We'll go ahead and get started. I'm Richard Close with Canaccord Genuity, covering digital and tech-enabled health. We're excited to have Claritev with us today. I think it's a really interesting story. From the company, we have Doug Garis, CFO, with us here today. Company's made meaningful progress under its Vision 2030 strategy, and the third quarter definitely provided further evidence of the strategy gaining traction. We'll dive into the third quarter a little bit deeper, but for investors newer to the story, Doug, let's just begin by just level setting, letting us know what Claritev does and what value the company's bringing to healthcare.
Sure. Thank you, Richard, and thanks to Canaccord. We've had a great conference so far. For those new to the Claritev story, Claritev has primarily three businesses. Our largest business focuses on out-of-network spend. Within the U.S. healthcare system, which is a little over $5 trillion in total spend, about 7% or 8% of that spend goes out of network for a variety of reasons. We serve as a cost containment affordability solution when a person goes out of network for various reasons. That's our largest business. We then actually have the largest independent PPO in the country, where we rent our network to large insurance carriers and TPAs, and we have 1.4 million providers under contract. That's a really strategic business. It's actually how Claritev was founded. It was founded as a network company.
Finally, we process over 5.5 billion claims a year through our payment and revenue integrity business, and that business really focuses on catching boo-boos on claims before they get submitted for payment. We also do a whole host of post-payment, payment revenue integrity, things like payment accuracy, coordination of benefits, and subrogation. When you look at those three businesses in total, that is what Claritev does, and does pretty successfully.
When I look at healthcare and everything that drove the recent election, affordability and healthcare affordability specifically is right up there. Everyone complains, "I don't know what prices are in healthcare." Talk a little bit about what your products do to address affordability issues and transparency issues.
Yeah. We actually just released a new solution called transparency-based pricing, which we are really excited about. Transparency is the law of the land. Payers and providers must submit transparency files. They are called MRF, machine-readable files. We process over 500 billion records a month and cleanse the data based on the transparency laws and regulations. When you really step back and think about the out-of-network business, what we do is we use a whole myriad of publicly available data to serve up an insight for a health insurance carrier operating on the behalf of an employer and ultimately the consumer to make sure whenever you go out of network or see a provider that is not within your health insurance network, primarily for self-insured companies, we prevent kind of the astronomical charges from happening. It is the simplest way to think about it.
We always kind of joke around and use the example of a $20,000 splinter. That is funny, not funny, because in our claims data, that has actually happened before. We are having a great time at a conference, you get a splinter, you go to a doctor, you get a $20,000 bill. Really, when you think about our out-of-network business and our cost containment business, that is what we mean when we talk about affordability. From a transparency perspective, we think over the next several years, transparency is going to become increasingly important because, as you mentioned, we are staring at 15-year highs of healthcare inflation. Pretty much all the various kind of macro indicators are suggesting that healthcare inflation is going to increase double digits next year.
For most consumers who buy their health insurance through their employer, that means your monthly premiums are going up 10%. We really like the position that we are in from an affordability perspective. As we develop solutions and bring them to the market for the future, we are really focused on transparency, and transparency is the law of the land. We think it is a really important thing to focus on for consumers of healthcare.
Okay. Out-of-network, in the claims intelligence business, you have concentration with customers. I mean, obviously, the largest of the large are your customers. Can you talk about what you are doing about that concentration? You have made some progress over the last several years, for sure.
Sure.
But just talk about that, what the risks are associated with that client base.
Yeah. We just eclipsed $1 billion of last 12-month revenue as the end of Q3. To get to the size of $1 billion of revenue and north of $600 million of EBITDA, you need big clients, right? Not surprisingly, our 10 largest customers are the familiar names within the book, so large national payers. What we've done over the last two years under our CEO and President Travis Dalton's leadership is we've brought in a refreshed management team. We've hired a chief growth officer. We've aligned our go-to-market strategy around our market verticals, which historically have been the payer and the TPA or third-party administrator space. We like having large clients. If you look at our $100 million of bookings year to date, 78% of that's come from our current install base.
A mix of refreshed sales leadership team, select investments in sales and marketing, and then our core fundamental thesis is, we can sell our solutions into multiple markets. Within that bookings number year to date, more than 50% of our bookings have come from outside of our core payer segment, which is our largest segment. We've started doing business with providers, so we signed a top five health system here at the beginning of the year. We started doing business with state and local and federal government and agencies. We had announced earlier this year that we are the primary network for the World Trade Center first responders and survivors with respiratory issues. That's a national network. We've opened into international markets.
We like some of the medium and long-term prospects as emerging nations are experiencing a lot of the similar issues with healthcare inflation, and then we've opened a broker and employer space. We haven't had to do anything exotic from a product development or innovation standpoint to enter these new markets. We just had to put wood behind the arrow with respect to sales leadership, segment, strategy alignment, and then bag-carrying sales folks who get paid commission when they sell things. There's nothing magical about it. It's just extreme focus on making sure that we can run a diversified go-to-market strategy to overall improve the health of our top-line revenue base.
Okay. Have the changes that you've made with respect to the sales force and targeting the different verticals, is that all done in terms of Or is that still evolving? Do you have to add more people? Do you have to
Yeah, I think it's We announced when we gave our guide this year that we're going to spend about $20 million-$25 million on our go-to-market and delivery functions this year, and we think that was well-timed investment. Obviously, the midpoint of our bookings indication is $120 million of new bookings growth. If you look at the last two years, that's about $187 million of net incremental ACV bookings under our new system. I think it's reasonable to assume that we're going to continue to invest in our sales, marketing, and go-to-market functions. The great thing is when you run a sales organization at scale, everything you do is on a percentage of revenue, right? You add salespeople, they have quotas, they hit the quotas, you book something, it turns into revenue, and I plan my business on a percentage of revenue basis.
Our sales team was under-invested in for a very long period of time, and we find ourselves now in a position where not only have we opened up new markets, we're getting a whole lot more at-bats within the markets that we currently serve.
Okay. Maybe looking at the three different buckets of revenue that you guys give us, networks, claims intelligence, and payment and revenue integrity, PRI, I guess we'll call it.
PRI.
Claims intelligence growth was huge in the quarter. I think it was like 17%. Then network and PRI down a little bit year-over-year, if I'm not mistaken.
That's correct.
Just go over the dynamics there, what are some of the nuances, and how we should think about growth in those three separate businesses.
Sure. Obviously, claims intelligence was a bright spot. I've joked around that a CFO's job's pretty easy when your business is growing, especially your largest business, which has been claims intelligence. I would attribute a good portion of our revenue over-delivery in claims intelligence to our NSA business, our No Surprises Act and surprise bill services. We had a pretty meaningful client win in Q1. It's part of the $100 million of net incremental bookings. We were able successfully to convert that client into revenue a little bit earlier than we originally modeled. Along with the surprise bill services within our claims intelligence business, we also have our reference-based pricing solutions and financial negotiation business. With our end-to-end surprise bill offering, those claims intelligence solutions complement each other really well.
We have seen great traction in our entire install base within our core offering, but specifically the bright spot for claims intelligence over the last two quarters, and the increase in growth has come from a specific client win. When you take a look at our network business, and we mentioned this on the call, and exclude about $18.6 million of one-time revenue associated with a specific P&C, property and casualty, client one-time revenue last year, our network business is actually up mid-single digits. As we look at 2026, if you were to normalize 2026, the growth is actually quite nice. When you think about some of the larger deals that we have signed, we signed the World Trade Center network deal. That is a $5 million ACV deal.
26% of our bookings year to date have come from in the TPA space, which is very much indexed towards network and PRI solutions. Finally, landing on PRI, the business has a geography issue where our solutions within financial negotiations and our clinical negotiations operate as the same thing. From a customer preference standpoint, we have seen a little bit more of a migration over to our financial negotiations business, which is six to seven times the size of PRI. For claims intelligence, it is a nice little bump, right? It is a couple points at the margin, but there is an outsize impact on our PRI business, which we are going to take a look at our segmentation going into next year.
I think we said this on the call too, is over the last four quarters, we have booked approximately $40 million of new business in PRI. Only a fraction of that has yet to convert to revenue. On a medium and long-term basis, we feel very bullish about the importance and the impact of that business and the return to growth, which is what we fully expect for next year.
Net-net, all three are pretty healthy at this point.
Correct. Yes.
Okay. Maybe let's discuss claims volume and revenue per claim. This is a transaction business. There's been pressures on claims volumes in the past for various reasons. Just talk about how we should think about the model. Should we be more focused on volumes or the revenue per claim?
Yeah. I think the challenging thing with introducing new metrics is to get folks to care about the right metrics.
Yeah.
I think what you've seen over the last, if you were just to kind of snap the chalk line back 12 quarters, over the last three years, we've seen a dramatic improvement of our revenue per claim, and three things are happening. One, healthcare inflation's real. Our business model accommodates for inflation vis-à-vis our PSAV model. Two, the mix of claims has moved far more towards higher acuity areas, especially within the out-of-network space. You look at emergency, ambulatory, behavioral health, pharmacy. So some of the higher-cost areas are becoming more of our business, so that's a positive mix and rate benefit. And then three, we spent a whole lot of time and effort making our solutions work better, and submitted charges were up 15% this year exiting Q3, and our ability to identify more savings on higher charges is also pushing our revenue per claim up.
All three of those things need to be considered, which is why we give a pretty detailed gross revenue to net revenue bridge. That is how we think about our business. There is rate, there is mix, and then finally on volume, look, we plan for kind of a modest claims volume environment, and we are really focused on what the total out-of-network dollarized market is, and it is pretty stable at 7%-8% of healthcare spend, and it has been for the last five to six years. As we look forward, we are still expecting kind of a modest volume environment, right? With the pickup of the NSA business, which will show positive volume attribution heading to and through next year. Then obviously, as we book net incremental ACV that has volume components, so PSAV models, that should be a net benefit to volume.
But we are not The 8% volume growth this quarter was very nice, but I would say that is probably a high level on a sustainable basis, where we would be much more in kind of the low single-digit range for volumes on a baseline assumption relative to our recent multi-year model that we published in March.
All right. That higher rate of growth this year is essentially that big client coming on and-
Yeah
surprises?
I would say the core business is running about a point to a point and a half ahead of our last guidepost, and then obviously, the client win has been the spread of the rest.
Yeah.
The last few points of
On No Surprises, that is relatively new, last four years. How do you see that program changing? I mean, that is a wild card question, but how do you see that program changing potentially? You made some comments on the most recent conference call, but should we think of it as a headwind or a tailwind, or?
Yeah. At this point, we think of the current final rulings that were issued as a net tailwind to our business. We had said we need a little bit, we probably need a couple more quarters to see how the final rulings have shaken out. But if you kind of take a step back and understand what the intention was when No Surprises Act was passed in 2022, the whole process was intended to try to rationalize egregious billing and reimbursement practices. And so when the original law was passed and signed, there was a thought that there would be like 15,000 or 20,000 IDR disputes a year. I think there is going to be 3.5 million this year. And so what we have seen is good intentions, bad behaviors.
And where we really like our position as complexity increases, our ability to adapt to regulatory changes, technology changes, client preferences, and provider practices puts us in a very unique position with the totality of our asset base between our claims intelligence, our network, and some of our other solutions to make sure we could stay on the front foot, so that it is a very easy buy versus make decision for our largest clients who use the full suite of offering we have.
A federal policy with unintended consequences. Fancy that. On bookings and revenue, obviously strong bookings growth this year, last year, strong bookings growth. You already surpassed through three quarters this year. How sustainable is bookings growth for you?
Yeah.
How much opportunity is out there?
Yeah. Without going further into details on what our bookings target might be for next year, I think it is fair to assume something in the same order of magnitude that we booked this year. What I would point our investors to, and the street to, is we have a $325 million funnel that is highly sufficient. It is highly diverse. It is made up of net new logos, our current install base. It spans multiple sectors and is a very comfortable and confident set of metrics that we use for Travis, myself, our leadership team, to understand that we can still keep pace because we have a sufficient funnel.
Maybe to relate that to some of the investments we have made over the last few years, we would not be able to confidently come and give some early indication in 2027 without the modern tools and enterprise software that we have put into place. We have a highly competent sales chief growth officer who has a wonderful sales operations team, a client success team. We have a very rigorous process to interrogate and antagonize sometimes to make sure that opportunities in the funnel are correct, they are highly visible, and that we have some sort of pacing mechanism to bring them through the sales stage process.
You set us up for the next part of the conversation. With respect to margins in the products, you used to have 70% EBITDA margins. You are down in the 60s now. Talk about the new products and dilution there, if there is any, and then can you maintain those margins? Then let us begin to talk about cash flow.
Sure. Yeah, our financial algorithm is Rule of 70. That is our long-term target. As a leadership team and as an organization, our, if you can call it fun, sometimes fun is a four-letter word, the challenge is how do you balance growth versus investment? This year, we purposefully made $20 million-$25 million of net incremental investment in OPEX to make sure we had a hardened sales function, a hardened delivery function. There were some questions around gross margin compression on the call. We feel like those are incidental, right? Going forward, the way that we hang onto the margin is we continue to innovate. We have invested in technology modernization. We had said previously that is going to yield 10%-15% net cost benefit over the next few years. We have good line of sight on that.
Finally, we are using AI like other companies are on continuous improvement initiatives. We expect to get better, faster, smarter, with a much better cost structure so that we can, on a discretionary basis, elect where to invest money back in the business. For us, we are really thinking about the programming of balancing revenue growth versus margin so that we can get to and through the Rule of 70 when you add those two together.
You pulled 2028 revenue target essentially becomes 2027. That is your preliminary guidance, $1.1 billion.
That is correct.
But is the transformation getting pulled forward a year, or is that still?
Yeah, our transformation program has not been accelerated. I think if anything, our revenue over delivery was a nice, pleasant surprise, but a result of putting a really good and robust sales process where we have been able to go out and win new business, and compete better in the market. For us, our transformation is still a multi-year thing, and we are still asking our team to do more with less because we are steadfastly working on delivering excess free cash flow. If you look at, and we said this in the prepared remarks as well, my number one metric this year with our leadership team, our board, and our investors is free cash flow, right? We are spending a lot of money on a lot of things, and I am highly pleased that in lieu of that incremental investment, we are actually going to drop free cash flow to the business.
Now, when you look at the growth of free cash flow year-over-year, we used about $12 million of cash last year. At the midpoint, we have a $15 million source of cash. As you carry that forward, we think that in the next couple of years, this business is going to start to spit out pretty significant excess free cash flow. For us, when you look at our capital allocation priorities, number one was invest in the business, right? That earned us the right to refinance the company, to focus on our technology modernization, and be the best partner for our large clients, and all of our clients. Part two of that is opportunistically delevering the company because that provides the durable foundation for us to take advantage of new opportunities to allocate capital in the market.
If anything, 2027 for us is more of the same, which is very high execution and what will start to look like increasing free cash flow delivery.
Maybe to finish up here, any thoughts on the midterms elections in terms of how that impacts Claritev's business?
Yeah, I think between now and the new session, there's probably limited impact. I know there's been a couple of bills working their way through Congress. We have a government affairs agency. We moved our headquarters to D.C. We're very active talking to regulators because it is important to have our ear to the ground. What we do for healthcare is critically important for employers and consumers. If you look at our core business, our core business is in effect to work on behalf of employers and consumers to prevent egregious billing practices. There's probably no update as it stands right now. The CMS updated rulings, the final rulings on NSA are something that we're monitoring. We mentioned it was, we think it's probably a net tailwind.
But on the regulatory front, at least for the foreseeable future, it's probably going to be tough to get anything done in Capitol Hill. But we will be watching it, and as we have updates, we'll of course give our investors updates.
Is there anything, as we enter into the fourth quarter, we're almost halfway through it, for when you report what we should be focused on?
Yeah, if you look at the midpoint of our growth in Q4, it's a 9.5% growth rate year-over-year, and it's still sequential progress. For us, our free cash flow print in Q4 we think is going to be fairly exciting. $100 million of operating cash flow, significant free cash flow, revenue growth, EBITDA growth on an already strong quarter. Those are the three things we're really focused on delivering, revenue growth, earnings drop-through, and free cash flow.
Okay. Congratulations on the progress.
Awesome. Thank you, guys.