All right, folks, thank you so much for joining us. Our next session is with Evolent Health. We've got the CFO, John Johnson, here, and I'm going to harass him on utilization for the next 30 minutes.
So, John, thank you for coming here. I think about how different your business looks than when I worked on the IPO.
Yeah. Yes.
I think about this all the time, right? We'll be listening on the call, and I'll flashback, talk about the Identifi Platform.
Mm-hmm.
Talk to me about where the company is today versus the IPO?
Yeah. You know, so the core difference, I'd highlight three areas that we've really changed the business at the time of the IPO. The first is who we're selling to. And so in 2015, our core market was health systems. In a way, we were a startup selling to startups, and some of our customers went out of business, and that was bad for our business.
I hate to ask you that. All right. I was like, "I don't know if I need to cover this anymore.
No, no offense taken. So the second, major change, first, we're selling to health systems, selling to payers, right? It's established managers and risk. The second major change was moving from selling just services to also taking risk. And doing that in a balanced way where we have a portfolio that is around 75% of our earnings coming from fees, and 25% coming from risk. The third major change is moving from a view of total cost of care focus, right, population health, early 2010s, some Affordable Care Act stuff, I don't know, to a focus on what we see as the next wave of value-based care, which is specialty value-based care. And the core thesis there is that if you look at the major drivers and trends within the sort of skyrocketing medical trend, most of those drivers are in specialty categories.
and so bringing a value-based lens to that category, in a way, that we can underwrite and stand behind the performance that we're delivering has really resonated. I guess the last thing that I'd say relative to the IPO is that we actually make money now, and it generates a decent amount of operating cash flow.
So you said something very interesting there, that a lot of what you do is fee-based, and then I bet probably 99% of your questions today are about the risk-based side of the business.
You're not wrong.
Talk to me about what's going on.
Yeah. Well, this is an important component of the business, right, where we believe that our platform, this sort of specialty management platform that's focused on oncology and cardiology and musculoskeletal conditions and advanced imaging and some other specialties, can be deployed in both of these ways. And so we can drive value for our clients on a pure admin fee basis in their ALR, right? And we charge $0.35 per member per month. We generate a 50% gross margin on it, nice ROI on that for the clients, and we can roll that out very rapidly, many, many millions of lives on that platform. The second way that we can sell the platform is by taking risk. And here, the revenue profile's very different, since we're taking the claims. The PMPMs might be $30-$35, and a mature gross margin might be in the mid-teens.
It's a guaranteed outcome for the provider or for the partner. This is highly attractive, particularly in a dynamic environment like we find ourselves in today. It's one that we've proven over time, an ability to consistently make money doing.
Well, let's maybe talk about that a little bit. You're seeing a lot of utilization concerns around the space, right?
Mm-hmm.
Is this an opportunity for you, or is this something that could be a bigger risk?
Yeah. No, it's a good question. We absolutely see it as an opportunity. The, if you look at where are the major comments around elevated utilization in Medicare Advantage, most of them are not in the specialties where we're taking risks today, which is limited to mostly oncology and cardiology and most recently advanced imaging. Most of the comments around elevated utilization are in supplemental benefits, outpatient, hips and knees, dentistry, etc., stuff that we don't take risk on today. So we're not impacted by that sort of broader trend, but we can benefit from it by being a solution for our existing and potential partners, where we can bring a solution that delivers cost savings with increased quality in a moment where there are a lot of players in the industry who are needing increased margin space.
Talk to the opportunity with Humana. Then, have you considered it, or is there conversations even ongoing on it?
Yeah. Yeah. I would limit it to Humana, right, as we're here to drive value for our customers. I think we're fortunate enough to work with a number of national players, who've ramped us quite quickly, right, whether that's Humana or Centene or Molina, and continuing to grow our relationship, across the board there. I think this is a really unique opportunity to do that.
You also have better visibility in your utilization, correct?
Yeah. I think one of the nice things about our business is it's a smaller scope, right? So if you're managing the total cost of care,
That's a lot.
It's a lot, right? There's a lot that happens that doesn't come through a prior authorization chain, where all of the specialty risk that we take requires that prior authorization. We have that initial insight into potential volumes that might then translate into claims. Now, that's not the whole picture, right? Ultimately, the claims are the whole picture, but it gives us a good level of insight into what's going on.
So let's look at the flip side of this. It looks like there's a big opportunity there, but also I think about whenever these large events happen, there's a mind-share issue, right? Maybe your clients could be distracted.
Mm-hmm.
How are you balancing that in the outlook?
Yeah. No, that's a good question. I, I think the I would say two things. The, the first is that we really seek to be partner-led. And what is it that we can do in a particular moment to support our partners? And what that might mean is if we were previously talking to them about the Performance Suite expansion, they need something quick. Maybe we go live with certain services first, right, because it's easier to go live. It's simpler. We're not going through an underwriting process together, and we come back later and talk about a transfer of risk. Maybe it's switching geographies. There's a particular need over here or over here, and so really seeking to be responsive to their needs is our perspective.
Could we see a different pipeline mix then for this year, just given some of these needs?
Yeah. Yeah. So I think we'd characterize the pipeline in a couple of different ways. I think we've said every quarter that it's the best it's ever been, and that keeps being true, which means it keeps getting bigger, which is great.
Don't hate it.
May, may need it. It is a nice diversified pipeline right now between existing customers and expanding with existing customers, both in the Tech and Services Suite and the Performance Suite. There's a lot of cross-sell in there, right, given the opportunity that we have there after some recent acquisitions that we've done. And then also some new payers, folks who maybe didn't think they had a challenge with specialty a year and a half ago or even nine months ago, who now sort of pick their heads up after the 2024 budget season and realize, "Hey, I think there's something we need to do here." So that's an exciting moment for us.
How does this tie into your new metric, new revenue agreement?
Yeah. So.
Why couldn't you launch that before I built my model?
So for years, right, we had a new partner metric that we called Operating Partners, and it was a specific designed metric really only captured new loads. And as the business evolved and we got foothold in a lot of health plans, we're alive in over 120 health plans now, it became less and less relevant. And it was also not comprehensive, right, because it only captured a part of the growth. And so the realization was, "You know what?
We just need to simplify this and say, instead of just capturing a portion of the new growth in this growth metric, we're going to talk about everything." And consistent with what we've been doing, we will typically give an indication when we're announcing a new deal, how big is it approximately, and what kind of margin profile does it have, if we allow folks like yourself to do the model?
Well, you called out margins, so I've got to ask. I get a lot of pushback around your gross margin trends.
Mm-hmm.
Pushback.
Yeah. So if you're growing a piece of the business that has a lower percentage gross margin much more rapidly than a piece of the business that has a higher gross margin, you'll see a change in the percentage gross margin. That is what's happening. The good news from my perspective is if you look at the dollar opportunity on the EBITDA line of a Performance Suite contract, versus a Tech and Services contract, so I can make $0.50 or 50% on a $0.30 PMPM Tech and Services deal or 15% on a $30 PMPM Performance Suite deal, I'll make $4.50 over $0.15 any day.
So you're an EBITDA dollars guy.
I'm an EBITDA dollars guy. That's how we're oriented businessly, right? So that, that is the gross margin story.
How do you see that playing out? Is this going to be a continuous trend, or do you think at some point the conspiracy theories can get to the bottom?
You know, I think at some point we're going to hit a steady state, where the amount of new Performance Suite revenue that we're adding is, by the nature of getting bigger, will be a smaller percentage of our overall revenue. And the other, like, confounding trend right now, of course, is Medicaid redeterminations, which is time-bound. It is a downward pressure on margins because a lot of that business is in the Tech and Services Suite and has high growth margins.
When you saw that question on the list, you're like, "I can't take risk and talk about suite redeterminations.
We probably will until for the next quarter, and I hope we're done.
Well, let's give a refresh then.
Yeah. So, so far, as this has played out, it has been quite consistent with our expectations, which were that it would largely start for us, given where we are, geographically dense, largely start last summer in July and proceed approximately linearly through this June. So as of December, we estimated that we were right at the 50% mark, and we'd seen a growth decline in Medicaid membership of 8.5%, which was right in the middle of our range that we expected between 8%-10% for the year. Once that was said and done, probably this summer, we think that the gross reduction in Medicaid membership will be in the mid-teens. And then the last thing that I would say is we've estimated a quarterly EBITDA impact.
Once it's all through, we compare Q4 EBITDA from 2023, to once all the Medicaid redeterminations are done, we've estimated that at a $3.5 million quarterly EBITDA.
What is your absolute worst-case scenario, given there's only a few months left?
Yeah. We feel pretty good about our understanding of how this has played out, in part because it's played out according to our expectations. And so we're far enough through.
So you're in a very different combo.
Far enough through the process now, right, where I would be surprised if there was a meaningful deviation from expectations.
Well, let's just be the last time I bring you to that topic. So you, you talked about some of the adjacencies you got into. There was an imaging contract that was brand new.
Mm-hmm.
Tell me about that. How big is that opportunity?
Yeah.
Is that, like, a cross-sale that we should be seeing a lot in the near term?
That's exactly right. So the opportunity that we saw was there was an existing client, that NIA had been serving for many years in a tech and services capacity with a risk-sharing component. And we saw an opportunity to build on that chassis with that partner and add the components that would turn it into an Evolent Performance Suite contract. We're really orienting around the value elements of, are we going to put into place alternative payment models? Are we going to engage more deeply with the network? Do we have the right kind of ability to do that? Are we going to be able to put into place something like diamond and gold carding on our roadmap? And so we saw this opportunity to build on an existing contract and create then a template for something that we could then go cross-sell.
So what we've generally indicated is it's probably not something you're going to hear us do a lot of standalone Performance Suite sales, but it's a really interesting incremental add-on to an integrated package of oncology and advanced imaging. Those two are related, right, or oncology and cardio or, advanced imaging and cardiology, same thing. So that's where we're sort of interested in taking this product and selling it in a bundled basis.
Because the industrial logic does make a lot of sense putting it together. What have you gotten pushback so far when trying to sell on advanced imaging, or is it just new?
No. I mean, I think the integration thesis of it resonates with everybody, right? It's like, it's a better outcome, a better product for the member, right, because you're looking at their care holistically. You don't have another silo over here. When you're trying to manage oncology, another silo is managing imaging and saying, "No, you don't want to do that test because you already had one." And we're over here trying to evaluate, you know, two months into a solid tumor.
A lot of disenrollments, right?
A lot of dis-synergies. And so the integration makes a lot of sense.
How should we think about this playing out then? You've got a cross-sell opportunity, but the name that you said had zero pushback.
Mm-hmm. Yeah. It's another arrow in our quiver, right, to continue to grow the business. I, one of the core stories of Evolent's over the last 18 months, and I think over the next 18 months, it's 36 months, is the execution of this cross-sell opportunity, where we have 40 million unique members. On those unique members right now, we only have two products on average deployed, but we account between six and eight products to sell. So taking that penetration further into our member base and moving an appropriate amount of that business into the risk model is really interesting to us.
You are the most measured person that I talked to on this stage.
Oh, great time to do.
But let's put it this way. You have these mid-teens growth targets.
Mm-hmm.
We've been well above that.
We have. Yes.
What idiosyncrasies have made it well above? How sustainable are those idiosyncrasies?
Yeah. It's an important question. So, you know, we target 15% better on the top line. And as you point out, our CAGR growth over the last four years has been well in excess more than double that.
2024, I think, was it 25%?
That's right. The reason for that very strong growth has been really strong uptake in the Performance Suite, which is great. We, we love that product. It delivers for our customers. At the same time, that's a risk-based business, and it goes through underwriting cycles. As we thought about setting the right long-term revenue growth target for the business, we didn't want to put ourselves in a situation where we needed to chase underwritten risk growth to get a top-line number, right, because the other piece of our growth trajectory is growing the bottom line by 20% a year. That is much more important to us than hitting a particular top-line number. That's how we think about top-line dynamics.
Given the outsized growth you have been seeing, does it open up any opportunities on cost?
Yeah. So I think it does. We've been pretty disciplined on our cost structure. You've seen our SG&A line sort of break down over the years. At some point, it probably will start to grow again. It will keep growing.
How long is that going to keep breaking down? Every quarter.
I don't think it will keep going. I think that cost discipline will continue. Operating leverage is the key piece of why we think we can grow. The bottom line is 20%+ while growing the top line 50%. As we continue to have rapid growth, there's some good opportunities there.
There's some nuance to that $300 million run rate, right?
In terms of the timing?
Yeah.
Yeah. It's just the way that we think about it, right? That's our exit run rate. Another way of saying it, right, is if you're looking at quarters, if we're on path or on track, Q4 is probably a little under $75 million, and Q1 of next year is probably a little over. That's the way that we're thinking about it.
Talk to me about how NIA contributes to this as well.
Yeah. So two things there. This is the acquisition that we closed on last January. It's been a really nice performer, in part driving this cross-sell opportunity. So it contributes both to the new business opportunity, right, the new margin opportunity there. There's also, as a part of the deal, we identified a total of $35 million in annualized synergy that comes both from a new contract phasing in, between the seller of that asset and NIA. Most of that has started phasing in this year. And then the second piece is cost synergies, which we also expect to be fully captured by the end of this year, since it's an important piece of the bridge between where we are in Q4 and where we will be exiting this year.
You also highlighted an obscenely large cross-sell opportunity.
We have. That's right.
How much of that is near term, just given the scale of that number?
Yeah. Yeah. No, totally.
Like, if you told me that during the IPO, I would have said, like, "That's obscene.
Yeah. Yeah. It's a very large number. You know, what are the rate limiters? That is another way to ask the question. And I think the biggest one, candidly, is inertia, right, that in this particular in the specialty management space, to make a change, a plan is going to be asking their network, which is a prized possession, right, to make a change. And that's not something that they do lightly. And so there needs to be a real pain point, either on the service, or on MLR, and we seek to capitalize on those moments. But yeah, it's a big opportunity.
I think about not just the opportunities you have on the business model side, but you have cash.
We do have cash. Yes. We generate more cash.
I love that. What are you doing with it?
Yeah. So, three capital allocation priorities. The first is investing back into the business. Last year, we spent about $50 million in R&D. Part of that is internal capitalized software. Part of that is just OpEx. And we'll continue to do that. It'll be a little bit more this year. It'll keep growing a little bit, but slower than real. The second piece is creative M&A. I think the NIA acquisition is a great example of that. We like businesses that we can pay fair EBITDA multiples for, or.
They're not fair enough.
They are. They are more fair now, that and that accelerate our strategy. We don't want to just buy just to be triggered or is it shortcut, something that we might be planning to do anyway, right? So we'll probably spend $50 million a year in R&D, $150 million of the next three years. If we can pick up an undervalued asset, right, for a reasonable price that shortcuts some of that, that's a good use of capital. So that's interesting for us. Third, priority is to do all of that with a disciplined balance sheet. So drop cap of 4X, net leverage, that we'd pop up to for the right assets, if we had to cut back down to two, about where we are now, and balancing leverage, cash, cash interest, and the dilution of the common equity.
It has to fit into your future roadmap. Can you give us just the highlight sheet of what would be in that roadmap?
Yeah. So things that we're spending a lot of focus on right now, patient navigation, is important to us. A couple of quarters ago, we announced a pilot partnership with our partners to think about cancer navigation. We think there's huge value to be added there, both for the member and for the plan. That's an interesting area of work for us. I think we're everybody else in this space, I'm sure, spending a lot of time thinking through our AI strategy. How much are we doing internally?
How much are we partnering? Are there assets that we can buy and accelerate what we're doing? That's interesting to us. On the other category, I would say, is a new specialty. That was the NIA archetype, right, where you're buying an asset that had real IP other specialties that you didn't currently use. That then is what creates sort of the cross-sell opportunity. Those tend to be chunkier, but,
How are you out in the business?
That's right. That's very accurate.
How many assets like that are there?
Yeah. It's a good question. There are plenty. I think the refined, like, filter that I would put on is, like, how many assets are there like that that are for sale or a reasonable EBITDA multiple? And that list is.
For sale. Reasonable EBITDA multiple.
Pretty small.
Scaled enough, that's going to make a difference in your business.
That list is pretty small, but it's also we sought to establish ourselves as a differentiated acquirer of that kind of asset. So we don't feel the need to urgently go out and buy something, but we want to be here and have balanced capacity. If there is something that we can optimistically add to this portfolio and then bring to our customers as a strong solution, in a way that's really driving their hold of value, we think that's really interesting.
You guys have changed so much over the past few years. It feels like an entirely different business. It's running on all cylinders. You've got 15 seconds left. What keeps you up at night now? You seem less stressed than Nikki.
My children are sleeping tonight. They're tiny, and they take a lot of work.
Very good answer. All right. Well, thank you so much for coming. I really appreciate it. Have a good company.