Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Steven Valiquette, the health care services analyst here at Barclays. I'm going to kick things off here with the health care services with MultiPlan. With us from the company is Dale White, the company's CEO. Also Luke Montgomery from Investor Relations. Jim Head, the CFO was scheduled to be here, but he eventually got sick at another conference last week. So that should be a less than everybody. Only come to the Barclays Healthcare Conference. So I just want to send the message out on that. I think first, we need a few quick disclaimers and we'll do that quickly, and then we'll direct it on a fireside chat.

Thank you. So on the screen, you can see forward-looking statements and a quick remainder, any remarks and responses today may include the forward-looking statements as outlined on the screen. Actual results may differ materially from those forward-looking statements due to a number of risks. A summary of these risks are shown on screen and a more complete description can be found in our annual report on Form 10-K and other documents we filed with the SEC. With that, I'll hand it back over to you, Steve. Thank you.

All right. Great. So I guess just to start things off, obviously, the MultiPlan business model can have some volatility in both directions around health care utilization trends. I think you pointed to some softer volumes as one of the primary drivers behind the results in the back half of '22, you talked about maybe things being slightly on the soft side for '23 as well. If you're in a position today to walk us through how volume is tracking so far in early 2023, but I'm sure people love to hear that if you have any thoughts. And can you remind us of the run rate exiting '22 as well. I just want to start with that.

Sure. Thank you. And it's good to see you and good to be here again. And I think as we said in our last call that we saw a soft in the second half of the year, related to utilization. In fact, that October was probably at the lowest point in terms of utilization. November was a little better. And in December, we started to see an uptick and it was our best month as we pointed out since May of 2022. It wasn't a snap back. It was marginally better. And then as we look at '23, inside our guidance, we had account for -- we were cautious in terms of utilization coming back. We were built in some audit recovery, we anticipated some modest recovery in terms of utilization. And it looks like sort of [ some ] line with what we expected in terms of seeing that going forward into where we sit today and what we're expecting for your kind of utilization is where we were tracking.

Okay. Great. All right. Maybe jumping around here a little bit. Can you just remind us of your mix in relation to percent of audit network claims that are inpatient versus outpatient? And how much exposure do you have to these areas of softness [indiscernible] would you break it down that way?

Yes, it's a good question. We look at it through the lens of facility versus professional . And so we see all claim types. And so our softness reflects the industry softness. What You see when you saw softness in terms of a hospital inpatient and the limited capacity of the system to deliver the care requested by the consumers, we experienced that same softness. So we see facility claims inpatient. We see facility claims outpatient, meaning ASCs, labs and other types of ancillary providers and then we saw the [ Seal ] professional claims. Doctor visits when members go to the doctors. And so our softness kind of neared the market softness in terms of the overall softness across those specific specialties and facility types.

I just say that we're -- as out-of-network providers kind of, in some ways, the marginal demand for health care. So what the industry saw in terms of softness of the utilization we saw with a little bit more beta.

Okay. Great. Okay. This next question, I think, has a long duration to it as far as the historical look back. Couple of years going back, people were wondering about the mix of claims tied in No Surprises Act, some people thought it might impact the whole company. I think the final legislation ends up being maybe a smaller number. Maybe you can just talk about the mix of claims that are impacted by NSA and how utilization is trending within that?

Sure. Look, the NSA focuses on emergency claims. And we had said that it was about 11% to 12% of our volumes while we did see softness in the second -- in that -- towards the -- towards the latter part of the year and elective procedures. The NSA claims were tracking were in line with our expectations. So we didn't see the same softness there that we -- now it ends up now because our web -- Our claim volume down -- our overall claim volume is down. The percentage of [indiscernible] would then be up to sort mid-teens. But it's in line with expectations. It's been steady throughout the fourth quarter and throughout the fourth quarter.

Okay. All right. And as we further slice and dice different ways to break down your book of business. I'm wondering whether or not you see the start of Medicaid redeterminations as a particular tailwind, maybe later on in 2023 with a potential uptick of our population, obviously, going back to commercial plans?

That's a great question. We would anticipate that if those members that come off on Medicaid enroll in onto commercial insurance, we would be the beneficiary of that, right? And again, where they go in terms of if they are on the exchange or with employer-based care, particularly with the employer-based care, if they come off the Medicaid programs and on to commercial health care, it would be a benefit to us. It would be tailored your point.

Okay. Great. Okay. So I guess shifting gears here. Obviously, some of the customer contract renewals are another key point for investors to be focused on for this year. If you called out 3 large contract renewals that are impacting the results for '23, a couple of them at the beginning of the year and then one thing later around in the year. But maybe -- just additional color around that you might provide anything over and above kind of what you talked about on the call and just time line of renewals, just to confirm that was correct as far as the timing of when those impact the business?

Sure. On the call, we said that we had renewed 2 of our larger customer contracts to multiyear arrangements. We had noted in Q2 of last year that we had renewed one larger customer. Since our last earnings call, we renewed the contract with a second larger customer, and we anticipate wrapping up a contract with a third larger customer by the first half of this year, by the end of the first half of this year, and that the way we looked at it is those 3 contracts accounted for more than 50% of our revenue.

And we kind of penciled that out. Rolled it all up. We have a pretty good line of sight on the -- the one that we're going to do in the first half of this year. So of the total impact of all that was around 8% headwind versus our 2022 revenues.

And all of the impact is included in our guidance for -- we accounted for in our guidance for 2023.

All right. Okay. And also maybe just to dive in a little bit deeper on that, if you're able to kind of opine on this, but the -- I think investors are wondering how much of the impact of the business is related to just your pricing resets on the contracts versus any sort of change in either the volume or number of service offerings within some of those contracts?

Yes. The service offerings remain the same. So the -- when we renewed the contracts with each of them, service offerings remain the same, and there isn't a significant change in the type of service or a material change. It was the scope of services remain a change really around price.

Okay. I guess for better or for worse, you probably don't have 50% of your book of business renewing every year. So I'm wondering any of those contracts early renewals? Or is it just going to be every certain number of years, you're going to have just a larger-than-average part of the book renewing? And once you get beyond '23 and do we have much lower risk of customer contract renewals in '24 and beyond at least for a couple of years?

So when you look at it -- it's a great question. When you look at the 3 contracts that are for multiyear arrangements, 2 were -- 2 of the 3 were up for renewal. And the third, we accelerated really to remove that the [ Hubcamp ] removed all the issues around our major customers to give us line of sight and stability going forward. The rest of our business, meaning the other 50% is really all around the relationships with our other customers' regional health plans for part the administrator. They tend to be on one year annually renewable contracts and have been like that for the 42 years we've been auto renewal.

One year...

They automatically renew every year.

Okay. Right. This goes back a couple of quarters ago, but obviously, you not to focus on all these customer changes and so forth, but you called out there's a partial customer carve out for some of the analytics negotiations business to another third-party vendor back in the third quarter of '22. Maybe just spend a minute to just discussing the competitive landscape for both the analytics business, but also where you think MultiPlan may be differentiated versus some of your top competitors?

Yes. When we look at the competitive landscape based on our products. And when you think about our 3 solution towers. We have provider network, we have analytics, and we have [ Payment integrity ]. But when we look at each one of those, when you look at Payment Integrity, for example, there's a different set of competitors, names that you recognize like Cotiviti and Optum and rolling and others are ones that we compete with in that space. In the analytics space, there's another set of competitors that we see. When we look at our reference-based pricing program, we have HST, there's another set of competitors that are there and then the same is true for provider network as we compete against smaller organizations that own provider networks. So when we -- depending on which product we're talking about, we see a different set of competitors for that the advantage that MultiPlan has is I don't -- is that we are each of those solutions. And so when I look at the competitors in Payment Integrity, I don't see them in analytics, when I see them in the analytics competitors, I don't see them in Payment Integrity or network, MultiPlan's sits in that unique position of having the ability to offer multi solutions. So we sit across all 3 solutions. And as we've said, we're adding a fourth solution this year on new data and data analytics solutions. So we'll now have 4 solutions to offer our customers and that's a unique piece of real estate to have where our competition does not.

I was just to take it up a level, too. I mean if you look at our latest 10-K, we've got almost $500 million of capitalized software, and that's largely investments we've made on behalf of our clients and [ itself ] operating in their IT environments, and we view that as a competitive moat. It's important.

Okay. Great. Okay. We talked about some of the existing customers, competitive landscape now, maybe talk about more of the -- going on offense and sales pipeline, where do you stand on the ability to attract new customers, whether it's payers, employers for services across the 3 segments? I think also, is there any -- what's the impact, if any, really, from kind of the macroeconomic outlook and some of these discussions as well?

It's -- the sales -- sales, I'm never happy with the size of our sales pipeline, nor the velocity of -- I want it bigger, I want it faster. But I am -- but we continue to see transactions move through the pipeline. We continue to close opportunities. We've built that into our guidance for 2023 transactions that then deals that we worked on last year, we'll have will be the beneficiary of those in 2023. And these are ones in the way we work together with our customer. So the opportunity for us in terms of new revenue, it's really looking at our existing customers and collaborating with them on ways to generate more savings and sell new products and upsell new services to them. New logos are always an opportunity, but our footprint with our customer base, the bigger opportunity is to deliver more value, more product, more service to our existing customer base.

Okay. Great. Okay. As far as the margin outlook for 2023, I think obviously, people are going to be aware of some of the margin impact tied to the pricing, et cetera. I'll be able to talk about or just separate that, but is there any view on the margin profile of the rest of the business separate from the price resets? Mean for you guys, where that's been an issue as far as impacting your margins one way or the other or can we check the box, but maybe that has not really been a problem for you guys? But just curious to kind of break down the margin outlook separate from the price resets.

Well, yes, a couple of things. I mean, at a high level, we have a really high fixed cost. So what you've seen in terms of margin compression recently has been -- revenue comes down, to all drops to the bottom line. And I think the good news is if we get a little help from utilization, we are successful in growing the business. You should see some natural uplift in the margin. I think we're going to get back to 75% on this. So I think that's healthy. We -- starting from the exit rate of kind of the fourth quarter, we were at 67% margin. What we've said is that we expect about 100 basis points of compression for this year. That's driven by structural cost increases, that's about 100 basis points and then also about 100 basis points of investments in the platform and then 50 basis points, which is largely pointed against our growth initiatives. And I think you could look at the 150 basis points of investments and we offset a lot of that with cost savings that we identified that are equal to about 4% of our cost base. With respect to your question about the pricing impact, I mean, I think you can make an assumption about what volumes will be in the first quarter. And we've kind of given our first quarter revenue guidance, and that will give you some indication of where the take rate -- quarter-over-quarter. And I think you've got enough to work with there to kind of figure out what the pricing effect will be as a separate dynamic.

Okay. Got it. Okay. Maybe just coming back to the NSA for a moment. Obviously, there are a lot of variables that impacted the back half of '22 alongside the NSA, you guys built out a new service offering as well. But maybe you can just give us some sort of final update coming out of the first year of claims impacted by the NSA and just give more color on how much that impacts the business relative to maybe the original expectations?

Sure. When you think about NSA, just reset the clock and go back to 2021. We spent -- it was our top priority to be to ready for the NSA implementation come in January 1 of last year, we were, and we really turned what was seen as a threat to the company into a real strength of the business. And last year, as an example, we repriced 1.75 million surprised bills. We did something like 158,000 postpaid negotiations, of which we settled 124,000 of them, 6% of the original [ QPA ]. We did -- there were 58,000 IDR request that came in last year, and there was a significant increase in the second half of the year. In IDR request, we've only settled a smaller portion of those because the Feds have come out and put most of those on hold at least until recently, that the IDRs are now able to render decisions on cases prior to October 1, but they were on hold for a period of time. And even now they remain on hold. So we're pleased with where we are. We -- as you heard, we're spending -- we're investing in the business this year, and we're investing in NSA and we're bringing more sophisticated analytics, we're bringing machine learning. We're bringing [indiscernible]. We're developing a portal with our customers and to continue to enhance our end-to-end solution for those that are working with us.

Okay. Great. Also on the NSA, I think this next question, there's probably more attention on this, maybe 9 months ago versus now. But just around some of the legal developments regarding sort of requirements of the NSA, mostly on the independent dispute resolution or IDR process. The latest update was a ruling of one of the Texas case is vacating certain parts of the rule. But just to give people a refresher on this, just walk through any expected impact from the ongoing litigation about MultiPlan's new NSA service offering around some of these legal decisions.

There have been 4 lawsuits filed against the NSA. 2 of which have been closed, both of which goes in favor of the provider. I think from that perspective, it's a much more balanced approach to the IDR process. So when you think about it and just recount the numbers, as I said, most of the work we do, where we spend our time, we ingest claims, we identify surprise bills. We pride the initiative, we repriced the claim in accordance with the payers rule set, whether that's QPA or another reimbursement and we handle postpaid if the payer is unhappy with the initial payment. That's where the lion's share of the work is done. Remember, I just said we repriced last year, 1.75 million in claims and only a handful of 55,000 to 58,000 ended up in the IDR. And that's where most of the litigation is, focused as the use of QPA for the arbiter, where does QPA sit originally sat in front of the other variables and it was the primary variable to be considered, but some of the rulings came back and said, "No, it should be on equal footing with the other variables." So for us, we went into this being very nimble and very flexible. We weren't concerned which way the lawsuits went we were ready to go in either direction. So it's a much more balanced approach. That's good for us. And if there's ambiguity, it's good for us. And -- and -- but it represents a small piece of the process of the overall process we do in terms of our end-to-end repricing and end-to-end NSA solution.

Okay. Great. Okay. Final topic here kind of ties into some of the growth. I think first, I'm curious with the balance sheet kind of set up the way that is current debt with the appetite or ability just don't do M&A. But also, I think more importantly, you just talked about some new growth initiatives and some new products and enhancements on the last quarterly call. Some new data and analytics service offerings. I think will drive growth even separate from M&A. I wonder if you can just intertwine those 2, just talk us through kind of the new areas of growth to maybe offset some of the other impacts on the business?

We're laser-focused on our customers and not growth going forward. So we've announced the development of 4 new products and one new data solution, all of which will be launched this year. We said that the 4 initiatives should develop about should account for $50 million to $100 million in incremental revenue over the next few years. And we're -- we're in the process of building our data and data analytics solution. So we're super excited about the strategic direction of the company and now being able to launch more products into the market and bring more value to our customers. That's all organic growth, right? That's all organic growth where we're building -- we're building it ourselves. We did say that if we -- that we may look at an acquisition in the data analytics space to help accelerate our development and rollout of that product. But in terms of acquisitions, our appetite is we'll continue to be opportunistic, right? Jim talked on the call about how our use of capital around, what our capital allocation is but our appetite would be much like what we did with HST and Discovery. We funded out of cash flow. Those deals were about $140 million to $160 million. That would be our appetite to be able to identify products and service that we can bring in-house and snap on the chassis and take advantage of the distribution power that the company has.

I'd just say, if you think about cash on the balance sheet and maybe the free cash flow we generate over the next couple of years and the size of the deals, Jim or Dale was talking about, it would probably be like less than 1/3 of our capital deployment. Most of it will be focused on chipping away at our debt stack. We know we've got to do that and made some progress in the fourth quarter, and it's still [ in the ] list of priorities.

Got it. Okay. With that, I think we're out of time. So I want to thank Dale and Luke for their time today, and enjoy the rest of the conference. Thanks.

Thanks.