Evolent Health Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Welcome to the Evolent Earnings Conference Call for the Quarter Ended September 30, 2023. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent are Seth Blackley, Chief Executive Officer and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on company's website in the section entitled Investor Relations. I will now hand the call to Seth Frank, Evolent's Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you and good evening. This conference call will contain forward Looking statements under the U. S. Federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations.

Speaker 1

A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results As an outlook, please refer to our Q3 press release issued earlier today. Finally, as a reminder, reconciliations of non GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website in the company's press release issued today and posted on the IR section of the company's website, ir.evolenthealth.com, and the Form 8 ks filed by the company with the SEC earlier today. And with that, I'll turn the call over to Evolent's CEO, Seth Blackwing.

Speaker 2

Good evening and thanks for joining us. Tonight, we're announcing another strong quarter of execution against our plan. We exceeded our guidance for profitability, Continue to see strong business development and cash flow in the quarter and are tracking towards our short and medium term targets. We believe we have the leading value based specialty care platform in the market and continue to believe we are set up for continued success. 3rd quarter revenue of $511,000,000 represents 44.9% reported growth in the quarter compared to Q3 2022.

Speaker 2

Our specialty offerings representing 87% of our total revenue grew 80 versus the same quarter last year with the NIA acquisition contributing approximately 24% of that 80% growth. Adjusted EBITDA of $48,700,000 exceeded our guidance, driven principally by strength in our maturing performance based arrangements. Our profitability is also translating to cash flow with cash from operations in the quarter of $60,300,000 We averaged over 78,000,000 product lives during Q3 and we believe that we're still in the early days of capturing the market opportunity ahead of us. This product life count is roughly flat with the Q2 of 2023 as we anticipated due to the offset of new lives added an impact of Medicaid redeterminations. Our shareholder value creation plan remains the same of 1, strong organic growth 2, expanding profitability and 3, disciplined capital allocation.

Speaker 2

Let's review progress on each element of the plan Discussing the macro environment. 1st, our growth algorithm is simple and powerful. Find new customers, Expand the number of products those customers use and convert customers from our technology and services product to our performance suite. Today, we announced 3 new operating partnerships, bringing our total for the year to 9, ahead of our annual target of 6 to 8. First, we are announcing today that we plan to launch our cardiology performance suite with Florida Blue for their Medicare Advantage population in the first Quarter of 2024 expanding on a successful partnership in oncology.

Speaker 2

We expect the cardiology Expansion to contribute over $75,000,000 of revenue on an annual basis. This type of expansion, which is a Core part of our growth algorithm is made possible by strong performance at our existing partnership and we're excited to more comprehensively serve Florida Blue's Medicare Within the performance suite, we also have opportunities to manage patients under our complex care area, formerly known as Evolent Care Partners. When supporting patients under complex care, we take a similar approach to cardiology, oncology or musculoskeletal care, but delivered through primary care physicians for the benefit of patients who are impacted by complex health conditions. Within complex care, added 2 new operating partners for 2024. The first is a multi specialty risk bearing group in Texas And the second is a medical group in the Southeast.

Speaker 2

Finally, on the heels of our successful rollout Of our technology and services for oncology specialty care solutions across Centene and WellCare's Medicare Advantage members We're happy to announce that Centene has added our cardiology technology and services solution to these Medicare members across the country, demonstrating the value of Evolent solutions across multiple specialties. Turning to our sales pipeline, we believe we are well set up Heading into Q4 and 2024 across each element of the growth plan. We have large and interesting to expand the performance suite in cardiology, oncology and complex care. Performance suite growth opportunities are usually within existing Our technology and services suite opportunities are available for existing accounts as well as for new customers through RFPs. More importantly, some of these new customer opportunities are ones that we were not able to respond to prior to the NIA and IPG acquisitions.

Speaker 2

Today, we already served many of the top health plans in the country, including 13 of the top 20 health plans in the country. Given the size of our installed base And that over 1 third of our total addressable market is addressable from cross selling opportunities, we continue to The majority of new business going into 2024 will come from existing clients and we continue to feel confident about exceeding our growth targets in Turning to our second theme of expanding profitability. Our diversified approach continues to expand our earnings growth. You'll recall that we typically generate about 75% of our earnings from our technology and services suite or our non risk business at about 25% from our performance suite for our risk business. Our large technology and service Suite business gives us a firm foundation of earnings to drive quarter to quarter profitability with upside opportunities available from our performance suite.

Speaker 2

We believe our results this quarter continue to validate our margin expansion model, where we continue to see strong results from the technology and services suite. In addition, our total adjusted EBITDA came in ahead of expectations because of our 2022 performance suite launches maturing Our 3rd investment theme is disciplined capital allocation, where our priority this year has been to generate cash And delever the business. John will go through more details here, but I'm pleased that since closing the NIA transaction in January, we have lowered our gross Debt by $71,500,000 made up of a $37,500,000 reduction to our revolver, A $23,000,000 reduction from the 2024 note conversion and another $10,000,000 reduction in principal on our senior term loan. In addition, after September 30, we repaid the remaining $1,000,000 of our 2024 notes in cash. Finally, relative to the leverage targets we laid out earlier this year, we are on track for our annual cash generation objectives and are ahead of our targets for net leverage ratio.

Speaker 2

Let's close with a macro view on our competitive position and focus on innovation where we believe Evolent is As the U. S. Continues to manage through challenges of higher interest rates and continued economic uncertainty, We believe the healthcare ecosystem, particularly the U. S. Government as the largest single payer for care as well as state Medicaid programs will be under even more pressure to identify opportunities for cost savings and look to slow the current course of medical inflation.

Speaker 2

Similarly, employers and in turn insurance companies are under increasing pressure to manage healthcare costs. As pressure mounts, levers like risk adjustment become less impactful and the cost of devices and drugs accelerate, We believe that the industry is focusing more on managing specialty utilization. Obviously, this is what Evolent does. We believe we are the market leader in reducing healthcare specialty costs, while improving patient quality and reducing physician friction. We can do this work with a guaranteed savings approach to the performance suite or on a fee basis through our technology and services suite.

Speaker 2

Investors sometimes ask me what's the difference about Evolent versus its competitors. The legacy approach Managing specialty care through so called utilization management is generally disliked, burdensome and often adversarial and not clinically oriented. We've all experienced this in our personal lives as well. It's frustrating and only marginally effective. Given our provider led heritage, even though we work for health plan customers, we have a deep understanding of physician needs and challenges when it comes to managing utilization.

Speaker 2

Evolent's model is clinically driven, lower friction and evidence based. Evolent's genesis and historical provider heritage Uniquely positions us to engineer solutions that engage physicians and patients in a better way, which I would describe as a clinical pathways model. Under our pathways model, we provide choices to providers, transparency and clinical evidence in real time. This approach lowers friction with providers And it allows for more holistic patient centered thinking across the continuum of care. Let me give you a few examples of what I mean by this.

Speaker 2

First, as we integrate NIA into Evolent, we are using expertise in areas like imaging and genetics to support holistic cancer, orthopedic and cardiology care in ways that the market has not historically seen. We don't think about or genetic test in a silo, we think about it in the context of providing the best cancer, cardiac or orthopedic care possible. Another example is Evolent's design of alternative payment models for specialists, which provide doctors with financial incentives to follow our pathways. And the third example is in the area of artificial intelligence, where we are investing heavily in technology to reduce administrative burdens on providers, while also improving adherence to our pathways. Just last month, Evolent hosted an artificial intelligence summit with a broad array of senior health plan executives.

Speaker 2

During the summit, we provided a deep dive to both clients and prospects of our current AI enablement and the new capabilities we are bringing to the market in the time ahead. There was strong consensus that increasing Automation should help us with an even create an even better lower friction model of care. These improved services to clients are not just ideas on paper. They include functionality that is already live. As we have in other areas, we expect to aggressively innovate in AI and hope to take a leadership position in the value based specialty care market.

Speaker 2

So now John will provide a more detailed commentary on the financial results for the quarter an updated guidance.

Speaker 3

Thanks, Seth. Since our last call in August, we've had a calendar full of investor And it's been great to see many of you on the road and virtually. Before going through the numbers and our outlook, I'll hit on a couple of key themes from those conversations With the benefit of an additional quarter's worth of data. First, the impact of Medicaid redeterminations on our top and bottom lines has been a frequent question I'll start by reiterating that our exposure here is limited by the fact that 62% of our revenue comes from Medicare and commercial lines of business and only 38% from Medicaid. Our forecasts have called for a decline in our Medicaid membership of between 8% to 10% by the end of this year with an expected mid teens gross decline when the process is complete sometime So if our redetermination forecast were to be for 20% instead of the mid teens, that would represent the variance of only 2% in our year over year growth rate.

Speaker 3

2nd, remember that we have regular dialogue with our partners regarding the soundness of our capitation rates and have specific contractual provisions that enable us to update our rates as disease prevalence changes. As of September 30, we estimate that our Medicaid states were approximately 25% of the way through the redeterminations process. Recall that most of our Medicaid revenue comes from states pursuing a linear rather than front loaded process And are generally deploying resources to assist members in retaining coverage. As an example, according to the latest data from the Kaiser Family Foundation, Our states reported an average 7% disenrollment rate versus a 10% rate nationally. Looking at our own numbers, which recall typically The pediatric population, our Medicaid membership declined approximately 4% on a gross basis, which was in line with our forecast.

Speaker 3

If the linear trend continues, this would put us at the favorable end of our 8% to 10% expectation for this year and in line with our total forecast for the end of the process next summer. We estimate redeterminations represented a revenue headwind of about $7,000,000 in the quarter, again consistent with our forecasts. This consistency is one contributor to our upward revised revenue guide for the year, which is in the top half of the original range we gave in February. The incremental data also gives us additional confidence in our $300,000,000 run rate target for adjusted EBITDA exiting 2024. We also closely watch the impact of Medicaid redeterminations on our bottom line since members who are leaving the Medicaid program are thought to be lower cost than those who stay.

Speaker 3

Recall that when we set our guidance for this year, we incorporated an estimate for this shift based on the underlying medical expense trends that we saw in the population. This is also playing out as expected With modest increases in authorization rates at our Medicaid partners during Q3 that are in line with our overall forecasts. In total, We expect this to be a headwind to EBITDA of less than $5,000,000 for the back half of this year, unchanged from our initial forecast. 2nd, we continue to hear investor interest in the underlying progression of profit maturation in our specialty performance suite contracts. In the 1st 3 years after the acquisition of New Century Health, we launched over $400,000,000 in annual performance suite revenue across multiple partners that we're managing today.

Speaker 3

This cohort has been live for more than 24 months and year to date is performing in our target Mature margin range of 12% to 18%. This is a function of execution on our clinical model, skilled underwriting And an overall utilization and acuity environment that is tracking with our expectations as Seth addressed. As a reminder, our approach for new performance suite launches is to remain actuarially conservative until we have enough data to make a change to our assumptions. So 3 to 5 quarters after we go live with a client for Performance Suite, we typically have enough actual performance data to shift From estimated medical expenses to actual claims expense and our financials will typically show a proportional increase in profitability as initial reserves are released to bring As an example, our year to date adjusted EBITDA includes about $25,000,000 from prior year claims development net of refunds to customers for outperformance, which is principally driven by this dynamic as it applies to the launch of several $100,000,000 worth of Performance Suite contracts in 2022. It is important to understand that this is not an unexpected or excess benefit, but is a natural part of our business as we grow and is incorporated into our annual and multi year outlooks.

Speaker 3

So far in 2023, we launched another several $100,000,000 worth of new contracts with this traditional conservatism. All else equal, we would naturally anticipate a similar release of initial actuarial conservatism for these contracts during 2024. The 3rd area of inquiry focuses on potential increases Medical expenses due to increased medical utilization. Our largest category, oncology, represents about 65% of our specialty Performance Suite revenue. At this stage, the prevalence and disease acuity of that population has tracked consistently With overall trends in oncology for this year, we have not seen a spike or a decline across the population for this year.

Speaker 3

The balance of our specialty performance suite or 35% is in cardiology where we have seen modest increases in outpatient activity had minimal impact to our results in Q3. Finally, we get frequent questions regarding our balance sheet, cash flow and capital allocation priorities. Recall that we set a target for this year of adding $120,000,000 or more in available cash before paying interest, dividends or prepaying debt Earnouts and acquisition costs. Through September 30, we are 80% of the way to that goal with strong cash performance in the 3rd quarter consistent with our expectations. We have ample cash flow coverage to pay our interest expense.

Speaker 3

In terms of ongoing balance sheet management, we look to optimize 3 items for our business: cash interest, overall leverage ratio and common equity dilution. Since the close of the NIA transaction on January 20 this year, we've lowered our gross debt by approximately 71,500,000 by proactively paying down debt and retiring our 2024 convertible notes, which we completed in October.

Speaker 4

As a result, our net leverage ratio at the

Speaker 3

end of the quarter was 2.5 times, ahead of our target to be below 3 times by the end of this year. In addition, after the quarter end, to prudently manage against dilution, we elected to pay the remainder of our earn out obligation for the IPG BG acquisition in cash, avoiding the issuance of equity at current market prices. Now let's go through the numbers before turning to our outlook. Revenue in the quarter was $511,000,000 an increase of 44.9% versus the Same period in the prior year and $42,000,000 versus Q2. Sequentially, exceptionally strong growth in our Medicare line of business Partially offset by expected declines in our Medicaid revenue.

Speaker 3

In Medicaid, the decline included about 7,000,000 related to redeterminations as I mentioned and about $7,000,000 in customer refunds from reconciliations. These refunds were associated with Some of the prior year developments we experienced in the quarter for a modest net EBITDA benefit. We had an estimated 41 point 7,000,000 unique members during the Q3 of 2023 and a total of 78,100,000 product members for an average of 1.9 products per unique member. These membership numbers as a whole are approximately flat to Q2 2, representing new business growth offset by the impact of Medicaid redeterminations. At the product level, our Performance Suite membership stepped up to $3,900,000 during the Q3 compared to $2,500,000 in the same quarter last year and a little less than $100,000 higher than Q2.

Speaker 3

As anticipated, we saw an uptick in Performance Suite and Specialty Tech and Services PMPMs this quarter as a function of new business rolling on. Average PMPM fee for the Performance Suite was $27.63 versus $27.02 a year ago and up over $3 on average From Q2, as anticipated, due to the aforementioned addition of Humana MA lives in the quarter. As a reminder, fluctuations in average PMPM results from sales mix depending on where growth is coming from along Medicare, commercial and Medicaid lines of business with MA typically associated with a larger PMPM due to the prevalence and acuity of illness in that population. Average product membership in our specialty technology and services suite was 72,400,000 members during the 3rd quarter compared to $14,900,000 in the same period last year prior to the acquisition of NIA. Average PMPM fees were $0.37 in the Q3 of 2023 versus $0.29 in the Q3 of 20 22 and $0.35 in the prior quarter.

Speaker 3

Product members for administrative services were $1,800,000 compared to $2,100,000 in the same period of the prior year and flat to Q2. Average PMPMC was $12.50 versus $16.41 in the Q3 of 2022. Total quarterly cases associated with Advanced Care Planning and Surgical Management totaled $15,000 for the Q3 and average revenue per case totaled approximately 2 5000 both in line with seasonal expectations. As a reminder, these metrics reflect build cases only and do not include cases for our performance suite populations. We continue to see some of these services increasingly deployed as part of our Our adjusted EBITDA result was $48,700,000 versus $28,100,000 in the Q3 of 2022, reflecting organic growth, maturation of our Performance Suite contracts and the addition of NIA.

Speaker 3

Adjusted EBITDA margin was 9.5 percent Year over year margin expansion of 150 basis points due to performance suite maturation, a higher mix of tech and services from NIA as well as organic growth in tech and services solutions year on year. Turning to the balance sheet. We finished the quarter with 100 and $84,500,000 of cash and cash equivalents, including approximately $12,200,000 in cash held in regulated accounts Related to the wind down of Passport, excluding the cash held for Passport, we had $172,300,000 of available cash, an increase of $41,800,000 versus the end of the second quarter, a strong performance. Given the strong cash quarter, We reduced long term debt by approximately $10,000,000 through a principal payment on our senior secured variable rate facility. Cash deployed for capitalized software development in the quarter was $4,300,000 Finally, in October, we closed out all remaining obligations under the 24 notes.

Speaker 3

Let me close with a quick housekeeping item on filings you'll see today and tomorrow. Shortly after filing our Form 10 Q, We will be filing a Form 8 ks with NIA's audited 2022 financials and associated pro form a financial statements along with a prospective supplement to register the shares that were issued as part of the NIA acquisition in January. For clarity, This process does not pertain to any other shares. Turning to guidance, given our continued strong performance, we are increasing Our full year outlook for revenue and adjusted EBITDA as follows. We expect revenues to be between 1.945 and $1,965,000,000 and we expect adjusted EBITDA to be between $192,000,000 $200,000,000 The associated quarterly guidance for Q4 is for revenues between $537,000,000 557,000,000 And adjusted EBITDA between $45,000,000 $53,000,000 We now expect to capitalize software development to be between $25,000,000 $30,000,000 as we have allocated certain engineering resources to non capitalized product development work.

Speaker 3

And with that, let's go ahead and open it up for Q and A.

Operator

And our first question will come from Ryan Daniels of William Blair. Please go ahead.

Speaker 5

Yes, guys. Thanks for taking the questions. Seth, maybe want to start with you. Appreciate all the details on the integrated product offering. And you mentioned You're now able to participate in RFPs that maybe previously you could not respond to because you didn't have the breadth of offering you do today.

Speaker 5

So the question is, number 1, how much has that expanded the potential growth opportunity? And then number 2, is that the case anymore? Meaning do you need any other ancillary service offerings? Or are you pretty comprehensive based on what you're seeing your client needs demand in these RFPs?

Speaker 2

Hey, Ryan. Yes. So on the first question, look, I think it has certainly helped with the growth rate. And in particular, if you look at the total addressable market right now that we have the inclusion of these other capabilities, I think it has been part of why we've had a really strong year this And part of why we're really well set up going into next year. So I think the answer to the first one is yes.

Speaker 2

The second one, no. I don't think we need anything else to participate in RFPs. The things that we have acquired have been pretty strategically chosen, right, that It fit really well within a pretty focused set of really high cost important specialties, Ryan, and I don't think there's anything else we To do to be able to be incredibly relevant for any RFP that comes out doesn't mean that we can cover everything in every RFP, I think we are covering enough that we're going to be well positioned to win any RFP that comes out. And look, I do think The question and the question of are there more things we can do, of course, there are. There are other specialties that are interesting.

Speaker 2

I think given The growth rates we're seeing with what we have and also the reasonably low penetration of what we have, we're really focused on Expanding what we have for right now versus adding new specialties.

Speaker 5

Okay, perfect. And then interesting color commentary about some of the Pressures facing your end market customers with risk adjustments, higher interest rates, we're seeing higher utilization in MLRs and some of the Medicare Advantage plans in particular. And I think that is stimulating demand for your services. I'm curious, how much of that is kind of Driven in uptick in the pipeline. And then maybe equally important, is it shrinking in all the conversion Cycles of RFPs to sales or your approach to customers and implementation given that maybe there's a more urgent need for cost containment than we've Over the last 2 or 3 years?

Speaker 2

Yes. I do think the answer is yes on both. It is helping For sure. On interest overall, and I think it is in certain cases, Ryan, it depends on the situation where there is acute pain. I think it is shortening the sales cycle a little bit.

Speaker 2

And I think the organic growth rate on the specialty side of over 50% is Part of that what we've been seeing this year and it's been going on for some time. I would say it's not brand new. The risk adjustment rule has been out for a while, those sorts of things. So it does feel like we're starting to see it. And I think it's going to be an ongoing issue for a while.

Speaker 2

It doesn't feel like a 12 month and then done kind of thing. It feels like we'll have pressure in the end market, which is good for us going into next year and beyond.

Speaker 5

Okay. Thank you. Great quarter. I'll hop in the queue.

Speaker 2

Thanks, Ryan.

Operator

The next

Speaker 4

We heard from 2 large payers this week about new MA enrollees being older And maybe showing higher utilization from the start. Is that something you're seeing as well? And maybe you can walk us through how those lives, If in fact they're happening, start to impact the mix within your existing MA business?

Speaker 3

Hey, Kevin. It's a good question. Yes. I think as you look at our risk business, right, it is relatively narrow versus a So the total cost of care model in an MCO. And as we look at acuity or other factors within oncology, for example, We've not seen that dynamic.

Speaker 3

That's not to say we won't see it in the next year, right? But relative to that commentary From the big MCOs, it's not something that we've seen in our risk.

Speaker 4

Okay. That's helpful and good to know. This is more of a broad question, more of a strategic question, I guess. I was when we initiated and picked up coverage, I was kind of surprised that sort of way the stock is valued and the way it's been trading. And you guys again sort of hit your numbers, you've executed And the like.

Speaker 4

I'm wondering if you're contemplating anything strategic above and beyond what you can control, which is the operations, which You've done a fantastic job of hitting your target. Is there a way to change capital allocation? Or is there anything strategic you have contemplated that Might be able to create shareholder value or get the investment community to understand sort of the what you've built here with this business.

Speaker 2

Yes. Kevin, it's Seth. I can take that. The easiest way to answer it and say is we're always open to anything that can be a catalyst And can create shareholder value. I think in particular for this year and kind of what you're referencing with the stock over the last, Say 6 months as of for instance, there have been from our perspective a couple of unique things going on with utilization concern and redeterminations that have been concerns for people and our view has been, hey, let's Get that data out there.

Speaker 2

I think this call is part of that, that we're continuing to feel really confident about our plan. And if for some reason that doesn't begin to The needle, then our Board would always consider things that helped us fully recognize the value. We do think we have a really unique asset. We think we're in Early innings of a really big opportunity. And so it does need to get recognized one way or the other.

Speaker 2

And there's obviously a couple of ways to get at that to your point. Right now, I we're pretty focused on getting this data out there and continue to execute. And we'll pull up on that question over time. If it doesn't work itself out.

Speaker 4

Appreciate that. Thanks guys.

Speaker 2

Thanks Kevin.

Operator

The next question comes from Jack Wallace of Guggenheim Partners. Please go ahead.

Speaker 2

Hi, this is Mitchell on for Jack. Thanks for taking my question. Would you be able to help us better understand what the go get portion of the $300,000,000 EBITDA run rate looks like now? And would that largely come from new tech Services deals? Thanks.

Speaker 3

Hey, Mitchell. It's John. It's a good question. As we've laid out that path, There are 3 core items. 1 was growth, as you noted, mostly in the tech and services suite.

Speaker 3

The second was the realization of the cost and revenue synergies within the NIA acquisition. And the 3rd was the maturation of our performance suite. On the first one, tech and services growth, announcements like the ones that we made today, With Centene and so on, we feel place us sort of nicely on track for filling up that bucket by the end of next year. On the second, we'll have achieved as we've talked about in previous calls, most of the Cost work already within the NIA synergy bucket. The one that we've mentioned before that is still work in progress is on the technology side and lots of work going on in that now, the visibility to completing that in Q1.

Speaker 3

The final piece maturation of our performance suite. I mentioned again on the call here that is tracking according to our expectations. That feels pretty good. And we still have the opportunity to add more to that. For example, the Florida Blue announcement today, Well, we'll go live, we expect in the Q1 of next year.

Speaker 3

By the end of next year, we would expect it to be contributing some EBITDA here. So feeling good overall.

Speaker 2

Very helpful. Thanks so much.

Operator

The next question comes from Charles Rhyee of TD Cowen. Please go ahead.

Speaker 6

Yes, thanks for the question. Wanted to follow-up on the Florida Blue expansion here into cardiology and think about the ramp up. John, you said it Likely starts in Q1. Maybe talk about the regional density you might have in cardiology in Florida. Is there already kind of performance suite with Florida in cardiology that could help maybe ramp it faster or is this relatively A new market for cardiology performance suite.

Speaker 6

So we would think of a more normal ramp up because if I recall you kind of said With oncology, if you have the regional density of oncologists using PerformanceSuite, adding on New lives can ramp quicker to maturation. Thanks.

Speaker 2

Hey Charles, it's Seth. So look I think in general regional density is really useful, right? So I think it's a good concept. We do strive to grow in ways that think first about existing markets We jump to a new state because we want to be very disciplined on the underwriting. We understand the market.

Speaker 2

We understand the providers. We have relationships. We have scale, etcetera. So that's absolutely a strategic choice that we've been making. We don't have a lot of cardiology risk business in the state.

Speaker 2

So I don't think it's like we added an oncology relationship, but look, we understand, we know the multispecialty groups, we know the health systems. And so we, I think, do have familiarity. The markets, I think, It's sort of somewhere in between, given those two factors. But it is overall the of dynamic we want to see, which is growing in markets where we have relationships.

Speaker 6

Great. And then if I could just follow-up, you had talked previously about building An at risk model for MSK, I think for 2025. Any sort of update or progress on development of this program and Any kind of more details you can share on how an at risk model for MSK might look?

Speaker 2

Yes. I'd say just in general, it's going to look a lot like What we're doing in oncology and what we're doing in cardiology. And so things like IPG begin to get folded into that And things like imaging get folded into that and physical medicine, things that we brought from different places, right? So I think the design of it's pretty clear And the value proposition will be really clear as well. In terms of timing, Charles, like we're working on it.

Speaker 2

It's not Super near term. We're not ready to kind of talk about a specific date yet. And I think the big thing for us, right, is growing at 50 Organically on the specialty side in the quarter, we have so much opportunity of what we have that we want to make sure we stay disciplined. And when we roll new things out, we don't need to take incremental risk on right now on the MSK specialty So we're going to do it thoughtfully and carefully. And the timeline you laid out is probably a reasonable one as a starting point.

Speaker 2

So not a super near term item.

Speaker 6

Okay, great. Thanks. Appreciate it.

Speaker 2

Welcome.

Operator

The next question comes from Jeff Garro of Stephens. Please go ahead.

Speaker 7

Yes, good afternoon. Thanks for taking the questions. Some more positive comments on the pipeline. So I want to ask a couple there. Roman to one here, just broadly any more color on the kinds of deals That you're seeing enter the pipeline?

Speaker 7

And maybe more specifically, you had previously talked about efforts to rebuild the NIA pipeline Given the multiple changes in ownership of that asset, so I was hoping to get a progress update there.

Speaker 2

Sure. Let me just give you a couple examples, Jeff, that I think will answer your question, including the last question, right, which is, we have Several things in the pipeline that are large performance suite opportunities right across oncology, cardiology and even the Complex Care piece. And those are usually with existing customers. So let's say we have a relationship with a customer and we're in some states, but not all the Or we're in one specialty and not the other. There's a number of those that are in the pipeline that feel really good.

Speaker 2

There are a number of with new logos that were probably broader, maybe more tech and services oriented that might have multiple specialties involved. And then we're seeing a number of opportunities across a pretty large installed base for NIA Magellan where maybe we can bring in several Additional capabilities or bring their capabilities into our footprint. And I think that last example does a pretty good job of answering the You're asking about NIA, which is rebuilding the pipeline a lot through cross sell, frankly. And then Related to that in the 2nd category I mentioned of net new logos when we respond to an RFP, we're going to be bundling in the imaging and physical medicine and genetics things like that. And so I think I would say just as a holistic comment on your last question, I feel like the pipeline is rebuilt at this point and we're Off and running with the strategy that we had set out a year ago.

Speaker 7

Great to hear. Follow-up for me on the new business side, that's Specifically about the Centene Cardiology expansion, interesting to see the cadence given you have a longer history on the Medicaid and Exchange line of businesses And it was just earlier this year that you expanded into MA with Centene in oncology. So I was hoping you could discuss what prompted the rapid adoption of your solution in MA for Centene and the potential for adding cardiology across multiple lines of business.

Speaker 2

Yes. Yes. So look, I think it's similar to the last question interestingly, which is most Partners that we work with would like to work with fewer vendors and fewer strategic partners on the specialty side, right? So they might have 5 or They work with today, they'd love to consolidate that down. And I think what you're seeing with a really good key partner in Centene is them starting to do that.

Speaker 2

And it's good for them. It's really good for Patient, right, in the sense that, hey, we can start to integrate across these different specialties. Nobody wants to Have one of their images and the request for an image reviewed in isolation. They want to be understood as, hey, I'm a human with a diagnosis So cancer, what's the right course of treatment for me and how does the image play into that, right, in that example. And so I think what you're seeing, same thing could go with cardiology, right?

Speaker 2

We're tying together imaging and imaging is a huge part of cardiology as a for instance. So I think this is the natural course of things. I think it's better for the partner or clients. It's also better for the patient. MA, YMA versus others, I think they're all opportunities.

Speaker 2

I think a lot of plans right now are focused on Medicare, Managing utilization in that line of business for the obvious reasons. But I think to your point, these should be relevant for all lines of business over time.

Speaker 3

Great. Thanks again. Thanks.

Operator

The next Question comes from Richard Close of Canaccord Genuity. Please go ahead.

Speaker 8

Yes. Thanks for the And appreciate all the details here today. With respect to Performance Suite, John, I was wondering maybe if you could talk a little bit On the ramp, you said you moved from estimated to Actual 3 to 5 quarters. And I'm just curious how that's trended for different cohorts In terms of maybe the bottom end of the 3 or the top end at the 5. And Can you like shorten that time frame at all in terms of have a better ramp?

Speaker 8

Any thoughts there?

Speaker 3

That's a good question, Richard. I'd say 2 things. The principal So the determinant of whether it's 3 quarters or 5 quarters is the cadence of data that we're receiving from our partner. And so what that can mean, right, is as we are growing with existing partners Who are already accustomed to this sort of data transfer with us, accustomed to this sort of scope that we do, it can happen faster. With a brand new partner, we typically happen maybe on the longer end.

Speaker 3

So that's the principal arbiter that will take us Whether it's 3 quarters or 5 quarters. Overall, what we've seen with these go lives, Regardless of the specific timing, it's a pretty consistent way that it's playing out in terms of our general Reserving methodology, starting off on the conservative end, which we feel is appropriate, and then releasing some of that conservatism, which when we have the actual claims data.

Speaker 8

Okay, that's helpful. And maybe a follow-up on that. I'm just curious, you're talking about Strong pipeline and obviously you have existing customers that you have a long standing relationship with. I'm curious if you ever look at pieces of business and just say, hey, we don't want Fairly do that in terms of just gauging in terms of what kind of line of sight do you have before Sign another Performance Suite contract.

Speaker 3

Yes. We absolutely have I've said that before, is the answer. We when we're underwriting a deal like this, We'll review 2 to 3 years' worth of claims. And you're looking at that data for sort of what's the size of the risk pool? What's the volatility of the risk pool?

Speaker 3

Is there a sort of are there manageable levers that we know we can pull here? Or are there not? And sometimes they are not. And that's a great customer for tech and services.

Speaker 8

Okay, very helpful.

Speaker 7

Thanks, Richard.

Operator

The next question comes from David Larsen of BTIG. Please go ahead.

Speaker 9

Hi, congratulations on the good quarter. Some of the health plans, we're talking about a few different things, obviously, Higher MA utilization, everybody's been talking about GLP-1s, diabetes, obesity management. And then also importantly, like for 2024, the plans are talking about pricing, have they fully accounted for The higher utilization levels in the pricing, sometimes they have, sometimes they haven't. Just any thoughts or color on how that Possible margin pressure that some health plans might see 1onetwenty 4 may either benefit you because they need your services more or how you basically Get your fair share of the premium. Thanks.

Speaker 9

Thanks very much.

Speaker 2

Yes, David. Look, I think what you're highlighting Whether it's GOP-one or pricing or the age gen question that we talked about before, the general Press towards slightly higher MLRs and I think the pressure that our customers are feeling is generally a positive thing Right. And I think risk adjustment, I put it in that category too, David, right? There's a set of factors that have created a little bit of pressure And the need to actually manage the thing that is driving a lot of the costs, which is utilization, in general And all these other factors is helpful to us. We have, as John mentioned earlier, ways to manage our reasonably narrow risk and we have Contractual protections on that.

Speaker 2

Also think just the way we manage our risk is a little bit different and clinically manage it. I think part of the results we're seeing this year through this commentary by the plans, but also The business development pipeline that I talked about earlier, it is partially related to the question you're asking. And it is a net positive for us. And we can talk about the puts and takes on that if we want to. But in general, it's a net positive.

Speaker 2

And I think it's going to continue for a while, which should be a positive for a while.

Speaker 3

Now I'll just add one piece of detail to that, which is the way that we price our performance suite is With dollars per member per month, not as a percentage of premium. And so as plans are contemplating their benefit Design, their pricing, that does not directly flow down to us.

Speaker 9

Okay. And then I just wanted to confirm that what I heard was There's no unusual increase in oncology or cardiology or GLP-one related costs. Your costs are coming in Sort of in line with your own expectations, is that correct?

Speaker 3

That is correct.

Speaker 9

Okay. Thanks very much. Congrats on a good quarter.

Speaker 4

Thanks, David.

Operator

The next question comes from Sean Dodge of RBC Capital Markets. Please go ahead.

Speaker 4

Yes, thanks. John, I think you just kind of hit on it, but I wanted to ask kind of the inverse of what I think Dave was asking, which is so on the redetermination, some of the MCOs are talking about upcoming Medicaid rate updates and those In some cases building in perspective consideration for acuity changes in those populations. And so if you've got a performance suite counterpart That gets a higher rate from the state, when or where they're actually seeing acuity changes. Does some of that flow through to Evolent?

Speaker 3

It does not, Sean.

Speaker 4

Okay. Okay. All right. That's clear. And then I guess, apologies if I missed it, but on the performance suite expansion with Florida Blue, are there any details that you can share in terms of number of lives involved and Maybe expected revenue from that when it's fully ramped?

Speaker 3

Yes. On the revenue side, we're expecting north of $75,000,000 on an annual basis, Going live probably in Q1 of next year. That represents a little north of 150,000 MA lives.

Speaker 4

Okay, perfect. Thanks.

Speaker 2

Thanks, Sean.

Operator

The next question comes from Jessica Tassen of Piper Sandler. Please go ahead.

Speaker 10

Hi, thanks for taking the question. I wanted to start with just on the $25,000,000 of prior year claims development year to date that you mentioned. Is that related to MSSP or NCH Or is it kind of diversified across the businesses?

Speaker 3

Yes. It's a good question, Jeff. That is all the Specialty Performance Suite. So that does not include anything with MSSP.

Speaker 10

Okay. Awesome. And so is that against all of the risk Contracts in the specialty business launched in 2022 or is it some subset?

Speaker 3

That's the majority of it. That's right. It launches from 2022.

Speaker 10

Okay. Got it. And then just one quick one and then one sort of philosophical one. Should we think about the cardiology And services contract with Centene as similarly sized versus the $5,000,000 to $10,000,000 run rate you gave us for the oncology launch?

Speaker 3

Generally speaking, cardiology is a bit cheaper than oncology in MA and so it would be a little lower, but same general ballpark.

Speaker 10

Got it. And then finally, hoping you guys can just describe the seasonality of the Performance Suite Sales and kind of launches around the Medicaid procurement cycles. Can ABH contracts be launched at any time during a Medicaid contract? And just what would your or the management team's philosophy be around announcing those types of new partnerships in terms of timing? Thank you.

Speaker 2

Yes. Jess, on the last question, there's not really seasonality, I wouldn't say. I think it really depends upon where the plan is in their own cycle of managing the cost structure of the plan clinically. Sometimes they may be interested in doing it early in a new state launch, which we've had a couple Doing it early in a new state launch, which we've had a couple of those, right, over time. And sometimes it might just be with a plan that's already Running in a year or 2 into the contract.

Speaker 2

So I don't think there's much of a cycle. Our floss got announced and it's generally going to be the Quarter after we sign it, we generally let everybody know.

Speaker 10

Great. Thank you guys and congrats on the results.

Speaker 4

Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Seth Blackley for any closing remarks.

Speaker 2

Thanks for everybody's time. We look forward to connecting soon. Have a good night.

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Earnings Conference Call
Evolent Health Q3 2023
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