Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thanks for joining us. So to kick the day off here, I am Frank Jarman, our high-yield health care analyst here at Goldman Sachs. And I'm very pleased to have the MultiPlan management team here. To my left is Dale White, President and CEO of the company; and to his left is Jim Head, who is the Chief Financial Officer for the company. So thank you, guys, very much for joining us today. And I know -- I think most folks have a pretty good understanding for the story, but I know it could be a somewhat of a complicated story. So maybe just to level set for everybody, if you guys could spend a couple of minutes just helping folks understand the MultiPlan business, the value proposition and help folks kind of understand the difference between network, analytics, payment integrity, that would be a great way to start things.

Sure. Absolutely. Thanks for the introduction, and thank you all for coming. We're -- Jim and I are delighted to be here. MultiPlan, first of all, is a 40-year-old -- 42-year-old company. And its primary mission is to address -- to encourage affordability, fairness and efficiency in the health care delivery system. We're a payer-centric company. We work with payers. We sit in between payers and providers as an independent organization, working with both to address issues of medical costs in the health care delivery system. As Frank said, we have 3 primary solutions: networks, analytics and payment and revenue integrity. And those 3 solutions, all together, bundled on their own, what we provide to payers to help them address medical cost and then to help payers and their employer groups, their ASO customers, address medical costs and ensure that the claims are paid accurately the first time. So one of our chief assets is a provider network. We have 1.2 million providers under contract, with a footprint in all 50 states that is available to payers to access and to use in different ways across their commercial health segment, their Medicare, their government segments, their Medicare Advantage and their Medicaid programs as well. We have a large part of our business and a large part of our revenue is analytics. We use our data and our platform to identify reasonable rates of reimbursement for providers. So we use our data, we use our methodologies. You've heard us talk about Data iSight and our program like that, our negotiations platform where we have negotiators who, on a claim-by-claim basis, reach out to providers to engage with them to reach a financial settlement that lowers the cost of that -- or any particular claim, and therefore, it drives savings for the payer if it's a fully insured claim or savings for the ASO customer if it's self-funded. And it helps reduce the out-of-pocket cost for the member as well because the member shares in our savings. Payment Integrity and revenue integrity is all about paying claims right at the first time. So it's identifying forms of waste, abuse across the system and working with the payers to call that out and identify it before the claim is adjudicated and paid, or in some cases, retrospectively looking at ways to make sure that the payer pays the claim right at the first time and it is accurate. Those are our 3 solution towers, and we work with -- we provide those services to an array of payers. And when you think about our payer mix, and you've heard us say, we have 700 payers across our commercial segments, they come in all sizes and shapes. So we work with the large national health plans. We work with the Blue Cross Blue Shield Health plans. We work with provider-sponsored delivery systems around the country. We work with regional health plans and third-party administrators who administer the plan on behalf of, typically, smaller to midsized employer groups. So our services reach that entire payer spectrum.

Great. That's super helpful. And maybe as a sort of second question, I really want to just kind of focus on some of the debates and areas of focus from investors. And to start, maybe we can dig into the no surprises at legislation and try and unpack what you guys are seeing, what it means for the business? And ultimately, how you're going to evolve through some of this changing scope across your -- across the claim? So maybe to start, I know you gave an update on your most recent earnings call, but -- and you've obviously given some guidance around that. But can you just help us think about today, where are you in terms of implementations for NSA? How you're thinking about those implementations relative to the guidance for the 0 to 2% revenue headwind this year? And when do you expect to be sort of fully implemented with regards to the customer?

The No Surprises Act is -- and we've been working on this for a long time. And it was certainly one of our largest IT lifts in the history of the company, given its complexities and all the things that -- all the platforms that I touched within our company. But we were ready on January 1 when the law went into place. We looked at -- last year, we talked about -- at that time, we thought it would impact about 10% to 11% of our claims. And we just got better line of sight as we got closer to the implementation date. Our larger payer started early, and they wanted to make sure they were in compliance with the law by 1x1. And so we had better line of sight when we -- on the earnings call that you referenced, where we were able to say, based on what we know now, we think it's a growth headwind of about up to 2%. And that's -- there's some puts and takes in terms of there's some client wins, there was some client losses and an element of conservatism because of that longer tail of customers with whom we were still in discussion. And so when you fast forward and you look at where we are today, we've implemented over 90 customers. Obviously, that represents a significant fraction of the larger customers. So it represents a significant traction of our volume. We have 26 payers that are in the process of being implemented and will go live very soon. And we have another 41 customers that are in our pipeline with whom we are in discussions and likely will implement in Q2. So we have much better line of sight and greater visibility into the impact. That's why even though it's early in the game, right, we said -- as we said on our call, 2/3 of our volume in Q1 was still for claims prior to January 1. And so -- but by March, we started -- it started to uptick and we started to see claims that were effective after January 1, effective service after January 1, and would have been covered by the No Surprises Act. And now in April, the business is starting to normalize, and it's within the expectations that we gave.

Great. And when I think about the legislation itself, it's essentially kind of grouped into 2 concepts. One is the prohibition of balanced billing. And then the other is the concept around the qualified payment amount and essentially incorporating an arbitrator into the process of ultimately settling a claim and determining the right amount. I think there's been some debate in the market around how the QPA, the introduction of an arbitrator and a QPA could potentially impact MultiPlan's role in the entire claims negotiation resolution process. And I think it's interesting that, obviously, you guys have already implemented a number of customers onto the program, and you're not seeing a significant change. But I would be curious, too, with some of the lawsuits that are currently out there, it sounds like we still may not have a final picture on what the second side of this legislation looks like. I'd be curious -- based on your perspective, number one, has it changed your role in the process at all? And then secondly, what's your view on maybe how this legislation ultimately all kind of plays out?

So look, the Texas ruling, that happened a month or so ago, overturned the department's position that the QPA was the primary variable, that an arbiter would take a new account and its instructions through the arbiter were absent compelling information from the provider. You're to use the QPA as the rate of reimbursement if the case goes through arbitration. The Texas ruling overturned that and said the QPA is now on equal footing with the other variables that were covered or cited in the legislation. And that's -- now that's an effect that's gone forward. The Department of HHS appealed that decision and then came back out and asked the court to stay for 60 days while I think it comes out with final regulations we're anticipating because we're operating under 2 sets of interim final regs and we're waiting for the final regs to come out. In addition, as you know, there's multiple lawsuits, as you pointed out, Frank, that are out there. Most of them are challenging the same issue of the QPA as the primary consideration in arbitration versus equal footing. One challenge is the constitutionality of the law and the prevention of balanced billing of consumer. So you're right, the final chapter has not been written under the Surprise bill. For us, I mean, it's -- we were ready either way. We were ready to move forward whether -- and again, the Texas ruling only impact that small part of arbitration, everything else stayed in place, so our -- everything we do on a prepayment basis. So our networks, our negotiations, our Data iSight, our repricing strategies, all the things we do on Surprise bill didn't change. It wasn't impacted by the legislation at all. We still have the capability of doing that. In fact, we believe that with the ruling, there's a greater incentive for payers and providers to come together and work on a prepayment basis to get to a reasonable outcome as opposed to waiting and going to arbitration and having the cost of rework, abrasion and potentially losing and then the added cost of paying the fee because under the law, the losing party pays the fee. And so we were ready in either direction. And as you said, we've gone through a number of implementations and we're managing, we're using all of our services. We're managing -- we're repricing claims 2 QPA amounts. In some cases, we're handling the postpaid negotiation. So if a provider is reimbursed or I'm happy with the reimbursement, their first action is to reach out and do a post pay negotiation. You have to do that. You have to go through that step. The provider has to go through that step before they go to arbitration to see if he can reach financial settlement, and we do that on behalf of many of our peers.

Got it. Where the QPA lands for the regulation plan, more than anything, it's just going to affect the timing and the geography of where we're going to help our clients. So there's the game theory, depending on where the regulations land, what happens at the very last step. But again, it's very costly to get to that last step. So what the providers and the payers are doing is saying, "Okay, given the chances of what the last step is going to look like, what do I do today to kind of make it simpler and easier." So the volumes that we're seeing in March, at the end of March, and through April, are largely recognizing the fact that the payers and providers, unless it's a really outlander circumstance, are really trying to settle this out. And what we're not seeing is providers rushing in network. That was something that kind of came out in terms of how it's working. We got too much at stake here in terms of their own economics. If you think a lot of these providers are suffering the same issues that we all are, which is labor inflation. So they're worried about whether to negotiate higher rates in their network agreements versus rushing -- or excuse me, in their own agreements versus rushing to get to something that might be most favored nation status with no benefit of volume, et cetera, attached to that. So we feel like this is steady as she goes. We -- as Dale mentioned, we've got a nice line of sight and our clients are signed up, and we knew their volumes before. We are starting to see the volumes come through as expected. And we think the regulation is going to influence behavior, but essentially tracking above.

Great. Thank you for all that color. The other big debate around the story has really been focused on the value proposition for Data iSight relative to other products out there. Obviously, one of your customers has developed a reference-based pricing tool. And you also recently bought HST, which is also a reference-based pricing mechanism. And so I think it would be great to first, maybe just hear you guys talk a little bit about the value proposition of your Data iSight solution versus a typical reference-based pricing solution? And Dale, you talked about abrasion, helping folks understand how to think about abrasion in either scenario and how that ultimately factors into the employer and employee experience when there is a health care claims submitted?

Data iSight -- and one of the benefits of Data iSight is it's been here. It's in the market. It has been in the market for NAV, for many, many years. And so there's a -- from our perspective -- and it's well known by the provider community. It's transparent. There's no hidden methodology. It's based on the provider's cost or reimbursement. There's a formula to it. It's explainable. We're very transparent with the providers. It's not -- reference-based pricing, typically, is a percentage of Medicare. And many providers don't like that, just a flat percentage of Medicare. And that's one of the fundamental differences between the 2, between the 2 programs as Data iSight has a rich history. It has significant provider acceptance. It has experience. It's known, it's transparent. We actually have a provider portal where at any time a provider can log in and see how the methodology calculated its reimbursement -- calculated the reimbursement for a specific claim. So we're very transparent. We are very educational with the provider because we understand we have a provider network of 1.2 million providers. And that's one of the differences. So to me, it's like Data iSight, in a way, is a form of reference-based pricing because there's no contract, right? But it's like -- reference-based pricing on steroids because there's so much beyond it. It's all the things I just said, make it much different than and gives a value proposition much different than Medicare. One of the things because you mentioned, Frank, about our acquisition of HST, which is a reference-based pricing program. We're really excited about it. It's different from others, and it uses Medicare as the foundation for reimbursement, but it snaps on a lot of tools for both the member and the provider to utilize prior to service during service or post service so that there's communication between the member and the provider at any point if there's a question around balance billing. And so there's member tools and engagement that we -- that HST is enabling the member to have at their fingertips as they navigate their way through the delivery system. And then if there's any question, there's an array of support, patient advocacy support that they give to the member to help resolve any issues that they had, whether that's pre-service, during the time they're getting treatment or post service. And it's very much the same collaborative approach that Data iSight use. That's what excited us about HST.

So if I think about Data iSight as really using an algorithm that basis the rate off of accepted rates across your network, and so it has a much greater degree of acceptance. You guys have thought about 95% acceptance, 5% abrasion. And then I think about reference-based pricing tools as sort of a cheaper option. But with higher abrasion, I'd be curious, can you help us understand how much is the abrasion for reference-based pricing?

Right. And maybe to segment it a little bit, the classic reference-based pricing percentage of Medicare is a small segment of the overall market. And there's a reason why. We have over 100,000 employers as our -- ultimately our end users and end customers. They don't make changes very quickly. I suspect that most people in this room don't have reference-based pricing in their benefit plan options. But there is a place for it, and it's for very cost conscious employers. And what it is, is essentially the employer is saying, "We're just going to put a rate out there to a provider and then we're going to let the employee absorb the rest of it, wherever that lands." So there's ambiguity on price, and so there's a bridge. We don't have statistics on that, the provider acceptance, so to speak of it, but it is lower. It is much lower. And so the benefits manager, when they make a choice about this, they are distinctively saying, "I'm living with the consequence of probably having more employee abrasions and more employee risk in that choice." So we track this. We actually see the market and where the claims volume is. And that segment hasn't really grown in size relative to the overall vast sea of choices out there and employer options. So over time, we think that's going to be relatively steady because there's a time and a place for it, but most employers are not that interested in switching at this point.

Would you say reference-based pricing is less than 5% of the market or 10%?

No, no, no, it's higher than that, but it's not material. And listen, that can change over time. We view this a just another competitive offering against what we do every day. So what we spend our time on and what we're investing in the businesses is making Data iSight better, stronger, faster every year, where we can go to a provider and basically put together the fully formed case as to why this is a good reimbursement for them. And it has full transparency, so they can see what we've developed. We can see the cost that we get from CMS that the doctor has. We bake in a profit. We have all sorts of tools that allow them to say, "Oh, this is fair." It's very different than a doctor saying, "You get a 140% of Medicare, and that's our price. Feel free to argue with us."

And given the fact that involuntary claims, involuntary merchant claims, are roughly 10%, kind of think of 90% of your business really is voluntary out-of-network care where balance billing actually can still happen and matters, right?

That's right. I mean, remember, the Surprise bill act covers just that -- typically, it's that treatment -- I go to a -- a member goes to a hospital, they are in-network, but they see an ER or a radiologist or an anesthesiologist and they're not under contract and they were surprised, right? That was the primary basis for the legislation. The rest of it is, it's not just elective treatments, it's necessary treatments, right? It could be necessary treatments. It could be elective surgeries, it's ambulatory surgeries, but the rest of our business, the other 90% isn't subject to the -- it shouldn't be subject to the law. And we -- all of our services we provide and the provider in theory could balance building that.

Got it. Great. I wanted to maybe then shift over to your outlook. So you guys posted the numbers this past quarter, reaffirmed your outlook for 2022, and you're calling, I think, for 5% to 6% revenue growth, 3% growth in EBITDA. And one of the bases just across the health care space is post-COVID, how do we think about -- maybe not post-COVID but in this different phase of COVID, how do we think about volumes and the volume factor, right, between emergent care and non-emergent care? And I'd be curious, how are you seeing the world evolve from a claims perspective, as we continue to move past sort of the most acute periods of COVID?

Yes. I think as we look forward into 2022, it's largely a story of volumes continuing to be relatively stable and growing nicely on a year-over-year comparison basis. But as we look forward, that effect that COVID had suppressing activity is abating. So if you look at our second -- excuse me, first quarter announcement, about a little over 1%, 1.5% of our revenues were, call it, COVID affected, so to speak. And that's down from 7% Q1 '21, and it was even higher before. So that's dissipating. And Frank, as we look forward, what we're seeing is volumes beginning to tick up. Now we lag a little bit. We lag 6 to 8 weeks. What we're seeing in the HCAs of the world, and the providers of the world is they're starting to see utilization pick up. That's encouraging to us. But just given the substitutes of the Omicron wave, et cetera, we're not going to get -- jump up and down and say everything is going to return to normalcy back to 2019 levels because there's probably going to be a little bit of a lag of people getting back in. But we definitely knew that if you lived in New York City, you probably weren't doing elective surgery in January. That's abating. And that's -- we view that as nothing but a tailwind. We're being cautious about it. And as it pertains to telemedicine and all those other things, the claims volume is actually relatively stable over time. So we're feeling pretty good about it.

Great. And then on the cost side of the equation, there's been some focus around your guidance with regards to the 2% haircut EBITDA margins that you're guiding to and be good maybe just to cover specifically what you're focused on in terms of spending and how you expect to see a return on that investment going forward?

Sure. The -- what Frank is referring to is, we exited last year at about 75% EBITDA margins, which I will note is best-in-class, probably gold metal, world record, all that. What we've done is made a conscious decision to make investments in our business, which is going to take our margins down slightly, still gold metal Olympic podium, et cetera, maybe not as good as it used to be, but still very strong. And we intend to keep those at that level over time. But it's about investing in the business. We will have some structural inflation because a lot of our costs are on the labor side. 2/3 of our cost base is essentially personnel, and we're absorbing that. The way I think about it is, we're absorbing it very nicely. We're not a low-margin business. So it doesn't kind of change the overall equation. But we also want to make investments in the platform, and we want to make investments in growth. So the platform activity is things that are going to make our savings generation are tools, Data iSight better, stronger, faster. And what we're -- what you're going to see is investments in growth is going to be things like, "Wow, HST is working well. Let's get some more salespeople." Our payment integrity, data mining contracts are standing up with customer wins. Let's put some -- we put resources behind it. So we feel very good about that. I'll call it, the return, so to speak. We don't think there's going to be deleveraging over time in our margins per se as a result of any major headwind.

Got it. Great. Then maybe just shifting over to the capital allocation discussion a little bit. So you guys have generated pretty consistent free cash flow. Last quarter you ended with a nice roughly $350 million cash balance on your balance sheet. And I know that in the past, as we think about the strategy around the SPAC transaction and just the overall big picture focus for MultiPlan, there's certainly been an element of strategic focus around M&A. And balancing that focus and opportunity against the credit side of the equation and the deleveraging focus and deploying cash flow toward the balance sheet. And so I'd be curious -- as you guys look out across the market today, obviously, valuations have changed a lot. I will say the credit markets are certainly in a different state than they were 6 months ago as well. How are you thinking about the sort of balance between balance sheet versus M&A opportunities?

I think just to kind of comment, we really did generate a fair amount of cash flow this quarter. Our first quarter and our third quarter are big cash flow generators because of the timing of interest payments and tax payments. So not surprising that we had a bumper quarter. And we sit here with a very good position with our debt stack. We're -- we really don't have to refinance anything in the near term. So here we are with some cash, and we are focused on 2 primary things to do that. We invest in the business as we just talked about, Frank, but also, we do think there are opportunities for M&A, and I would characterize that much more as the HST-DHP type of acquisition, $150 million payed for it with our cash flow. And we do understand that both debt and equity investors want to see some deleverage. So we're doing that. And that's through growth, but also through debt payment. What's happening here is the cash comes in really fast, and we don't feel compelled to immediately make a decision one way or the other. So we're trying to maximize our optionality and achieve the balancing act. So on our call, we said, please measure us over time, not quarter-to-quarter, because the cash comes in, and we don't want to feel compelled to face a deal just because we have the cash lying around. We want to fit in the batter's box and wait for the right pitch, so to speak.

Your bonds are trading now kind of in the 8.5% range. How do you think about that in terms of return on investment and with bonds in kind of the mid-80s? Does that look appealing to you from a valuation standpoint?

Yes. We're looking at our bonds every day, scratching our head a little bit, but I also understand it's relative to other stuff going on in the market. And we absolutely understand the attractiveness of -- if we're going to pay down debt, we have a pretty good sense that the stuff at discount is attractive to us. But we're going to measure that against the return on investment of M&A and other opportunities.

Great. We have about 5 minutes. I wanted to maybe open it up to the audience to see if any folks have questions if they wanted to ask the management team before we wrap it up.

I guess can you talk about sort of the incremental revenue opportunities, I guess, from the No Surprises Act and sort of the additional kind of work streams or ways that you're able to help your customers because of that and how you can make more money from doing that?

I couldn't hear.

So I think he was asking the -- where do you see -- maybe you can actually sort of help us better understand what the revenue opportunity might be for MultiPlan help your customers adopt the No Surprises Act regulation and specifically, or more tangibly, how is that incremental dollar coming into the MultiPlan?

So we -- obviously, we're in a great position of helping our customers to ensure their compliance with the law. So what are the ways to do that? We're able through our solutions, right, through networks, negotiations and our analytics solution to reprice a claim and provide a basis for reimbursement that payers can take and pay the provider. We can also ingest their PPA information and manage that on behalf of a payer as well and get all of that done. And then on and provide to them, right -- we're able to provide to them an end-to-end solution. So we're really able to say, "Send us your claim, we can flag a surprise bill. We can calculate the reimbursement. We can get the claim back to you, so you can adjudicate it and pay it." If a provider is unhappy with the reimbursement, we have 315 negotiators and years of experience in negotiating with providers during that post-payment process. And then we built an arbitration process. Using the subrogation experience of Discovery Health Partners, we now have clients that have come to us and said, "We want you to manage the arbitration. We want you to, not for us -- don't give us that, you manage that, you file the claim, you go to the portal, you manage the process, you provide the explanation on why the reimbursement was reasonable and you manage that on our behalf." And so -- and then -- and to wrap all that up, we're using the strength of our analytics engine to provide feedback to the payer. So think of it -- over time, as trends start to fall in place, payers will want to know what's the experience? Where am I getting the most appeals? Was it in this specialty? Is it this provider? Is it this geography? Do I need to adjust anything? Do you have any recommendation? What arbiter -- what are the outcome of the arbiters? Who's more favorable to me, the payer versus the provider, in this specialty or in this specialty? All of that analytics is what is in our wheelhouse, right? That's what we do day-in and day-out, 7 days a week, and we have the ability to get that back to the payer to maximize their experience and their compliance under the law. Well, we -- it's an often asked question, but we don't comment on the status of negotiations with our major customers. So I think you can kind of look back and see the long history and I think our performance testing that things are moving well with all our clients at this point, but that's about all we say about our customer contracts.

I think in that theoretical example, sure, there's no volume commitments and anybody can create a competitive business. But I would just remind people of the competitive strengths that we have. We're connected, independently connected, to 1.2 million providers. We have 40 years of building data and analytics. We have straight-through processing capabilities at scale with operational excellence and a very, very competitive cost base. So if anybody wants to try and create a competitive product. They will need to have a bunch of attributes beyond just saying we think we can do.

And when you think about the competitive landscape of the company, look at the depth and breadth of multiplan services. I mean, first of all, it's independent, as Jim said. We're independent. We're not payer-owned. We're not provider-owned, right? And that's -- and we sit in between payer and provider. And then when you look at the competitive landscape, MultiPlan is uniquely positioned because of the depth and breadth of its solution where we have analytics. We have network. We have payment integrity. We can offer a full array of bundled solutions to provide answers and solutions to payers pain point. Here are other companies that have payment integrity or they have analytics or they have just the network, but MultiPlan has all 3. And then the depth of that solution and the breadth of it is really hard to replicate.

And be able to pivot when a regulatory change happens. Over 6 months, we produced the largest release of software we ever did across an array of over 100 clients. That's hard to replicate. That's not something that a lot of our clients wanted to undertake.

And it's complex, right? That's -- everything about that law, it breathes complexity. And that, again, this speaks to MultiPlan's wheelhouse. That's why, as we said, we've had over 90 implementation. We had great line of sight and visibility. What did our larger payer needs -- payers need from us? To be ready from -- on January 1, and we were ready. And now since -- in 4 months, we have over 90 implementations. We have 20 more in the pipeline. We have 20 being in the process of being implemented, 40 more opportunities. We're just moving downstream and getting visibility in that longer tail of customers, regional health plans and third-party administrators who will also look to us for that end-to-end claim solution, including managing the arbitration process for them.

I think the point you made about independence is also an important one. And maybe if you just give us a quick sort of, like, history less than 10 years ago, there was some litigation that was focused specifically on one of your largest customers managing their own claims negotiation process. And that ultimately created, as I understand it, reference-based pricing pools. But the reality is that you do need an independent player involved in that process. Is that fair?

Yes. It's -- that element of independence is important to the provider and to the payer. I mean we sit in the middle between the payer and the provider. We serve both. And the fact that we're independent and work collaboratively with both payers and providers to drive affordability, to drive efficiency, to drive fairness in the delivery system is a critical and important distinction that MultiPlan offers.

Great. Thank you. With that, we are out of time. So again, I want to thank you, guys, for joining us today. And we'll move on to the next one.

Thank you.

Thank you.