Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Good morning, everyone. My name is Cheri Mowrey. I am co-head of the U.S. healthcare investment banking business at Morgan Stanley. Welcome this morning. We are excited to have with us Dale White, the President and CEO of Multiplan; as well as a former Morgan family alumni, Jim Head, as Chief Financial Officer. Before we get started, I'll read a very quick research disclosure. For important disclosures, please see the Morgan Stanley research disclosure website. You can find that at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm going to turn it over to Shawna real quickly.

Thank you. I just wanted to give a quick reminder that any remarks in response to questions may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the actual results may differ materially from those stated or implied due to the risks and uncertainties associated with their business, which are discussed in our risk factors included in our quarterly and annual reports and other documents filed or to be filed with the SSC. Any such forward-looking statements are based on the assumptions and 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. With that, I'll hand back over.

Thank you, Shawna. Good morning, fellows. Thank you for coming. We're excited to have you. So you are both relatively new in your roles, and we'd love to get an update from you on how you're thinking about the business and the path forward.

Well, first of all, thank you for being here. Thank you for the invitation to speak at the conference. And you're absolutely right. Jim and I are relatively new in our roles. In fact, I've been in this seat for just about seven months. And Jim, just a few months longer in his role as CFO. But I was with MultiPlan for over 18 years. And so- I've really had a courtside seat at watching MultiPlan's critical role in the healthcare ecosystem for the past 18 years. And so it's been an amazing place to be. The company itself -- we like to pride ourselves on our nimbleness, on our flexibility, and our responsiveness to our customers. And there's probably no better example, if you will. There's no better example than Surprise Bill. Surprise Bill has certainly occupied our attention over the past 18 months, and we're still in the early innings. But our adaptability, our ability to be ready for the law. Or, ability to enable our customers to be in compliance with the law when it came into place. And now to go through the various iterations of it, the recent court rulings, things that we'll talk about. But for us, it's an exciting time. I mean, when you think about the healthcare system and all the changes that are taking place, and the role that MultiPlan has. Some of the things that are out there. We're just so well positioned. We're so unique in that we have a 1.2 million provider network. We have domain expertise in payment integrity, networks, and analytics. We're the beneficiary of long and trusted relationships with several hundred payer customers. And so we're ideally positioned and have been ideally positioned to take advantage of that.

Great. Look, the health care industry is dynamically evolving to say the least. I think things are becoming more interesting every day. And there's been increasing progress towards value-based care. I think we still have a little ways to go. But could you talk a little bit about how vertical consolidation, which is a key portion of the path to value-based care, has impacted your business? And what opportunities does it present?

MultiPlan has been in business now for over 40 years. And so we embrace change. And this system, as everyone knows in this room, the health care system here in the U.S. is incredibly complex. And over these 40 years, we've seen it all. I mean, we've seen patient choice, narrow networks, high-performance networks, capitation, fee-for-service. We've seen high unemployment, low unemployment. We've gone through various economic cycles. And now the market and the providers are focused on value-based care. Our position, where we sit today in that prepayment space, we're ideally suited to provide solutions to ultimately whoever takes risks. And that, too, has changed and evolved over time. Today, whether it's a payer that takes risks; whether it's a fully insured product; or it's the 100,000 employer groups that we ultimately provide services to, who are partially self-funded or fully self-funded, who take risks; whether it's the providers taking risks; or whether it's the accountable care organizations. Any one of those entities. We're just ideally positioned to provide services and value to that party who's ultimately taking risks. And so for us, you can see as it's shifting incentives. The incentives are changing now. More risk is being given to the providers and to the ACOs. And for that, they'll need services. They'll need to manage their risk. They'll need to manage their cost. And for us, we can provide services no matter who is ultimately at risk.

Yes. I agree. I think it's an interesting opportunity for you all. Can you discuss the utilization trends and volume trends of 2022 and the residual COVID headwinds? And what you're seeing in that regard for back half as well as 2023.

Yes. I guess, first off, on utilization trends. We're not here to provide third quarter guidance. But I think what we're going to do is give you a little context because I think there's an evolution here. And if you follow us, you see our COVID adjustments and how we address that each quarter. And that was a vestige of essentially the beginning of the lockdowns: people were not going to the hospital because they were afraid of using the healthcare system, working from home, et cetera. And so we created a COVID adjustment to think about the suppressed utilization that existed in the system. And that worked pretty well in 2021 because we had comparisons, and we could see how the tide was shifting a little bit, and COVID was becoming less and less relevant. If you look at our numbers - we reported each quarter - the COVID adjustment kept on getting smaller and smaller. And here we're in Q2 as of our August earnings and we talked about a $4 to $6 million headwind. And looking in the rearview mirror, that was really just kind of connected back to the starting point of COVID and what the system was delivering in terms of claims flows. Now as time is passing, it's harder to tether ourselves back to 2019. So you'll see our COVID adjustment, so to speak, probably dissipate a little bit. And as we go into 2023, and we're in a new world, we may not even continue to show that adjustment. Now having said that, in our Q2 earnings call: on one hand, we said the COVID adjustment is pretty small, but we also said utilization is soft, okay? So the reality is, is it COVID-related? It's probably not lockdown related, but there is a change in the utilization that we talked about on our earnings call. And we think there's changing behavior, whether it's macro driven or essentially people travelling, things like that. So I'd just point you to our Q2 earnings to talk about some of those dynamics, which I think we expanded on quite a bit. But what's important to understand, though, on a go-forward basis, utilization is could be less clear than it was before the pandemic. Make no bones about it. The core demand for our programs - we're over 100,000 employers. Those programs are in place. They exist. We're in the middle of a plan year. That hasn't shifted. Our membership hasn't shifted in any dramatic way. There are always little ebbs and flows. So what's going on is that the structure is in place to capture the claims. And so we think it's a little bit of a temporary setback in terms of utilization. People are not getting healthier. They're not getting younger. So at a certain point, it's going to catch up. But quarter-to-quarter, it's going to be harder to predict.

Fair enough. Can you discuss where you are in terms of the implementation of the No Surprise Act, relative to guidance?

Sure. We're now nine months into the implementation. The law went into place on January 1st. And so we spent the better part of last year on working with our payers to bring them into compliance for January 1. As we reported in our second quarter earnings call, we've completed 126 implementations with customers . And we still have 28, 29, implementations in process, so a total of about 155 implementations that are either completed or underway. The law is still getting clarity, right? So just last month, the federal government came out with...

On behalf of Morgan Stanley, I apologize for this interruption. Give it a minute. We'll have to give you back time at the end. Sorry. I think there are companies having the same problem, trying to get their presentations finished. Hallelujah, we're back.

The federal government just came out with its final set of regulations last month. But the biggest change is that it followed what were the rulings of 2 what was one at the time, and now two, lawsuits in Texas. In which it was said at the point of arbitration in that final stage, the arbiter is now instructed to include the QPA as one of several considerations, and not the prima facie consideration. That's a single consideration. So other than that, we've said that for us, we bracketed the risk at about a 2% growth headwind. We're still in the early innings. But the numbers are coming in. As we reported in Q2, the numbers are tracking to expectations in terms of what we're seeing.

Great. Great. Let's talk a little bit more directly about the business in terms of the recent contract renewal. Can we get an update from you on this in terms of how it's improving your revenue visibility going forward? And how do you think about trade-offs when you're negotiating new contract terms or contract renewals in this case?

As we reported on our Q2, we renewed our contract with one of our larger customers. It was a multiyear contract extension. And as we always say, and we're very limited in what we can say about that our customer contracts as a matter of policy, and as a matter of the confidentiality provisions in our agreements with our customers. So we're limited in terms of what we can say. And what we said was that it was a multiyear extension with one of our larger customers. For us, it gives us a line of sight. We think it gives greater visibility going forward. And it's consistent with what Jim and I have tried to do since we took over these roles. That is to address the perceived risks of the business against the reality of the business.

And do you have any renewals coming up in the next 12 to 18 months that are notable? That investors should understand?

All of our contracts, as we said, particularly with our larger customers, are multiyear contracts. They just periodically come up as the term expires.

Okay. Got it. And then how should we think about long-term growth and accelerating into long-term growth given there are vagarities in 2023? What are you thinking in terms of '24 and beyond growth rate? Understanding that you're not giving guidance, we get that.

Yes. And maybe to turn into the financial components of the contract renewal. We talked about the contract renewal muting growth next year. So ultimately, we'll provide guidance in the beginning of the year for 2023. But we've been pretty consistent with investors talking about a, call it, a consolidated growth rate of mid-single digits off that. And the big drivers of that growth rate are membership. By the way, we sell our services through a lot of these big, core, ASO platforms. But ultimately, for the end customer, 85% of our business is in the ASO channel to plan sponsors, which are large employers. So membership growth, employment growth, et cetera, is one driver. Healthcare inflation, obviously, is a big component. And looking forward, the inflation seems to be potentially bigger in the future. We've got new products and we've got new customer initiatives, et cetera. So when you add those four components, you could say, "Well, that fills a lot more than mid-single digits." And I think what we have to acknowledge is over a cycle, with these big distribution partners, they're going to take a little bit of it back in terms of contract renewals and things like that. We look at that long-term trend that way. That doesn't mean we're satisfied with that, by the way. We think we need to push harder to develop new products, diversify our business. And I'll just make a comment about one of the reasons I joined here is... And Dale talked about the, I'll call it, the bones of the business. But the bones of the business are pretty impressive, given that we span both ends of the healthcare spectrum, providers as well as payers. We've got unbelievable analytics solutions, and we've got a right to win because we're in that prepayment realm. We're a very trusted operational partner to a lot of these big payers. So for us, the game is to try and drive more products, win more customers. And we're not starting from scratch. We're in the out-of-network space. We're a really clear winner. We've got real opportunity to go into the in-network space, and that is vastly larger than what we have. We just need to build the products, and it's not hard to get in the door with our payer clients. We're already in the door.

A slightly different tack away from growth on the investment side, where are you dedicating your investment dollars? And how do you see that evolve over time with the haircut that's expected in the EBITDA?

We talked about it, at least 2022. We talked about three components. And I think as we get into guidance later, we'll probably have those same components. We've got most of cost of our costs. Last quarter, it was about $80 million per quarter. Most of our costs are people. And we've got, I'll call it, structural cost inflation in our base. And we can manage that pretty well, but people aren't cheaper next year versus last year. We've got investments in the platform itself, which we view as very positive. That is: "Okay, how about NSA getting our NFA services up to speed, investing in cyber?" Our clients require really highly secure operating environments with their partners. And so we keep on raising the bar on that to make sure that we're in the game. And then ultimately, there are growth initiatives in our business. I think those three components are going to be the core components of how we think about the cost structure going forward. And investments in the platform and growth initiatives; we're willing to make those bets, in large part, because we feel like we've got an opportunity to grow the business. So if we see products that are going to deliver revenue, we'll make the investments behind it. And over time, the mix of the business could take the margins down a little bit. But by the way, we're still going to be best-in-class in our margins, full stop.

Yes. They're pretty hard to beat, those margins. It's very impressive. So speaking of that: generating consistent free cash flow and your balance sheet is very strong. What does that look like going forward? How do you see cash flow and in particular, capital allocation from that cash flow? Where do you see that trending?

Right. So as of second quarter, we have about $350 million of cash on the balance sheet. And depending on the year, we'll generate a fair amount of cash flow each year. So when we think about capital allocation, you could say, "What do we have today and what's are next couple of years going to generate?" It's a pretty big pool of capital to deploy. We've been pretty clear to all our investors, debt and equity investors, that our priorities are to invest in the business. That's the P&L and capital side of things, and that's not going to be giant investments. M&A. I'd characterize the M&A that we find most attractive is very consistent with what we did over the last couple of years, like in HST. $150 million. We snap that onto our chassis, as Dale likes to say, and drive growth. It's a very good risk-adjusted return when you can buy these businesses that are going to take advantage of our reach and our operational excellence. So those are the types of acquisitions that I think are going to be the heart of what we do. Third in line, but not to be dismissed, is deleveraging. We do generate a lot of cash, but we do have a substantial amount of debt. And I think we've acknowledged that we need to continue to work on that as a public company. As a private company, we've operated with much higher levels. But as a public company, we know that's a different world. So it's a balancing act. And we said throughout the year that cash was accumulating. We're the discipline between paying down debt or investing in acquisitions. The acquisitions are a little bit more periodic. So measure us over time, but we want to have a blended approach that's going to address both things. And we feel like that we've got an opportunity to continue to build the business, but also address our capital structure.

Great. Let me just let everybody in the audience know. If you have a question, just raise your hand, and we'll try to get to you. We've got a mic in the back of the room here. So just flag us let us now. So you talked a little bit about strategic M&A, Jim, and anticipated inorganic growth going forward. You said that they could be like the acquisitions that you've done recently. Any more specificity on what you're particularly interested in?

Sure. Well, we don't want to be too digital, but I think some themes are probably relevant. We've talked about continuing to fill in our Payment Integrity product line. We started with a prepayment solution started with a prepayment solution that we had acquired ourselves. We then acquired [indiscernible]. Okay. So filling out our Payment Integrity line, Discovery added some very interesting solutions. Subrogation, coordination of benefits. Revenue integrity is really interesting, which gets us into the government side of things. Medicare Advantage and Medicare. And so that's one component. I think we recognize that we have a right to win inside our payer relationships, but on the government side. So Medicare Advantage, that's more of a market lens versus the product lens because there's obviously not a lot of network in Medicare, but there's a lot of data analytics capabilities that we can bring to the fore. And then last but not least, our HST platform is really interesting because it goes directly to employers, smaller employers with reference-based pricing solutions. And we think we can wrap more around that. More solutions to sell to the customer. So we've been looking there. But those are the general themes. And I would just say that size of acquisition is where the bread and butter of the market is. Sometimes we see stuff that's a little bit bigger, but that's just got to have a strategic imperative which is really strong to justify perhaps over utilizing some of our capital for an acquisition for a year, then we'd pay down debt thereafter.

Right.

Let me just make just two additional comments. Jim spoke that we have this incredible chassis. I mean, it's just a well-built chassis. And so for us, historically, we've been very successful at buying companies and snapping them onto this chassis. And then using it to either expand our payment integrity, widen and deepen it, add to our analytics capability, bring more network providers, more prod and network-related solutions to the table and snap it on this chassis and then use the several hundred payer relationships that we have to drive growth. You saw an example now. Earlier this year, I'd say data analytics, data and analytics. We made an investment in Abacus Insights. It wasn't an acquisition, but it was a financial investment. We made that $15 million investment. They have a data platform, but they're interesting because they take data from disparate sources. What the payers do is they have claim data, Rx data, care management data, all these different sets of data, pharmaceutical data. And Abacus is able to take those disparate sets of data and consolidate into a single data platform. So it enables the payers to do much more intensive analytics of their utilization and their utilization. We're excited about that. And for us, it was a partnership as opposed to an acquisition. But historically, for us, we've been really successful of just buying things that we can look at. That resolve pain points for our customers, go into different areas, like government or analytics or deep in our payment integrity suite, and snap it on to that MultiPlan chassis and go.

Just on Abacus specifically. So a $15 million investment in addition to the partnership. What was the impetus for providing capital into that business versus maintaining it as a partnership? Was that to help direct their efforts in terms of what's going to be most useful to you? How did you guys think about that?

I think when it goes from a, I'll call it a commercial relationship, to something bigger. I think we like the idea of having a lens on the cutting edge of where people are looking at data. And I think mutually, we wanted to have a little bit more commitment than a reseller agreement, so to speak. And so we're going to learn a lot from them. They're going to help us in our own data structure, et cetera. So to us, it was worth taking it one step further. And we're not going to sprinkle investments with a bunch of different companies. We feel like they really understand our business. We understand theirs. But we have complementary capabilities. We're really good at analytics. They're really good at cleaning up data and making it work. And so the two of us, we felt like we needed to have a deeper commitment than just a reseller type agreement.

Yes. Makes sense. Just looking for any other questions from the audience. I probably have time for one more question. And if not, I'm going to ask it. Which is: to me, it feels like there is a huge opportunity in front of the company that you've only just started to capitalize on. The revenue integrity piece, I think, is a huge opportunity. The in-network piece, huge opportunity. So can you shape the size of those opportunities and the pace at which you may try to tackle those opportunities?

Well, we're not in the business of doing the... Hey, it's the Carl Sagan, billions and billions of TAM . But the reality is that we're talking about our mostly existing customers. And we're just going to a different side of the house. I think I would actually try it slightly differently. In the in-network space, you could argue it's 10x bigger than the out-of-network space. Now having said that, it's not claims repricing because in-network, it's already priced. So we have to come up with new solutions. But we do think there's a material opportunity against our base, and we're starting from a very small number. And so I think one of the things that Dale and I have recognized is with this distribution channel, this operational excellence, they are the bones of the business. We need to internally buy, build, and partner for more product. So it's snapping on to the chassis, but I think we need to accelerate that because we do have a privileged position and a right to win. And so part of that is, "Okay, what's the new product that we can sell?"

Right. That's great. Well, thank you both. I apologize for the interruption. Thank you. Fantastic having you here today.

Thank you.

Thanks. Thank you.