Okay, great. Hi everyone, thanks so much for joining. My name's Jess Tassin. I cover Managed Care and Healthcare IT at Piper. I'm so excited to be here with Seth Blackley, CEO of Evolent, and John Johnson, CFO of Evolent. Thanks, guys, so much for joining. We appreciate it.
Thanks for having us.
Awesome. Evolent's defining and dominating the market for specialty care management with a focus on oncology and cardiology, in addition to musculoskeletal conditions. This morning, you all at Evolent issued an 8-K reiterating 4Q and 2025 guidance. Obviously, cost trends are in line with your assumptions. Can you just remind us what are those assumptions by line of business? How much visibility does Evolent have as of 12/02/25? Do you wanna share anything else on utilization observed quarter to date?
For sure. So trends in line with expectations, right, right as you said, Sue. Within our Performance Suite, that's oncology trend, of a little under 11%, as expected w ithin cardiology, trends are a little bit higher, again, as expected, which we attribute to the benefits rush, within the exchanges, ahead of premiums increasing next year. Right in line, and that goes through authorization data as of November as well. Good visibility into the quarter at this point.
As of end of November?
That's right.
Okay, great. This one's for you, Seth. Two-thirds of Evolent's revenue is tied to the ACA Marketplace and Medicaid. About a third is tied to Medicare Advantage. How does Evolent demonstrate impact on specialty cost trend and value to customers in, in dynamic end markets with kind of such volatile risk pools?
Yeah. Great question. I think primarily, the way we do that is we have a set of adjustments that adjust for risk pool changes. We've strengthened those protections and adjustments across the last years we've been talking about. That allows us to isolate in what is the impact that we are having and carve out the impact of risk pool changes. That's kind of point one. The second point is, you know, we also have a big pipeline of additional business that's coming in. Additional Medicare Advantage in particular is growing very rapidly at the company right now, based on the big blue relationship that we just signed recently. I think the combination of those two things creates a lot of ballast in terms of our ability to forecast and guide where we're headed.
Okay, that's really helpful. Can you just give us a framework for kind of how we should think about Evolent's impact on cost trends in the specialties that you manage? Predominantly cardiology and oncology.
Yeah. Look, I think maybe for people who are a little newer to Evolent, the primary driver of the value creation we have is this adherence to evidence-based pathways, right? The way we do that, look, we walk into a market that we're not working in today or a payer, we'll often find that the adherence to that evidence is in the mid-60%s. 65%-68% is a typical number you might see. Meaning 35% of the care is actually not on evidence, which is kinda scary at a personal level when you think about it. If you have a family member diagnosed with cancer or cardiovascular disease, there's a one in three chance that something about their care isn't right. We tend to move that number from 65% up to about 85%, mid-80s within a couple years.
That ability to change physician behavior is the core of what we do. Turns out that when you get the right treatment plan the first time, you also reduce cost. It is primarily a quality-driven exercise, but like in manufacturing, if you get a defect, it's gonna be more expensive to manufacture. It's the same principle in oncology and cardiology. That's how we drive the care, towards better care for the patient, but it ultimately also drives down the cost.
Okay, that's helpful. What are the most kind of common categories of spend that Evolent's able to influence, in cardiology and then in oncology? I'm interested to know just whether the ability to influence those categories is different in larger practices or consolidated physician practices versus independent.
Yeah. Let's start with oncology since that's sort of the marquee platform at Evolent. 80% of the cost is in the therapeutic. This is, you guys, you know, the drugs Keytruda or on the checkpoint inhibitor space or a more complex CAR-T therapy. Go down the list of very high-cost therapeutics, either part B as in boy or part D. It would be injectables or small molecule. That is the primary opportunity for savings because it's 80% of the cost. It also happens to be a place where there are 10, 12, 15 regimens that are possible. There's a lot of complexity of 300 journal articles getting published a month. It's hard for the typical oncologist to keep up with which therapeutic is right for this biomarker set within a given patient. It's very customized.
There's 100 tumor mutations for a typical individual as well. Our ability to match right therapeutic to right patient is the biggest opportunity for savings in oncology. After that, it would be things like radiation, which are also opportunities but smaller. And then, you know, even the inpatient stay is a place where we're increasingly driving some savings as well. Meaning at the end of life, you guys probably have seen this or experienced this often. Unfortunately, people are continuing to get heavy treatment towards the end of life, and that treatment often shortens their lifespan, and they end up in the ICU for side effects and the like. We do a lot to help sort of manage the end-of-life process as well. It's kind of in that order of, you know, the therapeutic, number one.
Number two would be radiation, and number three would be the kind of part A, end-of-life care. In cardiology, it's a very different story. It's really about surgical interventions, right? Imagine surgical interventions for, you know, a placement of a stent or heart bypass or the like. The ability to get upstream of that and do work that is either preventing the surgical intervention or changing the surgical intervention, that's the number one opportunity for savings. You know, a lot of people ask us, Jess, like, "Hey, what is it about what Evolent does that allows us to influence that physician?" I think it's two things. One is the level of scientific innovation is astounding, as I mentioned. There was a big journal article last year about the fact that most oncologists can't keep up with the pace of innovation.
We have an information advantage over most treating oncologists who can't read those 300 journal articles a month, and we're finding lots of pockets of opportunity there. The second thing is we do a lot on incentives for the physicians because when you change the therapeutic, you might actually be changing their income as well. We try to neutralize the effect of these income changes. Those are the two biggest ways.
Okay. That's helpful. Just, do you find that it is more difficult to influence behavior at larger, consolidated practices versus independents, or is it sort of equivalent influence across?
Yeah, it's a great question. You know, for context for everybody, about 80% of cancer care is delivered through health systems. As you might imagine, this is, you know, MD Anderson or Duke or UNC or Vanderbilt, big academic institutions or community hospitals. And 20% is through more independent oncology practices. I'd say in general, the independent oncologists are slightly more open to innovative ways of doing things. They're a little more nimble, a little more entrepreneurial. You know, we do find slightly better opportunities. We just did a partnership with AON, as people may have seen, which is one of those independent groups in that 20% set. I do think, though, that it's not a huge difference, Jess. Meaning we still get very good outcomes with the big systems and the academics.
The reason is that if you think about it, in particular, if you're going and having a peer-to-peer conversation with a treating oncologist, that's where the magic happens. This big system that's around them doesn't have a huge impact when you can just have a peer-to-peer conversation. These oncologists wanna do the right thing, and they'll typically take our input.
Okay. That's helpful. Can you just remind us for a customer health plan implementing the Performance Suite in either oncology or cardiology, what can they hope to save relative to unimpacted cost trend in either of those categories? And how do Evolent's margins progress over the course of a contract tenure?
Yeah, for sure. Within the Performance Suite, which just to frame it for folks, today we generate about 80% of our adjusted EBITDA through the tech and services side of the business. That's fees. Then about 20% of our EBITDA through the risk-based Performance Suites. In that model, there's two real benefits, financial benefits to the plan partner. The first is an upfront discount to their trended benchmark. If they've been spending $60 per member per month, then our fee to start might be 2%-3% lower than that $60 per member per month fee. The second is a diminished trend. We might agree on a three-year deal to a 1% discount to the unmanaged trend that they've been experiencing, and that's consistent with a national trend.
The way that we underwrite that, to get really specific, is to look through two to three years' worth of claims, from that partner and understand exactly where those opportunities are. If we had been managing that population for those two to three years, implementing our pathways and our value-based initiatives, what would the opportunity be? Often when we do that work, we see between a 10%-20% total opportunity. What does that look like for Evolent? Typically in the first year, we anticipate a, approximately break-even, margin. In the second year of operation, we'd anticipate a 5%-7% margin. Then exiting that second year, we'd anticipate being at our target 10% margin in those relationships.
Got it. That's very helpful. Perfect segue. 2024 was obviously a tough year for the Performance Suite. That's your risk-bearing specialty care management business that comprises about 60% of revenue. How is 2025, you know, post-Performance Suite, different? What incremental protections has Evolent garnered? And why are health plans still interested in contracting for the Performance Suite despite all of these new contracting provisions that potentially make it slightly more attractive for Evolent?
Yeah. Two main protections that are in place. One is around the prevalence and case mix of the population. Meaning if more patients are getting cancer out of a given population than expected or the level of acuity that you would see, so patients are getting diagnosed at stage four instead of stage two, those kinds of things are now protected in 90% of our contracts. The second thing is any changes in new drugs and indications or in unit price. That really covers what we think of as the things that are outside of our control, Jess, to be able to protect those adjustments and really focus in on what we can control, which is how good is the care that the patient is receiving.
You know, historically, you know, four, three, four, five years ago, it was really hard to get those terms negotiated. I think the difference today is that plans are under tremendous pain, and they're struggling mightily just across their entire business and in cancer in particular. Their willingness to do deals at really different terms than they were three or four years ago is a, is a thing. We've drawn a very hard line to say we're not gonna do a deal again without these protections in place. The latest blue plan that we announced has those same protections even on a retrospective basis. Even looking backwards, which is sort of an added feature. Our ability to get those deals done is just different in this environment.
Our commitment to not, you know, signing a deal that does not have those is a full commitment that we have made. The combo of those things, if you asked us a year ago, I think we said, "Look, we think this will work, but we need to go out and prove it." I think we have now got a year of both redoing our existing contracts and signing a lot of very significant big new contracts with an Aetna and a big blue plan that prove that we can do it. I think it is, you know, the bell curve of Evolent's outcomes are a little tighter is how I would describe it. We are making, you know, 10% when things go well now, not, you know, 13%, 14%, 15%, but we have a lot more protections on the bottom side.
The last thing I'd note is these contractual protections around case mix and acuity. We also have hard corridors in place in all of these contracts as well. Meaning, "Hey, we cannot lose more than blank, on this contract." That, I think, is a term that would have been hard to get three or four years ago, and we're now able.
Yeah, that's really helpful just as we think about the ACA Marketplace in 2026.
Yep.
Evolent spoke about, as you alluded to, about $750 million of new Performance Suite ACV year to date with $550 million expected to hit in 2026. Can you just give us some color on these wins? Was this a competitive process? How did Evolent go about pricing these bids, and what's the scope of risk that Evolent's assuming?
Yeah. One of them was, I'd say, quasi-competitive. There was one other entity that was kind of around the conversation, and the other one was not competitive. I think that's classic of our model, Jess. Meaning we don't typically win deals through RFPs. Our model is unique enough that it's a little apples and oranges. If you're gonna run an RFP, we would be kind of an end of one given the way that we do our work. You know, the scope in both of these relationships is oncology. It really is the oncology suite of scope that we typically have taken on with all of these new contract protections that I just mentioned. Corridors, adjustments for acuity and case mix, new drugs, indications, and price. It's, they're very similar.
One starts in January, and one's gonna be starting in May. That's at least the current expectation. I think that'll stick, and we feel really good about those dates. Could they pull up a little bit? Maybe. I think those are likely, January 1st and May 1st.
Okay. Great. How should investors expect margins in these contracts to develop in 2026 and beyond?
Yeah. Very consistent with our overall expectation for the Performance Suite. We would currently expect minimal EBITDA contribution from the $750 million in annualized revenue that is going live next year in 2026, but then a nice tailwind from that business going into 2027 and then reaching maturity at 10% margin zone, in the middle to end of 2028.
Okay, that's helpful. This is getting a bit deeper into the model. In 2025, adjusted EBITDA is guided to $149 million. That's midpoint. What does that EBITDA number include in terms of mix of businesses, investments, and forthcoming divestitures? Then I've got a quick follow-up.
Yeah. As I mentioned before, about 80% of that EBITDA on a fully allocated basis is expected to come from the tech and services side of the business and 20% from the Performance Suite. That $149 million does include about $10 million of EBITDA from the asset that we are divesting. For clarity, that's part of the 80%, not the 20%. That in our guide is projected to close on 12/ 31. We will not have that next year. The equivalent pro forma number for this year then would be $139 million.
Got it. That's very helpful. Just, what does that imply in terms of Performance Suite, both gross margin and contribution margin in 2025?
Yeah. For 2025, expected an incurred Performance Suite care margin. So that's revenue less claims cost of 7%. and, administrative load on that of about 4%. So a 3% EBITDA margin in the Performance Suite.
Got it. How should we think about the persistence of 2025 Performance Suite EBITDA in 2026?
Yeah. You know, a couple of things here. First, on that 4% administrative load, we would expect nice scale on that over time, right? Over time, we'd see that 4% going down to 3% or below. Not all of that will capture next year, but some of it will, as we grow the top line of that business. On the care margin side for our current book, based on our current expectation of trend and pricing, we would expect modest accretion of the care margin, perhaps around 100 basis points as we move from 7% today to that 10% target over the next couple of years. That's how I would think about that next year.
Okay. That's helpful. Just kind of based on the breakdown of 2025 guidance, it, by our math at least, it seems like fee-based adjusted EBITDA is about $109 million, excluding ECP. That's obviously down from $160 million in 2024 when you guys attributed 100% of EBITDA to non-Performance Suite businesses. Just what explains the 2025 decline and how should we expect fee-based adjusted EBITDA to develop in 2026?
Yeah. The biggest change year over year, two things, both are membership related. In 2024, you may recall we were going through as an industry the Medicaid redeterminations process. We started 2024 with significantly more members with our partners than we ended the year. That trend continued a little bit this year where we're ending this year with lower Medicaid membership with our partners than at the beginning despite having actually added partners across the year. The second element coming into the year is, it's also membership related, is we saw with some of our MA partners in particular, some significant declines in membership this year, in particular with some of our national partners who had a strategy coming into 2025 of trimming their membership. Those are the two biggest elements.
The last thing that I'll note is we invested approximately $10 million in operating expenses this year. They mostly show up in this line, to drive AI and efficiency improvements in the cost of revenue line. If you think about the work that we're doing day in, day out, we have 1,500 clinicians who are doing this clinical work. They're reviewing cases to ensure that that is in line with best practice medicine. Everything that we can do or anything that we can do to reduce the number of manual reviews that must be done, or if a manual review must be done to have it be as efficient as possible, can help get the yes faster for the patient and for the doctor, which is great, and lower our aggregate cost structure.
The one thing as we think about moving into next year is we anticipate a $20 million year-on-year improvement from this work, kicking in as we're exiting this year. We feel really good about that number.
Okay. Got it. That's helpful. Just absent any headwinds related to membership or, you know, attrition, you'd be going from $109 - $129 in 2026 of the fee-based revenue.
Even higher because I would note that we also are launching a lot of new revenue next year.
Okay, that's helpful. Can you just quantify for us at, you know, again, as we think about 2026, can you quantify Evolent's individual ACA Marketplace exposure? From a revenue perspective, what is implied in the $2.5 billion 2026 revenue outlook? And then just any commentary on adjusted EBITDA in 2025 and expectations for that EBITDA to develop in 2026? Again, ACA Marketplace delivery.
For sure. It is about 20% of our revenue today. That is about $360 million of revenue that is split 50/50 between the Performance Suite and tech and services. What we have put out for next year is what we would categorize as a downside case for the exchanges, which is based on public commentary from some of our partners, a potential shrinkage between 40%-60%. What we have noted on the EBITDA line as an organization is an expectation that we can at minimum keep EBITDA flat or grow modestly in that downside case from the pro forma result from this year. That is our target. How do we do that? We are growing. We have improvements on the cost of revenue side, as we noted, and we have improvements on the medical margin side from the current book. That is the focus as we move into next year.
Okay. Got it. That's helpful. Kind of $139 is the floor then for 2026 as we think about adjusted EBITDA. Yeah.
Yeah. We think of that as a downside case.
Okay. Great. Just, you know, in the Performance Suite, are you confident that Evolent has priced 2026 business to account for both trend and morbidity? And then, you know, not just trend and morbidity of the existing book developing, but also just, you know, you've got Molina going from 50% first or second lowest price silver to 10%. How does that change acuity in, in populations that Evolent bears?
For sure. We are highly confident in our pricing for next year, and a lot of it comes down to these protections that Seth was describing earlier where our rates can float with actual prevalence and case mix. That eliminates the need for us and our partners to be highly precise at the beginning of the year on what is that right level, because that rate can float, based on actual prevalence index. That will serve to really align our margin with our value creation.
Okay, that's helpful. So any potential mispricing would be remedied sort of in year?
Yeah.
Got it.
That's right.
Okay. In the last minute or two, can you just discuss Evolent's decision to divest ECP to Privia? What did that sale process look like? How did you price the business? And what are the remaining conditions and timeline to close?
Yeah. Let me start by just addressing the why, which is we have this specialty business at Evolent that, you know, we're, we're gonna grow as a company 30% minimum next year. We're winning a lot of big accounts, and it feels like in oncology in particular, but across specialty, Jess, we have the leading product in a giant market, and we are the market leader from our perspective. I think from a strategic standpoint, putting all of our management focus, capital effort on going from, you know, sub 10% market share really is where we sit today to, you know, 20% market share and beyond over the next handful of years, you know, focus, focus, focus. I think that will yield the best growth and EBITDA story for the company. You know, from our perspective, it's not complicated. We need to execute, execute, execute.
The market's there. The pain is there. Our product is leading. That, you know, to me then translates to a very easy decision of if it's not in that focus, let's take that capital back. You know, we did run a process. I think we have a great, you know, relationship with Privia, closings over the, you know, the next month or two. We feel really good about, again, the strategic decision to really focus on execution on the, on the, the core of the, the specialty business that's growing so much.
Okay, that's helpful. Can you just describe how Evolent will use the $100 million in proceeds, where that gets you to from a net leverage perspective by year-end? Then just kind of expectations, given 60%-70% EBITDA to free cash flow conversion expectations for delevering in 2026, 2027, and thereafter.
Yeah. Yeah. We will put 100% of those proceeds towards paying down the first lien debt. That is 9.5% debt. That will be cash flow accretive to us. It'll improve our conversion of EBITDA to cash flow next year. By assuming a year-end close, that'll put our leverage ratio at about 5.5 x net at the end of the year. It is our target, both through EBITDA accretion and using that free cash to pay down debt, to delever by about one turn per year over the next couple of years. We have been quite explicit that that is our primary capital allocation priority.
Okay. Awesome. Thank you guys so much for being here. I appreciate it, John, in your potentially last appearance at the Piper Conference as CFO. Thank you again. That is it.
Thanks for having us.