Evolent Health Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 13 speakers on the call.

Operator

Welcome to the Evolent Earnings Conference Call for the Quarter Ending June 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 the 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 Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results Please refer to our Q2 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 The company's website, ir. Evolenthealth.com and Form 8 ks filed by the company with the SEC Earlier today, during management's presentation discussion, we will reference certain GAAP and non GAAP figures and metrics that can be found in our earnings release as well as And now with that, we'll turn the call over to Evolent's CEO, Seth Blackley.

Speaker 2

Good evening, and thanks for joining us. We're pleased to be here to discuss another strong quarter of execution against our plan. As context for today's call, I want to reiterate Three key elements of that plan. 1st, organic growth driven by a conviction that our integrated value based specialty management And thoughtful balance sheet management, including delevering. I think you'll see our results this quarter affirm all elements of this plan and that we've taken another step towards our target of $300,000,000 of adjusted EBITDA exiting next year with continued sales momentum thereafter.

Speaker 2

Turning to the quarter, 2nd quarter revenue Substantial organic membership growth, both quarter over quarter and year over year. Our profit growth year on year was driven by the high flow through margins from Acquired revenue from NIA plus initial benefits from our integration work. Given the results for the quarter and our visibility For revenue, we are maintaining our 2023 outlook based on the timing of several significant client go lives across quarters 3 and 4. John will provide more detail as well as the 3rd quarter outlook shortly. As part of the guide for the remainder of the year, we anticipate continued growth from the Humana performance suite announced this past January.

Speaker 2

That contract went live in Arizona in July and we plan to go live in Florida later this year. Our other existing and new contracts Looking briefly at the numbers, Evolent's 2nd quarter 2023 revenue was $469,100,000 Growth of 46.6 percent over the same period of 2022. Sequentially, revenue grew 10% compared to the Q1 of 2023. If we focus on Evolent specialty revenues, representing 83% of this quarter's total revenue. Total reported growth was 72% with acquisitions contributing 39.8 points of year on year growth.

Speaker 2

So before the impact of acquisitions, Evolent's core specialty base grew over 32% year 2nd quarter adjusted EBITDA totaled $47,400,000 more than doubling compared to the Q2 of last year. The growth in adjusted EBITDA year over year was driven both by expansion in the base business as well as the addition Now let's turn to Evolent's 3 core operating priorities of strong organic growth, Expanding margins and optimal capital allocation. Starting with organic growth, we had a robust quarter of 4 new agreements, Consisting of 2 new operating partners against our target of 6 to 8 per year, as well as 2 new cross sell Starting with the 2 new operating partnerships, we are first pleased to announce that we will expand to both cardiology and oncology performance suite for Molina's Medicaid and Exchange members in Florida. This agreement marks an important milestone for Evolent As our first Medicaid Performance Suite agreement in Florida, on the heels of years of success in the MA market. Continue to be pleased with our Molina relationship as we have been able to expand our footprint to multiple Molina states and specialties In rapid succession, including Florida, the relationship will cover 7 states and approximately 2,400,000 product members, Representing approximately 8% of the total addressable product members at Molina, leaving the opportunity for further Strong expansion ahead.

Speaker 2

It's also important to note that this Molina expansion into Florida allows everyone to continue to establish And our ability to collaborate both with the health plan and most importantly with providers in the market. Evolent's strong performance Florida makes it increasingly attractive for payers to contract with Evolent because of our existing scale and track record in the market. As more payers work with Evolent, our services to providers become more of a standard of care and therefore easier for providers to use. As provider populations in any given market become increasingly familiar with Evolent and more proficient in our clinical pathways, this network effect can help is a new logo and first time corporate level relationship with a regional not for profit health plan with over a 1000000 members. As part of the agreement, Evan will be Placing several legacy specialty vendors, helping create a more integrated environment for the health plan.

Speaker 2

This new agreement will be going live in the Q3. Beyond the 2 new operating agreements, we're excited to announce 2 significant cross sales. The first is with a Blue Cross Blue Shield plan in the Southeast. This agreement renews an NIA contract, expands into a new line of business and simultaneously adds an Evolent specialty technology and services solution. This agreement is a proof case for one of the strategic elements of the recent acquisitions whereby Health Plans using either an acquired product Or Enevolent product adopts some or all of the products or the other.

Speaker 2

As we believe will often be the case, the broader and more integrated product platform was We're seeing good evidence that our integrated product platform and cross sell approaches are working. This agreement with Centene is over and above the dollars of EBITDA from NIA by the end of 2024. Across all four of the agreements announced today, We see our thesis playing out that large payers are looking for innovative value based specialty solutions that can better integrate care for patients across multiple specialties. Our strategy of expanding and deepening Evolent's capabilities into the largest, most complex and challenging medical Specialties is resonating and providing a basis for conversations about how we can improve costs and quality for the leading risk bearing plans These agreements announced today bring our total new operating partnership count to 6 compared to our annual goal of 6 to 8 new operating agreements. Finally, while new logos like the regional And reiterated at Investor Day are the large opportunities cross selling into our existing Healthline footprint.

Speaker 2

It's worth noting that the top Moving faster on accelerating sales processes to manage their MLRs or to consolidate vendors because they see the value of working with us across more domains. Further, our recent acquisitions are absolutely helping elevate our profile nationally and contributing to an accelerating pipeline. In addition, we're starting to see a lot more RFP activity from multi specialty solutions consistent with our thesis around our recent acquisitions. Let's turn to our 2nd core operating priority of expanding adjusted EBITDA. Adjusted EBITDA for the 2nd quarter more than doubled year over year to $47,400,000 Adjusted EBITDA margin for the quarter totaled 10.1%, growing from 6.8% 1 year ago.

Speaker 2

While acquisitions contributed a portion of the year over year growth in adjusted EBITDA, we're also benefiting from a healthy mix of higher flow through of specialty technology and services as well as maturation of the Performance Suite book. I would note, we spent Time at the Investor Day focused on performance fee margin ramp and that margin maturation is continuing to perform as expected. Looking forward, we're focused on reaching $300,000,000 of adjusted EBITDA run rate exiting 2024, While continuing to quickly grow market share and revenues thereafter. And you can see from our quarterly results and the mix of agreements I discussed, we feel confident that we're on to achieve the $300,000,000 of adjusted EBITDA and our pipeline depth gives us confidence and continued strong sales momentum. Obviously, it's important that we continue to manage costs, utilization and acuity in the populations where we have Performance Suite contracts.

Speaker 2

We're aware of conflicting reports of evidence of increased utilization and demand for services, higher healthcare costs post COVID and reports of pent up elective outpatient surgeries, particularly in Medicare. For our part, 2023 is running as expected in terms of overall utilization trends on the heels of preventative screenings returning to normal over 18 months ago. You can see the utilization remains consistent with our expectations based on our results and the guide for the remainder of 20 In addition to the strong Q2 results and the Q3 guide, let me provide you a couple of 2023 year to date leading indicator data Prevalence of disease and authorizations per member is generally flat in the first half of twenty twenty three versus the 1st half of 'twenty two on a mix adjusted per member basis. Within cardiology, while we've seen some expected increase in both disease prevalence and authorizations, The absolute growth numbers are relatively small and the overall combination of prevalence per member and authorizations per member also remain below 2019 levels on a mix adjusted per member basis. Overall, across both cardiology and oncology, where we hold direct Underwriting risk, our utilization trends remain at or better than expectations.

Speaker 2

We believe that our utilization experience may be more favorable than other We will, of course, continue to monitor utilization closely. Our 3rd operating priority is optimal capital allocation. John will walk you through our cash flow dynamics for the quarter. I do want to reiterate our relentless focus on translating profitable growth into cash flow. As adjusted EBITDA grows and we delever, you can expect us to focus on capital allocation on our 3 capital allocation priorities of 1, Investing in the business to further accelerate our leadership in value based specialty care 2, discipline and strategic M and A, which as you can Seeing the results starting to pay off.

Speaker 2

And third, maintaining a disciplined and efficient capital structure. As of Q2, we lowered our adjusted net leverage ratio to 3.3 on a trailing 12 month basis compared to 3.9 times on March 31, and we reiterated at Investor Day our goal of being below 2x net leverage by the end of 2024. Let's close with a macro view on where Evolent stands at midyear on the integration front and the demand profile for our markets. Regarding integration, innovation and product roadmap, we shared a significant amount of new information during Investor Day. Since then, we officially rolled out our Onevalent approach and our new integrated logo to our clients.

Speaker 2

The fact is we're bringing to market what our clients want, which is an integrated platform to help improve outcomes for people with the most complex and costly health conditions. Initial feedback from our clients is extremely positive and they're pleased with the pace of our integration efforts, while we continue to provide strong day to day operational performance. Our clients also continue to tell us that they're impressed with our focus on product innovation. As an example, we recently signed a new agreement to pilot an oncology navigation program with the Blue Cross Blue Shield plan. The navigation program will enable us As part of the program, we will enhance our advanced care planning capabilities, which we acquired through VitalDecisions and make them available to plan In this pilot program, we will identify members where there is a to support members with care coordination, navigation to clinical and non clinical resources, education for patients on their diagnosis and treatment options, As well as aligning treatment with their goals of care and assisting them with meeting their preferences for advanced care.

Speaker 2

All of this will occur in a tightly In addition to this navigation product, we continue to drive rapid innovation in several other strategic areas like artificial intelligence. Across our entire product Innovation roadmap, we remain focused on market leadership and value based specialty care with an eye towards a long term plan of capturing larger and larger share in

Speaker 3

As you see in our release this afternoon, our operating focus and discipline continue to translate into financial results that are at or better than our targets. Let me go through the targets now before turning to the detailed numbers. First, we said we'd drive significant organic growth. As Seth highlighted earlier, specialty revenue for the quarter is up approximately 32% year on year, excluding acquisitions. We're excited about this growth engine.

Speaker 3

2nd, we identified cross selling new solutions into existing customers And we continue to be enthusiastic about the integrated specialty model we are taking to market. 3rd, we expect earnings expansion On our current book of capitation business, as we implement our value based initiatives with new populations, we continue to see steady improvements in performance suite populations that went live in 2021 2022. Our 2nd quarter revenue number Includes more than $200,000,000 in annualized Performance Suite revenue that has been under management for less than a year. These new populations contribute minimally to our 2nd quarter earnings, but represent more than $25,000,000 in annual earnings At maturity, 4th, we are focused on turning EBITDA into cash. During the second quarter, We added $5,000,000 to our available cash balance, which was impacted by collections timing.

Speaker 3

The net of increases in our AR and claims reserve Excluding these working capital fluctuations, we would have added $39,000,000 of available cash in the quarter. Note that consistent with our plan, we are investing incremental resources this year in integrating and repositioning our business to best Capitalize on the value based specialty opportunity. Without these targeted and nonrecurring investments, cash generation in the quarter would have been even higher. Now let's go through the numbers in more detail. Revenue in the quarter was 400 $69,100,000 an increase of 46.6 percent versus the same period in the prior year.

Speaker 3

In total, we had an estimated 41,800,000 unique members during the Q2 of 2023 with a total of 78,600,000 product members For an average of 1.9 products per unique member, an increase compared to the Q1 of this year. Note that most of the sequential increase in average product members is driven by having NIA in the numbers for a full quarter. Excluding that factor, we added about 1,500,000 product members in the quarter. Turning to the breakdown of membership, we averaged 3,800,000 product members in the Performance Suite during the Q2 compared to $2,100,000 in the Q2 of the prior year and about $600,000 higher than Q1. Average PMPM fee was $24.20 versus $32.53 a year ago and in line with both our forecast And flat quarter on quarter.

Speaker 3

As a reminder, the year over year change in average PMPM is from sales mix, The result of higher growth in Medicaid and commercial lines of business, which run lower than our corporate average. PMPMs will average higher later this year As the Medicare Advantage business from Humana begins to roll through, average product membership in our Specialty Technology and Services suite was 73,000,000 members during the Q2, inclusive of the full quarter of NIA membership, Compared to $15,100,000 in the same period last year, average PMPM fees were $0.35 In the Q2 versus $0.28 in the Q2 of 'twenty 2. Product members in administrative services were 1,800,000 Compared to $2,100,000 in the same period of the prior year with an average PMPM fee of $14.22 Versus $14.68 in the Q2 of 2022. Recall that we will continue to carry the wind down lives from Bright Healthcare, Casals:] Cases associated with Advanced Care Planning and Surgical Management totaled $15,000 for the 2nd quarter and average revenue per case totaled approximately and do not include cases for our Performance Suite populations. As a reminder, our strategic priority for these services is deployments as part of our Our adjusted EBITDA result was 47,400,000 Versus $21,700,000 in the Q2 of 2022, reflecting organic growth, maturation of our Performance Suite contracts And the additions of IPG and NIA.

Speaker 3

Adjusted EBITDA margin of 10.1% represented expansion of about 3 30 basis points over Same quarter last year with the same drivers. Recall that our quarter to quarter adjusted EBITDA trends this year reflect The pull forward of about $4,000,000 into the Q1 of 'twenty three from quarters 2 and 3, which we addressed back on the May call. Turning now to the balance sheet. We finished the quarter with $142,500,000 of cash and cash equivalents, Including approximately $12,000,000 in cash held in regulated accounts related to the wind down of Passport. Including the cash held for Passport, we had $130,600,000 of available cash, an increase of $4,700,000 versus the end of the first quarter.

Speaker 3

Cash deployed for capitalized software development in the quarter was $5,700,000 In addition, We recognized a non cash lease impairment of $24,100,000 from closing our Chicago office as we reduce our overhead footprint and drive efficiencies across the business. Finally, in our 8 ks this afternoon, We announced an early redemption of our remaining 2024 convertible notes as we continue to execute our delevering priority. Turning now to guidance. As Seth mentioned, we're raising the bottom end of our adjusted EBITDA outlook for the year. Let's go through a couple of macro factors we consider as we think about this outlook.

Speaker 3

1st, Medicaid redeterminations continue to be a focus of many who watch the space. Our expectations here have not changed Meaning before new adds, in our overall revenue given our particular Medicaid mix. As we have previously noted, Our Medicaid book is weighted towards states that are moving slower in the redetermination process. For example, More than 50% of our Q2 Medicaid revenue was in states that started the process in July, We will continue to monitor these trends closely throughout the fall and into next year. 2nd, our revenue guidance implies approximately 17% sequential growth in the second half of This is largely driven by new go lives in the performance suite that Seth reviewed.

Speaker 3

Recall that these will contribute minimally to adjusted EBITDA this year, but start to flow through as they mature into next year and beyond. Turning now to our positive revision to our outlook for the year. With continued strong core business performance, we are raising the bottom end of our full year adjusted EBITDA range to between $185,000,000 $200,000,000 and we are maintaining our revenue guidance for the year 1,930,000,000 to 1,965,000,000. We expect Q3 total revenue $500,000,000 to $520,000,000 We continue to expect Q3 to be sequentially lower in EBITDA Given the pull forward I mentioned earlier into Q1 of this year, and we are forecasting consolidated adjusted EBITDA $42,000,000 to $47,000,000 before stepping back up in Q4 to finish the year strong. We continue to expect the target net leverage ratio of under 3 times, including outstanding convertible notes by the end of 2023, And we forecast between $35,000,000 $40,000,000 in annual capitalized software development expenses.

Speaker 3

And with that, Let's go ahead and open it up for Q and

Speaker 2

A.

Operator

We will now begin the question and answer session. Jeff Garro with Stephens. Please go

Speaker 4

ahead. Yes, good afternoon and thanks for taking the questions. Maybe following up on Such comments about positive feedback on the rebranding efforts. I imagine it's just the kind of initial stage of several future steps to Roll out the brand and then also the integrated go to market approach and later on technology. So I was hoping you could give a little bit more color on Where the next steps might be to really help clients and prospects understand the power of the combined platform?

Speaker 2

Yes. Thanks, Jeff. Look, I think the key to the topic is really around the underlying operations and the technology And therefore, the integration that we can provide back to patients. And as we go around and talk to customers and prospects, that's what certainly what the market wants. And so the first step was communicating that really clearly at Investor Day and over the last couple of months, as we said, around our strategic product focus.

Speaker 2

And we're now out having those Conversations, I'd say, directly with our prospects and clients. So that's kind of the phase we're in right now. All the while, of course, the We put together and then the technology actually getting fully stitched together underneath is kind of the final step.

Speaker 4

Got it. Thanks. That helps. And maybe a follow-up there with a little more specifics. Already seen some of the Positive fruits of that work.

Speaker 4

And you announced this regional not for profit health plan win in the quarter. Curious to get a little more detail there, maybe what the key drivers were in their decision making, what key lines of businesses they're exposed to And what specialty is specifically you'll be addressing for them? Thanks.

Speaker 2

Great. Yes, look, it's Like a lot of situations with any regional plan, I think the buying criteria are similar, which are return on investment and the ability to kind of commit to savings The organization is certainly going to be high on the list and that comes with credibility and experience and referenceability and the like. The second thing though is that we can as we have completed acquisitions and begin to integrate our components, able to stitch together multiple products and offer those in a more integrated fashion. And so I think it's really those the combination of those two things that worked in that case. One of the other announcements we made today, I think had a similar theme to it.

Speaker 2

And if I looked at the pipeline more broadly, I didn't ask about that. I think that's just a big theme in general, which is Seeing an acceleration in the pipeline based on our ability to talk about multiple specialties across multiple lines of business, which is the case for this plan. And I think it's going to be a big theme, which is it's going to be commercial Medicare, Medicaid, multiple specialties. That's going to be something you see a lot of.

Speaker 4

Makes sense. Thanks again. I'll hop back in the queue.

Operator

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

Speaker 5

Yes, thanks. Good afternoon. There was a lot of new business activity that you walked through, Seth. Maybe just to help put it all into perspective, bridging to your $300,000,000 EBITDA target from where you expect to end this year, About half of that, you've said before you anticipated to come from new wins. If we kind of take the 4 that you've announced today, can you give us some sense of how you're tracking toward that?

Speaker 5

Sounds like maybe potentially running a bit better at least up to this point than you thought?

Speaker 2

Yes. Look, the way I would answer it in general is that I'd say we're certainly on track for that $300,000,000 Overall and the $50,000,000 piece of that, which is around new business, and I think this quarter helps a lot, Even the ones that are not technically new operating agreements that are cross sales help a lot because even though they may not be huge in of themselves, there's really high flow through on these. So I think what we were attempting to communicate in the tone and certainly this answer is that we feel like we're certainly on plan for the 300,000,000

Speaker 5

Okay, great. And then in the Performance Suite, you mentioned not seeing any indication of higher cost trends in your data. Can you give us just a quick refresher on if you were to see some type of spike or elevated trajectory, do you have Some contractual levers available to you, how often are you able to reprice those? What kind of protections, I guess, do you have if you were to see Thanks for taking the call.

Speaker 3

Yes. Hey, Sean, it's John. I'll take that one. I would think of this in 2 ways. The first and it's an important distinction in our risk bearing business versus a broad based MCO or risk bearing provider, where Nearly everything that we take risk on in the performance suites is pre auth.

Speaker 3

And so we have very good visibility Into those auth rates and the likely impact, right, in future claims. So that's the first thing that I'd say is we would generally speaking be able to know or see that earlier than we would if we were just waiting for claims completion. The second piece, as we think about how we contract for this business, we will typically include Things like a corridor around, say cancer prevalence. And so if prevalence in a population Moves up or down outside of that corridor, then the parties will come back to the table and adjust the rate accordingly. So that's an important part of the model.

Speaker 3

And it's also important to recall that We can have some visibility into that potentially happening before we see it in the claims.

Speaker 5

Okay. That's super helpful. Thanks again.

Operator

The next question comes from Ryan Daniels with William Blair. Please go ahead.

Speaker 6

Yes, guys. Thanks for taking the questions. I wanted to start with a little bit on the pipeline as it relates specifically to the potential Medicare business, which I think is a little under a third of your book today. So Seth, you talked about some of the pressures that Some might be facing there with increased surgical utilization, and then we have the lower MA rates and risk adjustment pressures for 20 24, and I'm curious if that is accelerating the pipeline as more and more payers are turning to you to help them manage Their MLR, what could be kind of a more challenging outlook for 2024 2025?

Speaker 2

Hey, Ryan. The answer is yes. It is moving the pipeline in a good way for us. And I think Yes, it is the general pressure on MLR around utilization. I think the risk adjustment piece is maybe equally important in the sense that I do think that lever has been reduced a little bit.

Speaker 2

And so I was talking to one of our customers a couple of months ago, and he Said exactly that, which is we're going to have to attack utilization a little bit more aggressively without that lever being a little bit reduced, Right. So I think the answer is yes. We're seeing it. As we said in the script today, it's feeling positive in the pipeline. And I think the combination of That pressure, but also the broader set of solutions that we can offer, tech services model, performance suite model, multiple lines of business, multiple specialties It gives us a lot of different ways to create win win partnerships with our clients and prospects.

Speaker 2

So it feels pretty good, Ryan.

Speaker 6

Perfect. And then John, maybe one for you just on Medicaid redeterminations. I want to make sure I heard you correctly. Can you just go through The impact that you're contemplating in the guidance regarding churn and revenue impact? And then maybe number 2, it sounds like some states have paused Redeterminations and a couple of plans have indicated that maybe it's progressing a little bit better.

Speaker 6

So net net, is it right in line with what you're thinking or maybe a little bit better? Thanks.

Speaker 3

Yes. So our thinking on this hasn't changed. So I'll give our expectation for this year and then also for Into next year when the redeterminations are complete. For this year, we anticipate a gross reduction in Medicaid membership of between 8% to 10%, Comparing end of last December to end of this December, which is about we think 2 thirds of the way there, Ending with total redetermination impact on a gross basis, probably middle of next year in the mid teens. On the speed question, I think what I wanted to highlight in my prepared remarks there was the Amount of our revenue that really just started redeterminations 4 weeks ago, 5 weeks ago.

Speaker 3

And so it's still too early for us On our populations to see is it going slower or faster than expected. What I would say is we've been encouraged both in talking to our partners and hearing Some of the MCO announcements over the last couple of weeks, at the way both CMS and The managed care organizations are working to ensure that Medicaid enrollees stay enrolled where they're eligible.

Speaker 6

Okay, perfect. That's very helpful clarification. Thank you.

Speaker 2

Thanks, Ryan.

Operator

The next question comes from Charles Rhyee with T. D. Cowen, please go ahead.

Speaker 7

Yes. Thanks for taking the questions and congrats on the quarter. Maybe if we think about the pathway to the $300,000,000 obviously, we have a lot of moving parts here With new like the Humana partnership kind of ramping up and some of the new partnerships you signed, can you give us a sense of Timing on when you when we should start to expect some of these to start hitting? I know with Humana ramping, It sounds like you're saying starting here in the Q3 more with EBITDA contribution coming more next year. But The new tech and services partnership that you announced, When would that you expect that one to start?

Speaker 7

Is that would be oneone of next year? Or is that sometime this year as well? Maybe just for some of the new ones, A sense of timing where we should start to expect contribution, either both from top line and EBITDA, that'd be great.

Speaker 3

Yes. So on the let me take those in turn. I'm going to focus first on EBITDA, then I'll circle back to growth. If you think about the path to $300,000,000 one of the things that we've set to communicate there is, if you look at our TTM EBITDA Today is $158,000,000 Add in the remainder of the acquired EBITDA, Then you'd see a pro form a EBITDA of about $190,000,000 On top of that, as I mentioned in my prepared remarks, We have a couple of $100,000,000 of new Performance Suite revenue that's live today that is not really contributing in that 190 And so that is going to add by the time we're exiting next year, north of $25,000,000 of Slow through down to the EBITDA line. Now you start to stack up on top of that Some of these announcements that we've made, the Humana relationship going live, which will be generating EBITDA probably mid next year, The series of T and S deals.

Speaker 3

And I think one thing that you'll see from us, Charles, is The an announcement like today with a number of partnerships is an important piece of the path to 300, Because while these partnerships are strong margin partnerships, so we can add a lot of value to the clients and they can Our EBITDA, they don't have a lot of top line that tend to be pretty small given the PMPMs. So that's how I would think about it In terms of where are we starting, pro form a today of about 190, how are we adding from there based on the current performance suite book And then adding on top of that to the $300,000,000 and the last thing just to be me see is the rollout of The NIA synergies that we talked about at the time of that deal, which is $35,000,000 in total.

Speaker 7

Okay. And then I guess to follow-up on the question on redeterminations, I think in particular, Illinois is a big one and that started July 1. Any kind of sense that you've gotten there On the progress or lack of progress perhaps, are they one of the states that are taking into consideration sort of the procedural issues?

Speaker 3

It certainly seems to be. Yes, I think if you read some of the notes that have come out of The state government and health agencies, it seems to us that they're taking a very deliberate approach there to support their citizens. It's also too early to see in the numbers.

Speaker 7

Okay, fair enough. I'm sorry, just one follow-up on another question, I think Sean asked it about Sort of the acuity in how you would see it, you talked about leading indicators. How early would those in those leading indicators would you be able to notice something changing? I know you talked about seeing the pre ops, but maybe any other factors that would give you some lead time in seeing changes? Thanks.

Speaker 3

That's going to be the big one, Charles, because that contains a lot of information, right? It's not just The information around the requested treatments, but it's also what's the diagnosis, what's the history of disease And all of those different factors. So that's an inclusive set of information.

Speaker 7

Okay, great. Thanks a lot.

Operator

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

Speaker 8

Hi. Can you talk a little bit about Bright Health? Like how much revenue is coming from that in 2023? And then I think Molina is buying a significant portion of them. Are you going to recapture that revenue through Molina in 20

Speaker 3

an expectation for total revenue this year between $30,000,000 $40,000,000 that is related to the wind down of their IFP lives And not related to any of their Medicare Advantage lives, which is a plan that Molina is purchasing. So That is a plan that we had not done any work with.

Speaker 8

Okay. That's great. Thanks. And then, can you maybe talk a little bit more about the expansion with Molina in Florida and that Medicaid book And that process, just any more color there? And then are other states looking at that?

Speaker 8

And I mean, does that

Speaker 2

It's a lot like the other 6 states that came before Florida and it's really a process of working with the local leadership to build confidence And it's around our ability to drive savings and the internal reference and ability within the other states in the markets, which we got to Continue to perform and I think each time we add a state, it's good evidence that we're delivering our commitments and I think it will be Same for states 8, 9 and beyond. And look, we're pretty heads down focused on execution. We feel like we do a good job for our clients. This is what comes out of the back of it and we feel really good about that partnership and continue to deliver a lot of value David's in it. I do think the Medicaid piece In Florida, it would be a potential interesting opportunity for other Medicaid plans in the state for that arrangement, even beyond Molina.

Speaker 2

So there's different reasons, we're excited about that announcement.

Speaker 8

Okay, great. Thanks. Congrats on a good quarter.

Speaker 2

Thanks, David.

Operator

The next question comes from Sandy Draper with Guggenheim. Please go ahead.

Speaker 9

Thanks very much. I think most of the Failing operational questions have already been asked. So maybe John, a financial one, thinking about a couple of my other companies Have recently started talking about refinancing, which is kind of interesting because they just raised rates, but it's because their financial conditions were getting better, their leverage And their comment was the debt markets are actually feeling a little better. I'm not certainly a debt analyst or A debt banker, but I would love to hear your thoughts about the potential to refinance. Are there certain Either leverage metrics that hit triggers were like, okay, if we get to this leverage ratio, we can do it.

Speaker 9

Rates start to tick down. Just trying to think about that opportunity and how we would think about tracking what the timing might be on that opportunity. Thanks.

Speaker 3

Yes. It's a good question, Sandy. We really seek to balance and optimize Three things as we're contemplating potentially refinancing, cash interest, total leverage and dilution of the common, All right. And so as we sit and look at it today, if you pro form a in the acquired the rest of the acquired EBITDA, we're sitting at about 2.7 times Net levered. And we are committed to maximizing and optimizing those three things.

Speaker 3

So if we see an opportunity To refinance into something that is cheaper, then absolutely we would contemplate doing that, if it was the right thing to do for those other two metrics, Leverage and dilution of the common.

Speaker 9

Got it. That's helpful. And that was the only question. Congrats on a good quarter.

Speaker 2

Thanks, Andy. Appreciate it.

Operator

The next question comes from Jessica Tassan with Piper Sandler. Please go ahead.

Speaker 10

Hi, guys. Thanks for taking the questions. So first, I wanted to just come back to your comment around Humana starting to generate adjusted EBITDA in the second half of twenty twenty four. Can you just help us understand kind of the margin trajectory of Performance Suite deals and maybe in their 1st 6 months and then their 2nd 6 months post launch.

Speaker 3

Yes. Yes, you got it. So what we've typically indicated, right, is an expectation that at go live, right, and for the 1st couple of quarters, As you look at your claims expense and watching the claims complete, your claims expense has a lot of IV and R in it. And so you're building for those first couple of quarters, the IVR stack and on a reported basis, you're not generating As those claims complete and the IBNR comes down, then you would have a natural release That initial actuarial conservatism that then translates into what we've typically indicated, the 1st full year of a performance suite arrangement, Between 4% 6% of the total profits down at the bottom line. So that's how I think about it is Quite little in the first couple of quarters and then ramping up.

Speaker 3

And is that 3 quarters, is it 5 quarters? That's going to depend a lot on the specific partnership, the Specific geography and so forth. That is the way that we see it playing out.

Speaker 10

Got it. That's fair. And then that's really helpful. And then I was just hoping maybe you could describe any changes you've seen lately in the competitive landscape for the

Speaker 2

Yes, Jess. I mean, I would just say in general without commenting on the specific situation, like just in general, I think our model Tends to be clinical, highly clinical in nature, right. That's been our differentiation point from the beginning, which is really more around pathways. And I think we talked last quarter about the satisfaction rate of oncologists using our platform being really high. And I think just in general, we tend to differentiate based on being more clinical and being more physician friendly.

Speaker 2

And I think added to that, our ability to offer multiple specialties, Jess, I think we feel like the competitive environment is a little more for us now than it was 6 months ago, 12 months ago. And I think it's really based on less what others are doing and more what we're doing. And that's really how we're focused is continuing to meet the market where they are and listen to our customers, voice of customers, a Core part of how we run the company. And I think we continued both in terms of the product that we're delivering, but also some of the innovation things that we talked about today With patience with AI, we can have a longer conversation about it, but I think that's going to be the determinant of our competitive landscape is our ability to And we're going to stay pretty focused on what we can do to control it, and we feel really good about it.

Speaker 10

Got it. And my that's helpful. And then my last one would Can you offer an updated stat on the percent of your NCH performance suite lives I'm sorry, the Evolent Performance Suite lives that are covered by a Vital Decision solution or have access to advanced care planning. And that's it for me. Thanks.

Speaker 3

Hi, Jeff. We haven't disclosed that. It's a it is an important piece of our Integrated portfolio, right, as we're both ramping it into existing clients and including in new sales, But we're not breaking out the specific mix.

Speaker 10

All right. Thank you.

Speaker 2

Thanks, Jess.

Operator

The next question comes from Richard Close with Canaccord Genuity. Please go ahead.

Speaker 11

Yes. Thanks Further questions, maybe just building on Jess' question and your answer To Ryan, with respect to saying attack the utilization, I'm curious with the increased press On utilization management, and then calling it out in Medicaid here recently over the last week or Based on your clinical, I guess, being more clinical, Are you seeing that accelerate the pipeline in terms of people deciding to switch out the old utilization management And go with the more clinical focus that you guys are offering?

Speaker 2

Yes, Richard, I do think that it has always been the Core of our differentiation and will continue to be the core of our differentiation. And when we talk today about things like patient navigation as a new product that We're developing, right, that takes us further down that path. And the more you do directly with the patient and the family, the less you have to think about utilization Management because you're sort of doing what I would call shared decision making rather than a utilization management model. So it has always been our differentiation. I think it is helping and it has always helped.

Speaker 2

I think we're I think it is helping and it has always helped. I think we're pushing that boundary further with the things that we Talked about today and AI would go down the same vector, right? AI, which we did not talk a lot about on the call and we'll talk about in the future, It's a lot about reducing abrasion and doing things in an automated fashion. And so we're going to we intend to lead on that front across all these areas and we're really pushing as quickly as we can down a lot of different vectors. And I do think the underlying issue and frustration that you're articulating It's an opportunity for us.

Speaker 11

And just as a follow-up, is it Portend, I guess, maybe an Acceleration in the adoption of the Performance Suite versus maybe tech and just tech and services?

Speaker 2

It's a good question. I don't know if I could forecast it one way or the other on that front. I think the Way we've thought about the business, I don't feel a huge shift in mix right now. It's a fair bit of growth on both sides, Richard. And I think it tends to be a little bit more Client specific as to they need a guarantee or are they okay with the tech services platform.

Speaker 11

Okay. Thank you.

Operator

The next question comes from Jaylendra Singh with Truist. Please go ahead.

Speaker 12

Thank you and thanks for taking my question. Actually, first quick can apply the same question on Molina partnership in Florida. I believe you said like 100,000 Medicare lives at typical Medicaid PMPM. Our understanding is Molina has close to 175,000 lives. Maybe they include duals and long term care lives there.

Speaker 12

Maybe those are not part of contract. And if so, do those remain future opportunity for you guys? And any color on PMPM for exchange lives, is that comparable to Medicaid PMPMs?

Speaker 3

Yes. Two things there, Jalendra. We only do performance suite for adults, not PEED. So that's likely the distinction. I would also say that as we think about this for next Of course, we are including an allowance for redetermination impact, right.

Speaker 3

So those two things are important. As you look at aggregate size That potential partnership, we would scope it likely over $20,000,000 of top line.

Speaker 12

Okay. Exchange PMPM, how much is that?

Speaker 3

We typically don't go that granular. Okay. That gets pretty nuanced.

Speaker 12

Okay. All right. Maybe my follow-up on the comments around Oncology cost trends, clearly, you guys have seen pretty stable trends. But as you pointed out, some commentaries have been pretty mixed From some entities, have you guys done any analysis on the cancer screening data for your population, Which keeps you confirmed that you never saw screening go down, so any such cost is unlikely to pick up in future? And a quick follow-up on your earlier comment that you have a corridor around your prevalence of cancer rates.

Speaker 12

But are there any protection around the acuity mix like More late stage cancer cases versus early stage cancer cases?

Speaker 2

Let me try to

Speaker 3

take those in turn. And on screenings, we don't take risk on screenings and so don't tend to have access to that data. What we You have access to is both in conversations with our partners and broad based research. There's a report that Epic put out, for example, back in February That indicated what we have seen, what we've heard from our partners, such as the cancer screenings, in particular in Medicare and Medicaid, have been at Normal rates for quite some time. And so that to us is pretty definitive.

Speaker 3

And it's consistent with what we're seeing in our data around Aggregate, Prevalence and Acuity. On the second question, the answer is yes. The specifics, as you can imagine, in a risk contract like this, get pretty nuanced around Specifically, how we work with our partner to ensure that we're fairly sharing the value that we're creating As a population might shift over time. And so the headline, just as We talk about corridors around prevalence and other items is that we're seeking to drive aligned Partnerships with risk bearing health plans, and that model to date has That generated both significant profits and significant growth.

Speaker 12

Okay. And then my final question on your MSSP business. CMS came out with some changes in their proposal under a physician fee schedule. It looks like they're encouraging more ACO participation. Can you talk about your thoughts on the changes including the proposal?

Speaker 12

And does that change your view on how you plan to approach your MSSP business next year? And on the same topic, any visibility on improvement in MSSP savings for 2022 plan year and expectations this year?

Speaker 3

Let me take that last one. Seth, maybe you can talk about how integrating this into the broader So on the fee schedule, Jalendra, there's a bunch of stuff in there that is net positive for primary Our ACO and of that, the overall product line. As we think about the Shared savings for 'twenty two at this point in the year, we typically have pretty good sense and line of sight into what that might be and have of course incorporated that into our guide. Seth, you want

Speaker 2

to talk about strategy? Yes. I'd just say, in general, diluted business is performing well, as John said, and we feel good about it. And Things are top and bottom line, feel good for this year, as John said, baked into the numbers. I think as you go forward and you go back to IR Day and look How we talked about the focus of the business, we have $150,000,000,000 TAM in the specialty side of the business, Largely with private payers and a lot of what we're doing, whether it's with formerly known as IPG, formerly known as Vital, Evolent Care Partners is stitching a lot of things together to get to serve payers' needs in a more integrated fashion.

Speaker 2

So I think Going forward, you're going to hear us talk a little bit less about Evolent Care Partners as an entity and ACO is a thing by itself. While it's still important, what we're really thinking about is $50,000,000,000 TAM, which integrating specialty and primary care is interesting and the things we can do for that, but that shows up less As an ACO and more in direct contracts with private payers, right? So I think just sort of setting the table for future That's really going to be how we think about whether again it's formally known as IPG, formerly known as Vital, ECP, you're going to really hear a lot more about just Evolent And how we're stitching all of it together.

Speaker 12

Perfect. Thanks a lot.

Speaker 5

This

Operator

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

Speaker 3

All right. Thanks

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Earnings Conference Call
Evolent Health Q2 2023
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