Claritev Corporation (CTEV) Earnings Call Transcript & Summary

All right. We'll get started. Shawna, if you can proceed.

Sure. Thank you, Carlos. Good afternoon, everyone. This call is being webcast and can be accessed through the Investor Relations section of our website at www.multiplan.com. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business, which are discussed in the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2020, and our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2021, and other documents filed or to be filed with the SEC. Any such forward-looking statements represent management's expectations, beliefs and forecasts based on assumptions and information available as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, please note that we assume no obligation to do so. With that, I'll turn it back over to Carlos.

All right. Thank you, Shawna. So good afternoon, everyone. My name is Carlos Consuegra, part of the health care technology and distribution team at Credit Suisse. I appreciate everybody joining us. Next up, we have MultiPlan. From the company, we have Mark Tabak, the CEO; David Redmond, EVP and CFO; Luke Montgomery, SVP of Finance and IR; and Shawna Gasik, AVP of IR. A little background, MultiPlan uses technology-enabled provider networks, negotiation, claim pricing and payment accuracy services as building blocks to customize health care cost management solutions for medical and dental payers. I have some prepared questions, which I plan to cover. But if anyone in the audience has any question they would like me to ask for them, you can e-mail me at [email protected]. And with that, I'll begin.

Thanks for joining us today, Mark, Dave. For those unfamiliar with MultiPlan, can you give us a high-level overview of your business model and how each of MultiPlan's service lines provides end-to-end cost management for health care payers?

Sure. Thanks, Carlos, and we appreciate the opportunity to speak to this group today. Our mission is to deliver affordability, efficiency and fairness to health care market. We offer a single product, that product being affordability, which is supported by 3 distinct offerings. Our most mature product is our network service offering. We contract with 1.2 million medical providers to obtain discounted rates. When a payer uses the service and encounters an out-of-network claim, our service matches that claim to a provider in our network. We offer payers a lot of flexibility in how payers can use this network solution. They can use it as a primary network, as a complementary or a wrapped network to their existing network. This is our most mature product and represents about 30% of our revenue. We have an analytical-based service. This includes proprietary patented claims processing engine, an engine called Data iSight, and the application of other pricing methodologies and/or negotiation services to achieve a reimbursement level that helps payers control out-of-network cost, and providers will accept this as a fair reimbursement for that service. It represents about 60% of our revenue and has a 95%-plus acceptance rate by the providers. Our newest product, our newest offering, is a payment and revenue integrity service. This eliminates payment issues and helps to avoid and correct improper payments. This is a relatively new service, as I mentioned, representing about 10% of our revenue but is a fast-growing product for us. We have a unique position in the marketplace and a number of competitive advantages I just would like to highlight briefly today. We contracted 1.2 million providers, that's hospitals, practitioners and other health care providers. We have a huge and very difficult, if not impossible, database of charges, claims and provider credentialing data. We have a staff of over 350 claim negotiators. We have extensive scale, which means we can provide service excellence at a very high level of performance. We have a leading position with our payer customers and are operationally embedded in their claims processing systems and their IT platform for decade upon decade. We service all the major payers and, in aggregate, have 700 customers. We have a strong recurring revenue model that has consistently generated very high EBITDA margins, over 70%, and we generate very high cash flow with a year-to-date free cash flow conversion in excess of 73%, which gives us the ability and the confidence to invest in our business to deliver operational excellence for our customers and grow revenue and EBITDA for more than 4 decades. It's a virtuous cycle of performance.

Okay. So I know you guys reported third quarter earnings last week. If you can share some of the key highlights and takeaways. And also what do the results suggest about the trajectory of the business?

In the interest of time today, I'll give you a couple of the highlights, and I'll refer you to our press release on November 3, the script of our earnings call and the supplemental deck. But our Q3 '21 was the strongest quarter ever. And I cannot be more proud of delivering these results and in the 2,000-plus members of the MultiPlan family. We delivered record revenue and EBITDA with very strong quarter-over-quarter and year-over-year organic growth. We had record activity levels in terms of claims and flows. We added to our business pipeline, which is as full as it's ever been. We reported our fifth consecutive strong earnings report as a public company. We raised our 2021 fiscal year guidance for revenue midpoint and EBITDA. We refinanced $2.3 billion of debt and significantly extended maturity, and we conveyed our increased confidence regarding how the No Surprises Act would impact on our business, a very, very strong performance.

Okay. So as I'm sure you appreciate better than everyone, key investor concern has been the high-level customer concentration. And obviously, the concern has been amplified by some of the details emerging from the ongoing litigation involving your largest customer and a large provider group. How do you think about customer concentration generally? What is, if anything, you can say about the details emerging from the case, including concerns that you could potentially lose a major customer?

Both of these issues have been significantly misunderstood, and let me parse all those out. Look, customer concentration is a measure of this company's success. It provides us the scale we've achieved over these many years. It's a product of the industry structure. It's an oligopoly in the health care industry that we serve. And our success in penetrating these customers and maintaining relationships for more than 3 decades reinforces that comment. So it is an asset. And frankly, I'm really surprised that there's a concern about that and that there's so much dialogue about client concentration. Client concentration values the compelling value proposition we bring to this marketplace serving the payers, the providers and the patients. With respect to the litigation, I just want to give you a little background. For anyone in the audience that may have not been aware, in one of the Discovery documents that was inappropriately publicly circulated, our customer appears to have laid out a 6-year plan starting in 2018 that involves moving away from MultiPlan and its services and ultimately terminating our contract with MultiPlan. Let me be clear, this is a distortion. It's a misrepresentation. It's a toxic and malignant falsehood. This plan has never been enacted. We know from our discussion directly with the customer, we know from the financial results we have with this company, in fact, the words cannot be reconciled with the actual performance. Let me burden you with some real facts here and forget the words that you're hearing in the marketplace. Since 2018, when this plan allegedly was contemplated, our revenues with this customer have grown more than 30%, from just under $300 million to almost $400 million this year, including the COVID impact. This is a banner year for the relationship with this customer with record activity, record revenue, record projects and a pipeline of initiatives that have been implemented or in the process of being implemented, which will grow the business even more in 2022 and beyond. We have no indication or reason to believe that this is going to change. We anticipate significant growth for this company as we move into 2022 and beyond. The second point I wish to make here is that this is good business practice. Every well-run company, that customer, MultiPlan looks at their cost structure. But the interesting thing is we're not a cost structure. As that document makes it very clear, if you read it carefully, we generate revenue for the customer. We generate EBITDA for the customer. We lower the medical expense ratio for that customer. We improve customer satisfaction. And we protect the subscriber. We provide a compelling value proposition for that customer and the customers and the members that they serve. It's interesting to me that UnitedHealthcare hasn't commented on that. They haven't confirmed it. They've never implemented that program. They demanded that document to be taken down, which it has been taken down. The next point I want to make is that the individual on the stand, who's run that company for 15 years, was prevented from explaining. He tried multiple times to explain what I just articulated, and the attorney would not allow him to do this. Finally, we have a long-standing relationship with that customer that goes back to 1992. We provided compelling value to that customer. These allegations are misstatements. They're being misinterpreted, and they're being twisted and turned inappropriately. I also want to comment on a very important factor. Our role as an independent provider of claims processing sitting between the provider and the payer is one of the most important value propositions we bring to the marketplace. If anything, it's further testimony from both parties in this case -- a testimony, in this case, by both parties makes that crystal clear that the use of an independent data provider is critical. It was critical then, it's critical now and it will be critical in the future as we continue to grow and expand that relationship. So from all the comments that they made in the marketplace, the facts on the ground totally dispute these false allegations, which is a malicious attempt to slander the relationship we have with this client.

Okay. Mark, that answers a couple of the questions I'm getting in my e-mail right now. Another question is some of the speculations related to the internalization of your services that seems to hinge on the breadth of appeal and potential adoption of Medicare reference-based pricing approaches to managing costs for out-of-network care. Could you help us think about what the value proposition and how it relates or sort of competes with the services you provide?

Sure. Look, we have a Medicare-based solution that we call HST. It is one of the best products in the marketplace because it prequalifies the provider and it sets the expectations for the patient. And for certain plan sponsors, it's of great value. We're getting a lot of traction in the marketplace from regional health plans, TPAs and the broker community. That said, nowhere in the strategic plan do we envision this becoming a replacement product for the core products that our customer offers or that we bring to the marketplace. Our legacy core product, our network-based services and our analytical-based services offer a high degree of plan member protection. They essentially hold the plan member harmless and greatly reduce or eliminate the possibility that the member will receive a balance bill or a surprise bill. In contrast, when you have a reference-based pricing product like a Medicare reference program, inherently, it creates friction. The reimbursement to providers is substantially lower and less likely to be accepted by that provider. And hence, the member is likely to be balance billed and the employer then has to deal with the inherent friction. The better solution of this type is to try to manage this friction by wrapping a number of tools together, including networks, analytics and payment and premium integrity together to address these issues. While these products can be more cost effective at times and transfer the cost from the employer to the employee, it inherently results in a significant amount of friction that the employer's HR department has to address.

Okay. I'm checking my e-mails quickly, I have another one. So this one is regarding the No Surprises Act. You've said you do not expect this regulation to significantly change the volume of claims and charges you receive, your scope of services or your fee structure for servicing those claims. Can you walk us through why you are confident about that statement?

Yes, it's a very accurate statement. And in fact, the legacy MultiPlan offerings of networks and analytics are very compatible with the No Surprises Act because it holds that member harmless from balance billing. But if you look at the No Surprises Act, it's still very new, and our payer customers are still working through the details. And they've come to us to help them firm up their strategies. So you can surely appreciate there's a lot of moving parts here, but let me give you a couple of relative message points here. First, the No Surprises Act has significant complexity. It increases that complexity. And that complexity plays to our strength, and our customers are asking for that help and need our help to achieve appropriate compliance with this new legislation. Second, we are at the strategy table with our customers as we've had literally hundreds of discussions with them, and we had 80 active implementations underway and over 100 customer opportunities are progressing through our pipeline. They need our help, and they want to our help and they've sought us out. Third, payers are going to continue to send us surprise bills for processing. Despite the emphasis on the regulation on a median in-network rate or a so-called QPA, a qualified payment amount, that is not a rigid standard because the payer can't force the provider to accept that. So the payers will still need our capabilities to process those claims, adjudicate those claims and deal with the conversations and negotiations with the provider community. Fourth, we do not believe our pay-for-performance culture is likely to change in any way. We expect the historic methodologies used to calculate our identified savings will remain intact. And finally, it's important to recognize that the No Surprises Act related to claim activity only represent a small slice of the marketplace, like 10-or-so percent of volume and all claims that should be implemented under that volume. So when you step back and look at the big picture, what you're gleaning from our discussion and implementation projects, we feel confident that the opportunity is greatly enhanced for us. Like I mentioned earlier, there's still a lot of moving parts that we need to address. But at a high level, we think it embeds us even more with our customers. And it has been the case across the history of the company. We see more opportunity coming out of this.

Okay. Perfect. Yes, thanks for answering that investor question. So I'm going to switch back to the questions I have. Some of the market participants believe the NSA has the potential to drive more providers into payer networks. What is your perspective on the likelihood of that outcome?

Look, we have on-the-ground experience in that because we have our own 1.2 million provider network. So we speak from hands-on, direct experience. Obviously, the decision to go in-network is a complex, multifaceted decision that has to be made. And the NSA, the No Surprises Act, is still evolving and it's going to continue to evolve over time. That said, from where we sit today, based on our experience with our own provider network, we do not see a mass movement of out-of-network into in-network contracting. As I mentioned earlier, we have 1.2 million providers. And our team of 100 professionals who take care of that network have had hundreds of conversations with providers across the entire specialty. And we see no indication of a mass movement of out-of-network into in-network. Our sense is that the No Surprises Act actually potentially could diminish the incentives for providers to move in-network, but that will play out over the coming months and years.

Okay. As you think about growing your business, what is the strategy road map and what key opportunities are you focused on? And also, if you can touch upon how does the business evolve from here.

Sure. Look, no company can stand still. And in our 40 years of business, we have not stood still. We're always thinking about how to evolve the business, grow the business and expand the business to continue the growth and reconfigure our assets and capabilities and, additionally, add new ones, either organically or through M&A. If you look back 10 or 15 years ago, we were simply a network business. Since then, we've added an analytical business, which now represents 60% of our revenue. We've added payment and premium integrity products over time. We've been successful because we evolve over time, understanding the needs, the wants, the likes and dislikes of our payer customers and provide a compelling value proposition to the marketplace. And we've grown historically year-over-year. When I think about growth, we think about it in 3 segments. We think about enhancing our existing products that we provide to our customers today. We think about extending into adjacent underpenetrated areas like government business, Medicare, Medicaid, workers' compensation, the medical component of auto insurance; and then expanding into new services, addressing other needs that the health care industry stakeholders feel they need, particularly in the consumer area and in the provider area. It would be much too complicated to cover all those growth initiatives today, and maybe we should do it at a future investor call, spend some time talking to that in a bit more detail. We're excited about the opportunities for growth we've created over time, especially in extending into those adjacent areas. Our payment and revenue integrity program, for example, has been a terrific product for us. And we recently did an acquisition earlier this year where we purchased Discovery Health Partners; and the second one where we purchased a company called HST, which is in the Medicare reference-based pricing. Both of those products accelerate our growth by providing more services to the marketplace with those 40-year established relationships we have with those with 700-plus customers over time. The rationale for MultiPlan going public was to provide additional financial capital and additional intellectual capital to accelerate our growth through our strategy of enhancing the existing product, extending into underpenetrated markets and then looking towards products to bring to the consumer and the provider segment of a very complex health care system.

Okay. I'm switching up to a couple of questions that have been coming inbound. One investor is asking, regarding the creation of Naviguard and then also if you have any comments regarding that and circa their employees.

Look, Naviguard is a reference-based pricing product. MultiPlan has a product called HST, which is a reference-based pricing product. It has a market appeal for a very narrow segment of the marketplace, that is regional health plans and third-party administrators. Inherently, with the achievement of the reduction in cost, by transferring the cost from the employer to the employee, it creates a lot of friction and abrasion: abrasion with providers because of the low payment, abrasion with the employer or the consumer or patient because of additional out-of-pocket costs. It is not designed to be a replacement product. It's designed to meet a specific need for a small segment of the health care industry today.

Okay. So switching it over to a little bit of the capital structure balance sheet. The company carries a pretty fair amount of leverage. If you can touch upon the priorities of capital allocation and how you see the balance sheet evolving over the next couple of years.

Let me touch on that briefly, give you a couple of headline thoughts. And then I'll ask my partner, Dave Redmond, to give you a bit more granularity. Look, first and foremost, is investing in the business domain our high level of service and develop new products and offerings. That's the primary driver, and that's the primary use of our capital. Two, there are opportunistic value-creating M&A opportunities much like the acquisition of Discovery Health Partners, which accelerated our payment and premium integrity product or HST, which accelerated and enhanced our reference-based pricing capabilities. That would be a second use. Third would be repayment of debt to delever the company. And finally, as we announced earlier, this year, we announced a share buyback program. Dave, do you want to add to that?

Sure. With respect to your question about our leverage, the level that we carried for several years as a private company was high given the recurring nature of our revenue and our high EBITDA margins and cash flow, and both our private owners and our bondholders were, on the whole, very comfortable with that. We understand that as a public company, the public equity market is less comfortable with the level of debt we previously had, and they're more comfortable with something in the range of 3 to 4x EBITDA. Today, when you look at our debt, we have about under 2.7 turn on our first-lien leverage. But when you take all of our operating debt, which includes our term loan, the 5.5% senior secured note and the 5.75% unsecured note, our leverage is about 4.25%, which is a little bit higher than the public market would like but aggressively going to that 3 to 4 range. It only gets above 5 when you add in the convertible PIK notes, which were issued as part of the transaction in October of 2020. They do not mature for about 7 years out there. And certainly, given where the stock price is today, people look at that as debt versus equity. Ideally, we would hope that, that debt would convert. So I think from an operating leverage, we're pretty -- we're getting into the 4x range, which we feel comfortable with. And only when you add the PIK notes, which is a long-term maturity that, hopefully, over an extended period of time, we'll convert do we get above 5. So we've extended the maturity of all of our debt essentially out 5 to 7 years. So we have great collectibility in our overall debt structure, and we will continue to bring down our leverage ratios.

Okay. I just want to continue on the capital allocation strategy quickly. And then given the priorities you've articulated, how did you arrive at the decision to repurchase shares as you've done recently?

Dave, do you want to start on that?

Sure. Obviously, we do not make capital decisions in a vacuum. And what we do at any given time is a function of the relative attractiveness of the opportunities and the company's position. We believe in our business and that our stock is trading well below its intrinsic value, and we are opportunistically taking advantage of that. We think it's currently the highest IRR opportunity with the lowest execution rate of pretty much any project we could have financed at that point. We prioritized, as Mark has said previously, on investing internally in our business to expand our service offerings. We've continued to do that regardless of any stock buyback. We look at M&A opportunities where we can grow our business strategically and that are financially attractive. We have a $450 million revolver. And as most of you saw at the end of September, we had $225 million of cash. So we had plenty of cash opportunity and financing available to capitalize on market opportunities. And third would be to repay debt to deleverage the company and last, share buybacks. As we look at the intrinsic value of the share buyback versus paying down some 4.75% debt, we believe that the higher IRR related to our stock buyback. We announced the $250 million authorization. And as we said last week, we set out aggressively executing against that authorization and did about $100 million of stock buybacks through the end of October.

Okay. I'm going to turn back to a couple of investor questions here, just curating real quick. This one is for Mark. You touched upon before the falsehoods on your customer leaving. And just this investor wants to know from the discussions that you mentioned, does that mean you've spoken to the customer recently? And if so, when?

We talk to our customers regularly. We have a dedicated team that services that customer. We're in regular conversation with that customer on a host of interactions. We would not be able to launch the kind of initiatives that we have or harvest the growth that we have without daily conversation and interaction with our customers across the entire spectrum.

Yes, okay. Another investor is asking regarding any management changes, positions that are outstanding. I don't know if you can touch upon that.

As we announced previously, Dave Redmond, our CFO, will be retiring at the end of the year. And we're in the final stages of identifying his successor, and an announcement should be forthcoming soon.

Okay. Also, they're asking small or large business development opportunities in the near term.

Near term, we're going to continue to do what we do. We're going to understand the needs of our customers, provide solution to those customers by reducing their medical expense, driving their top line revenue to make health care more efficient, more fair and more cost effective. MultiPlan sits in a very unique position and that we serve the triad of patients, providers and payers. And that's a position that we cherish, and that's the responsibility we've taken seriously over these past 40 years, and we've provided compelling value to all 3 of those groups, in addition to driving tremendous growth and success in MultiPlan for our owners and shareholders. And we will continue to do so in '22 and beyond.

Okay. Just looking here really quickly to any more questions. And one investor is asking regarding the 2020 budget posted by TeamHealth transitioning away from shared savings, contributing 20%, 25% earnings, maybe you can touch on that.

Say that again?

Yes. So he's asking why the -- so like the 2020 budget posted by TeamHealth is transitioning away from shared savings that contributes 20% to 25% of earnings.

Look, that document came to light in one of the Discovery documents. It was inappropriate to have that posted on the TeamHealth website. And as I said before, we have a terrific relationship with that customer. We've had a terrific historic relationship with that customer. More importantly, we have a growing and expanding relationship with that customer for the balance of this year and into '22 with a lot of initiatives that will grow and expand our relationship going forward.

Okay. Yes, that's about it. Just anything else I didn't cover that you want to highlight, just giving you a couple minutes if you guys have anything else. And yes, appreciate your time on here.

Well, look, I guess my closing comments would be the following. Look, perhaps in MultiPlan is a new story, perhaps it's difficult to understand, and we appreciate the time to tell our story. We've been in business for 40 years. We've provided a tremendous amount of savings. Last year, we identified $19 billion of savings opportunities to our customer base. We do that with 3 offerings: networks, analytics and premium and payment integrity program. We have a recurring revenue business model that provides robust EBITDA margins and a high conversion to free cash flow, and we invest that cash flow internally to develop new products and services and be opportunistic in our acquisition. I ask you to get burdened with the facts and not the words that you hear because I think the comments and concerns about client concentration is a validation of our success and our value that we bring to the marketplace. And the concerns about the document that was inappropriately posted and then was demanded by United to take down was another inappropriate malicious move on their part because what it does, it distorts the facts that we provide a tremendous value to that customer and other customers as evidenced by the more than 30% growth we've had over the past 4 years and the continued growth into '22 and beyond. And I really do appreciate the opportunity to tell our story and try to give you some fact-based and reality and veracity to these erroneous statements that are being propagated in the marketplace.

Perfect. Okay. Mark, one final thing just real quickly that one investor sent, do you guys still expect to give '22 guidance in Q4?

Yes. We take budgeting very, very seriously. We do a granular bottom-up budget. We're finalizing our budget over the next couple of weeks, and we will give guidance early in '22 for the year. So stay tuned for that.

Yes, perfect. All right. I appreciate it, and thank you very much.

Appreciate the time and interest. Thank you very much.

Thanks again for your support. Bye.