Evolent Health, Inc. (EVH) Earnings Call Transcript & Summary

Hi. Good morning. This is Frank Williams, Executive Chairman of Evolent Health. I'm happy to welcome you today to our 2020 Investor and Analyst Day. This is a day that we normally look forward to seeing all of you, having a large body of our executive team and customers present. It's been a very different year. And so we're going to do this in a slightly different format. First of all, I'm joined by our CEO, Seth Blackley; and CFO, John Johnson. I'm really happy to have them here. If we think about the cadence for the day, we're going to try to stay pretty focused in running through the materials. We're not going to have a lot of handoffs simply because I know we're on Zoom, and we also know really long meetings on Zoom don't go too well. And so we're really going to try to keep it relatively focused and then make sure that we allow time for questions at the end of the day. If you look at our agenda, you can see how the day will go. We'll start out with the key investment themes and then talk about our focused strategy for shareholder value, how our solutions create differentiated value and then touch a little bit on our financial profile. Starting with the next slide, which is really the executive summary. The executive summary, if you go in one more slide, really serves as a road map for the presentation. We're going to try to go in greater detail on 3 major themes: the first, how our focused strategy will create shareholder value. If you think about where we sit today, we have great products and solutions, a very strong balance sheet. And we feel very ready to execute and are in a strong position to continue to grow revenues, continue to grow the bottom line and to ultimately create shareholder value. Second, we're going to touch on how our solutions create value for our partners. If you think about health care today, there are a lot of really significant issues. You've got rising costs. We're not sure if we're getting the return for everything that we're spending. There's been a lot of sort of strife in between providers and payers. We've also got a very significant crisis, public health crisis with COVID. And yet, Evolent sits right in the center of working with payers, working with providers, helping them add clinical and financial value and ultimately take care of patients better. The managed care market that we tap in today is a huge opportunity. It exists today. It's obviously very large, over 100 million lives covered in that segment. So we have tremendous opportunity serving national and regional payers. And then ultimately, if you look at the addressable market, over $130 billion, we're approaching $1 billion in revenue this year. So you have a sense of the penetration opportunity going forward. Lastly, if you look at our financial profile, a few things to highlight. First, we have a recurring revenue model with a diversified customer base. As we grow revenues, given our scale today and sort of where we are from a G&A and infrastructure perspective, we have the potential to significantly expand margins in the coming years and also generate positive cash flow and ultimately using that cash flow to continue to strengthen our balance sheet. So those are the main topics we're going to cover today. And again, we'll make sure to allow 30 minutes at the end for questions. I'm excited at this point to turn over the presentation to Seth Blackley. As many of you are aware, this is a new era for Evolent with Seth taking the reins. Seth cofounded the company with me going back to 2011 and has been an amazing contributor in almost every area of the business. Most recently, he led the integration of New Century Health. He also has been really the architect of the 3 solutions strategy, which is powering our outlook and perspective across the next couple of years, and he'll obviously touch on that today. But the Board and I are both incredibly excited about Seth and the impact we know he's going to have on the business. And with that, I'll turn it over to Seth to take it from here.

Okay. Great. Thank you, Frank, and welcome to everybody to the Investor Day. I just wanted to first say thank you to Frank, and we're excited to have him supporting us in the time ahead. As we dive into the presentation, I also just wanted to say that I'm personally very excited about helping lead the team into the future. I think we are at an inflection point with the business. We're going to put forth today an incredibly specific plan around shareholder value creation. And I think you're going to be excited about what you see today as well, but before we dive into all of that, I'd like to start with a little bit of a refresh on Evolent. If you're new to the story and want a little bit of background, we're going to touch on that first. So if you flip to Page 5 here, just in brief. We have 3 core solutions at Evolent, 2 of them are clinical and 1 of them is administrative. We address specialty care -- specialty costs through our care management platform. We address total cost of care. And then we have an administrative simplification platform. You can see the numbers on the far right in terms of last quarter revenue and EBITDA. We touch about 35 partners, both payers and providers, across the country, just over 3 million lives today. I think, in the middle of the page, importantly, we have nice balance as between the provider market and the payer market. Provider market's about 60% of our revenue today and about 40% is payer. Obviously, that 40% number on the payer side up dramatically over the last couple of years due to the New Century acquisition. We do expect that number to continue to grow. But as we'll talk about in just a moment, we continue to have very good success on the provider side as well. So with that, we'll flip to the next page. Just a moment in terms of what is the problem we're trying to solve. You've all seen the statistic that there's over $1 trillion of waste in health care. The waste is driven by a number of different issues, one of which is out-of-control specialty spending, which has been growing at a rate that is very challenging to sustain. It's also driven, in the middle, by just a lack of coordination, particularly among elderly patients, and we address that through our total cost of care management solution. And on the far right, across both specialty and the total cost primary care space, the ability to have the data, the information, a process underneath all that for it to run smoothly from an administrative perspective. Those are the major issues that we address and we're going to talk about today. You flip then another slide. I just wanted to start briefly with a bit of outcomes data from our work at Evolent. We recently had a journal article published in The American Journal of Managed Care around the outcomes we're driving. These sorts of outcomes, which we're going to go into a lot of detail today, really do power our business. It powers our top line, and it powers our bottom line. These are just 2 examples into the work we do. Along with lower costs, we also see very significantly improved quality for patients. And almost everything we're going to talk about today is underpinned by these sorts of outcomes, and so we're going to start with that. You flip to the next slide. With respect to this $1 trillion of waste that we've talked about, the pace of growth of that is actually unsustainable. I remember when that number was $600 billion, it's now $1 trillion. It continues to grow each year, and the solutions and the status quo in the market aren't really addressing it. And so just to touch on it, what is the problem fundamentally, structurally? From our perspective, it's that, on the right-hand side of the page, you have providers. Providers have the ear of the patient. It's obviously said the pen, the physician's pen, is the most expensive piece of medical equipment in health care. They drive the decisions, they drive costs. And yet generally, providers do not have an incentive to manage the cost of care. On the left-hand side of the page, you have the payers, who have every incentive to manage the costs of the care, but they do not have the ear of the provider and often don't have the ear of the patient either. And so when people talk about value-based care, it's really, in our minds, working to coordinate between these 2 entities, supporting the patient, the payer and the provider and coordinating care. A huge set of untapped opportunities. It could be a patient that gets admitted that could have stayed at home. It could have been a therapeutic regimen that costs twice as much as it could with lower efficacy. It could be adherence to medication that might be preventative over time and keep the patient home and healthy. There's unfortunately hundreds of things that are not happening in this sort of disconnected system. Those missed opportunities are certainly what Evolent's focused on. Our 3 solutions focus on those opportunities, and that's going to be the framing for everything we talk about today. You flip into the next slide, just in terms of Evolent's role in all this. We really are serving as a bridge to support the divide that I just described between the provider and the payer. There are 3 primary things that we do to support that bridge. We'll talk a lot about them. So I'm not going to talk too much now, but one is proprietary technology. We have proprietary -- 2 proprietary technology platforms that link payer and provider, coordinate care, help identify missed opportunities and drive those opportunities from the payer perspective down to the provider side. Two is our deep clinical intellectual property that is embedded in the technology and drives the recommendations and the workflows that support the changes in care patterns. We intervene thousands and thousands of times every month with these sorts of interventions across our 3 solutions. And that, again, is core. And then third and finally is our scaled services model, which we'll talk about today. It's efficient, has a automation element, has an offshore in element. And when you take all that together, that really is Evolent's role across the ecosystem. You flip into the next slide, Page 10. We get the question a lot of, "Hey, where does Evolent fit within the value landscape?" There are a lot of different organizations out there, and there are a number of great value companies. I'd say all the companies on this page are working to do disruptive things. They disrupt the status quo and address this $1 trillion of waste that's in the system. They each are coming at it from a different perspective. On the right-hand side of the page, you have what we would call new provider models. These are organizations like Oak Street Health, VillageMD, ChenMed. Excellent organizations that are getting great outcomes, but they are becoming a provider. They are building clinics, and they are employing physicians to get at this $1 trillion issue. On the other end of the spectrum, there are a number of payers that are new and disruptive, Bright Health, Oscar health, Devoted Health, that are, again, running at the same issue but coming at it as a payer. And they've sort of said it themselves, like we need to be a payer to run at this issue. In the middle, where Evolent sits, I think, is a category of -- for payer-provider enablers. And I think some of the benefits of the middle category are: one, that most of the 250 million people who are insured today get their care from an existing payer and an existing provider. And so as the bridge, we're actually supporting that segment, we can scale reasonably quickly. And second, the middle category is less capital intensive. This is about technology and intellectual property and connecting existing payers and existing providers. So that's where we fit. Some other organizations you may know of that fall into this category, Livongo, Progyny, we don't compete with either of those 2 organizations, but I would say the business model and approach is similar. So hopefully, that's helpful in giving you a little snapshot of where we sit. We flip then one more slide to Page 11. And we also get asked a lot about the evolution of Evolent. Gosh, you've done a lot of things over time, how did you get here? And why did you land in this position? I would just say, that in general, when we started the business, we were doing all of our work around total cost of care management. And all of our work at the very beginning was with health systems and then independent physicians. And over time, we've obviously added 2 new solutions in administrative simplification, specialty management space, which has opened up the payer side of the market, which has been very helpful to us. We'll talk about this in a minute, but I think 2 of the benefits of this evolution are: one, a much larger TAM across a diversified set of solutions. And two, when we first started the business, particularly focused on health systems, we were more dependent on the pace of regulatory value-based care, that's changed a lot, which we'll talk about in a second. If you flip to the next page, just briefly a little bit on our solutions here at the beginning, we're going to go into a lot of detail today, so I'll hit these briefly. But our solutions, we have 3 main solutions, 2 of which are clinical, 1 is administrative. On the clinical side, we have specialty care management, which is really about working with oncologists and cardiologists to make sure that the treatment pathway is being followed for a given patient, are best evidenced and makes sense from a cost and quality perspective. Generally, we find very substantial cost reduction opportunities when we do this work, often 10% reduction, and that grows over time. The total cost of care management space, which again, we'll go deeper on today, is really about primary care. And think of this as total budget health care. The primary care physicians we partner with get a budget set for them around their population. Their goal is to beat the budget and do so by providing a higher quality of preventative care. We provide the systems to allow them to do that. And on the right, administrative simplification, again, this is about having the data and the information flow to the specialists, the primary care physicians. And the transactions happen in a way that is effective but also supports the clinical interventions, on the left-hand side of the page. From an operating model perspective, it's interesting. It's actually very consistent across all 3 areas, and that's why there's scale that we're building into across all 3 areas. The 3 things we do: one, proprietary technology, Identifi supports the far right; in the middle, CarePro, which is part of New Century, supports the specialty space. And we'll talk a lot about those technology platforms, but they are absolutely critical to everything we do and the outcomes that we achieve. Second, the scalable clinical IP and infrastructure that I mentioned, we'll talk a lot more about that, but there's a tremendous amount of 15-plus years in the case of New Century and 9 years of depth and clinical IP creation that underpins everything we do. And then third and finally, we're not just a technology business, an IP business, we do support our partners in actually achieving the savings, and part and parcel of that is having an efficient services model. That's onshore, offshore. It's automation, it's AI, and we're going to talk about those things today. Those 3 pieces, you're going to see them show up across the entire presentation today. And they're consistent across 3. The economic model is similar across all 3 of our businesses. It is all recurring revenue. There is a fee component for everything. On the far right, it's all fees. In the blue area, it's fee plus performance based. That performance-based element is one of the reasons we're differentiated. We're willing to stand behind our results. It's also some of the things that have driven the improved financial performance across this year. And about, again, 3/4 of the business is in the left 2, and about 1/4 is in the far right. Flipping to the next slide. The other thing we get a lot of questions on are: one, hey, there's an election coming up in a few weeks, does that have a big impact on you depending on what way it goes? And the second question is, does the pace of value-based care matter for you? And I'll take those questions in order. So the first question, does the election matter? I'd say, interestingly, the work we do, and I'll term it really anything and everything to address that $1 trillion of waste, which is what we're focused on, is incredibly bipartisan. You saw it under the Obama administration, you've seen it at CMS and CMMI under Seema Verma and the Trump administration. The idea of controlling health care costs and reducing waste is a bipartisan issue. And specifically, we really don't see much of an impact, whether it's Trump or Biden come November. In the bottom, the second question is, hey, does the shift to value and the pace of that matter? I'd say, 4 or 5 years ago, it did matter for us a lot. I'd say, today, it does not matter very much. And in general, we control our own destiny. We put a data point in here to help illustrate that. A lot of the work we do is with the managed care organizations or around evergreen programs with providers. Based on that, less than 10% of our current pipeline is dependent on the pace of value. Should there be a massive regulatory change around the pace of value, we don't think it has a big impact on us in terms of our ability to drive revenue and growth. So just to cap this section. To be clear, we're going to show you a lot of specific data today in terms of medium-term metrics, cost reduction plan, growth plan, yes. I think I want you to hit the point head on at the beginning that all of those metrics are really independent of these 2 issues. And regardless of the path here, we feel good about achieving those metrics. There are some outcomes around the pace of value that could accelerate our opportunity to go beyond the metrics we're going to show you today, but everything we've shown you today is isolated from these 2 issues. All right. So if we flip then a slide. We're now going to dive into the 3 themes that Frank started with at the very beginning. I'm excited about this. This is really I think we're going to get into the part that is the inflection one of Evolent and a couple of specific things that speak to where we're headed with a lot of confidence. And so if you flip into the next page, we're going to talk about 3 specific areas within the first area, which is focused strategy. First is driving continued organic growth in the core services business. The second is expanding our adjusted EBITDA margin, and the third is around optimizing our capital structure and simplifying the portfolio. So I'm going to dive into each of these in turn. So first, we want to put forth a set of medium-term targets. From our perspective, these are very clear expectations; as a shareholder, what you can expect from us. We feel very confident in achieving these metrics, and we want to start the presentation with these metrics. So first, adjusted services revenue. We've talked about this, but we are confident in mid-teens annual growth on the core adjusted services business. We'll talk about what that looks like and how we get there in a second. Secondly, perhaps more importantly, is a lot of confidence and commitment around mid-teens adjusted EBITDA margin through annual 200 to 300 basis point expansion coming off of 2021. And again, we're going to show you a lot of detail on how we get there, and we can have confidence in this metric. And then third and finally, we're going to talk about capital structure and portfolio. As you know, we have a number of things underway that are returning capital to the business. We're going to be using those proceeds to delever. All right. So let's flip into the next page, which just tees up the first of these, which is driving continued organic growth towards the mid-teens long-term target, yes. If we flip again to 18. In terms of how we get there, if you think about this target of mid-teens, our historic organic growth rate over the last 4 years has been 15%. We'll talk about that in a second. So we've been doing this. We expect to continue to do this. How have we gotten there? Historically, about 40% of the growth has been from existing customers cross-sell, expansion, on the far right, and about 60% of it has been from new customers, which 6 to 8 on a normal year. We share this to just sort of say, hey, we have a road map. We've been doing this. And also, I think, importantly, the fact that a very substantial portion comes from our existing customer base gives us a lot of confidence that our customers like what we're doing with them but also just makes the 15% much more achievable -- mid-teens much more achievable based on having that built-in growth with our relationships that are in place today. If you flip to Page 19. The other factor that obviously underpins the confidence around a mid-teens target is the TAM. The TAM is big. We've been talking about the TAM for a long time. It's grown a lot since we started the company. Today, it's well over $100 billion. It's around these 3 areas that we've been talking about. The specialty space, when we acquired New Century Health, was closer to $10 billion. We've done a number of things to expand this in terms of new line of business and a new approach to the scope, which has been fantastic. I would say this space is a hot space in general. It's a pain point for payers. Oncology drugs are huge in the pipeline, and there's a lot of concern, even with COVID, of cancer bounce-back as people have delayed their ability to get screened. There's a concern about that. And so this is a -- continues to be a very -- a strong solution space for us. We think we are the market leader in this space, and this probably continues to be our most differentiated, fastest-growing solution. In the middle, total cost of care space, this is the work with the primary care groups and other providers. Here again, this continues to be a very big opportunity. Post COVID, a lot of providers are saying, gosh, fee for service isn't so great when nobody's coming to the doctor. "I sort of like the idea of a little bit more predictability. I like the idea of being able to have a business model that is a little bit more linked to how the performance goes across the course of the year. And if folks stay home or prevent care, there's an opportunity for me." And so this space, sort of as COVID quieted down, has really heated up for us. And obviously, we have 2 new announcements that fall into this segment today which we'll talk about and we're very excited about. And then third and finally, on the far right, the administrative space. This has been very solid and predictable for us. We have Maryland Physicians Care in this space going live soon. This is a strong space. This has been around for a long time, and it's going to continue to be predictable both on the top and bottom line for us. Going into Page 20, just a little bit in the rearview mirror. On the left-hand side of the page, we've grown at close to 30% CAGR since 2017, 28% there. If you strip out any acquisition activity, that number is 15% on a pure apples-to-apples basis from a true organic growth rate, which again, is in the zone that we expect to continue growing into the future. If you think about how we get there, again, it's new customers and then it's further penetrating our existing customer base, same-store growth, and we're going to talk about both of those. I mentioned the 40% number earlier, that continues to be a big part, and it's going to continue to be important in the future. Next slide. So if you go to 21, on the new customers front. We have announced a number of new partnerships over the last several quarters. Obviously, excited about Maryland Physicians Care, which is going live the first part of next year. That's around the administrative simplification space with our Evolent Health Services business. We also have a number of strong announcements with New Century, some of which are listed here, and we will continue to obviously add to this over time. On the right-hand side, excited today to announce 2 new provider partners. These 2 are in our total cost of care space. One is Physicians Accountable Care of Utah and the other is Tar River Health Alliance, one in Utah, one in North Carolina. These are 2 excellent physician groups. These are independent physicians. And importantly, these are incredibly efficient, high-quality regional physician groups we think are very well positioned to take on the total cost of care opportunity. These aren't bigger national brands that you might see on the left, but they are the types of organizations if you think back to that bridge slide. This is where people are receiving their primary care today, with groups like this, in many cases, and these are going to be great partners for us. They'll be going live earlier -- early part of 2021, initially with 20,000 lives cumulatively, and then there'll be an opportunity across the panels of those physicians to cross-sell and grow up to closer to 100,000 lives over time. So incredibly excited about these 2, and we'll be talking a lot more about our total cost of care solution in a few minutes. Flipping to Page 22, let's turn for a second to talk about cross-sell. We have 35 partners today. 4 of those partners are national payers. If you just take those 4 national payers and think about a case example here with New Century Health and what could it mean if we took 1 of those 4 national payers and expanded the work we do today. We picked a payer that have -- that today we have an oncology solution in place in one state. And we said, gosh, what would happen if we added cardiology in that same state? That's $15 million of incremental revenue. What then if we went just for one line of business, Medicare, which is roughly 500,000 lives for this payer, and went to across the country for both cardiology and oncology? And that's $450 million. And obviously, this is 1 of our 4 national payers and 4 of our 35 partners. There is a very, very substantial cross-sell opportunity just for New Century. For this one line of business, there's a close to $500 million opportunity for this one payer. Obviously, across just the 4 national payers, we would see several billion dollars of opportunity over time, and consistent with our TAM, it's much more than that across the entire customer base. Turning now to expanding adjusted EBITDA margins. We have the target here, mid-teens adjusted margins in the medium term through this 200 to 300 basis points annually. Okay. So how do we get there? If we go then to Page 24, I want to be very specific about this because we have quite a bit of confidence. So we can flip forward one slide. There's really 3 levers around the metrics that I just shared. One, on the far left is a onetime targeted cost reduction that will be executed rolling into 2021. We size that at $20 million to $25 million. We know where to go get those dollars, and we're working on that today. In the middle is really, over time, growth through leveraging SG&A. We've made a lot of the investments. And we think there's at least 1 point there every year. And then third and finally, we think there's a lot on gross margin annually. And that's through product mix and automation. So that gets you to the 2 to 3 points a year, plus a onetime activity that we are undertaking currently. Flipping to 25, a little more detail on each of these 3 areas. We've taken out already, between Q2 of '19 and Q2 of '20, about 700 basis points. And that's through a lot of SG&A reductions, getting greater yield on our tech asset, our move to Pune and also disciplined targets around what does it mean to have a customer from a profitability perspective and where do we not have that and what action should we take to get there. So we've already done a lot. And then we'll continue to intensify this effort into 2021. We've actually hired. We hired right at the end of Q2, beginning of Q3 an outside adviser to help us on our costs targets and cost reduction activities, to have a fresh set of eyes. That gives us incremental confidence in achieving the $20 million to $25 million that we've talked about, and we'll be executing on those across the months to come. In the bottom part of the page. I mentioned growth leverage on SG&A. In many ways, I'd say at this point we are harvesting the value of all the hard work we've put in over the last 8 or 9 years. We've made lots of investments. I think today we have lower investment required on an ongoing basis. So each incremental dollar of revenue has higher incremental flow-through, and we're going to be harvesting that over time. And then at the bottom of the page, on the gross margin front, there's really 2 pieces here. One, on product mix, it's an important one, actually really excited about the fact that we're announcing today acceleration of a lighter technology solution as part of New Century Health that complements our full New Century Health performance suite. This is a solution that we've been testing now for quite some time with one partner, and we've recently begun to roll it out to 2 more partners, with a lot of positive feedback in the market. This solution is going to be a lower-PMPM product but a "much higher margin percentage" product. And obviously, that's going to contribute to where we land from a EBITDA margin perspective over time. I think it also is going to allow us faster entry into certain markets with new payer partners. So really excited about the addition of this new piece in the New Century Health suite. And then at the bottom, automation. We've talked a lot about this. You've been on our calls. We've talked a lot about our investment in Pune, India. We have done a tremendous amount around automation through technology investments and AI and those things are starting to yield. And so I'd just say, in general, across this page, led by John Johnson, our CFO, but the whole team, a lot of hard work is going into this. It gives us a lot of confidence in being able to execute on the plan to get to this mid-teens target that we've been talking about. All right. So flipping to 26. Next piece to the plan is really optimizing the capital structure and simplifying the portfolio. We're going to be using these proceeds to delever, as we talked about. So first, on 27. We obviously completed and closed the Passport transaction recently. And if you think about the metric on the far left of debt less cash at $260 million prior to that and then look at what the business looks like after the Passport capital return is complete, that obviously drives a very substantial reduction in this metric of debt less cash. So the delevering, in some ways, is underway, if you think about it in this way. And I'll just make one comment with respect to the $130 million to $170 million. We still have more work to do, but based on where we are in the year right now, with the proper caveats, I'd say we're likely to end kind at of the higher end of this range of $130 million to $170 million, which would leave us on the far right, kind of at that net metric of debt less cash closer to $100 million, a very substantial change, obviously, from just a few months ago. So as that capital comes back, we are expecting to delever. As I said, we'll be using the Passport proceeds to pay down our senior term loan in 2021. Flipping to 28. We've talked a lot about what our focus is. Our focus is on our 3 core services business. We want to put our management attention, our efforts, our energy and our capital against those 3 areas to be true to that. We also then have to look at any attention or capital that's not focused on those areas. And as we've been talking about for some time now, we've been exploring strategic alternatives for each of these 3 health plan assets, [ which are our 3 health plan assets ]. Obviously, we've made a very clear public statement that we're not going to be investing any new assets like this. These were important to us at a very specific time in our evolution. There was always a plan to monetize those investments at some point and be able to achieve the services revenue growth and the portfolio expansion that came along with it. That time is now. We've announced the Passport transaction. It's closed. We'll be anticipating the return of capital that I talked about over time, with a lot of confidence in where that metric sits. And importantly, we have the New Century Health relationship that has been attached to that and have been very impressed with the Molina team and a lot of good work going on there between New Century and Molina. Second, Florida Medicaid. We have a number of relationships across Florida. We are announcing today that we're in a strategic process with those partners right now to consider options and get the right path forward for those plans. I'm excited to also announce that we did sign a definitive agreement in Q2 to sell the Lighthouse Health Plan, where we own 40% of the business, to Anthem. We expect that to close in Q1 of 2021. And while we didn't put a lot of capital into this plan, it will return 2 to 3x our initial joint venture capital investment, like Passport, a good return, as this divestiture happens. And then third and finally, with respect to True Health New Mexico, we announced a couple weeks ago that we are exploring strategic alternatives for this asset. We did formally hire a financial adviser to do this work for us in the first half of the year. We should have a good sense towards the end of the year on the outcome here. So across all 3 of these, interestingly when you step back and look, we've deployed just shy of $100 million into these 3 assets based on just the returns that we know about today from Passport. [ And the one ] Florida plan will obviously return well north of that, and we expect to have some new information on True Health in the time ahead. So we're going to pretty quickly flip into a deeper dive on our differentiated solutions. But before we do that, I did want to touch just briefly on our team and our Board. I get the privilege of standing up and sharing all this great work with you. They're doing all the hard work. We have a phenomenal team. On the left-hand side of the page, you can see a select subset of our leadership team, incredible depth and many years of experience in this sort of work. I'll pick out one example just to kind of dive into it, Dr. Andy Hertler. He's been with New Century for a long time. Under he; and Dan, the CEO of New Century Health, we have several hundred clinicians that are executing on the types of pathways and interventions that I talked about earlier. And that's just one example. You've got hundreds of people with decades of experience doing this kind of work, and there's a tremendous amount of skill, very deep bench. And I think this team is the right team to execute on the plan that we've been talking about today. On the right-hand side, similarly, I'd say that our Board is an excellent Board to support the work that we're doing to have an expertise that's closely aligned with the strategy that I just laid out. I would say that we're coming up on 5 years since the IPO, it's a natural time to think about governance adjustments. I'd say, over the last year plus, we've had very detailed conversations about those adjustments with our Board. I would say we're going to have continued considerations as we think about the governance, and we're announcing today that we're commencing a process to declassify the Board or propose declassification at the annual meeting and also be eliminating the supermajority provisions as well, heading into annual meeting. So I think, with those government adjustment -- governance adjustments, the governance organization that we have in place and the strong leadership team we have in place, I think we've got the right team and expertise to execute on the plan that we've been talking about. And we're incredibly excited about it. So I think we are now taking a 5-minute break, let everybody grab something to drink, take a bathroom break, and we'll start back in 5 minutes and we'll go much deeper into each of the solutions. [Break]

All right. Great. Let's get started again. Welcome back. Let's flip in one slide here. So we're going to now go into our second theme that Frank introduced at the beginning, which is around our solutions and how they create differentiated value. Normally, we would have an array of our talented team here to walk through each of these, and you get a lot of exposure to them. Given the virtual video format, I will lead this, but fortunately for you, we will splice in 3 separate customer case examples, video conversations between our partners. So with that, let's start with Page 32, which is our specialty care management solution. Just a little bit of introduction as we dive into it. You think about what this solution is. We are serving payers and risk-bearing providers. The work here, again, is really about driving adherence with the best evidence around cardiology and oncology cases. So when a given patient is diagnosed with cancer or has a cardiology condition, the ability to map that patient back to our clinical algorithms using our technology, calling the physician or reaching out in a technology different way to the physician to propose adjustments to certain care plans that drive quality up and costs down, that is fundamentally what we do. The value proposition, as I mentioned earlier, is driving real tangible immediate savings to our payer partners, better administrative processes for our providers and in certain cases also better income for our providers. The key solutions, I just touched on them, and we're going to go through those in detail. So you flip in one more page to Page 33. And you think about oncology, to start. Oncology is growing incredibly rapidly. A huge proportion of the drugs that are in the FDA pipeline address this issue. It is a huge societal issue. And the spending is predicted to reach $240 billion annually by 2023. You can see the 11 of 12 drugs in the pipeline were priced at $100,000-plus per year. So this is an issue that is, again, if you're a payer is a rapidly accelerating problem with respect to the cost of care. And I would say even for the patients and the physicians, the oncologists, the quantity of new information, new therapeutics that are coming to market is incredibly confusing. So this is both a quality and a cost problem in oncology. Cardiology, similar set of issues, complicated space, a huge spending category that's growing. And as you can see, it's 14% of total health expenditures today. You put these 2 together, cardiology and oncology together are 25% of all Medicare spending. So when we take on these 2 issues and you go talk to a payer about it, oh, it's 2 specialties and it is also 1/4 of their total spending. So it's a very significant area. And this is going to be the focus on the next couple of pages. So we go flip in. In the simplest way possible, this is the value proposition of our specialty care management space. It's underpinned, as I talked about, with New Century Health, which we acquired several years ago, sometimes we refer to it as NCH. But as simply as possible, this is the value proposition for the payer, which is, before we show up, the payer is spending dollar X, which is the red line. And after we show up, we often immediately shift that line down, which is a significant reduction out of the gates. And then importantly, over time, our trend is much flatter than the trend of the payer through the same management techniques that I talked about earlier. And so when we put our solution in place, it's an oncology and cardiology example, these are real savings numbers from a real client. We made it illustrative by adjusting the number of lives to blind the case study. But if you apply this to 100,000 lives these savings numbers that we actually see, it's $79 million of value for the payer over 5 years. So put simply, this is why payers work with us. It's to help manage this. And again, as we'll talk about in a second, it's not that we're withholding care or adjusting care to the worse, this is higher-quality care at the same time. And in fact, we start with quality, and we start with what's right for a patient, but this is the result that you'll see financially. Flipping to the next slide. Let's talk a little bit about why traditional payers don't solve this on their own. Why do we get hired to do it? The 3 barriers that we would point out and 3 solutions on the right-hand side that we think we address. First, suboptimal network performance. This is around misaligned incentives and the fact that, again, the physician has the ear of the patient and the payer does not have the ear of the patient or the provider. We help align those 2 things through our network work and our high-performance networks. In the middle, there is rapidly increasing complexity with respect to both cardiology and oncology. And the same is true for some other specialties with these two in particular. And we'll talk about it in a minute, but huge new influx of new drugs, new influx of clinical trial information to sift through. And it's tough for any given physician, even tough for any given payer, to stay current on it and do all the work to have the right scientific advisory board. We have a 20-person scientific advisory board that helps us think about what those pathways are on the right to be able to address this medical complexity and figure out what's the right plan of attack for each given patient. And then third and finally, if you're the physician, the cardiologist, the oncologist dealing with this work, in the traditional model, it's labor intensive, it's manual, it's frustrating to get approvals from the payers. We simplify that through our specialty care management workflow platform, which is called CarePro. Going to next page, we're going to click in the network for a second. [ Essentially ] 3 things we do with the network. One is we set the network up and design the network, and that's around using our data. We have a huge base of data over many years for cardiology and oncology to understand who are the high-performing physicians and who are the less-high-performing physicians. We construct our network in a very thoughtful way based on that data, which is, again, more data than any one payer would have and more experience than any one payer would have. In the middle. We set up the right financial alignment with the cardiologists or the oncologists to make sure that there is alignment. Again, why does the payer not have the ear of the physician? Well, one reason is misaligned financial incentives. And so I'll give you an oncology example just to kind of make this come to life. Let's assume that there are 2 treatment possibilities for a given patient, one costs $50,000 a year in terms of the therapeutic, and one costs $25,000 a year in terms of the therapeutic. Let's assume for a second the $25,000 therapeutic has better efficacy and lower toxicity to the patient. Having the physician, the oncologist switch from the $50,000 therapeutic to the $25,000 therapeutic, given the buy-and-bill system that exists, would cost that oncologist probably over $1,000 of income. And so when you think about that, it's a real challenge to actually go out and have a conversation when you're asking very tricky trade-offs with respect to income. Let's say maybe the 2 things are actually therapeutically equivalent even. To ask that physician to take out $1,500 out of his or her pocket is tough. And so one of the things we do is align the financial incentives more closely between the payer and the provider so the linkage is there. One example of that would be to minimize the buy and the bill incentive with oncology drugs. So meaning, if you prescribe the $25,000 or the $50,000, as long as you're getting great quality and good outcomes, you get paid the same thing as that physician. Just take away the incentive for the misaligned incentive that exists. And on the far right, really working with the physicians, engaging them. Again, this is when we say who has the ear of the physician, often the payer doesn't. We build relationships that we do have their ear. That's through the systems but also a lot of the things listed here on the right side of the page. We have a dedicated team that works on these issues. We help them get their claims issues resolved. All sorts of things that, again, build relationships and stickiness with those physicians in a way that we have the right to have the conversation around a pathway change that I mentioned. If we flip to the next page, just an example of, I think, on the network issue for New Century Health and our specialty work in particular. Take a look at Florida. There's a very interesting case study where, from 2015 to 2020, New Century increased the number of oncologists networked by about 25% and the total number of lives under contract by 50%. And as that number increase, in particular the number of lives under management, you think about the effect on our payer customers and the oncologists. We start to build a single set of tracks into each providers so that more and more of the patients they see for oncology are using our CarePro system, and it reduces the administrative burden for them. On the payer side, it gives a greater savings because we have more of an all payer model and increases provider satisfaction. So there's sort of a 2-sided network benefit that develops here in each geography, Florida being a good example. You can see at the bottom, because of that in Florida -- you take a look at our provider satisfaction and portal ease-of-use scores. These are not scores out of 5 you would normally see with respect to payer, provider communication. Why do we have the ear of the provider and scores like this? And then what is the result of all that? In Florida, over this time, we've had a -- from 2015 to 2020, a 25% improvement in the savings versus unmanaged trend. So we've always saved a lot of money. That rate of savings is accelerating, which, again, I think, reinforces this 2-sided network effect that exists. Let's flip to the next slide. Okay. So how does this work specifically with respect to cardiology and oncology? We picked an oncology example here just to walk you through the brass tacks of it. It starts on the left-hand side of the page. Everything we do is rooted in deep clinical evidence. I mentioned the 20-person scientific advisory board. I mentioned Dr. Hertler earlier. But across a broad group of people, who are pharmacists, physicians, medical economics experts, we have developed what we call our level 1 precision pathways. And those precision pathways are best evidence for any given patient with any given diagnosis what is the right course of treatment given that patient's profile, age, comorbidities, genetic profile, all those things. And we've -- this is a huge asset for us, the level 1 pathway. We do use some of the national guidelines or some of the other practicing physician input, but ultimately, these are our proprietary pathways and are very core to the things that we do. Once you have those pathways, what we do is we -- every day, every hour of every day, we're getting data back from physicians. So in this case, oncologists. Would say, "Here's a new patient that I'm treating for a given oncology diagnosis." Let's say it's small cell lung cancer. There are a huge array of treatments because of the number of therapeutics and the number of different combinations of therapeutics, there might be as many as 10 different options for a given treatment. You can see those lined up in the middle, A, B, C, D, et cetera. The first screen that our algorithm applies, we take the data in through CarePro, and it says this is the patient, this is the condition. We put that through CarePro, our clinical algorithms, and bounce it against our pathways. Out of that comes a funnel of sorts that said, well, out of these total, [ specifically ] these 5, B, C, E, G and H, are most efficacious for the patient, meaning survival rates, tumor reduction rates, et cetera. After that, we look at toxicity. And when you look at toxicity, toxicity is what impact does it have on the patient, quality of life, ability to get up and do the things that they want to do. You apply that filter and see an H fallout, meaning B, E and G are the best therapeutic regimens to pursue. And then finally -- and finally -- this is the order we put it in. Last, we apply cost filter. And when you apply that, G drops out and B and E are the optimal pathways for that given patient. And again, I'm representing this incredible 15-plus years of work from New Century and our incredible team there, but it's a highly tuned system to get to this answer. If the physician is doing something different than B and E, we will pick up the phone and do a peer-to-peer consult. One of our oncologists will call a treating oncologists to have a conversation about the literature. An interesting fact is that today there are several hundred new journal articles that come out every month on oncology treatments. The average oncologist has time to read 3 a month. If you think about the disparity and knowledge from a system and an algorithm that takes in all that with one physician, the kind of care that you or I would want to receive, our families should receive is in the middle, where you have a system that thinks about it in this way and boils it down to best evidence. I truly believe almost all oncologists want to do the right thing, but it's pretty darn hard to keep up with everything here. And so getting down to B and E is the best choice for the patient, quality first, toxicity second, costs third, yields what you see on the right-hand side of the page. A different treatment, we intervene and we make changes in many cases across the year. And you can see what happens when we make that intervention, and often the intervention recommendations are accepted and taken by the physician. You see very significant reductions in cost per treatment. So if you have that small cell lung cancer example and you were going to follow path A and you end up following path B, you see a $12,000 reduction in the cost of treatment. You multiply that, times hundreds of thousands of opportunities across the year, and these are very substantial dollars that flow to our partners, and this is also the thing that drives our economic model. All right. So we'll flip into the next slide, a little more detail on the system itself. How does it work? I mentioned that we take data from the practices of the treating oncologists or cardiologists. The data comes in that data aggregation layer. We then run our prioritization engine against the algorithm from the scientific advisory board against that data. That creates the targeted engagement that I mentioned, which for us is not calling the patient, it is calling the physician or reaching out to the physician's practice or sending a message through CarePro to actually recommend the change. You can see a screenshot of the system on the far right, and then we do close the loop. We pay the claim, New Century in many cases. And that gives us the ability to match the data [ then ] and understand the total value that was created, and that's a big part of those value propositions as well. Flipping into the next page. You think about the work we're doing today. Today, NCH is managing actively 66,000 cancer patients through these base of lives that we have. Obviously, the populations are much, much bigger that we're touching to get to these 66,000, but this is the subset of people who actually have cancer. And this is an annual number. You think that there's 1.8 million new cancer diagnoses a year. We're treating a very small slice of that 1.8 million today through this 66,000 number. You'd see a similar kind of disparity on cardiology with respect to what we're doing today versus what we could be doing. This harkens back a little bit to the growth portion of the presentation. We think our solution is an excellent solution for the payer, for the patient and for the physician, and yet it has a reasonably modest market share. And this is, I think, core to why we have a lot of confidence in the growth rate ahead. All right. So you get to take a break from me for a second. It's if you flip then to Page 41. We did want to provide a case study for one of our new partners, Neighborhood health plan. They have about roughly 200,000 lives. They're based in Rhode Island, an excellent plan, regional payer. And the work that we do is very consistent with all the things that I just talked about. We launched in September of 2020 across medical oncology, radiation therapy and genomic testing. And we're off to a good start. We wanted to hear directly from our partners, so Giselle Habeych, our Senior Vice President of Network at New Century Health, is interviewing Casey Stockman, the VP of Pharmacy there at Neighborhood health plan. So we'll flip to a video and let you see a little case study. [Presentation]

All right. Great. That was excellent. Excited that you got to hear from Giselle. Giselle has been with New Century Health for 15 years. She is a good example of the kinds of people we have in the organization with an incredibly strong bench of talent that really knows how to do this kind of work. So -- and really excited to be partnering with Neighborhood Health Plan. All right. So we can flip then to Slide 42 just to wrap the New Century section around specialty care management. I think we've talked about this, who we're addressing, on the left. In the middle, it is a big market, and we have very modest penetration. I think we have the leading solution around cardiology and oncology and a lot of running room ahead of us. And so that's going to be our focus is taking that market penetration to a significantly higher number. And hopefully, you've gotten a feel for why we're differentiated both from the things I share but maybe more importantly hearing directly from a customer. I do think at the end of the day that we are performance oriented, and we can drive real savings. We have the confidence to do it, and we have the expertise clinically and from a technology perspective to stand behind it. That really ultimately is the -- I'd say, the biggest driver of our success in this space, and we look forward to a lot of good success ahead in this segment. All right. So let's go to the next one, second of 3 solutions, which is our total cost of care management space. We work here with risk-bearing providers. Here, think about often independent physician groups, think about independent physician groups who, as an example, may decide that they would prefer to have a piece of their revenue or business under a model where they have what I would call prepaid health care versus a fee-for-service version of health care. That has been a trend over time. And I think COVID will accelerate that. And again, the way to think about this is Evolent supporting an independent physician in taking and managing these value contracts. The opportunity here is to beat the budget, so-called beat the budget, and the budget is the total cost for a given population. We have a proven track record of doing this, and we use our clinical and technology platform, just like with New Century, to achieve that outcome. So if you look on 44, let's talk for a second about the profile of these primary care physicians that we're working with. It's not been easy for primary care physicians for a long time, frankly. 61% see declining reimbursement historically, and that goes back for a while. A lot of challenges in finding time to actually do the right kind of work and keep up with the compliance, the clinical knowledge that's coming down the pipe. And as a result of that, you get a lot of physician burnout. And I'd say, in general, if you're in an independent physician group out there, you have a couple of options in life. One could be to sell your practice to an aggregator, to an Optum or maybe a regional plan of some sort that wants to acquire physicians or a health system. If you want to stay independent, you don't have that many options to address these issues on this page. I think the value proposition that we bring to the physician really does get at these in terms of helping these physicians make more money, helping them provide better care and making life more livable for them. And that's ultimately the value proposition of these independent physicians. Go to the next page. We've been doing this for a while. This could be anything from an ACO program with CMS to a risk contract with a Blue plan or a national plan. And we've been doing this for a long time. We've learned a lot of approaches that work and the techniques from an underwriting actuarial perspective that are critical to get this right as well as the clinical impact that you have to have to realize the dollars. And you can see here we've got a lot of good proof points that we know how to do it. We had $100 million total savings across our ACO partners in '17 and '18. We're ranked #3 in 2018 by CMS for those ACO populations. Again, it's not just with CMS, we have some non-CMS contracts as well with these physician groups. On the right, I've talked about this study earlier, but these are very dramatic numbers that power this business and ultimately make it work. If you flip into 46. Okay. A little bit more on how it works specifically. Think about we partner with these physician groups to help set up the right arrangement for them, the right value contract with CMS or another payer. We put in place the things in the very top left of this slide, which are the care management systems, the networks and the things Giselle was just talking about, same for New Century, is in total cost of care. There's a network element. We set up our quality work, risk adjustment and then actuarial and analytics, and we use our technology platform to actually drive the interventions that we need. And that could be, again, keeping a patient out of the hospital, delivering home care, adherence to medication, behavioral health support, on and on and on. There are thousands of different intervention points across a given month across our network, and our Identifi system is sort of the air traffic control that drives all that. We take the data in. This is like a broken record with New Century, but it's a similar process, you take the data in. We run it through our predictive stratification engine that we think is market leading. Out of that, it says, oh gosh, out of these 500,000 patients, here are the 50,000 that need the intervention. And that's based on a predictive model and their future costs relative to the interventions they're already getting. We then drive targeted engagements, which have a lot of our clinical programming infused. So for example, when a patient has multiple chronic conditions, we have a very certain program that we launch. It has a care plan. Our care managers and the physician's staff work together to drive that care plan back to the patient. We do it with the physician because, again, the physician is the one that has the ear of that patient. We then, again, drive it all the way through continuous improvement and in some cases actually also do the claims payment. So that is a little bit on Identifi and how it works and how it powers things. And again, it's a similar methodology. I think this is another good opportunity to drop in and get a case study. And so I want to welcome Jessica Landin and Michigan Healthcare Professionals. Michigan Healthcare Professionals is a network in Michigan, and we're supporting their ACO work, and you're going to hear from that team and hear a little bit about the detail going on at Michigan.

Hi. I'm Jessica Landin, Chief Operating Officer at Evolent Care Partners. And I'm happy to be joined today by one of our partners, Dr. Barry Feldman, who's one of the leaders of Michigan Health Professionals, which is a provider group in the greater Detroit area that ECP is supporting in the enhanced model MSSP ACO. Dr. Feldman, thanks very much for joining me today to talk a little bit about your organization's partnership with Evolent. To start, could you tell me a little bit about MHP and your specific role in the organization?

Thank you, Jessica, for having me here. Michigan Healthcare Professionals is a multi-specialty group of providers in the Detroit area including over 200 primary care providers. We are a truly independent group of physicians that are focused on delivering the highest-quality, highest-value care to our patients. I lead one of the largest divisions of MHP, Millennium Medical Group, and also sit on the MHP Board of Directors.

Great. Well, thanks. And as we think back to 2019, when we first partnered together, can you shed some light on why Michigan health professionals originally sought out an operational partner like Evolent? What were your goals at the time? And what was the key problem that you were trying to solve?

Well, we were coming up on a big decision with our Shared Savings Program and ACO to move forward into new pathways for success program or exit the MSSP program altogether. We had been in the MSSP program previously with mixed success. We knew that to succeed in Pathways to Success, we needed more robust value-based infrastructure with solutions that would help us build upon our existing physician engagement. We needed dashboards, we needed real-time information, and we need more patient-centeredness and commitment to value.

So what are some of the reasons that you ultimately selected Evolent as your partner?

We selected Evolent for its population health, Medicare ACO and provider and patient engagement expertise as well as Evolent's support for independent provider practices. We knew Evolent had a great track record of working with providers in CMS ACO programs. While helping to drive cost savings, Evolent was also able to help partners deliver superior-quality results as well. The experience was a critical asset for us while we needed a partner that understood what it takes to succeed in value-based care. From the clinical administrative side, reporting and risk infrastructure.

Now that you've been in the Pathways to Success program for the better part of the year, can you speak to some of the results that you've seen so far in terms of physician and patient engagement and any other outcomes? And also now that you've partnered with Evolent in the context of the response to the COVID-19 pandemic, which has certainly been a challenge for everyone, can you talk a little bit about how that's worked and how that partnership has helped in Michigan and in your community?

Well, first and foremost, we've been incredibly impressed by the way Evolent partners have supported our response to the pandemic. As a group, MHP has been at the forefront of -- in our community of keeping our patients safe. We started a testing center back in March, long before anybody else in our area, to provide an outpatient service for testing of our most vulnerable people. Most recently, we've extended in that center flu immunizations because people still being afraid to come into the office are not getting immunized. We have started immunizing in our testing center. But having said that, it's been very challenging for our providers during this time. And having 20,000 ACO beneficiaries that we care for, we've taken on a huge role in our community, and Evolent has been there with us shoulder to shoulder fighting this battle. Evolent's care advisers, their support staff have acted as an extension of our practice-based teams and have supported our frontline nurses and other frontline workers by using their analytics to help target the patients at highest risk from complications of COVID-19 and even did direct outreach to the highest-risk patients, in some instances directing them for testing and, we hope, in the future directing them for flu immunizations to our immunization center. Evolent has opened a direct phone line where our patients could call to be put in touch with Evolent nurse or community health worker. We continue to work with them on ensuring smooth transitions to home and avoiding readmissions to hospitalized patients and other care management to help beneficiaries receive the care they need, along with other things. Secondly and more broadly, we've appreciated the way that Evolent has helped us navigate the new rules of the Pathways to Success program. And we're pleased at how Evolent partnered with our leadership to help drive physician engagement, which is considerably up during our partnership with Evolent. And this is leading to direct improvement in patient care. Using Evolent's panel insight tool, we've collectively completed over 20,000 timely patient interventions, avoiding readmissions. On a personal note, I was recently hospitalized with COVID for over 2 weeks. I didn't have any of this, wished I was an ACO patient, wished Evolent was my care provider. We didn't haven't had to manage all of that myself: no nursing navigator, nobody to call and no phone number. The crux of this is they are -- close to 85% of the practices in the ACO because of these performance tools are meeting their targets through the second quarter.

Well, great. Thank you so much, Dr. Feldman, again, for taking the time to speak with me today and for the great continued partnership between our organizations. We definitely look forward to continuing our work with you and in support of Medicare beneficiaries in Michigan. So thank you again.

Thank you, Jessica.

All right. Great. Hopefully, that was helpful to get a better feel for the kind of work we're doing. Dr. Feldman has been an excellent partner with the MHP team. And Jessica, again, is a long-time Evolenteer, has a lot of experience in this -- and to give you a sense of the type of talent that we have in the organization. Now I would say a couple quick comments with respect to this case study to kind of tie back to some of the earlier conversation we had. Earlier, we said, look, we're not that dependent on value, and now we're talking about ACOs. Just a couple of comments there: One, groups like MHP and other ones that we have around the country, ACO is a piece. We also have a number of private arrangements with private payers, and those will continue to grow over time. And then secondly, just to sort of highlight it, the Pathways to Success program is now an evergreen program within CMS. So we think of it like MA. It's a program that exists. It's not up for tweaking annually by CMMI. It's actually now part of the mainstream part of CMS. And again, that's been tested over now, I guess, close to 7 years and part of the permanent program. And so if we think about why we feel confidence around continued growth in this space, those are some of the reasons. And again, we'll have some opportunities on the backs of these partnerships to expand even beyond the ACO program. Let me just close on 48. We can flip one slide in. We've talked a lot about what this total cost of care solution is, how big it is and the fact, again, we have very modest penetration today. I think the reason we win, the 2 new announcements today, you heard this from Dr. Feldman a little bit, is we do have proven track record of success in this area, and then we have these integrated technology and clinical programs that we can drive all the way down to the front lines and again drive the results that power the economics for both our physicians and us. To again draw another analogy: The work we do in this area is not that dissimilar to some of the things that other leading physician groups like ChenMed or others that I mentioned earlier are doing. The difference, again, is that we're doing this not owning the clinic and not employing the physician, but we're actually doing it with these independent physicians that exist. And I think the final part of the differentiation is the ability to partner with those physicians in a way that they remain independent, which is a life goal for them. They're not getting acquired by an aggregator like an Optum, but they are able to continue doing the practice of medicine the way they like to do it, and there's a very significant market out there for us to continue to do the work like we just heard about from Dr. Feldman. All right. Last one, administrative solution. Here, our work is really serving both payers and risk-bearing providers. So you'll see partners in this category that are similar to Maryland Physicians Care, which you'll hear from in a second, but also organizations like SOMOS, which is ultimately a physician group but needed access to a set of administrative tools. These are broad-based administrative tools that, frankly, have some overlap with some of the things you just heard about from Dr. Feldman, but these are really purchased on a -- more of an a la carte basis or a platform basis, technology basis, and they also include many of the health plan back-office competencies that you need as either a risk-bearing provider like SOMOS or a plan like Maryland Physicians Care. And so that's a quick overview of what you're going to hear about today. I would say, importantly, these solutions do also support the work that we do in specialty and total cost of care space. So in many ways, our 3 businesses are interlinked. And the scale efficiencies we get from providing administrative simplification solutions to the market, third party, we also then benefit across our total cost of care management space and our specialty space because there is integration from a team, automation, offshore and et cetera spaces. Going to the next slide. We think about the problem for these risk-bearing providers or regional plans. There's 2 big problems. One is the infrastructure is not great. It's antiquated. And the second is that the patient and the physician, again, often have a very disconnected experience. So when I said earlier that physicians are the ones that have the ear of the patient, the plans less so, we try to fix that problem with our risk-bearing providers or our plans, using our Identifi platform and our ability to intervene in the same ways you just heard about, frankly. Providing that capability to a regional plan like Maryland Physicians Care to access that kind of engagement with their physicians is ultimately the kind of work we're doing and trying to address these sorts of issues you see listed on Page 50. We go to next slide. This gives you a quick sense of the types of results that we're getting in terms of financial and procedural accuracy but also on automation. So we actually only touch 1 out of 5 claims on a manual basis, and the 4 out of 5 have been fully automated. And again, some of the clinical outcomes you saw earlier will be the same kind of clinical outcomes to the SOMOS or a Maryland Physicians Care or our other partners would receive, on the right-hand side of the page. So this is what we would call best-in-class stack. I think, when we win, we win because of the integration across both the patient and member side but also the health plan side. If you go to the next slide. We just want to share with you the breadth of capability that's here. Identifi powers all of this. Originally, we did the acquisition about 4 years ago of Valence and Aldera. And that's integrated into this picture with our Identifi platform. And again, the ability to touch on the front and middle office, including clinical, and the back and corporate offices, which you think of as the administrative side, tied together, that's what makes our platform different than the other platforms that are out there. I think again, as with before, a little case study is helpful to bring all this to life. So if you flip then to Page 53. We're really lucky to have the CEO of Maryland Physicians Care, with Emily Rafferty, who's the President and COO of our Evolent Health Services business. So I'll let them take it away.

Good morning. I'm Emily Rafferty, President and COO of Evolent Health Services, accountable for the design, implementation and ongoing execution of an operating model in which ultimately our partners feel like we are operating as an extension of their team, working towards a shared vision and shared set of goals. And with that, I'm happy to be joined today by one of our partners, Cyndy Demarest, President and CEO of Maryland Physicians Care. Cyndy, thank you for joining me today to discuss the organization's partnership with Evolent. To start, can you tell us a bit about Maryland Physicians Care and your role specifically?

Pleasure to join you today, Emily. Thank you. Maryland Physicians Care is a local managed care organization owned by 4 Maryland hospital systems. For the past 16 years, I have served as CEO, leading the organization strategy in partnership with our great leadership team.

Great. Thanks, Cyndy. Evolent and MPC launched our partnership together last year. As you reflect back: Why did your organization seek out an operational partner to help support Medicaid health plan operations? And then what were your goal at the time and the key problems you were trying to solve?

Overall, we realized we needed to forge a true partnership versus purely a vendor agreement. Specifically, we needed greater transparency into our health plan operations data as well as more comprehensive reporting capabilities. We believe that Evolent's solution, including its analytics capability, provide a comprehensive approach to successfully managing overall health plan performance. Having real-time access to data is critical to addressing the needs of our members and our providers.

What are some of the reasons you selected Evolent as your partner instead of some of the alternatives?

Well, as we evaluated existing relationships and several alternatives, Evolent really stood out. First, we were and remain really impressed by Evolent's partnership model. Based on your successful track record and partnerships, particularly on the Medicaid side, we knew Evolent would be the type of partner with the experience to provide not only a comprehensive set of solutions but the level of transparency and true partnership needed to be successful with an operation as large as ours. Secondly, we felt that Evolent's expertise in Medicaid operations was a unique asset, and we're impressed by Evolent's ability to integrate clinical and administrative functions involved with managing operations. Medicaid is a challenge to manage in any state, but with a true partner such as Evolent, we believe we will achieve best-in-class operations. And Evolent is a one-stop shop, which made it an attractive partner for us given its integrated independent service offering. For us, that's a key differentiator with Evolent compared to other alternatives in the market.

Well, Cyndy, thank you. Thank you for your partnership and taking the time to join us today. We appreciate it. We're excited to continue the great work we've done with you so far and look forward to the launch early next year.

Great. Again, hopefully, that was helpful to go deeper into our third and final solution. I think what you see here is an organization like Maryland Physicians Care that cares deeply about their connectivity back to the provider market. Again, that's one of our [indiscernible] the differentiation. We do feel like, in general, the market is evolving that way irrespective of the value movement, that the idea of connecting more directly with physicians, having the tools and technology to pay the claims right and do the back office right but be very connected in the clinical side, where our depth sits, yes, is core to our differentiation, and we see organizations like MPC recognizing that, and I think we'll continue to see plans across the country move in that direction. So if you flip to the last slide in this section, 54. Again, it's another story that's similar with respect to a significant market where we have modest penetration. We do have, we think, the right scale and infrastructure that's pretty differentiated relative to the other platforms in the marketplace, and the ability to integrate clinical and financial continues to be our calling card over the time ahead. So with that, I'm going to take us to theme 3 and pass it to our Chief Financial Officer, John Johnson.

Thanks, Seth, and good morning, everyone. If we flip ahead into the next page here. I thought I would just take a few minutes and tie some of the key themes from Seth's -- the presentation this morning into our overall financial model [indiscernible] touching on our revenue model, talk about how we grow that revenue model through multiple channels, spend some time talking about our specific margin improvement targets and how we intend to achieve them, review our capital allocation strategy, both historically and going forward, and touch on our balance sheet before giving a quick update on guidance for this quarter and the full year. If you flip ahead to the next page. As we think about our revenue model, there are a couple of important characteristics. The first is that it is recurring in nature. The vast majority of our platform and operations revenue in our services segment is derived through contracts, which in a highly simplified form look like the top of the page here, where we have a certain number of members who are enrolled in our platform. We are paid a fixed "per member per month" fee for those members. And in many cases, we have the opportunity to earn additional payments based on performance against specific contractual objectives or guarantees. This recurring nature gives us a high degree of visibility into our forward revenue, and that combined with the long-term nature of our contracts also supports our visibility. Finally, our revenue is diversified. And we've worked hard to create this diversification, as Seth mentioned, over the years, diversified both across our solutions, both clinical and administrative. It's diversified across our line of businesses, with a little more than 50% of our members in Medicaid and then members also in commercial and in Medicare. And it is diversified by customer across health systems and, more recently, physician groups and regional and national payers. And this is the revenue model that we look to grow at that mid-teens organic growth rate per year that Seth has indicated. So we flip to the next page. How do we do that? How do we grow at that rate? First, we add new customers. As Seth mentioned, we've added 7 so far this year against a target of 6 to 8 and continue to feel good about our pipeline behind that as we move into next year. Once we add a partner, we can expand with them. We can do that by expanding geographically, for example, adding a new state with a national payer. We can do that by adding a line of business, expanding with a partner as they add Medicare Advantage to a Medicaid plan or vice versa. Or we can simply grow membership organically with our partner, both Medicare and -- advantage and managed Medicaid being growth areas for membership enrollment overall across the country right now. Finally, we have the opportunity to cross-sell services into an existing client, whether that's adding specialty care management to an administrative services clients, adding oncology to a cardiology client or vice versa. We see a significant amount of white space opportunity there with our existing partners. The combination of our ability to expand membership with our existing partners and to cross-sell new services and products into those customer relationships together has resulted in significant net positive same-store growth over the last 3 years since 2017, contributing about 40% of our organic growth during that time. Given the white space that we have with our current partner set, we see that theme continuing into the future and this cross-sell and expansion opportunity continuing to drive part of our growth forward. As we flip from growth into margins, for the next page, we've set both near-term and medium-term targets here. In the near term, we intend to continue our aggressive approach to managing our cost structure, which we started last year and which has delivered significant margin improvement since Q2 of last year, driving more than $60 million of year-over-year cost -- or annualized cost reductions Q2 to Q2. We've set a target going into next year to take out an additional gross $20 million to $25 million in incremental SG&A cost reductions to set up our margin for next year. On a medium-term basis, we have set a target of achieving a mid-teens adjusted EBITDA margin, and we see that a path to that is adding a couple of points, 200 to 300 basis points, of annual adjusted EBITDA margin per year from our 2021 baseline. We can do that through 2 key areas. The first is improving our gross margins, and the second is leveraging our fixed costs as we continue to scale. On the gross margin side, there are a number of different projects and initiatives that we have here that we will continue to focus on in the years to come. The first, as I mentioned on the prior slide, we have an opportunity to grow membership with our existing customers. That membership growth tends to come with high flow-through, higher -- much higher gross margins on the incremental life with an existing partner in an existing line of business than on the initial cohort with that partner. Second, we have been able to begin to deploy automation, whether that's robotic process automation or machine learning, to the core manual efforts that happen within our organization. As an example, we have used machine learning and RPA to significantly reduce the amount of manual intervention that a claim must go through before it is adjudicated and paid. That's an opportunity that has already started to bear fruit and, given the current composition of our business, one that we see as a meaningful opportunity to propel gross margin expansion into the medium term. As we think about our SG&A and overhead expense. Over the years, Evolent has invested in driving and building the scalable platform that will be able to best serve our clients and deliver the results that we are out to deliver. And we're now at a point where we see an opportunity to drive about 1 point of adjusted EBITDA margin expansion per year as we grow at our targeted revenue rate. The combination of that gross margin opportunity and the SG&A leverage opportunity results in that 2 to 3 basis -- or 200 to 300 basis point improvement per year that we see from our 2021 baseline until we reach that mid-teens targets a few years from now. If we flip now into looking at our allocation of capital. We have taken a strategic approach over Evolent's history to deploy capital in ways that have significantly expanded our total addressable market, accelerated our path to market leadership and accelerated our differentiation. And we've been able to do that by deploying the vast majority of our invested capital into both internal product development and core services M&A. As an example, both the Valence Health and New Century Health acquisitions were highly strategic. They were mission aligned. They expanded our total addressable market, and they continue to be strong contributors for our growth going forward for Evolent today. As Seth indicated earlier in the day, earlier in the year, we initiated a strategic review process for our health plan assets that has resulted, to date, in an expectation of a nice aggregate cash return on those assets, and we have made it clear that we will make no further investments in health plans. Finally, turning to the balance sheet on the next page. We started -- we ended Q2 with $115 million of cash and investments on the balance sheet, $75 million in a senior term loan and 2 tranches of convertible notes due in 2021 and 2024. Across Q3, we've taken 3 important actions to set up our balance sheet for a strong 2021. And the first is refinancing our 2021 convertible notes, pushing the vast majority of them out until 2024 and eliminating the near-term maturity on the balance sheet. The second is the Passport-Molina transaction, which closed in September, on the 1st of this month, and is expected to return between $130 million and $170 million in total capital back to Evolent. We would expect, subject to regulatory approval, for a portion of that capital to come back this fall and the vast majority of it to come back during the first half of next year. Finally, we've initiated plans to prepay our senior term loan with proceeds from the Passport transaction as they return to Evolent. The combination of those 3 actions sets us up for a 2021 where we have prepaid our senior term loan. We have no maturities until 2024, and we expect positive EBITDA less CapEx and, of course, a much lower cash interest burden with the prepayment of the senior term loan. Finally, before I hand it back to Seth to wrap, I thought I'd touch briefly on guidance on the next page. Just wanted to reiterate our recently raised guidance for both the quarter and for the year. And for Q3, we expect to be in an adjusted revenue range of between $258 million and $272 million and an adjusted EBITDA range between $10 million and $14 million. And for the year, we continue to expect to be within our raised range of $995 million to $1.035 billion in adjusted revenue, with adjusted services revenue being $900 million and (sic) [ to ] $930 million of that, and full year adjusted EBITDA to be in the range of $32 million to $38 million. We'll, of course, provide more details on our Q3 conference call, which we expect to be in early November. With that, I will turn it back over to Seth.

All right. Let's advance ahead to 64 just to wrap up here. Thanks for sticking with us. I know it's hard, long sessions here on video, but hopefully, you found it useful. I think just to reiterate the main messages from the day that we started with and then we covered throughout the day. First, our strategy, I think, is incredibly focused right now, and we are at an inflection point. You see that, I think, in how we're thinking about profitability, how we're thinking about specific metrics around growth and how we're thinking about sharpening the portfolio. So we feel really good about the strategy, feel like it's achievable. And we're very confident in the metrics we talked about today and look forward to staying very focused in executing on those. I think -- second, I think you got some flavor for the specific solutions that underpin that strategy. And I think each of the 3 have market leadership within their space and it's nice to be focused around those. And as a result of all that, [ out of the ] bottom of this, I think, as John just covered, translates a business that grows really nicely, has good profitability characteristics, good cash flow characteristics and, I think, will create strong shareholder value over time. And I hope that today's detailed look at each of these gives you incremental confidence in where we're headed. So that's it. We appreciate it, and we remain really excited on behalf of the whole team. We look forward to connecting with many of you in the weeks and months ahead. I think we're going to transition to Q&A. Chelsea Griffin is on the line and will be our moderator for the Q&A. And I know we got a bunch of questions during the session. We'll try to take those in order that we got them and starting, I think, with the analysts. And Chelsea, I'll pass it to you.

Thanks, Seth. So John, the first question is for you. Don Hooker has asked: In June, Evolent hosted a conference call with investors to discuss the loss of Passport health planned (sic) [ health plan ] contract. At that time, management indicated Evolent should be able to generate total 2021 revenues, including True Health, of approximately $900 million and approximately flat EBITDA margin. To be clear, does Evolent management continue to expect this post Passport?

Don, thanks for the question. So let me hit on the revenue piece first. I think, obviously, some things to wrap up as we close the year and before we give formal guidance usually in February. But I'd say at this point in the year, we continue to feel quite good about that $900 million figure, which, as you know, includes True Health premiums. On the bottom line, as we look at next year, I've tried to outline some of our key focus areas on margin improvements, particularly into next year with that SG&A cost takeout. And so I'd say we're highly focused on it. I think we would expect to see the -- probably a small margin improvement next year. And then that 200 to 300 basis points is really intended to be the medium-term target after next year as we continue to grow the business.

Thanks, John. Seth, the next question is for you. Ryan Daniels has asked, can you offer a bit more detail on the new IT offering from New Century? Does it replace the existing offering, augment it? How is it different? Can it also be cross-sold to existing clients? Or is it more of a novel offering for smaller payers?

All right. Good questions, Ryan. So first of all, it's a distinct offering from our existing performance suite. So a partner could have one or the other. They wouldn't have both. So it doesn't replace it, but it's additive, and I think it's valuable in that there are certain segments of the market where this newer solution may make more sense and help accelerate our penetration into that part of the market. Just to answer your question of like what is it exactly: If you think about New Century, there are 3 pillars to that solution that we talked about today. There's the network component. There's the ability to sort of close the loop at the claim on the back end. And then there's the technology, clinical IP and kind of care management services is the third. And this solution really is the care management clinical and technology piece and doesn't have the claim and network. So it works well in a market where a payer sort of says, "Hey, I want to move quickly. I don't want to go through the process of implementing the full network and redesigning and changing physician comp, but I do want to get at the clinical savings opportunity around the care management using the technology." So we think it yields slightly lower savings in the full stack but is another way to get at it if a payer wants to move more quickly. I also will just say the economic model, because it's a thinner service, more technology oriented, it's lower PMPM and a lot higher margin percentage, Ryan. And the last thing is, because we're not controlling all 3 of the pieces, it's less performance oriented than the performance suite. So on the performance suite side, we take more accountability for the full outcome. If the payer doesn't feel like they need us to do that and they want to keep more of the upside and take more of the downside associated with these relationships, then this is also a nice fit there. So what I love about it is it -- I think it expands the speed with which we can get into certain markets. I do think, to your question, there are some organizations where we may have the full performance suite in certain markets. And in other markets, they may decide that they have the technology solutions. I think it provides cross-sell and diversification of how we do things. And again, I think there are certain segments in the market where the market might actually prefer this solution. It will and it will certainly help on our gross margins over time. Hopefully, that answers it.