Our next session here, I'm Steven Valiquette, the healthcare services analyst here at Barclays. This session will be with Evolent Health. With us from the company to my right is John Johnson, the company's CFO. This will be a fireside chat. I think with that, I guess we'll just we'll dive right in. You know, this is a company that I have never ever officially covered, so not 100% plugged in on some of the nuances. We'll dive into some of the things that are, you know, key within the company. I think first there's been, you know, a lot of evolution within the company and also just within value-based care overall, obviously within the industry and even for, you know, for you guys as well.
Just start at a high level for others that might be less familiar with the company, just do a kind of a quick walk-through of how that evolution has occurred over the past 5 or 10 years or so, from, you know, more of a technology or solutions type offering to more of a greater services offering. We'll just kind of expand from there.
Great. You know, Evolent was founded in 2011, pre-Affordable Care Act, with two basic theses. One is that what we now call value-based care was inevitable. It's the integration in some way of the financing and the delivery of healthcare. The second thesis was that the best entities to drive that transformation would be the health systems across the country. They're the best capitalized, and they had the most to lose in the shift to value. The first several years of Evolent's growth were focused on building tools that could create clinical value for providers managing risk. We found two things. One is those tools really worked. They created a lot of value, and they improved the health of the patients that we worked with. The second was that our second thesis was wrong.
Health systems were not well-positioned to drive the transformation to value. We then, circa 2017, embarked on an evolution to point the tools that we knew worked, created real value for patients and for health plans. We sold them to health plans. We now generate more than 95% of our revenue from health plans. They're our major customer. Our major user of our technology is physicians. Our primary beneficiary is the patient themselves, deliver better quality outcomes for lower cost. We primarily now focus on specialty management in oncology and cardiology, musculoskeletal, the three most expensive, most complex conditions that insurance companies face. We've been growing nicely.
Organic CAGR over 35% over the last 3 years, and excited to continue to drive growth into the future.
Okay, great. Yeah, with that business mix now with, you know, majority of revenues now coming from the payer side, you know, less from, you know, the selling solutions to providers, my guess is that mix will probably, you know, stay that way, you know, maybe even move further up going forward. I guess somewhat tied into that based on what you described. There's been a wave of, you know, public companies describing themselves as technology-able providers. Some of them have come from it from the provider side first with, you know, physician clinics and tried to add technology later. Other ones did the technology first, then did more of the, you know, the VBC contracting, et cetera, which is, you know, you guys fall more into that camp.
Maybe just talk about how that maybe gives you some extra competitive advantages, as far as your evolution versus somebody maybe doing it the other way around.
Yeah. You know, I'd paint a couple of pictures on that. I think the first is we believe there's real value in our platform being independent. If you think of our core competitors, in particular in the specialty management space, they are universally at scale owned by health plans. You have AIM, which is owned by Elevance, and you have eviCore, which is owned by Cigna, both great companies and not independent. We find a lot of our customers prefer, where possible, to work with an independent entity. I think that brings some real value. The second element that I think is of particular value in our model is it is highly scalable because we do not have to employ physicians.
We can work directly with physicians and provide them tools, but we can contract with the payers and get lives that way through our platform. I believe that has really helped us to drive both the top line growth, of course, that you've seen, but also, and more importantly, growth in earnings and growth in cash flow, which we believe at this point in time also differentiates us as a value-based care public company that makes money.
Okay, great. Yeah, somewhat tied into that too, I was gonna dive into that next is, you know, across a lot of the publicly traded VBC companies, there's some pretty big variation in how many of the physicians are directly employed versus how many are just contractually affiliated. Maybe you just touched on that. Maybe there's some pros and cons to both sides of that. Is your, is your plan to mix, you know, over time and going forward, you know, gonna be still more on the affiliate side or?
It is. Yeah, you know, I think we have a humility that those are different business models. The actual owning and operating of a physician practice is a particular business. The sort of evidence-based, value-oriented solutions that we provide, rooted in technology are a different business. That's not to say that we would never merge the two, but that's our bread and butter and that's where we're focused right now.
Okay, great. you know, and also maybe just help everybody in the audience for a moment here just on you know, the mix of the affiliated physicians, how much is really a primary care physician or PCP focus versus getting into various you know, specialist categories. Where do you see you know, more opportunity going forward from here?
Yeah. The vast majority of our revenue, which this year we've guided to $1.92 billion-$1.96 billion revenue. The vast majority of that is coming from the specialty space. That's working with oncologists and cardiologists and orthopedists and on down the list on the specialties that we manage. We also have a smaller business that is focused on the primary care side of the house. It's very analogous to an Agilon or an Aledade, familiar with those business models, affiliating with physicians, helping them to stay independent and participate in value-based care. We manage about $1.3 billion in premium through that entity and drive cash flow and, you know, nice little growth engine on the primary care side.
Okay, great. You know, another thing across some of the publicly traded VBC companies, you know, some are pretty willing to talk about some of the payer relationships and which ones are the biggest and most important. Other ones keep that very close to the vest. You guys have given some clarity around that. You know, you mentioned, you know, one or two of the bigger ones, I think earlier in this discussion. I think you disclosed that previously as well. I think you've also talked about some newer relationships that are driving a lot of the growth with like Humana and Molina in particular.
Maybe you could just spend a couple of minutes, if you are able to, you know, talk about some of the biggest relationships, but also, you know, the biggest drivers of growth from here, maybe from some of those newer ones as well.
Yeah, totally. You know, I think strategically, we are pretty oriented towards diversification here. That goes both for our payer customers and also for things like line of business and revenue and economic business model and other areas. You know, on line of business, about 40% of our revenue is in Medicaid, 35 is in Medicare, the rest is in commercial. On payers, post the acquisition of NIA, our biggest customers will be for the most part, the biggest health plans in the country other than United. We've got Humana and Molina and Centene, and on down the list, all very important customers. Importantly, we have lots of running room to continue to grow with them.
We've estimated that if we were to roll out our Performance Suite, which is the capitation risk-bearing product, from our specialty unit across all of the lives that are currently managed by our current customers, that's a $50 billion revenue opportunity for Evolent as a whole. A lot of running room within our existing customers.
Okay. You know, tying some of this together, you know, another way you can slice and then dice it. You know, you talked about more of the, you know, specialty focus and less on primary care. You know, within that, you talked about, you know, some of these payer relationships. Is it just serendipitous then ultimately for the company, whether the payer mix is geared more towards, you know, commercial versus Medicare or Medicaid, or do you have an intentional focus to increase that mix one way or the other?
We have no particular intention to inflect that mix. The products work equally well across all of those lines of business. I'd say we've had historically a specific focus on the government-sponsored programs, Medicare and Medicaid, because generally speaking, that's where you see the most clinical complexity, where we can drive the most value in our model. Products work, and we expect to continue to grow across all of those lines of business.
Okay, great. you know, another way to kinda think about these business models, you know, from covering all the managed care companies, you know, they talk nowadays about, you know, within their provider arrangements that maybe, you know, 65%-70% of, you know, all of their cost of care is tied into value-based arrangements. Within that, you know, you find that maybe only, you know, maybe 5% or a high single digit just on average is sort of true, you know, full global risk versus, you know, and the majority is still gonna be shared risk arrangements. Like, from your perspective, you know, just curious, how you think about that from your end. You know, are you know, more open to doing, you know, global risk? You know, shared risk preferable?
I mean, a lot probably depends on the terms and everything else, but just talk about your thoughts around, you know, both those opportunities.
Yeah, totally. A couple of thoughts. Our most value-creating product, both in terms of dollar margin to Evolent and dollar savings to our partners, is our fully capitated products. We call it our Performance Suite, it's where we're taking the risk for a particular scope and a particular specialty. That's, it's a great product. It's been growing quite quickly. As, you know, from where I sit managing the finances of the business, we also really like to have a deep portfolio of fee-based business. It's not subject to underwriting cycles, it's a highly reliable margin. In fact, right now, about 75% of our profits in this year, we expect to come from the fee side of the business, 25% will come, we expect, from the capitation side of the business.
That may evolve a little over time, but I wouldn't expect those ratios to flip-flop. Generally speaking, our orientation in all of these models is towards sustainable margins, both at the outset and over time. We articulate a general margin curve for our capitation contracts starting in the mid-single digits, call it 4%-6% for the first year, and growing into the mid-teens by year 3. Importantly, you did not hear me say that we lose a bunch of money in the first year. That's not our model. It is the model in some global capitation arrangements, and it's why we have been judicious in our expansion into global capitation through Evolent Care Partners.
Okay, got it. All right, just jumping around on a few other topics here. You guys closed your NIA acquisition, you know, Magellan specialty business, you know, not too long ago. Maybe just give us an update on the integration efforts and, you know, what's going on in that part of your business.
Yeah. Integration's going very well. We're 2 months in. We are very explicitly investing in the integration to ensure both we mitigate any risks that come up operationally during the integration and that it goes well. We've articulated two sources of important synergies for this acquisition. The first, and more near term, is on the cost side. We've articulated a $15 million cost synergy goal. The second and larger opportunity is this cross-sell opportunity I mentioned earlier, where with the addition of both the specialties that NIA can manage and their customers, there's not a big customer overlap between them and us. We now have, we believe, a $50 billion addressable market to cross-sell with our existing customers.
That is, very high on our priority list as we think about integration, and executing on that over the next several years.
Okay, great. You know, so with the potential for that to be, you know, a successful acquisition, maybe just talk about, you know, the appetite for M&A overall and also balancing that within your capital structure. You know, again, on the one hand, maybe some investors wanna see you know, pay down debt, but also you still wanna be able to grow. Maybe just, you know, tackle that whole thought on just capital deployment, managing the balance sheet. I guess that's gonna be our CFO question for sure.
We've been really explicit this year that our priority on capital allocation is delevering. We've set a target to exit this year under 3x net leverage, and exiting 2024 under 2x net leverage. We'll be deploying excess cash to pay down the debt, and driving towards those targets. On broader capital allocation priorities, we tend to think of it in these three categories. First, we invest into the development of the organic products. We spent about $50 million last year in R&D and capitalized software developments. We will spend a little bit more than that this year, ensuring that our products remain very strong and competitive in the marketplace. Second, on M&A, you know, we bring two key criteria to evaluating potential M&A.
Again, this would be after we deliver the balance sheet under 2. The first is we would seek M&A that accelerates our strategy. We don't wanna just buy other things to get bigger. One of the things that we love about, for example, the NIA acquisition is that we believe it's able to accelerate our path forward by expanding our addressable market in a meaningful way. The second is we are only gonna buy things that are accretive for us. Since we trade on an EBITDA multiple and generate cash flow, that lowers our potential universe of companies to buy somewhat significantly. That means we tend to be asset-led from an M&A perspective and identifying those assets that may come to markets that may fit those two criteria and be good cultural fits within Evolent.
All right, great. Just jumping around here a little bit more, you know, so from our, you know, lunch session today with our keynote speaker, you know, the majority of that discussion was tied into value-based care, and part of that was, you know, some discussions around bundling as well. You know, some of those government-sponsored opportunities have proven to be maybe not quite as profitable as some of the participants hoped they would be. You know, maybe, clearly could be different, as far as contracting directly with payers.
I guess the question is, if you can just give us an update on, first maybe just some cross-sell discussions that you might be seeing across the various, specialty therapeutic categories you're focused on and also, you know, the potential for bundling within that, and again, whether that's more on the payer side or government or both. Maybe just, you know, tackle that coming off of the back of the discussion around that from the keynote earlier today.
On the cross-sell opportunity, what I would say there is a great example of this is some of the announcements of our expansions with Molina that we announced last year, where we believe we've been able to drive real value for Molina in a couple of key states for them, starting in cardiology. They were able to see that value and chose to both expand with us geographically into other states and also add oncology as an additional service. It's a important part of our growth story here, both in the past and our target growth in the future. Lots of focus on that from a go-to-market perspective right now. Bundling the, you know, we have a perspective that many of our customers prefer to have fewer vendors.
you know, if they had their druthers, they'd rather have one highly aligned performance partner for a number of different specialties rather than buying several different high-performing point solutions. We believe that with the NIA acquisition, we now have enough specialty oomph to take together as a product to be highly meaningful in that conversation. you know, we got to prove that out and execute on the cross-sell, we're excited about that opportunity.
Okay, great. Building on that, and this question, you know, maybe you already have answered this, but just gotta throw it out there anyway. You know, as far as the sales pipeline, you know, I mean, a lot of the payer relationships, you know, you'll take on, you know, a certain portion of their membership. It might be smaller. If you do that successfully, then you'll get more over time. That's kinda how it works.
You talked about how the, you know, some of the payers just wanna work with fewer vendors, but how do you balance, you know, getting more share, you know, within each payer versus also building up the, you know, the, physician affiliations and everything else, doing that methodically over time and just proving that you can, you know, do it more and more on a larger scale and just, you know, gain more share within each payer?
Yeah. Importantly, in the specialty side, the health plan conversations come first and the provider engagement is just that. We do not affiliate with oncologists. We're working with them and we're their partner when they need prior authorization in our specialties. We're really focused in on the payer as our key customer. The way that you tend to be able to grow within a payer is geographically. The way most payers are organized is with local plan leadership that is empowered to make those key decisions inclusive of their risk partner on a specialty deal.
What we tend to see is you have a really strong national relationship that is supportive of local expansion, but the sale is at the local level to that local plan leader, whether it be a state market president or a county MA plan, in this state, in Florida.
All right, great. Running low on time here. Maybe a final question. This just kind of piggybacks off one of the comments you made earlier. I think you said that you have payer relationships now with, you know, most of the major payers, maybe with the exception of UNH, if I heard you right. I wasn't sure with the backdrop there, if there was something that would prevent that or is that still an opportunity that you have, you know, going forward from here?
... you know, what the variables are within that.
Yeah. We do have a couple of services with United. I would say in an honest moment, they're not a big target customer because they have a lot of internal stuff, right? Our core customers are those health plans that need external support. The good news, from our perspective is there's like 250 million lives in the country who are covered by those payers.
Yep. Makes sense. Okay. Great. Well, with that, I think we're out of time. I wanna thank you for your time today and enjoy the rest of the conference. Everyone, thanks for being in the audience here today as well. Thanks.
Thanks.