UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 001-34746
R1 RCM INC.
(Exact name of registrant as specified in its charter)
Delaware
02-0698101
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
401 North Michigan Avenue Suite 2700 Chicago, Illinois
60611
(Address of principal executive offices)
(Zip code)
(312) 324-7820
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
ý
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  R
As of August 2, 2018, the registrant had 109,982,377 shares of common stock, par value $0.01 per share, outstanding.
 





Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 



R1 RCM Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)


PART I — FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

3

R1 RCM Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)


 
 
June 30,
 
December 31,
 
 
2018
 
2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
38.8

 
$
164.9

Current portion of restricted cash equivalents
 
2.0

 
—

Accounts receivable, net
 
40.9

 
8.2

Accounts receivable, net - related party
 
40.3

 
15.4

Prepaid income taxes
 
0.5

 
0.6

Prepaid expenses and other current assets
 
26.6

 
13.2

Total current assets
 
149.1

 
202.3

Property, equipment and software, net
 
90.7

 
48.3

Intangible assets, net
 
199.4

 
—

Goodwill
 
244.7

 
—

Non-current deferred tax assets
 
47.6

 
70.5

Non-current portion of restricted cash equivalents
 
1.5

 
1.5

Other assets
 
20.1

 
13.4

Total assets
 
$
753.1

 
$
336.0

Liabilities
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
14.6

 
7.2

Current portion of customer liabilities
 
8.5

 
1.1

Current portion of customer liabilities - related party
 
23.3

 
27.1

Accrued compensation and benefits
 
53.0

 
37.8

Current portion of long-term debt
 
2.7

 
—

Other accrued expenses
 
35.4

 
16.7

Total current liabilities
 
137.5

 
89.9

Non-current portion of customer liabilities - related party
 
17.4

 
11.5

Long-term debt
 
255.6

 
—

Long-term debt - related party
 
101.1

 
—

Other non-current liabilities
 
19.2

 
11.9

Total liabilities
 
$
530.8

 
$
113.3

 
 
 
 
 
8.00% Series A convertible preferred stock: par value $0.01 per share, 370,000 authorized, 236,672 shares issued and outstanding as of June 30, 2018 (aggregate liquidation value of $241.4); 370,000 authorized, 227,483 shares issued and outstanding as of December 31, 2017 (aggregate liquidation value of $232.0)
 
198.6

 
189.3

Stockholders’ equity (deficit)
 
 
 
 
Common stock, $0.01 par value, 500,000,000 shares authorized, 122,726,673 shares issued and 109,970,001 shares outstanding at June 30, 2018; 116,650,388 shares issued and 104,409,961 shares outstanding at December 31, 2017
 
1.2

 
1.2

Additional paid-in capital
 
359.8

 
337.9

Accumulated deficit
 
(270.7
)
 
(244.5
)
Accumulated other comprehensive loss
 
(4.1
)
 
(1.6
)
Treasury stock, at cost, 12,756,672 shares as of June 30, 2018; 12,240,427 shares as of December 31, 2017
 
(62.5
)
 
(59.6
)
Total stockholders’ equity (deficit)
 
23.7

 
33.4

Total liabilities and stockholders’ equity (deficit)
 
$
753.1

 
$
336.0

See accompanying notes to consolidated financial statements.

4

R1 RCM Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In millions, except share and per share data)


 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
 
(Unaudited)
Net services revenue ($141.9 million and $278.1 million for the three and six months ended June 30, 2018, respectively, and $87.7 million and $163.1 million for the three and six months ended June 30, 2017, respectively, from related party)
 
$
207.9

 
$
99.4

 
$
355.2

 
$
186.3

Operating expenses:
 
 
 
 
 
 
 
 
Cost of services
 
189.9

 
96.4

 
328.6

 
177.3

Selling, general and administrative
 
22.5

 
12.2

 
39.5

 
26.5

Other
 
13.2

 
1.0

 
15.6

 
1.2

Total operating expenses
 
225.6

 
109.6

 
383.7

 
205.0

Income (loss) from operations
 
(17.7
)
 
(10.2
)
 
(28.5
)
 
(18.7
)
Net interest (expense) income
 
(5.8
)
 
—

 
(5.6
)
 
0.1

Income (loss) before income tax provision
 
(23.5
)
 
(10.2
)
 
(34.1
)
 
(18.6
)
Income tax provision (benefit)
 
(20.6
)
 
(3.5
)
 
(7.9
)
 
(3.6
)
Net income (loss)
 
$
(2.9
)
 
$
(6.7
)
 
$
(26.2
)
 
$
(15.0
)
Net income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.07
)
 
$
(0.11
)
 
$
(0.33
)
 
$
(0.23
)
Diluted
 
$
(0.07
)
 
$
(0.11
)
 
$
(0.33
)
 
$
(0.23
)
Weighted average shares used in calculating net income (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
108,157,583

 
102,467,078

 
107,001,002

 
101,918,797

Diluted
 
108,157,583

 
102,467,078

 
107,001,002

 
101,918,797

Consolidated statements of comprehensive income (loss)
 
 
 
 
 
 
Net income (loss)
 
(2.9
)
 
(6.7
)
 
(26.2
)
 
(15.0
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net change on derivatives designated as cash flow hedges, net of tax
 
(0.4
)
 
—

 
(0.6
)
 
—

Foreign currency translation adjustments
 
(1.4
)
 
—

 
(1.9
)
 
0.8

Comprehensive income (loss)
 
$
(4.7
)
 
$
(6.7
)
 
$
(28.7
)
 
$
(14.2
)
Reconciliation of net income (loss) to income (loss) available to common shareholders:
Basic:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2.9
)
 
$
(6.7
)
 
$
(26.2
)
 
$
(15.0
)
Less dividends on preferred shares
 
(4.8
)
 
(4.4
)
 
(9.4
)
 
(8.7
)
Less income allocated to preferred shareholders
 
—

 
—

 
—

 
—

Net income (loss) available/allocated to common shareholders - basic
 
$
(7.7
)
 
$
(11.1
)
 
$
(35.6
)
 
$
(23.7
)
Diluted:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2.9
)
 
$
(6.7
)
 
$
(26.2
)
 
$
(15.0
)
Less dividends on preferred shares
 
(4.8
)
 
(4.4
)
 
(9.4
)
 
(8.7
)
Less income allocated to preferred shareholders
 
—

 
—

 
—

 
—

Net income (loss) available/allocated to common shareholders - diluted
 
$
(7.7
)
 
$
(11.1
)
 
$
(35.6
)
 
$
(23.7
)
See accompanying notes to consolidated financial statements.

5

R1 RCM Inc.
Consolidated Statements of Stockholders’ Equity (Deficit) (unaudited)
(In millions, except share and per share data)


 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
other
comprehensive
(loss)
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
116,650,388

 
$
1.2

 
(12,240,427
)
 
$
(59.6
)
 
$
337.9

 
$
(244.5
)
 
$
(1.6
)
 
$
33.4

Share-based compensation expense
 
—

 
—

 
—

 
—

 
7.9

 
—

 
—

 
7.9

Reclassification of equity award
 
—

 
—

 
—

 
—

 
1.3

 
—

 
—

 
1.3

Issuance of common stock related to share-based compensation plans
 
293,103

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of Common Stock and Stock Warrants
 
4,665,594

 
—

 
—

 
—

 
19.3

 
—

 
—

 
19.3

Exercise of vested stock options
 
1,117,588

 
—

 
—

 
—

 
2.8

 
—

 
—

 
2.8

Dividends paid/accrued dividends
 
—

 
—

 
—

 
—

 
(9.4
)
 
—

 
—

 
(9.4
)
Acquisition of treasury stock related to equity award plans
 
—

 
—

 
(497,300
)
 
(2.9
)
 
—

 
—

 
—

 
(2.9
)
Forfeitures
 
—

 
—

 
(18,945
)
 
—

 
—

 
—

 
—

 
—

Net Change on derivatives designated as cash flow hedges, net of tax of $0.2
 
—

 
—

 
—

 
—

 
—

 
—

 
(0.6
)
 
(0.6
)
Foreign currency translation adjustments
 
—

 
—

 
—

 
—

 
—

 
—

 
(1.9
)
 
(1.9
)
Net (loss) income
 
—

 
—

 
—

 
—

 
—

 
(26.2
)
 
—

 
(26.2
)
Balance at June 30, 2018
 
122,726,673

 
$
1.2

 
(12,756,672
)
 
$
(62.5
)
 
$
359.8

 
$
(270.7
)
 
$
(4.1
)
 
$
23.7

See accompanying notes to consolidated financial statements.

6

R1 RCM Inc.
Consolidated Statements of Cash Flows
(In millions)


 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
(Unaudited)
Operating activities
 
 
 
 
Net income (loss)
 
$
(26.2
)
 
$
(15.0
)
Adjustments to reconcile net income (loss) to net cash used in operations:
 
 
 
 
Depreciation and amortization
 
13.4

 
7.0

Amortization of debt issuance costs
 
0.4

 
—

Share-based compensation
 
9.0

 
5.9

Loss on disposal
 
0.7

 
0.2

Provision (recovery) for doubtful receivables
 
0.2

 
0.1

Deferred income taxes
 
(10.5
)
 
(4.1
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable and related party accounts receivable
 
(21.6
)
 
(13.2
)
Prepaid income taxes
 
(0.8
)
 
3.5

Prepaid expenses and other assets
 
(7.3
)
 
(9.2
)
Accounts payable
 
1.4

 
(2.3
)
Accrued compensation and benefits
 
7.9

 
(0.4
)
Other liabilities
 
11.4

 
(0.4
)
Customer liabilities and customer liabilities - related party
 
0.9

 
5.0

Net cash used in operating activities
 
(21.1
)
 
(22.9
)
Investing activities
 
 
 
 
Purchases of property, equipment, and software
 
(15.3
)
 
(23.2
)
Acquisition of IMX, net of cash acquired
 
(465.3
)
 
—

Net cash used in investing activities
 
(480.6
)
 
(23.2
)
Financing activities
 
 
 
 
Issuance of senior secured debt, net of discount and issuance costs
 
253.1

 
—

Issuance of subordinated notes, net of discount and issuance costs
 
105.9

 
—

Issuance of common stock and stock warrants, net of issuance costs
 
19.3

 
—

Exercise of vested stock options
 
2.8

 
—

Purchase of treasury stock
 
—

 
(1.2
)
Shares withheld for taxes
 
(2.9
)
 
(1.9
)
Net cash provided (used in) by financing activities
 
378.2

 
(3.1
)
Effect of exchange rate changes in cash, cash equivalents and restricted cash
 
(0.6
)
 
0.4

Net increase (decrease) in cash, cash equivalents and restricted cash
 
(124.1
)
 
(48.8
)
Cash, cash equivalents and restricted cash, at beginning of period
 
166.4

 
182.7

Cash, cash equivalents and restricted cash, at end of period
 
$
42.3

 
$
133.9

Supplemental disclosures of cash flow information
 
 
 
 
Accrued dividends payable to Preferred Stockholders
 
$
4.7

 
$
4.4

Accrued and other liabilities related to purchases of property, equipment and software
 
$
10.3

 
$
1.0

Accounts payable related to purchases of property, equipment and software
 
$
1.2

 
$
1.7

Income taxes paid
 
$
(1.3
)
 
$
(0.6
)
Income taxes refunded
 
$
0.4

 
$
3.4


See accompanying notes to consolidated financial statements.

7


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements


1. Business Description and Basis of Presentation
Business Description
R1 RCM Inc. (the "Company") is a leading provider of revenue cycle management ("RCM") services to healthcare providers. The Company helps healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician and staff satisfaction for its customers. The Company does so by deploying a unique operating model that leverages its extensive healthcare site experience, innovative technology and process excellence.
 
The Company's primary service offering consists of end-to-end RCM, which encompasses patient registration, insurance and benefit verification, medical treatment documentation and coding, bill preparation and collections. The Company deploys its RCM services through an operating partner relationship or a co-managed relationship. Under an operating partner relationship, the Company provides comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology, and process workflow. Under a co-managed relationship, the Company leverages its customers’ existing RCM staff and processes, and supplements them with the Company's infused management, subject matter specialists, proprietary technology and other resources. The Company also offers modular services, allowing customers to engage the Company for only specific components of its end-to-end RCM service offering. The Company's PAS offering complements the Company's RCM offering by strengthening customer’s compliance with certain third-party payer requirements and limiting denials of claims. For example, the Company's PAS offering helps customers determine whether to classify a hospital visit as an in-patient or an out-patient observation case for billing purposes.

Ascension
On February 16, 2016, the Company entered into a long-term strategic partnership with Ascension Health Alliance, the parent of the Company's largest customer and the nation’s largest Catholic and non-profit health system, and TowerBrook Capital Partners ("TowerBrook"), an investment management firm (the "Transaction"). As part of the Transaction, the Company amended and restated its Master Professional Services Agreement ("A&R MPSA") with Ascension Health ("Ascension") effective February 16, 2016 with a term of ten years. Pursuant to the A&R MPSA and with certain limited exceptions, the Company will become the exclusive provider of RCM services and PAS with respect to acute care services provided by the hospitals affiliated with Ascension that execute supplement agreements with the Company.
On and effective as of June 24, 2018, the Company and Ascension Health entered into a Supplement (the “Supplement”) to the A&R MPSA. Pursuant to the Supplement, the Company will provide RCM services for physician groups that receive services from Ascension’s National Revenue Service Center and other groups associated with Ascension hospital systems. Each such physician group will be required to execute an addendum to the Supplement for those physician groups to receive services under the Supplement. Ascension has agreed that the Company may provide services to additional physician groups affiliated with or acquired by Ascension over time. The Supplement also provides for the re-badging of certain centrally-based revenue cycle operations employees who support Ascension’s physician groups. The Company expects to begin providing services under the Supplement during the fourth quarter of 2018.

On June 24, 2018, the Company and Ascension entered into an amendment to the A&R MPSA (the “Presence Amendment”) to provide that the Company will enter into a supplement to the A&R MPSA to provide for RCM services and PAS services for acute care to Presence Health hospitals in accordance with terms set forth in the Presence Amendment. Presence Health is a part of AMITA Health, which is a joint venture of Ascension’s Alexian Brothers Health System and Adventist Midwest Health, part of Adventist Health System. If the Company enters into a new master professional services agreement with AMITA Health for end-to-end RCM services in the future, the end-to-end RCM business with Presence will be governed by such new agreement.


8


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

    
Intermountain

On January 23, 2018, the Company entered into an Amended and Restated Services Agreement (the “Intermountain Services Agreement”) with IHC Health Services, Inc. (“Intermountain”) having a 10 -year term. Pursuant to the Intermountain Services Agreement, the Company will provide revenue cycle management services to Intermountain hospitals and medical group providers under the operating partner model. In addition, the Company will provide revenue cycle management services to Intermountain’s homecare, hospice and palliative care, durable medical equipment and infusion therapy business. In conjunction with the execution of the Intermountain Services Agreement, the Company entered into a Securities Purchase Agreement (the “Intermountain Purchase Agreement”) with Intermountain, pursuant to which the Company sold to Intermountain, in private placements under the Securities Act of 1933, as amended (the "Securities Act"), (i)  4,665,594 shares of common stock and (ii) a warrant to acquire up to 1,500,000 shares of Common Stock at an initial exercise price of $6.00 per share, on the terms and subject to the conditions set forth in the warrant, for an aggregate purchase price of $20 million .

Intermedix

On May 8, 2018, the Company completed the acquisition of Intermedix Holdings, Inc. ("Intermedix") through the merger of Project Links Merger Sub, Inc. (“Merger Sub”), a wholly-owned indirect subsidiary of the Company, with and into Intermedix, with Intermedix surviving the merger as a wholly-owned indirect subsidiary of the Company (the “Acquisition”). The purchase price for the Acquisition was $460 million , subject to customary adjustments for cash, debt, transaction expenses and normalized working capital. The Company funded the purchase price for the Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness. Intermedix is one of the largest providers of RCM and practice management ("PM") services to physician groups and emergency medical service ("EMS") providers in the United States ("U.S."). Intermedix has a diverse customer base of approximately 700 customers and 2,500 employees located in offices within the U.S., Lithuania, the United Kingdom and New Zealand. Refer to Note 4, Acquisition, and Note 11, Debt, for further discussion on the Intermedix acquisition and related financing.
Basis of Presentation
The accompanying unaudited consolidated financial statements reflect the Company's financial position as of June 30, 2018 , the results of operations of the Company for the three and six months ended June 30, 2018 and 2017 , and the cash flows of the Company for the six months ended June 30, 2018 and 2017 . These financial statements include the accounts of R1 RCM Inc. and its wholly owned subsidiaries. All material intercompany amounts have been eliminated in consolidation. These financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial reporting and as required by the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information, have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2018 .
When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. For a more complete discussion of the Company’s significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 10-K").
In conjunction with the Acquisition, the Company has internally restricted cash on its Consolidated Balance Sheet as of June 30, 2018. The Company defines internally restricted cash as cash that is collected on behalf of certain customers that is not available for immediate or general business usage.  In accordance with contractual

9


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

arrangements, this cash is remitted to customers, generally within 60 days of receipt.  As of June 30, 2018, internally restricted cash of $7.3 million is included within cash and cash equivalents on the Company's Consolidated Balance Sheets.  Amounts that will be remitted to customers are included as collections payable to clients within the current portion of customer liabilities in the Company's Consolidated Balance Sheets.
2. Recent Accounting Pronouncements

Recently Issued Accounting Standards and Disclosures

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which supersedes existing guidance on accounting for leases in Topic 840, Leases. ASU 2016-02 generally requires all leases to be recognized in the consolidated balance sheet. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The Company plans to adopt ASU 2016-02 on January 1, 2019 on a prospective basis and is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.

On January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), using a retrospective transition method. ASU 2016-18 is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. ASU 2016-18 requires that the Consolidated Statement of Cash Flows explain the change in total cash and cash equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. Upon adoption of ASU 2016-18, restricted cash equivalents of  $1.5 million  as of December 31, 2017, June 30, 2017, and January 1, 2017 were reclassified to be included within the reconciliation of beginning and ending cash and restricted cash equivalents on the Company's Consolidated Statement of Cash Flows. Restricted cash equivalents of $1.5 million and $2.0 million in current portion of restricted cash equivalents are included in the ending cash balance on the Company's Consolidated Statement of Cash Flows as of June 30, 2018.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. In June 2018, the Company elected to early adopt ASU 2017-04, and the adoption had no impact on the Company's consolidated financial statements.
3. Fair Value of Financial Instruments

10


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

The Company records its financial assets and liabilities at fair value. The accounting standard for fair value (i) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, (ii) establishes a framework for measuring fair value, (iii) establishes a hierarchy of fair value measurements based upon the ability to observe inputs used to value assets and liabilities, (iv) requires consideration of nonperformance risk and (v) expands disclosures about the methods used to measure fair value. The accounting standard establishes a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect the Company’s assumptions about valuation. The three levels of the hierarchy are defined as follows:
•
Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;
•
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
•
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying amounts of the Company’s financial instruments, which include financial assets such as cash and cash equivalents, restricted cash equivalents, accounts receivable, net, and certain other current assets, as well as financial liabilities such as accounts payable, accrued service costs, accrued compensation and benefits and certain other accrued expenses approximate their fair values, due to the short-term nature of these instruments. The Company believes the carrying value of debt approximates fair value due to the relatively short time period between debt issuance and June 30, 2018. Other than the Company's derivative financial instruments, the Company does no t have any financial assets or liabilities that are required to be measured at fair value on a recurring basis. See Note 22, Derivative Financial Instruments, for a discussion of the fair value of the Company's forward currency derivative contracts.
4. Acquisition

Intermedix Holdings, Inc.

On May 8, 2018, the Company completed the acquisition of Intermedix. The Acquisition has been accounted for under ASC 805,  Business Combinations . Accordingly, the accounts of the acquired company, after adjustments to reflect fair values assigned to assets and liabilities, have been included in the Company’s consolidated financial statements since the date of the Acquisition.

The purchase price for the Acquisition was $460 million , subject to customary adjustments for cash, debt, transaction expenses and normalized working capital. The Company funded the purchase price for the Acquisition and the Company’s associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness through a term loan and subordinated debt (see Note 11, Debt). The purchase price has been provisionally allocated, on a preliminary basis, to assets acquired and liabilities assumed based on their preliminary estimated fair values as of the completion of the Acquisition.

The Company is continuing its review of the fair value estimate of assets acquired and liabilities assumed during the measurement period, which will conclude as soon as the Company receives the information about facts and circumstances that existed as of the acquisition date or learn that more information is not available. This measurement period will not exceed one year from the acquisition date. At the effective date of the Acquisition, the assets acquired and liabilities assumed are generally required to be measured at fair value.
 
Given the timing of the Acquisition, the fair value estimate of assets acquired and liabilities assumed are pending completion of multiple elements, including gathering further information about the identification and

11


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

completeness of all assets and liabilities acquired, the finalization of an independent appraisal and valuations of fair value of the assets acquired and liabilities assumed and final review by the Company's management.  Accordingly, management considers the balances shown in the following table to be preliminary. Some of the more significant amounts that are not yet finalized relate to the fair value of accounts receivable, accounts payable, property, equipment and software, intangible assets, operating leases or commitments, contingent liabilities and income and non-income related taxes.  Accordingly, there could be material adjustments to the consolidated financial statements, including changes in our depreciation and amortization expense related to the valuation of property equipment, and software, and intangible assets acquired and their respective useful lives among other adjustments.
 
The final determination of the assets acquired and liabilities assumed will be based on the established fair value of the assets acquired and the liabilities assumed as of the acquisition date.  The excess of the purchase price over the fair value of net assets acquired is allocated to goodwill.  The final determination of the purchase price, fair values and resulting goodwill may differ significantly from what is reflected in these consolidated financial statements.

The preliminary of the fair value of assets acquired and liabilities assumed is (in millions):
 
 
Purchase Price Allocation
Total purchase consideration
 
$
469.2

 
 
 
Allocation of consideration to assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
3.9

Accounts receivable, net
 
35.8

Prepaid income taxes
 
0.1

Prepaid expenses and other current assets
 
11.5

Property, equipment and software, net
 
30.8

Intangible assets, net
 
201.6

Goodwill
 
244.7

Other assets
 
0.5

Accounts payable
 
(6.4
)
Current portion of customer liabilities
 
(8.6
)
Accrued compensation and benefits
 
(6.8
)
Other accrued expenses
 
(4.4
)
Deferred income tax liabilities
 
(33.5
)
Net assets acquired
 
$
469.2


The fair value of accounts receivables acquired is $35.8 million , with the gross contractual amount being $37.4 million . The Company expects $1.6 million to be uncollectible.

The goodwill recognized is attributable primarily to synergies that are expected to be achieved from the integration of Intermedix. None of the goodwill is expected to be deductible for income tax purposes. As of June 30, 2018, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Intermedix.

Included in th e Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2018 are net sales of $27.6 million and a loss before income taxes of $1.8 million related to the operations of Intermedix since the acquisition date of May 8, 2018.

The Company retained Bank of America to provide both advisory and financing services related to the Acquisition. The amount of debt issuance costs paid to Bank of America was $4.1 million .

12


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements


Pro Forma Results

The following table summarizes, on a pro forma basis, the combined results of the Company as though the Acquisition had occurred as of January 1, 2017. These pro forma results are not necessarily indicative of either the actual consolidated results had the Intermedix Acquisition occurred as of January 1, 2017 or of the future consolidated operating results. Pro forma results are (in millions):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net services revenue
 
$
229.9

 
$
147.7

 
$
425.7

 
$
282.5

Net income (loss)
 
$
(1.8
)
 
$
(10.0
)
 
$
(29.1
)
 
$
(30.9
)

Supplemental pro-forma earnings were adjusted to exclude $11.9 million of acquisition-related costs incurred by the Company in 2018 and include those costs in 2017. Adjustments were also made to earnings to adjust depreciation and amortization to reflect fair value of identified assets acquired, to record the effects of extinguishing the debt of Intermedix and replacing it with the debt of the Company, and to record the income tax effect of these adjustments.

5. Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable is comprised of unpaid balances pertaining to modular services and end-to-end RCM customers, net receivable balances for end-to-end RCM customers after considering cost reimbursements owed to such customers, including related accrued balances, and amounts due from physician RCM and PM customers.
The Company maintains an estimated allowance for doubtful accounts to reduce its accounts receivable to the amount that it believes will be collected. This allowance is based on the Company’s historical experience, its assessment of each customer’s ability to pay, the length of time a balance has been outstanding, input from key Company resources assigned to each customer, and the status of any ongoing operations with each applicable customer.     
Movements in the allowance for doubtful accounts are as follows (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Beginning balance
$
329

 
$
107

 
$
363

 
$
66

Provision (recoveries)
268

 
50

 
237

 
91

Write-offs
—

 
(6
)
 
(3
)
 
(6
)
Ending balance
$
597

 
$
151

 
$
597

 
$
151


13


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

6. Property, Equipment and Software
Property, equipment and software consist of the following (in millions):
 
 
June 30,
2018
 
December 31, 2017
Buildings and land
 
$
4.6

 
$
—

Computer and other equipment
 
40.6

 
28.7

Leasehold improvements
 
30.2

 
22.3

Software
 
71.1

 
44.5

Office furniture
 
9.4

 
7.4

Property, equipment and software, gross
 
155.9

 
102.9

Less accumulated depreciation and amortization
 
(65.2
)
 
(54.6
)
Property, equipment and software, net
 
$
90.7

 
$
48.3

During the six months ended June 30, 2018 , the Company capitalized $14.9 million of computer equipment and software related to a capital lease and financing, of which $4.9 million and $4.9 million are recorded in other accrued expenses and other non-current liabilities, respectively.
The following table summarizes the allocation of depreciation and amortization expense between cost of services and selling, general and administrative expenses (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Cost of services
 
$
5.2

 
$
3.5

 
$
9.8

 
$
6.4

Selling, general and administrative
 
1.1

 
0.3

 
1.4

 
0.6

Total depreciation and amortization
 
$
6.3

 
$
3.8

 
$
11.2

 
$
7.0

7. Intangible Assets

In conjunction with the Acquisition of Intermedix, the Company acquired certain intangible assets. Prior to the Acquisition of Intermedix on May 8, 2018, the Company did not have any intangible assets. As discussed in Note 4, Acquisition, the amounts and estimated useful lives are preliminary. The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset at June 30, 2018 (in millions, except weighted average useful life):
 
 
 
 
June 30, 2018

 
Weighted Average Useful Life
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Book Value
Customer relationships
 
17 years
 
$
154.0

 
$
(1.3
)
 
$
152.7

Tradename
 
Indefinite
 
14.0

 
—

 
14.0

Technology
 
6 years
 
30.4

 
(0.7
)
 
29.7

Non-Competition agreements
 
3 years
 
0.9

 
(0.1
)
 
0.8

Favorable leasehold interests
 
7 years
 
2.3

 
(0.1
)
 
2.2

Total intangible assets
 
 
 
$
201.6

 
$
(2.2
)
 
$
199.4



14


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

A preliminary fair value of the identifiable intangible assets was derived, utilizing the following valuation methodology:
 
 
Valuation Methodology
Customer relationships
 
Income approach to derive the present value of future cash flows from customer relationship.
Technology
 
The cost, market, and income approaches were used.
• Cost approach - value is based on the current technology cost.
• Market approach - value is based on sales of similar technologies.
• Income approach - value based on identifiable discrete cash flows related to the technology.
Non-competition agreements
 
Income approach to compare cash flows with and without the non-compete.
Tradename
 
Relief from Royalty Method was utilized to determine the present value of savings from owning the asset.
Favorable leasehold interests
 
Income approach to derive the present value of the market versus contractual rent.

Intangible asset amortization expense was $2.2 million for the three and six months ended June 30, 2018 , and $0 for the three and six months ended June 30, 2017 .

Estimated annual amortization expense related to intangible assets with definite lives as of June 30, 2018 is as follows (in millions):
Remainder of 2018
 
$
7.4

2019
 
14.7

2020
 
14.7

2021
 
14.6

2022
 
14.5

Thereafter
 
119.5

Total
 
$
185.4

8. Goodwill

In conjunction with the Acquisition, the Company recorded goodwill. ASC 350, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. In the first six months of 2018, there were no events or circumstances that would have required an interim impairment test. Annually, during the fourth quarter, goodwill and other acquired intangible assets with indefinite lives are tested for impairment.

There were no changes to the carrying amount of goodwill during six months ended June 30, 2017. Changes in the carrying amount of goodwill for the six months ended June 30, 2018 were (in millions):
 
 
Goodwill
Balance as of December 31, 2017
 
$
—

Acquisitions
 
244.7

Balance as of June 30, 2018
 
$
244.7


9. Revenue Recognition

15


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

The Company follows the guidance under Topic 606, Revenue from Contracts with Customers (“Topic 606”). Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a service to a customer, which is typically over the contact term. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.

Nature of Goods and Services

The Company's primary source of revenue is its end-to-end RCM services fees. The Company also generates revenue through its physician group and EMS providers RCM services, and modular RCM services, where customers will engage the Company for only specific components of its end-to-end RCM service offering on a fixed-fee or transactional basis, as well as its PAS and PM offerings.

Revenue Cycle Management

RCM services fees are primarily variable and performance related, and are generally viewed as the consideration earned in satisfaction of a single performance obligation which is considered a series. Variable consideration for end-to-end RCM services are allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company’s efforts to satisfy its performance obligation. Fees for physician group and EMS provider RCM services are variable consideration contingent on customer collections and inputs to the Company’s revenue estimates typically include historical service fees and historical customer collection amounts. RCM services fees consist of net operating fees, incentive fees, and other fees.

Net Operating Fees

The Company’s net operating fees consist of:

i) gross base fees invoiced to customers; less
    
ii) corresponding costs of customers’ revenue cycle operations which the Company pays pursuant to its RCM agreements, including salaries and benefits for the customers' RCM personnel, and related third-party vendor costs; plus

iii) fees accrued for physician group and EMS provider RCM services.

The Company recognizes revenue related to net operating fees ratably as the performance obligation for the RCM services is satisfied. Base fees are typically billed in advance of the quarter and paid in three monthly payments as the entity performs and the customer simultaneously receives and consumes the benefits provided by the services provided. The costs of customers’ revenue cycle operations which the Company pays pursuant to its RCM agreements are accrued based on the service period. RCM services fees for physician groups and EMS providers are invoiced on a monthly basis and payment terms are typically 30 days.

Incentive Fees

The Company recognizes revenue related to incentive fees ratably as the performance obligation for RCM services is satisfied, to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. Incentive fees are structured to reflect quarterly or annual performance and are evaluated on a contract-by-contract basis. Incentive fees are typically billed and paid on a quarterly basis.

RCM Other

The Company recognizes revenue related to other RCM fees as RCM services are provided. These

16


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

services typically consist of the Company's modular RCM services offering, which consists of an obligation to provide services for a specific component of its end-to-end RCM service offering. Fees are typically variable in nature with the entire amount being included in revenue in the month of service. The customer simultaneously receives and consumes the benefits provided by the services and the fees are typically billed on a monthly basis with payment terms of up to 30 days. To the extent that certain service fees are fixed and not subject to refund, adjustment or concession, these fees are generally recognized into revenue ratably as the performance obligation is satisfied.

The Company recognizes revenue from PAS in the period in which the service is performed. The Company’s PAS arrangements typically consist of an obligation to provide specific services to customers on a when and if needed basis. These services are provided under a fixed price per unit arrangement. These contracts are evaluated on a contract-by-contract basis. Fees for the Company's PAS arrangements are typically billed on a monthly basis with 30 to 60 day payment terms.

PM services arrangements include a single performance obligation, constituting a series, to manage and administer various non-clinical aspects of a customer's physician practice, which may be comprised of numerous physical office locations. Consideration for PM services is typically variable in nature and allocated to and recognized over the related time period as the amounts reflect the consideration the Company is entitled to and relate specifically to the Company’s effort to satisfy its performance obligation. PM services fees are invoiced on a monthly basis and payment terms are typically 30 days.

Bundled Services

Modular RCM services may be sold separately or bundled in a contract. End-to-end RCM services are typically sold separately but may be bundled with PAS. PAS are commonly sold separately. The typical length of an end-to-end RCM contract is three to ten years (subject to the parties' respective termination rights) but varies from customer to customer. PAS and modular RCM agreements generally vary in length between one and three years.

For bundled arrangements, the Company accounts for individual services as a separate performance obligation if a service is separately identifiable from other items in the bundled arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The transaction price is allocated between separate services in a bundle based on their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells its RCM, PAS, PM, or modular services. PAS are provided at a customer’s election but do not represent material rights as the services are priced at standalone selling price throughout the life of the agreement.

Disaggregation of Revenue

In the following table, revenue is disaggregated by source of revenue (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net operating fees
 
$
181.7

 
$
80.1

 
$
309.3

 
$
150.8

Incentive fees
 
9.9

 
7.1

 
17.9

 
12.7

Other
 
16.3

 
12.2

 
28.0

 
22.8

Net service revenue
 
$
207.9

 
$
99.4

 
$
355.2

 
$
186.3

    

Contract Balances

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers (in millions):

17


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

 
 
June 30, 2018
 
December 31, 2017
Receivables, which are included in accounts receivable, net
 
$
81.2

 
$
23.6

Contract assets
 
0.8

 
—

Contract liabilities
 
21.9

 
15.5


The Company recognized a decrease in revenue of $0.4 million and an increase in revenue of $1.7 million for the three and six months ended June 30, 2018 and 2017 related to changes in transaction price estimates. The Company recognized revenue of  $0 million for both the three and six months ended June 30, 2018, and $0 million and $1.4 million  for the three and six months ended June 30, 2017 related to services performed in periods prior to the parties reaching an agreement that creates enforceable rights and obligations.

A receivable is recognized in the period the Company provides services when the Company’s right to consideration is unconditional. Payment terms on invoiced amounts are typically 30-60 days.

Significant changes in the contract assets and the contract liabilities balances are as follows (in millions):
 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
 
Contract assets
 
Contract liabilities
 
Contract assets
 
Contract liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period
 
—
 
$
50.3

 
—
 
$
29.6

Increases due to cash received, excluding amounts recognized as revenue during the period
 
—
 
$
5.9

 
—
 
$
2.2

Acquisitions
 
$
0.8

 
$
1.4

 
—
 
—

The Company recognized revenue of $50.3 million and $29.6 million during the six months ended June 30, 2018 and 2017 , which amounts were included in contract liabilities at the beginning of the respective periods. These revenue amounts include $47.8 million and $29.6 million for the six months ended June 30, 2018 and 2017 , respectively, related to advanced billings which become accounts receivable and contract liabilities on the first day of the respective service period.

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in millions). The estimated revenue does not include amounts of variable consideration that are constrained.
 
RCM
 
Net operating fees
 
Incentive fees
 
Other
2018
$
44.1

 
$
1.0

 
$
2.4

2019
19.4

 
—

 
2.8

2020
10.7

 
—

 
2.8

2021
5.3

 
—

 
2.8

Thereafter
0.4

 
—

 
11.6

Total
$
79.9

 
$
1.0

 
$
22.4

    

18


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

The amounts presented in the table above include variable fee estimates for the non-cancellable term of the Company's physician groups and EMS providers RCM services contracts, primarily consist of fixed fees which are typically recognized ratably as the performance obligation is satisfied, and incentive fees which are measured cumulatively over the contractually defined performance period.

Estimates of revenue expected to be recognized in future periods also exclude unexercised customer options to purchase services within the Company's PAS contracts that do not represent material rights to the customer. Customer options that do not represent a material right are only accounted for in accordance with Topic 606 when the customer exercises its option to purchase additional goods or services.

The Company does not disclose information about remaining performance obligations with an original expected duration of one year or less. The Company has elected certain of the optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies a practical expedient to its stand-alone PAS contracts and modular RCM services and does not disclose information about variable consideration from remaining performance obligations when the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance completed to date. PAS performance obligations are typically short in duration (often less than 1 day) with any uncertainty related to the associated variable consideration resolved as each increment of service (completion of a level of care review or an appeal) is completed which reflects the value the Customer receives from the Company’s fulfillment of the performance obligation. Modular RCM services performance obligations for variable consideration are of short duration with fees corresponding to the value the customer has realized, for example, patient accounts collected on behalf of the Customer or medical record lines transcribed.
For end-to-end RCM contracts, the Company does not disclose information about remaining, wholly unsatisfied performance obligations for variable consideration that the Company is able to allocate to one or more, but not all, of the performance obligations in its contracts. Company’s end-to-end RCM services performance obligations are satisfied over time and are substantially the same from period to period under either a co-managed or operating partner model. Fees are variable and consist of net operating fees and incentive fees with the uncertainty related to net operating fees and certain incentive fees being resolved quarterly with the uncertainty of other incentive fees being resolved annually. The information presented in the table above includes estimates for incentive fees where the uncertainty related to the final fee is resolved on longer than a quarterly basis and to the extent the Company does not believe the associated consideration is constrained.
10. Customer Liabilities
Customer liabilities include (i) accrued service costs (amounts due and accrued for cost reimbursements), (ii) refund liabilities (amounts potentially due as a refund to the Company's customers on incentive fees), (iii) collections payable to clients (consisting primarily of amounts collected on behalf of the Company’s physician group customers to be remitted within twelve months) and (iv) deferred revenue (contract liabilities) (fixed or variable fees amortized to revenue over the service period). Deferred customer billings are classified as current based on the customer contract end dates or other termination events that fall within twelve months of the balance sheet dates. Accrued service cost, refund liabilities and contract liabilities are classified as current or non-current based on the anticipated period in which the liabilities are expected to be settled or the revenue is expected to be recognized.
Customer liabilities consist of the following (in millions):

19


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

 
June 30,
 
December 31,
 
2018
 
2017
Accrued service costs, current
$
19.9

 
$
23.7

Collections payable to clients, current
7.3

 
—

Refund liabilities, current
0.1

 
0.5

Deferred revenue (contract liabilities), current
4.5

 
4.0

Current portion of customer liabilities (1)
$
31.8

 
$
28.2

Deferred revenue (contract liabilities), non-current
17.4

 
11.5

Non-current portion of customer liabilities (1)
$
17.4

 
$
11.5

Total customer liabilities
$
49.2

 
$
39.7


(1) Current and non-current portion of customer liabilities includes amounts for a related party. See Note 19, Related Party Transactions, for further discussion.
11. Debt

The carrying amounts of debt at June 30, 2018 and December 31, 2017 are (in millions):
 
 
June 30, 2018
 
December 31, 2017
Senior Revolver
 
$
—

 
$
—

Senior Term Loan
 
270.0

 
—

Notes (primarily with related parties)
 
110.0

 
—

Unamortized discount and issuance costs
 
(20.6
)
 
—

Total debt
 
359.4

 
—

Less: Current maturities
 
(2.7
)
 
—

Total long-term debt
 
$
356.7

 
$
—


Credit Agreement and Note Purchase Agreement

On May 8, 2018, the Company and certain of its subsidiaries entered into (1) a new senior credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and the lenders named therein, for the new senior secured credit facilities (the “Senior Secured Credit Facilities”), consisting of a $270.0 million senior secured term loan facility (the “Senior Term Loan”) issued at 97% of par and a $25.0 million senior secured revolving credit facility (the “Senior Revolver”); and (2) a new subordinated note purchase agreement (the “Note Purchase Agreement”) with TI IV ACHI Holdings, LP, IHC Health Services, Inc. and Ascension Health Alliance d/b/a Ascension, as purchasers, consisting of the issuance and sale of $110.0 million aggregate principal amount of subordinated notes due 2026 (the "Notes") issued at 98% of par.

Senior Secured Credit Facilities

The Senior Term Loan has a seven -year maturity and the Senior Revolver has a five -year maturity. The Credit Agreement provides that the Company may make one or more offers to the lenders, and consummate transactions with individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate class of term loans or revolving commitments.

All of the Company’s obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the “Subsidiary Guarantors”). Pursuant to (1) the Security Agreement, dated as of May 8, 2018 (the “Security Agreement”), among the Company, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, and (2) the Guaranty, dated as of May 8, 2018 (the “Guaranty”),

20


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

among the Company, the Subsidiary Guarantors and Bank of America, N.A., as administrative agent, subject to certain exceptions, the obligations under the Senior Secured Credit Facilities are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by the Company and a security interest in substantially all of the Company’s tangible and intangible assets and the tangible and intangible assets of each Subsidiary Guarantor.

The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of June 30, 2018 , the Company had no borrowings and no letters of credit under the Senior Revolver.

At the Company’s option, the Company may add one or more new term loan facilities or increase the commitments under the Senior Revolver (collectively, the “Incremental Borrowings”) in an aggregate amount of up to $25.0 million plus any additional amounts so long as certain conditions, including a consolidated first lien leverage ratio (as defined in the Credit Agreement) of not more than 3.75 to 1.00 (on a pari passu basis) or 5.50 to 1.00 (on a junior basis), in each case on a pro forma basis, are satisfied plus the amount of certain voluntary prepayments of Senior Term Loans.

Borrowings under the Senior Secured Credit Facilities bear interest, at the Company’s option, at: (i) an ABR rate equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.5% per annum , and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25% (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus 5.25% . The interest rate as of June 30, 2018 was 7.62% . The Company is also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate of 0.50% of the average daily unutilized commitments thereunder if the first lien net leverage ratio is greater than 2.00 to 1.00, or at a rate of 0.375% at any other time. The Company must also pay customary letter of credit fees, including a fronting fee as well as administration fees.

The Credit Agreement requires the Company to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year 2019, 75% (which percentage will be reduced upon the achievement of certain first lien net leverage ratios) of the Company’s annual excess cash flow; (ii) 100% of net cash proceeds of all non-ordinary course assets sales or other dispositions of property or casualty events, subject to certain exceptions and thresholds; and (iii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Credit Agreement. The Company is required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the principal amount commencing on September 30, 2018, with the balance payable at maturity. If, on or prior to May 8, 2019, the Company prepays or reprices any portion of the Senior Term Loan, the Company will be required to pay a prepayment premium of 1% of the loans being prepaid or repriced.

The Credit Agreement contains two financial covenants. (1) The Company is required to maintain at the end of each fiscal quarter, commencing with the quarter ending September 30, 2018, a consolidated first lien net leverage ratio of not more than 5.50 to 1.00. This consolidated ratio will step down in increments to 4.00 to 1.00 commencing with the fiscal quarter ending September 30, 2020. (2) The Company is required to maintain at the end of each such fiscal quarter, commencing with the quarter ending September 30, 2018, a consolidated interest coverage ratio of not less than 1.75 to 1.00. This consolidated ratio will step up in increments to 2.50 to 1.00 commencing with the fiscal quarter ending September 30, 2020.

The Credit Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x)

21


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

amend material agreements governing certain of the Company’s junior indebtedness; (xi) change the Company’s lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default.

Note Purchase Agreement

The Notes issued pursuant to the Note Purchase Agreement each have an eight -year maturity, as extended in accordance with the Notes from time to time.

All of the Company’s obligations under the Note Purchase Agreement are guaranteed by the Subsidiary Guarantors pursuant to the Subsidiary Guaranty, dated as of May 8, 2018 (the “Subsidiary Guaranty”), among the Company, the Subsidiary Guarantors and the Purchasers (as defined in the Notes). The obligations under the Note Purchase Agreement are unsecured.

As of June 30, 2018 , $105.0 million of the Notes were due to related parties. For the three and six months ended June 30, 2018 , $2.2 million of interest was payable to related parties.

The Notes bear interest at 14.0% per annum, increasing by 1.0% per annum on May 8, 2021, and by an additional 1.0% per annum on each subsequent anniversary until the Notes are repaid in full. Interest is payable quarterly in cash; provided, that, subject to the subordination agreement, (i) for any fiscal quarters ending on or prior to May 8, 2019, at the Company’s election, up to 75% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash; (ii) for any fiscal quarters ending after May 8, 2019 and on or prior to May 8, 2020, at the Company’s election, up to 50% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash; and (iii) for any subsequent fiscal quarters, at the Company’s election, up to 25% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash.

The Note Purchase Agreement does not require any mandatory prepayments. Any voluntary prepayment of the obligations pursuant to the Note Purchase Agreement (other than in connection with a change of control) shall be subject to a prepayment premium of (a) if such prepayment is made before May 8, 2019, 3.0% of the principal amount of the obligations prepaid, (b) if such prepayment is made on or after May 8, 2019 but prior to May 8, 2020, 2.0% of the principal amount of the obligations prepaid, (c) if such prepayment is made on or after May 8, 2020 but prior to May 8, 2021, 1.0% of the principal amount of the obligations prepaid, and (d) if such prepayment is made on or after May 8, 2021, 0.0% of the principal amount of the obligations prepaid.

The Note Purchase Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) create liens on assets; (ii) engage in mergers or consolidations or sell all or substantially all of their respective assets; and (iii) pay dividends and distributions or repurchase the Company’s capital stock. The Note Purchase Agreement contains customary affirmative covenants and events of default.

Debt Issuance Costs

The Company incurred debt issuance costs of $11.1 million in relation to the Credit Agreement and Note Purchase Agreement which were allocated to the respective agreements.

12. Stockholders’ Equity (Deficit)     
    
Intermountain Purchase Agreement

As discussed in Note 1, Business Description and Basis of Presentation, on January 23, 2018, the Company entered into the Intermountain Purchase Agreement, pursuant to which the Company sold to Intermountain, in private placements under the Securities Act, (i)  4,665,594 shares of common stock, at a purchase price of $4.2867

22


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

per share (representing the per share average closing price of the Company’s Common Stock for the period from January 1, 2018 to January 12, 2018), and (ii) a warrant to acquire up to 1,500,000 shares of Common Stock at an initial exercise price of $6.00 per share, on the terms and subject to the conditions set forth in the Warrant Agreement, for an aggregate purchase price of $20 million . As a result of the sale of the common stock and warrant, the Company recorded $47 thousand to common stock and $19.3 million to additional paid-in-capital, net of $0.7 million of issuance costs.
Preferred Stock and Warrant
The Company has 5,000,000 shares of authorized preferred stock, each with a par value of $0.01 . The preferred stock may be issued from time to time in one or more series. The board of directors of the Company ("Board") is authorized to determine the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock. On February 16, 2016, at the close of the Transaction, the Company issued to TCP-ASC ACHI Series LLLP, a limited liability limited partnership jointly owned by Ascension Health Alliance and investment funds affiliated with TowerBrook (the "Investor"): (i) 200,000 shares of its 8.00% Series A Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock" or "Preferred Stock"), for an aggregate price of $200 million and (ii) an exercisable warrant to acquire up to 60 million shares of its common stock with an exercise price of $3.50 per common share and a term of ten years. The Series A Preferred Stock is immediately convertible into shares of common stock. As of June 30, 2018 and December 31, 2017 , the Company had 236,672 and 227,483 shares of Preferred Stock outstanding, respectively. See Note 16, 8% Series A Convertible Preferred Stock, for additional information.
Common Stock
Each outstanding share of the Company's common stock, par value $0.01 per share ("common stock"), is entitled to one vote per share on all matters submitted to a vote by shareholders. Subject to the rights of any preferred stock which may from time to time be outstanding, the holders of outstanding shares of common stock are entitled to receive dividends and, upon liquidation or dissolution, are entitled to receive pro rata all assets legally available for distribution to stockholders. No dividends were declared or paid on the common stock during 2018 or 2017 .
Treasury Stock
On November 13, 2013, the Board authorized a repurchase of up to $50.0 million of the Company’s common stock in the open market or in privately negotiated transactions. The timing and amount of any shares repurchased will be determined by the Company based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time at the sole discretion of the Board. Any repurchased shares will be available for use in connection with the Company’s stock plans and for other corporate purposes. The Company funds the repurchases from cash on hand. During the year ended December 31, 2017 , the Company repurchased 855,474 shares of the Company's stock for $2.5 million . During the three and six months ended June 30, 2018 , no shares were repurchased. No shares have been retired. As of  June 30, 2018 and December 31, 2017 , the Company held in treasury 5,321,393 shares of repurchased stock, respectively.
    
Treasury stock also includes repurchases of Company stock related to employees’ tax withholding upon vesting of restricted shares. For the three and six months ended June 30, 2018 , the Company repurchased 134,898 and 497,300 shares related to employees’ tax withholding upon vesting of restricted shares, respectively. Additionally, treasury stock includes restricted stock awards that have been canceled or forfeited. See Note 13, Share-Based Compensation.
13. Share-Based Compensation
The share-based compensation expense relating to the Company’s stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") for the three months ended June 30, 2018  and  2017  was  $5.1 million  and  $2.2 million , respectively, with related tax benefits of

23


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

approximately  $1.3 million  and $0.8 million , respectively. The share-based compensation expense relating to the Company’s stock options, RSAs, RSUs and PBRSUs for the six months ended June 30, 2018  and  2017  was  $9.0 million  and  $5.8 million , respectively, with related tax benefit of approximately  $2.3 million  and $2.2 million , respectively.

As of January 1, 2017, the Company adopted ASU 2016-09. The Company elected to change its accounting policy to account for forfeitures as they occur under the new standard. The change was applied on a modified retrospective basis with a cumulative effect adjustment recorded to increase accumulated deficit by $0.9 million , increase additional paid-in capital by $1.5 million and increase non-current deferred tax assets by $0.6 million as of January 1, 2017. Excess tax benefits and shortfalls for share-based payments are now included in operating activities rather than in financing activities.

Amendments related to accounting for excess tax benefits and shortfalls have been adopted prospectively, resulting in recognition of excess tax benefits and shortfalls in income tax expenses (benefit) rather than additional paid-in capital. The Company recognized $1.3 million of tax benefit and $0.0 million of income tax expense from windfalls and shortfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2018 and 2017, respectively. The Company recognized $2.0 million of tax benefit and $0.9 million of income tax expense from windfalls and shortfalls associated with vesting and exercises of equity awards for the six months ended June 30, 2018 and 2017, respectively.
Total share-based compensation costs that have been included in the Company’s consolidated statements of operations were as follows (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Share-Based Compensation Expense Allocation Details:
 
 
 
 
 
 
 
 
Cost of services
 
$
1.5

 
$
1.0

 
$
2.8

 
$
2.1

Selling, general and administrative
 
3.5

 
1.1

 
6.1

 
3.6

Other
 
0.1

 
0.1

 
0.1

 
0.1

Total share-based compensation expense (1)
 
$
5.1

 
$
2.2

 
$
9.0

 
$
5.8

(1) Includes $0.1 million in share-based compensation expense paid in cash during the three and six months ended June 30, 2017 , respectively. No shared-based compensation expense was paid in cash during the three or six month periods ended June 30, 2018. In addition to the share-based compensation expense recorded above, $0.1 million and $0.2 million of share-based compensation expense was capitalized to deferred contract costs for the three and six months ended June 30, 2018 , respectively, and $0 million and $0.3 million during the three and six months ended June 30, 2017 , respectively. See Note 20, Deferred Contract Costs, for further discussion.
The Company uses the Black-Scholes option pricing model to estimate the fair value of its service-based options as of its grant date. Monte Carlo simulations are used to estimate the fair value of its PBRSUs. The PBRSUs vest upon satisfaction of both time-based requirements and performance targets based on share price. Expected life is based on the market condition to which the vesting is tied.
The following table sets forth the significant assumptions used in the Black-Scholes option pricing model and the Monte Carlo simulations and the calculation of share-based compensation expense for the six months ended June 30, 2018 and 2017 :

24


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

 
 
Six Months Ended June 30,
 
 
2018
 
2017
Expected dividend yield
 
—

 
—

Risk-free interest rate
 
2.3% to 2.7%
 
1.9% to 2.3%
Expected volatility
 
40% to 45%
 
45%
Expected term (in years)
 
2.59 to 6.25
 
6.25 to 6.29
The risk-free interest rate input is based on U.S. Treasury instruments, and expected volatility of the share price based upon review of the historical volatility levels of the Company’s common stock in conjunction with that of public companies that operate in similar industries or are similar in terms of stage of development or size and a projection of this information toward its future expected volatility. The Company used the simplified method to estimate the expected option life for 2018 and 2017 option grants. The simplified method was used due to the lack of sufficient historical data available to provide a reasonable basis upon which to estimate the expected term of each stock option.
Stock options
A summary of the options activity during the six months ended June 30, 2018  is shown below:
 
 
Shares
 
Weighted-
Average
Exercise
Price
Outstanding at December 31, 2017
 
17,742,966

 
$
4.70

Granted
 
204,942

 
5.53

Exercised
 
(1,117,588
)
 
2.55

Canceled/forfeited
 
(1,284,812
)
 
2.52

Outstanding at June 30, 2018
 
15,545,508

 
5.04

Outstanding, vested and exercisable at June 30, 2018
 
7,986,285

 
7.22

Outstanding, vested and exercisable at December 31, 2017
 
5,778,376

 
$
8.87

Restricted stock awards     
A summary of the RSA activity during the six months ended June 30, 2018  is shown below:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at December 31, 2017
 
2,352,490

 
$
3.03

Granted
 
—

 
—

Vested
 
(1,184,687
)
 
3.07

Forfeited
 
(18,945
)
 
3.35

Outstanding and unvested at June 30, 2018
 
1,148,858

 
$
3.03

RSA vesting is based on the passage of time. The amount of share-based compensation expense is based on the fair value of the Company's common stock on the respective grant dates and is recognized ratably over the vesting period.

The Company's RSA agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSAs in lieu of their payment of the required personal employment-related taxes. During the

25


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

six months ended June 30, 2018 and 2017 , employees delivered to the Company  404,466  and  713,753  shares of stock, respectively, which the Company recorded at a cost of approximately  $2.2 million  and  $1.8 million , respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.
Restricted stock units
A summary of the RSU activity during the six months ended June 30, 2018  is shown below:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at December 31, 2017
 
1,183,500

 
$
2.50

Granted
 
417,008

 
7.96

Vested
 
(294,825
)
 
2.40

Forfeited
 
(73,885
)
 
2.49

Outstanding and unvested at June 30, 2018
 
1,231,798

 
$
4.37

The Company's RSU agreements allow employees to surrender to the Company shares of common stock upon vesting of their RSUs in lieu of their payment of the required personal employment-related taxes. During the six months ended June 30, 2018 and 2017 , employees delivered to the Company  92,834  and  50,762  shares of stock, respectively, which the Company recorded at a cost of approximately  $0.7 million  and  $0.2 million , respectively. Shares surrendered for payment of personal employment-related taxes are held in treasury.
Performance-based restricted stock units
In the third quarter of 2017, the Company began to grant PBRSUs to its employees. The PBRSUs vest upon satisfaction of both time-based requirements and performance targets based on share price with awards vesting between December 31, 2019 and December 31, 2021. Depending on the average price of the stock for the 60 days prior to the end of the vesting period, the number of shares vesting could be between 0% and 350% of the number of PBRSUs originally granted. Based on the established price targets, 11,052,549 is the maximum number of shares that could vest.

A summary of the PBRSU activity during the six months ended June 30, 2018  is shown below:
 
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Outstanding and unvested at December 31, 2017
 
4,785,900

 
$
3.37

Granted
 
1,456,671

 
8.29

Vested
 
—

 
—

Forfeited
 
(863,761
)
 
3.92

Outstanding and unvested at June 30, 2018
 
5,378,810

 
$
4.59

At March 31, 2018, the Company had 983,472 shares subject to PBRSU award agreements that were intended to be settled in cash until such time as the share reserve available under the 2010 Amended Plan had been deemed sufficient by the Compensation Committee of our Board of Directors ("Compensation Committee") to allow for settlement of the PBRSUs in shares. On the consolidated balance sheet, these awards settleable in cash were liability classified as of March 31, 2018. During the second quarter of 2018, the Compensation Committee determined that the available share reserve was sufficient for the awards to be settled in shares rather than cash and thus the provision allowing for the awards to be cash settled was terminated. As a result, $1.3 million was reclassified from liabilities to equity.

26


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

14. Other

Other costs are comprised of reorganization and acquisition costs along with certain other costs. For the three months ended June 30, 2018 and 2017 , the Company incurred $13.2 million and $1.0 million in other costs, respectively. For the six months ended June 30, 2018 and 2017 , the Company incurred $15.6 million and $1.2 million in other costs, respectively.
Other costs consist of the following (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Severance and employee benefits
$
1.0

 
$
0.3

 
$
1.0

 
$
0.4

Facility charges
0.2

 
—

 
0.2

 
—

Non-cash share based compensation
—

 
0.1

 
—

 
—

Reorganization-related
1.2

 
0.4

 
1.2

 
0.4

Acquisition related costs (1)
10.3

 
—

 
11.9

 
—

Transitioned employees restructuring expense (2)
1.7

 
0.6

 
2.5

 
0.8

Other
12.0

 
0.6

 
14.4

 
0.8

Total other
$
13.2

 
$
1.0

 
$
15.6

 
$
1.2


(1) Costs related to evaluating, pursuing and integrating acquisitions as part of the Company’s inorganic growth strategy. Integration costs include employee time and expenses spent on integration activities, vendor spend and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
15. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant and infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the projected annual pre-tax earnings by jurisdiction and the allocation of certain expenses in various taxing jurisdictions where the Company conducts its business. These taxing jurisdictions apply a broad range of statutory income tax rates.
The Tax Act was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Tax Reform permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a 21% rate, effective January 1, 2018.

While Tax Reform provides for a territorial tax system, beginning in 2018, it includes the global intangible low-taxed income (“GILTI”) provision. The Company elected to account for GILTI tax in the period in which it is incurred. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company included a provisional amount for the current year GILTI impact in the estimated annual effective tax rate calculation.

27


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company recognized provisional tax impacts related to the deemed repatriated earnings and the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Any adjustments made to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the period identified (not to extend beyond the one-year measurement provided in SAB 118). During the six months ended June 30, 2018, the Company has not completed its analysis of the impact of the Tax Act on the Company's provisional amounts included in the Company's consolidated financial statements for the year ended December 31, 2017. The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in October of 2018.

The Company recognized income tax benefit for the three and six months ended June 30, 2018 on the year-to-date pre-tax loss. The deviation from the federal statutory tax rate of   21%  is attributable to the geographical mix of earnings and permanent differences. The income tax benefit for the three and six months ended June 30, 2017 was lower than the amount derived by applying the federal statutory tax rate of  35%  primarily due to discrete items.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. U.S. federal income tax returns since 2013 are currently open for examination. State jurisdictions vary for open tax years. The statute of limitations for most states ranges from three to six years.

Accounting for excess tax benefits and shortfalls result in recognition of excess tax benefits and shortfalls as part of income tax expense. The Company recognized $1.3 million excess tax benefit and $0.0 million expense, from windfalls and shortfalls associated with vesting and exercises of equity awards for the three months ended June 30, 2018 and 2017, respectively. The Company wrote-off approximately  $0.1 million  and $0.4 million of deferred tax assets due to the expiration of shared-based awards and recognized as discrete expense during the three months ended June 30, 2018 and 2017.

At December 31, 2017 , the Company had deferred tax assets of  $70.5 million , of which  $47.9 million  related to net operating loss carryforwards. The majority of the Company's carryforwards were generated in 2014 and 2016. The Company expects its business growth contracted for under the Ascension A&R MPSA and Intermountain Services Agreement will be profitable and allow the Company to utilize its NOL carryforwards and other deferred tax assets, except there is a possibility that approximately $1.0 million of the deferred tax assets as of December 31, 2017 for costs related to the exploration of strategic initiatives with Intermountain and Intermedix may not be realized. Should the Company not operationally execute as expected, and the growth in the Ascension and Intermountain businesses not be as profitable as expected, such realizability assessment may change. The additional costs incurred in the current year related to the ongoing strategic initiative exploration efforts may not result in deferred tax assets.
16. 8.00% Series A Convertible Preferred Stock
At the close of the Transaction on February 16, 2016 (as described in Note 1), the Company issued to the Investor: (i) 200,000  shares of Preferred Stock, for an aggregate price of $200 million , and (ii) a warrant with a term of ten years to acquire up to 60 million shares of common stock at an exercise price of $3.50 per share, on the terms and subject to the conditions set forth in the warrant. The Preferred Stock is immediately convertible into shares of common stock.

The Company incurred direct and incremental expenses of $21.3 million (including $14.0 million in closing fees paid to the Investor) relating to financial advisory fees, closing costs, legal expenses and other offering-related expenses in connection with the Transaction. These direct and incremental expenses reduced the carrying amount of the Preferred Stock. In connection with the issuance of the Preferred Stock, a beneficial conversion feature of $48.3

28


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

million was recognized. Since the Preferred Stock is presently convertible into common stock, this amount was subsequently accreted to the carrying amount of the Preferred Stock, and treated as a deemed preferred stock dividend in the calculation of earnings per share.

Dividend Rights

The holders of the Preferred Stock are entitled to receive cumulative dividends January 1, April 1, July 1 and October 1 of each year (dividend payment dates), which commenced on April 1, 2016, at a rate equal to 8% per annum (preferred dividend) multiplied by the liquidation preference per share, initially $1,000 per share adjusted for any unpaid cumulative preferred dividends. For the first seven years after issuance, the dividends on the Preferred Stock will be paid-in-kind. As of  June 30, 2018 and 2017, the Company had accrued dividends of $4.7 million and $4.4 million  associated with the Preferred Stock, respectively. Of the amount accrued as of June 30, 2018 , $4.7 million  was paid in additional shares of Preferred Stock and  $440  was paid in cash in July 2018. Of the amount accrued as of June 30, 2017 , $4.4 million  was paid in additional shares of Preferred Stock and  $0  was paid in cash in July 2017 .

Conversion Features

Each share of the Preferred Stock may be converted to common stock on any date at the option of the holder into the per share amount (as defined in the Certificate of Designations of the 8.00% Series A Convertible Preferred Stock (the "Series A COD")). Fractional shares resulting from any conversion will be rounded to the nearest whole share.

Redemption Rights

Since the redemption of the Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480,  Distinguishing Liabilities from Equity . As the Preferred Stock is redeemable at the option of the holders upon a fundamental change (as defined in the Series A COD) and is redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company's control, the Company has classified the Preferred Stock in mezzanine equity on the Consolidated Balance Sheets. In the event the Company believes that redemption of the Preferred Stock is probable, the Company would be required to accrete changes in the carrying value to the redemption value over the period until the expected redemption date.

Voting Rights

Each holder of the Preferred Stock is entitled to vote with the common stock on an as-converted basis, and has full voting rights and powers equal to the voting rights and powers of the holders of common stock.

The following summarizes the Preferred Stock activity for the six months ended June 30, 2018 :
 
 
Preferred Stock
 
 
Shares Issued and Outstanding
 
Carrying Value
Balance at December 31, 2017
 
227,483

 
$
189.3

Dividends paid/accrued dividends
 
9,189

 
9.2

Balance at June 30, 2018
 
236,672

 
$
198.5


17. Earnings (Loss) Per Share
Basic net income per share is computed by dividing net income, less any dividends, accretion or decretion, redemption or induced conversion on the Preferred Stock, by the weighted average number of common shares

29


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

outstanding during the period. As the Preferred Stock participates in dividends alongside the Company’s common stock (per their participating dividends), the Preferred Stock would constitute participating securities under ASC 260-10 and are applied to earnings per share using the two-class method. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.
Diluted net income per share is calculated using the more dilutive of the if-converted or the two-class method. For the three and six months ended June 30, 2018 and 2017 , the two-class method was more dilutive and was computed by adjusting the denominator used in the basic net income per share computation by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of RSAs, RSUs, PBRSUs and shares issuable upon conversion of Preferred Stock.
Basic and diluted net income (loss) per common share are calculated as follows (in millions, except share and per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Basic EPS:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2.9
)
 
$
(6.7
)
 
$
(26.2
)
 
$
(15.0
)
Less dividends on preferred shares
 
(4.8
)
 
(4.4
)
 
(9.4
)
 
(8.7
)
Less income allocated to preferred shareholders
 
—

 
—

 
—

 
—

Net income (loss) available/(allocated) to common shareholders - basic
 
$
(7.7
)
 
$
(11.1
)
 
$
(35.6
)
 
$
(23.7
)
Diluted EPS:
 
 
 
 
 
 
 
 
Net income (loss)
 
(2.9
)
 
(6.7
)
 
(26.2
)
 
(15.0
)
Less dividends on preferred shares
 
(4.8
)
 
(4.4
)
 
(9.4
)
 
(8.7
)
Less income allocated to preferred shareholders
 
—

 
—

 
—

 
—

Net income (loss) available/(allocated) to common shareholders - diluted
 
$
(7.7
)
 
$
(11.1
)
 
$
(35.6
)
 
$
(23.7
)
Basic weighted-average common shares
 
108,157,583

 
102,467,078

 
107,001,002

 
101,918,797

Add: Effect of dilutive securities
 
—

 
—

 
—

 
—

Diluted weighted average common shares
 
108,157,583

 
102,467,078

 
107,001,002

 
101,918,797

Net income (loss) per common share (basic)
 
$
(0.07
)
 
$
(0.11
)
 
$
(0.33
)
 
$
(0.23
)
Net income (loss) per common share (diluted)
 
$
(0.07
)
 
$
(0.11
)
 
$
(0.33
)
 
$
(0.23
)
Because of their anti-dilutive effect, 23,304,974 and 21,875,423 common share equivalents comprised of stock options, RSAs, PBRSUs and RSUs have been excluded from the diluted earnings per share calculation as of June 30, 2018 and 2017, respectively. Additionally, the Investor's and Intermountain's exercisable warrants to acquire up to 60 million and 1.5 million shares, respectively, of the Company's common stock have been excluded from the diluted earnings per share calculation because they are anti-dilutive for all periods presented.
18. Commitments and Contingencies

Legal Proceedings

Other than as described below, the Company is not presently a party to any material litigation or regulatory proceeding and is not aware of any pending or threatened litigation or regulatory proceeding against the Company

30


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

which, individually or in the aggregate, could have a material adverse effect on its business, operating results, financial condition or cash flows.

In May 2016, the Company was served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS clients and a place holder, John Doe hospital, representing all PAS clients ( U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.) , and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees.  The Second Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago twice, and the U.S. Attorneys declined to intervene. The Company filed a motion to dismiss the Second Amended Complaint on July 29, 2016. On March 22, 2017, the district court dismissed all claims against all hospital defendants other than Medstar Inc.’s WHC, and dismissed all claims related to TriCare-related episodes of care. Plaintiff filed a Third Amended Complaint, seeking to add back claims related to other PAS clients in January 2018, and the Company has moved to dismiss all such claims related to any hospital other than WHC. That motion has been fully briefed. The Company believes that it has meritorious defenses to all claims in the case and intends to vigorously defend itself against these claims. The outcome is not presently determinable.

19. Related Party Transactions
As a result of the closing of the Transaction with Ascension Health Alliance on February 16, 2016 and Ascension Health Alliance's ownership interest in the Investor, Ascension became a related party to the Company. Accordingly, Note 19, Related Party Transactions, encompasses transactions between Ascension and the Company pursuant to the A&R MPSA, including all supplements, amendments and other documents entered into in connection therewith. See Note 1, Business Description and Basis of Presentation, Note 12, 8.00% Series A Convertible Preferred Stock and Note 11, Debt for further discussion on the agreements with Ascension.
Net services revenue from services provided to Ascension included in the Company’s consolidated statements of operations for the three months ended June 30, 2018 and 2017 were (in millions):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Ascension
 
$
141.9

 
$
87.7

 
$
278.1

 
$
163.1


31


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

Amounts included in the Company's consolidated balance sheets for Ascension, excluding debt (see Note 11, Debt), as of June 30, 2018 and December 31, 2017 are (in millions):
 
June 30,
 
December 31,
 
2018
 
2017
Accounts receivable, net - related party
$
40.3

 
$
15.4

 
 
 
 
Accrued service costs, current
$
20.3

 
$
23.7

Customer deposits, current
—

 
—

Refund liabilities, current
0.1

 
0.5

Deferred revenue (contract liabilities), current
2.9

 
2.9

Current portion of customer liabilities
$
23.3

 
$
27.1

 
 
 
 
Refund liabilities, non-current
$
—

 
$
—

Customer deposits, non-current
—

 
—

Deferred revenue (contract liabilities), non-current
17.4

 
11.5

Non-current portion of customer liabilities
$
17.4

 
$
11.5

Total customer liabilities
$
40.7

 
$
38.6

As part of the transition of Ascension personnel to the Company, the Company has agreed to reimburse Ascension for certain severance and retention costs related to certain Ascension employees who will not be transitioned to the Company in connection with Ascension on-boarding. As of June 30, 2018 and December 31, 2017 , the Company had $1.2 million and $0.5 million in accrued compensation and benefits related to these costs, respectively.
As Ascension is the Company's largest customer, a significant percentage of the Company's cost of services is associated with providing services to Ascension. However, due to the nature of the Company's shared services and information technology operations, it is impractical to assign the dollar amount associated with services provided to Ascension.
20. Deferred Contract Costs
Certain costs associated with the initial phases of customer contracts and the related transition of customer hospitals are deferred. These fulfillment costs relate directly to the Company’s responsibilities under the corresponding customer contracts, generate or enhance resources of the Company that will be used in satisfying its performance obligations in the future, and are expected to be recovered through the margins realized. The following table summarizes the breakout of deferred contract costs (in millions):

 
 
June 30, 2018
 
December 31, 2017
Prepaid expenses and other current assets
 
$
2.3

 
$
1.6

Other assets
 
15.1

 
11.6

Total deferred contract costs
 
$
17.4

 
$
13.2

 
The associated assets are amortized as services are transferred to the customer over the remaining life of the contracts. For the three and six months ended June 30, 2018 , total amortization was $0.6 million and $1.0 million , respectively, and there were no associated impairment losses. For the three and six months ended June 30, 2017 , total amortization was $0.3 million and $0.4 million , respectively, and there were no associated impairment losses.

32


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

21. Segments and Customer Concentrations
The Company has determined that it has a single operating segment in accordance with how its business activities are managed and evaluated. All of the Company’s significant operations are organized around the single business of providing end-to-end management services of revenue cycle operations for U.S.-based healthcare providers. Accordingly, for purposes of segment disclosures, the Company has only one reporting segment. The Company acquired Intermedix on May 8, 2018 with the intent to integrate Intermedix into the Company's primary service offering consisting of end-to-end RCM. The integration of the operations of Intermedix into the Company's end-to-end RCM operations is on-going as of June 30, 2018.
Ascension has accounted for a significant portion of the Company’s net services revenue each year since the Company’s formation. For the three months ended June 30, 2018 and 2017 , net services revenue from Ascension accounted for 68% and 88% of the Company's total net services revenue, respectively. For the six months ended June 30, 2018 and 2017 , net services revenue from Ascension accounted for 78% and 88% of the Company's total net services revenue, respectively. The loss of customers within Ascension would have a material adverse impact on the Company’s operations.
As of June 30, 2018 and December 31, 2017, the Company had a concentration of credit risk with Ascension accounting for  50% and 66%  of accounts receivable, respectively.
22. Derivative Financial Instruments

Certain of the Company’s subsidiaries are exposed to currency risk through their use of the Company’s global delivery resources. During the first quarter of 2018, to mitigate this risk, the Company began using foreign currency forward contracts to hedge the foreign exchange risk of the forecasted intercompany expenses denominated in foreign currencies in the normal course of business. The Company is actively managing the risk of changes in foreign currency exchange rate through foreign currency forward contracts traded in over-the-counter markets governed by International Swaps and Derivatives Association, Inc. (ISDA) agreements. Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored using techniques such as market value and sensitivity analyses. The Company does not enter into derivative transactions for trading purposes. As of June 30, 2018 , the Company’s currency forward contracts have maturities extending no later than December 31, 2018. The Company has designated these derivatives as cash flow hedges. As of June 30, 2018 , the Company held no derivatives, or non-derivative hedging instruments, that were designated in fair value or net investment hedges.

In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a cash flow hedge by documenting the relationship between the derivative and the hedged item. The documentation includes a description of the hedging instrument, the hedged item, the risk being hedged, the Company’s risk management objective and strategy for undertaking the hedge, and the method for assessing the effectiveness of the hedge. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in either the fair value or cash flows of the hedged item at both inception of the hedge and on an ongoing basis. Prospective and retrospective hedge effectiveness will be assessed by a comparison of the critical terms of the hedging instrument and the hedged transaction. In the event that the Company’s ongoing assessment demonstrates that the critical terms of the hedging instrument or the hedged transaction have changed and no longer match, hedge effectiveness is assessed by use of a Hypothetical Derivative Method, which assesses hedge effectiveness based on a comparison of the change in fair value of the actual derivative designated as the hedging instrument and the change in fair value of a perfectly effective hypothetical derivative. The perfectly effective hypothetical derivative would have terms that identically match the critical terms of the hedged item. 

For a cash flow hedge, the change in fair value of a hedging instrument is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity (deficit) and is reclassified into cost of services in the consolidated statement of operations during the period in which the hedged transaction impacts earnings. As of June 30, 2018 , the Company estimates that $0.5 million of existing losses reported in accumulated other comprehensive income are expected to be reclassified into earnings within the next 12 months. The amounts related to derivatives

33


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

designated as cash flow hedges that were reclassified into cost of services were a net loss of $0.3 million and $0.4 million during the three and six month period ended June 30, 2018 . The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows.

The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts. Fair values for derivative financial instruments are based on prices computed using third-party valuation models and are classified as Level 2 in accordance with the three-level hierarchy of fair value measurements. All of the significant inputs to the third-party valuation models are observable in active markets. Inputs include current market-based parameters such as forward rates, yield curves and credit default swap pricing. For additional information related to the three-level hierarchy of fair value measurements, see Note 3, Fair Value of Financial Instruments to these Consolidated Financial Statements.
Impact of Derivatives on our Consolidated Financial Statements at Fair Value
As of June 30, 2018 and December 31, 2017 , the notional amount of the Company's open foreign currency forward contracts was approximately  $13.2 million and $0 , respectively.
 
The effect of derivatives in the Company's consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 are (in millions):

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Realized gains (losses) recognized in cost of services
 
$
(0.3
)
 
$
—

 
$
(0.4
)
 
$
—

Unrealized gains (losses) recognized in other comprehensive income
 
(0.2
)
 
—

 
(0.5
)
 
—

Net derivative gains (losses)
 
$
(0.5
)
 
$
—

 
$
(0.9
)
 
$
—


The fair value of the Company's derivatives on its consolidated balance sheets as of June 30, 2018 and December 31, 2017 are (in millions):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Assets
 
 
 
 
Prepaid expenses and other current assets
 
$
—

 
$
—

Other assets
 
—

 
—

Total assets
 
$
—

 
$
—

 
 
 
 
 
Liabilities
 
 
 
 
Other accrued expenses
 
$
0.7

 
$
—

Other non-current liabilities
 
—

 
—

Total liabilities
 
$
0.7

 
$
—

 
 
 
 
 
Stockholders’ equity (deficit)
 
 
 
 
Accumulated other comprehensive loss (net of tax of $0.2 million)
 
$
0.6

 
$
—


The Company's ISDA agreements contain credit risk-related contingent features. In the event of certain defaults or changes to the Company's credit profile, counterparties may request early termination and net settlement of certain derivative trades or may require the Company to collateralize derivatives in a net liability position. As of  June 30, 2018  and  December 31, 2017 , the aggregate fair value of the derivative instruments with credit risk-related contingent features in net liability positions was  $0.7 million  and  $0 million , respectively, which also approximates the fair value of the maximum amount of additional collateral that would need to be posted or assets

34


R1 RCM Inc.
Notes to Unaudited Consolidated Financial Statements

needed to settle the obligations if the credit risk-related contingent features were triggered at the reporting dates. As of  June 30, 2018  and  December 31, 2017 , we had  $1.6 million and $0 million in cash collateral on deposit with counterparties for derivative contracts, respectively. The cash collateral on deposit with counterparties is classified as current portion of restricted cash on the consolidated balance sheets. The credit support documents executed in connection with certain of our ISDA agreements generally provide us and our counterparties the right to set off collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event.

The following table presents amounts relevant to offsetting of the Company's derivative assets and liabilities as of  June 30, 2018  and  December 31, 2017 (in millions):

 
 
June 30,
 
December 31,
 
 
2018
 
2017
Net assets
 
$
—

 
$
—

Net liabilities
 
(0.7
)
 
—

Total Fair Value
 
$
(0.7
)
 
$
—


Certain derivatives also give rise to credit risks from the possible non-performance by counterparties. Credit risk is generally limited to the fair value of those contracts that are favorable to the Company, and the maximum amount of loss due to credit risk, based on the gross fair value of all of the Company’s derivative financial instruments, was $0 as of June 30, 2018 .

35



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to “R1,” “the Company,” “we,” “our,” and “us” mean R1 RCM Inc., and its subsidiaries.
The following discussion and analysis is an integral part of understanding our financial results and is provided as an addition to, and should be read in connection with, our consolidated financial statements and the accompanying notes. Also refer to Note 1 of our consolidated financial statements.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws, that involve substantial risks and uncertainties. These statements are often identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” "designed", “may,” “plan,” “predict,” “project,” “would” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” in Part II, Item 1A of this Quarterly Report on Form 10-Q, and elsewhere in this Report, as well as those set forth in Part I, Item 1A of the 2017 10-K as well as our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. Subsequent events and developments may cause our views to change. 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. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
Our Business
We are a leading provider of technology-enabled RCM services to healthcare providers. We help healthcare providers generate sustainable improvements in their operating margins and cash flows while also enhancing patient, physician and staff satisfaction for our customers.
While we cannot control the changes in the regulatory environment imposed on our customers, we believe that our role becomes increasingly more important to our customers as macroeconomic, regulatory and healthcare industry conditions continue to impose financial pressure on healthcare providers to manage their operations effectively and efficiently.
Our primary service offering consists of end-to-end RCM, which we deploy through an operating partner relationship and a co-managed relationship. Under an operating partner relationship, we provide comprehensive revenue cycle infrastructure to providers, including all revenue cycle personnel, technology and process workflow. Under a co-managed relationship, we leverage our customers’ existing RCM staff and processes, and supplement them with our infused management, subject matter specialists, proprietary technology and other resources. Under the operating partner model, the Company records higher revenue and expenses due to the fact that almost all of the revenue cycle personnel are employees of the Company and more third-party vendor contracts are controlled by the Company. Under the co-managed model, the majority of the revenue cycle personnel and more third-party vendor contracts remain with the customer and those costs are netted against the Company's co-managed revenue. For the six months ended June 30, 2018 and 2017, substantially all of the Company's net operating and incentive fees from end-to-end RCM were generated under the operating partner model.
    
We also offer modular services, allowing customers to engage us for only specific components of our end-to-end RCM service offering, such as PAS and revenue capture. Our PAS offering assists hospitals in complying with payer requirements regarding whether to classify a hospital visit as an in-patient or an out-patient observation case for billing purposes. Our revenue capture offering includes charge capture, charge description master ("CDM")

36



maintenance and pricing services that help providers ensure they are capturing the maximum net compliant revenue for services delivered.

In conjunction with the acquisition of Intermedix, we expanded our service offering to physician groups and Emergency Medical Services (“EMS”) providers. Intermedix provides RCM and Practice Management (“PM”) services to primary care physician groups and hospital-based physicians in a variety of specialties including emergency medicine, hospitals, anesthesia, and others. Intermedix also provides RCM services to emergency-service providers including municipalities, private providers of emergency service as well as hospital-based emergency-services providers.
We operate our business as a single segment configured with our significant operations and offerings organized around the business of providing end-to-end RCM services to U.S.-based hospitals, physicians groups, and other healthcare providers.
Business Update
Ascension
On February 16, 2016, we entered into the A&R MPSA with Ascension for a 10-year term, becoming the
exclusive provider of RCM and PAS services to Ascension hospitals that execute supplement agreements with us. We started onboarding the first phase of new hospitals in mid-2016, which was followed by the second phase of new hospitals in mid-2017. We expect the final phase of hospitals to be onboarded by the third quarter of 2018. The A&R MPSA is structured as an operating partner model, whereby a significant number of Ascension’s revenue cycle employees become our employees. As a result, our employee count has increased by over 5,000 employees since mid-2016. The operating partner model also requires the transition of the non-payroll expenses supporting a hospital’s revenue cycle operations to become direct expenses of the Company. New hospitals onboarded, along with direct control of payroll and non-payroll expenses, have been the primary drivers of the growth in our revenue and cost of services in 2017 and in the first half of 2018.

In May 2017, we announced the expansion of our relationship with Ascension. The expanded relationship adds a health system which was acquired by Ascension after the signing of the A&R MPSA and increases the scope of our contract by adding physician RCM services for all Ascension ministries in Wisconsin. We completed onboarding this expanded scope of business in the first quarter of 2018.
 
In July 2017, we launched a portfolio of five modular solutions to complement our end-to-end RCM offerings. The sophistication of our capabilities and additional flexibility for health systems to contract with us for specific components of the revenue cycle should position us favorably to win new business. Additionally, we also announced the appointment of a new chief commercial officer in August 2017. In addition to organic growth, we also expect to continue to actively pursue acquisitions to complement our existing capabilities and further enhance our market presence.
    
On and effective as of June 24, 2018, we and Ascension entered into a Supplement to the A&R MPSA. Pursuant to the Supplement, the Company will provide RCM services for physician groups that receive services from Ascension’s National Revenue Service Center and other groups associated with Ascension hospital systems. Each such physician group will be required to execute an addendum to the Supplement for those physician groups to receive services under the Supplement. Ascension has agreed that the Company may provide services to additional physician groups affiliated with or acquired by Ascension over time. The Supplement also provides for the re-badging of certain centrally-based revenue cycle operations employees who support Ascension’s physician groups. We expect to begin providing services under the Supplement during the fourth quarter of 2018.

On June 24, 2018, we and Ascension entered into an amendment to the A&R MPSA (the “Presence Amendment”) to provide that we will enter into a supplement to the A&R MPSA to provide for RCM services and PAS services for acute care to Presence Health hospitals in accordance with terms set forth in the Presence Amendment. Presence Health is a part of AMITA Health, which is a joint venture of Ascension’s Alexian Brothers

37



Health System and Adventist Midwest Health, part of Adventist Health System. If we enter into a new master professional services agreement with AMITA Health for end-to-end RCM services in the future, our end-to-end RCM business with Presence will be governed by such new agreement.
Intermountain
On January 23, 2018, we entered into the Intermountain Services Agreement with Intermountain having a ten-year term. Pursuant to the Intermountain Services Agreement, we will provide our RCM service offering to Intermountain hospitals and medical group providers under the operating partner model. In addition, we will provide RCM services to Intermountain’s homecare, hospice and palliative care, durable medical equipment and infusion therapy business. Intermountain has agreed that we may provide services to additional hospitals acquired by Intermountain over time. With certain limited exceptions, we will be the exclusive provider of RCM services for the hospitals, medical group providers, and home health business affiliated with Intermountain. In addition, we entered into the Intermountain Purchase Agreement with Intermountain, pursuant to which we sold to Intermountain, in private placements under the Securities Act, (i)  4,665,594 shares of common stock and (ii) a warrant to acquire up to 1,500,000 shares of Common Stock at an initial exercise price of $6.00 per share, on the terms and subject to the conditions set forth in the Warrant Agreement, for an aggregate purchase price of $20 million .

Intermedix

On May 8. 2018, we completed the Acquisition of Intermedix through the merger of Merger Sub, a wholly-owned indirect subsidiary of the Company, with and into Intermedix, with Intermedix surviving the merger as a wholly-owned indirect subsidiary of the Company. The purchase price for the Acquisition was $460 million , subject to customary adjustments for cash, debt, transaction expenses and normalized working capital. We funded the purchase price for the Acquisition and our associated transaction expenses with a combination of cash on hand and the incurrence of additional indebtedness. Intermedix is one of the largest providers of RCM and PM services to physician groups and EMS providers in the U.S. Intermedix has a diverse customer base of approximately 700 customers and 2,500 employees located in offices within the U.S., Lithuania, the United Kingdom and New Zealand.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides consolidated operating results and other operating data for the periods indicated:

38



 
Three Months Ended June 30,
 
2018 vs. 2017
Change
 
Six Months Ended June 30, 2018
 
2018 vs. 2017
Change
 
2018
 
2017
 
Amount
 
%
 
2018
 
2017
 
Amount
 
%
 
(In millions except percentages)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
Net operating fees
$
181.7

 
$
80.1

 
$
101.6

 
127
 %
 
309.3

 
150.8

 
$
158.5

 
105
 %
Incentive fees
9.9

 
7.1

 
2.8

 
39
 %
 
17.9

 
12.7

 
5.2

 
41
 %
Other
16.3

 
12.2

 
4.1

 
34
 %
 
28.0

 
22.8

 
5.2

 
23
 %
Net services revenue
207.9

 
99.4

 
108.5

 
109
 %
 
355.2

 
186.3

 
168.9

 
91
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services
189.9

 
96.4

 
93.5

 
97
 %
 
328.6

 
177.3

 
151.3

 
85
 %
Selling, general and administrative
22.5

 
12.2

 
10.3

 
84
 %
 
39.5

 
26.5

 
13.0

 
49
 %
Other
13.2

 
1.0

 
12.2

 
1,220
 %
 
15.6

 
1.2

 
14.4

 
1,200
 %
Total operating expenses
225.6

 
109.6

 
116.0

 
106
 %
 
383.7

 
205.0

 
178.7

 
87
 %
Income (loss) from operations
(17.7
)
 
(10.2
)
 
(7.5
)
 
74
 %
 
(28.5
)
 
(18.7
)
 
(9.8
)
 
52
 %
Net interest (expense) income
(5.8
)
 
—

 
(5.8
)
 
100
 %
 
(5.6
)
 
0.1

 
(5.7
)
 
(5,700
)%
Net income (loss) before income tax provision
(23.5
)
 
(10.2
)
 
(13.3
)
 
130
 %
 
(34.1
)
 
(18.6
)
 
(15.5
)
 
83
 %
Income tax provision (benefit)
(20.6
)
 
(3.5
)
 
(17.1
)
 
489
 %
 
(7.9
)
 
(3.6
)
 
(4.3
)
 
119
 %
Net income (loss)
$
(2.9
)
 
$
(6.7
)
 
$
3.8

 
(57
)%
 
(26.2
)
 
(15.0
)
 
$
(11.2
)
 
75
 %
Use of Non-GAAP Financial Information
We supplement our GAAP consolidated financial statements with the following non-GAAP financial performance measure, adjusted EBITDA. Adjusted EBITDA is utilized by our Board and management team as (i) one of the primary methods for planning and forecasting overall expectations and for evaluating actual results against such expectations; and (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees.
Selected Non-GAAP Measure
Adjusted EBITDA
We define adjusted EBITDA as net income before net interest income, income tax provision, depreciation and amortization expense, share-based compensation expense, reorganization-related expense and transaction-related expenses, and certain other items.
We understand that, although non-GAAP measures are frequently used by investors, securities analysts, and others in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect share-based compensation expense;
•
Adjusted EBITDA does not reflect income tax expenses or cash requirements to pay taxes;
•
Adjusted EBITDA does not reflect certain Other expenses which may require cash payments;

39



•
Although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect cash requirements for such replacements or other purchase commitments, including lease commitments; and
•
Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Reconciliation of GAAP and Non-GAAP Measures
The following table represents a reconciliation of adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:
 
 
Three Months Ended June 30,
 
2018 vs. 2017
Change
 
Six Months Ended June 30, 2018
 
2018 vs. 2017
Change
 
 
2018
 
2017
 
Amount
 
%
 
2018
 
2017
 
Amount
 
%
 
 
(In millions except percentages)
Net income (loss)
 
$
(2.9
)
 
$
(6.7
)
 
3.8

 
(57
)%
 
$
(26.2
)
 
$
(15.0
)
 
$
(11.2
)
 
75
 %
  Net interest expense (income)
 
5.8

 
—

 
5.8

 
100
 %
 
5.6

 
(0.1
)
 
5.7

 
(5,700
)%
  Income tax provision (benefit)
 
(20.6
)
 
(3.5
)
 
(17.1
)
 
489
 %
 
(7.9
)
 
(3.6
)
 
(4.3
)
 
119
 %
  Depreciation and amortization expense
 
8.5

 
3.8

 
4.7

 
124
 %
 
13.4

 
7.0

 
6.4

 
91
 %
  Share-based compensation expense (1)
 
5.1

 
2.2

 
2.9

 
132
 %
 
9.0

 
5.8

 
3.2

 
55
 %
  Other (2)
 
13.2

 
1.0

 
12.2

 
1,220
 %
 
15.6

 
1.2

 
14.4

 
1,200
 %
Adjusted EBITDA (non-GAAP)
 
$
9.2

 
$
(3.3
)
 
$
12.5

 
(379
)%
 
$
9.5

 
$
(4.7
)
 
$
14.2

 
(302
)%
            
Due to rounding, numbers presented in this table may not add up precisely to the totals provided.
    
(1)
Share-based compensation expense represents the expense associated with stock options, restricted stock units and restricted stock awards granted, as reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 13, Share-Based Compensation, to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the detail of the amounts of share-based compensation expense.
(2)
Other costs consist of the following (in millions):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Severance and employee benefits
$
1.0

 
$
0.3

 
$
1.0

 
$
0.4

Facility charges
0.2

 
—

 
0.2

 
—

Non-cash share based compensation
—

 
0.1

 
—

 
—

Reorganization-related
1.2

 
0.4

 
1.2

 
0.4

Acquisition related costs (1)
10.3

 
—

 
11.9

 
—

Transitioned employees restructuring expense (2)
1.7

 
0.6

 
2.5

 
0.8

Other
12.0

 
0.6

 
14.4

 
0.8

Total other
$
13.2

 
$
1.0

 
$
15.6

 
$
1.2


(1) Costs related to evaluating, pursuing and integrating acquisitions as part of the Company’s inorganic growth strategy. Integration costs include employee time and expenses spent on integration activities, vendor spend and severance and retention amounts associated with integration activities.
(2) As part of the transition of personnel to the Company under certain operating partner model contracts, the Company has agreed to reimburse, or directly pay the affected employees, for certain severance and retention costs related to certain employees who will not be transitioned to the Company, or whose jobs will be relocated after the employee transitions to the Company.
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Revenue
Revenue increased by $108.5 million from $99.4 million for the three months ended June 30, 2017 to $207.9 million for three months ended June 30, 2018 . The increase was primarily driven by a $72.1 million increase in net operating fees as a result of hospitals onboarded in the last 12 months. In addition, we realized year-over-year growth of $27.6 million as a result of the Acquisition.

40



Cost of Services
Cost of services increased by $93.5 million , or 97.0% , from $96.4 million for the three months ended June 30, 2017 , to $189.9 million for the three months ended June 30, 2018 . The increase was primarily driven by a $64.0 million increase in costs associated with hospitals onboarded in the last 12 months. The Acquisition resulted in an increase in costs of services of $19.9 million. The remaining increase resulted from IT and operational support expenses to support our service delivery infrastructure as a result of new business growth.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $10.3 million , or 84.4% , from $12.2 million for the three months ended June 30, 2017 to $22.5 million for the three months ended June 30, 2018 . This increase was primarily driven by by the inclusion of Intermedix and investments in corporate IT infrastructure, sales and marketing, as the Company increased its efforts to pursue new business opportunities, as well as finance and compliance-related spend to support scaling business operations. For the three months ended June 30, 2018, selling, general and administrative expense included $6.3 million in expenses for Intermedix. In addition, stock-based compensation increased by $2.9 million predominantly due to PBRSU grants in the second half of 2017.
Other Costs
Other costs increased by $12.2 million , or 1,220.0% , from $1.0 million , for the three months ended June 30, 2017 , to $13.2 million for the three months ended June 30, 2018 .  This increase was primarily driven by $10.3 million in acquisition-related expenses as well as an increase in transitioned employees restructuring expense and reorganization-related expenses.
Income Taxes
Income tax benefit increased by $17.1 million from a $3.5 million income tax benefit for the three months ended June 30, 2017 to a $20.6 million income tax benefit for the three months ended June 30, 2018 , primarily due to an increase in forecasted pre-tax income attributable to the Acquisition, the geographical distribution of income/(loss), changes related to the Tax Act and share-based compensation. Our effective tax rate was approximately 88% and 34% for the three months ended June 30, 2018 and 2017, respectively. The interim tax accounting guidance requires the use of the estimated Annual Effective Tax Rate (“AETR”) based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is also affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Revenue
Revenue increased by $168.9 million from $186.3 million for the six months ended June 30, 2017 to $355.2 million for six months ended June 30, 2018 . The increase was primarily driven by a $135.2 million increase in net operating fees as a result of hospitals onboarded in the last 18 months. In addition, we realized year-over-year growth of $27.6 million as a result of the Acquisition.
Cost of Services
Cost of services increased by $151.3 million , or 85.3% , from $177.3 million for the six months ended June 30, 2017 , to $328.6 million for the six months ended June 30, 2018 . The increase was primarily driven by a $114.4 million increase in costs associated with hospitals onboarded in the last 18 months. The Acquisition resulted in an increase in costs of services of $19.9 million. The remaining increase resulted from IT and operational support expenses to support our service delivery infrastructure as a result of new business growth.
Selling, General and Administrative Expenses

41



Selling, general and administrative expenses increased by $13.0 million , or 49.1% , from $26.5 million for the six months ended June 30, 2017 to $39.5 million for the six months ended June 30, 2018 . This increase was primarily driven by the inclusion of Intermedix and increased investments in corporate IT, sales and marketing expenses, as the Company has increased its efforts to pursue new business opportunities, as well as finance and compliance spend to support scaling business operations. For the three months ended June 30, 2018, selling, general and administrative expense included $6.3 million in expenses for Intermedix. In addition, stock-based compensation increased by $3.2 million predominantly due to PBRSU grants in the second half of 2017.
Other Costs
Other costs increased by $14.4 million , or 1,200.0% , from $1.2 million , for the six months ended June 30, 2017 , to $15.6 million for the six months ended June 30, 2018 .   This increase was primarily driven by $11.9 million in acquisition-related expenses related to the Acquisition as well as an increase in transitioned employees restructuring expense and reorganization-related expenses.
Income Taxes
Income tax benefit increased by $4.3 million from a $3.6 million income tax benefit for the six months ended June 30, 2017 to a $7.9 million income tax benefit for the six months ended June 30, 2018 , primarily due to an increase in pretax loss, the geographical distribution of income/(loss), changes related to the Tax Act and share-based compensation. Our effective tax rate was approximately 23% and 19% for the six months ended June 30, 2018 and 2017, respectively. The interim tax accounting guidance requires the use of the estimated AETR based on a full year of forecasted income and tax expense/(benefit) applied to year to date income/(loss). Our tax rate is affected by discrete items that may occur in any given year, but are not necessarily consistent from year to year.
CRITICAL ACCOUNTING POLICIES
Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Application of Critical Accounting Policies and Use of Estimates" of our 2017 Form 10-K. There have been no material changes to the critical accounting policies disclosed in our 2017 Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
For additional information regarding new accounting guidance, see Note 2, Recent Accounting Pronouncements, to our consolidated financial statements included in this Quarterly Report on Form 10-Q, which provides a summary of our recently adopted accounting standards and disclosures.
Liquidity and Capital Resources
Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
(In millions)
Net cash (used in) provided by operating activities
 
$
(21.1
)
 
$
(22.9
)
Net cash (used in) investing activities
 
$
(480.6
)
 
$
(23.2
)
Net cash provided by (used in) financing activities
 
$
378.2

 
$
(3.1
)

42



Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Operating Activities
Cash used in operating activities improved by $1.8 million , from cash used of $22.9 million for the six months ended June 30, 2017 , to cash used of $21.1 million for the six months ended June 30, 2018 . Cash used in operating activities is comparable for the periods presented.
Investing Activities
Cash used in investing activities increased by $457.4 million from $23.2 million for the six months ended June 30, 2017 , to $480.6 million for the six months ended June 30, 2018 . Cash used in investing activities increased primarily due to the use of $463.5 million to pay for the Acquisition. This was partially offset by a decrease in purchases of property, equipment and software due to spending during the six months ended June 30, 2017 related to expanding our India operations.
Financing Activities
Cash provided by financing activities increased by $381.3 million from cash used in financing activities of $3.1 million for the six months ended June 30, 2017 to cash provided by financing activities of $378.2 million for the six months ended June 30, 2018 . This change was primarily due to the issuance of the Senior Term Loan and Senior Revolver and the Notes, net of issuance costs, of $359.0 million as well as the investment of $20 million from Intermountain related to the Intermountain Purchase Agreement, partially offset by $0.7 million of issuance costs.
Future Capital Needs
The Company continues to invest capital in order to achieve our strategic initiatives. In conjunction with our acquisition of Intermedix, we entered into the Credit Agreement and Note Purchase Agreement for the $295 million first lien Senior Secured Credit Facility, of which $270 million is Senior Term Loan and $25 million is a Senior Revolver, and $110 million of unsecured, subordinated notes. In addition, we plan to continue to enhance customer service by continuing our investment in technology to enable our systems to more effectively integrate with our customers’ existing technologies in connection with our strategic initiatives. We plan to continue to deploy resources to strengthen our information technology infrastructure in order to drive additional value for our customers. We also expect to continue to invest in our shared services infrastructure and capabilities, and selectively pursue acquisitions and/or strategic relationships that will enable us to broaden or further enhance our offerings.
New business development remains a priority as we plan to continue to boost our sales and marketing efforts. We plan to continue to add experienced personnel to our sales organization, develop more disciplined sales processes and create an integrated marketing capability. Additionally, we expect to incur costs associated with implementation and transition costs to onboard new customers.
We believe that our available cash balances and the cash flows expected to be generated from operations and to the extent necessary, new borrowings under the revolving credit facility will be sufficient to satisfy our current and planned working capital and investment needs for the next twelve months. No assurance can be given, however, that this will be the case.
Debt and Financing Arrangements
On May 8, 2018, the Company and certain of its subsidiaries entered into (1) the Credit Agreement for the Senior Secured Credit Facilities, consisting of a $270.0 million Senior Term Loan and a $25.0 million Senior Revolver; and (2) the Note Purchase Agreement consisting of the issuance and sale of $110.0 million aggregate principal amount of subordinated notes due 2026 . On the closing date, we used the proceeds, together with cash on

43



hand, to fund the purchase price for the Acquisition and to pay certain fees and expenses incurred in connection with the Credit Agreement and Note Purchase Agreement.

Senior Secured Credit Facilities
The Senior Term Loan has a seven-year maturity and the Senior Revolver has a five-year maturity. The Credit Agreement provides that we may make one or more offers to the lenders, and consummate transactions with individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate class of term loans or revolving commitments. All of our obligations under the Senior Secured Credit Facilities are guaranteed by the subsidiary guarantors named therein (the “Subsidiary Guarantors”), and, subject to certain exceptions, the obligations under the Senior Secured Credit Facilities are secured by a pledge of 100% of the capital stock of certain domestic subsidiaries owned by the Company and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of each Subsidiary Guarantor.
The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. As of June 30, 2018, we had no borrowings and no letters of credit under the Senior Revolver.
At our option, we may add one or more new term loan facilities or increase the commitments under the Senior Revolver (collectively, the “Incremental Borrowings”) in an aggregate amount of up to $25.0 million plus any additional amounts so long as certain conditions, including a consolidated first lien leverage ratio (as defined in the Credit Agreement) of not more than 3.75 to 1.00 (on a pari passu basis) or 5.50 to 1.00 (on a junior basis), in each case on a pro forma basis, are satisfied plus the amount of certain voluntary prepayments of Senior Term Loans.
Borrowings under the Senior Secured Credit Facilities bear interest, at our option, at: (i) an ABR rate equal to the greater of (a) the prime rate of Bank of America, N.A., (b) the federal funds rate plus 0.5% per annum, and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25% (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the Term Loan Facility shall not be less than 0.00% per annum), plus 5.25%. The interest rate as of June 30, 2018 was 7.62%. We are also required to pay an unused commitment fee to the lenders under the Senior Revolver at a rate of 0.50% of the average daily unutilized commitments thereunder if the first lien net leverage ratio is greater than 2.00 to 1.00, or at a rate of 0.375% at any other time. We must also pay customary letter of credit fees, including a fronting fee as well as administration fees.
The Credit Agreement requires us to make mandatory prepayments, subject to certain exceptions, with: (i) beginning with fiscal year 2019, 75% (which percentage will be reduced upon the achievement of certain first lien net leverage ratios) of our annual excess cash flow; (ii) 100% of net cash proceeds of all non-ordinary course assets sales or other dispositions of property or casualty events, subject to certain exceptions and thresholds; and (iii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the Credit Agreement. We are required to repay the Senior Term Loan portion of the Senior Secured Credit Facilities in quarterly principal installments of 0.25% of the principal amount commencing on September 30, 2018, with the balance payable at maturity. If, on or prior to May 8, 2019, we prepay or reprice any portion of the Senior Term Loan, we will be required to pay a prepayment premium of 1% of the loans being prepaid or repriced.
The Credit Agreement contains two financial covenants. (1) The Company is required to maintain at the end of each fiscal quarter, commencing with the quarter ending September 30, 2018, a consolidated first lien net leverage ratio of not more than 5.50 to 1.00. This consolidated ratio will step down in increments to 4.00 to 1.00 commencing with the fiscal quarter ending September 30, 2020. (2) The Company is required to maintain at the end of each such fiscal quarter, commencing with the quarter ending September 30, 2018, a consolidated interest

44



coverage ratio of not less than 1.75 to 1.00. This consolidated ratio will step up in increments to 2.50 to 1.00 commencing with the fiscal quarter ending September 30, 2020.
The Credit Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase the Company’s capital stock; (vi) make investments, loans or advances; (vii) repay certain junior indebtedness; (viii) engage in certain transactions with affiliates; (ix) enter into sale and leaseback transactions; (x) amend material agreements governing certain of the Company’s junior indebtedness; (xi) change our lines of business; (xii) make certain acquisitions; and (xiii) limitations on the letter of credit cash collateral account. The Credit Agreement contains customary affirmative covenants and events of default. We were incompliance with all of the covenants in the Credit Agreement as of June 30, 2018.
Note Purchase Agreement
The Notes issued pursuant to the Note Purchase Agreement each have an eight-year maturity, as may be extended in accordance with the Notes from time to time. All of our obligations under the Note Purchase Agreement are guaranteed by the Subsidiary Guarantors.
As of June 30, 2018, $105.0 million of the Notes were due to related parties. For the three and six months ended June 30, 2018, $2.2 million of interest was paid or payable to related parties.
The Notes bear interest at 14.0% per annum, increasing by 1.0% per annum on May 8, 2021, and by an additional 1.0% per annum on each subsequent anniversary until the Notes are repaid in full. Interest is payable quarterly in cash; provided, that, subject to the subordination agreement, (i) for any fiscal quarters ending on or prior to May 8, 2019, at our election, up to 75% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash; (ii) for any fiscal quarters ending after May 8, 2019 and on or prior to May 8, 2020, at our election, up to 50% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash; and (iii) for any subsequent fiscal quarters, at our election, up to 25% of the interest payments will be payable in kind and the remaining amount of such interest payment will be payable quarterly in cash.
The Note Purchase Agreement does not require any mandatory prepayments. Any voluntary prepayment of the obligations pursuant to the Note Purchase Agreement (other than in connection with a change of control) shall be subject to a prepayment premium of (a) if such prepayment is made before May 8, 2019, 3.0% of the principal amount of the obligations prepaid, (b) if such prepayment is made on or after May 8, 2019 but prior to May 8, 2020, 2.0% of the principal amount of the obligations prepaid, (c) if such prepayment is made on or after May 8, 2020 but prior to May 8, 2021, 1.0% of the principal amount of the obligations prepaid, and (d) if such prepayment is made on or after May 8, 2021, 0.0% of the principal amount of the obligations prepaid.
The Note Purchase Agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability and the ability of its subsidiaries to: (i) create liens on assets; (ii) engage in mergers or consolidations or sell all or substantially all of their respective assets; and (iii) pay dividends and distributions or repurchase the Company’s capital stock. The Note Purchase Agreement contains customary affirmative covenants and events of default. We were in compliance with all of the covenants in the Note Purchase Agreement as of June 30, 2018.


45



CONTRACTUAL OBLIGATIONS

The following table presents a summary of our contractual obligations as of June 30, 2018 (in millions):
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Operating Leases (1)
 
$
6.3

 
$
11.3

 
$
11.3

 
$
10.8

 
$
7.6

 
$
6.6

 
$
24.3

 
$
78.2

Purchase and Capital Lease Obligations (2)
 
$
—

 
$
5.7

 
$
5.7

 
$
1.5

 
$
—

 
$
—

 
$
—

 
$
12.9

Debt obligations
 
$
1.4

 
$
2.7

 
$
2.7

 
$
2.7

 
$
2.7

 
$
2.7

 
$
365.1

 
$
380.0

Interest on debt
 
$
18.2

 
$
36.2

 
$
36.0

 
$
36.5

 
$
37.4

 
$
38.2

 
$
73.8

 
$
276.3

Total
 
$
25.9

 
$
55.9

 
$
55.7

 
$
51.5

 
$
47.7

 
$
47.5

 
$
463.2

 
$
747.4


(1) Obligations and commitments to make future minimum rental payments under non-cancelable operating leases having remaining terms in excess of one year. The Company rents office space and equipment under operating leases, primarily for its Chicago corporate office, U.S. shared services centers and India operations. Office space lease terms range from one to ten years, whereas equipment lease terms range from one to three years. The Company’s leases contain various rent holidays and rent escalation clauses and entitlements for tenant improvement allowances. Lease payments are amortized to expense on a straight-line basis over the lease term.
(2) Includes obligations associated with IT software and service costs.

We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a material current or future impact on our financial results.
Item 3.
Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Sensitivity . Our results of operations and cash flows are subject to fluctuations due to changes in interest rates due to our debt and banking arrangements, which can result in fluctuations in our interest income and expense. As of June 30, 2018, we do not utilize hedging relationships to manage interest rate fluctuations.
As of June 30, 2018, approximately $270 million aggregate principal amount of our debt bears interest at floating rates. Assuming the current level of borrowings, a one percentage point increase or decrease in interest rates would increase or decrease our annual interest expense by approximately $2.7 million .    
Our interest income is primarily generated from variable rate interest earned on operating cash accounts.
Foreign Currency Exchange Risk . Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee and the Euro because a portion of our operating expenses are incurred by our subsidiaries in India and Lithuania, and are denominated in Indian rupees and Euros, respectively. We do not generate significant revenues outside of the United States. For the six months ended June 30, 2018 and 2017 , 6% and 16% of our expenses were denominated in foreign currencies, respectively. As of June 30, 2018 and 2017 , we had net assets of $34.7 million and $19.5 million in foreign entities, respectively. The reduction in earnings from a 10% change in foreign currency spot rates would be $2.7 million and $1.9 million at June 30, 2018 and 2017 , respectively.
Starting in January 2018, we have hedge positions that are designated cash flow hedges of certain intercompany charges which have maturities not exceeding one year and are intended to partially offset the impact of foreign currency movements on future costs relating to our global delivery resources. For additional information, see Note 22, Derivative Financial Instruments to our Consolidated Financial Statements under Item I, Consolidated Financial Statements. These instruments are subject to fluctuations in foreign currency exchange rates and credit risk. Credit risk is managed through careful selection and ongoing evaluation of the financial institutions utilized as counterparties.

For designated cash flow hedges, gains and losses currently recorded in accumulated other comprehensive loss will be reclassified into earnings at the time when certain anticipated intercompany charges are accrued as cost of services. As of June 30, 2018 , it was anticipated that approximately $0.6 million of net losses, net of tax, currently

46



recorded in accumulated other comprehensive loss will be reclassified into cost of services within the next 12 months.

We use sensitivity analysis to determine the effects that market foreign currency exchange rate fluctuations may have on the fair value of our hedge portfolio. The sensitivity of the hedge portfolio is computed based on the market value of future cash flows as affected by changes in exchange rates. This sensitivity analysis represents the hypothetical changes in value of the hedge position and does not reflect the offsetting gain or loss on the underlying exposure. A 10% change in the levels of foreign currency exchange rates against the U.S. dollar (or other base currency of the hedge if not a U.S. dollar hedge) with all other variables held constant would have resulted in a change in the fair value of our hedge instruments of approximately $1.3 million as of June 30, 2018 .
Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management including its principal executive officer and principal financial officer to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018 . Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2018 , our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the second quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


47



PART II
Item 1.
Legal Proceedings

Other than as described below, we are presently not a party to any material litigation or regulatory proceeding and are not aware of any pending or threatened litigation or regulatory proceeding against us which, individually or in the aggregate, could have a material adverse effect on our business, operating results, financial condition or cash flows.

In May 2016, we were served with a False Claims Act case brought by a former emergency department service associate who worked at a hospital of one of the Company’s customers, MedStar Inc.’s Washington Hospital Center (“WHC”), along with WHC and three other hospitals that were PAS clients and a place holder, John Doe hospital, representing all PAS clients ( U.S. ex rel. Graziosi vs. Accretive Health, Inc. et. al.) , and seeking money damages, False Claims Act penalties and plaintiff’s attorneys’ fees.  The Second Amended Complaint alleges that the Company’s PAS business violates the federal False Claims Act. The case was originally filed under seal in 2013 in the federal district court in Chicago, was presented to the U.S. Attorney in Chicago twice, and the U.S. Attorneys declined to intervene. We filed a motion to dismiss the Second Amended Complaint on July 29, 2016. On March 22, 2017, the district court dismissed all claims against all hospital defendants other than Medstar Inc.’s WHC, and dismissed all claims related to TriCare-related episodes of care. Plaintiff filed a Third Amended Complaint, seeking to add back claims related to other PAS clients in January 2018, and we moved to discuss all such claims related to any hospital other than WHC. That motion has been fully briefed. We believe that we have meritorious defenses to all claims in the case and intend to vigorously defend the Company against these claims. The outcome is not presently determinable.
Item 1A.
Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2017 10-K.  The risk factors disclosed in Part I, Item 1A of our 2017 10-K, in addition to the other information set forth in this Quarterly Report on Form 10-Q, could materially affect our business, financial condition, or results.  Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of common stock during the periods indicated (in millions, except share and per share data):
Period
 
Number of Shares  Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
  
Maximum Dollar Value of Shares that May Yet be Purchased Under Publicly Announced Plans or Programs (in millions) (2)
April 1, 2018 through April 30, 2018
 
88,971

  
$
7.14

 
—

  
$
49.0

May 1, 2018 through May 31, 2018
 
43,029

 
$
7.90

 
—

 
$
49.0

June 1, 2018 through June 30, 2018
 
2,898

 
$
8.24

 
—

 
$
49.0


48



(1)
Includes strategic repurchases and repurchases of our stock related to employees’ tax withholding upon vesting of restricted stock. See Note 13, Share-Based Compensation, to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
(2)
On November 13, 2013, the Board authorized, subject to the completion of the restatement of our financial statements, the repurchase of up to $50.0 million of our common stock from time to time in the open market or in privately negotiated transactions (the "2013 Repurchase Program"). The timing and amount of any shares repurchased under the 2013 Repurchase Program will be determined by our management based on its evaluation of market conditions and other factors. The 2013 Repurchase Program may be suspended or discontinued at any time. See Note 8, Stockholders' Equity (Deficit), to our consolidated financial statements included in this Quarterly Report on Form 10-Q.





49



Item 6.
Exhibits

The following are filed or incorporated by reference as a part of this Quarterly Report on Form 10-Q:

(a)
Exhibit Number
Exhibit Description
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Labels Linkbase Document
101.DEF
XBRL Taxonomy Extension Document
101.PRE
XBRL Presentation Linkbase Document
*Management contract or compensatory plan or arrangement.
+Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the  Securities and Exchange Commission.





SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  
 
R1 RCM INC.
 
 
By:
/s/  Joseph Flanagan
 
Joseph Flanagan
 
President and Chief Executive Officer
 
 
By:
/s/  Christopher Ricaurte
 
Christopher Ricaurte
 
Chief Financial Officer and Treasurer
Date: August 9, 2018
    


51
Exhibit 10.4
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.






ADDENDUM NO. 2 TO

AMENDED AND RESTATED SERVICES AGREEMENT

BETWEEN

IHC Health Services, Inc.

AND

R1 RCM Inc.







ADDENDUM NO. 2 TO
AMENDED AND RESTATED SERVICES AGREEMENT
This Addendum No. 2 (this “ Addendum ”) is made and entered into as of the 18 th day of June, 2018 (the “ Addendum Effective Date ”) by and between IHC Health Services, Inc., a Utah non-profit corporation, (“ IMH ” or sometimes referred to as “ Intermountain ” or “ Intermountain Healthcare ”) and R1 RCM Inc., a Delaware corporation, formerly known as Accretive Health, Inc. (“ R1 ”) (each a “ Party ” and collectively, the “ Parties ”), pursuant to and subject to that certain Amended and Restated Services Agreement (referred to herein as the " Services Agreement ") dated as of January 23, 2018, by and between the Parties. The Parties have also entered into a Transition Services Agreement (referred to herein as the “ Transition Services Agreement ”) dated April 8, 2018.

NOW THEREFORE, in consideration of the premises and mutual consents set forth below, the Parties hereby agree as follows:

1.
Purpose
When signed by both Parties, this Addendum shall be attached to, and deemed a part of, the Services Agreement. The Parties intend to supplement the Services Agreement to add missing information and terms that the Parties specifically intended to agree upon following the Effective Date of the Services Agreement. All other terms and conditions of the Agreement shall remain in full force and effect.
2.
Schedules and Attachments
This Addendum includes each of the following attached Exhibits, all of which are incorporated into this Addendum by reference:
Exhibit A: Amended and Restated Exhibit 11.1-A
Exhibit B: R1 Leased Spaces at Intermountain Buildings
Exhibit C: Sample Calculation
 
3.
Definitions
Capitalized terms used in this Addendum but not otherwise defined herein shall have the meanings given to such terms in the Services Agreement.

 
1
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



4.
Base Fee
4.1
Effective as of the Commencement Date, Exhibit 11.1-A (Base Fee for Services) to the Services Agreement is hereby deleted and replaced in its entirety with Exhibit A hereto.
4.2
In accordance with Section 2.2(ii) of Exhibit 11.1-A , the Parties have agreed on a methodology relating to allocation of costs and expenses for information technology support and real estate for purposes of the calculation of Base Fee.
Use of Lake Park Premises
4.3
Pursuant to a separate lease agreement between the Parties, Intermountain is leasing to R1 certain floors and square footage located within the “north” building, and may lease to R1 space within the “south” building, of 4646 Lake Park Blvd. in Salt Lake City, Utah 84120 (together, the “ Lake Park Premises ”). The base rent charged by Intermountain to R1 for use of the Lake Park Premises as set forth in the lease agreement [**] is based on fair market rent for similar space in the Salt Lake City region.
4.4
[**]
4.5
R1 will notify Intermountain (the “ L.P. Services Notice ”) promptly after R1 commences performing services at the Lake Park Premises for a client other than Intermountain. [**]
4.6
Thereafter, on a quarterly basis, R1 will provide to Intermountain a report that contains (a) the percentage of working space at the Lake Park Premises dedicated solely to Intermountain and (b) the percentage of other space (i.e., “mixed” use working space plus space dedicated solely to any non-Intermountain client) as of such date. [**]
4.7
If at a future date, the Parties enter into a lease for 3930 Parkway Boulevard, West Valley City, Utah 84120 (“ Parkway ”), the Parties agree that Sections 4.3 – 4.6 will apply to Parkway with the references to Lake Park Premises and [**] interpreted to refer to the Parkway premises and base rent at the Parkway premises.
Real Estate Baseline Costs
4.8
With respect to those Intermountain locations listed on Exhibit B that are leased to R1 pursuant to sublease or license agreements (collectively, the “ Leased Spaces ”), if there is a difference between (i) the total cost of operations at the Leased Spaces, including, but not limited to, base rent, furniture fees, utilities and operating expenses, and (ii) the baseline costs and expenses associated with the Leased Spaces that were included in the Cost to Collect Numerator for the Initial Cost to Collect Factor, then the Parties agree to perform a one-time adjustment prior to September 30, 2018 to equitably increase or decrease the Non-Labor Cost to Collect Factor to account for such difference in

 
2
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



accordance with Section 2.2(ii) of Exhibit 11.1-A to the Services Agreement, with such adjustment to be effective retroactively to the Commencement Date.
4.9
The Parties further agree to equitably decrease the Non-Labor Cost to Collect Factor to remove baseline costs and expenses associated with closure of the following short term leased spaces as identified in Exhibit B : (a) Med Group CBO Springville, (b) Med Group CBO Riverdale, (c) Provo Eastbay CBO, (d) St. George CBO (BE) & (FE), (e) St. George CBO (Med Group), and (f) St. George – Knight, with such reduction to take effect as of the termination date of each such sublease agreement or license agreement. The termination date for all short term leases is anticipated to be September 1, 2018, but such date may be extended if and as agreed by the Parties in writing. [**]
Information Technology Support
4.10
In consideration for R1’s access and use of [**], on a [**] basis, R1 will [**].
4.11
In consideration for the Transition Services (not covered by Section 4.10 above) provided by Intermountain under the Transition Services Agreement between the Parties, on a [**] basis, R1 will [**].
4.12
On a quarterly basis, R1 will provide to Intermountain a report that contains (a) the number of R1 employees with [**] and (b) the number of R1 employees located in premises who use, or for whom is used, any of the Transition Services or IT infrastructure under the Transition Services Agreement, as of such date. Upon Intermountain’s request in good faith, R1 will provide Intermountain with information reasonably needed by Intermountain to calculate or verify the [**].
4.13
[**]
5.
Amendment to Exhibit 18.8
Effective as of the date of the Services Agreement, Exhibit 18.8 to the Services Agreement is hereby amended by adding the following paragraph as Section 8 :
“8.    R1 is not entitled to and shall not take any tax position that is inconsistent with being a service provider to Intermountain Healthcare with respect to property owned by Intermountain Healthcare. For example, R1 shall not claim any depreciation or amortization deduction, investment tax credit, or deduction for any payment as rent with respect to Intermountain Healthcare property (except for payments of rent on the property leased, subleased or licensed by R1 from IMH under the following agreements, all dated to be effective as of April 8, 2018: (a) Office Lease Agreement for Lake Park North building, (b) Office Lease Agreement for space in Layton building, (c) Office Lease Agreement for space in South Jordan Homecare building, (d) Master License Agreement for space in Provo Eastbay building, (e) Sublease Agreement for Riverdale location, (f) Sublease Agreement for Springville location, (g) Sublease

 
3
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



Agreement for St. George – 340-342 E. 600 S. location, (h) Sublease Agreement for St. George – Knight Bldg. location, and (i) Sublease Agreement for St. George – Foremaster Bldg. location).”

SIGNATURE PAGE FOLLOWS

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


 
4
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



IN WITNESS WHEREOF, the Parties have caused this Addendum to be executed by their respective duly authorized representatives as of the Addendum Effective Date.

IHC Health Services, Inc.  
By:    /s/ Mark A. Runyon                      
Name:    Mark A. Runyon                     
Title:    VP Operations Finance               
R1 RCM Inc.  
By:    /s/ H. Jeffrey Brownawell               
Name:    H. Jeffrey Brownawell               
Title:    SVP of Operations                        


SIGNATURE PAGE TO ADDENDUM __ TO AMENDED AND RESTATED SERVICES AGREEMENT

[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



EXHIBIT A
AMENDED AND RESTATED EXHIBIT 11.1-A


EXHIBIT A TO ADDENDUM 2 TO AMENDED AND RESTATED SERVICES AGREEMENT

[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
[R1 Draft 4-23-18]
Confidential Draft for Discussion Purposes Only



AMENDED AND RESTATED SERVICES AGREEMENT

between

IHC Health Services, Inc.

and

R1 RCM Inc.


EXHIBIT 11.1-A

BASE FEE FOR SERVICES



[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
Confidential Draft for Discussion Purposes Only



Exhibit 11.1-A

Base Fee for Services
1. Base Fee.
For R1’s provision of Services, IMH will pay to R1 a single base fee with respect to the combined IMH Facilities and the IMH Providers (the “ Base Fee ”), which Base Fee shall be calculated in the aggregate and will be comprised of:
1.1
For the period from the Commencement Date through [**], a [**] fee (to be invoiced in accordance with Exhibit 11.1-C ) equal to the sum of:
a.
the product of:
(i)
the prior year’s [**] Cash Collections with respect to such [**] for the revenue cycle operations of the IMH Facilities and the IMH Providers in the aggregate,
multiplied by
(ii)
the sum of (A) one, plus (B) [**] (the result of (i) multiplied by (ii) will be referred to herein as “[**] Base Fee Cash ”),
multiplied by
(iii)
the [**] Cost to Collect Factor,
plus
b.
the product of:
(i)
the prior year’s [**] Cash Collections with respect to such [**] for the revenue cycle operations of the IMH Facilities and the IMH Providers in the aggregate,
multiplied by

 
1
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

(ii)
the sum of (A) one, plus (B) [**] plus (C) [**] (the result of (i) multiplied by (ii) will be referred to herein as “[**] Base Fee Cash ”,
multiplied by
(iii)
the [**] Cost to Collect Factor,
minus
c.
the product of:
(i)
the [**] Base Fee Cash,
multiplied by
(ii)
the [**] (as defined in Section 4.3 ),
minus
d.
the product of:
(i)
the prior year’s [**] Cash Collections with respect to such [**] for the revenue cycle operations of the IMH Facilities and the IMH Providers in the aggregate,
multiplied by
(ii)
the [**] (as defined in Section 5).
1.2
For the period of [**] to [**], a [**] fee equal to (to be invoiced in accordance with Exhibit 11.1-C ) the sum of:
a.
the product of:
(i)
the [**] Base Fee Cash with respect to such quarter,
multiplied by
(ii)
the [**] Cost to Collect Factor,
plus
b.
the product of:
(i)
the [**] Base Fee Cash with respect to such [**]

 
2
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

multiplied by
(ii)
the [**] Cost to Collect Factor,
minus
c.
the product of:
(i)
the sum of (A) [**] (as defined in Section 4.3 ), plus (B) [**] (as defined in Section 5 ),
multiplied by
(ii)
the [**] Base Fee Cash with respect to such quarter.
1.3
For all periods beginning on or following [**], a [**] fee equal to (to be invoiced in accordance with Exhibit 11.1-C ) the sum of:
a.
the product of:
(i)
the prior year’s [**] Base Fee Cash with respect to such quarter,
multiplied by
(ii)
the sum of (A) one, plus (B) [**] plus (C) [**]
multiplied by
(iii)
the [**] Cost to Collect Factor,
plus
b.
the product of:
(i)
the prior year’s [**] Base Fee Cash with respect to such quarter
multiplied by
(ii)
the sum of (A) one, plus (B) [**] plus (C) [**]
multiplied by
(iii)
the [**] Cost to Collect Factor

 
3
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

minus
c.
the product of:
(i)
the sum of (A) [**] (as defined in Section 4.3 ), plus (B) [**] (as defined in Section 5 ),
multiplied by
(ii)
the [**] Base Fee Cash with respect to such [**].
It is the intent of the Parties to commence Services on the first day of any month; however, in the event any Services do not start on the first of a month, the Parties shall account for any proration in the Base Fee in accordance with Section 11.5 of the Services Agreement.
1.4
Certain Definitions
(i)
“ Acute Adjusted Admissions ” means, for any Contract Quarter, the quotient of: (x) Total Patient Revenue for such quarter, divided by (y) the quotient of (1) Inpatient Revenue for such quarter, divided by (2) Inpatient Admissions for such quarter.
(ii)
“ Acute Adjusted Admissions Percentage Change ” means, for any Contract Quarter, the quotient of: (x) the difference between (a) the Acute Adjusted Admissions for such Contract Quarter, minus (b) the Acute Adjusted Admissions for the prior year’s Contract Quarter, divided by (y) the Acute Adjusted Admissions for the prior year’s Contract Quarter.
For example, to calculate the Acute Adjusted Admissions Percentage Change for the quarter ended 6/30/2019, you would evaluate the percentage change in the Acute Adjusted Admissions from the three-month period ended February 2018 to the three-month period ended February 2019.
(iii)
“ Baseline Year ” means [**].
(iv)
“ Contract Quarter ” means each three-month period during a Contract Year during the Term (i.e., January 1 st to March 31 st , April 1 st to June 30 th , July 1 st to September 30 th and October 1 st to December 31 st ).
(v)
“ Contract Year ” means each calendar year during the Term, provided, however, that the initial Contract Year shall be the truncated year starting on the Commencement Date and ending on December 31, 2018.

 
4
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

(vi)
[**]
(vii)
“ Inpatient Admissions ” means, for any Contract Quarter, the total number of Inpatient Admissions as set forth in IMH’s Enterprise Data Warehouse or equivalent reporting system.
(viii)
“ Inpatient Revenue ” means, for any Contract Quarter, the total dollar value of Inpatient Revenue as set forth in IMH’s Enterprise Data Warehouse or equivalent reporting system.
(ix)
“[**] Cost to Collect Factor ” means the Initial Cost to Collect Factor (as defined in Section 3.1 ), minus the [**] Cost to Collect Factor.
(x)
“[**] Cost to Collect Factor ” means the sum of: (i) the [**] Cost to Collect Factor plus (ii) the [**] Cost to Collect Factor (as each is defined in Section 3.1 )
(xi)
[**]
(xii)
“ Provider Visits ” means, for any Contract Quarter, the total number of Provider Visits as set forth in IMH’s Enterprise Data Warehouse or equivalent reporting system.
(xiii)
“[**] Cash Collections ” means, for each of the IMH Facilities and the IMH Providers (or both), the cumulative Cash Collections received by IMH for the IMH Facilities or the IMH Providers (or in the aggregate with respect to both), during the [**] period that ends one month prior to the commencement of the [**] for which the Base Fee with respect to IMH is payable.
For example, to calculate the Base Fee for [**] ended 6/30/2018, the [**] Cash Collections would equal IMH’s Cash Collections for the IMH Facilities and the IMH Providers for [**].
(xiv)
[**]
2. Initial Assessment.
2.1
Performance and Timing. The Parties will perform and complete a collaborative initial assessment of the Services prior to the Commencement Date in order to determine the Initial Cost to Collect Factor ( as defined in Section 3.1 below ) (the “ Initial Assessment ”).
2.2
Assessment Principles . In connection with the Initial Assessment, the following principles will be followed.

 
5
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

(i)
Payroll Expenses for IMH: All payroll costs and expenses at IMH for In-Scope Employees (defined below) and, to the extent not otherwise included in the definition of In-Scope Employees, all payroll costs and expenses for Management Employees (as defined in this Section 2.2 ), all of which shall be borne by R1. “ In-Scope Employees ” means:
a.
those non-clinical employees, as identified by job title, which are responsible for performing functions that relate to the Services which are designated, pursuant to the Initial Assessment, as having an In-Scope Percentage (as defined below) that is greater than or equal to [**] percent ([**]) (all of which employees shall also be deemed to be In-Scope Employees); and
b.
if approved by the Joint Review Board, any non-clinical employees, as identified by job title, that are responsible for performing functions that relate to the Services and are designated, pursuant to the Initial Assessment as having an In-Scope Percentage higher than [**] percent ([**]) but lower than [**] percent ([**]).
Notwithstanding the foregoing, (y) subsection b of this definition shall include those employees working in departments which perform both the Services and services not qualifying as the Services, and (z) IMH may remove any Management Employee from the In-Scope Employees (in which case, R1 [**] for any payroll costs and expenses relating to such Management Employees). For the avoidance of doubt, if IMH removes an employee who is not a Management Employee from the In-Scope Employees, then such employee will remain an IMH employee, but the Cost to Collect Numerator will [**] with respect to any such employee. R1 shall [**] relating to such employees for the period of time such employee remains an IMH employee and provide services for IMH that would otherwise be Services under the Agreement if such employee had transitioned to R1.
“ In-Scope Percentage ” shall mean, for any “Department” at IMH, the proportion of “In Scope FTEs” cost for such Department divided by the “Total FTEs” cost for such Department.
“ Management Employee ” shall mean any (i) [**], and (ii) any employees performing similar functions to any of the employees referenced in clause (i).
(ii)
IT Support/Real Estate Expenses for IMH : With respect to allocation of costs and expenses related to information technology support and real estate for

 
6
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

purposes of inclusion in the Cost to Collect Numerator, the Parties shall, prior to the Commencement Date, mutually agree in good faith on a methodology that (A) represents an accurate reflection of the allocation of costs and expenses between the Parties including both operating expense and depreciation expense; and (B) favors simplicity in execution and invoicing and excludes any cost allocation for In-Scope Employees whom we reasonably expect to remain in Authorized Space. The Parties shall mutually agree in good faith on a mechanism to avoid a material amount of duplicate or unfunded costs or expenses related to IT support and real estate.
(iii)
Other Expenses for IMH : Allocation of all other expense categories shall be determined through mutual agreement of both Parties in good faith.
(iv)
[**]
(v)
Non-Payroll Expenses for Third-Party Vendors : The Cost to Collect Numerator, as defined below, will include all costs and expenses related to In-Scope Vendors (defined below), [**] shall [**], excluding any portion of the costs and expenses for Partially Related Vendors that are not related to the Services.
“ In-Scope Vendors ” means third party vendors that perform functions as part of or related to the Services, including: (A) any vendor that, provides a product, solution or service (a “ Vendor Service ”) that is [**] percent ([**]) related to the Services; and (B) any vendor that is, providing or offering a Vendor Service is partially related to the Services (“ Partially Related Vendors ”).
In-Scope Vendors shall not include any (y) IT Host System Vendor; and (z) vendor with respect to a Vendor Service that is not related to the Services in any manner. “ IT Host System Vendor ” means a third party vendor that provides a product, solution or service (including hosting or providing a platform or system) that is used to capture patient encounters and associated charges that result in generation of a patient statement or bill.
(vi)
Partially Related Vendors : For any Partially Related Vendors, the portion of the cost of the Partially Related Vendor that relates to the Services will be [**]. The Joint Review Board may review the list of vendors from time to time and, when appropriate, determine whether any such vendor is not an In-Scope Vendor. If a vendor is deemed not to be an In-Scope Vendor, an adjustment to the Cost to Collect Numerator shall be made to [**], and R1 shall [**].

 
7
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

(vii)
Additional Considerations :
a.
If a termination fee or other termination-related costs or expenses must be paid to allow for the termination or any splitting of an existing In-Scope Vendor contract, such fee will be [**], subject to Section 14.6 of the Agreement.
b.
The allocation of one-time, lump-sum implementation and/or license fees for a particular In-Scope Vendor will be [**] the Cost to Collect Numerator.
c.
R1 and IMH shall each be responsible for its own incurred costs associated with information technology, such as interface development, file transfers, and custom programming related to the R1 technology solutions and other third party vendors.
d.
The allocation between the Parties of one-time costs related to information technology system conversion services, including consulting services, staff augmentation and training, will be excluded from the Cost to Collect Numerator.
e.
Recurring maintenance, support, service, license, or contingency fees for all In-Scope Vendor products, solutions, and services, shall be included in the Cost to Collect Numerator, and [**] R1.
f.
The Parties will work together to identify any costs from the Initial Assessment that should be either added or removed from the Cost to Collect Numerator.
2.3
Determination of Initial Cost to Collect Factor . The Initial Cost to Collect Factor shall be determined by the Joint Review Board after the completion of the Initial Assessment.
(i)
Calculation Principles . In addition to the principles listed in Section 2.2 above, the Joint Review Board shall also follow the methodology below with respect to completing the table set forth in Section 3.1 in order to establish the Initial Cost to Collect Factor:
a.
The fraction to be set forth in the table (expressed as a percentage) representing the Cost to Collect Factor as of the Effective Date will be calculated as follows: (i) the aggregated annual value of all costs from the Initial Assessment for IMH, as approved by the Joint Review Board, and otherwise normalized to account for any extraordinary

 
8
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

costs that do not relate to the Services provided during the Baseline Year or are not reasonably expected to continue (e.g. payroll costs related to Transcription) (collectively, “ Cost to Collect Numerator ”); and (ii) the denominator is equal to the aggregate amount of Cash Collections for the IMH Facilities and the IMH Providers, in the aggregate, during the Baseline Year.
(ii)
The Parties must determine the Initial Cost to Collect Factor prior to the Commencement Date.
3. Cost to Collect Factor.
3.1
“ Cost to Collect Factor ” means the fraction (expressed as a percentage) approved by the Joint Review Board after completion of the Initial Assessment (such fraction subject to any adjustment agreed by the Joint Review Board in accordance with Sections 3.2 and 3.3 below).
 
Baseline Year Cash
Cost to Collect Numerator
Initial Cost to Collect Factor
All IMH Facilities and IMH Providers
[**]
[**]
[**]

[**]
The Cost to Collect Factor in the first table above shall be referred to as the “ Initial Cost to Collect Factor .”
For the avoidance of doubt, the applicable Cost to Collect Factor that will be used in the Base Fee calculation in Section 1.1 shall equal the sum of:
(i)
the Initial Cost to Collect Factor listed above,
(ii)
any downward adjustments, as provided for in Section 3.2 below, and
(iii)
any upward adjustments, as provided for in Section 3.3 below.
For purposes of clarity, the Parties agree that the adjustments contemplated by subsections (ii) and (iii) directly above shall only be effective to Base Fee calculations prospectively , as of the latter to occur of: (x) the date of approval of the adjustment by the Joint Review Board; and (y) any later date as set forth in the approval by the Joint Review Board.
3.2
Discontinued Services

 
9
 
[**]  Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

Confidential Draft for Discussion Purposes Only

If any Service is approved to be discontinued by the Joint Review Board, or via a written amendment to the Services Agreement executed by the Parties, the Parties will conduct an assessment of the cost assumptions underlying the Cost to Collect Factor with respect to such Service and the Joint Review Board shall approve an equitable downward adjustment to the Cost to Collect Factor to account for such Discontinued Services.
3.3
New Services, Acquisitions and New Hospitals
(i)
For the avoidance of doubt, if IMH requests that R1 provide any services other than the Services or if IMH requests that R1 provide any Services which were not provided to IMH prior to the date of such request, all such requested services shall be New Services under Section 3.8 of the Services Agreement. The Parties agree that for any such New Services, if the costs or expenses associated with such New Service are not accounted for in the determination of the Cost to Collect Factor as of the date such New Service would commence, then the Cost to Collect Factor will be equitably increased by an amount to be determined by the Joint Review Board, and such adjustments shall be effective as of the date R1 begins performing such New Service.
(ii)
In the event that after the Commencement Date additional existing facilities and providers are added to the IMH Facilities or IMH Providers that result in an increase of [**] of net patient services revenue, the Parties will perform and complete an assessment of such facilities and providers that is consistent in scope with the Initial Assessment and follows the principles set forth in Section 2.2 . The results of any such assessment shall be submitted to the Joint Review Board and the Joint Review Board shall determine the proper increase to the Cost to Collect Factor in accordance with the guidelines and principles of this Exhibit 11.1-A . If the additional facilities and providers result in an increase of [**] of net patient services revenue the Cost to Collect factor then in place will be applied to the new facilities and providers.
(iii)
In the event that after the Commencement Date IMH opens new facilities that are added to the IMH Facilities or IMH Providers, and R1 hires any employees who will perform the Services for such new facility more than [**] in advance of IMH opening a new facility at IMH’s request, IMH shall reimburse R1 for the expenses incurred for hiring each such employee.
Any adjustments made for discontinuation of Services under Section 3.2 or addition of New Services under Section 3.3(i) will be based on the following fraction – the annualized expense for such Services divided by the trailing twelve months Cash Collections for the IMH Facilities and the IMH Providers – which fraction will be added or removed from the then current Cost to Collect Factor, depending on whether Services are being added or removed.

 
10
 
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Confidential Draft for Discussion Purposes Only

4. [**]
4.1
During the Term, Intermountain shall be entitled to a [**] on each [**] Base Fee invoice, as reflected in Section 1.1 , of the applicable [**] (as defined below), which shall be phased in over the [**] period from the Commencement Date.
4.2
For each year that Intermountain receives Services from R1 during the Term, the Cost to Collect Factor shall be [**] to be calculated as follows:
(i)
For the period starting on the Commencement Date and ending [**], [**] of the [**] shall be [**] from the Cost to Collect Factor;
(ii)
For the [**], [**] of the [**] shall be [**] from the Cost to Collect Factor;
(iii)
For each subsequent calendar year during the term thereafter, [**] of the [**] shall be [**] from the Cost to Collect Factor.
4.3
“[**]” means the quotient (expressed as a percentage) of (x) [**] divided by (y) the aggregate Cash Collections of the IMH Facilities and the IMH Providers during the Baseline Year.
Period
[**]
[**]
Commencement Date – [**]
[**]
[**]
[**]
[**]
[**]
[**]  – Term
[**]
[**]

5. [**]
[**]
Period
[**]
Commencement Date –  [**]
   [**]
[**]
[**]
[**]
[**]
[**] – Term
[**]

[**]
6. Windfall Situations and Changes in the Environment
6.1
In the event that there is a Force Majeure Event, a material change in the environment in which IMH is operating its revenue cycles, or a material change in the laws and

 
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Confidential Draft for Discussion Purposes Only

regulations that apply to IMH or R1 that significantly affects the economics of one or more of the Parties or frustrates the ability of a Party to perform its obligations hereunder, through no fault of its own, there will be a fair and appropriate adjustment (increase or decrease) to portions of the Base Fee. Upon such request, the Parties will, in good faith, discuss the costs associated with the change in circumstance, with the outcome to equitably reflect the incremental change in costs to deliver the Services.
6.2
Examples of matters that could trigger an adjustment to the Base Fee include the following:
(i)
Material changes in the form of reimbursement by commercial or government payors, including changes to a payment model such as an at-risk or partial or fully capitated system;
(ii)
[**]
(iii)
Changes to the IMH IT Environment, which results in a material [**] in the cost of revenue cycle operations.


 
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EXHIBIT B
R1 LEASED SPACE AT INTERMOUNTAIN BUILDINGS

Summary Location
Verified Working Location
Status
Home Care
11520 S Redwood Rd, South Jordan, UT 84095
IMH Owned Space
Lake Park CBO
4646 Lake Park Blvd, West Valley City
IMH Owned Space
Layton CBO
2195 N 1200 W, Layton
IMH Owned Space
Med Group CBO Springville
375 S 3 E, Springville
IMH Leased Space
Med Group CBO Riverdale
495 S 15 W, Riverdale
IMH Leased Space
Provo Eastbay CBO
75 East 1700 South, Provo
IMH Owned Space
St. George CBO (BE) & (FE)
544 S 400 E, St George
IMH Leased Space
St. George CBO (Med Group)
1490 E Foremaster Dr, St George
IMH Owned Space
St. George – Knight
616 South 300 East, St. George
IMH Leased Space


EXHIBIT B TO ADDENDUM 2 TO AMENDED AND RESTATED SERVICES AGREEMENT

[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
Confidential Draft for Discussion Purposes Only

EXHIBIT C
SAMPLE CALCULATION FOR [**]
[**]


EXHIBIT C TO ADDENDUM 2 TO AMENDED AND RESTATED SERVICES AGREEMENT

[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
EXHIBIT 10.5
EXECUTION VERSION
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.






SUPPLEMENT 26 TO
AMENDED AND RESTATED MASTER PROFESSIONAL SERVICES AGREEMENT
between
Ascension Health
and
R1 RCM Inc.

















SUPPLEMENT 26 TO
AMENDED AND RESTATED MASTER PROFESSIONAL SERVICES AGREEMENT


This Supplement 26 (this “ Supplement ”) is made and entered into as of June 24, 2018 (the “ Supplement Effective Date ”) by and between Ascension Health (“ Ascension Health ”) and R1 RCM Inc., f/k/a Accretive Health, Inc. (“ Supplier ”) (together, the “ Parties ”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the MPSA (as defined below).

WHEREAS , the Parties are party to that certain Amended and Restated Master Professional Services Agreement, dated as of February 16, 2016 by and between Ascension Health and Supplier, as amended by that certain Amendment No. 1 to the Master Professional Services Agreement, dated as of the 28th of April, 2017 (as further amended, restated, supplemented, or otherwise modified, the “ Master Professional Services Agreement ” or “ MPSA ”), pursuant to which Supplier provides Dependent Services and Physician Advisory Services for Acute Care with respect to certain Eligible Recipients;

WHEREAS , Ascension Health has historically provided revenue cycle management services to certain Eligible Medical Groups (as defined in Section 1(c) below) through, among other resources, (a) Ascension Health’s National Revenue Service Center, and (b) the use of certain third party Platforms (as defined below);

WHEREAS , the Parties entered into that certain Term Sheet for Ascension Medical Group RCM Services, dated as of February 23, 2018 (“ Term Sheet ”), pursuant to which Supplier agreed to provide, and Ascension Health agreed to receive, the EMG Services (as defined in Section 4(a) below) in accordance with the terms set forth herein; and

WHEREAS , the Parties now desire for Supplier to provide the EMG Services, which will be deemed as New Services accepted and to be provided under the MPSA, to the Eligible Medical Groups pursuant to the terms and subject to the conditions set forth in this Supplement.

NOW THEREFORE , in consideration of the foregoing premises and mutual consents set forth below, the Parties hereby agree as follows:
    
1. Schedules and Attachments; Relationship with the MPSA; Scope and Authority.

(a)
Schedules, Exhibits, and Annexes . This Supplement includes each of the following attached Schedules, Exhibits, and Annexes, all of which are hereby incorporated into this Supplement by this reference:
Schedule A
Current Non-Standard Third Party Eligible Medical Groups
Schedule B
Supplier Technology Tools and Software

Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4

EMG Services
EMG Base Fees
EMG Incentive Fees
Service Level Targets and Metrics

 
 
Annex 1
Form of EMG Services Addendum

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(b)
General Relationship with the MPSA . This Supplement is entered into pursuant and subject to, and, solely as provided herein, amends certain provisions of, the MPSA, the terms of which are incorporated herein by reference (as modified by this Supplement). In accordance with Section 1.1(c) of the MPSA, any amendment to the MPSA, including amendments made after the Supplement Effective Date, shall automatically, as of the amendment effective date, be incorporated into this Supplement, unless otherwise specifically set forth in such amendment. This Supplement shall be considered a “Supplement” for purposes of the MPSA, notwithstanding any deviations herein from the form set forth in Annex 1 of the MPSA. This Supplement sets forth a legal framework under which Supplier will provide EMG Services to Eligible Medical Groups that are the subject of this Supplement. Notwithstanding anything to the contrary in this Supplement or the MPSA: (i) the Parties agree that Exhibits 2-A, 2-B, 4-A, 4-B, 4-E, and 17 to the MPSA, and any provision of the MPSA that relates solely and exclusively to Acute Care, the Physician Advisory Services, or the transition or onboarding of Additional Book Eligible Recipients or New ABMs shall be disregarded and have no effect for purposes of this Supplement (except that references to Exhibit 4 to the MPSA in the body of the MPSA will be deemed to refer to Exhibit 2 and/or Exhibit 3 to this Supplement, as applicable); and (ii) solely with respect to the provision or receipt of the EMG Services, in the event of a conflict between the terms in this Supplement and the terms set forth in the MPSA, the terms of this Supplement shall prevail. Upon the execution and delivery of this Supplement by the Parties, the Term Sheet is hereby terminated, and this Supplement contains, and is intended as, a complete statement of all of the terms of the agreements between the Parties with respect to the matters provided for in the Term Sheet, and supersedes and terminates the Term Sheet.
(c)
Eligible Medical Groups . Each physician group that is permitted to receive EMG Services from Supplier hereunder (each such physician group, an “ Eligible Medical Group ”, and collectively, the “ Eligible Medical Groups ”) will be either (x) an Entity that is a Controlled Affiliate of Ascension Health or an Ascension Health Affiliate, or a department operating under the control of Ascension Health or an Ascension Health Affiliate (each, an “ Owned Eligible Medical Group ”) or (y) subject to Section 1(e) , a third party legal entity that is receiving revenue cycle services from Ascension Health or an Ascension Health Affiliate pursuant to contractual agreements between such third party legal entity and Ascension Health or an Ascension Health Affiliate (each such contract, a “ PSA ”, and each such entity, a “ Third Party Eligible Medical Group ”). To the extent a physician group is either an Owned Eligible Medical Group or, subject to Section 1(e) , a Third Party Eligible Medical Group, the Parties agree that any such physician group included in one of the below groups, whether such physician group is currently existing or hereafter becomes acquired by, employed by, or party to a PSA with Ascension Health or an Ascension Health Affiliate, is an Eligible Medical Group and will receive EMG Services under this Supplement following the execution of an EMG Services Addendum (as defined in Section 1(g) below) covering the applicable physician group(s):
(i)
all physician groups that receive revenue cycle management services through the Athena Platform (or any successor Platform that Ascension Health uses as its primary Platform with respect to revenue cycle management services), which physician groups are located in various U.S. states (“ NRSC/Athena Group ”);
(ii)
all physician groups associated with Via Christi Health in Kansas that receive revenue cycle management services through the Cerner Platform (“ Cerner Group ”); and
(iii)
all physician groups associated with Wheaton Franciscan Healthcare in Wisconsin that receive revenue cycle management services through the Epic Platform (“ Epic Group ”).
(d)
Treatment of the Owned Eligible Medical Groups . Ascension Health shall be and remains responsible and liable to Supplier for all acts or omissions of an Owned Eligible Medical Group, including the physicians employed by the Owned Eligible Medical Group (each, an “ Employed EMG Physician ”), in connection with this Supplement and the EMG Services (including failure by an Owned Eligible Medical Group or Employed EMG Physician to perform in accordance with this Supplement or to

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comply with any duties or obligations imposed on Ascension Health under this Supplement) to the same extent that such act or omission was committed by Ascension Health or Ascension Health employees hereunder. Any claims or rights that may accrue to any Owned Eligible Medical Group or Employed EMG Physician under this Supplement may be exercised only by Ascension Health against Supplier.
(e)
Treatment of Third Party Eligible Medical Groups . Following the Supplement Effective Date, Ascension Health and Supplier will work together in good faith to create a set of terms and conditions related to the receipt of EMG Services by Third Party Eligible Medical Groups from Supplier, to which Ascension Health may, in its sole discretion, bind any Third Party Eligible Medical Group in connection with such Third Party Eligible Medical Group’s receipt of EMG Services from Supplier (such terms and conditions, “ Third Party Terms ”). Ascension Health will take the lead in determining a strategy for approaching Third Party Eligible Medical Groups regarding their potential receipt of EMG Services from Supplier under this Supplement and Supplier shall comply with any such strategy determined by Ascension Health. The Parties anticipate that each Third Party Eligible Medical Group would receive all of the EMG Services described in Exhibit 1 of this Supplement, which receipt of EMG Services would be subject to and in accordance with this Supplement (including an applicable EMG Services Addendum) in the same manner as the Owned Eligible Medical Groups also receiving EMG Services under this Supplement (including such EMG Services Addendum); provided that [**]. Ascension Health shall be and remains responsible and liable to Supplier for all acts or omissions of a Third Party Eligible Medical Group, including the physicians employed by the Third Party Eligible Medical Group (each, an “ Third Party EMG Physician ”), receiving EMG Services under this Supplement (including any failure by a Third Party Eligible Medical Group or a Third Party EMG Physician to perform in accordance with this Supplement or to comply with any duties or obligations imposed on Ascension Health under this Supplement) to the same extent that such act or omission was committed by Ascension Health, an Ascension Health Affiliate, or its or their employees hereunder, notwithstanding any conflicting terms or conditions in the applicable PSA or any Third Party Terms. Any claims or rights that may accrue to any Third Party Eligible Medical Group or Third Party EMG Physician under this Supplement may be exercised only by Ascension Health against Supplier.

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(f)
Onboarding of Eligible Medical Groups . In accordance with the terms of this Supplement, the provision of EMG Services to the Eligible Medical Groups will be transitioned to Supplier as soon as practicable, but in distinct phases and at different times during the Supplement Term, in accordance with the timelines set forth in this Section 1(f) , Section 4.2(b) of the MPSA, and the initial transition plan provided to Ascension Health by Supplier. The Parties intend that both Owned Eligible Medical Groups and, subject to Section 1(e) above, Third Party Eligible Medical Groups included in the NRSC/Athena Group, Cerner Group or Epic Group will be transitioned to Supplier in accordance with the timeline below; provided that [**].
A1.GIF
(g)
EMG Services Addenda . The Parties intend for Eligible Medical Groups included in the NRSC/Athena Group (excluding those located in Binghamton and Bridgeport, which will only receive Platform-Specific Services) to: (i) first receive Platform-Specific Services under an EMG Services Addendum covering the NRSC/Athena Group as a whole (i.e., “Enterprise 1” in the chart below) (“ NRSC/Athena Addendum ”); and (ii) thereafter, on an EMG Market-by-EMG Market basis, receive Medical Group Market Services (as defined in Section 4(a) below, which would be in addition to the Platform-Specific Services) under separate market-specific EMG Services Addenda for the Eligible Medical Groups included in the NRSC/Athena Group (each, a “ Market Addendum ”). Eligible Medical Groups in the Epic Group will receive all of the EMG Services under the Wisconsin Addendum (as defined below). Eligible Medical Groups in the Cerner Group will receive all of the EMG Services under an EMG Services Addendum covering only the Cerner Group (“ Cerner Group Addendum ”). The Parties intend for the aforementioned EMG Services Addenda to be executed in accordance with the timeline above. Supplier will have no obligation to provide EMG Services to any Eligible Medical Group, and Ascension Health will have no obligation to pay the EMG Base Fee (as defined in Section 5(a) below) in respect of any Eligible Medical Group, until Ascension Health and Supplier enter into an addendum to this Supplement in substantially the form set forth in Annex 1 , which applies specifically to such Eligible Medical Group and sets forth: (i) an acknowledgment that the provision of revenue cycle management services for the applicable Eligible Medical Groups will be transitioned to Supplier; and (ii) any terms or conditions that deviate from, or are in addition to, the terms and conditions of this Supplement as specifically applied to such Eligible Medical Group (each such addendum, an “ EMG Services Addendum ”). Upon execution, each EMG Services Addendum will be automatically incorporated by reference into this Supplement. In the event of a conflict between the terms in this Supplement and the terms of an EMG Services Addendum, the terms of the EMG Services Addendum will control with respect to the applicable Eligible Medical Group.
(h)
New Eligible Medical Groups . If: (i) (A) following the Supplement Effective Date, Ascension Health or an Ascension Health Affiliate acquires, employs, or enters into a PSA with, a physician group that is not automatically included in the NRSC/Athena Group, the Cerner Group or the Epic Group under the applicable EMG Services Addendum or (B) there is any physician group that, as of the Supplement

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Effective Date, is an Owned Eligible Medical Group or Third Party Eligible Medical Group but is not included in the NRSC/Athena Group, the Cerner Group, or the Epic Group (any such physician group described in this clause (i), a “ New Eligible Medical Group ”); and (ii) Ascension Health wishes to have Supplier perform the EMG Services for the applicable New Eligible Medical Group, then the Parties will enter into a separate EMG Services Addendum for such New Eligible Medical Group, which EMG Services Addendum shall describe the EMG Services to be provided to such New Eligible Medical Group, the EMG Service Commencement Date for such EMG Services, and the calculation of a separate or revised EMG Base Fee to include such New Eligible Medical Group, as determined in accordance with Exhibit 2 . Supplier shall, subject to Section 1(e) , offer to provide to each such New Eligible Medical Group the full scope of EMG Services set forth on Exhibit 1 of this Supplement. For the avoidance of doubt, this Section 1(h) does not apply with respect to physician groups that are automatically included in the NRSC/Athena Group, the Cerner Group or the Epic Group under the applicable EMG Services Addendum (as contemplated in Section 1(c) above), which physician groups will automatically receive EMG Services under the applicable EMG Services Addendum.
(i)
Divestitures of Eligible Medical Groups Receiving EMG Services . If, during the Supplement Term, Ascension Health or an Ascension Health Affiliate divests or sells an Eligible Medical Group then-currently receiving EMG Services under this Supplement to an unaffiliated third party (including if such divestiture is part of a divestiture to any unaffiliated third party of the Ascension Health Affiliate that Controls or owns such Owned Eligible Medical Group), then the Parties agree to undertake the obligations set forth in Section 4.6(b) of the MPSA, including, if all of the Owned Eligible Medical Groups within an EMG Market then-receiving EMG Services are divested (provided that for purposes of this sentence, the Oklahoma, Kansas, Alabama, Florida, Maryland and D.C. markets will each be considered separate EMG Markets), with respect to Acquirer Termination Charges and Divestiture Termination Charges (i.e., a one-time termination fee equal to 0.65% of the Cash Collections for the applicable sold or divested Owned Eligible Medical Groups for the applicable trailing twelve (12) month period, which percentage shall decrease to zero percent (0%) on a straight line basis over the five (5) year period beginning on the Supplement Effective Date), which shall be applied to this Supplement, mutatis mutandis. With respect to all divestitures or sales of an Owned Eligible Medical Group to an Affiliate of Ascension Health, the Parties agree to undertake the obligations set forth in Section 4.6(c) of the MPSA, which shall be applied to this Supplement, mutatis mutandis. For clarity, any Eligible Medical Group then-receiving EMG Services that is not divested or sold shall continue to receive EMG Services after such divestiture or sale in accordance with the terms of any applicable EMG Services Addendum. With respect to any divestiture covered under this Section, Supplier agrees to provide support relating to the winding down of legacy Ascension Health-owned accounts receivable for any divested Eligible Medical Group then-receiving EMG Services, the scope of which support shall be, on a case-by-case basis, separately negotiated and agreed by the Parties in good faith.
(j)
Wisconsin . Effective as of October 1, 2018, the Parties intend to (i) terminate each of Supplement 23 (Wheaton) , Supplement 24 (Ministry (MHS)) and Supplement 25 (Columbia St. Mary’s) (collectively, the “ WI MG Supplements ”) and (ii) replace the WI MG Supplements with an EMG Services Addendum applicable to the Wisconsin EMG Market (“ Wisconsin Addendum ”), which EMG Services Addendum will incorporate all of the schedules that had been attached to the WI MG Supplements.
2.      Definitions.
Exhibit 1 to the MPSA is hereby supplemented (solely for purposes of this Supplement) with the definitions set forth below and as otherwise defined herein.
(a)
“ Athena Platform ” means a Platform licensed, or otherwise provided, by athenahealth, Inc. (or any successor in interest) (“ Athena ”).

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(b)
“ Cerner Platform ” means the “OneChart” Platform (or any successor Platform) licensed, or otherwise provided, by Cerner Corporation (or any successor in interest).
(c)
“ EMG Market ” means each of the following geographical physician group markets: 1) Wisconsin, 2) Indiana, 3) Tennessee, 4) Michigan, 5) Oklahoma/ Kansas, 6) Texas, 7) Alabama/ Florida, and 8) Maryland/D.C (as set forth in the table in Section 1(f) above). Where applicable, references in this Supplement to an EMG Market shall be deemed to also be a reference to all of the Eligible Medical Groups comprising such EMG Market.
(d)
“ EMG Service Commencement Date ” means, for each EMG Service and the provision of such EMG Service to certain Eligible Medical Groups, the date set forth in the applicable EMG Services Addendum designated for the commencement of such EMG Service to such Eligible Medical Groups or, if no such date is set forth in the applicable EMG Services Addendum, the effective date of such EMG Services Addendum.
(e)
“ Epic Platform ” means a Platform licensed, or otherwise provided, by Epic Systems Corporation (or any successor in interest).
(f)
“ Platform ” means a practice management or patient accounting system.
3.      Supplement Term.
The Supplement Term shall commence as of 12:00:01 a.m., Central Time on the Supplement Effective Date and shall continue until the date that is ten (10) years from the Supplement Effective Date; provided that if the Parties elect not to extend the MPSA in accordance with Section 3.1 of the MPSA with respect to Acute Care, then, at any time following February 16, 2024, Ascension Health may elect to terminate this Supplement for convenience upon notice to Supplier at any time, effective no earlier than February 16, 2026. For the avoidance of doubt, the Parties acknowledge that (a) the expiration date of the MPSA is unchanged by virtue of this Supplement and (b) the termination rights in Section 20 of the MPSA apply to this Supplement.

4.     Services.
(a)
EMG Services . Subject to and in accordance with Section 1(g) , Supplier shall provide the Services set forth in Exhibit 1 to this Supplement (the “ EMG Services ”) in accordance with this Section 4 and Section 4.1 of the MPSA.
(b)
Technology Tools and Software . In connection with the provision of the EMG Services, Supplier will make available to the Eligible Medical Groups, at Supplier’s cost, the technology tools and software set forth on Schedule B , which tools and software shall constitute Supplier Owned Materials and will be licensed to Ascension Health (solely for the benefit of the Eligible Medical Groups receiving the EMG Services) pursuant to Section 14.3 of the MPSA.
(c)
Expansion of Services . The Parties agree to have good faith discussions regarding the possible expansion of the scope of EMG Services to cover the entire revenue cycle for all Eligible Medical Groups (e.g., to add front end services to the scope of EMG Services). The Parties will agree on appropriate pricing for any such adjustment to the scope of the EMG Services in connection with any such expansion. For clarity, such expansion of scope shall not include EMG Base Employees (as defined in Exhibit 2 ) .
(d)
Disclaimer Regarding Athena-Provided Services. The Parties understand and acknowledge that (i) Athena is a contractor of Ascension Health, (ii) as Supplier and Athena are not in privity of contract, Supplier does not have any contractual right to control or otherwise be responsible for Athena’s acts and omissions taken or made under its contract with Ascension Health or an Ascension Health Affiliate, and (iii) Supplier’s obligation to perform the EMG Services shall not include any tasks or

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activities that Athena may undertake with respect to Ascension Health’s revenue cycle management operations. Without limiting the foregoing and notwithstanding anything in this Supplement to the contrary, Supplier expressly disclaims all claims, liability, and responsibility, and makes no representations or warranties (express or implied), with respect to any acts or omissions taken or made by Athena relating to its obligation to provide services or otherwise perform on behalf of Ascension Health or any Ascension Health Affiliate.
5.      Pricing.
(a)
EMG Base Fees . Ascension Health shall pay to Supplier, in addition to the EMG Incentive Fees, base fees for the EMG Services (“ EMG Base Fees ”) in accordance with Exhibit 2 to this Supplement. With respect to the EMG Services and this Supplement, all references to “Base Fee” in the MPSA are hereby deemed to refer to the EMG Base Fee.
(b)
EMG Incentive Fees . Ascension Health shall pay to Supplier, in addition to the EMG Base Fees, incentive fees for the EMG Services (“ EMG Incentive Fees ”) in accordance with Exhibit 3 to this Supplement.
(c)
Cost Board . Any disagreement between the Parties regarding compensation for the EMG Services shall be finally resolved by the Cost Board (as defined in Section 1.5 of Exhibit 2 to this Supplement).
6.      Subcontractors.
Subcontractors that relate to the NRSC/Athena Group in a certain EMG Market (with respect to the Medical Group Market Services), the NRSC/Athena Group as a whole (with respect to the Platform-Specific Services), or the Cerner Group or Epic Group (with respect to the EMG Services) shall be set forth in the applicable EMG Services Addendum.
7.      Initial Transition Plan.
The initial transition plan with respect to the transition to Supplier as the provider of the EMG Services will be provided by Supplier to Ascension Health prior to the EMG Service Commencement Date for each EMG Service to be provided under each EMG Services Addendum.
8.      Service Level Agreements.
(a)
Service Levels . The Service Levels described in Exhibit 4 to this Supplement will apply to the EMG Services.
(b)
Separate Treatment from Acute Care . Service Levels for the EMG Services shall be measured independently from the Service Levels applicable to the Dependent Services with respect to Acute Care. Any Service Level Credits resulting from a Service Level Default relating to EMG Services shall apply only to portions of the EMG Base Fee, as further described in Exhibit 4 and, conversely, any Service Level Credits resulting from a Service Level Default relating to Dependent Services for Acute Care shall not apply to any portion of the EMG Base Fee. Exhibit 4 sets forth the Service Level Defaults applicable to the EMG Services, which, for purposes of Section 20.1(b) of the MPSA, will be determined separately from any Service Level Default relating to the Dependent Services for Acute Care. For the avoidance of doubt, a trigger of Section 20.1(b)(i) or Section 20.1(b)(ii) of the MPSA resulting from Service Level Defaults in respect of EMG Services will result in Ascension Health’s right to terminate the EMG Services only (and not any Dependent Services for Acute Care).

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9.
HIPAA .
Supplier shall execute a Business Associate Addendum substantially similar to the form attached to Annex 3 to the MPSA if Ascension Health reasonably believes that any Eligible Medical Group receiving EMG Services is not covered by the BAA currently in effect between the Parties.
10.      Addendum-Specific MPSA Modifications .

In connection with entering into each EMG Services Addendum, the Parties shall discuss in good faith whether any modifications are needed to the following Sections and Exhibits of the MPSA: Section 9.10 of the MPSA (Audit Rights), or Exhibits 7 (Facilities), 8 (Ascension Health Rules and Policies), 13 (Transitioned Employee Terms), or 14 (Reports and Data Sets) to the MPSA.

11.
Transitioned Employee Terms .
With respect to this Supplement, the term “ Affected Employees ” means an In-Scope Employee (as defined in Section 5.1 of Exhibit 2 ) who does not have a clinical certification.
12.      Governance.

(a)
Supplier Executive Sponsor
In accordance with Section 8.3 of the MPSA, the Supplier Executive Sponsor is John Sparby.
(b)
Ascension Health Relationship Manager (for all Eligible Medical Groups)
In accordance with Section 10.1(b) of the MPSA, the Ascension Health Relationship Manager (on behalf of all Eligible Medical Groups) is Stephanie Delks.

SIGNATURE PAGE FOLLOWS

[SPACE LEFT INTENTIONALLY BLANK]


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IN WITNESS WHEREOF, the Parties have caused this Supplement 26 to be executed by their respective duly authorized representatives as of the Supplement Effective Date.

R1 RCM INC.
 
ASCENSION HEALTH


 
 
By:
/s/ John Sparby
 
By:
/s/ Rhonda Anderson
 
 
 
 
 
Name:
John Sparby
 
Name:
Rhonda Anderson
 
 
 
 
 
Title:
EVP Customer Operations, R1 RCM
 
Title:
Sr VP & CFO
 
 
 
 
 

    

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL                                 Signature Page to Supplement 26
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SCHEDULE A

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CONFIDENTIAL              Page 10
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SCHEDULE B

Supplier Technology Tools and Software


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R1Access Suite
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R1Link
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R1Decision
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ePars
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R1Contact
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R1Insight
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R1Integrity


R1 RCM AND ASCENSION HEALTH
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Exhibit 1

EMG Services

The EMG Services described below are being undertaken for the purposes of optimizing the revenue cycle operations process to maximize compliant collections from the amounts billable as a result of operations of the Eligible Medical Group. None of the EMG Services described below are being undertaken to manage medical decisions or business operations of any Eligible Medical Group, nor are any of the Services intended to increase the volume of operations of the Eligible Medical Group.

With respect to each function in the revenue cycle operations of the Eligible Medical Groups, Schedule A to Exhibit 1 attached hereto sets forth ownership, applicable technology, and whether Supplier is responsible for implementing related processes and performance improvement.

1.
EMG Services . In accordance with Section 4 of this Supplement and Section 4.1 of the MPSA, Supplier shall provide the following EMG Services, subject to the allocation of tasks set forth in Schedule A of this Exhibit 1 .
a.
Medical Group Market Services . “ Medical Group Market Services ” shall include the following functional areas:
i.
PRE-SERVICE – Supplier will provide leadership, management oversight, staffing and technical expertise of:

• Authorization/Referral (Verification ) – Supplier will (i) perform authorization clearance services for patients to verify that an authorization is in place, and (ii) document all required authorizations.

• Insurance Eligibility Verification (Financial Clearance ) – Once the payer is identified, check benefit eligibility and obtain verification from insurance (governmental or commercial) that the patient reported insurance for the applicable service is still in force and will reimburse the provider for the service.

ii.
TIME OF SERVICE - Supplier will directly provide leadership, management oversight, staffing and technical expertise of, or indirectly support through implementation of “best practices” and process standardization, the following services:

• Self-Pay Financial Advocacy and Eligibility of Services (e.g., self-pay conversions) (Financial Counseling ) – For those patients that are unaware of what insurance they have, or declare they have no insurance, work diligently and use proprietary tools to gather information to understand what might be an acceptable source of reimbursement.

•     Registration – Obtaining all required patient liability (i.e., outstanding balance), clinical, demographic, and financial information from patients that was not obtained during scheduling or pre-registration when the patient is present for service regardless of status (scheduled or walk-in). Obtaining information necessary to obtain financial clearance at time of service (to include collection of co-pay, deductible, or co-insurance).

• Collection of Residuals – Support and monitor the patient education and communication process, present the opportunity for patients to pay their patient balances as both a convenience and improvement to patient flow at the point of service.

iii.
POST-SERVICE - Supplier will directly provide leadership, management oversight, staffing and technical expertise of, or indirectly (depending on the applicable patient accounting system) support through implementation of “best practices” and process standardization, the following services:

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL                Exhibit 1                         Page 12
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•     Coding Supported Accounts Receivable Management – Once a medical record coding and/or charge entry is completed and submitted for billing, identify and remedy billing deficiencies in accordance with payer requirements and compliant billing practices. When required, utilize certified coding professional to review and correct billing editor rejections and payer denials to correct and resubmit claims.

•     Charge Capture/ Pre-Bill, Post-Bill (Charge Optimization ) - Use automated and manual methods, including retrospectively, to correctly bill gross revenue and to capture applicable and authorized charges on the bill that is sent to the payer/ patient, while remaining in compliance with all applicable laws and guidelines. For retrospective review, analyze claims after the bill has been sent to look for incorrect or missing charges or codes, and initiate confirmation and rebill processes to ensure all applicable and authorized charges have been captured by clinical departments and re-billed to the payer/ patient.

b.
Platform-Specific Services – “ Platform-Specific Services ” shall include the following functional areas:

POST-SERVICE – Supplier will directly provide leadership, management oversight, staffing and technical expertise of, or indirectly (depending on the applicable patient accounting system) support through implementation of “best practices” and process standardization, the following services:

• Billing/Claims Processing, Claims Scrubbing/Preparation/Claims Submission - Send all required information to the billing editor application or system so that a claim proceeds to the applicable payer. Though the goal is to have no bill editor rejects, Supplier shall oversee processes to resolve all discrepancies in a timely manner for resubmission of the bill to the applicable payer. Once the insurance balance is resolved, confirm that the applicable patient billing system sends a bill for the residual patient responsibility. Recommend billing edits and bridge routines to improve the number of claims sent to the payer without intervention and/or to reduce denials.

•
Credits (Refund Processing ) - Research credit balances and reasons for credit balances (e.g., over-contractualization, system processing issues, actual over-payments, etc.), and prepare appropriate payment alterations where no refund is due. Supplier shall process credit balances for refund payment for Ascension Health Affiliates’ review and consent. Implement processes necessary to comply with state escheatment laws for uncashed refund payments.

• Unpostables – Research and gather all information necessary to support posting an “Unpostable” to the correct account. “Unpostables” are unidentified remittances, whether made by check, cash payment, remit or individual account balance, which do not contain sufficient information to accurately process and post such payments to a patient account.

• Credit Card Processing – Manage and/or support processes for patient and payer credit card processing.

• Cash Posting and Processing (Lockbox and Payment Posting ) – Electronically and manually post cash from both payers’ and patients’ accounts and reconcile outstanding accounts receivable in a timely and accurate manner. Reconcile daily cash at patient account level to the extent reasonably feasible (except Ascension Health will be responsible for general ledger and patient accounting reconciliation). Post payments not processed electronically (e.g., over-the-counter deposits, payroll deductions, returned lockbox items, bank credit/debit adjustments, credit card chargebacks) on the day such items are received or in a longer timeframe determined by Ascension Health to be proper. Identify and reconcile unidentified cash receipts and daily lockbox deposits to payment posting in the patient accounting system on a daily basis.


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CONFIDENTIAL                Exhibit 1                         Page 13
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• Third Party Collections and Self-Pay Follow-Up (internal and external collection activities) (AR Follow-up ) - Manage the collection process in accordance with Ascension Health Standards, federal, state and local hospital policies and practices. Coordinate with third party collectors for debt in default. Attempt to resolve all issues (e.g. registration, coding, billing, clinical, etc.) which have caused a partial or full denial. Perform denial and appeal service on third party claims, including review Remittance Advice and/or Explanation of Benefits and determine payment discrepancies between actual payment and expected payment. Create and send appeal letters for accounts that have been denied by the insurance payer. As necessary, resubmit all applicable bills to the payer and make improvements to attempt reduction or elimination of re-occurrence of such events. This service includes all non-zero balances.

• Denial Management (Operational and Clinical ) - Attempt to resolve all issues (e.g., registration, coding, billing, clinical, etc.) which have caused a partial or full denial. Resubmit the applicable bill to the payer as necessary and make systemic improvements to reduce or eliminate re-occurrence. Implement process improvements to reduce future denials based on root cause analysis of current denials.

• Customer Service (Patient Billing/Patient Financial Services ) – Provide an inbound call center capability and mail response capabilities for patient inquires, complaints, and possible payment/resolutions via a phone number and address listed on the patient bill. Customer service agent shall handle and resolve a wide range of questions or issues to include disputes. Supplier shall record all relevant customer service calls and maintain recordings for a period of a least ninety (90) days after the date of call, making such recordings available to Ascension Health upon request. Manage all correspondence received by the call center or patient correspondence sent to an Eligible Medical Group’s lockbox. This function will also include processing post-service financial assistance applications, Medicaid applications, and other patient liability functions (e.g. bankruptcy, attorney requests, etc). This call center will receive calls for both acute care and professional fee patient balances at the mutual agreement of each Eligible Medical Group.

• Patient Statement/Pre-Collect – Manage processing of patient statements and perform patient/ authorized guarantor non-defaulted receivables collection services.

• Bad Debt Management (Self-Pay Collections ) - Manage patient bad debt through internal means and/or third party vendors and maintain documentation to support bad debt logging.

• Underpayment Review/Recovery – Use a contract management system and other tools or vendors to identify claims (after all efforts related to AR follow-up have been exhausted) that were not technically paid correctly (commonly due to a payer mistake or a misinterpretation of or a vague contractual term). Once such claims have been identified, appeal such claims and follow-up until either the claim is paid correctly or the contract is clarified for re-modeling or changed.

•
Patient Billing / Secondary Billing – Identified as part of the registration process (preferred) or subsequently from the patient at time of patient billing. Send a secondary payer bill for the patient responsibility portion of such bill after the primary insurance is settled to gain reimbursement from a secondary insurance payer.

• AR Oversight Support as Appropriate to Support General Operations – Provide oversight of open accounts receivable and escalate items as appropriate to assist the Eligible Medical Group to timely resolve items and maximize collections.

c.
OTHER SERVICES – The Platform-Specific Services and the Medical Group Market Services will include the additional services listed below, which Supplier will provide across all Pre-Service, Time of Service and Post-Service functional areas:


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CONFIDENTIAL                Exhibit 1                         Page 14
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• Revenue Cycle Analytics and Reporting - Provide detailed reports and analytical support to revenue cycle functions through data mining, analysis and report creation.

• Revenue Cycle Technology and Support - Revenue cycle support services including, but not limited to, technology support, training and special projects.

• Revenue Cycle Training - Conduct training and quality assurance across all revenue cycle processes.

• Vendor Management - Contracting for and management of vendor relationships specializing in revenue cycle sub-functions including areas such as authorization management, coding and debt collection.

1.
Out of Scope Services .
Without limiting Section 4.1 of the MPSA, the Parties agree that any services that are not described in Section 1 of this Exhibit 1 shall be considered to be out-of-scope services unless agreed to in writing by Supplier and the applicable Eligible Medical Group. Notwithstanding the foregoing, the Parties acknowledge that (i) Supplier shall be responsible for overall performance improvement across the entire revenue cycle with respect to Eligible Medical Groups and will be accountable for revenue cycle performance of the Eligible Medical Groups through the Incentive Fee Payments (as defined in Exhibit 3 ) and Service Levels (as defined in Exhibit 4 ) and (ii) in the future, certain out-of-scope services may be provided by Supplier for any Eligible Medical Group in accordance with Section 4.3(a) of the MPSA.

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL                Exhibit 1                         Page 15
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Schedule A to Exhibit 1

ASCENSIONAMGSUPPLEMEN_IMAGE2.GIF




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CONFIDENTIAL                Exhibit 1                         Page 16
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Exhibit 2

EMG Base Fees

For clarity, any reference in this Exhibit 2 to a particular Section shall be deemed a reference to a Section within this Exhibit 2 unless otherwise stated. Capitalized terms used in this Exhibit 2 and not otherwise defined will have the meanings ascribed to such terms elsewhere in the Supplement or, if such terms are not defined in the Supplement, the MPSA.
1.
Base Fees .
For Supplier’s provision of EMG Services to the Eligible Medical Groups, Ascension Health will pay to Supplier a base fee (the “ EMG Base Fee ”), which EMG Base Fee shall be comprised of the following four components:
1.1.
with respect to all Eligible Medical Groups in the NRSC/Athena Group (“ NRSC/Athena EMGs ”) receiving Platform-Specific Services, a [**] fee (to be paid in accordance with Exhibit 4-D to the MPSA) equal to the product of:
(i)
the [**] Rolling Average Cash Collections with respect to such [**] for all such Eligible Medical Groups (in the aggregate),
multiplied by

(ii)
the result of:
a.
the NRSC Cost to Collect Factor (as defined in Section 2.2 )
minus

b.
[**]
(the portion of the EMG Base Fee described in this Section 1.1 , the “ NRSC Base Fee ”)
and

1.2.
with respect to all NRSC/Athena EMGs that have commenced receiving Medical Group Market Services from Supplier, for each EMG Market, a [**] fee (to be paid in accordance with Exhibit 4-D to the MPSA) equal to the product of:
(i)
the [**] Rolling Average Cash Collections with respect to such [**] for all such Eligible Medical Groups in such EMG Market (in the aggregate),
multiplied by

(ii)
the EMG Market Cost to Collect Factor (as defined in Section 2.3 ) applicable to the NRSC/Athena EMGs in such EMG Market,
(the portion of the EMG Base Fee described in this Section 1.2 , together with the NRSC Base Fee, the “ Combined Athena Base Fee ”)
and

1.3.
with respect to all Eligible Medical Groups in the Epic Group receiving EMG Services, a [**] fee (to be paid in accordance with Exhibit 4-D to the MPSA) equal to the product of:

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CONFIDENTIAL             Exhibit 2                    Page 17
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(i)
the [**] Rolling Average Cash Collections with respect to such [**] for all such Eligible Medical Groups (in the aggregate),
multiplied by

(ii)
the result of:
a.
the Epic Cost to Collect Factor (as defined in Section 2.4 )
minus

b.
[**]
(the portion of the EMG Base Fee described in this Section 1.3 , the “ Epic Base Fee ”)
and
1.4.
with respect to all Eligible Medical Groups in the Cerner Group receiving EMG Services, a [**] fee (to be paid in accordance with Exhibit 4-D to the MPSA) equal to the product of:
(i)
the [**] Rolling Average Cash Collections with respect to such [**] for all such Eligible Medical Groups (in the aggregate),
multiplied by
 

(i)
the result of:.
a.
the Cerner Cost to Collect Factor (as defined in Section 2.5 )
minus
b.
[**]
(the portion of the EMG Base Fee described in this Section 1.4 , the “ Cerner Base Fee ”).
It is the intent of the Parties for the EMG Service Commencement Date to occur on the first day of any month; however, in the event any EMG Service does not start on the first of a month, the Parties shall account for any proration in the EMG Base Fees in accordance with Section 11.1(c) of the MPSA.

1.5.
Certain Definitions
(i)
“ Cerner Assessment ” means the inspections, examinations, or assessments performed by the Parties in connection with the onboarding of the Cerner Group (i.e., the transitioning to Supplier of the provision of all of the EMG Services to the Cerner Group), which will conclude prior to the execution of the Cerner Group Addendum in accordance with the Assessment Principles listed in Section 5 , which will identify and analyze various costs and expenses relating to the Revenue Cycle Operations of such Eligible Medical Groups (including the allocation of costs relating to In-Scope Employees and non-payroll vendors).
(ii)
“ Cerner Baseline Year ” means the most recent and concluded Ascension Health fiscal year or calendar year (as mutually agreed by the Parties) as of the time of the effective date of the Cerner Group Addendum.

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CONFIDENTIAL             Exhibit 2                    Page 18
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(iii)
“ Cost Board ” shall mean a joint governance group that shall be tasked with decisions relating to cost allocation and EMG Base Fee calculation, as such decisions may be required under this Agreement, including relating to the determination of In-Scope Employees and In-Scope Vendors that will transition to the Supplier, and the resulting calculation of EMG Base Fees. The Cost Board shall have an equal number of members from each of Ascension Health and Supplier. The default members of the Cost Board shall at all times be comprised of two Ascension Health representatives (i.e., Executive Vice President and Chief Financial Officer, Ascension, and Senior Vice President and Chief Financial Officer, Ascension Health), and two Supplier representatives (i.e., Chief Executive Officer, R1 RCM Inc., and Managing Director, TowerBrook Capital Partners, L.P.). The Cost Board will meet on a periodic basis as mutually agreed to by the Parties. Decisions of the Cost Board shall require [**] representatives. In the event the Cost Board cannot resolve any disputes or other issues submitted to it, such disputes or issues shall be subject to formal mediation proceedings. If not resolved through such mediation proceedings, any such unresolved disputes or other issues shall be subject to final and binding arbitration proceedings. In the event a third party acquires, directly or indirectly, Control of Supplier, or a third party acquires all or substantially all of Supplier’s assets, the Cost Board shall be dissolved and all responsibilities and rights of the Cost Board shall be assumed by the JRB.
(iv)
“ EMG Assessment ” means any of: (a) the NRSC Assessment, (b) the Epic Assessment, (c) the Cerner Assessment and (d) each Market Assessment.
(v)
“ EMG Numerator ” means any of: (a) the NRSC Cost to Collect Numerator, (b) the Epic Cost to Collect Numerator, (c) the Cerner Cost to Collect Numerator Factor and (d) each Market Cost to Collect Numerator.
(vi)
“ Epic Assessment ” means the inspections, examinations, or assessments performed by the Parties in connection with the onboarding of the Epic Group (i.e., the transitioning to Supplier of the provision of all of the EMG Services to the Epic Group), which will conclude prior to the execution of the Wisconsin Addendum in accordance with the Assessment Principles listed in Section 5 , which will identify and analyze various costs and expenses relating to the Revenue Cycle Operations of such Eligible Medical Groups (including the allocation of costs relating to In-Scope Employees and non-payroll vendors).
(vii)
“ Epic Baseline Year ” means the period actually used for purposes of calculating the Base Fee for the physician groups associated with the Wheaton ministry as set forth in the EMG Services Addendum for Wisconsin, which Base Fee shall be subject to any MG Realized Cost Savings (as defined in MPSA Amendment No. 1) for each ministry realized through [**], with [**] percent ([**]%) of the MG Realized Cost Savings applied to the EMG Base Fee.
(viii)
“ Initial EMG Cost to Collect Factor ” means any of: (a) the Initial NRSC Cost to Collect Factor, (b) the Initial Epic Cost to Collect Factor, (c) the Initial Cerner Cost to Collect Factor and (d) each Initial Market Cost to Collect Factor.
(ix)
“ Market Assessment ” means the inspection, examination, or assessment performed by the Parties in connection with the onboarding of each EMG Market (i.e., the transitioning to Supplier of the provision of Medical Group Market Services to the NRSC/Athena EMGs in such EMG Market) and in accordance with the Assessment Principles listed in Section 5 that will conclude prior to the execution of the applicable Market Addendum, which will identify and analyze various costs and expenses relating to the Revenue Cycle Operations of such EMG Market (including the allocation of costs relating to In-Scope Employees and non-payroll vendors).
(x)
“ Market Baseline Cash ” means the aggregate amount of Cash Collections received by the NRSC/Athena EMGs in an EMG Market during the Market Baseline Year for such EMG Market.

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(xi)
“ Market Baseline Year ” means (a) with respect to the NRSC/Athena EMGs in the Wisconsin EMG Market only, the period actually used for purposes of calculating the Base Fee for the physician groups associated with Ministry (MHS) and Columbia St. Mary’s ministries as set forth in the EMG Services Addendum for Wisconsin, which Base Fee shall be subject to any MG Realized Cost Savings (as defined in MPSA Amendment No. 1) for each ministry realized through [**], with [**] percent ([**]%) of the MG Realized Cost Savings applied to the EMG Base Fee, and (b) with respect to the NRSC/Athena EMGs in all other EMG Markets, the most recent and concluded Ascension Health fiscal year or calendar year (as mutually agreed by the Parties) as of the time of the effective date of the applicable EMG Services Addendum for that EMG Market.
(xii)
“ NRSC Assessment ” means the inspections, examinations, or assessments performed by the Parties in connection with the onboarding of the NRSC (i.e., the transitioning to Supplier of the provision of Platform-Specific Services for the NRSC/Athena Group), which began before the Supplement Effective Date and will conclude prior to the execution of the NRSC/Athena Addendum in accordance with the Assessment Principles listed in Section 5 , which will identify and analyze various costs and expenses relating to the Revenue Cycle Operations of such Eligible Medical Groups (including the allocation of costs relating to In-Scope Employees and non-payroll vendors).
(xiii)
“ NRSC Baseline Year ” means [**].
(xiv)
“[**] Rolling Average Cash Collections ” means, with respect to an Eligible Medical Group, the average for [**] Cash Collections received by such Eligible Medical Group based on the Cash Collections during the [**] period that ends [**] prior to the [**] of the [**] that includes the [**] for which the applicable portion of the EMG Base Fee is payable.

For example, to calculate an Eligible Medical Group’s portion of the EMG Base Fee for [**], the [**] Rolling Average Cash Collections would equal the [**] Cash Collections received by such Eligible Medical Group in [**].

2.
Cost to Collect Factors . Each Initial EMG Cost to Collect Factor shall be determined by the Cost Board after completion of the corresponding EMG Assessment.
2.1.
Calculation Principles. In addition to the principles listed in Section 5 below, the Cost Board shall follow the methodology below in order to establish an applicable Initial EMG Cost to Collect Factor:
(i)
The “ Initial NRSC Cost to Collect Factor ” means the fraction (expressed as a percentage) representing the NRSC Cost to Collect Factor as of the completion of the NRSC Assessment, which will be calculated as follows: (i) the numerator is equal to the aggregate annual value of all costs and expenses associated with providing the Platform-Specific Services identified as part of the NRSC Assessment to the NRSC/Athena Group, as approved by the Cost Board, and otherwise normalized to account for any extraordinary costs that do not relate to the Platform-Specific Services provided to the NRSC/Athena Group during the NRSC Baseline Year or are not reasonably be expected to continue (collectively, the “ NRSC Cost to Collect Numerator ”); and (ii) the denominator is equal to the aggregate amount of Cash Collections received by the NRSC/Athena EMGs during the NRSC Baseline Year.

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CONFIDENTIAL             Exhibit 2                    Page 20
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(ii)
The “ Initial Market Cost to Collect Factor ” means the fraction (expressed as a percentage) representing the EMG Market Cost to Collect Factor as of the completion of the Market Assessment for the NRSC/Athena EMGs in each EMG Market, which will be calculated as follows: (i) the numerator is equal to, for the EMG Market addressed in the applicable EMG Services Addendum, the aggregate annual value of all costs and expenses associated with providing the Medical Group Market Services that are identified as part of the Market Assessment, as approved by the Cost Board, and otherwise normalized to account for any extraordinary costs that do not relate to the applicable EMG Services provided during the applicable Market Baseline Year or are not reasonably be expected to continue (collectively, the “ Market Cost to Collect Numerator ”); and (ii) the denominator is equal to the Market Baseline Cash for the NRSC/Athena EMGs in such EMG Market.
(iii)
The “ Initial Epic Cost to Collect Factor ” means the fraction (expressed as a percentage) representing the Epic Cost to Collect Factor as of the completion of the Epic Assessment, which will be calculated as follows: (i) the numerator is equal to the aggregate annual value of all costs and expenses associated with providing the EMG Services identified as part of the Epic Assessment to the Epic Group, as approved by the Cost Board, and otherwise normalized to account for any extraordinary costs that do not relate to the EMG Services provided to the Epic Group during the Epic Baseline Year or are not reasonably be expected to continue (collectively, the “ Epic Cost to Collect Numerator ”); and (ii) the denominator is equal to the aggregate amount of Cash Collections received by the Eligible Medical Groups in the Epic Group during the Epic Baseline Year.
(iv)
The “ Initial Cerner Cost to Collect Factor ” means the fraction (expressed as a percentage) representing the Cerner Cost to Collect Factor as of the completion of the Cerner Assessment, which will be calculated as follows: (i) the numerator is equal to the aggregate annual value of all costs and expenses associated with providing the EMG Services identified as part of the Cerner Assessment to the Cerner Group, as approved by the Cost Board, and otherwise normalized to account for any extraordinary costs that do not relate to the EMG Services provided to the Cerner Group during the Cerner Baseline Year or are not reasonably be expected to continue (collectively, the “ Cerner Cost to Collect Numerator ”); and (ii) the denominator is equal to the aggregate amount of Cash Collections received by the Eligible Medical Groups in the Cerner Group during the Cerner Baseline Year.
(v)
The Parties agree that one-time system implementation-related costs (i.e., costs for both (1) implementing systems and (2) stabilizing operations as a result of such implementation) will be excluded from the calculation of the EMG Base Fees. The Parties acknowledge that the EMG Base Fees are intended to compensate Supplier for steady-state revenue cycle management services and will exclude extraordinary costs for substantial or non-recurring projects (e.g., system implementation). If either Party believes that there were any anomalies, significant events or other cost-generating developments (including the recurrence of non-recurring costs) during the NRSC Baseline Year, Market Baseline Year, Epic Baseline Year and/or Cerner Baseline Year (as applicable), the Parties agree to reasonably address such concerns in good faith, with escalation to the Cost Board if necessary.
2.2.
“ NRSC Cost to Collect Factor ” means the Initial NRSC Cost to Collect Factor determined by the Parties in accordance with this Exhibit 2 , as such fraction may be adjusted if agreed by the Cost Board in accordance with Sections 2.6 and/or 2.7 below.
For the avoidance of doubt, the NRSC Cost to Collect Factor that will be used in the EMG Base Fee calculation in Section 1.1 above shall equal the sum or difference of:

(i)
the Initial NRSC Cost to Collect Factor,

plus (if the adjustment is upward) or minus (if the adjustment is downward)


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(ii)
the aggregated value of all adjustments (as may be agreed in accordance with Sections 2.6 and/or 2.7 below) associated with the provision of Platform-Specific Services to NRSC/Athena Group EMGs.

For the further avoidance of doubt, the Initial NRSC Cost to Collect Factor shall not be changed except in accordance with Sections 2.6 and/or 2.7 below, and any such changes will be applied prospectively to EMG Base Fee calculations.

2.3.
“ EMG Market Cost to Collect Factor ” means, the Initial Market Cost to Collect Factor determined by the Parties in accordance with this Exhibit 2 , as such fraction may be adjusted if agreed by the Cost Board in accordance with Sections 2.6 and/or Section 2.7 below.
For the avoidance of doubt, the EMG Market Cost to Collect Factor that will be used in the EMG Base Fee calculation in Section 1.2 shall equal the sum or difference of:
 
(i)
the Initial Market Cost to Collect Factor for the NRSC/Athena EMGs in the applicable EMG Market,

plus (if the adjustment is upward) or minus (if the adjustment is downward),

(ii)
the aggregated value of all adjustments (as may be agreed in accordance with Sections 2.6 and/or Section 2.7 below) associated with the provision of Medical Group Market Services to NRSC/Athena EMGs in the applicable EMG Market.

For the further avoidance of doubt, the Initial Market Cost to Collect Factor shall not be changed except in accordance with Sections 2.6 and/or Section 2.7 , and such changes will be applied prospectively to EMG Base Fee calculations.

2.4.
“ Epic Cost to Collect Factor ” means the Initial Epic Cost to Collect Factor determined by the Parties in accordance with this Exhibit 2 , as such fraction may be adjusted if agreed by the Cost Board in accordance with Sections 2.6 and/or 2.7 below.
For the avoidance of doubt, the Epic Cost to Collect Factor that will be used in the EMG Base Fee calculation in Section 1.3 above shall equal the sum or difference of:

(i)
the Initial Epic Cost to Collect Factor,

plus (if the adjustment is upward) or minus (if the adjustment is downward)

(ii)
the aggregated value of all adjustments (as may be agreed in accordance with Sections 2.6 and/or 2.7 below) for Eligible Medical Groups in the Epic Group.

For the further avoidance of doubt, the Initial Epic Cost to Collect Factor shall not be changed except in accordance with Sections 2.6 and/or 2.7 below, and any such changes will be applied prospectively to EMG Base Fee calculations.

2.5.
“ Cerner Cost to Collect Factor ” means the Initial Cerner Cost to Collect Factor determined by the Parties in accordance with this Exhibit 2 , as such fraction may be adjusted if agreed by the Cost Board in accordance with Sections 2.6 and/or 2.7 below.
For the avoidance of doubt, the Cerner Cost to Collect Factor that will be used in the EMG Base Fee calculation in Section 1.4 above shall equal the sum or difference of:

(i)
the Initial Cerner Cost to Collect Factor,

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plus (if the adjustment is upward) or minus (if the adjustment is downward)

(ii)
the aggregated value of all adjustments (as may be agreed in accordance with Sections 2.6 and/or 2.7 below) for Eligible Medical Groups in the Cerner Group.

For the further avoidance of doubt, the Initial Cerner Cost to Collect Factor shall not be changed except in accordance with Sections 2.6 and/or 2.7 below, and any such changes will be applied prospectively to EMG Base Fee calculations.

2.6.
Post-Assessment Adjustments to Initial NRSC Cost to Collect Factor, Initial Market Cost to Collect Factor, Initial Epic Cost to Collect Factor and Initial Cerner Cost to Collect Factor
(i)
Prior to the EMG Service Commencement Date of each of the NRSC/Athena Addendum, any Market Addendum and the Cerner Group Addendum, Ascension Health shall keep Supplier reasonably apprised of any material developments, updates, and other process and organizational changes, including with respect to cost and scope of the services applicable to Eligible Medical Groups included in each of the NRSC/Athena Group, the Epic Group and/or the Cerner Group (as applicable) and the Parties will cooperate in good faith with respect to any implications on baselining and calculating the EMG Base Fee that may result from such changes.

(ii)
Prior to the EMG Service Commencement Date of each of the NRSC/Athena Addendum, any Market Addendum and the Cerner Group Addendum, the Parties shall identify: (A) any areas of material change with respect to Eligible Medical Groups included in the NRSC/Athena Group, Epic Group or the Cerner Group (as applicable) that occurred between the Supplement Effective Date and the contemplated date of onboarding of such Eligible Medical Groups; (B) any areas that may result in material changes to the manner in which the EMG Services are provided to such Eligible Medical Groups (e.g., onboarding of material revenue amounts, materially substandard performance); and (C) any factors or conditions that may otherwise require investments in technology, employees and other infrastructure that may improve the operational performance of the EMG Services with respect to such Eligible Medical Groups. If any such changes, factors or conditions are identified, the Parties will, in good faith, make adjustments to the applicable Initial EMG Cost to Collect Factor to equitably reflect such changes, factors or conditions.

(iii)
[**]

2.7.
Other Post-EMG Assessment Adjustments to EMG Cost to Collect Factors
If, after an EMG Assessment: (i) an Eligible Medical Group requests that Supplier provide an EMG Service that was not received by such Eligible Medical Group at the time of such EMG Assessment (such EMG Service, an “ Unfurnished Service ”); or (ii) the costs or expenses associated with such Unfurnished Service are not accounted for in the determination of the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor or any EMG Market Cost to Collect Factor, as applicable, as of the date such Unfurnished Service would commence, then, subject to Cost Board approval, the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor and/or the applicable EMG Market Cost to Collect Factor, as applicable, will be equitably increased by an amount to be determined by the Cost Board, and such adjustments shall be effective as of the date Supplier begins performing such Unfurnished Service. For the avoidance of doubt, the mere reconfiguration or natural evolution of an EMG Service (or multiple EMG Services) that had been provided by Supplier under this Supplement will not, by itself, trigger any Cost Board determination under this Section 2.7 , and such reconfigured or naturally evolved EMG Service shall not constitute an Unfurnished Service.

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[**]

If, after an EMG Assessment, Ascension Health enters into an agreement (or a series of related agreements) to add (whether via acquisition, employment or PSAs) additional physician groups that will automatically receive EMG Services under an EMG Services Addendum pursuant to Section 1(c ) of the main body of the Supplement, and either Party reasonably believes that such addition may result in an increase of [**]% or more of Net Patient Service Revenue (as measured over the then-current Ascension Health fiscal year to the subsequent Ascension Health fiscal year) across all of the Eligible Medical Groups in the aggregate, then such Party shall provide notice to the other Party of the same and the Parties will promptly perform and complete an assessment of such additional physician groups that is consistent with the assessments described in this Exhibit 2 and follows the principles set forth in Section 5 for purposes of determining whether an adjustment to the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor or any EMG Market Cost to Collect Factor, as applicable, should be adjusted to account for such additional physician groups. Suppler acknowledges and agrees that the addition of such physician groups may cause the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor and/or any EMG Market Cost to Collect Factor to decrease and the Parties agree that the results of any such assessment shall be submitted to the Cost Board and the Cost Board will determine the proper increase or decrease to the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor and/or any EMG Market Cost to Collect Factor, as applicable, in accordance with the guidelines and principles of this Exhibit 2 .

2.8.
New Services
If any Eligible Medical Group requests that Supplier provide any services other than EMG Services, all such requested services shall be New Services under Section 4.3(a) of the MPSA.

3.
[**] . [**].

4.
Benefits Uplift . Ascension Health will have the option, in its sole discretion, to direct Supplier to provide a Benefits Uplift as described in and in accordance with Exhibit 13 , Section 2.5(b) of the MPSA.
5.
Guiding Principles for the EMG Assessments . The Parties agree that, in connection with each EMG Assessment undertaken by the Parties, the calculation of the corresponding EMG Numerator will be based on the following guidelines.
5.1.
Payroll Expenses for Eligible Medical Groups: All payroll costs and expenses at each Eligible Medical Group for In-Scope Employees (defined below) that are [**] shall be [**].
 
“ In-Scope Employees ” means those employees which are responsible for performing functions that relate to “Job Titles,” which at the applicable physician group and at the applicable “Cost Center” (collectively, an “ Area ”) for EMG Services which are designated by the Parties, pursuant to the applicable EMG Assessment, as having an In-Scope Percentage (as defined below) that is: (A) greater than or equal to [**] percent ([**]%); and (B) higher than [**] percent ([**]%) but lower than [**] percent ([**]%), in each case of (A) and (B), subject to the right of the Cost Board to remove any such “Job Title”, job code, or some other categorical identifier, from the “In-Scope Employees.” Notwithstanding the foregoing, “In-Scope Employees” exclude (A) those employees working in departments which perform both EMG Services and services not qualifying as EMG Services, (B) all National Employees, and (C) all EMG Base Employees.

“ In-Scope Percentage ” shall mean, for any Area, the proportion of “In Scope FTEs” cost for such Area divided by the “Total FTEs” cost for such Area, in each case, as determined by the Parties in the applicable EMG Assessment.


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“ EMG Base Employee ” means those employees who are responsible for performing functions for EMG Services and such functions by their nature are performed at a physician’s office or clinic location.

“ National Employee ” shall mean any employee of Ascension Health engaged in Revenue Cycle Operations but without any operational responsibility for any Eligible Medical Group.

5.2.
IT Support Expenses for Eligible Medical Groups: The Parties will identify costs and expenses related to information technology support and real estate for Revenue Cycle Operations and agree on the proper allocation of such costs and expenses for inclusion in the applicable EMG Numerator.
5.3.
Non-Payroll Expenses for Third-Party Vendors: Each EMG Numerator will include all costs and expenses related to In-Scope Vendors (defined below), all of which shall be [**], excluding any portion of the costs and expenses for Partially Related Vendors that are not related to the EMG Services.
“ In-Scope Vendors ” means third party vendors that perform functions as part of or related to the EMG Services, including: (A) any vendor that, pursuant to the applicable EMG Assessment (as applicable), provides a product, solution or service (a “ Vendor Service ”) that is [**] percent ([**]%) related to the EMG Services; and (B) any vendor that is, pursuant to the applicable EMG Assessment, providing or offering a Vendor Service [**] related to the Services ([**]).

In-Scope Vendors shall not include: (i) the vendors of the Athena Platform, Cerner Platform or Epic Platform; and (ii) any vendor with respect to a Vendor Service that, pursuant to the applicable EMG Assessment, is not related to the EMG Services in any manner.

5.4.
[**] : For any [**], the portion of the cost of the [**] that relates to the EMG Services will be [**]. The Cost Board may review the list of vendors from time to time and, when appropriate, determine whether any such vendor is not an In-Scope Vendor (subject to Section 5.5 ) . If a vendor is deemed not to be an In-Scope Vendor, an adjustment to the NRSC Cost to Collect Factor, the Epic Cost to Collect Factor, the Cerner Cost to Collect Factor or any EMG Market Cost to Collect Factor (as applicable) shall be made [**], and Supplier [**].
5.5.
Additional Considerations:
(i)
If a termination fee or other termination-related costs or expenses must be paid to allow for the termination or any splitting of an existing In-Scope Vendor contract, such fee will be [**].
(ii)
The allocation of one-time, lump-sum implementation and/or license fees for a particular In-Scope Vendor which are greater than or equal to [**] dollars ($[**]) will be dependent on whether or not such fees will be determined to be in or out of the applicable EMG Numerator by the Cost Board. If the Cost Board does not make such a determination, allocation of such fee shall be submitted for resolution in accordance with the governance mechanism set forth in Exhibit 6 to the MPSA. Notwithstanding the foregoing, one-time, lump-sum implementation fees less than [**] dollars ($[**]) are included in each EMG Numerator and shall be [**].
(iii)
Supplier and Ascension Health shall each be responsible for its own incurred costs associated with information technology, such as interface development, file transfers, and custom programming related to the Supplier technology solutions and other third party vendors.
(iv)
The allocation between the Parties of one-time costs related to information technology system conversion services, including consulting services, staff augmentation and training, shall be determined by mutual agreement of the Parties with any adjustment of the applicable EMG Numerator to be agreed by the Cost Board.

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(v)
Recurring maintenance, support, service, license, or contingency fees for all In-Scope Vendor products, solutions, and services, shall be included in the applicable EMG Numerator and [**].
(vi)
Ascension Health reserves the right to separately contract with and utilize vendors for services not provided by Supplier, subject to such vendors being reviewed by the Cost Board to confirm that Supplier does not provide such service to any Eligible Medical Group. If the use of any such vendor results in additional [**] for Ascension Health, Supplier may: (A) [**] Ascension Health for the actual vendor cost; or (B) have such additional [**] solely purposes of calculating the EMG Base Fee (to the extent such additional [**]).
6.
EMG Base Fee for New Eligible Medical Groups . With respect to any EMG Services that will be provided to New Eligible Medical Groups: (i) the Parties shall conduct an assessment of such New Eligible Medical Groups that is consistent in scope with the EMG Assessments; (ii) such assessment will identify any areas that may require investments in technology, employees, and other infrastructure that may improve the operational performance of the EMG Services with respect to such New Eligible Medical Groups; (iii) the results of any such assessment shall be submitted to the Cost Board; and (iv) the Parties will work together in good faith to determine the methodology for calculating the EMG Base Fee for such New Eligible Medical Group in accordance with guidelines and principles that are consistent with those set forth in this Exhibit 2 .
7.
Binghamton and Bridgeport Ministries. For Supplier’s provision of Platform-Specific Services to the physician groups associated with Binghamton and Bridgeport, Ascension Health will pay to Supplier the monthly NRSC Base Fee calculated in accordance with Section 1.1 of this Exhibit 2 . The Parties acknowledge and agree that there shall be [**] with respect to the sale of either Binghamton or Bridgeport.
8.
Windfall Situations and Changes in the Environment.
8.1.
In the event that there is a Force Majeure Event, a material change in the environment in which the Eligible Medical Groups are operating their revenue cycles, or a material change in the laws and regulations that apply to Ascension Health, Supplier, or an individual Eligible Medical Group which significantly affects the economics of one or more of the Parties or frustrates the ability of a party to perform its obligations hereunder, through no fault of its own, the applicable Party shall have the right to request that the other Party or Parties consider a fair and appropriate adjustment to portions of the EMG Base Fee. Upon such request, the Parties will, in good faith, discuss the costs associated with the change in circumstance, with the outcome to equitably reflect the incremental change in costs to deliver EMG Services.
8.2.
Examples of matters that could trigger a request to adjust the EMG Base Fee include the following:
(i)
Material changes in the form of reimbursement by commercial or government payors, including changes to a payment model such as an at-risk or partial or fully capitated system;
(ii)
Changes in the Laws governing portions of provider processes in the revenue cycle such as the way medical treatments are reported (an example would be mandated changes to the medical coding that will result due to CMS’s requirement to implement ICD 11 or any subsequent material changes to the ICD nomenclature);
(iii)
Changes in payer or state regulation that may affect the performance of any functions comprising or included in the EMG Services (e.g., financial clearance, transcription, coding, billing, and payer follow-up);
(iv)
An Eligible Medical Group’s investment in or adoption of new technologies that affect the level of, or type of, work conducted in the revenue cycle (e.g., advances in EMR or CPOE technology that reduce the need for transcription services); and

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(v)
Any large-scale system, which shall include any patient accounting system (e.g., EPIC, Cerner/Siemens, Meditech, McKesson), is replaced or undergoes a vendor change or other fundamental or significant conversion or modification.

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Exhibit 3

EMG Incentive Fees

1.
Incentive Payments
1.1.
General . Supplier will deliver a set of core strategies and management services designed to improve and optimize the revenue cycle operations for Eligible Medical Groups receiving EMG Services. Ascension Health shall pay to Supplier EMG Incentive Fees in the form of Incentive Fee Payments subject to, and in accordance with, the terms of this Exhibit 3 . Whether Supplier qualifies for an Incentive Fee Payment will be determined separately with respect to each Applicable Phase by measuring Supplier’s Actual Performance against a pre-determined and mutually agreed set of Operating Metrics for all of the Eligible Medical Groups receiving the EMG Services in such Applicable Phase. The EMG Incentive Fees will be determined separately for each Applicable Phase for each Measurement Period; provided, however, that after the completion of the fourth (4th) Contract Year with respect to the Kansas EMG Market, the Parties shall meet to discuss combining the calculation of the EMG Incentive Fees for the Kansas EMG Market together with the calculation for the Phase 1 Group.
The Incentive Fee Payments will relate to Supplier’s ability to deliver the EMG Services efficiently and in compliance with all applicable rules and regulations.
For the avoidance of doubt, Exhibit 4-B of the MPSA shall not apply to EMG Incentive Fees.
1.2.
Definitions.
For purposes of this Exhibit 3 , the following terms will have the meanings set forth below:

a)
“ Actual Performance ” means the actual result achieved for an Operating Metric with respect to an Applicable Phase during the Measurement Period.

b)
“ Applicable Phase ” means, as applicable, (i) the Phase 1 Group or (ii) the Kansas EMG Market.

c)
“ Applicable Platform ” means (i) with respect to the Eligible Medical Groups in the NRSC/Athena Group, the Athena Platform, (ii) with respect to the Eligible Medical Groups in the Cerner Group, the Cerner Platform, and (iii) with respect to the Eligible Medical Groups in the Epic Group, the Epic Platform.

d)
“ Contract Year ” means, for each Applicable Phase, a period commencing on the Commencement Date for EMG Services (and, for each subsequent Contract Year, each anniversary thereof) for such Applicable Phase and ending twelve (12) months thereafter. For the avoidance of doubt, the Phase 1 Group will be in a different Contract Year than the Kansas EMG Market at any given time during the Term. For the Phase 1 Group, the Commencement Date will be deemed to be [**].

e)
“ Fiscal Year ” means Ascension Health’s fiscal year, which shall begin on July 1 (or, in the initial Contract Year for any Applicable Phase, its Commencement Date for EMG Services) and end on June 30.

f)
“ Lower Bound Score ” means with respect to an Applicable Phase: (i) for any Measurement Period in which the YTD Lift Percentage for such Applicable Phase is less than [**] percent ([**]%), [**] percent ([**]%); and (ii) for any Measurement Period in which the YTD Lift Percentage for such Applicable Phase is greater than or equal to [**] percent ([**]%), [**] percent ([**]%).

g)
“ Measurement Period ” means any Ascension Health fiscal quarter.


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h)
“ Metric Lift ” means, with respect to an Applicable Phase for any Measurement Period, the dollar value assigned to the Operating Metric representing increased Cash Collections for the Applicable Phase during such Measurement Period for such Operating Metric as compared to the Performance Baseline value for such Operating Metric.

i)
“ Performance Baseline ” means, with respect to any Operating Metric, the Actual Performance for such Operating Metric with respect to the Applicable Phase during the applicable baseline period described in Section 3 below.

j)
[**]

k)
“ Performance Score ” means with respect to an Applicable Phase:

(i)
if for any Measurement Period the YTD Lift Percentage for such Applicable Phase is greater than or equal to [**] percent ([**]%), then the result of the following (expressed as a percentage): the sum of (A) the result of (x) the difference of the YTD Lift Percentage and the Lower Bound, divided by (y) the difference of the applicable Upper Bound Score and the applicable Lower Bound Score, multiplied by (z) [**], and (B) [**]. An illustrated example of this [**] Performance Score is set forth in Appendix D.

[**] = Performance Score

For example, a YTD Lift Percentage of [**]% would result in a Performance Score of [**]% since

[**]

or

ii)
if for any Measurement Period the YTD Lift Percentage for such Applicable Phase is less than [**] percent ([**]%), then the result of the following (expressed as a percentage): (A) the difference of the YTD Lift Percentage and the applicable Lower Bound, divided by (B) the difference of the applicable Upper Bound Score and the applicable Lower Bound Score, multiplied by (C) [**]. An illustrated example of this [**] Performance Score is set forth in Appendix E.

[**] = Performance Score

For example, a YTD Lift Percentage of [**]% would result in a Performance Score of [**]% since

[**]

Notwithstanding the foregoing, in each case, the maximum Performance Score is [**] percent ([**]%) and the minimum Performance Score is [**] percent ([**]%).

l)
“ Phase 1 Group ” means all of the EMG Markets other than the Kansas EMG Market.

m)
“ Quarterly Aggregate Lift ” means, with respect to an Applicable Phase for any Measurement Period, the sum of the Metric Lifts for each Operating Metric for such Applicable Phase during such Measurement Period.

n)
“ Upper Bound Score ” means with respect to an Applicable Phase: (i) for any Measurement Period in which the YTD Lift Percentage for such Applicable Phase is less than [**] percent ([**]%), [**]

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percent ([**]%); and (ii) for any Measurement Period in which the YTD Lift Percentage for such Applicable Phase is greater than or equal to [**] percent ([**]%), [**] percent ([**]%).

o)
“ YTD Aggregate Lift ” means, with respect to an Applicable Phase, the sum of the Quarterly Aggregate Lifts for each Measurement Period to date in the applicable Fiscal Year. For example, when calculated at the end of the third fiscal quarter in a Fiscal Year, the YTD Aggregate Lift equals the sum of the applicable Quarterly Aggregate Lifts in each of the first, second, and third fiscal quarters in such Fiscal Year.

p)
“ YTD Cash ” means, with respect to an Applicable Phase, the aggregate Cash Collections to date of such Applicable Phase for the applicable Fiscal Year.

q)
“ YTD Lift Percentage ” means, with respect to an Applicable Phase, the YTD Aggregate Lift divided by the YTD Cash.

2.
Operating Metrics Scorecard
2.1.
General . Separate Operating Metrics Scorecards will be utilized for each Applicable Phase to determine the Performance Score for the Applicable Phase for each Measurement Period in order to determine the amount of any Incentive Fee Payment earned by Supplier for such Measurement Period. For Metric 1, Metric 2 and Metric 3, the Operating Metrics Scorecards will be populated with the requisite financial performance data from (i) the Applicable Platforms used by the Applicable Phase for each Measurement Period until the Parties mutually agree that the Crowe RCA System is ready for use in connection with such Metrics, and (ii) thereafter, the Crowe RCA System. For Metric 4, and Metric 5, the Operating Metrics Scorecards will be populated with the requisite financial performance data from Supplier’s system of record; provided that Ascension Health will have the right to approve and audit Supplier’s calculations. The Applicable Platform for each Eligible Medical Group will be the sole source of data for the applicable Operating Metrics Scorecard. Each Operating Metrics Scorecard will also include the supporting information that is used to determine the Actual Performance for each Operating Metric and the overall Performance Scores.
2.2.
Metrics . For purposes of this Supplement 26, the “ Operating Metrics ” are comprised of the following five (5) revenue cycle operating metrics, as each is further described and defined in Appendix A to this Exhibit 3 . The Operating Metrics will be calculated separately for each Applicable Phase:
a.
Metric 1 : [**]
b.
Metric 2 : [**]
c.
Metric 3 : [**]
d.
Metric 4 : [**]
e.
Metric 5 : [**]
3.
Operating Metric Performance Baselines
Ascension Health and Supplier will calculate the Performance Baselines in accordance with this Section 3 for each Operating Metric in the Operating Metrics Scorecard. The Performance Baseline for each Operating Metric for: (i) the Phase 1 Group will be calculated using the twelve (12) month period beginning [**]; and (ii) the Kansas EMG Market using the most recent completed Ascension Health fiscal year or calendar year (as mutually agreed by the Parties) prior to the Commencement Date for the Kansas EMG Market.

4.
Operating Metric Scorecard Performance

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An Operating Metric report card (the “ Operating Metric Scorecard ”) will be generated at the end of each Measurement Period for each Applicable Phase summarizing Supplier’s overall Operating Metrics Scorecard performance for the Measurement Period, including the Performance Score, Quarterly Aggregate Lift, YTD Aggregate Lift, YTD Lift Percentage, and YTD Cash. For clarity, no Operating Metric Scorecard will be generated for the Kansas EMG Market until the first Measurement Period following the Commencement Date for the Kansas EMG Market.

5.
Timing of Calculation
The Operating Metrics Scorecard for each Applicable Phase will be calculated at the end of each Measurement Period. The calculation will be based on the [**] of the applicable Measurement Period for each Applicable Phase, and will [**] on the first day of each subsequent Fiscal Year [**]. The Operating Metrics will be measured quarterly, on a cumulative basis within any single Fiscal Year.

6.
Calculation of Incentive Fee Payments
Supplier shall be eligible for Incentive Fee Payments as calculated pursuant to this Section 6 , in accordance with the Operating Metric Scorecard performance, and subject to the Performance Caps.

“ Incentive Fee Earned Year-to-Date ” means, with respect to an Applicable Phase for any Measurement Period, an amount equal to the product of:

(i)
YTD Cash for such Applicable Phase,
multiplied by
(ii)
[**],

multiplied by

(iii)    the applicable Performance Score for such Applicable Phase in such Measurement Period.

“ Incentive Fee Earned In Period ” means, with respect to an Applicable Phase for any Measurement Period, an amount equal to the result of:

(i)
The Incentive Fee Earned Year-to-Date for such Applicable Phase,
less
(ii)
The Incentive Fee Earned Year-to-Date for such Applicable Phase as of the end of the prior Measurement Period within the same Fiscal Year.
“ Incentive Fee Payment ” means, with respect to an Applicable Phase for any Measurement Period, an amount equal to the result of:

(i)
The lesser of:
(a)
The sum of all Incentive Fees Earned In Period for the applicable Measurement Period for such Applicable Phase and all previous Measurement Periods within the applicable Fiscal Year
and

(b)
[**] for such Applicable Phase for such Measurement Period
less

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(ii)
The sum of all Incentive Fee Payments for such Applicable Phase for all previous Measurement Periods within the applicable Fiscal Year.
For the avoidance of doubt a schedule detailing a sample of this calculation has been included in Appendix C and a range of scenarios for the calculation of Performance Scores has been included in Appendix F .

7.
Review and Invoicing Process
Step 1:
Operating Metric Scorecards will be provided and distributed by Supplier to Ascension Health for each Applicable Phase in accordance with Section 2.1 above by the [**] day of the month following the end of each Measurement Period.

Step 2:
Ascension Health and Supplier will have [**] days from the delivery of the Operating Metric Scorecards to review such Operating Metric Scorecards for the Applicable Phases, perform audits of Applicable Platform data as appropriate, and work to reach agreement on the Operating Metrics Scorecards for the Measurement Period. In the event that a potential error is identified in an Operating Metrics Scorecard which error may, as determined by either Party, have a material impact on the measurement of the Operating Metrics Scorecard performance for the Measurement Period, the Parties will work to identify the range of impact of the potential error and shall establish a mutually agreed upon plan to review and resolve such potential error, which error will be resolved effective retroactively as the date that the error impacted the applicable measurement. Absent exceptional circumstances, the Parties will work to resolve all such issues within [**] days of discovery of such issue.

Step 3:
Supplier will invoice Ascension Health for each Incentive Fee Payment for each Applicable Phase no later than [**] days following the end of the Measurement Period for which the EMG Incentive Fees accrued. The invoice shall not include amounts associated with unresolved potential errors identified in Step 2 above. If any Incentive Fee Payment amount is negative for any particular Measurement Period, then such amount shall be held as a credit against EMG Incentive Fees owed in future Measurement Periods.

Step 4:
Incentive Fee Payments shall be jointly reviewed quarterly by Ascension Health and Supplier promptly following the delivery of Operating Metric Scorecard results by Supplier to Ascension Health. To the extent that neither Party delivers written notice of objection to such results within [**] days following such delivery to Ascension Health, the performance results and the resulting Incentive Fee Payments shall be final and binding on the Parties.

8.
Adjustments to Measurement Metrics
When appropriate, Ascension Health and Supplier can mutually agree to adjust the calculation of one or more metrics (the “ Prospective Adjustment ”) when market events or actions outside of either Party’s control compromise the ability to accurately compare Actual Performance to Performance Baselines. Any such adjustments shall only take effect on a prospective basis from and after the Measurement Period during which the Parties agree to such adjustments. The Parties agree that a Prospective Adjustments may take into account any prior Measurement Periods affected by such Prospective Adjustment beginning as of the date either Party provides a formal written request for adjustment to the other Party (the “ Adjustment Request ”) and any Measurement Periods thereafter. For the avoidance of doubt, a Prospective Adjustment may affect any Measurement Period during and after the Adjustment Request is made but not any Measurement Periods prior to the Adjustment Request.

9.
Governance Principles
9.1.
Code Mapping .

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a.
Ascension Health will be responsible for mapping the transaction codes and planning codes within the Applicable Platforms to the applicable figures in the Operating Metrics, and shall provide Supplier with sufficient time to review, discuss and concur with such mapping of transaction codes and planning codes before they are implemented.
b.
If Supplier does not agree to any mapping of any transaction code or planning code proposed by Ascension Health, then the Parties shall seek to resolve the dispute in good faith. However, if the Parties are unable to resolve the dispute, then the issue will be escalated to the Cost Board for resolution.
9.2.
Notification . Supplier agrees to promptly notify Ascension Health of any proposed changes in the processes or technology under their management that are reasonably likely to impact any of the revenue cycle operating metrics including but not limited to the use of transaction codes or management of accounts receivables. Ascension Health will have sufficient time to review and discuss the proposed changes before they are implemented and, if requested by Ascension Health, Supplier will provide an account sampling to ensure that any such proposed changes will be accurate.
9.3.
Records . Supplier and Ascension Health will maintain a reconciled record of the key assumptions used to derive targets and/or make decisions to support development and management of the Operating Metrics Scorecard.
9.4.
Supplier Access . Ascension Health shall provide to Supplier access to the Applicable Platform databases to review, reconcile and validate the data used to populate the Operating Metrics Scorecard. Supplier will have the right to audit the Applicable Platform database. In the event the Supplier’s auditor requires information regarding or from the database or access to the database in connection with its audit related to Supplier’s financial or operating controls, Ascension Health shall reasonably cooperate with Supplier to secure that information for Supplier’s auditors. Any data or database deficiencies will be addressed by Ascension Health (on behalf of the applicable Eligible Medical Group) in a timely manner.
9.5.
Windfall Situations and Changes in the Environment . In the event that there is a Force Majeure Event, a material change in the environment in which the Eligible Medical Groups are operating their revenue cycles, or a material change in the laws and regulations that apply to Ascension Health, Supplier, or an individual Eligible Medical Group which significantly impacts the economics of one or more of the Parties or frustrates the ability of a Party to perform its obligations hereunder, through no fault of its own, the applicable Party shall have the right to request that the other Party consider a fair and appropriate adjustment to the Operating Metrics Scorecard. Upon such request, Supplier and Ascension Health will discuss the impact associated with the change in circumstance, with the outcome to equitably reflect the impact on the Operating Metrics Scorecard. Examples of material matters that could affect one or more metrics on the Operating Metrics Scorecard performance include, but are not limited to, the following:
•
Payor bankruptcies.
•
A pattern of services to patients for whom an Eligible Medical Group is not certified by a payor to bill for such services and thus not entitled to reimbursement.
•
Changes in Self-Pay Discounts and/or changes in Charity Policy.
•
Material growth or decline in self pay population or patient residual balance after insurance.
•
Changes in accounts receivable write-off policies or Medicaid Pending aging policies
•
Implementation of new systems outside the control of Supplier (e.g., new patient accounting system).
•
Regulatory changes, including changes to the ICD nomenclature (e.g., ICD-11) or changes to the status of Medicaid Expansion in a given state.

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APPENDIX A – Operating Metrics Calculation Methods

Set forth below are the details of each of the Operating Metrics.

1.
Metric: [**]
Calculation:     
[**]
Metric Lift = [**]
Measurement Period:
Measured Fiscal Year to Date on a quarterly basis
Performance Baseline : [**] calculated during the baseline period
Applicable Definitions/Other Notes:
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
2.
Metric: [**]
Calculation:     

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[**]
Metric Lift = [**]
Measurement Period:
Measured Fiscal Year to Date on a quarterly basis
Performance Baseline : [**] calculated during the baseline period
Applicable Definitions/Other Notes:
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]

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3.
Metric: [**]
Calculation:     
[**]
Metric Lift = [**]
Measurement Period:
Measured Fiscal Year to Date on a quarterly basis
Performance Baseline : [**] calculated during the baseline period
Applicable Definitions/Other Notes:
For the Performance Baseline, the component (b) [**] will be the defined term [**]; while during the Measurement Periods it will be the defined term [**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**]
•
[**].

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4.
Metric: [**]
Calculation:     
Metric Lift = [**]
Measurement Period:
Measured quarterly
Performance Baseline : Baseline value = $0
Applicable Definitions/Other Notes:     
•
[**]
•
[**]
•
[**]
5.
Metric: [**]
Calculation:     
Metric Lift = [**]
Measurement Period:
Measured quarterly.
Performance Baseline : Baseline value = $0
Applicable Definitions/Other Notes:     

•
[**]
•
[**]



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APPENDIX B – [**]
Phase 1 Group
Measurement Period End Date
Applicable Measurement Period (Fiscal Quarter)
Contract Year Quarter
[**]
[**]  
9/30/2018
FY19-Q1
N/A
[**]
[**]
12/31/2018
FY19-Q2
CY1-Q1
[**]
[**]
3/31/2019
FY19-Q3
CY1-Q2
[**]
[**]
6/30/2019
FY19-Q4
CY1-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2019
FY20-Q1
CY1-Q4
[**]
[**]
12/31/2019
FY20-Q2
CY2-Q1
[**]
[**]
3/31/2020
FY20-Q3
CY2-Q2
[**]
[**]
6/30/2020
FY20-Q4
CY2-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2020
FY21-Q1
CY2-Q4
[**]
[**]
12/31/2020
FY21-Q2
CY3-Q1
[**]
[**]
3/31/2021
FY21-Q3
CY3-Q2
[**]
[**]
6/30/2021
FY21-Q4
CY3-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2021
FY22-Q1
CY3-Q4
[**]
[**]
12/31/2021
FY22-Q2
CY4-Q1
[**]
[**]
3/31/2022
FY22-Q3
CY4-Q2
[**]
[**]
6/30/2022
FY22-Q4
CY4-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2022
FY23-Q1
CY4-Q4
[**]
[**]

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Kansas EMG Market
Measurement Period End Date
Applicable Measurement Period (Fiscal Quarter)
Contract Year Quarter
[**]
[**]
9/30/2019
FY19-Q1
N/A
[**]
[**]
12/31/2019
FY19-Q2
CY1-Q1
[**]
[**]
3/31/2020
FY19-Q3
CY1-Q2
[**]
[**]
6/30/2020
FY19-Q4
CY1-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2020
FY20-Q1
CY1-Q4
[**]
[**]
12/31/2020
FY20-Q2
CY2-Q1
[**]
[**]
3/31/2021
FY20-Q3
CY2-Q2
[**]
[**]
6/30/2021
FY20-Q4
CY2-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2021
FY21-Q1
CY2-Q4
[**]
[**]
12/31/2021
FY21-Q2
CY3-Q1
[**]
[**]
3/31/2022
FY21-Q3
CY3-Q2
[**]
[**]
6/30/2022
FY21-Q4
CY3-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2022
FY22-Q1
CY3-Q4
[**]
[**]
12/31/2022
FY22-Q2
CY4-Q1
[**]
[**]
3/31/2023
FY22-Q3
CY4-Q2
[**]
[**]
6/30/2023
FY22-Q4
CY4-Q3
[**]
[**]
 
 
 
[**]
[**]
9/30/2023
FY23-Q1
CY4-Q4
[**]
[**]



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APPENDIX C – Quarterly Invoice Sample
[**]

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APPENDIX D – [**] Performance Score Example
[**]

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APPENDIX E – [**] Performance Score Example
[**]

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APPENDIX F –Performance Score Scenarios

TABLE2.JPG
Assumptions included in the above:
1) [**]
2) This example is shown for the NRSC cash only but would hold methodically for other Applicable Phases




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Exhibit 4

Service Level Targets and Metrics


For clarity, any reference in this Exhibit 4 to a particular Section shall be deemed a reference to a Section within this Exhibit 4 unless otherwise stated. Capitalized terms used in this Exhibit 4 and not otherwise defined will have the meanings ascribed to such terms elsewhere in the Supplement or, if such terms are not defined in the Supplement, the MPSA.

1.
Definitions .
 
•
“ AMG-Wide Service Levels ” means each of Service Level 1, Service Level, 3, Service Level 4, Service Level 5, and Service Level 11.

•
“ Current Service Levels ” means the AMG-Wide Service Levels and the Group-Specific Service Levels listed in this Exhibit 4 as of the Supplement Effective Date.

•
“ Future Service Levels ” means Service Level 2 and any additional Service Levels agreed by the Parties after the date hereof.
 
•
“ Group-Specific Service Levels ” means Service Level 6 and Service Level 8.

•
“ Measurement Window ” means the time during, or frequency by, which a Service Level shall be measured. The Measurement Window shall be quarterly, unless otherwise specified.

•
“ Root Cause Analysis ” is the formal process, specified in the Policy and Procedures Manual, to be used by Supplier to diagnose problems at the lowest reasonable level so that corrective action can be taken that will eliminate, to the extent reasonably possible, repeat failures.

•
“ Service Level ” means, with respect to this Supplement, any service level described in one of the following Sections (and any additional service levels agreed to by the Parties): Section 3.1 (“ Service Level 1 ”), Section 3.2 (“ Service Level 2 ”), Section 3.3 (“ Service Level 3 ”), Section 3.4 (“ Service Level 4 ”), Section 3.5 (“ Service Level 5 ”), Section 3.6 (“ Service Level 6 ”), Section 3.8 (“ Service Level 8 ”), Section 3.11 (“ Service Level 11 ”).

•
“ Service Level Default ” means Supplier’s level of performance for a particular Service Level fails to meet the applicable Target Level for such Service Level during the applicable Measurement Window.

•
“ Service Level Effective Date ” means, with respect to each Service Level as applied to a particular Eligible Medical Group, the date that such Service Level will be effective and enforced, which shall be the date that is [**] months after the EMG Service Commencement Date for the EMG Service against which the applicable Service Level is applied. For clarity, the Service Level Effective Date for any particular Service Level can vary among different groupings of Eligible Medical Groups (i.e., the Service Level Effective Date for Service Level 1 for the Cerner Group can be different from the Service Level Effective Date for Service Level 1 for the Epic Group).

•
“ SLA Measurement Commencement Date ” means, with respect to each Service Level as applied to a particular Eligible Medical Group, the date that such Service Level will start to be measured, tracked, and recorded, which shall be the EMG Service Commencement Date for the EMG Service against which the applicable Service Level is applied.

2.
General .

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2.1
As of the SLA Measurement Commencement Date for each of the NRSC/Athena Group, the Epic Group, or the Cerner Group (as applicable), Supplier shall perform the EMG Services with the intention to meet or exceed the Target Levels (as defined below) for each of the Service Levels by its applicable Service Level Effective Date. For the avoidance of doubt, in no event shall Supplier be liable for any Service Level Default (including any Service Level Credits) with respect to any Service Level prior to its applicable Service Level Effective Date.
2.2
The Current Service Levels apply solely to Supplier’s performance of the Platform-Specific Services. In connection with any Future Service Levels, the Parties shall agree upon (i) whether the Future Service Level will be applied against a Platform-Specific Service or a Medical Group Market Service, (ii) whether, for purposes of the Service Level Credits, the Future Service Level will be an AMG-Wide Service Level or a Group-Specific Service Level (or if the applicable Service Level Credit should apply in another mutually agreed manner), (iii) the applicable SLA Measurement Commencement Date and Service Level Effective Date (which may vary among different groupings of Eligible Medical Groups) and (iv) any other relevant adjustments to this Exhibit 4 for purposes of measuring and enforcing such Future Service Levels.
2.3
Supplier shall report to Ascension Health regarding Supplier’s performance against each of the Service Levels for each Measurement Window. With respect to all of the Service Levels other than Service Level 4, such reports shall provide information and data at a state-by-state level.
2.4
Ascension Health will have the right to receive Service Level Credits to be applied against the [**], in accordance with Section 7 below (subject to the last sentence of Section 2.1 above).
2.5
Supplier shall provide Ascension Health with the performance reporting for the EMG Services as specified in Section 6 below and as set forth in Section 9.2 of the MPSA.
2.6
As of the SLA Measurement Commencement Date for each Service Level and continuing throughout the duration of the Supplement Term, Supplier shall, in accordance with this Section 2.6 , monitor, measure, collect, and record Supplier’s performance with respect to the metric applicable to each such Service Level. Commencing on the applicable Service Level Effective Date for each Service Level, the Target Levels with respect to such Service Level shall equal the applicable Target Level agreed pursuant to this Exhibit 4 .

2.7
The Parties shall agree upon the Target Levels for each of the Current Service Levels by no later than September 14, 2018. The Parties acknowledge and agree that, for purposes of this Supplement, the Target Levels and Service Level metrics are intended to reflect rational and reasonable standards of performance in line with industry standards, but are not intended to be in the top quartile of performance standards; provided that the Parties may, in accordance with Section 5 , mutually agree to increase any Target Levels or Service Level metrics during the Supplement Term to be in such top quartile.

2.8
For the avoidance of doubt, all of the Current Service Levels, metrics, and measurement standards will be the same for each of the NRSC/Athena Group, the Epic Group and the Cerner Group. The Parties may mutually agree that Future Service Levels, and its associated metrics, and measurement standards will vary based on the identity of the applicable Eligible Medical Group.

3.
Service Level Criteria – Supplier will measure Supplier’s performance against the following Service Levels.

3.1
Service Level 1 - Customer Service Mean Speed to Answer (mean wait time, in seconds, to answer calls at Supplier’s customer service centers). This Service Level shall mean, for a given Measurement Window, for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole), (a) the Aggregate Hold Time divided by (b) the number of calls to Supplier’s customer service center for which the caller requested to speak with a Supplier representative during the Measurement Window.  For purposes of calculating this Service Level, “ Aggregate Hold Time ” means the aggregated total amount of time during the Measurement Window that all callers to Supplier’s customer service center for all of the Eligible Medical Groups then-receiving Platform-Specific Services collectively (including “hang-ups”) remained on hold or in the interactive

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voice response unit after such callers requested to speak with a Supplier representative with respect to Supplier’s customer service center for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole).

3.2
Service Level 2 - Financial Clearance. By September 14, 2018, the Parties shall agree upon a Service Level which measures Supplier’s ability to contact and interact with a patient, identify a patient’s eligibility and verify the requisite insurance authorization.

3.3
Service Level 3 – Percentage of financial assistance applications completed in less than [**] days in compliance with Ascension Health policies and CMS Refund Rules and Regulations. This Service Level shall mean, for a given Measurement Window, for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole), (a) the number of patients who have completed applications for financial assistance that were received by Supplier during such Measurement Window, for which, in accordance with [**] Practices, (i) the application has been evaluated, (ii) a determination has been made as to the application and (iii) the patient has been notified of the determination within [**] days or less from Supplier’s receipt of the completed application divided by (b) the number of patients who have completed applications for financial assistance that were received by Supplier during such Measurement Window.

3.4
Service Level 4 - Associate Engagement. The Parties will apply the protocol agreed to by the Parties for measuring associate engagement related to Dependent Services. This metric will be, for a given Measurement Window, measured for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole).

3.5
Service Level 5 - Patient Satisfaction survey. The Parties will utilize the patient satisfaction survey methodology agreed to by the Parties for Dependent Services to measure patient satisfaction with Supplier’s Financial Clearance Center, Medical Financial Solutions (pre-collect services) team, and customer service centers. This metric will be, for a given Measurement Window, measured for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole).

3.6
Service Level 6 – Credit AR Days. This Service Level shall mean, for a given Measurement Window, for each of the NRSC/Athena Group, the Epic Group and the Cerner Group respectively, (a) the negative balance accounts receivable as of the last day of the Measurement Window, divided by (b) the average daily GPSR for such Measurement Window. Average daily GPSR is calculated by dividing the total GPSR for the applicable Measurement Window by the number of calendar days during such Measurement Window. With respect to the NRSC/Athena Group, the source data for measurement will be the Athena Platform. With respect to the Cerner Group or the Epic Group, the source data for measurement will be the Cerner Platform or the Epic Platform, respectively.

3.7
Intentionally Deleted.

3.8
Service Level 8 – Remittance Resolution: Accountable Unpostables and Unposted Cash.

a.
For the NRSC/Athena Group: this Service Level shall mean, for the NRSC/Athena Group as a whole, during any Measurement Window, (a) the Trailing Period Monthly Average Unpostables (as defined below) for the NRSC/Athena Group, divided by (b) the average daily NPSR for such Measurement Window.

“ Trailing Period Monthly Average Unpostables ” shall mean, the result of (i) the sum of the aggregate amount of the Accountable Unpostables as of the last day of each of the most recent three months ended on or prior to the date of measurement, divided by (ii) three.

“ Accountable Unpostables ” shall mean, for the NRSC/Athena Group as a whole, the sum of the aggregate balances of the NRSC Unpostables that are aged greater than [**] days from the date that such item first appeared in the Supplier’s work queue as reflected by the Athena Platform.
 

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“ NRSC Unpostables ” shall mean those NRSC appropriate groups from the Unpostables dashboard in the Athena Platform designated by the Parties to measure unidentified remittances that do not contain sufficient information for payments to be processed and posted. The Parties will designate the groups for the NRSC Unpostables by no later than September 14, 2018.

b.
For Eligible Medical Groups in the Epic Group and the Cerner Group respectively: this Service Level shall mean, for the Epic Group or the Cerner Group (as applicable), during any Measurement Window, the absolute value of the quotient of (i) the Trailing Period Monthly Average Unposted Cash (as defined below) as of the last day of such Measurement Window, divided by (ii) the Trailing Period Daily Average NPSR as of the last day of such Measurement Window. For purposes of the foregoing:

“ Trailing Period Monthly Average Unposted Cash ” shall mean, the result of (i) the sum of the aggregate amount of Unposted Cash as of the last day of each of the most recent three month ended on or prior to the date of measurement, divided by (ii) three.

“ Unposted Cash ” shall mean, for the Epic Group or the Cerner Group (as applicable), the sum of the aggregate balances in each of the accounts used to hold unposted or unidentified cash; provided, however, that any portion of such balances for which Supplier has provided instruction or recommendation for the proper posting of such amounts shall be deducted from the calculation of Unposted Cash.

c.
Section 2.5 above, Section 6 below and the data and reporting requirements of Section 2.6 above shall not apply with respect to Service Level 8 for the Epic Group or the Cerner Group. Ascension Health shall provide Supplier, within 5 business days following the end of each month, with reports setting forth for each of the Epic Group and the Cerner Group, respectively: (i) the Trailing Period Monthly Average Unposted Cash (including a detailed itemization of the applicable balances of each account holding Unposted Cash) and (ii) the Trailing Period Daily Average NPSR together with all supporting data reasonably necessary for Supplier to verify such amounts and calculations. Additionally, Ascension Health shall provide (or cause the applicable Eligible Medical Groups to provide) Supplier with continuous, direct access to review the balances of each account holding Unposted Cash through PeopleSoft or similar reporting applications.

In the event that Ascension Health or any Eligible Medical Group changes the manner (including accounting methods, principles or procedures) in which unposted cash is accounted for, or changes any accounting methodology, principles or procedures related to the accounts holding Unposted Cash, then Service Level 8 shall be deemed to be of no effect whatsoever with respect to any such Eligible Medical Group for which such changes have been employed until such time as Supplier and Ascension Health agree on reasonable modifications to the metrics for Service Level 8 and the Target Level applicable thereto.

3.9
Intentionally Deleted .

3.10
Intentionally Deleted .

3.11
Service Level 11 – Customer Service Abandonment Rate. This Service Level shall mean, for a given Measurement Window, for the Eligible Medical Groups then-receiving Platform-Specific Services (as a whole), (A) the number of calls to Supplier’s Customer Service Center entering the queue that are abandoned after at least 20 seconds in the queue, divided by (B) the total number of inbound calls.


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4.
Target Levels .

The target level for each of the Service Levels (“ Target Level ”) will be mutually agreed by the Parties in accordance with the terms of this Exhibit 4 .
5.
Changes to Existing Service Levels .
The number of Service Levels will not exceed eleven (11). An opportunity to reset the target for each of the Service Levels will occur every [**] during the Term. In the [**] months prior to the applicable anniversary of the Supplement Effective Date, Supplier and Ascension Health will meet to discuss whether to reset any targets. The baseline reset methodology to be discussed will allow the target for each Service Level to increase or decrease, and may reflect or be derived from the following as mutually agreed upon information and factors:
-    External benchmarks; and/or
-    Then-current performance.
Any adjustment to any Service Level resulting from this Section 5 must be mutually agreed, shall apply prospectively only and shall not be applied to any period of time preceding the written agreement of the Parties with respect to such adjustment.
6.
Measurement and Reporting .
6.1
Supplier’s performance against the Service Levels will be measured for each Measurement Window as of the Service Level Effective Date for such Service Level.
6.2
Supplier will implement automated or other measurement and monitoring tools and procedures reasonably acceptable to Ascension Health to measure Supplier’s performance against the Service Levels in a manner and at a level of detail approved by Ascension Health. Supplier will provide Ascension Health and the Eligible Medical Groups then-receiving EMG Services with access to up-to-date problem management data and other data reasonably requested by Ascension Health regarding the status of failures and/or user inquiries.
6.3
If Supplier fails to measure its performance with respect to a Service Level so that it is not possible to confirm whether the level of performance specified for the Service Level has been achieved for a given Measurement Window (including if and to the extent the Parties are unable to timely agree upon the Target Levels), then, unless such failure to measure was previously excused in writing by Ascension Health, such failure will be deemed a Service Level Default for the applicable Measurement Window.
6.4
Supplier shall provide to the Eligible Medical Groups then-receiving EMG Services, as part of Supplier’s monthly performance reports, a set of hard- and soft-copy reports to verify Supplier’s performance and compliance with the Service Levels where data is available monthly.
6.5
Supplier shall provide detailed supporting information for each report to the Eligible Medical Groups then-receiving EMG Services in machine-readable form suitable for use on a personal computer. The data and detailed supporting information shall be Ascension Health Confidential Information, and the applicable Eligible Medical Groups may access such information online, where technically feasible and permissible under Supplier’s applicable third party agreements, at any time.

7.
Service Level Credits.

7.1
If Supplier fails to meet any Service Level, then Supplier will pay or credit Ascension Health for the amounts described below (each, a “ Service Level Credit ”). Service Level Credits are not exclusive remedies and will in no way limit the rights of an Eligible Medical Group or Ascension Health at law or in equity. Service Level

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Credits will be deemed to be reductions in the charges reflecting the impact on the Services as a result of the failure, and not as a penalty.
7.2
If Supplier’s performance relative to any one of the Service Levels does not achieve the Target Level during a particular Measurement Window, such failure shall be deemed a Service Level Default, and Supplier will perform the problem analysis described in Section 8 . Supplier will also propose a corrective action plan to improve Supplier’s performance in the upcoming Measurement Window, subject to the approval of the affected Eligible Medical Groups. Unless mutually agreed upon by Supplier and the affected Eligible Medical Groups, the measurement of Supplier’s performance for a Measurement Window will be completed no later than [**] days after the completion of such Measurement Window.
    
7.3
Calculation of AMG-Wide Service Level Credits . With respect to each of the AMG-Wide Service Levels, if Supplier’s performance within a Measurement Window for such Service Level does not achieve the applicable Target Level, resulting in a Service Level Default for such Service Level, then Supplier shall apply a Service Level Credit equal to the product of (i) [**] percent ([**]%) divided by the number of Service Levels then in effect, multiplied by (ii) [**] for such Measurement Window, which Service Level Credit shall be applied on the first day of the second month following the applicable Measurement Window (e.g., May 1 for a Service Level Default for the first quarter Measurement Window) for such Service Level Default. If more than one AMG-Wide Service Level has experienced a Service Level Default for any Measurement Window, Supplier will apply the sum of the Service Level Credit amounts for each of the AMG-Wide Service Levels that had Service Level Defaults during such Measurement Window as described in this Section 7.3 . There shall be up to [**] percent ([**]%) of the [**] at risk with respect to such Measurement Window (excluding any portion of such [**] that, [**], and Supplier shall in no event be liable for Service Level Credits in excess of such at-risk amount with respect to AMG-Wide Service Levels.

7.4
Calculation of Group-Specific Service Level Credits . With respect to each of the Group-Specific Service Levels, if Supplier’s performance within a Measurement Window for such Service Level for the NRSC/Athena Group, the Epic Group, or the Cerner Group does not achieve the applicable Target Level, resulting in a Service Level Default for such Service Level with respect to the NRSC/Athena Group, the Epic Group, or the Cerner Group (as applicable), then Supplier shall apply a Service Level Credit equal to the product of (i) [**] percent ([**]%) divided by the number of Service Levels then in effect with respect to the NRSC/Athena Group, the Epic Group, or the Cerner Group (as applicable), multiplied by (ii) [**], for such Measurement Window, which Service Level Credit shall be applied on the first day of the second month following the applicable Measurement Window (e.g., May 1 for a Service Level Default for the first quarter Measurement Window) for such Service Level Default. If more than one Group-Specific Service Level within the NRSC/Athena Group, the Epic Group, or the Cerner Group (as applicable) has experienced a Service Level Default for any Measurement Window, Supplier will apply the sum of the Service Level Credit amounts for each such Group-Specific Service Level that had Service Level Defaults during such Measurement Window as described in this Section 7.4 . There shall be up to [**] percent ([**]%) of the [**], at risk with respect to such Measurement Window (excluding, with respect to [**]), and Supplier shall in no event be liable for Service Level Credits in excess of such at-risk amount with respect to Group-Specific Service Levels.

7.5
Except as otherwise expressly set forth in Section 20.1(b)(ii) of the MPSA, if Supplier’s performance on the Service Level that experienced a Service Level Default achieves the Target Level in the subsequent Measurement Window, Ascension Health will remit the previously paid applicable Service Level Credit on the first day of the second month following the next Measurement Window (“ Earnback ”). However, if Supplier’s performance on such Service Level fails to achieve the Target Level during the next Measurement Window, Supplier will no longer have an opportunity to earn back the applicable Service Level Credit.

7.6
The mechanism for applying Service Level Credits and Earnback credits to the EMG Base Fee invoice and payment schedule is set forth in Exhibit 4-D to the MPSA.

8.
Problem Analysis and Correction .

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CONFIDENTIAL    Exhibit 4    Page 49
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Supplier shall promptly investigate and correct each failure to meet a Service Level, by (i) promptly investigating and reporting on the causes of the problem; (ii) providing a Root Cause Analysis of such failure as soon as practicable after such failure or at the request of the affected Eligible Medical Groups; (iii) correcting the problem as soon as practicable or coordinate the correction of the problem if Supplier does not have responsibility for the cause of the problem; (iv) advising the affected Eligible Medical Groups of the status of remedial efforts being undertaken with respect to such problem; (v) demonstrating that the causes of such problem have been or will be corrected on a prospective basis; and (vi) taking corrective actions to prevent any recurrence of such problem. Supplier shall complete the Root Cause Analysis as quickly as possible, but in all events within [**] days, and shall notify such affected Eligible Medical Groups prior to the end of the initial [**] day period as to the status of the Root Cause Analysis and the estimated completion date. The Parties shall report on Service Level Defaults at each meeting of the JRB, including any disputes regarding problem analysis and correction steps, and without limiting any obligations of the Parties to implement any other decision of the JRB, each Party shall promptly implement or facilitate implementation of any resolutions determined by the JRB (e.g., Supplier cooperating with any exercise of step-in rights by Ascension Health as required by Section 4.4 of the MPSA).

9.
Windfall Situations; Environmental Changes and Other Issues .
If any of the events described in Section 8.1 or Section 8.2 of Exhibit 2 to the Supplement occur, and such event significantly affects the Service Level measurement, Supplier’s performance under any Service Level (including the amount of resources required to maintain such performance) or Supplier’s ability to measure its performance with respect to any of the Service Levels, then either Party shall have the right to request that the other Party consider a fair and appropriate adjustment to the affected Service Levels and/or Target Levels. Upon such a request, the Parties will, in good faith, discuss the impact of such event on (i) Supplier’s performance under each such Service Level; (ii) the amount of resources required to maintain performance at or above the applicable Target Levels and (iii) Supplier’s ability to measure such Service Levels, with the outcome to equitably reflect the impact of such event(s).

With respect to the NRSC/Athena Group, in the event that the Athena Platform experiences any outage, bugs or other support issue not attributable to Supplier that materially affects Supplier's ability to meet any Service Levels, as applicable (" Athena Support Issue "), Ascension Health shall promptly work to resolve the Athena Support Issue. Until such time that the Athena Support Issue is resolved or a reasonable work around is implemented that eliminates the adverse effect of the Athena Support Issue on the NRSC/Athena Group and Supplier, the impacted Service Levels, as applicable, will be calculated as if failure to meet such Service did not occur due to the Athena Support Issue.



R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Exhibit 4    Page 50
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


ANNEX 1
Form of EMG Services Addendum
EMG SERVICES ADDENDUM [X] TO SUPPLEMENT 26 TO
AMENDED AND RESTATED MASTER PROFESSIONAL SERVICES AGREEMENT

FOR [NRSC/ATHENA GROUP / MEDICAL GROUP MARKET/ ELIGIBLE MEDICAL GROUP]

[Instructions for use of this document: This document is intended only as a template. The Sections and Schedules referred to below can be included or omitted as applicable for the particular Eligible Medical Group(s) being onboarded.]

This EMG Services Addendum No. [x] (this “ Addendum ”) to the AMG Supplement (as defined below) is made and entered into as of the ___ day of ______, 20___ (the “ Addendum Effective Date ”) by and between Ascension Health (“ Ascension ”) and R1 RCM Inc., f/k/a Accretive Health, Inc. (“ Supplier ”) (together, the “ Parties ”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the AMG Supplement, and if not defined therein, then in the MPSA (as defined below).

This Addendum is entered into pursuant to and subject to (a) that certain Supplement 26 of the MPSA (as defined below), dated as of June 20, 2018 (the “ AMG Supplement ”) and (b) that certain Amended and Restated Master Professional Services Agreement (“ Master Professional Services Agreement ” or “ MPSA ”) dated as of February 16, 2016, in each case, by and between Ascension Health and Supplier, the terms of which, except as expressly modified or excluded herein, are incorporated herein by reference. In accordance with Section 1.1(c) of the MPSA, any amendment to the MPSA (or the AMG Supplement), including amendments made after the Addendum Effective Date, shall automatically, as of the amendment effective date, be incorporated into this Addendum, unless otherwise specifically set forth in such amendment.

NOW THEREFORE , in consideration of the premises and mutual consents set forth below, the Parties hereby agree as follows:
    
1.
Schedules and Attachments.

This Addendum includes each of the following attached Schedules, all of which are incorporated into this Addendum by this reference:
Schedule A
Transitioned Employees
Schedule B
Contract Employee Roster
Schedule C
Subcontractors
Schedule D
Ascension Health Facilities
Schedule E
Supplier Facilities
Schedule F
Managed Third Party Agreements
Schedule G
Assigned Third Party Contracts
Schedule H
Ascension Health Provided Equipment
Schedule I
Local EMGs
Schedule J
Administered Expenses

2.     Definitions .
Section 2 of the AMG Supplement is hereby supplemented with the definitions set forth below:


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Form of EMG Services Addendum    Page 51
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


[List any additional definitions specific to this Addendum.]

The definitions added to Section 2 of the AMG Supplement by this Addendum shall apply only with respect to the EMG Services provided under this Addendum.

3.      Addendum Term .
The term of this Addendum shall commence as of 12:00:01 a.m., ____ Time on the Addendum Effective Date and shall continue for the Supplement Term, unless this Addendum is terminated as provided in the MPSA, in which case the term of this Addendum shall end at 11:59:59 p.m., Central Time, on the effective date of such termination.

4.     Applicable Eligible Medical Group(s) and EMG Services.
This Addendum shall cover the provision of EMG Services by Supplier to the Owned Eligible Medical Groups and Third Party Eligible Medical Groups set forth in Schedule I (the “ Local EMGs ”) in accordance with the AMG Supplement. For the avoidance of doubt, if a physician group is an Owned Eligible Medical Group or, subject to Section 1(e) of the AMG Supplement, a Third Party Eligible Medical Group that is (i) included in the [NRSC/Athena Group / Epic Group / Cerner Group], (ii) is not listed on Schedule I and (iii) hereafter becomes acquired by, employed by, or party to a PSA with Ascension Health, then such physician group will automatically be deemed included in Schedule I .
[Schedule I will differentiate between Owned Eligible Medical Groups and Third Party Eligible Medical Groups. If there are any special terms or conditions related to Local EMGs, they can be listed here.]
5.     EMG Services.
Supplier shall provide to the Local EMGs the [Platform-Specific Services/Medical Group Market Services/other EMG Services] set forth in Exhibit 1 of the AMG Supplement.
[If there are any changes to the scope of EMG Services (including any provision of out-of-scope services), they can be listed here.]
6.      Pricing.
The EMG Base Fee shall be determined in accordance with Exhibit 2 to the AMG Supplement. The EMG Incentive Fees shall be determined in accordance with Exhibit 3 to the AMG Supplement.
[Parties may add an updated Cost to Collect Factor.]

7.     List of Transitioned Employees and Key Supplier Personnel .

7.1
List of Transitioned Employees . Schedule A to this Addendum lists the Ascension Health Personnel to whom offers of employment shall be made by Supplier, its Affiliates or Subcontractors pursuant to the terms of Exhibit 13 to the MPSA.

7.2
Key Supplier Personnel . In accordance with Sections 8.2(a)(i) and 8.2(b) of the MPSA, the Key Supplier Personnel positions under this Addendum are listed below:

[Please identify the Site Lead.]

8.      Contract Employee Rosters.
In accordance with Exhibit 5 of the MPSA, the Contract Employee Roster applicable to the provision of EMG Services to the Local EMGs is set forth in Schedule B .

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Form of EMG Services Addendum    Page 52
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[This may be deleted if not applicable.]

9.      Subcontractors.
The Subcontractors identified on Schedule C are approved by the Local EMGs for the purposes of the EMG Services.
10.     Facilities .

10.1
Ascension Health Facilities . In accordance with Section 6.1(a) and 6.2 of the MPSA, Supplier may provide any of the EMG Services at or from those Ascension Health Facilities set forth in Schedule D or any other office-based/practice-based facility from which the Local EMGs provides services, and Local EMGs shall provide Supplier with access to and the use of the foregoing locations (or equivalent space).
10.2
Supplier Facilities . In accordance with Section 6.1(a) and 6.2 of the MPSA, Supplier may provide any of the EMG Services at or from the [the locations identified in Schedule E .]
11.     Managed Third Party Agreements; Assigned Contracts.
The Managed Third Party Agreements listed on Schedule F shall not be assigned to Supplier. The Third Party Contracts to be assigned to Supplier shall be set forth in Schedule G .
12.      Ascension Health Provided Equipment.
In accordance with Section 6.5(e) of the MPSA, the applicable Eligible Medical Group shall provide Supplier with the Ascension Health Provided Equipment listed on Schedule H , for the purpose of performing the EMG Services for Local EMGs during the term of this Addendum.
13.      Administered Expenses.
In accordance with Section 11.2(a) of the MPSA, the Administered Expenses are set forth in Schedule J .
14.      Initial Transition Plan.
Supplier shall deliver to Ascension Health an initial transition plan for the Local EMGs by [_____] .
15.      Other Terms.
[●]

SIGNATURE PAGE FOLLOWS

[SPACE LEFT INTENTIONALLY BLANK]


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Form of EMG Services Addendum    Page 53
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


IN WITNESS WHEREOF, the Parties have caused this Addendum to be executed by their respective duly authorized representatives as of the Addendum Effective Date.

R1 RCM INC.
 
ASCENSION HEALTH


 
 
By:
 
 
By:
 
 
 
 
 
 
Name:
 
 
Name:
 
 
 
 
 
 
Title:
 
 
Title:
 
 
 
 
 
 

    

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL     Signature Page to Form Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


NRSC/ATHENA ADDENDUM TO SUPPLEMENT 26 TO
AMENDED AND RESTATED MASTER PROFESSIONAL SERVICES AGREEMENT

This NRSC/Athena Addendum (this “ Addendum ”) to the AMG Supplement (as defined below) for the provision of Platform-Specific Services to the NRSC/Athena Group is made and entered into as of June 24, 2018 (the “ Addendum Effective Date ”) by and between Ascension Health (“ Ascension ”) and R1 RCM Inc., f/k/a Accretive Health, Inc. (“ Supplier ”) (together, the “ Parties ”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the AMG Supplement, and if not defined therein, then in the MPSA (as defined below).

This Addendum is entered into pursuant to and subject to (a) that certain Supplement 26 of the MPSA (as defined below), dated as of June 20, 2018 (the “ AMG Supplement ”) and (b) that certain Amended and Restated Master Professional Services Agreement (“ Master Professional Services Agreement ” or “ MPSA ”) dated as of February 16, 2016, in each case, by and between Ascension Health and Supplier, the terms of which, except as expressly modified or excluded herein, are incorporated herein by reference. The Parties have entered into this Addendum to set forth additional terms and conditions pursuant to which Supplier shall provide the Platform-Specific Services to the NRSC/Athena Group. In accordance with Section 1.1(c) of the MPSA, any amendment to the MPSA (or the AMG Supplement), including amendments made after the Addendum Effective Date, shall automatically, as of the amendment effective date, be incorporated into this Addendum, unless otherwise specifically set forth in such amendment.

NOW THEREFORE , in consideration of the premises and mutual consents set forth below, the Parties hereby agree as follows:
    
1.
Schedules and Attachments.

This Addendum includes each of the following attached Schedules, all of which are incorporated into this Addendum by this reference:
Schedule A
Transitioned Employees
Schedule B
Contract Employee Roster
Schedule C
Subcontractors
Schedule D
Ascension Health Facilities
Schedule E
Supplier Facilities
Schedule F
Managed Third Party Agreements
Schedule G
Assigned Third Party Contracts
Schedule H
Ascension Health Provided Equipment
Schedule I
Local EMGs
Schedule J
Administered Expenses

2.     Definitions .
Reserved.

3.      Addendum Term .
The term of this Addendum shall commence as of 12:00:01 a.m., Central Time on the Addendum Effective Date and shall continue for the Supplement Term, unless this Addendum is terminated as provided in the MPSA, in which case the term of this Addendum shall end at 11:59:59 p.m., Central Time, on the effective date of such termination. The EMG Service Commencement Date for all of the Platform-Specific Services provided under this Addendum is October 1, 2018.

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL     NRSC/Athena Addendum        Page 2
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.




4.     Applicable Eligible Medical Group(s) and Scope of EMG Services.
This Addendum shall cover the provision of Platform-Specific Services by Supplier to the Owned Eligible Medical Groups and Third Party Eligible Medical Groups, in each case, included in the NRSC/Athena Group (“ Local EMGs ”) in accordance with the AMG Supplement. The Parties shall, on or prior to October 1, 2018, amend this Addendum to include Schedule I listing all of the Local EMGs. For the avoidance of doubt, if a physician group is an Owned Eligible Medical Group or, subject to Section 1(e) of the AMG Supplement, a Third Party Eligible Medical Group that is (i) included in the NRSC/Athena Group, (ii) is not listed on Schedule I and (iii) hereafter becomes acquired by, employed by, or party to a PSA with Ascension Health, then such physician group will automatically be to deemed included in Schedule I .
5.     EMG Services.
Supplier shall provide to the Local EMGs the Platform-Specific Services set forth in Exhibit 1 of the AMG Supplement.
6.      Pricing.
(a)
The NRSC Base Fee shall be determined in accordance with Exhibit 2 to the AMG Supplement. The EMG Incentive Fees shall be determined in accordance with Exhibit 3 to the AMG Supplement.
(b)
As a result of the NRSC Assessment conducted in accordance with Section 5 of Exhibit 2 to the AMG Supplement, for purposes of calculating the portion of the NRSC Base Fee, the Initial NRSC Cost to Collect Factor shall equal the result of [**] divided by [**] (i.e., [**]%).
7.     List of Transitioned Employees and Key Supplier Personnel .

7.1
List of Transitioned Employees . The Parties shall, on or prior to October 1, 2018, amend this Addendum to include Schedule A listing the Ascension Health Personnel to whom offers of employment shall be made by Supplier, its Affiliates or Subcontractors pursuant to the terms of Exhibit 13 to the MPSA.

7.2
Key Supplier Personnel . In accordance with Sections 8.2(a)(i) and 8.2(b) of the MPSA, the Key Supplier Personnel is Roger Carroll.

8.      Contract Employee Rosters.
The Parties shall, on or prior to October 1, 2018, amend this Addendum to include Schedule B , the Contract Employee Roster applicable to the provision of Platform-Specific Services to the Local EMGs, in accordance with Exhibit 5 to the MPSA.
9.      Subcontractors.
The Subcontractors identified on Schedule C are approved by the Local EMGs for the provision of the Platform-Specific Services.

10.     Facilities .

10.1
Ascension Health Facilities . In accordance with Section 6.1(a) and 6.2 of the MPSA, Supplier may provide any of the EMG Services at or from those Ascension Health Facilities set forth in Schedule D or any other office-based/practice-based facility from which Local EMGs provide services, and Local EMGs shall provide Supplier with access to and the use of the foregoing locations (or equivalent space).
10.2
Supplier Facilities . In accordance with Section 6.1(a) and 6.2 of the MPSA, Supplier may provide any of the EMG Services at or from any of the locations (or equivalent space) identified in Schedule E .

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL     NRSC/Athena Addendum        Page 3
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11.     Managed Third Party Agreements; Assigned Contracts.
The Managed Third Party Agreements listed on Schedule F shall not be assigned to Supplier. The Third Party Contracts to be assigned to Supplier shall be set forth in Schedule G .
12.      Ascension Health Provided Equipment.
The Parties shall, on or prior to October 1, 2018, amend this Addendum to include Schedule H , the list of Ascension Health Provided Equipment to be provided by the NRSC in accordance with Section 6.5(e) of the MPSA, for the purpose of performing the Platform-Specific Services for the Local EMGs during the term of this Addendum.
13.      Administered Expenses.
In accordance with Section 11.2(a) of the MPSA, the Administered Expenses are set forth in Schedule J .
14.    Initial Transition Plan .
Supplier shall deliver to Ascension Health an initial transition plan for the Local EMGs by August 1, 2018.

SIGNATURE PAGE FOLLOWS

[SPACE LEFT INTENTIONALLY BLANK]


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL     NRSC/Athena Addendum        Page 4
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IN WITNESS WHEREOF, the Parties have caused this Addendum to be executed by their respective duly authorized representatives as of the Addendum Effective Date.

R1 RCM, INC.
 
ASCENSION HEALTH


 
 
By:
 
 
By:
 
 
 
 
 
 
Name:
 
 
Name:
 
 
 
 
 
 
Title:
 
 
Title:
 
 
 
 
 
 

    


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL         NRSC/Athena Addendum                 Signature Page
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE A

TRANSITIONED EMPLOYEES

[Schedule to be inserted following October 1, 2018]




R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL         Schedule A to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE B

CONTRACT EMPLOYEE ROSTER

[Schedule to be inserted following October 1, 2018]


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL         Schedule B to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


SCHEDULE C

SUBCONTRACTORS

To the extent that any of the following vendors constitute Data Subcontractors, such vendors are hereby approved for the provision of the services applicable to such vendor:

Vendor Name
[**]



R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule C to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
 



SCHEDULE D

ASCENSION HEALTH FACILITIES

CAPTUREA02.JPG

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule D to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE E

SUPPLIER FACILITIES

1.
Supplier Facilities .
In accordance with Section 6.1 of the MPSA, the Supplier Facilities owned or operated by Supplier are set forth below:
 
SUPPLIER FACILITY
LOCATIONS
APPROVED SERVICE TYPES
1.
Chicago
401 N. Michigan Avenue, Chicago, Illinois 60611
•
Revenue Cycle Training
•    Vendor Management
•    Revenue Cycle Technology and Support
•    Revenue Cycle Analytics and Reporting
•    Charge Optimization
2.
Michigan Customer Contact Center
225-229 & 234 N. Rose Street, Kalamazoo, Michigan 49007
•    Authorization / Referral Verification
•    Insurance Eligibility Verification
•    Collection of Residuals
•    Pre-Service Collections
•    Patient Billing Customer Service/Patient Financial Services
•    Prior Balance Found Insurance
•    Patient Liability Collections
3.
Southeast Customer Contact Center
950 22nd Street North, Birmingham, Alabama 35203
•    Authorization / Referral Verification
•    Insurance Eligibility Verification
•    Pre-Service Collections
4.
Underpayment Center
725 N. Highway A1A, Jupiter, Florida 33477
•    Underpayment Review/Recovery
5.
Contract Modeling/Analytics
2811 Wintergreen Drive, Cape Girardeau, Missouri 63701
•    Revenue Cycle Technology and Support (R1 Contract)
•    Underpayment Review / Recovery
•    Revenue Cycle Analytics and Reporting (for Contract Modeling (R1 Contract))

R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule E to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



 
SUPPLIER FACILITY
LOCATIONS
APPROVED SERVICE TYPES
6.
Michigan Shared Services Center
Travelers Tower II, 26533 Evergreen Road, Southfield, Michigan
•    Billing (patient and payer)
•    Secondary Billing
•    Self-Pay Financial Advocacy and Eligibility of Services
•    Prior Balance Found Insurance
•    Cash Applications
•    Patient Billing Customer Service/Patient Financial Services
•    Denial Management (e.g., Medicaid and other Third Party Payer Follow Up, and Rejections follow up)
•    Collection of Residuals
•    Prior Balance Found Insurance
•    Charge Optimization
•    Bad Debt Management
•    Revenue Cycle Analytics and Reporting
7.
Noida Shared Services Center
Building 3 and Building 9 Situated at IT/ITeS Sez, Sector 135

Noida, India
•    Billing (patient and payer)
•    Secondary Billing
•    Denial Management (e.g., Medicaid and other Third Party Payer Follow Up , and Rejections Follow Up)
•    Cash Applications
•    Credits
•    Revenue Cycle Technology and Support

        No patient facing-activities associated with the above functions will be performed at this location.
8.
Gurgaon Shared Services Center
Building 2, Tower A Situated at IT/ITeS Sez, Sector 21,

Dundahera, Gurgaon, Haryana, India
•    Authorization/Referral Verification
•    Insurance Eligibility Verification
•    Billing (patient and payer)
•    Secondary Billing
•    Prior Balance Found Insurance
•    Denial Management (e.g., Medicaid and other Third-Party Payer Follow Up, and Rejections Follow Up)
•    Cash Applications
•    Revenue Cycle Analytics and Reporting
•    Credits

No patient facing-activities associated with the above functions will be performed at this location.
9.
Various U. S. Employee Residences
Various addresses
•    Denial Management (ie - Coding Follow Up)


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule E to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



 
SUPPLIER FACILITY
LOCATIONS
APPROVED SERVICE TYPES
10.
Hyderabad Shared Services Center
NSL SEZ Arena, Survey No- 1, Plot No. 6, Ramanthapur Road, Uppal, Gaddi, annaram,

Hyderbad, Telangana 500039, India
•    Authorization/Referral Verification
•    Insurance Eligibility Verification
•    Billing (patient and payer)
•    Secondary Billing
•    Prior Balance Found Insurance
•    Denial Management (e.g., Medicaid and other Third-Party Payer Follow Up, and Rejections Follow Up)
•    Cash Applications
•    Revenue Cycle Analytics and Reporting
•    Credits
•    Revenue Cycle Technology and Support

No patient facing-activities associated with the above functions will be performed at this location.
11.
Tikri Shared Services Center
Candor Gurgaon One Reality Projects, Private Limited IT/ITES, SEZ, 2 nd , 3 rd  and 4 th  floor, Building No. 1, Village Tikri, Sector 48,

Gurugram 122001, Haryana, India
•    Authorization/Referral Verification
•    Insurance Eligibility Verification
•    Billing (patient and payer)
•    Secondary Billing
•    Prior Balance Found Insurance
•    Denial Management (e.g., Medicaid and other Third-Party Payer Follow Up, and Rejections Follow Up)
•    Cash Applications
•    Revenue Cycle Analytics and Reporting
•    Credits

No patient facing-activities associated with the above functions will be performed at this location.
12.
Indianapolis Shared Services Center
10330 N. Meridian Street, 2 nd  Floor, Indianapolis, 46290
•    Billing (patient and payer)
•    Secondary Billing
•    Self-Pay Financial Advocacy and Eligibility of Services
•    Prior Balance Found Insurance
•    Cash Applications
•    Patient Billing Customer Service/Patient Financial Services
•    Denial Management (e.g., Medicaid and other Third-Party Payer Follow Up, and Rejections follow up)
•    Collection of Residuals
•    Prior Balance Found Insurance
•    Charge Optimization
•    Bad Debt Management
•    Revenue Cycle Analytics and Reporting
13.
RCS (formerly NRIT)
3030 Salt Creek Lane, Suite 301, Arlington Heights, IL 60005
•    Underpayment Review / Recovery
•    Charge Optimization


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule E to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.





R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule E to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE F

MANAGED THIRD PARTY AGREEMENTS

Each agreement described in Schedule C hereto shall be deemed to be a Managed Third Party Agreement until such time as such agreement is either assigned to Supplier or terminated (either at Supplier’s direction or otherwise).




R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule F to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE G

ASSIGNED THIRD PARTY CONTRACTS

None.




R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule G to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.
 



SCHEDULE H

ASCENSION HEALTH PROVIDED EQUIPMENT

[Schedule to be inserted following October 1, 2018]


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule H to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE I

LOCAL EMGS

[Schedule to be inserted following October 1, 2018]


R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule I to NRSC Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



SCHEDULE J

ADMINISTERED EXPENSES

None.




R1 RCM AND ASCENSION HEALTH
CONFIDENTIAL    Schedule J to NRSC/Athena Addendum
[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.

EXHIBIT 10.6

[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


AMENDMENT NO. 2 TO
AMENDED AND RESTATED MASTER PROFESSIONAL SERVICES AGREEMENT
BY AND BETWEEN
ASCENSION HEALTH AND R1 RCM INC.

This Amendment No. 2 to the Master Professional Services Agreement (this “ Amendment ”) by and between Ascension Health (“ Ascension Health ”) and R1 RCM Inc. (formerly known as Accretive Health, Inc.) (“ R1 ”) is entered into effective June __, 2018 (the “ Amendment Effective Date ”). Ascension Health and R1 are sometimes referred to in herein as a “ Party ” or collectively as the “ Parties ”. All capitalized terms used and not otherwise defined herein will have the meanings ascribed to them in the MPSA (as defined below).
WHEREAS , Ascension Health and R1 entered into that certain Amended and Restated Master Professional Services Agreement (the “ MPSA ”) dated February 16, 2016, as amended;
WHEREAS , Ascension Health recently acquired Presence Health Network (“ Legacy Presence ”), which operates within Alexian Brothers - AHS Midwest Region Health Co d/b/a AMITA Health (“ AMITA ”) (an Affiliate of Ascension Health), and the Parties desire to have R1 provide to Legacy Presence certain Dependent Services and Physician Advisory Services to be described in the Presence Acute Supplement (as defined below), pursuant to the MPSA; and
WHEREAS , R1 and AMITA are entering into a separate master professional services agreement with respect to the performance of revenue cycle management services by R1 on behalf of AMITA (for certain AMITA-operated facilities, excluding Legacy Presence facilities); and
WHEREAS , the Parties desire to add Legacy Presence as a New ABM.
NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Amendment, and of other good and valid consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:
I.
Supplement .
a.
The Parties shall enter into a Supplement between R1 and Ascension Health with respect to Legacy Presence for the provision of Dependent Services and Physician Advisory Services for Acute Care (the “ Presence Acute Supplement ”) that will reflect the terms of this Amendment. Upon the execution of the Presence Acute Supplement, Legacy Presence will be deemed a New ABM under the MPSA.

b.
If R1 agrees to provide AMITA with revenue cycle services under a separate agreement between R1 and AMITA (“ AMITA MPSA ”), then any Supplement between the Parties regarding AMITA-operated facilities (e.g., (A) Supplement A-04 to the AH MPSA with respect to certain billing services; (B) Amendment No. 1 to Supplement A-02 with respect to physician advisory services provided to AMITA-operated facilities; and (C) any

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Supplement entered into following the date hereof but prior to the execution of the Agreement) will be automatically terminated for purposes of the MPSA. It is the intention of the Parties that the AMITA MPSA, once effective, will govern the Presence Acute Supplement instead of the MPSA. If the Parties for any reason fail to enter into the AMITA MPSA, then the Parties agree to discuss in good faith whether, on a prospective basis, any equitable changes to the terms and conditions of the Presence Acute Supplement, including in connection with pricing, may be necessary based on any changed circumstances, environmental factors, market conditions, or other substantially changed variables.

c.
For the avoidance of doubt, the Presence Acute Supplement will not cover Dependent Services to be provided by R1 to physician groups owned by, affiliated with, or otherwise contracted by Legacy Presence, which will be contracted for separately under the AMITA MPSA.

II.
Tranche Four .
a.
The following new definition is hereby added to the MPSA:

“ Tranche Four ” means Legacy Presence.

b.
The defined term “ Tranche ”, as defined in Exhibit 1 of the MPSA is hereby amended and replaced in its entirety with the following:

“ Tranche ” means Tranche One, Tranche Two, Tranche Three and Tranche Four.

c.
Following an assessment to be performed by the Parties consistent in scope with the Original Assessment and in accordance with Exhibit 4-A of the MPSA, the Parties will determine in good faith (i) the Additional Book Cost to Collect Factor with respect to Legacy Presence (to be approved by the Cost Board) and (ii) the Terminal Value for Tranche Four. The projected start date for Tranche Four is August 1, 2018 and the projected Tranche End Date for Tranche Four is July 31, 2019.

III.
Pricing and Terms for Dependent Services .

a.
The Parties shall determine the Base Fee for the Dependent Services for Acute Care to be provided by R1 to Legacy Presence in accordance with Exhibit 4-A to the MPSA and the terms of the Presence Acute Supplement, using the twelve-month period from January 1, 2017 through December 31, 2017 as the Baseline Year. For the avoidance of doubt, no Base Fee will be payable for any period prior to the Supplement Commencement Date for the Presence Acute Supplement. In accordance with Exhibit 4-A to the MPSA, the Additional Book Cost to Collect Factor will include an I&I Factor (as determined in accordance with Exhibit 4-A to the MPSA) will apply with respect to Tranche Four, phasing in over [**] after the projected Tranche Start Date. The Presence Acute Supplement will provide that the Base Fees to be payable to R1 during the [**] of the Legacy Presence arrangement described herein will be subject to [**].


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[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


b.
In accordance with Section 5 of Exhibit 4-A to the MPSA, the Implementation Fee for the Acute Care Facilities associated with Legacy Presence will be [**] of annual Cash Collections (measured as of the Baseline Year), which Implementation Fee will be earned beginning on the Employment Effective Date for the first of the Transitioned Employees [**]. For clarity, (i) the foregoing Implementation Fee will apply only to the Dependent Services for Acute Care provided to Legacy Presence and (ii) there are [**] Implementation Fees payable to R1 in connection with the Services provided to Legacy Presence under the Presence Acute Supplement.

c.
The Incentive Payments for the Acute Care Facilities associated with Legacy Presence will be determined in accordance with Exhibit 4-B of the MPSA, except that, with respect to Legacy presence only, (i) “Performance Target” shall be based on a Performance Score of [**], and (ii) in each of the definitions of “Balance Sheet Incentive Payment” and “Income Statement Incentive Payment”, the value of [**] shall be replaced by [**]. The Performance Targets for the Income Statement Performance Metric and Balance Sheet Performance Metric will be equal to the Actual Performance for each Facility during the twelve-month measurement period from January 1, 2017 through December 31, 2017.

d.
The Employment Effective Date for the first of the Transitioned Employees for Legacy Presence with respect to Acute Care is anticipated to be August 27, 2018.

e.
Prior to the commencement of Services for Legacy Presence, R1 will be entitled to conduct (directly or through an agent of R1), at R1’s expense, a comprehensive compliance audit of all revenue cycle operations of Legacy Presence. Each of Ascension Health and Legacy Presence shall cooperate with R1 in connection with any such audit, including by facilitating access to the Legacy Presence facilities and personnel. Ascension Health shall use commercially reasonable efforts to correct any adverse findings of any such audit.

IV.
Liability Cap . Section 18.2(b) of the MPSA is hereby amended and replaced in its entirety with the following:
 
“Except as provided in this Section 18.2, the total aggregate liability of either Party, for claims asserted by the other Party under or in connection with this Agreement, regardless of the form of the action or the theory of recovery, will be limited to $30,000,000 per calendar year. For avoidance of doubt, this annual liability cap is an aggregate liability cap for this Agreement and all Supplements.”
  
[ signature page follows ]

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[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.


IN WITNESS WHEREOF, the Parties have executed and delivered this Amendment effective as of the Amendment Effective Date, first indicated above.

Ascension Health
R1 RCM Inc.

By:    /s/ Rhonda Anderson                        
Name:    Rhonda Anderson                        

Title:    Sr VP & CFO                                 

By: _/s/ John Sparby                              
Name:    John Sparby                                 
Title:    EVP Customer Operations, R1 RCM


[Signature Page to Amendment No. 2]

[**] Indicates that text has been omitted which is the subject of a confidential treatment request. The text has been separately filed with the Securities and Exchange Commission.



Exhibit 31.1


Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
I, Joseph Flanagan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of R1 RCM Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2018
/s/ Joseph Flanagan            
Joseph Flanagan
President and Chief Executive Officer
(Principal Executive Officer)





Exhibit 31.2


 
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
I, Christopher Ricaurte, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of R1 RCM Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2018
/s/ Christopher Ricaurte        
Christopher Ricaurte
Treasurer and Chief Financial Officer
(Principal Financial Officer)





Exhibit 32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
In connection with the Quarterly Report on Form 10-Q of R1 RCM Inc. (the “Company”) for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Joseph Flanagan, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2018
/s/ Joseph Flanagan                 
Joseph Flanagan
President and Chief Executive Officer
(Principal Executive Officer)







Exhibit 32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
In connection with the Quarterly Report on Form 10-Q of R1 RCM Inc. (the “Company”) for the period ended June 30, 2018 as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), the undersigned, Christopher Ricaurte, Chief Financial Officer and Treasurer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2018
/s/ Christopher Ricaurte        
Christopher Ricaurte
Treasurer and Chief Financial Officer
(Principal Financial Officer)