Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Thank you, Abby, and thank you, everyone, for joining us for our next presentation. With our presentation, we have the team from MultiPlan Corporation. Let me walk you through the attendees. We have Jim Head, newly appointed Executive Vice President and Chief Financial Officer; Dave Redmond, Executive Vice President; Luke Montgomery, Senior Vice President, Financial and Investor Relations; and Shawna Gasik, Assistant Vice President of Investor Relations. And I just wanted to -- before I turn it over to Shawna for forward-looking statement comment, I just wanted to do 1 quick thing. One, I want to thank Dave Redmond for his many years of support of both me and our franchise broadly, always attending our conference and always being very gracious with his time. So -- thank you, Dave. And secondly, I just want to welcome Jim Head to his new role and wish him the best of luck. So with that, I'll turn it over to Shawna for its forward-looking statements, and then we'll go right into Q&A.

Thank you, Larry. Good afternoon, everyone. This conference 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 Larry.

Thank you, Shawna. And again, thanks to the team for taking the time and joining us at the conference. I thought it would be a good place to kick off as always. I know we have a mix of understanding of your company model. So I thought it'd be a great -- from an investor perspective, so I thought it would be great if we just kick it off with just kind of walking through -- give us possibly a high-level overview of your kind of service lines and your kind of your end-to-end cost management model for the payers. I thought it would be a good place just to kick us off, if you wouldn't mind, just -- we could just jump right into it, and then we can take it from there, Dave.

Sure. Thank you, Larry. I just want to make a couple of comments upfront because probably at the end, I'll have all these tough questions, and I won't be able to make a comment. But I -- as Larry said, we've been participating ever since I joined on the MultiPlan buying merger in 2010. In my opinion, this is not just because Larry's on the call. Larry has the best leveraged finance conference of any of the groups within the United States, and we have attended every single year. And amazingly, when I look at our top lenders, both term lenders and bondholders, the highest percentage of those attend Larry's conference and for good reason. So I thank you, Larry, very much. A lot of you actually, I knew way before I joined MultiPlan in 2010 when MultiPlan buy and merge. But I do want to say to many of you who have supported us wonderfully over these past almost 12 years, we thank you so much. Mark and I are very proud that every piece of term debt and every bond that we've ever issued at MultiPlan has been paid early and at a premium. And so when Mark and I joined forces in 2010, MultiPlan had about $500 million of revenues and about a 45% EBITDA margin. We've doubled those revenues and increased that EBITDA margin to about 75%. So revenue has gone up about $500 million and expenses have actually gone down. So we feel very proud of our record. And like I said, we are very indebted to all of you for the wonderful support that you've provided over these many years. And so those of you that have us on video, you'll know that the old CFO has a T-shirt on and a [indiscernible] Stanley Cup Champion Lightning T-shirt on and the new CFO has a sports code on. So that's probably the appropriate attire for old and new. But on your 70 years old, it's time to retire. So without further ado to answer Larry's really question, our mission at MultiPlan has always been to deliver affordability efficiency in the fairness to the health care market. We offer really a single product, which is a savings and affordability and fairness item. And that product is supported by 3 distinct service offerings. In 2010, many of you that are still with us that time, MultiPlan had 1 service offering. Basically, it was a network product, and that accounted for in excess of 95% of our revenue. In our network-based services, we contract with about 1.2 million providers to obtain discounted rates. When a payer uses this service and encounters amount of network claim, our service tries to match the claim against the provider in our network. Those contracts are signed by the providers and the pricing in our contracts are agreed to upfront. We offer payers a lot of flexibility in how payers can use our network. They can use it as a primary network or a complement to their existing network. Our network-based services today are about 25% to 30% of our revenues compared to, as I said, back in 2010, they were almost 95% of our revenues. Our second service offering is our analytics-based services, which includes our proprietary patented claims pricing engine Data iSight, the application of other pricing methodologies in our negotiation services to achieve our reimbursement level that helps the payers control out of network cost that providers will accept as a fair reimbursement for our service. This is approximately 60% to 65% of our revenue today. And the genesis a lot of this was a very small acquisition that we made in 2011 of MCN, which basically fueled the analytics-based services. The third service is the payment and revenue integrity services, which eliminate payment issues and help avoid and/or correct in proper payments and coatings. This is a relatively newer service that was created basically in 2014 when we bought an extremely small company. But -- and it now represents 10% to 12% of our revenue and probably is the most significant runway for real growth. We believe we have a unique position in the marketplace with all 3 of these service offerings. We contract with 1.2 million providers, hospitals, practitioners and other health care providers. We have a huge and difficult to replicate database of charge claim and provider credentialing data to staff able for 350 claims negotiators, extensive scale, which means we can provide service excellence at a very attractive price and cost. We have a leading position with our payer customers and are operationally embedded with our largest customers, most of which have been our customers for decades. We service all the major payers and have over 700-plus payer customers and we have a recurring revenue model that has consistently generated very high EBITDA margins in excess 70% over the last 7 or 8 years, and we generated very high cash flow with a year-to-date cash flow conversion of approximately 73%, which gives us the ability and the confidence to invest in our business to deliver operational excellence for our customers and to grow EBITDA and revenue for ourselves and our shareholders and lenders. Larry?

Thank you for that introduction, Dave. Dave, obviously, there's been a lot of information flow recently. And I know Mark has given some parameters at a competitor's conference. But I really curious, as you talk about your relationship with your primary customer or customers, can you talk about the importance of that relationship? How that relationship has grown, as Mark has highlighted, how the value proposition? And why at the end of the day, they are not going to terminate you as a provider of how they cannot replace you?

Sure. And as we stated before, our policies do not discuss specific customers. But when you look at our customer mix, obviously, we are the -- in most cases, the sole source or the primary source of all out of network claims with the major payers. And if you kind of use the abbreviation for the major payers and say, BUCA, it's Blue, United, Cigna and Aetna. All of those 4 are our top 4 largest customers, Anthem, Aetna, United and Cigna. And when you look at their memberships, it's kind of consistent with what our memberships are. So we have significant customer concentration, which we believe is a good thing. As we disclosed in our annual financial statements, our largest customer is about 33% to 35% of our revenues. All of you on this call can guess that is. And our second largest customer is 19% to 20%. That's been consistent. Will be consistent going forward. We had an internal meeting the other day, and we were talking about the forecast and the projections that we made in March of 2020. And Mark and I predicted what the 2021 revenue would be for our largest customer, and I think we're within $2 million to $3 million. We're 18 months out. And with COVID, we feel very good about being able to predict that level. But we believe, as we've said over and over, and Mark has talked about this constantly. Our customer concentration is a measure of our company's success and the scale that we have achieved. It's a result of the industry structure in the markets which we serve which are basically an oligopoly. And it's a mark of our success in penetrating that industry deeply with the value we create. Frankly, all the anxiety about concentration has been persistently out of proportion. It's one of the most misunderstood aspects of the MultiPlan story. We love the concentration. We provide a needed service to our customers. Auto network leakage is inevitable and managing cost of that leakage is critical to make health plans and health plan affordable. Doing it successfully means deriving reimbursement rates that are acceptable to both the payers and the providers, neither of which can be their own referee. We serve as that referee in Switzerland, if you will. I cannot really stress that enough. The key aspect of the durability of our business models is the role we play as a provider of independent pricing. Our Data iSight methodology, for example, is unbiased, fully supported and validated by independent experts. It's wide acceptance in the marketplace with very low appeal rates speaks really for itself. Additionally, what we do is neither easy nor easy to replicate. For over 40 years we have invested in intellectual and technological capital. We have evolved this company along a unique path. And because of that, we have a set of differentiated operating assets. I mentioned several of those above, including our network, the database of over 1 billion claims and over 3 petabytes of structured claims data from across 700 payer customers and proprietary processing algorithms that are deeply integrated into the claim management IT processes of our core customers. So we are deeply operationally embedded with our customers. And they stay with us because that works for them, because they have the scope to provide the service the -- that they need the scale to do it cost effectively, the expertise to form these services efficiently and the agility to adjust these services as the customers' needs warrant. What this means for our customers is high-cost savings, less rework and less churn.

Great. As an extension of that, in the new environment, no surprise in active biomaterial, NSA environment. Do you -- what is your outlook for kind of wrap networks? And will they be any way possibly used as a kind of a proxy for the in-network strategy or some of the -- pricing strategy for some of the payers?

I think, Larry, I'd probably honestly say I've gotten that question every year for probably 10 years is why people use not a network, why don't they just take everything in network. And it's not that simple. Some of the major players, their philosophy and their business strategy is to go into a market and identify if there's, say, 14 hospitals in Dallas, they identified 10 to drive deeper discounts and convincing the hospitals they can push volume to them. But they don't want every provider in every hospital in their network, part of their strategy. And the strategy from the provider standpoint is not every provider wants to be in network. Yes, you fix what the in-network rate is. But there are other conditions that go along with being in network. And there are certain burdensome requirements from the payers for being a network that a lot of people don't want. One of the things you look at is a provider -- let's say you have a provider that's a pretty mature provider probably in his 50 has been in practice 15, 20 years. He doesn't need more volume. A dermatologist in downtown New York that's 55 years old, has all the buying he can handle, right? You can't even get an appointment to go to somebody like that. So there are reasons to be out of network. There are reasons to be in network. But I don't really believe that you're going to see as a result of no surprise of that, a significant movement in or out of network. I don't think the in-network percentage is going to go up, and I don't think it's going to decline. Historically, on the bigger customers outside of the Blues, the out-of-network volume is 5% to 6%, which is consistent with their business philosophy. And when you look at the Blues, which have not necessarily as deep a discount but a wider bandwidth, that is a 3% to 4% out of network. So it sounds like a small percentage, but it's critical to their bottom line, and it's critical for them to manage that as they use us effectively. And so I think I probably answered that question similarly way before most surprises that, but we just -- we have not seen over an extended period of time of movement from outed network into in-network. And we really don't foresee that going forward.

You don't. You don't think despite that NSA will have an impact on that longer term?

It's hard to be a predictor of the future -- at 70 years old you don't even buy green banana. So -- but I don't foresee any major changes in that as I look forward to what's going on with in-network versus outed network. And I think that the no surprises act, we -- you and probably 80% of the people on this call remember Mark's in my famous call back in June of '19. So we've been talking about that for a long period of time. And I think it will continue to evolve. But I don't see there are no surprises at having a significant impact on the percentage of providers that are in network.

Okay. Along those lines, can you talk about how you -- in the new environment, call it, new NSA environment, presumably, again, there's going to be some modifications potentially. But -- what do you view as kind of the challenges and opportunities? I know Mark has provided some kind of high-level feedback and he's pretty confident there's some opportunities. Can you provide us kind of what you see your potential challenges and opportunities as you get into 2022?

Well, I think as our customers have found out and we found out that the NSA significantly increases complexity, and that complexity actually plays into MultiPlan strengths because we have run an efficient, easy to change the sales and relatively easy to maneuver. So the additional claim processing steps added by NSA requires skills and capabilities that are not always available to the payer, but squarely in our wheelhouse, data capture, data manipulation management, data analysis, claims pricing, provider appeal management, case defense. And what we're gleaning from our discussions, and we've had hundreds of discussions with our clients and from our implementation project is that our customers need and are asking for our help to help achieve compliance with the regulation. So the net effect of all that, we believe, NSA is likely to embed us more deeply with our customers and each customer is unique in terms of where they stand with NSA, what they can do internally, what they can't do internally. But I think what -- it's critical to remember that NSA-related claims represent only about 10% of our identified savings and most of the other claims should not be impacted by the regulations. But they will continue to send us surprise bills. We will continue to get substantially all of the out-of-network bills, and we don't see our pay-for-performance fee structure changing as a result of the NSA.

Okay. Can -- maybe along those lines carrying it forward and then just maybe paralleling your thoughts on -- the thought process and the rationale behind the discovery and the HST acquisitions. And I guess as just maybe following on your prior conversation, prior dialogue, your thoughts on, do you -- are you properly positioned organically? Do you need to expand your product profile to meet potentially some of the needs of the payers as we get into a new environment, if you will? Do you think I have to acquire some of those skill sets, or do you think you could pretty much address those organically?

Well, as to M&A strategy more broadly, no company can stand still. We are always thinking about how to evolve the business, how we can reconfigure our assets and capabilities or add new ones to address opportunities that play to our strength. As I said, if you look back 10 years ago, we were a network company, right? And since then, we've added analytics, 60% of our revenue, Payment Integrity. And so we -- that's why I joke with Mark, that's why we make the big box. We're supposed to determine where this stuff -- we're supposed to be like we ingest and skate to where the puck is going, not where it's been. And so I think as you look at the management of this company, as it existed over the last 10 years under Jim's leadership in finance and the other people going forward, that's an important factor is how do you address where you're going? The HST and DHP acquisitions were at the center of the strategy component to extend our value in what we consider to be underserved markets. HST has strengthened our analytics-based services category with value driving health care plan services that have an appeal with third-party administrators and in the small to midsize group market through brokers and consultants and has accelerated our ability to enable its customers to flexibility and health plan design. And sometimes -- and this is the case at MultiPlan. When you have so many opportunities among your bigger customers to BUCAs, you need to reassess what you need to provide to those additional customers, the smaller payers, and that's what HST has addressed significantly. We did not have a pure reference-based pricing product, which is probably more utilized within those regional health plans and TPAs, did into big players, and we felt we needed to address that market with HST. Discovery has added a number of services that enhance and expanded our Payment Integrity category and added a new category called Revenue Integrity. With these new services came significantly new relationships and services targeting government sectors like Medicare Advantage and Medicaid where MultiPlan has not historically played as well as the services to deliver value for our payers in-network claims. These additional services include coordination of benefits, data mining, subrogation and Medicare Payment Integrity. The acquisition of Discovery especially gave our plan to extend into underpenetrated markets a real boost, especially as it pertains in-network claim processing with our Payment and Revenue Integrity services and into the Medicare Advantage market with Payment and Revenue Integrity. Those were opportunities with huge addressable markets and faster growth trajectories than we might have seen otherwise. In-network claim volume numbers out-network claim volume by a factor of 10x. And we wanted to factor that in and look at opportunities there as we look at growth projections for MultiPlan, particularly in Medicare Advantage. We think those 2 acquisitions have the potential to diversify and transform our business. Jim will talk a little bit about the future and how we prioritize capital, but we are aggressively pursuing other opportunities as we look at how we can add to our core businesses and how we can differentiate and grow our services moving forward, and we're excited about that.

Okay. Maybe that's a good segue maybe over to Jim. I know you've given some highlights in the past couple of calls. But Jim, could you just walk us through few terms of capital allocation priorities I mean your thoughts with either the share buyback and the recent acquisitions, kind of what you're thinking on a go-forward basis?

Yes. And sure and I guess 3 days in. The good news is the retiring CFO and the incoming CFO are completely symphonic independently on this topic, which is this business generates a lot of free cash flow, as you're aware. And if you think about it over a time continue over a couple of years, that generates a lot. And how we allocate that is going to be crucial and it's a big part of my focus in the early days of learning the business and getting involved here. But it is fair to say the following: The primary goals are to grow the business, as David just mentioned, and that's internal development, where we've got real capability but also acquisitions. And I think it's been a very sound acquisition strategy where we've got a right to win and the right to build these businesses and these -- extending our markets or enhancing our markets. So that's 1 component is growing the business. And the other is, over time, consistent with past practices, is bringing leverage down. And that will be over time as we grow the business, but also use our capital wisely. And so how we mix it on a quarter-to-quarter basis is going to be dynamic a little bit, but I'm hoping you can all understand that over time, we're going to try and get a balanced mix here. And I would say that first priority, growing the business, enhancing the business, second priority, taking the leverage ratios down over time and meeting the commitments that David mentioned. And the share buyback is probably going to be a lower priority in terms of -- but we'll still be flexibly using that tool in our toolkit.

Yes. Okay. I'm getting a handful of questions coming in here. I guess the first 1 is, if one of your larger customers does not use MultiPlan in their fully insured book, why do they necessarily need you in the self-insured book?

Well, I think almost all of our major customers use us, to some extent, in their fully insured book. We've said publicly that the ASO business is probably 60% to 65% of our total volume. I think it is the dynamic of how they run the shared savings program that drives greater flexibility in that business. And candidly, I think in the fully insured book, the payers can be a little bit more strong arm in terms of what they want to drive because they own everything whereas in the self-insured ASO market, they're working with, in most cases, a major corporation or incorporate some size that is really focused on making sure they provide the best options from a health care perspective to their employees. And it's not just the payer making the decision. There's a significant input from the employer that's involved in that ASO business.

Okay. Great. Another question coming in here. Can just highlight -- curious on MultiPlan how they see competition in the industry. How has market share evolved over the years? Have you seen other players kind of emerge on the landscape over the last handful of years?

I think as we've looked at our business and moving from kind of 1 service offering to the 3 service offerings, we have various competitors and various components of the business. Obviously, if you looked at the Payment Integrity business, is probably the largest player in that business. As you look at our analytics business, we really dominate. There are some peripheral players. Zales has historically been considered a customer or a competitor in various shapes or forms. And I think 1 thing that I'll throw out relative to that question, Larry, is Optum has been a competitor of ours for 10 to 15 years. And Optum does provide some of the services that we do. And some of the services that Optum provides we provide to United because we can do it better and more efficiently. And so we believe that we're unparalleled in terms of the broadness of our 3 service offerings in terms of finding another company that has the network, the analytics and the Payment and Revenue Integrity that we have. But we do understand that there's real competition in those segments. We believe we're the market leader on a global basis of all 3 of those and at least in the network -- out-of-network space and in the analytics space, we're the leader within those spaces. Well, I'm not naive enough to say we're the leader in Payment Integrity because we're not, but that's a smaller, more growing part of our business.

Okay. I think we've got maybe time for 1 more question, and it just came up here. And this maybe get back to Jim, your commentary. In terms of acquisition, acquisition strategy, you got the flexibility. Would a larger size deal versus smaller kind of tuck-in-type transaction? Trying to get a sense of maybe what you're seeing? Could it -- what are the sizes range larger without giving?

Yes. I would just open -- offer the following, which is there's a dynamic of getting the best possible returns and opportunities out of the capital we're deploying. And I think there's going to be, over time, large acquisitions will become available. But I think if you just look back in history, that strategy in 2020 of Discovery and HST. We're really, in my opinion, very sound ways to deploy capital because the ability for a MultiPlan to enhance the business through all the foundation that they have with respect to payer relationships, provider relationships, et cetera, as well as sales force and best-in-class operations. Those are where I think you're going to see some real opportunities for high-return acquisition. And so I would say that's kind of the starting point. But obviously, we're going to continue to look at larger things. I mean I would just hasten to say that the -- despite my background in mergers and acquisitions, I think the strategy is very sound at MultiPlan and I'm not necessarily going to come up with something revolutionary and I think what we're going to dig in and actually execute against these -- integrating the acquisitions we have and looking for more. So come on that.

I would just say kind of in closing, obviously, I'm excited about the transition, just so everybody knows, I talk to a lot of CFO candidates. Jim was at the top of my list. Fortunately, he is at the top of a couple of other people's list. But this transition will be totally seamless. It is clearly my responsibility to make sure that it is seamless and to make sure Jim steps in fully briefed, fully understood. We will reach out to most of the people on this call, I will give Jim the good points of all of the bondholders that are on the call that not all the bad points, which are very few anyway. And that process will occur over the next few weeks as Lucas and Jim reach out to the people on these calls.

Larry, just to echo 1 last point that Dave made, but I've got big shoes to fill. We all do as Dave retires, but I think well, I'm not, a, there's a lot of things that we share in terms of our common goals here. And I think we're committed to being straight shooters like Dave was transparent and candid like Dave was. And I'm very mindful of maintaining credibility that MultiPlan is built up with debt holders and bondholders over the last 10 years or plus. So going forward, Luke and I will be your points of contact. We look forward to working with you, and we look forward to keeping the track record alive.

Okay. Great. Thank you, Jim, and thank you, Dave, as highlighted earlier. I think that's going to wrap us up. We're a little over a couple of few minutes over. Thank you, everyone, for joining today. And I especially want to thank Dave and Jim and the team for taking the time this afternoon.

Thank you.

Thanks.

Thank you, everyone.

Thanks all.