So thank you everyone for joining us for our next session today. Very pleased to have John Johnson, Chief Financial Officer of Evolent Health. You know, John, obviously a significant year in the last couple of years. The company has, you know, I think, grown and transformed significantly over the last few years. You know, maybe just quickly, if you can give us a brief overview of Evolent's business as it stands today, and sort of the where you're positioning yourselves in this environment.
Yeah. Great to be here. Thanks for having us, Charles. Evolent is focused today on driving value in specialty care. We believe that we're the leader in value-based specialty care. And what does that mean? Specialty care, for us, is identifying the highest quality pathways for patients with complex conditions. Today, we cover oncology, cardiology, musculoskeletal conditions, among others. And we do so in both risk-based models, where we take capitated fees, and Technology and Services models, where we're being paid an administrative fee. Gives us a nice balance between underwriting margin, risk-based margin, and admin margin. It adds a level of predictability to our earnings.
We believe because of our positioning, as one of the larger independent providers of specialty value-based care in the country, we think we're really uniquely positioned to continue to derive growth. We did about $2 billion of revenue last year. We believe we have a TAM of $150 billion, of which $50 billion is within our existing footprint, within our existing customers. So, very early days of what we think is a pretty exciting opportunity.
Great! Then maybe if we think about the competitive environment, who is it that you are competing against right now? Is it in-house solutions, or in-house third-party vendors?
Yeah
A t your potential customers?
Yeah.
What does that landscape look like?
Yeah. So, typically, the way that specialty benefits, like oncology, are managed is through utilization management. There are plans that do that themselves. There are plans that outsource it. The two largest players in that space are AIM, which is owned by Elevance, and eviCore, which is part of Cigna. We take what we think is a differentiated approach based on pathways. It's really seeking to drive the next level of performance beyond utilization management. In Medicare Advantage, for example, if fee-for-service Medicare will approve a particular regimen, you cannot deny that regimen through utilization management. It takes something more granular, more provider-oriented, to identify with that provider what is the optimal pathway for that patient. That's sort of our pitch.
I think the other thing that is really differentiating about Evolent is we're the only player today that's taking significant risk in specialty management. And so we stand by our results. We'll guarantee an outcome in oncology or in cardiology, and most recently announced a Performance Suite product in advanced imaging as well.
Yeah, maybe touching on that, right, you announced your first sort of Performance Suite product outside of oncology and cardiology, which was for advanced imaging, went live in a, in a Medicaid client. Why, why did you choose advanced imaging as sort of the first Performance Suite outside of oncology, cardiology?
Yeah. So this opportunity that we identified was building on an already successful relationship that NIA, a company that we acquired last January, had been serving for several years successfully in a Technology and Services capacity with a risk-sharing component. So it felt like really fertile ground for us to lay the tracks for what might a full Performance Suite arrangement look like for Evolent in this area of advanced imaging. I think the exciting thing about that opportunity, Charles, is then being able to take that template and add it to an integrated bundle with oncology or with cardiology. Both of those specialties include important imaging components, and being able to consolidate both of those into an integrated package we think is going to be particularly attractive for our payer partners.
What are sort of the key metrics that people should watch for, how that is performing, and, you know, how much additional interest have you seen into the imaging products since you've announced this one?
Yeah. You know, early days, I think the cross-sell opportunity that we have within the business is significant. I talked about a $50 billion in-sell and cross-sell TAM with our existing customers. Part of that is, right now, out of eight products, we average two products deployed per unique member. We have about 40 million unique members. And so an important part of the growth algorithm is adding products to those existing members, of which advanced imaging is an example. And we've announced other examples of that at a Technology and Services level over the last year, and certainly anticipate more of that to come. And then I think an opportunity, now that we've launched this Performance Suite product, to drive that through the sales process as well.
Okay, that's really helpful. Also, you recently announced Enterprise Oncology, which obviously we're now bringing in, what, surgical oncology and radiation oncology.
Yeah.
I nto the, to what you've already been doing with medical oncology. Maybe talk about sort of, was that a, a sort of a demand from clients saying, "Hey, you know, you're doing well here. We need these other areas of oncology taken care of?" Or, you know, you know, talk about sort of what the financial profile looks like. Does that add to the PMPM?
Yeah.
You know, as you provide those services, and any kind of additional color on that.
Yeah. So if you think about our Technology and Services Suite, it is predominantly focused today on medical oncology. It's chemotherapy, right? And surgical oncology and radiation oncology round out that picture. So radiation oncology here is not imaging, but it's proton beam therapy and things like that, just for clarity. And so the opportunity that we saw, we had done some radiation oncology work within our Performance Suite already. So we had some IP that we'd developed, and the opportunity was: can we take that and meet a customer need that they had to support them in a Technology and Services capacity alongside the medical oncology piece? This is a great fit, right? We had some IP, the customer had a need.
Let's bring that together, deliver something that's going to drive a lot of value for the customer. That then, to your point, will expands our addressable market, for the Technology and Services product, where now we can add on to that PMPM, the radiation products and the surgical products. And so an opportunity to, for price expansion. Yeah.
Right now, the way I understand it, Enterprise Oncology is really more of a tech and services capability. How hard would it be to convert it to a Performance Suite kind of solution, or is that fairly straightforward?
Straightforward. And so some of our existing Performance Suite oncology contracts do include radiation.
Okay.
They don't include, today, surgical.
Is there a difference when you talk about surgical, given the. Or would that still be the same in terms of your willingness to take a risk?
We would rethink about underwriting it in the same way.
Okay.
Yeah.
Obviously, we talked a little bit about the cross-sell opportunities. So far, $50 billion, as you've kind of stated. You know, a lot of it, right, you know, I, I think everyone's looked at Molina as a great success, in part just been great partners for you. And what I find interesting is that, you know, the time between the first, you know, sale and the second was a bit, but every successive one has kind of come quicker. And now you're kind of adding more solutions into that customer base. Is that a good analogy as we think about, you know, how, what we should think about maybe Humana going forward? And I guess, and, and maybe Centene as well.
Maybe starting with Humana, maybe give us a little bit more update on the experience so far in Florida and Arizona and, you know, maybe any potential discussions you're having that we could see expansion faster into other states.
Yeah. I think we have now, as you noted, several examples of going live with a client, a national client, in a particular geography with a particular specialty, and then meaningfully expanding that over time, whether that's Humana, Molina, Centene, or others. And that's an exciting piece of our growth trajectory. Every customer is going to be different in terms of timing, right? And we believe firmly in earning this growth, that delivering for a customer in a particular geography earns us the right to then sell into the rest of that customer's member base. As we think about it, it can proceed in a couple of different ways, right? There's geography expansion, like you saw us do relatively rapidly with Molina, to your point.
One, a second would be specialty expansion, and so adding cardiology, for example, to a market where we're already live with oncology. The last would be adding a line of business, right? So if we're live with Medicare Advantage, can we add Medicaid or vice versa? You saw us do that last year with Centene, where we were quite penetrated in Medicaid, able to add the WellCare and Centene MA lives to that deal. So each partner's going to be different, but even across those three, where we're the most penetrated, the remaining opportunity is quite large.
Yeah. I want to talk a little about utilization. Obviously, that's been a big concern all of last year. 4Q, we've continued to see elevated, utilization trends. I think they've carried so far into January, probably into February as well. You've, you've obviously stated that you don't see it really having a, a meaningful impact on the business. At what point would utilization start to have an impact? Like, what would that scenario look like?
Yeah. You know, if you think about what is utilization in our business, what might drive costs up? The easiest thing to think about is it might be cancer prevalence, right? Number of active cancer cases in a population, or it might be, a change in the acuity of that population, more Stage III and IV cancers, for example, which are more expensive to treat. One of the things that is unique about our risk-bearing business, relative to other versions of value-based care, is the vast majority of the risk that we take requires a prior authorization. What that means is we have an incremental level of visibility into utilization trends, before we receive the claims. We don't have to wait for the claims in order to have a sense of what's going on.
And so that has allowed us to comment, as we have, that utilization has been relatively steady, in particular, within the Medicare Advantage population, where you've heard some of the MCOs have commentary around other cost categories like supplemental benefits and dentistry and cash cards, things like that.
Yeah.
So it's those leading indicators that we watch in terms of what are the authorizations that are coming through each day, each week, as our first indicator that there might be an increase in utilization.
What about kind of the reverse right now with Change Healthcare down? Maybe talk any kind of impact for you? Like, does that affect some of your visibility into what's going on? I know that some state Medicaid plans use it. It is a major switch for claims processing. Maybe give an update on sort of what that kind of scenario—what does that scenario kind of look like for you right now, and what kind of workarounds are you.
Yeah.
Able to do?
Yeah. I'll preface this saying it's pretty early, and I don't think anybody knows how long.
Yeah.
T hey might be down. The good news for us, right, is that we have our own platform, right? So physicians are coming to us for those prior authorizations that I referenced earlier, and that's coming straight to us, right, without an intermediary. To the extent that our customers, our payer customers, are seeing impacts in their, for example, their claims completion timing, right? That would, of course, impact our own visibility into claims completion. At the moment, we're not forecasting any meaningful financial impact from this, but we remain early, and we're working closely with our partners on it.
Claims completion, would that. It wouldn't affect necessarily revenue recognition, right?
Right.
It would affect cash collection.
Correct.
It would be a cash flow timing issue, 'cause eventually, right, we would catch up with those.
That's right.
Okay. You know, maybe kind of sticking with the utilization, you know, obviously, it, it hasn't had an impact, you know. What about for more of your mature Performance Suite, arrangements, you know, is that more sensitive to utilization at that point, something that's fully ramped up? 'Cause I'd imagine when you're ramping up something at the beginning, and you're still seeing margins and, as they, as those improve and get to steady state. But any difference between a fully ramped contract versus, you know, something in the early stages?
Yeah, we haven't seen a big difference between those two.
Okay. Medicaid redeterminations, I know that's the other big topic a lot of people have focused on, recently. I think on the recent call, you kind of talked that you're over halfway through the process. You know, if we bridge sort of your 4Q Adjusted EBITDA target, you're expecting, you know, roughly a $4 million headwind on a quarterly basis. That's, you know, up, though, from the $3 million impact you saw in 2023. Maybe talk a little bit more about the assumptions and so sort of what you're supporting the evidence for.
Yeah.
In 2024.
Yeah, so what we're seeing play out in the states where we are most dense, Illinois, Washington State, and others, is largely a linear progression. These states started their process on average in July of last year, and a linear progression of redeterminations through the middle of this year. That's what we expected, and that's what's been playing out. We ended the year with membership on a gross basis, down 8.5%, which was right in the middle of our expectation of between 8% and 10%. Expecting to land sometime in the summer when it's all said and done, in the mid-teens. With the EBITDA impact, as you noted, Q4 of 2023, we scoped the EBITDA impact at $3 million in that quarter.
From there, we're expecting another 3.5 incremental to that three by the time we get to this summer.
Okay. Let's maybe shift gears a little bit. MA, we'll talk about the MA landscape. I mean, obviously, you've highlighted that you're seeing health plans and risk-bearing physician groups, you know, turn to you, given the shift in the landscape. Maybe speak about how you guys see V28.
Mm-hmm.
Sort of changing, you know, those changes kind of increasing preference for PPO plans and how are they driving increased demand for your products?
Yeah. You know, I think I will not be alone in describing the MA landscape right now as one with a lot of moving pieces.
Yeah.
Changes in the revenue model. You have movement of membership between plans, between plan sponsors, and between plan types, with a number of members opting for the PPO sort of option over an HMO option. A lot of that doesn't directly impact Evolent, right? We don't do risk adjustments, so V28 doesn't impact us. Our fees are tied to costs, not plan revenue. But where that does impact us is all of those dynamics are contributing right now to margin pressure within Medicare Advantage plans. And we have a solution that we believe delivers not just an improved member experience and quality, but also lower costs, and can be a guaranteed lower cost in the case of our performance fee.
And so we see it as a strong selling environment for us, given the nature of our solutions.
I s, you know, I think before we started, you were talking about, you know, Seth is on the road, meeting with a lot of clients, selling season's going well. Is that a lot of the. Is that where you're seeing some of the activity of.
It is.
Yeah.
Now, I will note that as the activity is not limited to Medicare Advantage plans.
Yeah.
Right? So we were just talking about redeterminations, Medicaid plans feeling some margin pressure from that as well. I think then one of the things that we like about this business is it is applicable to anyone, right, with cancer or anyone with cardiovascular disease, regardless of the line of business.
Yeah. You know, maybe before jumping to guidance, just one last question about the product suite. MSK, right, is a lot more case-based, and I don't know that we actually saw that this higher utilization has necessarily driven a lot more cases per se. You know, maybe I would have expected maybe a little bit more, given what you're seeing in terms of, you know, sort of a utilization trend. You know, any kind of thoughts on why that might not be the case, or is it?
Yeah, I think my best guess there, Charles, is geographically dependent.
Okay.
Speaking in generalities, for national MA plans.
Yeah.
I think what's happening in reality is a lot of local, specific dynamics.
Okay, that's fair. But if we were to see it, though, that is all.
That would be upside.
That would be upside.
That's right.
So speaking of that, so if we're looking at the guidance that you gave, obviously, for EBITDA, $235 million-$265 million, you kind of talked about that the top end is if we're seeing Performance Suite performance that mirrors sort of what you saw in 2022 and 2023, and then the bottom $10 million, kind of a buffer for utilization. We've just talked about that you're not really seeing any utilization issue, and what would be the trigger that would call that into question? And I guess in a sense, because you're at risk, does that $10 million represent sort of the risk corridor that you have to absorb before maybe you're able to renegotiate pricing?
Yeah. You know, it's certainly something that we monitor across the year.
Yeah.
And we have the least data right now than for this year than I'm ever going to have again. So we'll know a lot more as we go through the year. As you think about, you know, why $10 million? To answer that question, the way that we think about it, and one of the important components of our Performance Suite contracts is that they typically contain protections for Evolent in the event that cancer prevalence, for example, moves outside of a corridor. And one way to think about the $10 million buffer is, maybe given a dynamically changing environment, it takes us a couple of quarters to update a fee after we see that sort of trend, right? And so, those protections are an important component of our overall risk mitigation strategy.
As we thought about the full year, it seemed prudent to have that buffer in there.
On the other side, though, on the top end of it, when we think about the Performance Suite experience, you know, obviously, what year was that now? Was that in 2022? Was that third quarter 2022, when there was that mix, because you had the
Mm. Mm-hmm.
The cohort issue with the.
Oh, with the primary care.
Yeah.
Yes, yes.
So if you think about sort of the performance, would you kind of exclude that as part of what we're trying to think of real underlying Performance Suite performance?
I would, yeah.
Okay.
The issue that you're referring to is specific to the MSSP ACO.
Right
T hat we also operate, and was limited to a dynamic for the pandemic between 2020 and 2021.
Right.
Now, firmly in the rearview mirror.
Exactly. It took me a while to remember. So where else can we see, you know, maybe potentially upside? Because I know that we're still trying to. We have a little bit left to get to hit the.
Mm-hmm.
Q4 2024 target. Seems like tech and services would be the fastest way to get there. Maybe kind of any sense on what that kind of looks like at the moment for you guys?
Yeah. So the other major dynamic, as we think about full year EBITDA, is the pacing of go lives, right? So you have the Performance Suite, claims expense dynamic, and then how fast can we sign and get new business live? And that is often an important contributor, as you think of past years, to are we at the high end of the range, or in the middle, or what?
Yeah. Maybe in terms of cash generation, just remind us again sort of what your expectations for cash flow.
Mm-hmm.
A nd maybe as a conversion rate as well-
Yeah.
W hat your targets are, and how close do you think we're going to, we'll be at the end of the year?
Yeah. So we have talked about a target of converting 65% or more of our adjusted EBITDA into operating cash flow. What that means this year, our adjusted EBITDA range is $235 million-$265 million. 65% of $235 million is about $150 million. So our target is generating operating cash flow of $150 million or better. That number was on track for 2023, so we feel really good about that.
What do you think then of use of the cash? I know obviously we, you want to get the leverage down. But actually, you actually are below your target, right?
Yeah.
It was 3x .
Yeah.
You're below that now. Maybe talk about sort of capital deployment priorities at this point.
Mm-hmm.
Where does. Yeah, maybe.
Yeah.
List those first, and then we can.
Yeah, absolutely. So three capital allocation priorities. One is investing back into the business. We invested a little more than $50 million in R&D last year, of which about $25 million was capitalized as internal software developments. This year, we've guided an expectation we'll capitalize about $30 million of internal software development. I think that's really important, right? We are living in a dynamic world, and it's critical for us to stay ahead of the curve on the platform development. The second is strategic M&A. We want to do M&A that is accelerating our mission in terms of delivering the highest value specialty care that we can. And then doing those two, you know, one and two, in the context of a disciplined balance sheet.
Balancing net leverage, cash interest, and dilution of the common equity. So then as you think about what does that mean for 2024, right? I think we are still targeting exiting the year at a net leverage of 2x or less. Very much on track with that, having ended last year at 2.2x. So on track there. And then, on the M&A front, what we have historically been is asset-led. We have a thesis on what we're trying to do in specialty care, and we look to be value buyers of assets that can either bring important capabilities.
So as an example right now, a tuck under in oncology or in AI, something that is in our roadmap that might accelerate what we're trying to do, could be a great use of capital, highly accretive. Or, if the right opportunity arose, to bring in another specialty to further propel our cross-sell opportunity, that has also in the past been highly accretive and we think could be very strategic going forward. So those are the sorts of things that we look at with an eye ultimately to driving shareholder value.
And then maybe speaking of which, right, as we kind of round out here, I mean, not too long ago, you know, there were sort of talks of Evolent also being maybe acquired. I know that Seth, on occasion, has kind of stated, always looking to enhance, maximize shareholder value. You know, given sort of the success, though, you've had, and, and how good the outlook has been, does that change the way you guys are thinking about, you know, Evolent's role in sort of the, the current healthcare ecosystem, either as a standalone or, or, you know. Or does that not really change how you think about sort of the long-term future? Because given such, you know, sense of success you've had and, and the partners that you've had, you know, long-term outlooks looks pretty positive as it stands.
Yeah, look, I think we're really excited about our journey here and our opportunity. And we have an outlook and a commitment to drive shareholder value, and whatever ownership capacity, right, that we're doing that in will be based on what is in front of us. But I think that our conviction in the underlying opportunity here and how early we think we are in penetrating it is the thing that is exciting to me.
Great. I guess in the last minute or so, you talked about strategic asset-led strategy. New Century Health was the vendor within Humana, right? NIA was within Magellan that, you know, went to Centene. Is that the way we should be thinking about it, looking at, you know, sort of what are the vendors or assets that are serving payers today that could be a strategic fit?
Mm-hmm.
Or is there much in the universe that's sort of emerging technologies that, you know, are trying to then disrupt and move into, move into the payer space from outside?
Yeah, there's definitely both.
Both.
And I think both of those archetypes are potentially interesting.
Okay. We have a minute left. I don't know if there's a question from the audience. No? All right, then I guess we have a little extra time.
Okay.
John, thank you so much.
Thank you.
Really appreciate.