A Valuation into Cross Country Healthcare

Cross Country Healthcare (CCRN) specializes in healthcare staffing solutions, connecting a diverse pool of professionals with healthcare facilities across the U.S. to meet dynamic staffing needs.

Cross Country Healthcare Inc. is a leading healthcare recruitment, staffing, and workforce solutions company. The company places healthcare professionals for temporary, permanent, and per diem positions across a variety of healthcare settings including hospitals, clinics, in-home care, and even schools. Cross Country Healthcare provides additional services in the areas of technology solutions, consulting, data aggregation, executive search, project management and more. They are estimated to be the second largest travel nursing and healthcare staffing firm in the United States behind AMN Healthcare.

Cross Country Healthcare was founded in 1986 with goal of “transforming the healthcare staffing industry through innovative marketing initiatives, cutting-edge technology, and a laser-focus on delivering clinical excellence for healthcare professionals.” The company was cofounded by Kevin Clark, who served as CEO from its 1986 founding to 1994, and from January 2019 to January 2022 before transitioning to Chairman of the Board. Cross Country Healthcare went public on the NASDAQ stock exchange in 2001 under the ticker symbol CCRN. Today they employee around 2300 corporate staff and over ten thousand full time equivalent field employees in nurse and allied staffing. They are headquartered in Boca Raton, Florida and provide their staffing services and workforce solutions to all 50 states.

Operations

In addition to their headquarters in Boca Raton, Florida, CCRN leases 11 facilities across the United States that support operations in human resources, recruitment, credentialing, travel reimbursement, payroll and billing, sales, marketing, corporate executive staff, legal, finance, risk management, internal audit, and IT. CCRN also leases office space in Pune, India, which serves as a hub for specific software development and IT support functions.

Cross Country Healthcare Inc. functions as a parent company with a number of subsidiaries and brands underneath, each of which specializes in specific areas of healthcare staffing operations. Some of their most notable subsidiaries and brands include Cross Country Nurses, Cross Country Allied, Intelify Talent Solutions, Travel Staff, and Assignment America.

Recruitment is a foundational aspect of CCRN’s operations, with recruiters playing a pivotal role in forming and maintaining relationships with healthcare professionals and healthcare facilities for which they provide staffing solutions. Key channels for recruitment include word-of-mouth, referrals, social media, and mobile applications including Cross Country Marketplace, a proprietary mobile on-demand staffing platform. The relationship between CCRN and healthcare facilities, particularly regarding contingent staffing solutions like temporary and per diem, is managed through their proprietary Managed Service Programs (MSPs) or vendor-neutral programs, depending on client needs.

Managed Service Programs (MSPs) are critical tools used by healthcare staffing agencies including CCRN, acting as centralized hubs for all contingent staffing needs. They function as intermediaries between healthcare facilities and staffing vendors (vendors in this case refers to staffing agencies), streamlining the recruitment, credential verification, hiring, compliance, and placement processes of healthcare professionals. This consolidation reduces administrative overhead and boosts operational efficiency. MSPs offer features like detailed reporting on staffing metrics, predictive analysis, and contract management, which help in making informed staffing decisions. Additionally, they assist healthcare facilities in reducing staffing-related costs through economies of scale, efficient resource allocation, and negotiating favorable rates from staffing vendors. In 2022, CCRN’s MSP served more than 80 customers across over 700 healthcare facilities. This metric is typically reported in the annual 10K however I’ll note it was not mentioned in the 2023 10K.

In addition to its MSPs, Cross Country Healthcare (CCRN) offers a vendor neutral Software as a Service (SaaS) platform called Intellify. Unlike the company specific MSPs, where CCRN can prioritize its in-house staffing solutions over other vendors, the vendor neutral program operates impartially, without favoring any staffing vendors. This neutrality allows healthcare facilities access to a wider and more diverse pool of candidates. Demand for vendor neutral programs has increased following COVID-19 and the resulting nursing shortages as healthcare facilities look to draw from a greater pool of candidates to meet their needs.

CCRN primarily derives its revenues from the fees it earns for placing healthcare professionals and other services. Fees include the billable transactions generated by field employees and independent contractors as well as other services invoiced upon the achievement of specific deliverables which vary depending on the contract. The company operates in two segments, Nurse & Allied Staffing, and Physician Staffing.

Nurse & Allied Staffing: The Nurse & Allied Staffing segment is Cross Country Healthcare’s largest segment bringing in $1.841 billion of sales in 2023 and $196.7 million in contribution income. Contribution income is the revenue remaining after subtracting the variable costs (salaries for temporary staff, benefits, and other direct labor costs) directly associated with providing its services. The segment includes the temporary, per diem, and permanent placement of travel and local nurses, advanced practitioners, pharmacists, healthcare leaders, administrative personnel, and more than 100 specialties of allied professionals. All these staffing solutions are managed through CCRN’s proprietary managed service programs (MSPs) and vender neutral programs. CCRN earns a fee for managing these programs for healthcare facilities. Within the Nurse & Allied Staffing segment, CCRN also derives revenue from services including education healthcare services, in-home care services, outsourcing services such as Recruitment Process Outsourcing (RPO), project management, executive search, consulting, and data aggregation.

Providing Nurse and Allied Staffing solutions is CCRN’s largest source of revenue. The company tracks two major KPIs related to the segments including average full-time equivalent field employees (FTEs) in Nurse and Allied Staffing and average revenue per day. For fiscal 2023, CCRN had 10,831 FTEs, down from 12,980 in 2022 but well above pre pandemic levels around 7000. I expect this number to continue normalizing with the industry but remain above 10,000 as a result of continued nursing shortage pressures and acquisitions. Average revenue per day was $462 down from $565 in 2022 but well above pre-pandemic levels around $300.

Physician Staffing: Physician Staffing brought in sales of $178.3 million in 2023, and contribution income of $9.8 million. The segment includes the temporary and permanent placement of licensed practitioners across an array of specialties including certified registered nurse anesthetists, nurse practitioners, and physician assistants.

The Physician Staffing segment tracks two major KPIs related to its operations including days filled and revenue per day. In 2023 days filled for Physician Staffing was 92,504, up from 60,038 in 2022 primarily a result of the acquisition if Mint, a physician staffing agency. Revenue per day was $1,927, up from $1,769 in 2022.

Under most circumstances, CCRN serves as the principal employer for its staffing arrangements as opposed to being an agent. This distinction significantly affects how revenue is recognized. When CCRN operates as the principal, revenue is recorded on a gross basis, reflecting CCRN's control over the services provided. In contrast, when acting as an agent, CCRN records revenue on a net basis. The determination of whether CCRN is a principal or an agent hinges on the level of control it exercises over the services. As a principal, CCRN is responsible for hiring, paying, and managing healthcare professionals, and directly controls the services provided at client facilities including scheduling, scope of work, and terms of employment. This role also involves bearing the risks and rewards associated with staffing services, including the authority to set prices and terms. Examples of principal arrangements include temporary staffing, per diem staffing, and managed service provider (MSP) management. 

In an agent arrangement, CCRN does not control the services provided by healthcare professionals before their assignment to the client. Instead, CCRN's role is to facilitate the placement of these professionals to serve directly at client facilities. Operating as an agent, CCRN acts as a broker or intermediary, linking independent contractors or third-party staffing agencies with healthcare facilities, without directly employing the healthcare professionals. Examples of agent arrangements include the permanent placement of healthcare professionals, or situations where CCRN serves simply as an intermediary between a healthcare facility and a smaller staffing agency.

Customers

CCRN serves a wide range of healthcare settings, including “public and private acute care and non-acute care hospitals, government facilities, public and charter schools, academic medical centers, outpatient clinics, ambulatory care facilities, physician practice groups, local and national healthcare plans, managed care providers, PACE programs, correctional facilities, and many other healthcare providers.”  CCRN has a nationwide footprint with their staffing and workforce solutions serving all 50 states.  California, Florida, and New York were the states with the largest concentrations of revenue during 2023. No customer accounts for more than 10% of revenue indicating limited customer concentration.

Acquisitions

CCRN has actively expanded its portfolio through several acquisitions in recent years as part of its ongoing growth strategy. Many of these acquisitions are strategically chosen for their complementary nature, enhancing CCRN's business capabilities and offerings. The company has acquired smaller companies such as Mediscan (2015), Advantage (2017), American Personnel (2018), Workforce Solutions Group (2021), Mint (2022), and HireUp (2022) that have expanded the size of CCRN’s healthcare staffing solutions and expanded the company’s market share in areas of travel nursing, physician staffing, leadership staffing, consulting, and in-home care offerings. Other acquisitions such as Selected Inc. (2022), have enhanced the companies software and platform capabilities and expanded the company into areas of education staffing.

The Healthcare Staffing Industry

The healthcare staffing industry in 2023 had an estimated “market size of $55.7 billion, of which $29.9 billion was travel nursing, $7.0 billion was per diem nursing, $11.6 billion was allied health, and $7.2 billion was locum tenens and advanced practitioners.” The industry is projected to expand at a compound annual growth rate (CAGR) of 5.5% through 2030. Growth rates are expected to differ across various segments, with travel nursing and locum tenens predicted to see the most significant increases.  According to the Bureau of labor Statistics, employment for registered nurses is expected to grow at 6% CAGR through 2032, and physicians and surgeons at 3% CAGR. Macro trends indicate a consistent demand for healthcare personnel, underscoring the need for staffing agencies throughout the decade. Key factors fueling the demand for healthcare staffing include:

·       An aging U.S. population: By 2030, all baby boomers will have reached the age of 65 or older, meaning that one in five U.S. residents will be at retirement age. Additionally, life expectancy is increasing overall, leading to a heightened demand for staff in nursing facilities, chronic disease management, and other healthcare settings. 

·       Increased chronic disease: Increased rates of chronic disease among the population will increase the need for healthcare and respective professionals. The increase in chronic disease can be in part attributed to an overall older demographic making up the population, but there are also notable trends in younger people reporting chronic disease.  

·       Increased access to healthcare: The expansion of healthcare into underserved areas and increased access to healthcare due to programs like the Affordable Care Act increase demand for healthcare professionals and facilities.

·       Growing adoption of PACE programs: The Program of All-Inclusive Care for the Elderly (PACE) is a Medicare and Medicaid initiative designed to meet the healthcare needs of older adults, enabling them to continue living in their homes. As PACE programs become more widespread, there is an anticipated increase in the demand for healthcare workers trained to deliver comprehensive, in-home care to the elderly.

·       Healthcare professional shortages: There remains a persistent shortage of healthcare professionals, including nurses, physicians, and allied health staff in areas of the country, further exacerbated by an aging healthcare workforce and delays in in education. Healthcare facilities will likely continue to utilize staffing agencies for recruiting talent.

·       Increased use of outsourcing: Many healthcare facilities are increasingly turning to outsourcing to manage costs and focus on core healthcare delivery. By utilizing staffing agencies, these facilities can avoid the costs and complexities associated with recruiting, credentialling, hiring, and training staff. Outsourcing has effectively filled positions, offered cost savings, and granted healthcare facilities greater flexibility; however, it also introduces additional risks, such as ensuring consistent quality of care.

The healthcare staffing and workforce solutions market, in which CCRN operates, is intensely competitive. Companies in this space must not only work to attract, retain, and expand business relationships with healthcare clients but also strive to recruit qualified professionals to fill healthcare roles. Success hinges on a company's ability to understand its clients' environments, provide a comprehensive range of services for assessing personnel needs, and collaborate with clients to design innovative solutions. Key competitive factors include timely fulfillment of client needs, competitive pricing, exemplary customer service, robust quality assurance and screening processes, effective risk management policies, adequate insurance coverage, and a strong industry reputation.

In attracting healthcare professionals, the ability to offer a large national pool of appealing assignments is crucial. Competitive pay and benefits, speed of placement, quality of accommodations, superior customer service, and a solid industry reputation also significantly influence a company's ability to remain competitive in attracting top talent.

Fees for healthcare staffing solutions vary by company but generally fall within ranges. The fees for temporary and travel nurses is typically 15% to 25% of the bill rate. Locum tenens is about 20% to 30%. And the fee for a permanent placement is often 10% to 20% of the first year’s salary. Numerous factors can impact bill rates such as the healthcare field one is in, geographical locations, additional services provided, and length of contract. For example, if a staffing agency can provide additional services in areas of education, training, living expenses, and credentialling a higher bill rate may be justifiable.

Fees for healthcare staffing solutions vary by company but generally adhere to established ranges. For temporary and travel nurses, the fees are typically between 15% and 25% of the bill rate. Locum tenens fees range from 20% to 30%, while fees for permanent placements often constitute 10% to 20% of the candidate's first year's salary. Several factors can influence bill rates, including the specific healthcare field, geographic location, the range of additional services provided, and length of the contract. For instance, if a staffing agency offers services such as education, training, background checks and coverage of living expenses, a higher bill rate may be justified. Additionally, market dynamics such as low supply and high demand for healthcare professionals can drive up bill rates, as observed during the Covid-19 pandemic. Bill rates moderated through 2023 and continue into 2024, however I expect they will remain above pre-pandemic levels.

Healthcare staffing companies operate under stringent regulations to ensure they provide qualified and competent professionals capable of delivering safe and effective care. These regulations also safeguard the rights and welfare of staff placed in various healthcare settings. Healthcare staffing firms are required to rigorously verify the credentials of healthcare professionals. They must comply with the Health Insurance Portability and Accountability Act (HIPAA), which establishes standards for the protection of sensitive patient data. Additionally, they need to be well-versed in labor laws specific to each state in which they operate. Many healthcare staffing companies pursue accreditation from recognized bodies to demonstrate their commitment to high staffing standards. The Joint Commission and the National Committee for Quality Assurance are two prominent accrediting bodies with which CCRN is accredited. Healthcare staffing companies are also required to adhere to regulations concerning health and safety, worker classification, and continuing education, ensuring they meet comprehensive standards for quality and accountability in healthcare staffing.

A key aspect of a healthcare staffing company's value proposition is its ability to reduce costs through economies of scale. These companies operate business models designed to attract a large and diverse pool of quality healthcare professionals, enabling flexible and scalable workforce solutions. This capability allows them to adeptly manage general staffing needs, seasonal workforce fluctuations, and unexpected events such as pandemics. A healthcare facility alone would not be able to act with the same level of efficiency or flexibility. Additionally, healthcare staffing companies centralize essential processes such as credentialing, conducting background checks, providing training and educational opportunities, and navigating complex labor laws. This centralization significantly reduces the costs for healthcare facilities by minimizing the need for extensive recruitment and hiring operations. It also cuts down on the compliance and administrative expenses typically associated with a large HR department. By housing these functionalities under a single roof and distributing their costs across numerous healthcare facilities, healthcare staffing companies streamline operations and reduce the overall cost of services.

Healthcare staffing companies also benefit from economies of scale when offering employment benefits. In arrangements where the staffing company acts as the principal employer, it is responsible for providing workers' compensation insurance, professional liability coverage, healthcare benefits, and 401(k) plans for eligible professionals. In some cases, such as travel nursing and per diem, the company may provide housing and allowances. The ability to streamline and standardize the management of benefits and other perks across a larger centralized workforce enables companies like CCRN to negotiate more favorable terms and secure lower rates per employee compared to traditional healthcare facilities. Greater leverage allows companies to bargain for superior benefits and insurance offerings, which in turn can be a decisive factor for healthcare professionals when choosing between potential employers. Additionally, healthcare staffing companies may benefit from their ability to pool risks, which reduces the financial risks associated with insurance liabilities and contributes to greater financial stability in the company.

As previously noted, the healthcare staffing and workforce solutions industry is highly competitive, with limited opportunities for differentiation among companies. CCRN competes with other healthcare staffing firms on national, regional, and local levels. Some of the most notable competitors include CHG Healthcare Services, AMN Healthcare, Jackson Healthcare, Aya Healthcare, Maxim Healthcare Staffing, ProLink Staffing, Ingenovis Health, and Medical Solutions. AMN Healthcare is the only other dedicated healthcare staffing company that is publicly traded in the space.  

The healthcare staffing market has gone through the largest cyclical resets ever on the back of the Covid 19 pandemic. Staffing levels have declined significantly from their 2021 highs as showcased by declines in contract volumes and healthcare professional earnings. Despite the moderation of demand there remains a persistent level of nursing and healthcare professional shortages in some geographic markets. I personally believe that nursing shortages are no longer a major issue facing the industry, and the claims of severe shortages by the year 2030 are poorly projected, it's clear that the industry is not yet fully stable.  An aging workforce, burnout, higher rates of turnover, and education faculty shortages continue to put strains on healthcare facilities. An estimated 20% of nurses are expected to retire within the next five years. To address this, not only will more nursing students need to enter the workforce to replace retirees, but also to accommodate industry growth. Currently, there is a shortage of nursing faculty and other healthcare educators available to teach and train the next generation, both in classroom and clinical settings. Due to these shortages, potential students are being turned away, but there have also been declines in enrollment rates to Bachelor programs that precede nursing and PhD programs, reflecting broader trends in higher education. As the market stabilizes, I anticipate that economic incentives will align and help mitigate these obstacles. CCRN and AMN Healthcare expect to return to historical growth trends by the end of 2024.

Competitive Advantages

Many of CCRN’s competitive advantages can be attributed to their large size in the industry. Opportunities to differentiate and earn outsized returns in the healthcare staffing industry are limited, and I would not consider competitive advantages to be exceptionally durable, but they can give the company an edge. Here are four competitive advantages I’ve identified for CCRN:

·       Economies of scale – CCRN is estimated to be the second-largest travel nursing company in the United States and one of the largest healthcare staffing companies overall. Their substantial employee base enables them to negotiate more favorable terms and secure lower rates per employee compared to smaller competitors. This capacity not only attracts healthcare professionals who value superior benefit programs but also allows CCRN to offer more competitive rates to healthcare facilities. Additionally, CCRN benefits from economies of scale through centralized administrative functions and training, as well as their ability to pool risks, enhancing their operational efficiency and market positioning.

·       Scalability – CCRN's substantial size enables them to provide healthcare facilities with scalable and flexible staffing solutions. This capability positions them as a crucial partner during periods of seasonal fluctuation, such as flu season, or in response to demographic shifts like winter migrations in southern states. Such flexibility is vital for healthcare facilities that need to ensure they can meet patient demands effectively and adapt quickly to rapid market changes.

·       Network Effects – Word-of-mouth and referrals are CCRN’s leading channel for attracting and accessing healthcare professional candidates. As CCRN's database of healthcare professionals expands, it attracts more healthcare facilities, thereby enlarging its network. The growth of this network increases the number of placement options available, enhancing the alignment between the qualifications of the staff and the specific needs of the facilities. This improvement in matching capabilities enhances the value of CCRN's services for both healthcare professionals and employers. A larger network increases the likelihood of finding the ideal fit for both parties, making the platform increasingly attractive to use. Central to CCRN’s network is their technology solutions including Intellify and Xperience, their self-service technology portal. For travel nurses and allied health professionals.

·       Data Advantages – CCRN's extensive network of healthcare professionals and facilities provides them with a competitive advantage in data analytics over smaller competitors. This wealth of data enables CCRN to make more informed decisions regarding recruitment, training, compliance, logistics, and customer satisfaction, facilitating smoother operations. Additionally, the use of predictive analytics allows CCRN to forecast staffing needs, helping healthcare facilities efficiently meet their requirements. This strategic use of data not only enhances operational efficiencies but also improves the overall service quality provided to healthcare facilities and professionals.

Risks

Like any business, CCRN faces various risks that could negatively impact its business model. The risks I believe are most relevant to my valuation include the following:

·       Economic Downturn – An economic downturn, characterized by increased unemployment and widespread loss of insurance, would likely lead to a decreased demand for healthcare professionals and CCRN's services. In such scenarios, healthcare facilities might terminate or opt not to renew their contracts with CCRN, impacting the company's revenue and business stability.

·       Competition – The healthcare staffing and workforce solutions industry is highly competitive with low to moderate barriers to entry. For CCRN, maintaining bargaining power, attracting top talent, securing profitable billing rates, and offering technological solutions that meet the needs of both customers and healthcare professionals are crucial for success. There is a risk that competitors might develop superior technological solutions and lure talent away from CCRN, which could impact the company's market position and profitability.

·       Intermediary Organizations – Recent trends show that customers are increasingly using intermediary organizations and side-by-side Managed Service Providers (MSPs) to broaden their access to employment pools. These relationships could disrupt the direct connection between CCRN and its customers, potentially resulting in a decreased number of professionals assigned to those customers and reduced spending.

·       Ability to Recruit Healthcare Professional – CCRN's business success hinges on its ability to attract qualified talent to meet customer demands. To achieve this, the company might need to increase wages and enhance benefits, often without the leverage to pass these increased costs onto the customers. Additionally, shortages of healthcare professionals in specific fields and geographic areas could impair CCRN's ability to deliver effective solutions to its customers.

·       Failure of Technology and Information Systems – A failure, disruption, or cyberattack on CCRN’s technology and information systems could have detrimental effects on the company. It is crucial for CCRN to safeguard the information of its customers and healthcare professionals. A data breach involving the loss of personal information could severely damage the company’s reputation, which is essential for its recruitment capabilities.

·       Regulatory Risks – CCRN may be directly or indirectly impacted by changes in reimbursement policies for healthcare expenses, industry consolidation, regulatory changes, litigation, and general economic conditions that influence the purchasing practices, operations, and financial health of its customers. Additionally, CCRN operates across several federal and state jurisdictions and their ability to maintain compliance may at times adversely affect the business.

Valuation and Final Thoughts

Using a discounted cashflow model and a reverse discounted cashflow model, I estimated a fair value of $20 for CCRN. At its current price near $17, my fair value estimate would give CCRN a margin of safety of 15%. I believe my inputs to be conservative assuming a growth rate of 5% similar to the market outlook. Cost of capital was 10% and ROIC was 13%. With respect to valuation ratios, CCRN currently trades to the low end of its historical price to earning and price to book. Price to sales is within its historical range and price to free cash flow also appears to be towards its low end.

CCRN is well-positioned to capitalize on macro trends in the market over the next decade, boasting a strong balance sheet with no debt and a solid brand reputation that has established it as a leader in the healthcare staffing and workforce solutions industry. Despite these strengths, I am hesitant to include CCRN in my portfolio. The company exhibits inconsistent financial performance, operates on slim margins, and shows significant fluctuations in return on invested capital and cash flows—factors that undermine my confidence in making accurate financial projections. Furthermore, CCRN lacks what I consider to be a durable competitive advantage, and it does not currently offer a sufficiently attractive margin of safety to warrant investment. At this time, I simply believe that there are better investment opportunities out there.

In the past I wrote a valuation on AMN Healthcare. I’ll be the first to admit that I severely underestimated the level of moderation that would occur in healthcare staffing, which can certainly be attributed to my ignorance in the space. I maintain a small position in AMN that I do intend to add to as the industry shows signs of resumed growth. Compared to CCRN, AMN offers a broader level of staffing and technology solutions that believe are better aligned with prevailing macro trends. AMN also demonstrates more consistent cash flows and currently trades at a more attractive margin of safety, enhancing its appeal as an investment option.