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

Good morning. My name is Allen Lutz, health care analyst at BofA. We're pleased to have Evolent Health here. We have CFO, John Johnson; and Head of IR, Seth Frank.

I guess, to level set here, Evolent has gone through quite an evolution over the past couple of years. John, can you do a quick walk-through of how the company has evolved and kind of where it's going from here?

Yes. Thanks again for having us. If I had to have one word to describe this evolution that we've been on over the last couple of years. It will be focus. If you think of Evolent circa 2018, 2019, we had a lot of different products that we sold to a lot of different parties. And -- over the last several years, we've been on this journey of winnowing those down and identifying what are those products that create the most value, where we have the biggest differentiation and it's sort of the most right to win. And where we have landed now quite officially this year is as what we believe to be the leading provider of value-based specialty services in the country that is not owned by a health plan, which we think is a pretty important differentiator for our buying customers. We sell our solutions to health plans almost exclusively and risk-bearing providers, other bearers of medical risk. And that's really how we've unified the company over the last couple of years.

And I wanted to dig into the specific areas of specialty value-based care that you operate in. I think one of the things that I've learned over 10 years in health care technology is that companies in health IT that succeed are ones that focus on very specific niche areas of health care, where there is some type of problem that's just not being addressed. So can you talk about the specific areas of health care that you're trying to enact change within.

Yes. Our focus, we've had the same mission for 12 years now, which is to change the health -- the nation by changing the way health care is delivered. And that language is quite intentional that we're not out to do sort of broad strokes, tops down changes in care models, it really is a local effort, right, supported by our national scale. And so we focus on areas of health care where we have specific clinical IP that can -- that has some evidence-based history of driving value. And so where we've doubled down is in oncology, the most -- probably the most complicated specialty right now with the fastest-growing trend. Cardiology, right behind oncology on those 2 metrics. And increasingly, with our most recent 2 acquisitions, musculoskeletal conditions. Those 3 together, comprise the 3 largest spend categories for specialty care across most lines of business, which one is first, depends on whether it's a commercial plan or an MA plan or whatever. And we believe that package is -- can then be highly differentiated to our health plan customers.

And as you think about being standalone versus some of your competitors that operate within a health plan, what differentiates Evolent versus those competitors?

Yes. I think there are 2 things. One is the simple fact that we're independent, right, is not necessarily a deciding factor in a lot of purchasing decisions, right? If you put yourself in the shoes of the regional Blue Cross plan, making a decision on which vendor they're going to go with for oncology pathways. On balance, we believe it makes it easier for them to choose us that we are independent and they're not padding the potential competitors' margins. That helps. The second piece, and this is more core to the product is we believe that our model of providing value-based pathways is different in kind than most of the other models out there, which I'll call denial based, right? The classic way that you manage specialty spend is to shrink the number of procedures that are allowed to be done based on a specific set of symptoms and to say no a lot, right? And that is not our model. Our model is to partner more deeply with the provider through a portal, so make it web-first and show them through the dynamic portal, what's the evidence? What are the best pathways. There might be 12 indications that the chemotherapy regimen for a particular disease state. And not all 12 are going to be as effective -- and that data is not easily available, right? You look at the main national pathway sources. There's compendia, things like that. InterQual is a classic vendor here that uses, that provides these sorts of guidelines. And it's our perspective, you've got to go two ticks more detailed. What -- not just what is approvable by Medicare or the payer, but what is actually most effective. And it's that orientation working with the provider, not just saying no that we believe is pretty differentiated.

And as you think about the stakeholders in this, I'd say there's 3, you have the payer, the provider and then the patient. And obviously, they're probably each going to react to Evolent their business differently. The patient might not even be aware of it. Can you talk about how conversations with health plans go that utilize Evolent services and then conversations with providers because you're effectively changing the way that they would do care. And so just trying to understand how those conversations differ between a health plan and a provider.

Yes. Yes, it's interesting. So I like this trio that you started with. And the way that we think about it is the health plan is our customer. They pay us. But they don't use our platform. the provider, the physician or the nurse practitioner or the PA is the user of our platform. So they are the entities that we're most directly engaging with. And then the patient is the beneficiary of better care, cheaper care, more effective care. And I think those -- that framework, I think then naturally leads to, all right, what's most important for each of these stakeholders, the health plan buyer is making a decision on are you going to generate the savings that you're promising? I know you're going to do it in a way that is going to avoid a lot of friction and abrasion with my network. And then naturally lead into, all right, well, we're actually quite provider-focused and that allows us to demonstrate a level of provider engagement that we think is pretty differentiated. Our most recent survey, which was done in November of oncologists that use our platform, and an 85% -- 84% approval rate, which is relatively high for what is at its core of prior off-platform right, is not necessarily the most popular thing in health care right now.

Is there a specific go-to example that you always use, maybe it's oncology, maybe it's cardiology, maybe it's end of life, this sort of the kind of the poster child for ways that Evolent can, can really change maybe the prior standard or leverage data to change the way that customers think about specific indications? Is there one kind of overarching or is it just a lot of different ones that you think about?

Yes. I mean the value is created in the details, right? And so it really is a ton of different substitutions and tweaks and thoughts, and there are some good examples. So a good example is KEYTRUDA, right? It's a miracle drug for those for whom it works. And if you don't have the genetic profile that KEYTRUDA is going to be most effective on -- is probably not going to work. And so a classic approach, the utilization management style approach would be to prescribe it, and then it has a particular duration of the therapy. And then you check at the end if the CT scan shows a decrease in the size of the tumor. And a classic sort of approach to radiology, right, might be to say that we're not going to approve another CT scan until you're all the way through that therapy. And we take a whole person approach, right, which is to say, first, we're not going to approve it until we've seen your genetic test. Because if the genetic test says it's not going to work for you, our Chief Medical Officer likes to say that the most expensive therapy is the one that doesn't work. So we're going to put you on something else or suggest something else. If -- once you have the genetic test, instead of waiting for a CT scan until the therapy is complete, we're going to do a scan 30 days or 45 days in to see if the tumor is getting smaller. Because if it's not, then that's an indication that we need to move faster to get you on a different pharmaceutical that might work better in that instance. So that's the sort of style of approach here. It's taking a whole sort of person regimen based approach to how can we get to the most effective medication here that is really considering each of those steps along the way.

Kind of seems like the way that you approach it is almost like a decision tree in each of the different specialties. Is there -- and I would assume that there's a lot of coding that goes into that and kind of making sure that the data, your -- the position is performing the appropriate protocols. Is there a specific number of kind of individual itineraries, so to speak, for each of the different indications that you're working on, for example, for oncology, would there be maybe substantially more than cardiology. We kind of know some of the specific issues that lead to issues there. I'm just curious, numerically, are there a lot of different issues in oncology versus cardiology?

That's an interesting question. Yes. I would say yes. Simply because the pace of drug discovery in oncology is so fast. And the volume of new indications and updated journal articles and all of that is so wide for oncology specifically, that they're typically just more to digest there.

Switching gears a little bit. You've announced a lot of partnerships in 2022, and I think you already have 4 through Q1. I think your guidance is 6 to 8 per year. So you've done a really good job of kind of at least through 1Q and 2022 really exceeding that. What can you point to that's driving these partnerships? Is there something from a macro level that's leading some of these customers to maybe accelerate change? Or is it Evolent specific where you've kind of gotten things more streamlined on your end? Just curious what's driving that?

Yes. That's a good question. I think if you look at the core of what we offer, what we offer our solutions that can improve the value ratio of health care, right? So better outcomes at lower costs. And in macro environments, like one -- like the one that we're experiencing now, where health plans and other risk-bearing entities are feeling either at current margin squeeze or a prospective margin squeeze with stars changes that are coming into effect next year, for example, that to us feels a little bit like a tailwind. The other thing that I think is also true is as we've been able to grow and develop some real scale and a track record of creating real value for some of the biggest payers in the country, there is a sense that other payers are noticing that. And that's exactly where we want to be.

You have some pretty big relationships with Humana, Molina, Centene. Can we take a step back and just think about how can Evolent grow through those partnerships. Where do you think the bar is what does Evolent have to do or prove in order to expand those partnerships beyond what they are today?

Yes. The -- just to frame it out a little bit, we introduced the metric last week that we're calling unique members. And we now have about 41 million unique Americans who are on at least 1 of our products. And across those 41 million Americans, we've deployed about 66 million products. And so that's an average of 1.6 products per American. And the clear opportunity, right, is to take that 1.6 and move it up. We've got between 6 and 10 products, depending on how you count. And so some real opportunity there at the product level. And then step 2 is transitioning arrangements that are tech only, right, tech and services into our capitation arrangements, which we call the performance suite. That, together, doing those 2 things is $50 billion-plus opportunity, huge opportunity. How do we get there, right? It comes down fundamentally to the 2 key things that I mentioned earlier, which is, one, we need to demonstrate real savings and value, right, in an environment with equal or better quality. And so really seeking to drive performance for our current partners. And the second is we really have to do that in a way that fulfills our promise to not be super abrasive with the network and to be -- continue to be really aligned with the providers, so they see at Evolent as a resource, not as a barrier to care.

The way that our health insurance system is set up, everything sort of each year, everything gets reset for a lot of patients, employees. Is that the best way for companies like Evolent and health plans to look at savings and cost and enacting change? And is Evolent doing anything kind of in that realm like thinking about longer-term performance beyond sort of a 1 year?

Yes. Within the specialty space for our capitation contracts, the bulk of the contracts are evergreen. So they're annual contracts that don't typically have a renewal cycle that have an annual inflator that's agreed to at the beginning of the arrangement that is related in some way to the trend of that underlying specialty with a discount. And that's part of the value proposition, right? Not only are we going to save you money upfront, but we're going to lower your trend over time. And what we've found is the most important thing, particularly in these contexts where an oncology trend might be 8%, 12% a year in total spend growth. So significantly faster than overall medical inflation. And what we find is if you are actively in dialogue with your partners on what's happening in a network, what's happening in the market and you're demonstrating value year-over-year. Well, my goodness, sorry about that. The thing that we have to do is we have to be the best. We have to be better than our partners can do it. And in that context, what we've seen over the years is then the economics work for both parties then you're able to strike contracts and deals that work for everybody.

One of your core strategic priorities is to expand margins. And I think last quarter, you had a high watermark for EBITDA margins. And I know that looking through the story over the past couple of years, you've talked about sort of the cadence of health plan margins from the beginning through 3 to 5 years out. Is there any -- within that ramp from the beginning to the end, is there any seasonality with -- as you're ramping those up? I know that the first year, there's a lot of onetime costs. But as you think about how a patient goes through the benefit over the course of the year, is there anything worth calling out there in terms of intra year seasonality?