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

Good afternoon, everyone, and welcome to the JPMorgan Healthcare Conference. My name is Annie Samuel, and I cover health care technology and distribution here at JPMorgan. We're thrilled to have Evolent with us today. They had a really interesting release of their presentation last night, so we're excited to hear all about it. Presenting today is CEO and Founder, Seth Blackley; and CFO, John Johnson. They'll do the presentation, and we'll do some Q&A after that.

All right. Thank you, Annie. Welcome. You're almost at the end of day 2, which is a good thing. All right. So I'm obviously here to represent the work of our 5,000-person team, and let me start by telling you a little bit about what we do. So at the end of the day, Evolent's primary motivation is helping patients receive higher quality, lower cost care. That's what we're trying to accomplish. We do that primarily in oncology, cardiology and musculoskeletal disorders, where we work directly through the treating physicians. So oncologists, cardiologists, orthopods are our primary touch points. We're trying to help them deliver the best care possible with lower friction. And our customers are health plans or risk-bearing entities, you can see on the right, a sampling of our 75 customers; to deeply clinical organization, 350 physicians, over 1,000 other clinicians, engineers and the like. And if you go to our website right now, the first thing you'll see on our website is that our objective is to make sure that our members and patients are being taken care of like family, and that's going to be core to how we talk about the business throughout today. In terms of how we organize the business, it's the same 3 pillars ever since I've been CEO, and will continue to be these 3 around growth, profitability and capital allocation. I'm going to talk about each of these in a lot more detail later, so I'm going to largely skip over this page, but I'll just highlight a couple of things on the growth segment, which is it's a $150 billion TAM, $50 billion is addressable to cross-sell, so very low penetration and a very significant market. And on the profitability and capital side, we're going to go in a lot of detail at the end. I don't want to bury the lede, so let's talk a little bit about some of the near-term, company-specific tailwinds and also some of the headwinds that we have. These things affected us in Q3 when we had a bad quarter. And this gives you a sense of kind of what happened in that quarter, but also how we're reacting to it. So on the near-term updates that have happened since Q3, on the left-hand side of the page, let me highlight kind of four things. One, we set an objective of reaching $100-plus million of rate increases to deal with some of the increasing utilization we saw, and we'll talk about the fact that we achieved that. Two, on the tailwind side, after the tragic events of December that affected United and then broader in the industry, I think what's emerged from that is a real desire to have a lower abrasion version of still managing costs. And I think that fits really well with what Evolent does and how we manage care. And on the right-hand side of the page, a couple of the tailwinds, let me highlight two of them. One is this sort of generational dislocation around utilization, which we'll talk about in a minute. And then secondly, there's a lot of membership changes that we're seeing going into 2025. So I'm going to break those out in more detail later, but I wanted to highlight throughout the presentation, at least those 2 tailwinds and 2 headwinds. Just backing up a little bit with respect to the opportunity. I mentioned the $150 billion market, the $50 billion cross-sell. I think if you think about why our customers buy our product, if you look on the right-hand side of the page, there are tremendous pressures on affordability. And that's no secret. There's been $50 billion of increases in the cost of onco, cardio and MSK in a 5-year period. Premiums are going up for members. Even at the federal level, DOGE and everything that we're trying to accomplish with deficits, there's a massive affordability crisis. We all know that. At the same time, there's this broken experience issue, right, that has, unfortunately, been highlighted over the last few months, 60% of people highlighting a negative health care experience in the last 3 months. And so hopefully, everything I'm going to talk about today about Evolent is both addressing affordability but also the customer experience, and that's core to how we, I think, differentiate ourselves. Okay. So what do we do in a little bit more detail? Again, across these major specialty categories, we are helping address the best-quality, lowest-cost option for each time a patient receives care. I'll tell you how that works in a minute. There's 3 main pillars to how we do this. There's a clinical decision support model, meaning patient is diagnosed, what is the treatment plan, do we have the right treatment plan. Our decision support system helps identify right treatment for right patient. The second is working with those specialists, the oncologists, the cardiologists, et cetera, to make sure they have the right incentives. And the third is engaging directly with the patient. So let me just give a little bit of more detail on how that works in practice. So the first thing that Evolent does is aggregate what we define as Level 1 pathways. Level 1 pathways, on the left-hand side of the page, are not just the evidence that's in the market, but our Scientific Advisory Board, our teams aggregating best evidence, best literature; about 300 journal articles getting published a month in cancer. It's actually very hard to keep up with, and so we're aggregating that information to have it at our fingertips. Then we, in the middle of the page, apply that to a given patient. So let's take an example. If we're managing a population of 200,000 Medicare members in a given state, several thousand of those members will be diagnosed with cancer every year. Anytime one of those members is diagnosed with cancer, we go through a process of viewing the case. We receive the data from the treating physician through the EMR, a 40-year-old patient, non-small cell lung cancer, this genetic profile. We look at the various therapeutic alternatives for that patient. There are dozens usually that are viable. Each tumor has about 100 different mutations to give you a sense of how much variation there can be. So our job is to review all the treatment options and make sure we get down to the couple that are best for the patient: first, highest quality; and second, we think about toxicity and cost. 65% of the time, we find that the planned treatment plan for the patient is on evidence. Level 1 pathway looks good. 35% of the time, either the diagnosis or treatment plan roughly is wrong. And you think about that, think about the number of people in this room, I bet everybody has had a family member diagnosed, 35% of the time, that is going to be an incorrect diagnosis or treatment plan, not because oncologists are trying to do a bad job but the pace of scientific innovation is such that it's hard to keep up. So 35% of the time, that is our focus to intervene in some fashion, often through conversations with physicians. We do about 1,000 peer-to-peer physician-to-physician phone calls a day across the country, across all of our specialties, for instance. And then through our soft steering mechanism in these conversations, we often get a move from a Level 2 pathway or worse to Level 1 pathway. That's going to be better for the patient for their quality, but also you can see, on the right-hand side of the page, significantly lower cost for the payer. Worth noting, about 15% of the time, we recommend higher-cost treatment. So this is not about cost. This is about what's the right answer, what's the right quality. And then that translates, on average, to lower cost, but sometimes it's more expensive. The following a couple of pages I'm going to skip over. They're in the presentation for you to go deeper on if you're interested around each of the 3 pillars: so how does our decision support work, how does our technology take data out of the EMR, how do we use AI to do that to save the physician and our staff time. Very important to note, we don't use AI to make any clinical decisions, but to aggregate information and help recommend the right care to our physician who then does the review and makes the determination. On the provider alignment side, think about physicians, take oncologists, we'll stick with that example, they have financially an incentive, higher-cost drug equals more revenue for the physician. And so we do a lot of work to make sure that the incentive structure is set up correctly so that the physician is able to make the right decision for the patient and is not affected negatively. Here's a great stat, 81% of the time that one of our physicians, one of our 300 physicians, reaches out to the treating physician, an oncologist in this example, we get a change in the treatment plan. So to me, that's a very significant statistic. It says that our oncologists are trusted by the treating oncologist. We don't have, obviously, a non-oncologist call an oncologist. We also don't have a general oncologist call a specialist, a subspecialist. We have subspecialists reach out to subspecialists. And I think that's key to having that sort of peer-to-peer conversion rate. And the 84% satisfaction rate at the bottom, I think, is really important. We are known in the industry as the more clinical, more provider-friendly model do this kind of work. And then on the third page, a little bit on the member journey. I won't take any much detail here, but just suffice to say that historically, Evolent has done all of its influence through the treating physician. Increasingly, we have solutions that go directly to the member to provide transparency to the member, to provide support to the family, to help navigate the system. And I think this is going to be a bigger and bigger part of Evolent over time. Let me just end this section with a very brief case example. This is a 52-year-old female, aggressive form of breast cancer. Oncologist was ready to start the chemotherapy quickly, which is good. But one of the drugs had a cardiotoxic side effect. And through the process of reviewing the case, our oncologist noted the side effect that had come up in a recent study, flagged that, found out that the patient actually had a family history of cardiac issues, and reached out to the treating physician. The physician changed that therapy to a different therapeutic option. And you can sort of see at the bottom, a thank you from the oncologist for being a second set of eyes. Patient never knew about it, of course, but obviously potentially avoided a hospitalization or worse. All right. So a little overview of how our product works. Let's turn into the specifics around how our business works and the business model. Just as a refresher for everybody, we have 2 basic models at Evolent. One is the Specialty Technology and Services. Think of it as a tech services business with a 50% margin, lower revenue, higher margin percentage, lower dollar margin contribution, been growing strongly. We believe that model creates strong value for the client. But if you look on the right-hand side of the page, our second model is the Performance Suite. We think it creates the most value for clients, has also been growing well, but it is a risk product fundamentally. And I think a couple of takeaways I have on this page. One is both Tech Services and the Performance Suite have been growing rapidly over the last few years. And secondly, we've really sought to balance the two things, both in growth but sort of also how we build up the EBITDA outlook of the company. So let me, from that baseline, talk a little bit about the Performance Suite specifically, which is where we have had the issue over the last couple of quarters. If you think about the things that we established in November and communicated out on the call in November, we had 2 specific objectives to help improve the Performance Suite. One was to go out quickly over the last 60 days and target about $100 million of operating income improvement through rate increases by 1/1/25. I'm very excited to have announced at this conference that we have achieved that objective. Two, we had 3 major contracts we needed to rework. Two of those are now signed. The third one is being finished. And we got to about $105 million through 2 contract changes, one of which is moving from Performance Suite to Tech Services across about 600,000 lives. That improves our run rate by about $40 million. And then for the remaining run rate of about $60 million to $65 million, we had contractual adjusters plus this second contract that was signed. So that was objective number one. Mission accomplished. Objective number two was to improve the Performance Suite risk profile. And I think just to state it, what we were setting out to do, we had Tech and Services here and the traditional Performance Suite on the other end of the spectrum, is to narrow the risk profile of the Performance Suite. And we'll talk about how we did that and what it looks like. But an example contract in this case might be Evolent can make no more than 10% margin, but can lose no money, so a 90% to 100% MER corridor. And excited that we have achieved some changes in this category as well. As part of these renegotiations, about 2/3 of our contracts are now covered by a corridor model like that. And then finally, I think probably most importantly, through making both of these changes on this page, 100% client retention. Having personally sat in on a lot of these meetings with our clients, felt a really strong commitment to what we're doing, our clinical value, and I think it was incredibly validating the work we're doing to be able to make these changes in a short amount of time and do it in a way that, I think, our clients are supportive of how the contracts got reworked. All of these, by the way, are effective January 2025, headed into this year. So if we take those changes that we've made and reflected on, okay, how has the Performance Suite evolved? It really has gone from this traditional model to an adjusted model where, I think, we're still creating the same value for the client, same clinical interventions, same savings. I think we have narrowed the corridor such that the maximum amount of money we can make is a little bit lower, and we are also capping in a hard way, hard capping our downside. If you're the client, I think the trade works for them because they're still getting very significant clinical value creation, and they're still getting all the same investments that we were making, and it's sort of essentially narrowing the bell curve. We will not be selling the left side of this page going forward. The large deal we announced in November, for instance, will be in the adjusted column on the right-hand side of the page. And as I mentioned on the previous slide, about 2/3 of our Performance Suite contracts are now covered through this adjusted model. So let me take all that and sort of turn it to the question I think everybody's thinking about is, okay, what does 2025 look like for the year? The way I want folks to think about this is if you start with Q4 run rate as the starting point for 2025, we have a guide out there for Q4. We haven't commented on the guide at this conference, but $22 million to $37 million is the guide. Wherever that ends up, we've had the month of October, which was kind of at expectations; the month of November, which was a little bit higher utilization than expectations. Adding in December, that quarter end, run rate that, going into '25, and then net out the net of these three things, which is about $60 million. And that gives you a reasonable way to think about '25 as a starting point. And it's sort of what we're trying to accomplish here headed into the year. I think one of the things I want to note before leaving this page, you see this $25 million headwind that I talked about earlier from increased cost in oncology of about 12% compared to historical average of 8%. Obviously, that's an expectation we're setting, that we believe trend will be higher going into next year. If it's lower and more like our traditional 8%, that $25 million number comes down. The membership number on the $20 million side is just based on our most recent data we've gotten from our clients. Obviously, that will be fully updated over the next couple of weeks, and we'll be able to fully guide, obviously, coming in February. Lastly, I wanted to note on the $25 million. A lot of people have asked this tonight. And today, you put in these new protections. One way to think about this is, if you took this $25 million headwind that we have for 2025 and thought about what would it have been if we had the same contracts and the same contract terms we had in '24, and that $25 million number would have been more than double. So through the contract renegotiations, I think significantly limiting this headwind coming into the year, which we think is really important. We look forward to being able to put out a full picture in February when we give guidance. So let me sort of wrap up here with just a little bit around reiterating how we think about the business across our 3 categories. Largely, the main message I want you to take away is, on the growth side, the market feels very, very strong for us. The pipeline is as full as it's ever been for us. This 15%-plus annual growth rate, excepting any onetime adjustments for Tech Services and Performance Suite, it feels really good to us, and reiterating that number today. On the profitability side, just talked about the way we should be thinking about that headed into the year. We're reiterating the 20% long-term growth rate on operating income, adjusted EBITDA coming out of whatever the '25 number is. And on the capital front, nothing new here really other than just restate our principles, which is continue to delever a little bit. We have a very strong liquidity position today. We have a path to cover our '25 converts with the capital we've already secured. We are not that focused on M&A in the near term given this focus on execution and profitability. And look, we're continuing to, as we think about shareholder, make sure we're looking at all the alternatives to make sure that that's in the right place for shareholders. I'll close with just mentioning, again, if you go to our website right now, you'll see this message. This has been on there for the last several years. And I do think we strongly believe the work we're doing is improving affordability and doing it in a way that if it's our family member or your family member, we'd be very proud of how that patient is being taken care of and that they're getting the best care. We think both of those things can be true and do need to be true for the health care system. All right. Annie?

Perfect. Thank you so much for the presentation, and also thank you for the transparency and the help around the build on the numbers. I think that, that is extremely, extremely helpful to kind of understand all the moving pieces of the complex issues that you're facing. I thought maybe to start off, can we touch on the push and pull factors of this elevated medical cost environment? On one hand, it's led to unprecedented margin pressures. On the other hand, it's led to record new contracts in 2024. So how might that impact your 2025 pipeline? How are these managed care organizations thinking about mitigating that cost and leveraging Evolent?

Yes. Look, I think the way I'd answer that was, with a bunch of plans last week in sales meetings, Annie, I think what I'm consistently hearing is we have a massive affordability issue across the board. If you talk to employers, if you talk to anybody, affordability is a big problem. And we have an abrasion problem, right, at the same time in the system. And so I think they're all looking for solutions that can both address cost in the near term, not over 5 years, but this year and next year, in a way that, again, we could be proud of if it's our family member. And that model is what Evelyn is today, certainly compared to our competitors, I feel. And I think our product road map is going to take us further in that direction where increasingly, we can drive even higher savings in ways that are, AI being a good example, not to make a determination but to take the burden on the physician practice down and down and down. And so that's one example of many that I think is part of our road map. And I think we're in a good place today, and we're going to be in a better place over time.

That's great. And then I asked you this last night, but I want to ask you again for everyone here is, given all of the increasing costs, is that impacting how the payers are thinking about value-based care? And what is the appetite like for it?

Yes. Look, I think it does feel like more and more over the last 3, 6 months, as affordability has come into focus more for these payers, I hear more about the term value-based care. Of course, I think the work we've been doing has been value for a long time, and we're delivering in ways that are more traditional for the system, in direct benefit management ways. So I think we blend the two a little bit, Annie, but I do think that the market, there's a little bit of a resurgence happening on value-based care, yes. And it's really just payers looking for ways to how do I actually deliver value to my consumers and employers.

That's helpful. Can we just talk about the elevated oncology costs? What is driving that? And how do we think about it in terms of increased costs versus increased prevalence?

Yes. It's a combination of both, right? Certainly, no singular answer here. If you were to look at the data and rank order the drivers, the single biggest one that we experienced in '24 was an increase in prevalence, the number of people in a given population who have an active cancer treatment that is ongoing. And we think that stems from a number of factors. I think some of it is certainly most likely that pandemic-driven, whether that be a later diagnosis than might have otherwise happened or other factor. The second largest driver of costs is continued expansion of the use of checkpoint inhibitors. It's been the singular largest driver of cancer trend over the last 5 years. And '24 was no different, probably even higher than we had seen in the years prior. And we're expecting, as Seth referenced, that to continue into '25. As you look a bit further out, right, beyond 2025, it does seem to us that that's likely to moderate as the checkpoint inhibitors start to reach saturation in terms of swapping traditional chemotherapeutics for a checkpoint inhibitor-type model. And that likely is a mitigator to trend as you look into a couple of years from now. So we're not seeing this 12% that we're projecting for '25 as a new normal, but we are expecting it into '25.

That's really helpful. On cost, more recently, you touched on the presentation on expectations for elevated cost trends versus the normal 8% trend that you're seeing. In 3Q, how did cost trend relative to your initial expectations?

Yes. So in other words, how is the 12% compared to what we've seen recently?

Yes.

So we came into '24 with an expectation of about 8%, as we've seen previously, plus an expectation for an impact from redeterminations, right, which you can calculate it separately. If you look at the revenue base that we're bringing with us into '25, that trend that we saw in Q3 on an incurred basis was about 10%, so meaningfully higher than the 8%. And then add in what we've seen in October and November, it creeps up a little bit towards that 12% number, which is what landed us, as we think about the '25 forecast, at that 12% view.

Okay. That's really helpful. Maybe we could talk about how the conversations with your customers went in these renegotiations. How much friction was there? Do you think that it was an opportunity to kind of have a conversation with them about how you demonstrate your value to them?

Yes. Look, I mean one good part of those conversations, Annie, was we were able to really start all of them with a review of our outcomes, which we do anyway as part of account management process, but the ability to start there and look at the clinical interventions, what percentage of the time are we intervening, and what percentage of the time are we helping drive a better outcome for the patient, and what's the physician satisfaction around that, I think it's always a good opportunity to rereview those things. And the feeling in the room every time is tremendous support for the clinical model. And that sets the stage for a negotiation, which is both they want to get something done to make an adjustment. And I'm probably biased, but I do believe we're better than their next best alternative for how we do this work. And I'm very passionate about the work our clinical teams do, Annie. I think it's shown through in those meetings. And so then that set the table for a negotiation that was like, "Hey, we both want to get this done, what's the right way to do it?" And so yes, like sometimes there can be challenging conversations, but I think we got to a very good place without a ton of friction.

That's great. And has what happened this year impacted your appetite for incremental Performance Suite contracts? Are you thinking differently about what kind of contracts you want to add going forward?

Yes. Look, I mean we sought to be really balanced over time, Annie. So historically, you could see strong growth rate in both segments. I think that will continue. So I think we will continue to sell the Performance Suite with these adjusted terms, a little bit of a narrower bell curve, but still some more. And I think we'll still have a lot of Tech and Services. And a lot of it depends on what does the client need, from voice of customer, what do they need and use that as the true north for how we set it up. And I think we'll have a lot of both.

And as we think about kind of competitive differentiation, right, I think your kind of guaranteed savings model is pretty compelling. As your partners are thinking about other options, what are they thinking about? What are their other options to mitigate cost?