Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Okay. Great. We're going to get started with our next session here. I'm Steven Valiquette, the health care services analyst here at Barclays. We have MultiPlan as our next company. We have Dale White, the CEO; and Jim Head, the CFO. But I think, first, we're going to do a quick disclaimer with Shawna. This will be a fireside chat, but we need a quick disclaimer. So Shawna, over to you.

So as you're all familiar with, on the screen, you can see our forward-looking statements. As a quick reminder, our remarks and responses to questions may include forward-looking statements as outlined on the screen, and that actual results may differ materially from those stated or implied due to risks and uncertainties associated with our business, which are discussed in the risk factors included in our quarterly and annual reports filed with the SEC. Any such forward-looking statements are based on information available as of today. 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. Thank you.

Okay. Great. I'm sure that's the first time ever we heard that. That's excellent. Okay. Great. So I guess we'll just dive right into the questions here. First, maybe just to kick off with the No Surprises Act. You'll see it as NSA just as the acronym. That remains very topical for investors right now. Maybe let's get your latest thoughts on the ruling in Texas in February against the use of the QPA as the de facto benchmark. Not to get too granular out the bat here, but how that might change things going forward with the final version of the law coming out in May?

Yes, that's -- Steve, good morning, everyone. That's very topical, right? And so let me level set for the room. The original regulations that were issued by CMS back in October required the arbiter to consider the QPA as the primary variable when they made a decision and have put the burden on the provider to provide compelling evidence as to why the provider believed it should get reimbursement higher than the QPA. And the Texas ruling, it was litigation filed in Texas by the Texas Medical Association on that specific point. The rest of the NSA remains intact. But on that specific point, it argued that the regs went too far and -- in having QPA be the primary variable that should be used by the arbiter. And so the Texas ruling overturned it and overturned that. And now the variable is -- the QPA is 1 of 6 or 7 variables, including such things as the providers' training, education, experience, specialty, complexity of the case, the acuity of the situation and other 1 or 2 additional variables that the arbiter must now look at on equal footing. And that's the biggest change. And so from that perspective, it adds more complexity to the process, where before the arbitration was largely just -- it was QPA-based, and the arbiter was required to take the rate or the proposal. The provider makes a proposal, the payer makes a proposal, and the arbiter was required to take the one closest to the QPA unless there was compelling evidence provided by the provider. And so now that's changed. And the arbiter is required to look at them equally. And so it makes -- certainly makes it more provider-friendly. It makes it more -- it adds complexities to the process in terms of how you go about making the case on behalf of the payer to still win the arbitration here.

Okay. And some of that complexity plays into your hands a little bit. So maybe you can just expand on the value proposition that MultiPlan has and what you can offer around the NSA services.

Yes, it's a great question. Look, from our perspective, the NSA is not -- it's not a straightforward exercise, right? It's not simply pay the QPA, and it's done. There's 5 or 6 elements in the surprise billing process. One is you first have to identify the surprise bill. Two, you have to calculate the QPA amount or what's called typically the median contracted rate of a payer. And then that's used to determine the member's cost share. And then third, you pay, you have to determine the amount that you're going to pay the provider as an initial payment. And then once the payment is made, the provider has the opportunity that if they're unhappy with that process to raise their hand and enter into a negotiation with the payer or in many cases, us on behalf of the payer to arrive at a settlement. And absent an agreement between the payer and the provider in that post-pay phase, the provider can go to arbitration. And all of that's on a very accelerated basis. The post-pay negotiation, the provider has 30 days to decide if they want to negotiate. There's a 30-day window to negotiate, and then it moves very quickly in terms of just a matter of days if the provider wants to go to arbitration. So all of that complexity, all of those many steps in the process, it's in our wheelhouse, right? That's just -- it's right in our wheelhouse. We know how to identify a surprise bill. We can calculate median contracted rates. We can apply the median contracted rates on behalf of payers. We do today. We can make all that happen at a technical level. We do post-pay negotiation for the providers today. We do hundreds and thousands of negotiations with providers today on behalf of payers. And arbitration is a new service for us. That's one of the things that did come out of the surprise bill legislation. We have a new service now where we're -- we can manage the arbitration on behalf of a payer, if and when the provider wants to go in that direction.

Okay. Okay. And somewhat intertwined in all this is the fact that payers, they can use your services. They can also potentially have to handle things in-house. Maybe just spend a minute or 2 just comparing and contrasting some of the situations where customers are choosing to pursue other options versus choosing to implement your service -- your NSA services. Maybe just tackle that for a moment.

Sure. Yes, the payers can -- look, I'd love nothing more than to have 1,000 batting average, right? It's just a 1,000% batting average and at a home front every time we step up to the plate. But in a handful of cases, the payers and we had -- let me reset the clock. We had great visibility into our larger customers early on, right? They were early adopters and paid attention to the developments of surprise bill. So we had great line of sight into our larger customers and knew exactly what they were doing and when -- what they wanted to do, what they expected us to do on their behalf. A payer can look to go internally if it believes it has the technical capability to do it and if it wanted to do it itself, it could or outsource it to a third party, other -- someone other than MultiPlan. And in one case, the payer made the decision to take it in-house. And in the case of another, they went outside to a different third party. And we both -- in our case, we'll continue to provide an array of other services. Remember, the Surprise Bill Act applies only to a subset of our claims, right? So even though they may be doing something on surprise bill, we're still working with the payer on all the other claims that are not surprise bills. They didn't change the relationship there or would change. But for the surprise bill, they believe they can take it in-house. I think there's going to be opportunity, and I said this on the call that there'll be opportunity later in the year to come back and demonstrate our capabilities, right, as we get experience with the surprise bill legislation and the act, as we get experience with the way the process unfolds and you get into post-pay negotiations and you get arbitration experience. Our analytics capability is top shelf. And I think we'll be able to go back to the payers and demonstrate our ability to help them analyze the outcomes of the process and how they can effectively manage the process.

Okay. Yes, I was going to touch on that because you mentioned on the call that some of the customers could come back to you if they went in a different direction early in the year. It sounds like it's too early to give any update or any traction there yet.

It is too early. It is early. The law went into effect January 1. And remember, the Texas ruling only had to do with one component of the IDR process. There still is -- we're still expecting the final regulations to be issued by CMS in late -- later in May. And then there's still 5 other litigation suits taking place across the country in multiple geographies, where most of them were centered on the same issue around the IDR process. The one that's filed in New York is different because it's challenging the constitutionality of the large cell. And that's -- it's coming in through a different approach.

Okay. Okay. Staying with NSA service offering here. You mentioned that in the earnings call that the new offering, you touched on this a minute ago, was actually the largest software release in company history. I guess just curious and for the audience too, maybe they want to hear more about the implementation costs, how much cost you may have absorbed upfront, but then the positive of that would be the operating leverage going forward from here. Just talk about how that pay off going forward.

Yes. And just to reset, as Dale mentioned, we were seeing 100% of the claims. And what we had to do is essentially reroute and create new engines and rules for the subset of claims that were specific to the NSA and be able to march them through that 5-step process. So it was a pretty significant undertaking. We had to do that in a prepayment environment in a whole host of customers. So it was a -- it was our largest software release. It's not new technology per se, but it just made us focus on a whole new set of rules and engines. The costs were -- some were implemented in 2021. And if you remember, the ruling came into place at the end of October. And so we only had a couple of months to stand up these software releases inside our clients. So we did incur some costs then, both capital and OpEx. But going into 2022, you'll see a little bit of that in our investments in the platform that we talked about on the earnings call, which is about 50 basis points. So inside that is some of the spend that we're doing on NSA. But again, it should be pretty efficient over time because this is claims that we've already seen. And it's -- a lot of the technology has really been put into place.

Okay. Great. Maybe just a final question on this NSA topic. So typically, there's a 6- to 8-week claims lag. Most of the commentary around the expectations were based off of client activity on the last earnings call because there wasn't full visibility on that yet. But now that we're a few months into '22, I don't know if you're in a position to talk about this or not. But as you're getting some claims volume in for January, February, we're 6 to 8 weeks post that, at least from January anyway. Just any updates you can -- or any color you can provide on how that's trending out? You have some actual claims to look at in calendar '22 that you are on the 6- to 8-week lag.

I think it's still too early. We're only starting to see early -- and it's still too early, given our lag. And it's still -- and we're only starting to see claims from -- with dates of service on or after January 1, which is where the serve -- the law applies. We have -- we know what claims are in scope. And we have great line of sight into that because as Jim mentioned, prior to the effective date of the law, the clients, we were managing the clients' no surprise claims. So we had great visibility, particularly into our larger accounts as I said. And we know what claims are today that were considered surprise bills. We know what claims are in scope. So we felt good. And as we talked about on the call, in narrowing that the impact of no surprise bill to a maximum of about 2%. And because we said, look, we have great visibility into our larger accounts. We know exactly what their expectations are of us now. And we were conservative with that upper range. Just to allow some -- the tail to -- for us to go downstream into the smaller customers, the smaller regional health plans and the third-party administrators. I think as we mentioned on the call, we had over 90 implementations underway, and we're working our way through that. And we had 60-plus in the pipeline of other opportunities around no surprises. So we're still early in it, and it's hard for us today to say, here's what we're seeing because of that lag. We're just starting to see the claims come through us.

Okay. Okay. Let's shift gears here a little bit and talk about some '22 outlook-type questions. I guess the first one really ties in to COVID a little bit. Obviously, January, some higher claims probably tied to COVID then falling off February and March. I know another sort of level set-type question. For you guys, I think, historically, it will be an impact on volumes and your margins a little bit during some of these COVID spikes, and it oscillates the other way. Maybe just talk about how that's kind of flowing based on Omicron spike that occurred then kind of fell off. And now there's buzz about another new variant coming. Who knows? I'm not sure if they named it yet, we'll find out. But anyway, so just curious to get your thoughts around the oscillations around these COVID spikes and troughs.

Yes. Maybe to set the clock back, at the beginning of 2021, we were estimating roughly $20 million a quarter of COVID effect, i.e., suppression of our revenues because of COVID. By the time that we got the Q4 in our earnings announcement, it was $5 million to $7 million. So the amount had been drifting downwards. I described it as rather than being a fire in 2020, it was a little bit more like embers that were glowing. And we see that going into the first and second quarter. And our crystal ball is no better than anyone else, and we do get a lag. So it's interesting. As Dale mentioned, we're not seeing a pickup just yet because we're a little bit idiosyncratic. We deal with out of network claims and oftentimes that is related to travel in our network side, and moving around when people go to out of network facilities. So if the travel is lower, we're just not going to see it just yet. So it is early days. And as we think about COVID in 2022, we think it's the embers kind of concept for the first couple of quarters. And then we'll see where -- whether it dissipates or whether it's -- hopefully, it does not pick up, but we just can't predict what's going to happen with the next strain.

Yes. That makes sense. Okay. Also on the '22 outlook, I mean, the guidance you guys gave, I think, was pretty solid and generally in line with expectations. No real surprises there. But within that, you talked about some voluntary investing and some growth initiatives, some investments in some of the product offerings. And I think, unfortunately, there was maybe some inflationary pressure that was kind of baked in for that as well, which should not really be a surprise to anybody at this point. But maybe just put a finer point maybe on some of those -- I do not want to call them headwinds, maybe voluntarily spending against some of your upside or however you want to phrase it, talk about kind of the puts and takes on the plus and negative side around that '22 outlook.

Right. And we came into the year having -- the business ramped pretty heavily in the second half, and we had -- there was some spend that needed to happen, both investment in the business. But also as we faced off into the year, we realized that there's going to be some structural cost increases. And that's -- the right way to think about it, we talked about 75 basis points of pressure. About 2/3 of that is wage-related, so people-related. So we're going to be competitive. We want to retain our people. And so that is something that we felt we needed to do. And the other part of it is external spend, insurance, travel, things of that nature. So that's picking up a little bit but not unanticipated. We talked about making 50 basis points of spend and investment in the business. And then we talked about 75 basis points in supporting some of the growth in our business. That's sales force. It's standing up some of our new Payment Integrity services, which require people before the revenues start happening. So it's a little bit of a build. So all in all, it's about 200 basis points. And I would say a couple of things. Number one, Dale and I want to invest in the business if we think that there's going to be attractive opportunities to grow our EBITDA. And number two, we don't think that this is a step down every year. What we're trying to do is position our business well so we can maintain best-in-class margins, which we are going to do. They drifted down a little bit this year, but mid-70s is still very attractive for us. And we think that we can manage that over time.

Okay. Great. So jumping around here on a few topics. For those who follow the stock, it's been fairly volatile over the past weeks or months. I think some of it's more technical base as opposed to anything fundamental. So some noise around maybe some moving into and out of certain exchanges that is listed on, et cetera. But 2 questions tied to that. I guess, first, maybe if you want to just address the stock volatility from your own perspective. And maybe I have a follow-up on what that means for M&A as you kind of just talk about your own view of the stock volatility here.

Well, this week, we had an interesting technical issue, which is we're a member of the Russell 2000 Index. And I think twice in the last 2 quarters, they have rebalanced, re-weighted us in terms of what our weighting is in the index. And what I mean by that is the free float calculation was changed twice. So the free float calculation came down. They announced it on Friday, and so it is because they -- passive investors have to make a pretty radical shift in what they did on Monday, which was a little bit of a startling shock to our share price because we don't have a lot of liquidity. So it is fair to say that we don't like this. We're going to be working with the Russell people to understand how we are calculated in terms of our free float. And we're going to make sure that whatever the basis is, it's stable and it's consistent. But it is a little bit of a black box, and so we're going to work on that. But I think it does beg the question, the fundamentals, we're going to let those speak for themselves. And we feel like that's -- Dale and my job -- and my job is to make sure that we are highlighting the fundamentals and dealing with the risk and opportunities that you want to see as investors. And we're striving to make it clear and more transparent for you. And hopefully, we're going to have less hiccups on this technical stuff.

Okay. Great. So somewhat tied into that, I think when you guys -- your stocks are trading publicly last year. Part of the growth outlook was tied to a lot of tuck-in M&A. But with the stock probably not performing as probably how you envisioned it from 18 months ago or so when it first started trading publicly, I mean, how do you guys think about the M&A or just, I guess, the level of M&A given debt ratios, et cetera, and where the stock is trading and using equity currently?

Yes. And well, maybe let's start with a little bit of the macro. We are really focused on allocating our capital well. And the good news is, is we generate over $300 million of cash flow per year. It's -- we -- if you think about it, the free cash flow after interest, after taxes, after capital expenditures is 29% of our revenues in 2021. So it's a pretty nice attribute of our business. As we think about it, we want to accomplish a balancing act here, which is to bring our leverage down over time, which we've done but also invest in the business through M&A. And I would point back to '20 and '21, where we actually did 2 tuck-in acquisitions of roughly $150 million apiece and -- which have turned out to be very nice and successful deals for us. But we also managed to take our leverage down from high 6s down to high 5s by -- over the course of the year. And I think we're going to continue to use our cash flow and our growth to accomplish both those goals. So the good news is we feel like we have the capacity to actually do those high-return, lower-risk type of acquisitions, where we can bring a new product into our client set or they can bring new clients. And we can put our operational excellence and our scale against some of these new opportunities. So HST and Discovery were perfect examples of that tuck-in strategy, and that's something we want to continue.

Okay. Great. Okay. So I think also kind of tied into that '22 outlook, as far as just the organic growth breakdown, I think you guys cited a 2% to 4% organic growth. But I think Payment Integrity is probably a decent part of that. But you want to sort of just break down the organic growth components to the best you can kind of on the fly here?

Yes. Well, the -- what we did for the first time is broke it down between the core and some of our growth initiatives, which is not a new way of segmenting the reporting. But the core, if I remember correctly, was roughly 4 to 6. And those gross initiatives are going to add maybe 2 to 4. All in, 6% to 9%, and this is before the NSA. So when we talked about breaking that down, the 4 to 6 was really kind of same-store sales on our existing clients, if you will, whereas the -- that additional growth was around new initiative, HST, some of our Payment Integrity wins. And thinking about that is slightly different because we are adding new customers and building that out. So the good news is it's showing that our core is very healthy in mid-single digits. And we've been able to augment that with some of the higher-growth areas like Payment Integrity and value-driven health.

Okay. Great. All right. I think we're in our final minute here. Maybe last question to touch on. You guys talked about the government plans and maybe MA, Medicare Advantage as a growing market for MultiPlan potentially in 1 or 2 of your segments. Maybe just talk about what the current footprint looks like -- in the networks business in particular, kind of where you see room for upside for growth on the back of that.

Yes. Medicare Advantage and Medicaid are both important market segments for the company, and we're certainly in the early innings in both. We -- look, as the payers, it's one of the highest priorities for our payer customers. Baby boomer, 10,000 baby boomers are turning 65 every day. It's a growing market for them. They want to expand their footprint and their coverage. And we want to leverage our 1.2 million provider network to help them do that and accomplish their goal. And so we've -- over the past few years, we've been engaged by multiple payers to help them accelerate their network coverage needs and leveraging our provider network and building out Medicare Advantage networks in multiple states and multiple counties. And again, we were -- we finished up a number of projects last year. And we're engaged again this year to build out Medicare Advantage networks in over 80 counties across the country and in multiple states. So it's early innings for us but very excited about the opportunity. Obviously, Medicare Advantage is a growing market share and a priority for our payers. And we have the resources, the skill set, the provider network to help them meet those expansion goals.

Okay. Great. All right. Well, with that, we're out of time. So I want to thank Dale and Jim for their time today, and thanks, everyone, for joining us.

Thank you.

Thank you.

Thank you.