Thanks, everyone, for being here at RBC's 2024 Global Healthcare Conference. My name is Sean Dodge. I'm the healthcare IT analyst here at RBC, and I'm pleased to be joined by our next presenting company, which is Evolent Health. Here on behalf of the company is John Johnson, who's their Chief Financial Officer, and then Seth Frank, who runs our Investor Relations. Special thanks for both of you.
Thanks for having us.
For both of you for joining us. I want to start, you guys reported your Q1 results not all that long ago, just a few days ago. And John, you want to just give us kind of a quick recap of how the quarter went?
Yeah. We reported a good quarter, crushed it on the top line, raised our guidance there, and we're in line on the bottom line. I'd say a couple of things before we dive into the Q&A. First, taking a step back, the demand for this business, for managing specialty costs and quality, has never been stronger. In this particular macro environment, where health plans are sort of seeing some historical levers for managing margin, whether that's the risk adjustment lever, a disappointing rate notice for next year, a number of other elements, seeing those be less valuable, in driving bottom line earnings, we're seeing them increasingly turn to managing specialty costs as a top priority. And that is what we're here to do.
So you see that, I think, reflected in the guidance raise on the revenue side, a $115 million increase on the top line there to the midpoint. The second thing that I'd say is, we've articulated a path to exit this year at $300 million of Adjusted EBITDA or better, and each element of that path continues to feel really good. We'll talk about it later, I'm sure, but it's just reinforced based on being now, what, 4.5 months through the year along that path, feeling really good about each step. The last thing that I will say, and I'm sure we'll talk more about this, is also in Q1, we saw some elevated disease prevalence and acuity in certain of our risk markets in both oncology and cardiology services.
And that caused us to book higher medical expenses in the first quarter. The good news is that we have protections in our risk contracts for exactly this sort of event. If there's a change in the population that leads to an increase in disease prevalence or disease acuity, something like that, we have the ability within our contracts to update our capitation rates, and are doing so. What that may result in is a timing difference between the execution of those increased rates and an elevated medical expense that has resulted in a wider Q2 range. And so with that, we can launch into the questions.
Sounds good. So there's of course been a lot of focus on your execution toward the $300 million EBITDA run rate target that you've laid out exiting this year. As you said, there's kind of three buckets or elements of that. There's cost synergies, there's the new business wins, and then the margin maturation and the Performance Suite. So if we just kind of walk through those, and we'll start with the easiest one, I would imagine, which is the cost synergies.
Mm-hmm.
So you completed in the quarter the transition of the Centene services agreement. Is that all that's left to do there? Maybe, like, what's left in the cost synergy bucket-
Yeah.
O r the synergy bucket?
Yeah, totally. So we've articulated an expectation of $8.75 million of quarterly EBITDA benefits from that acquisition in terms of the synergies that we're capturing. That's both cost and the rollout of some revenue commitments that were signed at the time of the deal. The cost piece is now done as we move here into Q2, and the revenue piece is rolling out on track. We expect that will be in place largely in the back half of the year.
Okay. And then on the new business piece of it, you did announce in the quarter a new Tech and Services agreement, and you said that did contribute to lowering the remaining go-get-
Mm-hmm
B ut you also mentioned that there was a Performance Suite. There was kind of stronger membership there.
Yeah.
So maybe you could just disaggregate the two of them. With the Tech and Services agreement, maybe size that for us in terms of revenue and EBITDA.
Yeah. So, as we think about what we'd identified as a $4 million quarterly go-get, for, on the EBITDA line towards that $300 million target, now, shave that down to being a little under $3 million, and that's both the newly announced tech and services contract, which is a few hundred thousand lives at typical, Medicaid PMPM on the tech and services side, plus really strong membership performance really across the book. You see that, on the tech and services side immediately, right?
Mm-hmm.
And on the Performance Suite side, we did not see it immediately. Right? We didn't see that flow through right at the beginning, because that typically has a margin maturation curve. But as we're exiting this year, as we're thinking about the back half even, we would expect that growth translates into EBITDA accretion, so counts towards that goal as well.
Okay. And so you've got If we think about, again, new businesses, that element, you've got about $3 million of quarterly EBITDA-
Mm-hmm
Y ou need to add to get to that target. At this point in the year, is it, is it really just now down to tech and services, agreement-
That's the right way to think about it.
To win?
That's right, that's right. And it might be the tech and services sort of specialty suite for oncology or cardiology or musculoskeletal, it might be our surgical management solution, which focuses on providing fee-for-service work with ASCs. Seeing some really nice traction with that part of the business, other fee-based parts of the business as well.
Okay, and if we think about, so $3 million remaining EBITDA, if we think about normal tech and services margins implies something around $5 million of quarterly revenue.
That's right.
Maybe just talk about your visibility or your kind of confidence into that in the-
Yeah.
Back half of the year.
Yeah, as I mentioned at the beginning, really strong pipeline right now. I think driven both by, you know, I think the products are pretty good. But also the market for these services feels quite strong. So we're excited about that and excited about the pace of activity within the pipeline.
Okay. But before we get into the maturation of the Performance Suite margins, you touched on it a bit at the beginning, but just around the pressures that are on payers right now, the growing pressures that are on payers right now, and the silver lining there being just increasing demand for the value add that you all bring. So maybe just talk a little bit more about just the macro demand backdrop for Evolent.
Yeah. So, you know, with, you think about this sort of simple equation, right? How are you driving margin? You can drive top line, you can drive up premiums, or you can capture sort of clinical value on the med loss line. And what I think our observation is, there are fewer revenue items facing a typical health plan today, fewer levers to drive that up, and so necessarily a more important focus on driving the bottom end, and driving the costs down. And where we really sought to position Evolent in the marketplace is as a way to do that in high-cost specialties in a way that is not as abrasive to the physician network as other traditional cost containment approaches.
And so as we think about what's Evolent's sort of core competency, since the very founding of the business and our provider heritage, it really is that orientation towards how can we make this work for the doc? How can we make it easier? How can we remove administrative friction, and how can we guide those providers to what we think, based on the review of the evidence, is the best pathway for that particular patient? And if you can do that right, everybody wins, except for the pharmaceutical companies. That's what we're here to do.
Okay. So if we talk about the Performance Suite, margins in the maturation expectations there, there's a lot to unpack, but in Q1, as you pointed out, the membership was really strong. That led to a lot more revenue, I think than you thought... we thought, but we didn't necessarily see it flow to EBITDA yet. And there were probably at least three dynamics there behind this. So maybe if, if again, you just want to kind of unpack how new Performance Suite business, how that matures, margin-wise matures, and then just you don't have to touch on the dynamics around the utilization piece of it.
Mm-hmm.
But, maybe, maybe again, to like how Change played into that.
Yeah. So if you think about how are we driving margin in our side of the business here, if we're thinking about taking risk, we typically will talk about a first year flow through margin, once all is said and done, of between 4% and 6% of revenue. And then over the ensuing two years, that grows into the mid-teens, between 12% and 18%. If you then drill into let's look at that first year specifically, and look at it quarter by quarter, what we typically see is that 4%-6% represents a quarterly reported number of, like, 0, 0, 0, 10. Or 0, 2, 4, 10.
As in those first couple of quarters, and often we're talking about 3-5 quarters of initial experience before we're making that transition, we don't have as much claims visibility, we don't have as much history with that population, so we're necessarily booking more conservatively. So that's sort of how we think about the margin maturation opportunity in the Performance Suite. And we've seen that, and this is an important note, we've seen that now for many years in a row. Go-lives in 2019, how did they perform? Go-lives in 2020, how did they perform? Go-lives in 2021. And that curve, over a large enough book is pretty consistent.
The other thing that I would add, and you noted the Change Healthcare dynamic here, is when we have less visibility into claims data, whether that's because it's a brand-new client or because there's a big hiccup in the healthcare system for our partners, and all the claims aren't getting paid, we are naturally more conservative, and we rely more on leading indicators. That is one of the things that impacted our results in Q1, where we saw, as I mentioned, some spikes in disease prevalence and acuity, that elevated our expense, and we had lower visibility into the claims that added a layer of conservatism on top of that.
And so as we think about the full year, and our full year EBITDA guidance of $235-$265, the protections that we have to increase our rates in the event of these prevalence changes, combined with the momentum that we have on each of those categories that we walked through before, EBITDA accretion towards the 300, feel really good about the full year.
Mm-hmm.
We have a wide range for Q2.
T he spikes that you mentioned in prevalence and acuity, can you kind of put some quantification around how much that spiked up in March? And then you also said that it did, you saw it soften in April. So maybe how much did it spike up, and how much did it soften-
Yeah.
S ubsequently?
Yeah. And I'll, I'll specify, too, that what I'm talking about here is not what we're seeing in the claims, because, as I mentioned, we don't have as much claims visibility as we typically would. So what we're focused on here is those leading indicators. What are we seeing in the prior authorization request data in terms of disease prevalence and acuity, and so on? And what we saw was not a broad-based change across all of our markets, but within pockets of our risk book, a pretty meaningful spike. And we're still figuring out why exactly that sort of thing happens, but when we see that sort of data, what it typically is reflective of is a change in that population.
Mm-hmm.
New members brought a new risk book, or, churn between carriers didn't result in net gains, but is still a different risk book. That's our hypothesis on what happened. Now, we did, as you noted, see a decline in some of those indicators for April. As the claims complete, and as we have more data, we will seek to keep folks apprised of what we're seeing here, if there's something that is definitive that we can say before our next earnings.
Okay, and then the decline you saw in April, was that lower than March? Is it back to where you thought April was going to be originally, or is it still kind of elevated relative to, to-
Yeah, on a seasonally adjusted basis, it's back to where we thought April would be originally. And I, you know, I'm a conservative CFO, and this is a risk business, so drawing a line between one point is a dangerous business.
Mm.
That's why we have a wider range and are thoughtful about that, and are beginning to execute on those protections that we have in the contract.
Then just to clarify, so you gave a particularly wide range for Q2 EBITDA guidance, so $48 million-$62 million. If we think just simply the lower end of that is that if March levels were to persist forward-
Mm-hmm
Y ou'd be toward the lower end of that, and if March turned out to be anomalous, and April is indicative of more kind of the go forward, then you'd be at the high end of that?
That's the right way to think about it.
And then if we think about, s o we'll get more into the contractual protections in just a second. If it turned out March were the new normal, we'd see a kind of an EBITDA depression or step down in Q2, but there would be some amount of that, given the lag in your ability to scrape some of that money back, there would be some amount of that you'd be able to recoup in subsequent quarters.
That's correct. That's correct. Often these change events based on changes in the population around prevalence and acuity and so forth, are retroactive. And so there is a timing question, right? When is that executed?
Mm.
But, the value is still there. And importantly, as importantly, our ability to continue to create clinical value, right, lowering the cost of care while keeping quality the same or better, is also still there, right? So that's how we are thinking about the rest of this year.
You mentioned protections against changes in population. We also talked about changes in prevalence and acuity. I guess maybe if we kind of take all of that and distill it into what actually are you protected against?
Yeah.
Is it, is it prevalence, but not necessarily acuity, or is it some amount of both?
Yeah. So every contract is different, and it's a dialogue with the partner as we're creating the contract. But the spirit of it is to protect both sides for changes in a population that are outside of either party's control. And so, a simple example is disease prevalence, the number of people within a particular year who are going through an episode of cancer. If that were to go down in a year, the plan doesn't want us to benefit unnaturally for that, right? They would like to have some of that money back.
Mm-hmm.
And similarly, if it goes up, then we're not in the business of underwriting those changes. And so the goal is, it's not just to protect us, right? But it's to support a sort of profitable for both parties long-term relationship. What are those sorts of metrics that you typically see in a performance fee contract? Prevalence is one, case mix or acuity is another. We will sometimes also have some controls around things like unit costs, right? If there are changes within a network that are significant, other sort of material change events that, again, are outside of our control-
Mm-hmm
W e can raise our hand, and update the rate accordingly.
Okay. And if we think about, so you did, you did give a little bit of a quantification on the call. You said that you'd be able to recoup about 70% of the expected potential cost increase. Yeah, I guess the question is, how wide are these kind of protective corridors? Like, how much do you have to absorb before you're able to kind of go back and ask for some-
Yeah
S ort of reconsideration?
Yeah, I think this is where it's particularly relevant that what we're talking about here is not a broad-based trend across all 7 billion of our risk lives.
Mm.
We're talking about changes that we saw in pockets of the risk portfolio, where the spikes were quite significant, a nd so that's a different dynamic than if we were seeing a sort of more modest increase across the board, and why we're pretty confident in our ability to sort of rightsize those rates.
Okay. And the point you made earlier is that these are all different by payer, so lots of different variations in how these protections work, and some have small legs, and some have long legs. Mechanically, how do most of these work? It's retroactive on a prospective basis. Is that the right way to kind of think about it? Or maybe just kind of give us a sense, when you do go to these payers and you are able to get some consideration or relief, what does that look like?
Yeah. You know, so this is a collaborative process. Our partners are often the ones who are paying the claims, right? And so they see the claims as we do too, and we can look at that same data set together and agree, yes, the prevalence here is 1.7. The number in the contract is 1.3. Let's make an adjustment. Contract provides for XYZ timing for that. And so that's the conversation. As you can imagine, medical economics, it is not nearly as simple as I just described.
Mm-hmm.
Actually running through that analysis takes some time, and verifying it on both sides takes some time. But the other thing that we've sought to underline here is this is not a sort of novel, sort of break glass protection, where it's been on the wall, but we've never had to break the glass. This is a pretty common piece of the business, and we've been through this process for markets here, markets there, many, many times over the last couple of years with most of these payers.
Okay.
And so they're well-trodden paths-
Yeah
T hat if we need to, if it's borne out in the claims, then we will execute on.
Okay. And I think that's an important point, reinforcing that, like you said, these are well-worn kind of processes, something that happens often, and so nothing new here.
That's right.
Okay. Okay, so I think we can leave that part there. The one other thing I wanted to talk about with Performance Suite margins is, historically, you all have talked about at maturity-
Mm-hmm
K ind of 12%-18% is what you target in those contracts. You've also done some acquisitions recently, where you bought, like, end-of-life planning, and you're now working to start to integrate that into the oncology-
Yeah.
Performance Suite, for example. So if we think about the amount of money that's spent in the last years of people's lives and your ability to bend those cost curves, how meaningful could the integration of some of these new capabilities into the Performance-
Yeah.
will the Performance Suite margins be over the longer term?
Yeah, look, I would think of that in two ways. The first is the opportunity to provide better, more goal-aligned service, and care to a patient near the end of their life, or to provide more comprehensive care management navigation services to a patient and a family going through a cancer episode, are massive, both in terms of quality and cost. You know, the sort of frequency with which a patient diagnosed with cancer is headed to the ER or being admitted for something that is not related to the cancer is very high, right? And that's terrible for them, and it's expensive for the system.
and so that's why we have made these investments in the end-of-life products, the strategic alliance we mentioned on the call with Careology, which is a cancer navigation platform, a digital platform there. Really excited about the opportunity there to provide both better service and better control costs. The other piece of this, like, how accretive to our margins could it be?
Mm-hmm.
We think of that as it's a long-term journey, right? There is a reasonable standard in risk-taking businesses that are in the government-funded space of running a 15% or so medical margin, right? Our perspective is, if we can outperform that in a meaningful way, then that should allow us to meaningfully grab a share and continue to rapidly grow that business.
Mm-hmm.
And that's our orientation of fairly sharing in the value that we're creating, while also securing strong long-term partnerships with the health plans and the members that ultimately are paying for the service.
Okay. Maybe just in our last minute and a half here, we'll do some modeling questions. So in the quarter, you all did a really good job of managing down SG&A.
Yeah.
And so maybe just help us think through, I don't know, the cadence-
Mm-hmm
O r trajectory of SG&A over the-
Yeah.
- course of the year.
Yeah, so we'll see one more step down into Q2 here, though we have come off of the TSA that happened late in Q2, or sorry, Q1. We also have some lower rent expense that we're run rating into the rest of this year. After that jog down, I would expect that we're at a stable point, and it grows then, and scales a little bit with the company.
Okay, and then I think it's good that Medicaid redeterminations are left for the last 48 seconds. It sounds like everything's tracking-
Yeah.
A ccording to what you had guided there. You know, Illinois is your biggest state, and so the one that, you know, I think most people focus on. Just, how's Illinois trending to-
Yeah
- relative to what you all?
Right on to our expectations, and I'd note two things, right? We've talked about, there's an impact on the top line.
Mm-hmm.
And there's an impact on the bottom line, with within the risk business, particularly, right, where the folks who are leaving slightly healthier than the folks who are staying, and that results in slightly higher medical loss ratios in the risk business. That piece of redeterminations, along with the top-line revenue changes, happening exactly as we expected it to. So right in, right in line, and we reiterated on our call, an expectation of a total -$3.5 million headwind in the per quarter-
Mm-hmm
O nce all is said and done in, at the end of Q2.
Okay, great. We're out of time, so we'll leave it there.
Very good.
John-
Thanks
T hank you very much.