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

Good afternoon, and thanks for joining us for our next presentation. And we're very pleased to have with us Evolent Health. And presenting for the company here is Seth Blackley, CEO; and John Johnson, CFO. Gentlemen, thanks for joining us today.

Great to be here, Charles.

So I want us to talk about the company from a little bit of high level. Obviously, a lot of changes at the company over the last year or so, and some listening -- tuning in today might not understand all that has occurred. Maybe, Seth, you can just start and remind us some of the changes and the new strategic priorities for the company.

Sure. Sure, Charles. So maybe I'll answer that by walking through what our 3 strategic priorities are for the company, and I'll talk a little bit about the evolution that's occurred across each of those 3. So the first priority we've had is mid-teens organic growth into the foreseeable future. And if you think about where the company has evolved over the last few years, historically, our product has always been a value-based care product, reduce the cost, improve the quality of care. The thing that's evolved over the last few years is we've changed the end market a little bit to add the payer community to the end market. So while we still serve providers in a pretty big way, we've also added a very significant presence directly to the managed care space. And so that's probably been the biggest part of the evolution. The other thing that's been a slight change is we increasingly are working with independent physicians and maybe a little bit less with the health system market. And as a result of those couple of changes on the end market side, we feel really good about the organic growth rate that we've communicated. We feel like we have less than 5% market share in a really big market. So a lot of running room to continue to do what we do. So that's the first theme. The second theme is around focusing on getting to a mid-teens EBITDA margin, and that's been an evolution of the business. I'd say the couple of things that, to your question, have evolved the most over the last 12, 18 months is a heightened focus on cost. John and his team have had a very significant effort to reduce our cost structure. And at the same time, we've evolved our product mix a little bit, Charles. We talked a lot about this New Century Health Light product on the call, and that has gross margins that are 3 to 5x what our historical gross margins have been. So the combination of running at the cost structure and also some things like additional Lighter product with higher margin, we feel really good about the path of this mid-teens EBITDA line. And then the third piece is around optimizing how we deploy capital and thoughtful capital allocation. I think the biggest thing here to your question of what's changed is 2, 3 years ago, we were doing a lot with the provider-sponsored health plan community, even joint venture in certain plans. We've decided to monetize all those plans last year. We've completed that process. We are returning that capital to the company and able to really focus on our 3 primary products, which I'm sure we'll talk about. But that's been a big part of the evolution as well. So I feel great about where we are. We're really well set up for 2021.

That's great. And so maybe let's jump into sort of the provider side first a little bit. Last week, on earnings, you announced 2 new primary care partnerships, which -- with Blue Cross Blue Shield of Texas spans a number of lives covered by Evolent Care Partners, I think, by 40% and a number of participating physicians by 30%. You've had good momentum in the provider space, but generally, the shift -- but if we think about it, generally, the shift to value-based care has been fairly slow across the industry. What do you think is now driving the momentum among providers over the last year or so?

Yes. The -- So first of all, just to talk a little bit about Evolent Care Partners. We have 3 businesses for those who don't have all the context. We have a specialty business, New Century. We have a services business, Evolent Health Services. And Evolent Care Partners is our solution that's most provider-facing and is really about primary care performance management and taking risk for primary care physicians. So maybe akin to an Oak Street, although we're not an employed model, so we're not competitive or similar to Oak Street in that way, but the model is similar. And I would say to your question, Charles, for Evolent Care Partners, the biggest thing, and this has sort of been there and has -- it's gone up and down a little bit, but generally continues, is that when the primary care physicians are focused and engaged with the payer and have the right tools, there's a huge savings opportunity. And that savings opportunity allows better quality for the patients, and it's going to return more income to the physicians and the payers are happy. So there's this nice win-win-win. And I think for us, we've had some acceleration as we focused even more on that independent primary care space, Charles, in your question. To put it in perspective, the 90,000 lives is about $900 million of premium, which we don't rev rec the $900 million, but our EBITDA opportunity is on the full $900 million. So it's a pretty big business for us. Maybe a little bit of a hidden gem within that one in the sense that it's -- we haven't talked about it as much historically, but it's a nice business with a lot of opportunity, and it has, again, pretty small market share relative to the opportunity out there. So we're excited about it.

And maybe sticking with that and to dig into a little bit more, maybe what does the patient mix look like? Is that more -- is it kind of focused on Medicare? Is it kind of broad-based commercial and just a general population mix? What do the patient population look like?

Yes. It's mostly Medicare, a little bit of commercial. No Medicaid at the moment, but at some point, that will be added, too. But Medicare is the biggest chunk of it.

And then -- are all -- is all the contracting at risk basically within Medicare Advantage? Or is there a fee-for-service population in there as well?

Yes, it's a lot in the Medicare fee-for-service population actually where, from our view, some of the biggest savings opportunities exist because it's historically been under managed. So we focus in a pretty big way on what I would call the fee-for-service side of Medicare.

And then because of that, are you looking at direct contracting? Are you participating in the direct contracting pilot that's starting up in the month?

We're not in it for the 2021 period. We probably will be in it for the future. Our experience, Charles, for the type of physician groups that we have on our programs in CMMI, we feel like giving it a year to have the rules harden a little bit is advantageous. But we view the direct contracting program as a nice tailwind for us over time and will certainly be in the program. And year 1 is always interesting because there's new rules [indiscernible] the whole thing out, and I think it will be a strong program.

Great. And before I forget, if anyone has any questions, I think there's an option and you can click on the chat option and put a question in, and we'll try to get it in through the course of the discussion. So we're talking a lot about the progression of value-based care over the last several years, and obviously, it seems to be accelerating. How much of that do you think is COVID-related? I think generally, people have viewed -- or it seems that those practices or providers that were taking risks fared much better, right, because they weren't as dependent on volume. And those who were in fee-for-service were, obviously, last year. Are you seeing that with your clients either in the -- in Evolent Care Partners or in the services business?

Yes, I would say that COVID has not had a huge impact, frankly, Charles, yet on our sales momentum across the business. I think it will be a positive tailwind for the reasons you mentioned. But thus far, partially because last year was such a disruptive year for everybody at a human level, that had some negative or positive of the issue you mentioned because people now see the value in taking on more of a total budget contract. So it's been pretty flat in terms of impact thus far, but should be a tailwind kind of psychologically, in particular, going forward for these physician groups.

Okay. Also, I think one of the things coming out of COVID was a lot about virtual care and telehealth. Can you talk about what are the -- some of the opportunities that also presents for Evolent? Are there ways that you participate in that?

Yes. It's interesting. We -- for Evolent Care Partners, as an example, a lot of the work we've always done since we started the company has been remote virtual care management work. And so in that way, there's sort of an acceleration of the adoption of our ability to get to patients across the last 12 months through the pandemic. And so that's been a positive for us. We've also facilitated telehealth coordination across Evolent Care Partners and using broader networks and using platforms that exist. I would say that just in general, if you look at the $900 million of premium that we have and look at where are the opportunities to save, let's use a round number 5% off of that, telehealth is one of 15 things. It's a piece, but it's a reasonably small piece to the puzzle, given that the focus for -- like take oncology as an example, where there are some ways that telehealth affects it, but in general, these huge cost categories, the cost is in the drug and the infusion and the surgery and the inpatient stay. And so to really bend the number, you have to attack those things. So I think telehealth is an enabler, but it's one of many that we utilize.

Okay. That's helpful. Going back to this idea of taking risk and in your patient population -- for care partners, right, I guess 2 questions, right? One, as it relates to care partners, and one when you're providing total cost to care management for end customers. I guess starting with that, with the total cost of care management, do your clients who are dealing mostly with a commercial population use it differently than those who might have a heavier Medicare population? Is there a different way to use the solutions depending on the population you're going after?

Charles, it's a good question. It's reasonably standard across the types of populations, meaning we take in data, we prioritize using that data, which patients need to be intervened and supported, and then we drive the clinical programming out of it. Obviously, the type of clinical intervention that happens is pretty different. The more aged somebody is, the more chronic conditions they have. You have different clinical programs and pathways. And obviously, pediatrics is on the other end of the spectrum, pretty different. So the systems, the infrastructure and the process don't change much. The clinical interventions do. It's reasonably scalable for us, meaning if we are going to do this on Medicare, we can do it with Medicaid and commercial without huge changes in the infrastructure.

Okay. That's helpful. And then with Evolent Care Partners, you talked about your population is largely Medicare fee-for-service. A lot of the -- you mentioned Oak Street before, right? They're all attacking Medicare Advantage, taking risk in contracting with MA plans and which kind of makes sense, right? The MA plan will just pay you out 85% of the premiums because that's all they can keep. And then it's up to you as a plan. Why have you guys kind of more focused on fee-for-service? Recognizing that is probably where the bigger cost dollars are, but given how MA is structured, it would seem like that's a -- an opportunity itself.

Yes. We like MA a lot, Charles, and we do work there, and it's going to be a growth segment for us. We look at the competitive landscape and who's doing what and where the opportunities are. We went where the first opportunity was, but we're going to -- we'll do a lot in Medicare Advantage, but also commercial Medicaid, to your earlier questions. But at the end of the day, the physicians are going to want to do things consistently across all these populations versus just a piece. And so that's informing our strategy as well.

So then I guess just to stick with that. So can you talk about how you guys are managing costs down when you partner with these primary care practices in a fee-for-service population? I think everyone kind of understands maybe in a MA population. What do you need to do differently in fee-for-service to be effective?

Yes. And John may jump in here, too. I'd say it's, first and foremost, figuring out, out of a population of 90,000, there's going to be, let's call it, 5,000 to 7,000 patients that are the most critical to intervene with, Charles, or figuring out who they are. And it's not necessarily who is the most high cost, high utilization patient last year, it could be different. So we use a predictive model to figure out who to engage with. And then the whole game from there is to engage with that patient and get them engaged in one of our programs. And our program has a series of proven pathways that if we can follow the pathway for that patient, they're much happier, they stay out of the hospital, and the costs are a lot lower. It's pretty formulaic, and it involves adjusting how frequently patients take their medication, what their routine is with respect to checking in with their primary care physician. If they have one of several different significant procedures or conditions, cancer, cardiology, et cetera, that you, again, follow the pathway that's relevant for best managing that disease. So it's really about following evidence-based medicine. And again, that's good for patient and good for payer.

That's helpful. On the call last week, you guys talked about the EBITDA in the quarter benefited from strong results in the performance-based arrangements. First, can you kind of quantify the total amount of performance-based revenue in the quarter and perhaps how much incremental benefit you got relative to your initial expectations?

Yes. Yes, obviously, really happy with our results for the quarter. I think if you look at where we came out at a little over $16 million of EBITDA relative to the midpoint of our guide at $11.5 million, that gives you a range for the above-expectations number that came in, in the quarter. I'd say that was really driven by a couple of different factors, Charles. The first, and I think I mentioned on our earnings call, was we recognize performance revenue when we get data on our performance. And so in some of these CMS programs, you really don't get the data for the year until near the end of the year. And so one of the items that happened in Q4 was we got a comprehensive view of how Evolent Care Partners did for the year. [indiscernible] quite well. We recognize that revenue during the Q4 2020. So that's sort of just an indication of how some of the revenue recognition mechanics work. The other components of the strong performance across 2020, more standard performance on the performance-based contracting, and we also saw some nice pickups on the membership side across the year, ending the year at 3.6 million numbers.

Is that something how you appoint people to be modeling now as maybe care partners becomes a bigger piece over time that the fourth quarter should have that kind of -- as long as you guys are performing well, that should be where we kind of see kind of a step-up relatively speaking?

What I would say generically, this pattern of recognizing the revenue when we get the data will add some variability to our quarter-to-quarter EBITDA. I wouldn't necessarily say it's always going to be Q4. I've seen this picture from CMS before, and it's not always sort of right on the nose in terms of timing. But generically, and I think I mentioned this on the call, too, as we look at the $40 million to $50 million EBITDA guide for this year, feel very good about that range, we will see some quarter-to-quarter variability based on some of these timing factors.

Yes. I want to maybe jump over to the health plan business, health plan side of it. Obviously, you've kind of monetized the plans that you were kind of working with, but you've kind of pivoted here, right? And when we think about particularly New Century Health, seems that you're sometimes more to the smaller plans, but you had some nice wins really recently with Centene, Molina, some really big plans out there. What does the health plan pipeline look like today for you and maybe compared to 1 to 2 years ago? And any change in sales strategy here?

Yes. I would just say, Charles, it's dramatically grown over the last 2 years in terms of the opportunity and the pipeline that we have there. That's based on a couple of factors. I think one is having more proof points with these larger plans, as you noted, and doing a good job for them and word of mouth that carries out of that from delivering our commitments to those organizations, that's one, and first and foremost. Two is we have invested more in sales capacity in this area, and that's been helpful. And then third, we've done some strategic things that help -- have opened up new segments. I think the Florida Blue relationship is an example of that, where there's, I think, 36 Blue plans and Florida Blue is the first. So we had 35 other ones. Kim Keck, who's a fabulous addition to our Board, is the CEO of the Blue Association. And so just sort of establishing more and more credibility with that segment, I think, is opening it up and creating a lot of opportunity for us. So we feel great about that segment. And it should be -- just in general, the health plan segment will be a continued strong place for us.

Maybe can you just remind us sort of what the market opportunity you're seeing right now just in oncology and cardiology in terms of sort of the number of opportunities out there, maybe how penetrated that market for this type of solution is at the moment? Maybe start there. Yes.

I mean we -- I think we've talked about it as a $50 billion market. And we have -- we've talked about New Century as a proportion of our total Evolent revenue, and you can kind of do the math on it. We've got sub-1% share in terms of dollars, in terms of lives as we've added the lighter platform and you think about the several hundred million lives that are available. Again, a very small part, Charles, what we have on our platform relative to what's out there. So we have a lot of running room. And we can use both products, the light product, as sort of an entry vehicle or for an organization that wants to move very quickly. We have the performance suite for an organization that feels like they're under a lot of pressure financially and wants a guarantee. So we're -- and we get the question a lot of, "Hey, should you add more specialties beyond cardiology and oncology?" And for this reason, our first answer is, "Hey, we've got a lot of running room with cardiology and oncology, and so let's focus there for now." Over time, there will be opportunities for more specialties. But right now, the clear opportunity in front of us is around market share.

What's the competitive -- what is the competitive landscape for, let's say, oncology? Like what are our other plans using? I know there's like 1 or 2 other solutions out there that we hear of, like Eviti seems like a kind of a competitor. But beyond that, I don't hear too much. Just curious how you kind of map out this -- the landscape here in oncology.

Yes. Yes, for New Century, Charles, the biggest competitive dynamic is that the payers might have what we call a utilization management solution that cuts across the entire business. So whether it's a radiology scan or an oncology drug or an orthopedic surgery, they have a way to sort of review and say yes, no. And that's utilization management. There's a couple of problems with that approach that -- what I would call as broad and thin when you're dealing with something like oncology. One problem is that oncology is really complicated, and it's growing like crazy. There are new drugs being added all the time. So the ability to be a little narrow or very deep on oncology allows for much better cost management. But secondly, almost as importantly and related, is that rather than just saying to an oncologist, no, you can't do that or you can't do that scan, we look at the patient holistically and say, what is the best pathway for this patient? Very clinically oriented. So we have really good relationships with our oncologists. They, I think, prefer to engage with us than some of the other tools that are out there and feel like it's more of a peer-driven model. And that is -- carries a lot of weight with the payer community as well. So being able to guarantee more savings and being able to kind of engage the oncologist or cardiologist in the right way has been our key differentiator.

That's helpful. You target 6 to 8 partnerships per year, obviously with the new NCH-like solution kind of gives -- does that give you an opportunity to accelerate the number of partnerships per year? Is that something we could expect in the future?

Yes. What I would say there, Charles, that 6 to 8 per year is calibrated based on what we need to propel that mid-teens growth targets for the top line. So we think, look, historically, about 60% of our growth has come from new clients that would be included in that 6 to 8 targets. And about 40% of our growth has come from same-store and cross-sell. So if you project that forward, we feel pretty good about the 6 to 8 today being the right target to get us into the mid-teens for next year and into the years to come. Of course, as we continue to get bigger, then you could expect that to go up as well. But I think the power of the cross-sell in this particular moment of the company's cycle is really high. And so that's an area we're particularly focused.

Okay. That's helpful. A couple of questions come in. First one, as companies like CVS and Walgreens, managed care organizations -- and managed organizations look to provide more service offerings to their customers, do you, as Evolent, expect to partner with them? And by partnering with these, they're basically asking, would it be able to offer Evolent's patient care management services to augment these large organizations offerings?

Well, I think one of the ways, Charles, that we do partner with those organizations, and I use Caremark as an example, is just on the PBM side. And particularly with New Century, the work that we do in oncology is very closely linked to that piece of the pie, right? And so that's probably the biggest way that we integrate now. As they build up more clinic capacity over time, which we think is great for the market and for patients in general, that will be another coordination point that will be likely over time.

Okay. That's helpful. Another question here is, where do you feel investors may sometimes be misunderstanding the Evolent story here going forward?

I don't know, Charles, if misunderstanding would be the way I would frame it. But I think there are some places that are -- particularly as we focused in and been clear that we have this nice organic growth, top and bottom line story, I think there's -- relative to peers, there's a multiple opportunity probably. And then just in general, maybe using a sum of parts mindset for Evolent is another place where we see an opportunity to better describe Evolent and frame what we're doing. And I think your questions on Evolent Care Partners are pretty helpful there in the sense that, that's a business we haven't talked a lot about, but it's $900 million of premium, big EBITDA opportunity, big growth opportunity that in and of itself is a really interesting organization, but just 1 part of 3. And so kind of helping folks understand how each of the 3 are pretty interesting and have a lot of value in and of themselves. And putting that together in terms of the aggregate market cap of the company is the other thing that I'd say we're having a lot of conversations with investors around.

Yes. So then you just brought up a point about some of the parts. And I think at the beginning, you said it's $900 million of premium. You don't book all the -- you don't book the premium revenue itself, but the EBITDA part is. Can you just remind us then what is sort of the economic breakdown between for Evolent providing the services -- the back-end service and then the primary care practices that you partner with? Is it a 50-50 split? Any kind of framework you could put around there for us?

Yes. At expected savings levels after we recover our costs, it's roughly 50-50. It is the way to think about it, Charles.

Okay. And so then when we think of -- so then we can just look at premiums, make an assumption on what the typical EBITDA margins on that kind of business is, factor out cost and then split in half and that's roughly the math?

You got it.

Okay. Anything else that -- maybe I know this has been a big focus as well, return on capital, statutory capital from Passport and others. I know you guys talked about it last week on the call, but just maybe to round out, just remind people where we are in terms of capital return, what are we -- anything that we're still waiting for and as we think about future capital deployment priorities. Just maybe we'll -- we can end there.

Yes. So feeling good about where the balance sheet is. The number that I would use in modeling is to start the year with $157 million of available cash after our paydown of our Ares senior term facility. From there, we expect to have positive cash flow this year, a combination of a little bit of operating cash flow and the continued return of capital from the asset sales. And against that, we have a little under $300 million of convertible notes that aren't due until '24 and '25. So a nice long runway there and feeling good about where the balance sheet is. And just to your last point, Charles, I'd say right now, given the opportunity in front of us, we are heads down executing on this organic path in the near term. So that's where our focus is.

Okay. Then -- and if we're not looking for -- obviously, it sounds like additional M&A or something is probably not at the top of mind. Any other thoughts on like a return of cash to share -- return of cash to shareholder, maybe share repo, anything like that in the cards? Or...

Yes, it's a fair question. Right now, we're focused on deleveraging. So that's been the near-term focus, will continue to be. As the cash comes back, we still have $27 million of those outstanding '21 converts. So we'll take care of those. That's the near-term focus, Charles.

Okay. That's helpful. And I think with that, we're out of time. So Seth and John, thanks for being with us today and...

Thank you.

Thanks, everyone, for joining us for this session, and please tune in to the next presentation. Thank you.

Thanks, Charles.

Thanks. Bye.