Jailendra Singh: Okay. And then my follow-up, I completely understand that we will have to wait until Q4 for detailed 2024 guidance. But if you can just spend some time on percentage, any qualitative color, we should keep in mind as we have some moving parts here as we think about 2024 compared to this year?
Jennifer Williams: Yes. We’ll provide our guidance in early January, normal course as we always do. And Lee mentioned the pipeline and new business. So that certainly will be one factor – we expect continued growth in our modular business that will be strong growth for us. And we’ll continue security of the margins on the new business over time, continued opportunities with automation. So those will be some of the drivers consistent with this year, quite frankly, but we’ll provide more details when we give guidance in early January.
Jailendra Singh: Okay, thank you.
Operator: Your next question comes from Daniel Grosslight.
Daniel Grosslight: Hi, thanks for taking the question here. As you know, there’s a report out there questioning some of your accounting techniques among other things. I know you’re not going to respond line by line to some of that news flow, but I was curious if you could just address if there’s been any change in your accounting assumptions around contract assets or receivables if you remain comfortable with those assumptions given what you just mentioned around the challenges at your customer base and how we should think about the development of bad debt or reserves for the next, call it, 12 months or so?
Lee Rivas: Daniel, if you allow me, I’d love to just frame it first and then hand it over to Jennifer to answer your specific question on the report. First and foremost, we don’t believe the information included in the short report is accurate. A couple of points I would highlight. Underlying demand remains high, as we mentioned. We continue to have success with expanding with our more than 500 customers, including 95 of the top 100 systems. Pipeline modular bookings continue to expand with diverse opportunities which support long-term growth. Further evidence of the strength of our model is the expansion of our strategic collaboration with Microsoft to leverage our purpose-built technology to drive new innovations and further strengthen our competitive advantage.
And as we said before, our customers face challenges due to things Jennifer mentioned on the call payer time frame, increasing coding complexity, regulatory shifts and macro pressures. So while this provides us with significant opportunities, at times it can create some headwinds as we saw with a couple of our physician-based clients. And while difficult, we’ve created a diversified scale business to provide flexible solutions to support continued growth even after these events. So with a strong financial profile, we’re on track to deliver on our 2023 guidance. And last, our third quarter performance demonstrates the strength of our model for continued growth improved cash flow in Q3, which enabled us to pay down an additional $30 million in debt above our acquired repayment.
Jennifer?
Jennifer Williams: Sure. Specific to the revenue recognition question, there was a shift in our revenue recognition policy or methodology at the time of acquisition. So let me just give you a little bit of context around the reasoning behind it – there are some specific questions related to contract assets and some of that. So what happened is at the time of the acquisition, we made a change to still recognize revenue under ASC 606, but we’re recognizing revenue at the time that we are performing the performance obligation because we have determined we can estimate the transaction price. So a little bit of context there. 606, which is the guidance for revenue recognition requires that you recognize revenue at the time that you performed the performance obligation to the extent that you can estimate the transaction price, and that’s the important point here because prior to the acquisition, Cloudmed determined that they could not estimate accurately the transaction price.
And therefore, if you can’t do that at the time the performance obligation is met, you have to wait and recognize revenue at the time you can estimate the transaction price. So in particular, this change happened in our underpayments business. So the nature of the underpayment businesses, we inflow potential opportunities back to clients. They determine if it’s an opportunity they want to pursue with the payer. We send it to the payer. Ultimately, the payer pays some, all or none. And so there was – there’s an estimation of pretty – a lot of judgment in it, but there’s an estimation process. What we determined and this came from an acquisition that we couldn’t estimate it because we didn’t have the models in place to ultimately be able to determine that liquidation rate.
And so we were taking a more conservative approach and saying, okay, well, when the cash comes in and we know what the liquidation is by the time we build a customer, we’ll recognize the revenue. This was the Triage acquisition acquired by Cloudmed in 2020. So that’s the way they were recognizing revenue. We kept it consistent after acquisition. But Cloudmed through ‘21 built out a model to be able to estimate that transaction price. And so by the time R1 acquired the business in ‘22, we made the determination that we actually had good data, historical data, that was accurate and we could estimate the transaction price. So at the time of the acquisition and accordance with diligence and the auditors and everything, we made the decision that we would change the revenue recognition methodology at that time.
We did it as part of the purchase price at the opening balance sheet. So we set up the contract asset and we changed the methodology going forward. The important point there is we thought that was the best thing to do. And the reason why is because if we had done at some point after acquisitions, we would not have had a – we would not have – we would have had incremental revenue that would have distorted our results going forward. We would have had this kind of bolus of revenue that hit at the time we changed the revenue recognition process, and we didn’t want that to happen because we had the data we did it. Now the accuracy of the model has continued to be on kind of on point, and we’re constantly every quarter updating for the collectibility percentage.
