Welcome to Oppenheimer's 36th Annual Healthcare Conference. I am Michael Wiederhorn, the Healthcare Services Analyst. It's our pleasure to introduce Evolent Health and Chief Financial Officer Mario Ramos. We're gonna be a fireside format today, so welcome. Just starting out, Mario, why don't we just give you a you know, give us a quick update on the business post Q4, and then we can jump into more details after that.
Sure. Thanks, Mike. Thanks for having us. We appreciate being here with everybody. You know, I don't think there's much that's changed since we talked in the Q4 call. You know, we've had smooth implementations of Aetna, and we're on track to implement Highmark, as we talked about on May first. That's obviously a big driver of our top line this year. The other main aspect of the business that we're watching closely, but it's still a little bit too early to tell, is the exchange impact. We've had some early membership numbers, but I think as everybody knows, it will be a quarter or so or a few months at least until we see the members that are dropping off as the subsidies go away and their premiums rise.
Not much change other than to say implementations are going as we expected and on time. We're pretty much on track with what we discussed last time.
Great. Why don't we talk about guidance? Can you start out discussing your new guidance and how much conservatism is baked into the numbers? You know, you can talk about the wiggle factors that could bring you either to the top or bottom end of that range.
Sure. You know, I would characterize the guidance as our best view of how we think the year's going to play out. You know, I think by nature, because we have such a large portion of our revenue this year with new clients coming in on the risk side of the business, and the way that is reserved when a client is implemented is by nature conservative. Now there's a reason for that. Obviously, when you're launching a new relationship and doing a new implementation, there are many things that could go wrong and have gone wrong in the past. We don't believe that to be the case, but that's really a big driver of our guidance this year.
Then there's also an element of any new account needs to be reserved appropriately, and there's some additional things that flow through the P&L that I've talked about. We feel like the guidance is appropriate for where we are and what we look like in the year 2026. We will see how the year plays out, but we're hopeful that we can outperform.
Perfect. Why don't you talk about the seasonality? Can you discuss some of the factors contributing to the back end seasonality projection and, you know, as we think about the fourth quarter 2026 and the run rate into 2027 to, you know, to kind of bridge that as well?
Sure. There are two drivers of call it seasonality or the shape of the year. The first is just with any risk business, and because we have a large percentage of our revenue on the risk side, you know, we follow that natural progression of fourth quarter being a sort of better quarter from an expense standpoint as holidays and there's less claims. That's not a major impact. What's really driving the favorability this year is, number one, the fourth quarter will not include some of the conservative reserving that I talked about when I talked about the new business. As we ramp up new business, we're adding to the reserves as standard methodology on the accounting side.
As we reach the appropriate level of reserves, that will fall off. The fourth quarter will look better than the prior three quarters. The second piece is we're expecting some adjustments to contractual reimbursement terms. The way we're projecting MER through the year, we have some claims expense that we believe will trigger some contractual adjustments to the terms throughout the year. That will flow through the fourth quarter, but it would be for the full -year of 2026. That'll make fourth quarter look better than it should.
That's why when we discussed during our call the progression of the quarterly EBITDA for the year, we said we're shooting, we believe it'll be $20 million or so in the first quarter, about the same in the second quarter, and then $10 million-$50 million improvement sequentially in the third and fourth quarter. Now, if you did that, you're gonna get to a number that's probably much higher than what we expect the run rate to be. We said in the fourth quarter, we probably think a good reasonable run rate for the business is probably around $150 million. The reason why the fourth quarter would be even higher than that run rate is the adjustments I talked about, which are not gonna continue on to 2026. They'll be smoothed out through, sorry, to 2027.
The $150 million is probably a good number to think about in terms of what we expect the run rate in the fourth quarter to be.
Perfect. Why don't we go, you know, a question that everyone always talks about, cost trends. Why don't we jump in and kind of give us your thoughts on how the cost trend's shaping up. What are you seeing in the cancer side? What are you seeing in the cardio side and any other areas that you want to speak of?
Yeah, I think on the cardio side, we're actually seeing trend that's a little bit lower than we expected. It's really early in the year. We really don't have a ton of claims data, so it's hard. I know everybody's interested and wants to talk about what's the trend shaping up to be, but as we sit here on March 15th, we have only a very small percentage of run out. We have some authorization, some claims data, but it's very incomplete. I would say on the cardio, based on that, the cardio is probably a little bit lower than what we had been expecting. Not a ton. On the oncology, on average for the year, we're probably still around the same that we expected. Oncology tends to move around a little bit more.
No real change from what we talked about in the fourth quarter, which is stable from last year.
Perfect. Are you seeing any, you know, provider pushback, prior authorizations? You know, that, you know, there's been obviously a lot of noise around that. Anything changing or anything developing there?
Obviously there's been a lot of talk about that. I think the good thing about our business is we really like to think we are a place in the ecosystem where we're trying to facilitate things working better. Obviously, ultimately, we wanna make sure that the patients get the right treatment, and we can manage cost that way, and there's a lot of opportunity for that. Because of that, we haven't really felt any pressure or, you know, we tend to be very clinically based, and if anything, I think there's more of a movement to do more of the things that we do at Evolent than I think some others that are more sort of blunt force methods on the authorization side.
Perfect. Let's move over to the Performance Suite, the new contracts, MER assumptions. I think you're now assuming 103% on that book. Is there any way to frame the, you know, kinda how conservative that is relative to historical assumptions and also your historical actual experience?
Yeah. That assumption is not new. That methodology that we use to arrive at the 103% is not new. I think what is different this year is there's just a much bigger portion of new revenue coming in, which is one, shedding a bigger spotlight on that, but also it obviously putting more pressure on EBITDA. That's really caused by two things on new accounts. One, when we launch a new contract, and this is not different for us than I think any other MCO or value-based provider, we build a set of reserves that go along with claims data that we're seeing. Those we call that explicit margin, or it's also referred to as provision for adverse change. That's a big portion. We talked about $13 million of that flowing through the P&L.
That's not recurring unless there's a meaningful change in claims volume. That just sits on the balance sheet and acts as a buffer to make sure that we are appropriately reserved. Again, because of the amount of new revenue that we have, that number's higher than normal, but the methodology has not changed. The second piece is any new business will be reserved in a way that if you compare it to existing business, it'll be more conservative. We do build in some buffers. Sometimes there are a lot of issues at the beginning with implementation, data flow, even network connectivity with the providers. We wanna make sure that we're giving ourselves enough time to really make sure all those things are resolved.
Finally, the third piece is that it just takes time for us to impact MER. We have, you know, an initial period of time where we're getting up to speed. Again, we're educating the providers. We're incorporating our workflows into the client systems. You don't really see an impact on MER until later. Those factors really cause us, you know, to feel like we're being more conservative, but I think all of that is based on our historical experience. It has improved over time, but we haven't seen enough to be able to change the methodology from what we've used in the past.
Moving over, you talked about earlier about the exchanges, you know, about the marketplace. You know, can you talk a little bit about what you're seeing versus expectations? I know this is early on. How should we think about the wiggle room around that business in terms of membership and earnings?
Yeah, it's probably too early to really tell what the final impact is. We had expected in the year to start at a certain level and then have it decline quickly because of the nature of the membership subsidies and how they work. People sign up, and once they get their premiums, they just stop paying them, and then ultimately they're kicked off the membership roll. We're at this point in time where we're starting to see what the impact is, but we probably need another month or two at least. It's not just us. I think the entire industry is in the same boat. I would say that things have played out generally the way we've expected, but it certainly could change over the next two months.
Okay. Wanna move over to Medicare Advantage. You know, with respect to the MA plans, how should we be thinking about this business in 2026? Obviously, some of your clients have had, you know, have had significant growth. Does that have any impact on expectations? Do you have any concerns about the enrollment, you know, how it's gonna impact the rate environment, you know, as well?
We have experienced some growth with some clients that are more heavily weighted towards Medicare Advantage, which is good. Unfortunately, when you look at our membership, Medicare Advantage, particularly on the TNS side, is only 12% of the total members. It's growing very well. It's just growing off a very small base, so it hasn't really offset the impact that we expect from the exchange declines, for example. You know, I do think Medicare Advantage is going to continue to be a growth driver for us for lots of reasons. I think, you know, a lot of people are going through some rationalization in markets and membership in that business. Long- term, the structural trend, I think, is unchanged and we're really looking forward to continue to penetrate that market.
I mean, I guess this dovetails, you know, with you know, managed care plans are struggling to maintain profitability. Can you talk about how this is impacting your conversations over new deals, pricing margins and so on?
Sure. Yeah, I think there's a version of that that's a glass half full, which is, especially with the revenue pressure and the rationalization that's going on, there's obviously a ton of cost focus. The glass half full is that's really great for our business. This is what we help people with. We help them do it in the right way. We help them find pockets of opportunity. Yes, our pipeline is bigger than ever. We're getting a lot of inbound calls, and we have a lot of demand for our products across the spectrum that we serve. The glass half empty side of that is certainly the clients are under pressure. They're negotiating as hard as they've ever negotiated. They want concessions.
They want pricing to be better. We're just managing through that. It's a bit of a you know of a two-sided story here. We're very hopeful that we'll be able to grow much more than the pricing pressure that we'll face over the next 18 months.
Let's go a little bit more into the pipeline. You guys have done a great job expanding the business. You know, can you go more into specifics about, you know, what type of, you know, how the pipeline looks like currently, what type of managed care products are driving the most demand? You know, how is cross-selling, how much the growth is cross-selling? Is there still momentum there? You know, go from there.
Yeah, the pipeline's good. I think there's a good mix of existing clients that we're trying to cross-sell to your point. We do have a lot of clients that are already using multiple lines of business that we have. You know, the demand really right now appears to be coming more heavily towards the risk side. I think people want, for a variety of reasons, their vendors to be more aligned with them, and they view the risk business as doing that, the risk model as doing that. Obviously, that's something that we are excited about, but we're very, very mindful that that adds volatility and that adds risk.
You know, I think the good news is we have enough discussions where we have enough revenue this year and next year and even into 2028 that we can really try to select the best partnerships for us and make some bets. I, you know, I think the oncology is getting a lot of focus just because of the cost trend there and particularly on the risk side.
The enhanced contract structure, you've been getting favorable feedback. Everyone, you know, kind of a comfort with that. Did that take a lot of negotiation, a lot of back and forth, or was a lot of, you know, were the managed care plans very open-minded to this?
I mean, there's always a negotiation in the sense there's a discussion, but I think it's a very rational one. I think when you sit down with them and you show them what are the things that Evolent brings to the table, what are the things that we can impact, and what are the things that really they control, whether it's unit pricing or membership mix, those types of things. I think it's always a negotiation and something that takes a little bit of time. You sit down, you look at the data, and they see the path of why we're trying to structure it that way. They also want us to continue to thrive. I mean, that's gotta be a partnership that works for both. We've been fortunate where people have been able to see why we're trying to structure it that way.
I think you mentioned that the contract growth is, you see it as being very robust post 2026. You know, kinda give us a longer term. Do you think you can sustain the numbers you've been putting up from a growth perspective beyond 2026 into 2027, 2028? Kinda what's your thoughts, you know, longer term?
Yeah. My comment was more around, I think, you know, we all feel like we have enough revenue. Even if we didn't grow, like just a Highmark contract being a mid-year May start, just when you annualize that contract, it's so big that it'll give you a nice tailwind on the revenue side, even if we didn't add any new accounts. Of course, we're expecting to grow some more. Really what we're focused on is making sure that we're growing in a smart way, in a profitable way. You know, we will always have some pressure because of the accounting side. You know, that's something that we'll have to manage through. The pipeline is robust. We will have opportunities.
It's just, again, can we find the right partnership under the right terms, to continue to grow beyond 2027, 2028, knowing that we also are focused on EBITDA and profitability and not just the top line?
Yeah. That, you know, that's the next question. Contract growth versus profit growth. How should we think about that? You know, the growth versus profit evaluation. How should investors view the latent profit upside in the business? And are you getting to the target margins on Enhanced Performance Suite contracts in accordance with your multi-year targets?
Yeah. I think the answer is yes. We feel very confident about getting to the target margins that we've talked about 7%-10%, especially as a book of business. We will be selective in how we grow. We will grow if we know there's a really good path to profitability in the contract. Again, the first year is always tough. We are hoping to avoid mid-year starts because that does create that volatility in the year and the pressure in the year. If we have an opportunity at a big contract that in a way that we think is gonna create a lot of value long-term, I think we're really gonna do that at the end of the day. That's why we're here.
Especially because a lot of the pressure comes from the accounting side. It's a margin issue, it's an excess margin issue. We know that once we ramp up and really start accelerating, we can make an impact, and that should create earnings down the road.
Perfect. Why don't we switch over to capital structure and balance sheet? You know, do you wanna discuss some of your goals for improving the balance sheet over the next 12 months, and then we can go into more of the portfolio review type of a perspective?
Yeah. I think our goal is to delever. We have far too much leverage for now. I think it you know, especially when you think that there's a lot of opportunity on the risk business that we wanna take advantage of, the balance sheet needs to be appropriately sized. You know, I would say there are two things that we're looking at. One is we just need to execute and convert revenue into profitability. We talked about this. I think there's a ton of opportunity to do that over the next year. We're very hopeful that by the fourth quarter, the leverage you know, even though it'll peak 'cause of the progression of the quarters, by the fourth quarter, we start reversing that trend and we should continue down that path.
That's one. The second piece is we're actively looking at any opportunities to delever above and beyond just operating the business, whether it's liability management. You know, we have maybe other levers that we can pull internally. We would always consider asset sales at the right price. Right now, you know, I think people should know that we're actively looking at all those options. Right now we're just making sure that we can execute.
Okay. You know, on capital deployment priorities, are you just entirely focusing on debt pay down, or is there potential for acquisitions and, you know, kind of your-
I'd say the potential for acquisition is very, very low. We're very focused on debt pay down and cash flow at this point.
Okay. A portfolio review. You know, I said, you know, think about the risk rewards of any divestitures, anything from that perspective.
Yeah. That's an area where it could be super interesting. It could be a way for us to delever quickly. That's not something that we take lightly. You know, number one, you have to see the trade-offs of losing that cash flow versus what are the proceeds and what are you able to do with those proceeds? How much cash interest expense can you really bring down? What are you doing to your maturity profile? We can't look at asset sales in a vacuum, and you don't really control necessarily an asset sale. You need buyers at a right level. Again, I think the message is we're looking at all alternatives. We're looking at everything that might create value, which would include delevering. That's just not something that we can go into any more detail today.
Okay. Let me switch gears to competitive dynamics. You know, what are you seeing on a competitive front from large peers, either insourcing or building out this business? Kinda what's the playing field look like at this point in time?
Yeah. I mean, I would say there are plenty of competitors out there. I don't think we see competitors that have nearly the depth and breadth of services that we have. I think in any given RFP or any given account, there may be very formidable competitors that can do some of the things that we're doing. We're really trying to differentiate ourselves by the scale that we have and the ability to you know, be a agnostic provider. That's not always the case, especially with the assets associated with larger payers.
Today's day and age with the business that we're in, with the auths and the PR element of it, that's a very important component of it, to be able to say you have somebody who's independent and able to provide the service in a way that's transparent and really works with provider. We feel really good about how we show up. Yeah, there's plenty of competition and there's tons of opportunity out there.
Let's shift gears to AI. Obviously, this is a, you know, big discussion point, and obviously AI is becoming a more important role in healthcare and in your business. What are you seeing as the role of AI? Obviously, we know you guys are obviously, you know, adopting it. Can you speak about the pros and cons as it pertains specifically to your business and how far along you're on the spectrum of AI opportunity in your viewpoint?
Yeah. I think we're in the game, but we're still early innings. I think we talked about some of the cost cuts that we were able to effect last year, you know, I think when we look at our workflow and you look at the clinicians and the providers that we employ to support other providers, the AI opportunity to date has really been more on the back office, making their lives more efficient, create more efficient workflows, being very targeted. We're really excited about what we think AI can do closer to the front line to make case reviews more efficient, to identify auths to automatically approve those types of things which are more closer to the case review and the physician support. You know, I think the pros are obvious.
I think there's tons of opportunity to deploy that. The cons on that is it you just gotta do it in a way where it doesn't impact our trusted relationship with physicians. Part of what makes Evolent different is we are a clinical-based specialty management company. We're in the ecosystem. We support providers. We don't get in the middle of the patient-provider relationship. You wanna deploy AI that's consistent with that. You don't wanna just take the human factor out altogether, or if you do, you wanna make sure you do it very carefully, and you do it in a way where the physicians we support are feeling like they continue to be a trusted partner with us.
Perfect. Well, we're running close to the clock here, so one final question. Is there anything that you would like to point out to the investor community that you believe is misunderstood or underappreciated at this time?
Yeah. I think what's underappreciated is the base of revenue that we have. You know, I think, Mike, you and I talked about how the MCO business in general, not just us, we're all trying to get through the other side of a rough patch. I think people are adjusting their business, adjusting membership, the markets that they're in, and so we're trying to follow and support our clients as much as possible. We have the benefit of having an amazing base of revenue. Even if we didn't grow revenue and we just executed and took advantage of the opportunity that we have already in-house, there's a ton of embedded earnings in our company, and we should start to see that late this year come to first in 2027. This is not a sales-dependent story. The sales should add.
It really is about executing on some of the things that we are already doing and shown that we can do. Whatever else growth comes on top of that is just additional opportunity.
Well, it's a great way to end it, Mario. Thank you very much. I think it was a great conversation. I learned a lot about the story, and appreciate your time today.
Thank you. I appreciate it, Mike. My pleasure.