Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended March 31, 2023. As a reminder, this conference call is being recorded. Your host for the call today from Evolent Health are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. This call will be archived and available later this evening for the next week via the webcast on the company's website in the section entitled Investor Relations. I'll now hand the call over to Seth Frank, Evolent's Vice President of Investor Relations.

Thank you, and good evening. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our first quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the Form 8-K filed by the company with the SEC earlier today. During management's presentation and discussion, we will reference certain GAAP and non-GAAP figures and metrics that can be found in our earnings release as well as a summary presentation available on the Events section of Evolent's IR website. And now I will turn the call over to Evolent's CEO, Seth Blackley.

Good evening, and thanks for joining us. My prepared comments today will focus on updating you on our quarterly results, progress on our 3 operating priorities and the status of integrating our recent acquisitions. As you know, we're hosting an investor meeting in Arlington, Virginia with a live webcast option as well on May 23, and I'll preview that event at the end of this call. John will discuss the quarterly results in more detail. and our update on guidance for the year, and we'll look forward to taking your questions at the end as always. Reviewing the first quarter, Evolent began 2023 with strong results. Adjusted EBITDA exceeded the top end of our guidance range and revenue was within the range. We also continue to feel good about our guidance range for the full year. And today, we're raising the bottom end of the revenue range for the year given our high visibility into growth as the year progresses. Overall, we're happy with the strong start to the year. For the quarter ended March 31, 2023, Evolent Health's reported revenue was $427.7 million, growth of 44% over the same period of 2022. Excluding the $48.5 million of revenue contribution from NIA which was acquired during the quarter, our revenue growth rate was approximately 28%, consistent with the range of 25% to 28% we guided for 2023. And as John will discuss, we expect meaningful quarter-over-quarter revenue growth for Q2 and Q3 as we go live with our previously announced Performance Suite expansions at Molina and Humana. Looking at profitability. First quarter adjusted EBITDA totaled $50.5 million, an increase of $26.2 million and more than doubling results from 1 year ago. The growth in adjusted EBITDA was driven both by expansion in the base business as well as the addition…

Thanks, Seth. We are looking forward to seeing many of you in Arlington here in a few weeks. Before we get into our detailed results for Q1, I'd like to highlight a couple of disclosure updates we're making as we integrate NIA and move towards One Evolent. These were previewed on our February call, and now we have numbers to talk about, so let's review those. First, as discussed, we are now reporting our financial results in one reportable segment. as we focus future growth on our specialty value-based care business and integrate the entire organization around the specialty-led strategy. To provide insight into the growth drivers of our business, we are continuing to disclose product membership and PMPM fees for our 3 core product types, which we'll describe going forward as Performance Suite, Specialty Technology and Services Suite and Administrative Services. We are also maintaining the metrics for cases and revenue per case we established last year for the parts of our business where revenue is not PMPM driven. Since our clients can have multiple solutions deployed over the same membership, for example, cardiology, oncology, musculoskeletal, advanced imaging and so on, we are also introducing a metric of estimated unique members to accompany our existing metrics on members by product. Let me give you a real-life example here. The Medicaid plan on the East Coast has approximately 250,000 members and 3 Evolent products deployed administrative services and specialty technology and services for musculoskeletal and advanced imaging. This plan will account for 5,000 specialty and technology services product members and 250,000 administrative services product members for a total of 750,000 product members. Under our new disclosure, this plan would contribute $250,000 to our unique member count. In total, we had an estimated 41.3 million unique members during the first quarter…

[Operator Instructions] Your first question comes from the line of Sandy Draper from Guggenheim Partners.

Great. Thanks very much. I guess the first question, John, I just want to make sure I understand the -- I think you said it was about a $10 million reduction in revenue. That was from prior period adjustment and so it was nothing that happened this quarter? I just want to -- if you can maybe just walk through those dynamics. And then, I guess, the unrelated follow-up. I appreciate no new information on Medicaid redetermination. But just thinking about some of the commentary out of the payers around '24 that some of the -- they're expecting maybe a headwind to cost. Is that something that would have an impact on you guys? Or as you just said, maybe that you've already factored in the numbers?

Sandy, good questions. On the revenue side, so it was related to 2022 and this sort of thing can happen when -- in particular, as I mentioned, in Medicaid plans, when you have very strong performance, when you release a hold on claims, claims come in better than expected. If the plan is performing very well, then the plan has a minimum MLR floor. And when we do well and the plan does well, it can result in an element like this. I would say, generally speaking, so more broadly on this topic, we tend to have very good insight into how these sorts of dynamics will play out over the full course of the year. The timing, though, of something like this is not at our discretion and is based on when we receive the final data from our partner health plans. And so we had expected something like this, not a surprise and incorporated into our full year guide. The specific timing is harder to predict. Moving to redeterminations to hit on that point. So yes, no new information that is significant. I think we'll have more information end of the second quarter into the third quarter as our major Medicaid states really get into their processes. Generally speaking, as we think of the bottom line impact on potential risk pools of the redetermination process, I would say 2 things, and our perspective has not changed. The first and the most important is that the way our pricing tends to work is if there is, for example, a change in cancer prevalence in a population, then we have the ability to work with our partners to update our fees accordingly. And secondly, as I mentioned in the prepared remarks, we have incorporated an estimate in the spirit of conservatism of a potential impact of the risk pool shifting a little bit. So that's how we're thinking about it, feeling pretty good about where we are, and we'll continue to keep you updated as we see things move forward.

Your next question comes from the line of Charles Rhyee from TD Cowen.

Great. John, just wanted to maybe follow up there when you're talking about the ability to adjust pricing if there's changes in the population, is that like over -- like how periodic are you able to make those changes? And I guess, particularly as when we think about going with oncology with Humana into Florida and Arizona, obviously, you start to get the much bigger populations here. Maybe talk a little bit about sort of the underwriting process that you guys go through as you think about that? And then as I asked earlier, how often are you able to repeat that?

Yes, it's a great question, Charles. I think the most important component of this answer is that it's an ongoing dialogue with our partners. Where are we performing, how are we delivering value for them, both on the pure cost side and also network performance and quality. As we think about the sort of speed of potentially updating the fee schedule, I think the real answer to bracket it is it's not real time, and it's much faster than a health plan state cap rates. And so the key from our perspective is to be hyper focused on performing for our customers and in regular dialogue with them on what's going on in the market and what are we seeing so that we can best align with them going into the future.

Okay. And maybe just a follow-up. The $4 million in EBITDA that you discussed being pulled forward from the second and third quarters. Can you talk about what were the triggers that kind of released that earlier than you would have expected? And is there any additional margin that's sort of tied up in the potential performance fees that's perhaps not in the current guidance that could be that you might see later?

Yes. So the way that this sort of thing tends to work, and as I mentioned in my earlier answer to Sandy, is highly dependent on when we get data. And mostly, what that looks like is when we get claims completion. And in this particular case, the data came in a little earlier than we expected it to. The actuarial standards as you really know is to retain a margin for adverse development until you see that final claims completion. And that's the standard that we follow. And we'll continue to follow over the course of the coming quarters and years.

Your next question comes from the line of Anne Samuel from JP Morgan.

You spoke about margin progression for performance fee contracts being beneficial in the quarter. I was wondering how much does that vary by payer in terms of the maturity curve? Or is it relatively consistent?

That's a good question, Anne. I think if you were to look at the beginning to end, we typically think of it as a 36 months with a cure, right? If you look at the beginning to end, it looks pretty consistent. And on a quarter-to-quarter basis, it can be pretty different from customer to customer. And part of that can be driven just like what we were just talking about the availability of data. Part of it can be driven by the network and so on. What I think we've been particularly pleased with over the last several quarters is the way that we've been able to go live with quite a significant amount of new business across a number of different states and a number of different lines of business and preserve both the ability to drive that margin maturation and to serve the our customers and the ultimate to the consumer here being the member.

That's really helpful. And then just one more kind of housekeeping question. In your deck, you called out a wind down of legacy clients in administrative services. I was just hoping maybe you could explain what that is?

That's just normal churn on the EHS side of the business, Anne.

Your next question comes from the line of Ryan Daniels from William Blair.

My first, Seth, I wanted to get a little bit more detail from you on the payer/AMSURG announcement you made tonight. Can you just explain that a little bit more? I guess I'm curious if it's for all of AMSURG's ASE cases that use implants, number one? And then number two, is it just for ortho or does that still into the opto space, as I know ophthalmology and GI are kind of the 2 biggest areas of focus?

Yes. Ryan, so I think the way to think about this. This relationship is we IPG, which we now refer to as our surgical solution, had a relationship with an existing national payer, the national payer I think is happy with the work we're doing on their behalf in a small number of states and is expanding their relationship into some different ASC arrangements and want us to be involved in that to help them manage cost and trend. And so that then pulls us through into a number of new states that we weren't in to begin with, Ryan, drives obviously additional revenue and EBITDA for us. But I think the fact that we're being brought into these new states with this existing ASC that we announced today, but we'll have any opportunity to go to other ASCs in those same markets. So I think this is just part of a normal growth strategy, and it is beyond MSK into I think -- and that's the thing about ASCs, right? It's surgical activity with implantable devices could be across a number of different specialties.

Okay. And though, if I'm a doctor, one of the doctors working at an AMSURG Center, is it going to be for all my cases that I would leverage the IPG solutions? Or is it just for cases that are with that specific payer?

In this case, it's with that payer, right? Now of course, it gives us an opportunity to do more and have a broader growth opportunity in those markets, as I mentioned earlier.

Okay. That's helpful. And then the comments you had earlier just on the Medicaid redeterminations, we've heard that as well, some of the healthier members may be exiting on redetermination. Do you think that will provide increased incentive for managed Medicaid companies to look for solutions like yours to help them control MLR in a period where membership could be reduced and the remaining members could be higher cost. Is that a potential growth stimulant for the business?

Ryan, I do think that anything that creates pressure on the payer community, this being an example, are generally good for us in terms of creating a sales dynamic, it's helpful. I think the risk adjustment efforts that have been going on in the Medicare Advantage side fall into a similar category, again, anything that puts pressure. And so I think the answer to that is yes. And I think more broadly, one of the things that lifted us up a little bit in the conversation today that has been useful as I think as payers look at the next horizon of quality and cost management. We've done a lot with primary care. There's a lot less on the specialty side. And so we feel like we're still in early innings and as pressure comes, that is helpful to us.

Your next question comes from the line of Jeff Garro from Stephens.

I want to ask a couple on the NIA integration. And so the first would just be any color you could provide on the adjusted EBITDA contribution in the quarter if it's performing kind of in line with the annual expectations you had said earlier?

Jeff, it's sure is right in line. Only 10 weeks in the quarter. We had NIA, but feel good about it.

Yes. And Jeff, it's Seth, I would say more broadly just in terms of the integration, we mentioned in the remarks earlier, but we feel like we're on track A lot of things going quite well, and we're very happy with where we are, having kind of the organizational part of the integration and now really focusing on the platform side and cross-selling all the things that come after that. So we feel quite good about where we sit right now.

Yes, that's great. Maybe to follow up a little bit on that cross-sell opportunity. I know it's early -- so I would love to hear about any early successes building the pipeline. But maybe the question is more appropriately to the extent that you are making sure you're not disrupting any existing sales cycle and kind of any learnings you might have about what's making you maybe more or less excited about the combined organization's ability to be a more valuable partner to your clients and prospects?

Yes. Look, I think the things that were in the pipeline prior are proceeding as expected. When you think about cross-sell, Jeff, I think as we have talked about with IPG or vital or anything else in the past 6 to 9 months in is when you really start to bear fruit. We bought IPG last summer. First quarter I think, was consistent with when we thought we would start seeing some opportunities like the one we announced today, and I think it would be similar in this situation with NIA. The one thing that's new and different is that we now, because of the breadth of what we have with all the assets pulled together, have the ability to talk about a really broad and deep platform that I think is quite differentiated that, as I mentioned in the comments, we had a bunch of customers and prospective customers in a room too long ago, and I think the attachment to the platform and where we're headed with it is excellent. I'll say excellent. It's exciting. I think a lot of positive feedback on where we're headed and it gives us a lot of confidence to keep running the direction we're going.

Your next question comes from the line of Jessica Tassan from Piper Sandler.

We were hoping you could just help us understand the impact of NCH on a plan provider network. So basically, we'd love to understand how or if NCH actually reduces the friction of prior off by kind of inserting streamlined workflows and peer-to-peer consoles. Just any anecdotes or metrics on provider satisfaction pre and post NCH deployment?

Yes. Jess, it's a couple of different ways I might answer the question. At the end of the day, our goal is to improve quality and reduce cost. And the more we can do that without touching a physician's workflow in any meaningful way, all the better. And that's our objective and how we do things. So many times, we auto approve something, very high auto approval rates as for instance, as you mentioned. The next thing I would mention is that very, very rarely do we actually get involved or a payer and denial. We're doing a lot more what I would think of as B2B second opinion work, right, meaning we're actually providing valuable input to that physician. And that, as you mentioned, it comes in the form of peer-to-peer or some other easy way to do it that's automated. And then the last thing I'd say is we do survey our physicians pretty frequently. And I think the last survey I saw was 84% on extremely satisfied with New Century for I think that was an oncology example. And so that gives us a lot of confidence that the way we're doing it is creating value, but doing it in a way that has less friction, Jess. And over time, right, we're going to hopefully improve on that, not just the 84%, but on this idea of further automating things. And I think AI could be part of that over time as could our ability to continue to do things with incentives that turn into more of a shared decision-making model with the physician and the patient rather than us having to do the intervention. So a lot of innovation in this area, and we certainly want to lead the market on moving down the path you're describing.

Got it. That's really helpful. And then just as a quick follow-up, can you guys remind us what Evolent has been assuming for the persistence of the Bright relationship in '23 or what the contribution was in 1Q? And then just whether or to what extent that relationship is factored into the 2024 adjusted EBITDA run rate guide? And that's it for me.

Yes, I'll take that one, Jess. I believe we said that we expected between $30 million and $40 million of revenue this year from right. No change there. And we do not expect revenue next year.

Your next question comes from the line of Sean Dodge from RBC Capital Markets.

Maybe just going back to the AMSURG deal. With the payer involvement there, I guess the way Evolent gets paid, should we think about this being like a tech and services kind of arrangement? Or is there some shared savings element to it, too? And then any kind of data points you can give us to help triangulate in on expected revenue and EBITDA contribution from it either this year or next?

Yes. So revenue model is IPG's paid per case. It is a fee-for-service model that enables value-based care and has extremely predictable margins, something from the CFO chair that I would like. On size, it's not huge on the top line but a nice contributor on the bottom line given the strong margins.

Okay. Great. And then I guess if you could just give us a little bit of insight into the dynamics behind why Q3 is now expected to be the low point for EBITDA for the year. Is that just simply the $4 million in medical cost release that shifted? Or is this tied to the Bright exit or something else or a combination of all those?

It is. Yes, it's a good question, Sean. It really is just sharpening our pencils with more data on the timing of these performance margin releases with the acceleration of that $4 million into this quarter, we now have a better sense of how that's going to lay out across the year.

Your next question comes from the line of Jailendra Singh from Truist.

So I want to go back to Sandy's question around this $9 million revenue reduction. John, you said it's related to minimum MLR rebate. I'm still a little confused like why Evolent is on hook for that. Is there some unique arrangements with a particular payer? Or is this across all your payer contracts? And how are these rebate dollars even allocated to you guys considering that you guys capitate only on certain specialties? And why would this dynamic not put a cap on your profitability because if trends are better? I mean you should realize that as your profit? And I'm just curious, like clarify like why this did not impact our EBITDA in the quarter?

Yes. So a couple of thoughts on that one. The first is, as you know, this is mostly limited to a Medicaid type of arrangement. And as I mentioned earlier, this is typically only relevant when we have a mature Medicaid client that's already operating at or better than our target margins, where that client itself is also doing very well. And you can imagine the look, right, if we're driving outsized margins in a world where a Medicaid client is having to ship money back. And so in the spirit of partnership, the way that we seek to align with our partners, is consistent with their own regulations. So as claims complete, and you're able to remove holds on -- in your IBNR based on the final claims completion, then that can sometimes result in symmetric revenue reduction. That's what happened in this quarter.

Okay. That's helpful. And then also like on the second half to first half, like first half second half of ramp up this revenue, I know you talked about Humana and Molina contract contribution. I know you talked about EBITDA cadence. But fair to say that to the ramp you expect in second half, that's all Humana and Molina contract and partially offset by redeterminations? And in general, if you could just provide some color around Humana arrangement expected to begin the second half? What's the progress there? Kind of which quarter should we start seeing the revenue coming from that contract?

Yes. So taking those in reverse order, Humana implementation on track to live in Q3 to ether. And the rest of the revenue shaping across the year is, as I mentioned in the remarks, we'll see a nice step up in Q2 and then another nice step up in Q3.

Your next question comes from the line of Richard Close from Canaccord Genuity.

A little surprised with respect to the Centene and WellCare beginning to go live here in April. Can you just talk a little bit more about that rollout and the above corporate average tech and services in terms of what the magnitude MA is versus like Medicaid?

Yes. Richard, it's Seth. I think good question. Look, I think it's a positive, and it speaks to the depth of the partnership that we have with our partner at Centene. And I think we're doing a nice job for them, meeting our commitments. And as we've said, I think, for many, many quarters in a row, when we do that, we generally get the right to either go faster add things, and this is a great example of that, right? And so love seeing it, it's consistent with what we thought we would see, and it's a part of our plan to the $300 million of EBITDA, Richard, that we're driving towards. So I think it's a nice piece. As we've talked about in the past, tech and services has a nice margin profile. And so while this kind of relationship might not be huge on the top line, approaching between $5 million and $10 million, say, at run rate, Richard, it certainly we have a really nice flow-through on the bottom line. And so we think about that bridge to the $300 million, having a nice set of arrangements like this that contribute nice EBITDA and very consistent along with the performance suite margin maturation. I think the biggest thing I want people to take away from the call today is that both of those are progressing as we hoped.

Okay. And with respect to someone that's doing tech and services, what historically has been maybe the time line in terms of adopting the tech and services and then potentially transition into the Performance Suite? Is there any rule of thumb that you experienced over the last, call it, 4 years since 4 or 5 years since you've had NCH?

Yes, it's a good question, Richard. I don't think there is a rule of thumb on that one. We've had a couple that have switched over from Tech Services to Performance Suite. They've happened on slightly different time lines. It depends, I think, largely on what is the issue that our customer is trying to solve, and we can guarantee more savings with the Performance Suite, right? So part of the earlier question, the more pressure there is, the more likely we have opportunities, I think. We've also had a bunch of Performance Suite go straight to Performance Suite. We skipped the whole tech services kind of stop. And I think you're going to continue to see some of both for all the reasons I just said. I don't think there's an easy rule of thumb on it.

Your next question comes from the line of David Larsen from BTIG.

I think you mentioned that the Centene win was in addition to the sort of announced deployments at the time of like this transaction. And I think I heard there was another $20 million in addition to the post-synergy $85 million of EBITDA. Did I hear that correctly?

Dave. No, we were just making the point that the MA Oncology Tech and Services deal was not a part of the originally announced Centene NIA expansion that went into the $85 million number. There was not an additional $20 million.

Okay. And then in terms of the revenue impact from this Medicaid health plan, I think it was $20 million in the quarter, not $10 million or $9 million, right? It was $20 million?

I think I understand. So what I sought to articulate in my prepared remarks was we had in the quarter a reduction of $20 million in total in claims expense related to 2022. About $9 million of that $20 million was associated with the revenue deduct as well. The other $11 million dropped to our bottom line.

Yes. And David -- I think, David, just the last comment I'd make for the group. But relative to this question is just highlighting what John said, which is -- these are things that we understand. We know they're coming. We forecast for them. They're in guidance. We kind of have a sense of when they're going to come up. And I would think of it as normal course things that we factor in, which is why we're continuing to end up inside of the guidance ranges.

[Operator Instructions] Your next question comes from the line of Brian Tanquilut from Jefferies.

Okay. JP, you can wrap the call then if there’s no other additional questions, if no one else has polled in.

Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.