, a lot of mobilization activities. But that's a pretty big installed base, and we feel like we're a very strong skills partner, and we intend to serve Cerner and their customers really well on our core value proposition.
And your last question comes from the line of Gene Mannheimer with Colliers Securities.
Congrats on the good numbers. My question revolves around the Q4 revenue guidance. And I'm just curious if that includes any onetime bounce back or catch-up due to providers and utilization opening back up again following the lockdown. So for example, we're hearing that there was kind of a bolus of office visit volume in the July, August time frame once things started to open up again? Any comment there would be great.
There's probably a little bit just of the -- there's a little bit of just the progression of how provider volumes have progressed over the year via COVID. What I would really -- and what I would really comment on Gene is, we're encouraged with underlying execution on KPI performance. And that's very important for us because that's -- when you think about the economics of the KPI performance, there's an order of magnitude, more value that's going back to the provider than we're retaining in that equation.
And so that's something that has been a priority for us. It's encouraging to see it play through this quarter and also as we go into the fourth quarter. But there's a little bit of just the normal progression you're seeing from a COVID recovery standpoint. And I would say for our mix of business, not as much office visit, they're obvious that we're seeing the same trends you're probably hearing from other providers in that segment of the market, no doubt.
But for our book of business and mix of care settings, same-day surgery is probably the thing I would highlight that. We've seen an uptick in that kind of through the summer coming out of March, April, May time frame. But there's -- in that revenue line, core execution is contributing as well.
Makes sense. And my follow-up would be if you could remind us if the LifePoint deal, if that win included SCI or not and what competitor or competitors are being replaced there?
On the LifePoint deal, it did include SCI. It does include SCI being deployed. And then competitively, as we mentioned, it was a competitive process, we competed with 2 incumbents. So two incumbents that were existing partners into LifePoint, we did not have a pre-existing relationship at the start of that RFP process. And one of those incumbents was a technology-oriented company. So as is always with our engagement, there will be some displacement of third-party technology spend and replacement with our core technology.
And there are no further questions at this time. I will turn the call back over to Joe for closing remarks.
Great. Well, first, Julie, thanks for all your help on the call moderating, et cetera. And thank you, everybody, for joining us today. I'd like to close just thanking our team for their continued focus on delivering very strong performance in a complicated operating environment. And we look forward to executing on the growth opportunity ahead and updating all of you accordingly on our future calls. So thank you very much again for the participation.
This concludes today's conference call. You may now disconnect.