Evolent Health, Inc. Q3 FY2024 earnings call

Key Managerial Messages - CEO Seth Blackley noted that Q3 results were driven by a rapid increase in oncology costs. The team is taking four actions to address the issue: working closely with partners to update reimbursement rates (successfully negotiated $35 million in incremental higher rates by end of August), carefully auditing new data, aggressively managing cost structure, and having the contractual ability to exit risk arrangements or shift to technology and services model if needed. - CFO John Johnson mentioned that while three out of four drivers of margin expansion were ahead of expectations, higher medical costs offset progress. New business implementation was ahead of expectations, medical expenses were reduced while quality increased, and $35 million in new revenue was captured. Cash from operations was $18.7 million in the quarter, and there was a slowdown in collections from health plan partners, leading to drawing on the revolving credit facility and obtaining incremental committed financing. - Evolent announced six new revenue agreements in Q3, the largest number of new revenue agreements in one quarter since the company was founded 12 years ago. These include a letter of agreement for an oncology performance suite with a large state and top national payer, and expansions and new agreements for various specialty, technology, and services products, as well as a significant renewal.

In Q3 2024, Evolent's adjusted EBITDA was $31.8 million. The specialty performance suite business was impacted by approximately $42 million in higher-than-expected medical costs compared to the forecast when setting Q3 guidance in early August. This included two components: $24 million in higher net expenses related to prior periods due to new claims data received and processed from September through early November, and an additional $18 million increase in medical expense in August and September due to an acceleration in medical costs after a period of relatively flat experience. In some markets with a small number of customers, medical expense ratios exceeded 100% on an incurred basis. In terms of revenue contribution, the specialty performance suite was the segment most affected by the higher medical costs.

Forward-Looking Guidance - Revised 2024 adjusted EBITDA guidance is between $160 million and $175 million, with Q4 guidance between $22 million and $37 million. - Revenue outlook is updated to between $2.55 billion and $2.575 billion for 2024, with Q4 revenue expected to be $642 million to $667 million. - Reaffirmed long-term expectations of growing annual adjusted EBITDA by at least 20% on average and revenue growth of 15% plus, though 2024 growth is off a lower reference point.

Risks - Unusually high medical costs inflation in the specialty performance suite in Q3 driven by factors like significant increases in disease prevalence, Medicaid redetermination-driven adverse selection, rapid unit cost increases, post-COVID acuity increases, and provider coding intensity. - Slowdown in collections from health plan partners in September and October, leading to drawing on the revolving credit facility, though it's considered temporary but proactive financing was obtained.

Q: Charles Rhyee asked about the expenses outside of the scope reviewed so far and the percentage of performance revs the small number of partners driving high MLR represent.

A: John Johnson said the claims audit process is ongoing, with the number of reviewed items growing 10x vs last year in Q3, only a little less than 10% reviewed so far, and the small number of partners driving high MLR represent 40% to 50% of performance revs.

Q: Jailendra Singh followed up on the $100 million rate adjustments and how to think about margin performance from mature cohort of contracts and long-term margin target for performance suite.

A: John Johnson said the current trend affects all cohorts, and they firmly believe in a mid-teens margin target for the performance suite in the long term based on value creation opportunity.

Q: Kyle Aikman asked about new partnerships' financial contributions and expected live time.

A: John Johnson said the six announcements have an annualized revenue of around $200 million, with tech and services announcements contributing around $5 million to $10 million in total revenue once fully live, and all expected to go live in 2025.

Q: Richard Close asked about contract renegotiations process and thinking on performance suite in pipeline.

A: Seth Blackley said flipping from performance suite to technology and services could take a couple of months, and they are being prudent and thoughtful with pipeline agreements, still seeing opportunity but with heightened scrutiny.

Q: Sean Dodge asked about Q4 EBITDA guidance bridging and cost trend.

A: John Johnson said the Q4 guide assumes possible worsening of trends in Q4 and beyond the $100 million, there are normal course escalators that bridge the gap.

Q: Jessica Tassan asked about $100 million sought after price increases and impact of Part C drug negotiation under Inflation Reduction Act.

A: John Johnson said $100 million is needed to get back on track, and Evolent anticipates minimal impacts from Part C drug negotiation under the Inflation Reduction Act.

Q: Kevin Caliendo asked about 2025 EBITDA outlook and clinical questions.

A: John Johnson said they reaffirm long-term growth expectations, and Seth Blackley mentioned changes in oncology treatments contributing to elevated expenses but the fundamental opportunity remains intact.

Q: Daniel Grosslight asked about flexibility in non-mechanical rate increase for next year.

A: John Johnson said it's a negotiation based on incontrovertible trend and population-driven metrics.

Q: David Larsen asked about premium increases in 2025 and impact of election.

A: John Johnson said rates not linked to planned premiums, and Seth Blackley said election outcome won't change much for Evolent as it depends on ability to set up thoughtful contracts.