Claritev Corporation (CTEV) Earnings Call Transcript & Summary

Okay. Good morning. Before we get started, just a quick reminder, any remarks and responses to questions today may include forward-looking statements. These forward-looking statements represent management's beliefs and expectations only as of today. Actual results may differ materially from these forward-looking statements due to a number of risks. A complete description of these risks can be found in our annual report on Form 10-K and other documents we file with the SEC. With that, I will turn it over to you, Cheri.

Thank you. Good morning, everyone. My name is Cheri Mowrey. I run our U.S. healthcare investment banking business in Morgan Stanley. Before I introduce the management team from MultiPlan here, I'm going to read a short disclaimer as well. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that, we are thrilled to have with us this morning, Dale White, the CEO of MultiPlan and Jim Head from MultiPlan, who is the Chief Financial Officer.

Maybe I kick off this morning gentlemen. We would ask you to just share a little bit more of your thoughts around the highlights from the strategy Refresh and the plan that you've undertaken since you joined.

Well, look, I joined -- I've been with MultiPlan, as you know, Cheri, over -- for nearly 20 years. And I've been in this seat since early in 2022 and when you look back the past 3 years and you look at what the company in terms of the headwinds the company had in terms of pandemic and inflation and changes in consumer behavior, we're in a much different point than where we were a year ago. And it's super exciting for us because we embarked on a journey starting last year with the development of our growth plan. And we saw an opportunity. We seized it. We put the ball in our hands, so to speak, and this year, particularly Q2. Q2 was a real inflection point for the company. And we're excited about all the things that we have accomplished, and we're super excited about all the opportunities that are in front of us. And so when you look back, just even if you reset the clock just to the beginning of the year and you look at -- we have -- we're in a much different place. Utilization is starting to normalize, right? So we saw that in our numbers. In fact, the uptick in utilization started earlier than what we anticipated. But we saw that uptick in Q1. It continued in Q2. We saw it in -- and we mirrored what the leading indicators, what the hospitals, what the medical suppliers were saying about upticks in utilization. We saw that in our business. We saw it in inpatient. We saw it in outpatient. We saw it in surgical procedures. We saw it in lab and radiology procedures. So volume started to normalize for the first time. That was important. That gave us great line of sight into our business, right? So headwinds started to dissipate. Tailwinds started to grow. We announced the implementation of our growth plan, 4 initiatives this year that we wanted to launch. Good news, as we said on our earnings call, all 4 are on track. In fact, we launched our first -- 1 of the first of the 4 initiatives in July, where we expanded our -- what we call our HST platform and our Balance Bill Protection initiative. We already have 11,000 members on the program starting in July. So we're super excited about that. And the acquisition of BST and the formation of our new Data & Decision Science's service line, that's -- it's a game changer for us. It's just simply a game changer for us. And so it brings to us a fourth solution set in addition to our provider network, in addition to analytics and our payment and revenue integrities, now we have Data & Decision Sciences and the acquisition of BST accelerated the formation of that. One of our first initiatives there is the -- is our -- what we call our PlanOptix, which is price transparency. And we collaborated with them on that last fall, came together probably about 120 days ago, and we've launched that product in July as well. So we wanted more product and with the addition of BST, as I said, it's a game changer. They just bring an array of advanced healthcare analytics and other products to the portfolio. On top of that, we entered into a partnership with ECHO Health for payments. We launched that in the summer. We looked at it from the classic buy, build or partner. We wanted the speed to market. It was an important issue for us. ECHO is 1 of the premier payments companies in the business, terrific partner for us. We've known them for a long time. And so we're already engaged with them. Implementations under the way, and we're in the market. So much, much, much different place than where we were.

Yes. Congratulations. You've been very busy for the last 6 months -- 12 months. Can you tell us a little bit about how long you think it will take to ramp these initiatives and for it to really show effect in your financials?

Yes. Maybe I'll take that one. In our Investor Day, we talked a little bit about the ramp of the business. And the drivers of our growth are the growth in our core business, which is our out-of-network business, which we think could be 4% to 5%. And as Dale talked about, we've got products lined up, our HST business, we've got Benefits Science, or BST acquisition, Payment & Revenue Integrity launches. And those all kind of later kicked up to an 8% to 10% growth. And we don't think that's a J curve necessarily. We talk about -- in our second quarter, we talked about how we're seeing stability in the first half, confidence in the second half. So I would describe that as a base in which we start building for next year. So as we think about going forward, it's not too much of a wait and see. But on the other hand, to get to fruition, some of the benchmarks that we've put out to the public. It's going to take -- we've said several years, but we feel pretty good that this is going to move along in that direction at that rate.

Yes. So what gives you that confidence?

Well, we start getting visibility and there's some sales visibility, but we just feel there's a lot of stability given the fact that we've reset our contracts. That's a big -- that provides a heck of a lot of visibility. And in our core business, we've got tailwinds that just are irrefutable. Medical inflation, utilization, it will continue to be stable in our minds, if not uptick a little bit. We still aren't seeing utilization back to where it was in 2019 before the pandemic. So there's a little bit of pent-up demand there. And we've got productivity enhancements that we've always been able to grind out. So that offset some of the other headwinds that we see great and other things in our business. So we feel pretty good about where we sit in the ecosystem. And the other thing that helps us get there is we're making investments in the business, and more investments we're making in the business, the more opportunities we're finding. At our Investor Day, we talked about the demand side being there. That's not the problem on the demand side, the supply side, us getting those products to market is the thing that keeps us up at night.

Yes. Let's talk about good juggernaut in your business, which is out of network claims pricing business. How much can that continue to grow? How do you guys steer the growth in that business in the core?

We continue to be -- we've always been very excited about our core business and continue to be. When you think about just the growth plan that we put in place, 4 initiatives that were launched in this year are all [ in-depth ] the core, right? So it's taking that core set of products and services, making them better and doing more. So we talked about -- we talked about Balance Bill Protection and expanding our HST platform. That's our core. We talked about adding what we call Pro Pricer, which is adding machine learning and AI to our claims repricing process. That will increase savings for our customers and revenue for the company, that's aimed at our core. We're refreshing our IBR, what we call itemized bill review, which is the future of our Payment Integrity program. That's aimed at our core. We're expanding our presence in surprise. Still, we're doing more for our customers around the NSA Act, which everyone thought was a headwind to the company. And we've worked real hard at turning it into a strength for the company. So we're investing in -- we're investing in NSA. We're investing in the No Surprises Act. So all of that functionality is aimed at our core. And so we continue to be excited about the ability for our core to grow. Layer on top of that, the acquisition of BST and the formation of a Data & Decision Sciences and Advanced Healthcare Analytics, were kind of unleashing the value of the company, right? We've always said we want to -- we have an incredible platform. We have this massive amount of data, and how do we take advantage of that. That solution enables us to go to cross over into in-network to go deeper into Medicare Advantage, Medicaid and other government programs. It's turning us loose on claims that we have already inside our 4 walls, but we've only had limited opportunity. Data & Decision Sciences just turns us loose. So that's what's really exciting about the sort of the future direction of the company.

Great. Thank you. Let's talk about the environment for a minute. So it feels like external indicators are positive. But you guys kind of struck a more cautious tone in the second quarter conference call. Can you address that?

Sure. And when we say caution, I think it's not a caution on the demand side or whether we're seeing pot holes in front of us. But we're not ready to call another uptick in utilization. So as we came out of the fourth quarter, the first quarter was actually pretty strong sequentially in terms of utilization about 4%. So coming through our platform, we saw about 4% more volume. And then it kind of flattened out, grew a little bit in the second quarter. So that's 5% year-to-date versus kind of Q3, Q4 run rate last year. That came as Dale said, a little bit earlier than we expected. So now the question is, can it step up further? That's where we're showing caution. One of the reasons why is, it's not -- it's a capacity issue. So can an ortho do 1 more surgery a day? No, you have to have more orthos. And so -- I think the healthcare system, hospitals, the intensity of surgeries, et cetera, has ticked up. And the real question is whether it's going -- we think it's going to sustain, the question is, is it going to tick up again. And so that's our caution. It's less about worrying about the kind of the core health of the business.

Got it. Okay. That's helpful. In terms of revenue drivers, your revenue yield began declining in the back half of '22, and it took another step down in the first half of '23 as you digested the impact of contract renewals. What kind of visibility do you have on the revenue yield? And how do you expect it to trend from here?

Yes. There's 2 components of our revenue yield. And when Cheri says revenue yield, it's our revenues versus the savings that we're generating for our clients. And the 2 components are mix and yield. We saw mix last year as some of the higher margin or higher priced products slowly dissipate and then stabilized in the second half. And then we had rate. We had our contract renewals. And as you're aware, in February of this year, we gave our guidance, we talked about that headwind, but we're cycling through the contract renewals, and the mix is starting to stabilize. So if you think about Q1, that was the first quarter that actually had the contract renewals baked in, and so there was a step down. Q2, it was relatively flat. I think it was one basis point different on the yield, 5.1%. What we're seeing here is the contract renewals are through. So the rate issue is kind of, for the near term, not the component of how it's going to move. And we're seeing mix improve a little bit. Mix is improving because surgeries are ticking up, so more complicated, higher ticket stuff where we have to apply clinical negotiation or financial negotiation, higher-margin knowledge work to the claims. And so we've actually seen stability in our yield. We anticipate -- mix is going to change over time, but it's not going to move around as much as they've had over the last year. So it's stabilizing.

Okay. Great. Your adjusted EBITDA margin has come down about 1,000 basis points over the last year. Can you talk about the drivers of the compression? And as you look forward, how are you thinking about the trade-off between higher adjusted EBITDA margin and investing in the business?

Yes. Let's remember the starting point. The starting point was a 75% margin, which when I did the math for a public company over $1 billion of revenues, was the number #1 company out there. That's not sustainable. And through rate and some investment, the margins have come down to 64%, 65%, which is still best-in-class. I think Visa, Mastercard beat us last year. We lost the crown. But -- so here we are. We talk about our margins being in the mid-60s, and we've got 2 things going on. We've got some high-margin product if the volume improves, it's very -- with our fixed cost of our platform, it just drops down. That has a natural bias towards uplifting the margins. But we've got lots of opportunities to create more products, and our mix is going to change over time. So those will maybe mitigate some of the uplift. And so we think we're going to be in that mid-60s stable place for a while. Some mix may change over time. But generally speaking, that's where we think we're going to level off.

Can you address the CapEx piece as well?

Sure. You're seeing our CapEx tip up over the last year or so because of the investments we're making in the business. And Dale talks about the opportunities. What we're talking about is an incremental step up about $20 million last year -- $20 million, $25 million this year, I should say. And what you're hearing from us is we're seeing opportunity to continue to invest in our platform, and that's basically new products. So 1 of the things that underpins our strategic plan and our vision and our growth is, we've got a platform that was built over 40 years that has a valuable piece of real estate inside our payer clients IT environment that's a switch. We have 1 product. We invested $500 million in capitalized software to get there, and countless more dollars in P&L and stuff that we are expensing and hardware. And we had 1 product that we were really employing, which is out-of-network repricing. So we see that incremental investment is piled on top of $500 million, and it's very good ROI. High-margin business, easy to distribute because if you turn on a service, when you're already in there, you don't have to get a -- it's -- you can accelerate the time to market very quickly and make it easy for your clients when you've got that investment. So that's what you're seeing. And we think over time, we've said at our Investor Day, it will sustain itself at those levels, but it will probably start coming down as a percentage of revenues as we grow the business.

Okay. Helpful. You've deployed quite a lot of capital in the last 3 quarters between debt repurchase and the acquisition of BST. How are you thinking about capital allocation going forward?

Right. So, between fourth quarter of last year and this year, we put to work about $350 million of capital -- $200 million in repurchase of bonds, our 5.75% notes and then basically $150 million-$160 million to our BST acquisition. And that took our cash balance down to $90 million as of Q2. So going forward, I would describe our capital allocation as a pay-as-you-go kind of mentality. They don't have a stockpile anymore, but we know we need to make progress on our debt retirement. So we put out in our Q2 deck kind of our priorities, and it really is around investing in the business that CapEx you're describing, which is not marginally a big use. And then the remainder is probably going to go towards debt retirement in the near term. And the good news is we will continue to look at acquisitions, buy, build, partner, all that continue the corporate development exercise. But the good news is we've got lots of stuff on our plate right now to focus on, new products, BST rollout of -- the ECHO payments partnership. So from a growth perspective, that's where our focus is going to be, and we'll take our capital and pay down debt.

Got it. How much cash do you expect to keep on the balance sheet in that context?

At any given quarter, I think we need probably I'd say, $50 million to $75 million of cash lying around. Now that doesn't mean you hold a $50 million cash balance because we have lumpy interest payments throughout the year. So our first and third quarter are cash generative and then we've got big payments in the second and the fourth quarter in terms of our interest expense. So as a practical matter, I think $75 million is a good benchmark for what we need.

Okay. That's helpful. Dale, back to you. Given the highly attractive nature of the markets that you operate in, in addition to the fact that you guys are extremely well positioned, have you seen increased competition or further activity on clients in sourcing any of this work?

Yes. Look, we've been -- we've always had competition. We've had it. The company has been in business for 43 years. We've had competition since the first day of the business was launched. I feel -- like I said, I've been here for 20 years, and I've seen both external competitors and internal competitors, right? And they exist today. I really like our position. When you think about -- when you think about the position that MultiPlan has not only based on -- to Jim's point, around the $500 million that we've built in this company and the connections in the platform into the IT environments of the payers. When you look at our solutions suite, we're very unique in that we cross over into multiple solutions. So when I look at competition, I look at it, who are my competitors in the provider network space. Who are my competitors in the analytics arena. Who are the competitors in payment integrity. And where we cross over into each of those arenas and very few competitors do. They're highly specialized in payment integrity. They focus on analytics, where they have provider networks, but very few have the depth and breadth of our product solution. Now to add to a Data & Decision Sciences and we're in rare air, right? Just in terms of the depth and breadth of our reach, I like our position.

I agree. What keeps you up at night Dale?

Execution. This year, the first 6 months, as you heard Jim and I say, right, we got a lot done. And we've got greater line of sight into -- the contract renewals are behind us with our larger customers, they're into the run rate. Q1 and Q2 behind us. We wanted to accelerate the formation of our Data & Decision Science, check the box. We wanted to be in the payments business, check the box. We launched our growth plan, we are now in the -- we're launching the first of 4. We committed to getting 4 growth initiatives done this year, check the box. We're not standing still there behind the scenes. We're already developing products and services that we're going to launch next year, right? So we're not standing still just with that growth plan. I like our position. I like our odds. The balls in our hands, to use a sports analogy, right? And that's exactly where I want it. In our hands, and it's all about execution. But if we deliver on that and on the execution, then we'll stand behind the promises and commitments that we're making to our shareholders and to our customers.

Great. Jim, is the answer different for you?

No, believe it or not, is the financial steward of the company, I'm deeply interested in product opportunities. And just from my past life, I've seen other companies go through this journey, and I feel like it's the most important component. So strangely, that's where a lot of my focus is, too, in terms of trying to support the investment in the business while maintaining best-in-class margins. . I'm speaking about this on Wednesday with the entire team, our product team, our ops team, our IT team, but this is our focus. And I think over the last couple of years, we were so -- I was new in the seat, Dale took over, and we were dealing with the aftermath of COVID, the giant regulatory change of NSA, giant change in the utilization environment in 2023 and just a lot of static all over the place. And so that was -- 2022 is very much an externally focused year. I think 2023 is internally focused because we know we have the opportunity. So I think I'm amplifying what Dale said. And the 2 of us are pretty sympotical on this, which is it is all about execution and delivering and it's kind of the boring make a list and get it done kind of stuff.

Yes. That's the best kind of stuff. I didn't know what you're going after, right? Last month, yet another federal court case regarding the NSA rules which sided in favor of providers, the plaintiff and federal court. This time, challenging the HHS's Regulations governing how insurers calculate the TPA. Can you give us an understanding of the court's ruling and some perspectives on how you expect this to affect MultiPlan's NSA services?

Sure. I think the -- certainly, The Federal Court in Texas is sending a clear message that is receptive to the provider arguments that the NSA implementation has been flawed, and the CMS went beyond what was intended when it [indiscernible] regulation passed in Congress. This particular ruling was focused on the QPA. And so there were -- I think there were 9 arguments advanced, 7 of those arguments, the court ruled in favor of the provider arguments. And so from that perspective, when you think about it, what did it say? It said what's known as Ghost Rates should not be included in the calculation of the QPA. Ghost Rates are rates that a provider could have agreed with an insurance company or a carrier, but it's a service that they don't typically provide. So an example on the pediatrician, but inside my rigs, there are services for ER, but I'm never in the ER. And so that should be extracted from the calculation of the QPA. There were other things like you can't -- for a third-party administrator who has multiple clients and may use multiple networks, you can't aggregate those networks and come up with a single QPA. You have to look at each employer plan sponsor and the network and the QPA for that particular plan sponsor. So it's use it for employer 1, a separate calculation for employer 2, a separate calculation for employer 3 and so on, you can aggregate it. Thirdly, the plans were required, the court said, you had to include all the incentives. So risk bonuses, incentive payments you couldn't exclude those from the calculation of the QPA. You needed to include those. And then it switched to air ambulance, right? That was also part of the ruling. And it said there were a number of things around the air ambulance, most importantly, probably the biggest change was it had to do with payments. You couldn't -- the court said, you can't wait for what's called a clean claim, mean you get all the information for a payer to digest the claim and process it and pay it. You have to either pay it or deny it within a certain amount of time. You can't wait for a clean claim. Two, it also said that if the payer had individual contracted rates, meaning what's called single case agreements, that too had to be included in your calculation of the QPA. So there were 7 rulings that were in favor of the plaintiff. 2 around information like there was 1 ruling around, hey, what's being asked to the payers in terms of disclosure around the QPA. The court ruled in favor of the payer and said it's fine. For us, it continues to mean that the NSA is complex, changing, not in any way set in place. So that plays to our strength, right? That complexity, the changing environment, the whole challenge. I mean even today, IDRs are shut down, right? There's no IDRs being done until the next iteration of regulations come out as I understand, it's with OMB and it's going through more instead of an interim final rule, it's going through the normal process. So the system is in upheaval right now. The only change that really came out of the ruling for us was the single case agreement, and we needed to go back and look at our contracted rates for -- with air ambulances, but that's fine. We're good. So for us, and we continue to take advantage of that process. As I said, 1 of our growth initiatives is all centered around NSA. And it's bringing machine learning and AI to that process to give our customers more flexibility, more information, actionable analytics in their hands to make the best decisions that they can as they go through this really complex and continuing to change process.

That's great. Well, congratulations on all the work that you guys have been doing and the new growth plan that's exciting from MultiPlan. We are excited for you. So congratulations, and thank you for joining us today.

We are excited. Thank you.

Thanks for having us.