Q3 2019 Earnings Call
Welcome to Evolent Health earnings conference call for the quarter ended Septemberthirty 2019.
As a reminder, this conference call is being recorded.
Your host for the call today is Mr., Frank Williams, Chief Executive Officer Evolent Health.
This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations.
Here are some important introductory information. This call contains forward looking statements under the U.S. Federal Securities laws.
Statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or press present expectations.
A description of some of the risks and uncertainties can be found in the Companys reports that are filed with the securities and Exchange Commission, including cautionary statements included in the current and periodic filings for additional information on the company's results and outlook. Please refer to its second quarter News press release issued earlier today.
As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most directly comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website <unk>.
Our dot Evolent health Dot com.
And the 8-K filed by the company with the FCC earlier today.
At this time I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.
Thank you and good evening.
Frank Williams, Chief Executive Officer about will help and I'm joined by John Johnson, Our Chief Financial Officer, Nicky Mcgrane, our executive Vice President of corporate performance.
Well open the call. This evening with a summary of our recent financial results.
The update on the market, our current pipeline and progress on Apple watch key strategic priorities for the your Uh Huh.
Well then had to do the job to take us through a more detailed financial review third quarter.
Close with a brief summary of our market leading positions serving both payers and providers as always we'll be happy to take questions with the other recall.
In terms of our results total adjusted revenue for the quarter ended September Thirtyth 2019.
Reached 46.7% to 220.3 million from the comparable quarter of the prior year.
Adjusted EBITDA for the quarter ended September Thirtyth, 2019 was 3.3 million compared to 4.8 million for the quarter ended September Thirtyth 2018.
As of September Thirtyth 2019, we had approximately 3.7 million total lives on the platform with the addition of Maryland positions Carol This quarter, we welcome seven new partners to the other one national network this year.
Overall, we're quite pleased with our top and bottom line results for the third quarter and the progress we've made and meeting our key strategic objectives for 2019.
We're experiencing strong same store growth, which is the result of delivering consistent performance improvement operationally clinically and financially for our partners.
In terms of new business, we're continuing to see a deep and diverse new business pipeline. Thanks to a compelling macro environment and a portfolio of solutions that have successfully evolved with market demand.
As we come into the ended the year. This combination of cross sell momentum new partnerships provides us with a high level of visibility for top line growth and margin expansion as we head into 2020.
Turning to the macro environment. There continues to be abroad focus on slowing health care cost growth and driving improved clinical outcomes for patients.
If anything the pressure from payment innovation narrow networking consumer driven health care and increased competition is creating greater urgency with both governmental and managed care payers to look for alternative arrangements with providers that drive value.
The governor's moving rapidly to new payment models in Medicare and Medicaid managed care payers are also delegating significant risk both in primary and specialty focus models.
Well in just the providers generally don't have the systems to support an integrated population health oriented trouble over a large geographic region and pairs tend to manage care with claims based data and the utilization management approach first as a whole patient focus.
It's 10 shouldn't ultimately leads to friction between payers and providers and sub optimal cost in clinical outcomes at a time, where total cost are pure matters.
As a bridge between payers and providers have once approach and integrated platform facilitate successful risk transfer and ultimately drives administrative efficiency clinical value and financial results.
That's a result were somewhat unique in the industry and that we offer differentiated capabilities to drive clinical value not only in the value based care market, but also to the managed care industry achieved through working more effectively with providers.
Even the national and regional peers, who already have over 150 million lives and collect 970 billion in premiums under some form of underwriting risk we have a large market to serve today that isn't simply dependent on the pace of new value based care models.
As we've discussed over the course of the year for differentiation comes to life in three primary offerings to payers and providers.
First is true up on health services, which is uniquely positioned to help simplify the administrative side of health care operations.
Years regional payers have struggled with outdated legacy administrative systems for critical function like claims management utilization management payment integrity remember services.
This has resulted in process inefficiency dissatisfaction excess costs and an inability to innovate payment models. Moreover, these systems that typically not been integrated with clinical data, which can result in delayed interventions poor risk stratification, there's someone clinical programs and sub optimal out.
Yes.
The level of clinical administrative and operational integration in our core platform is highly unique in the market and positions us well to support regional payers and providers in streamlining operations and providing outstanding service experience to members.
We would estimate that this market is growing with the proliferation of new regional plans that need more sophisticated infrastructure and scale to support their growth strategies.
Our second differentiator is are unique ability through new century, how to manage specialty care more effectively for national regional and governmental payers.
Yeah sure in cardiovascular care together represent approximately 25% of total spend in Medicare alone and there's high cost variation with limited correlation to clinical outcomes.
Pace of drug development emerging clinical protocols inside of service variation for creating major pain points for payers as current cost trends are crippling to overall financial performance.
Two centuries deep expertise in total cost of care management through innovative data analytics pathway development and specialists to specialists engagement offers a unique solution to address rising medical trend and sub optimal clinical outcomes.
We also believe that governmental policy will be an additional catalyst for this business as oncology in cardiology currently represent a significant portion of Medicare spend and are well suited to a bundle model.
Lastly, the approach a knowledge base can be translated to other specialty areas that allow for more integrated solution for payers.
The third solution area is focused on reducing total cost of care through a provider driven clinically based population health approach.
Since the launch of other what Weve engage physicians and leveraged end up clinical data in a highly sophisticated interventions to proactively manage patient populations and drive significantly improved quality at lower costs.
In Medicare advantage alone are complex and transitional care programs have helped our partners to decrease total medical expense and hospitalizations by 24% and 51%, respectively, and we continue to develop new clinical pathways for additional interventions every year.
Most recently, we focused on identifying high performance physician groups in markets, where we can add a significant number of lives and leverage our platform to deliver a market, leading clinical and financial performance.
The risk based H.C.O. programs recently introduced by CMS serve as an excellent catalyst for market expansion, we're excited to expand our physician network footprint to multiple geographies.
All in all the breadth of the three solution areas has more than doubled our total addressable market, but also diversifies our target market to include the existing managed care market as well as the emerging value based care segment.
This is an important evolution because we expect this diversification to increasingly insulate the business from the pace of industry transformation and regulatory change.
As I mentioned previously our differentiated integrated platform facilitates risk transfer and ultimately drives administrative efficiency clinical value and financial results for both payers and providers.
On the new partner fraud, we welcome seven new partners. This year across all three of the segments I just outlined.
This quarter I'm excited to announce a partnership with Maryland physicians care M. C. O I managed care organization that administers health care services to over 200000, Medicaid beneficiaries enrolled in the Maryland help choice program.
MPC is a highly regarded provider on the plan that has an outstanding reputation for clinical quality a number satisfaction.
Will support Mpcs Medicaid operations through the deployment of the Identifi platform and a wide range of ongoing services, including claims processing care management, you M analytics never portals risk adjustment and payment integrity.
I wanted MPC will begin the implementation process. This month with full health plant operations slated to launch in January 2021.
We believe this partnership will be a perfect example of how are integrated health plan and clinical services platform can help a regional managed care organization drive improved outcomes and enhance experience for its members.
Beyond the seven new partners. We welcome this year, we continue to see a strong pipeline across our portfolio of solutions with several opportunities likely to close in the next several quarters.
Witching gears to our existing network and cross sell opportunity. We're in the midst of one of the largest same store growth cycles in our company history. Several partners are expanding services and new populations on the other one platform.
Few highlights across our last several months include first the addition of in CHS oncology and cardiovascular services for chronic care health plan, but MTO and the Illinois market. It serves over 300000 members. We went live with a portion of the services on County cares adult membership in late Q3 will be.
Wrapping up across the fourth quarter and into 2020.
This is an important opportunity for us to significantly improve specialty care outcomes and we expect this opportunity to contribute meaningfully to the top and bottom line as the contract ramps second we launched new century hole that passport in August and are off to a good start in driving significant improvements in oncology and cardiovascular.
Services management for a subset of the plans 300000 members.
We expect this new contract to be fully up and running at passport sometime during the fourth quarter.
Third two of our partners are formally entering the Medicare advantage space in 2020 benevolent is contracted to provide comprehensive administrative and clinical services to support the operation of both plants.
Lastly, we're supporting several partners an expansion or new entry in some of the recently announced governmental AC O programs, which builds on Evelyn significant accumulated experience and driving strong clinical and financial outcomes in new payment models.
In addition, we're encouraged by strong partner renewal environment.
Yes, and the cross sell opportunities I touched on represent an exciting vote of confidence in our partnership model and in our ability to deliver consistent results.
All in all the combination of a good renewal environment strong same store growth and a total of seven partner additions. This year gives us considerable momentum as we start to think about a revenue outlook for next year.
Lastly, before I turn it over to John I'd like to give an update on our partner passport health plan.
Since the beginning of the year, we've worked hand in hand, with the leadership team at passport, including Scott Bowers, the new CEO to put in place an aggressive operational and financial agenda for the health plan.
I'm happy to report that we've made meaningful progress and driving administrative efficiency optimizing network performance, improving clinical outcomes and driving a strong service experience for members.
As a result passport has seen a significant improvement in its core operating metrics, including a 14 point turnaround and operating margins posting a positive 1.3% margin in the third quarter.
Lots of ongoing work still to do but strong progress and a great team in place to drive performance.
Well, we don't have any new information on the status of the Commonwealth of Kentucky's Medicaid RFP, we anticipate we will receive notification from the Commonwealth in the near term.
Given the strength in new signings and cross sell activity to date in 2019 in the event that passport wins. The RFP, we anticipate services growth in 2020 of approximately 20%.
Passports contract is not renewed beyond June 2020 than we anticipate services growth in 2020 of at least 10%.
Overview I'll turn it over to John to speak about our financial performance on the quarter and our outlook for the remainder of the year.
Thanks, Frank and good evening, everyone today, I will cover our financial results for the third quarter 2019, and we'll finish with an overview of our 2019 outlook.
Overall, we're pleased with our progress against our financial goals through the third quarter, including a return to adjusted EBITDA profitability in the quarter as well as our visibility into expected strong growth for next year.
Beginning with our consolidated third quarter results adjusted revenue increased 46.7% year over year to 220 point Threemillion, mostly to the impact of New partner addition, cross sell the new century acquisition as well as growth within our true health segment.
Adjusted EBITDA was 3.3 million relative to 4.8 million in the prior period.
Adjusted loss available for class, a and class B common shareholders with negative 7.7 million or negative 0.0 $9 per share for the quarter compared to negative 3 million or negative 0.0 $4 per share in the same period the prior year.
As of November 2019, they were 83.9 million shares as our class a common stock outstanding and Euro point 7 million shares in our class B common stock outstanding.
Within consolidated adjusted EBITDA adjusted cost of revenue, which includes claims expenses increased to 163.8 million or 74.4% adjusted revenue for the third quarter compared to 90 million or 59.9% adjusted revenue in the same.
Quarter at the prior year.
Adjusted EPS DNA expenses decreased to 53.1 million or 24.1% and adjusted revenue for the third quarter compared to 55.4 million were 36.9% adjusted revenue and the same quarter in the prior year the increase in adjusted cost of revenue year over year was due primarily.
Only to incremental cost to serve new partner. In addition, cross sell and costs assumed in the assets acquired as part of new century.
Combined our total adjusted cost of revenue and adjusted SGN, a expenses as a percentage of total adjusted revenue was 98.5% in the third quarter of 2019 compared to 96.8% in the same quarter at the prior here.
Now I will take you through the third quarter results by segment.
And our services segment third quarter adjusted services revenue increased 37.4% to 180 million up from 131.1 million in the same period the prior year.
Adjusted transformation revenue in the third quarter accounted for 5.2 million or 2.9% of our total adjusted services revenue for the third quarter compared to 9.2 million in the same quarter last year.
Adjusted platform and operations revenue accounted for 174.9 million or 97.1% of our total adjusted services revenue for the third quarter compared to 121.8 million in the same quarter last year.
On a year over year basis, the increase in adjusted services revenue was driven primarily by new partner additions cross sell and the impact of the new century acquisition.
As of September Thirtyth 2019, we had approximately 3.7 million lives on our services platform.
Our average P.M.P.M. fee for the quarter was $16 in 22 cents compared to $13.05 in the same period at the prior year.
Adjusted EBITDA from our services segment for the quarter with 3.1 million compared to 4.1 million in the prior year.
Performance in the third quarter was right on track relative to our expectations with adjusted EBITDA in the services segment, increasing by 11.9 million sequentially versus the second quarter.
Turning to our true health segment, we had premium revenue of 43.8 million in the third quarter up 20.9 million from the same quarter last year and largely due to the amended reinsurance agreement with New Mexico Health connections are NMHC entered into during the fourth quarter 2018.
Our own health plan Truhealth served an average of just over 17000 large and small group members in new Mexico in the quarter generating 20.9 million of the totaled $43.8 million premium revenue in the quarter.
Adjusted EBITDA from true health for the quarter with your point 2 million.
James expenses as a percentage of premium revenue was 79.5% in the third quarter and in line with a 79.3% ratio we experienced in the first half of the here.
Turning to the balance sheet, we finished the third quarter with 115.6 million in cash and cash equivalents and investments an increase of 5.7 million relative to the end of the second quarter 2019.
The principal source of cash in the third quarter with the release of restricted cash that was held for performance based arrangements that were settled in the corner.
Cash used by operations was 16.6 million.
Cash used in investing activities during the quarter was 11.6 million and largely attributable to approximately 8.6 million of capitalized software development expenses and purchases at BP any and 1.8 million the purchases and investment has provided by financing activities during the quarter with 96.8 million.
And predominantly due to increases to restricted cash accounts held on behalf of our partners for claims processing purposes.
Long term debt at quarter end consisted of 228 million net carrying value of our 2021 and 2025 convertible senior notes.
Turning to guidance as Frank laid out in his comments the announcements and the county care you century health expansion and the NPC partnership increase our visibility into expected growth for next year.
This growth exceeds our prior expectations and as a result, we expect to make additional expenditures in Q4 to bring that revenue online for 2020, which will impact our Q4 19 adjusted EBITDA.
We're now forecasting total adjusted revenue of 838 to 850 million for the calendar year 2019.
The components of full year 2019 adjusted revenue.
Yes.
We expect adjusted services revenues to be in the range 679 million to 689 million.
We are forecasting through health segment revenues of 172.9 to 174.9 million.
We are forecasting intercompany eliminations.
Minus 13.7 million.
With respect to full year adjusted EBITDA, we're now forecasting a range at minus 11.1 to minus 8.1 million.
For the fourth quarter, specifically, we're forecasting total adjusted revenue at 227.5 to 239.5 million.
The components of adjusted revenue for the fourth quarter 2019, our its policy, we expect adjusted services revenues of 195 to 205 million.
We are forecasting to health segment revenues of 36 to 38 million.
We are forecasting intercompany eliminations at minus 3.5 million.
We are forecasting adjusted EBITDA of eight to 11 million.
With that I will turn it back over to Frank.
Thanks, John overall, we've made significant progress on our strategic operational and financial goals for the year.
Procedurally, we've established ourselves as a leading organization in the market the partners with both payers and providers on risk based payment models, and ultimately drives enhance clinical and financial performance.
Evolent is distinctive and having a fully integrated offering the brings together the clinical administrative and financial capabilities that a payer provider need to collaboratively drive demonstrable improvements and outcomes.
As an increasing market focus on reducing growth and health care spending the ability to drive clinical value is paramount given that it represents the lions share of spending growth.
Over the last several years Evolent has developed highly sophisticated clinical analytics risk stratification methodologies clinical protocols and primary in specialty care and proven approaches to gauge patients and providers effectively.
Across the last several years, we've established a national network of payers and providers now covering more than 3.5 million lives and have successfully expanded our addressable market across three distinct but integrated offerings.
From a growth perspective, the strategy has worked as we continue to see strong new partner additions cross sell.
Strong pipeline.
As a result, we have a large and growing service business with a diversified customer base approaching 700 million in revenue in 2019, as well as a positive growth outlook for 2020 and beyond.
We've also worked to streamline our operating model and drive efficiency in the business to drive bottom line scalability as the business continues to grow.
Overall, we anticipate continued margin expansion going into 2020, driven by topline growth DNA leverage and strong operational performance and.
In summary, we sit in a unique position in a large and expanding market with a strong track record on growth in an industry, leading team that is poised to drive high performance into 2020 and beyond.
Thank you again for participating in tonight's call without will end, our formal remarks and take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Ryan Daniels of William Blair. Please go ahead.
Hi, guys. Thanks for taking the questions appreciate all the color on the margin.
Following the fourth quarter and the startup expenses kind of depressing that I think it's good reason for my questions more for 2020, if we think of.
The robust same client growth that you're experiencing.
How should we think about that from an incremental margin perspective I assume.
Same client growth is a lot more profitable given the lack of startup costs, but I want to confirm that that's a case and some of it is and.
Novel business lines versus kind of the core clinical services.
Yes, good question Ryan.
I would say one I do think we have good visibility on topline growth as we talked about that obviously helps from a margin perspective. When you think about current client growth. It does matter where it comes from if you're adding lives in an existing line of business that it's pretty straightforward as full flow through with that.
Usually if it's a new population for instance, if you're launching a new Medicare advantage plan or you're adding something like new century than you're actually are adding some cost base early on and so therefore, the ramp will be a little bit different and sometimes it takes time, you're putting the cost basis and that it takes some time.
For the for the associated revenue and then performance to ramp. So I think that's what we're going to see just going into the fourth quarter and that really part of next year again in the overall message I think is highly positive on driving a very strong type a strong topline and we have high visibility into that some of that will ramp a little bit.
In the fourth quarter going into the first quarter of next year and then overall, we do anticipate margin expansion, obviously versus the second half when we look out to 2020.
Okay. That's helpful. And then if you think of the 2020 revenue outlook I think you said.
20% or more if the Kentucky contracts renewed 10% or more even without it.
What level of visibility do you have at this point to that and how much more do you need to close over the next few months to achieve that are what anything that closes be above and beyond that growth metric.
Yeah, I would say, if we're going to throw out those targets we have high visibility.
End of those numbers that are not dependent on something significant closing so we feel very comfortable with the minimum 10% that we talked about.
In the last scenario, and then being above 20% and the one scenario.
Okay, and then last one I'll hop back in the queue the.
It sounds like passport, we saw another 600 basis points. I think you said 1400 14 percentage points total I believe last quarter was 800, so what's driving the incremental 600 basis point improvement it seems pretty significant on top of once you've already done there.
Yeah, I mean look I would say to go and drive a 14 point improvement in margins across two quarters.
He is pretty impressive and I just give the team at passport to the team at Avalon a lot of credit for incredible focus and discipline in terms of what we've tried to bring to the table as we were able.
Again to really work in a number of different areas. So obviously some of the benefit we talked about came from the rate most of that was in the April timeframe, but we did get a little pickup in the third quarter and then the remaining.
Benefit really came from.
Further execution on our clinical programs again, sometimes there's things that you do that have a lag in terms of their full impact so more months of the work that we've put in place in the early part of the year. We've obviously been thoughtful about network management and just making sure that we have high performance in terms of the provider network continuing to streamline.
Admin expense.
We also expanded with new century, which runs directly odd no specialty costs and I think also has had a pickup in terms of the benefit. So I think it's all of those things incredible discipline and a lot of hard work from the team, but we feel good about progress at this point.
Okay, great. Thank you appreciate it.
Our next question comes from Robert Jones of Goldman Sachs. Please go ahead.
Great. Thanks for taking my questions. This is Jack robot find for Bob.
So on the Maryland physicians care when it sounds like there is a ramp and implementation will you be recognizing incremental PMPM dollars in 2020, and 21 or do you get the all in rate off the bat.
It will go live on the platform in 2021, we will recognize some implementation revenue across 2020 as that these ramps.
Got it and then as pricing for this win consistent with what we've come to expect for a full suite of Medicaid plan services.
Yes pricing is in line with historical expectations.
Great. Thanks.
Thanks.
Our next question comes from Jamie Stockton of Wells Fargo. Please go ahead.
Hi, Thanks for taking my questions a I guess, maybe I just first of all on Kentucky. I mean are we are we basically just sitting around you know unexpected decision any day now they communicated anything more specific about timing do you guys.
Hi, Jamie no new information on the RFP I think as we commented we expected decision in the near term, but we haven't heard anything regarding a formal date for decision.
Obviously, when the information becomes public well communicated.
Immediately if we're allowed to communicate it but we don't have any new information in terms of when a decision will come.
Okay.
And then.
You know it seems like maybe over the last month, we've seen a lot of incremental stories about between 18 results for the Ace program.
Two thirds I think of participants are roughly thereabouts generated savings, but maybe more like one third actually got paid something.
You know is is that generating any change in the environment a you know.
People paying attention to those who got an actual payment.
Just any color on that would be great.
No I would say in our 2018 cohort we've had pretty good performance and I don't have the exact figure in front of me, but.
I think we've generated 40 million in savings or thereabouts and working with.
Number of partners in the program, so pretty pretty significant savings generated if you think about the noise that that's generated if you go back to the next Gen application process I think maybe 50 under 50 organizations applied for next Gen.
You then had new administration, a new set of programs come out.
All different flavors and if you actually take direct contracting as an example, where there's still a lot of detail that needs to be laid out I think there's over 1000 applicants and the direct contracting program. So in my mind, what that says is that the market realizes that CMS in particular is going to move to value based reimbursed.
Spent.
They've tried to create a number of flexible programs. They really are not going to let people stay and upside only programs.
Qualify for the lot of the advance payment benefits and the market is recognizing that and again wanting to really evaluate participation in these programs. So some of them, they're still detail the come out they'll still be final application processes.
I again for a pair with the cloud of CMS amount of dollars at throw through CMS, making such a sort of bold set of moves in terms of payment models. It surely a good thing for us from a market perspective in the level of interest we're seeing out there, particularly in in Medicare.
Okay. Thank you.
Thanks.
Our next question comes from Sean Weiland of Piper Jaffray. Please go ahead.
Hi, Thank you a couple of more on passport if I could do we know why the decision was was delayed I think we thought that that that decision was going to come in October .
And.
Do you in your view is there any read through on the outcome of that today's election relative to the to the award.
Yeah, Hi, as I said again, we don't have any new information that's come out regarding the RFP indecision timing.
In these processes that.
Involve it stayed making a significant decision going to review process you have delays. So it happens in a lot of these procurements.
Depends on a lot of factors, but we don't have any any new information again as to why are timing.
We just know that a decision hasnt occurred and.
As best we know as we said we think it will happen in the near term.
As terms of the election, we don't think it impacts the outcome.
The decision process as already sort of move through.
You know with the current administration in place.
And again, we view our role as being a strong fiduciary for the state in serving Medicare Medicaid beneficiaries, a clinically in terms of great member service, that's our focus and were pretty not sense, we're going to work with any administration. That's it that's why.
And with the program, but a lot of the decision process obviously has occurred.
With the existing Ministry administration, and so I don't see much impact from the election.
Okay. That's helpful. Thanks and.
Looking out into 2020 your comments around the revenue lift do you am I right in thinking that we get their predominantly through a cross sell and new century, which means for modeling purposes like average PMPM.
Sequentially increasing.
Yeah again, if you look across the year I think a combination of things are driving the growth.
We have seven new partner additions, we have a strong pipeline, there's some things that could add to that.
We've had a strong I think general cross sell across the entire membership base and I give a bunch of examples and few in Medicare advantage. Some other pickup of populations and lives that I view as positive both the passport and county care New century ads are pretty significant their large contracts. So I do think it's fair.
To say.
We've got some strong revenue growth within new century, along with the other things that I talked about.
We do count the lives of new century as to separate and distinct wives because of the large PMPM, we want that to be reflective in.
In average PMPM.
So you will see again some pickup in PMPM, obviously, and then we have the growth in lives to 3.7 million and that'll obviously.
You know adjust as we as we move forward into next year.
Great. Thanks. Thanks. Thanks.
Our next question comes from Matthew Gilmore of Robert Baird. Please go ahead.
Hey, Thanks for the question I wanted to try follow up on the Maryland physicians M.C. I would it seems like maybe that's a larger relationship given the number of lives in a more comprehensive set of services that Avalon will provide.
I think John had mentioned the pricing would be sort of in line with historical to does that mean sort of above the average of a $16 PMPM and sort of more in line with some of the more comprehensive relationships you happen and then if you could speak to the implementation cycle it seemed up a bit longer than normal just curious what drove that.
I mean, I would just say I Miss is really well regarded group they've been in business for over 20 years 200000 lives is a lot of lives. So we feel really good about the when I think what attracted.
Us to them.
Them to us is the ability to integrate the administrative side and the clinical side, which has been a big point of differentiation and we tried to build into the platform I think a lot of exciting things we can do there.
In terms of the implementation period, a lot of times for.
And existing population that you're moving over to a new infrastructure and services you can see implementations that are a year on length, which has which is roughly what we're talking about again will pick up some nice implementation revenue next year, we'll have a long time to make sure that the implementation goes well and then it will be.
Major contributor in 2021, so I think in in terms of the PMPM I think the general answer that it's a it's a PMPM we feel good about and strong relative to the size of the contract and at an average is probably the best way to go we generally don't for all sorts of reasons share specific PMPM clients, but I think John .
On was accurate and saying that it's reflective of our base business and again, we feel the pricing is adequate.
In terms of the targets that we set up.
Got it fair enough.
On the 2019 revenue guidance I, just want to make sure we understood. The changes there it looks like the service revenue picked up by call. It 10 million or so and then the Truhealth revenue maybe came down by 5 million or so would you mind just walking us through those changes sort of what drove that better service revenues out some of these contracts coming on and then also what drove the lower.
Hello.
Yeah. So on the services side I think.
He theme of the year has been strong revenue growth and that has exceeded our expectations across some of those populations but.
Revenue from New partners that were added during year and the cross sell as Frank mentioned that has caused us to increase the revenue guidance on the services side.
On the true health side. The principal change there is an early termination of the reinsurance agreements with new.
In Mexico Health connections, which we had expected to end at the end of the year.
And as to how our plan expects to launch its own individual product on the new Mexico exchanges next year.
We decided to wind that down a little bit early.
And if I remember on the true if you remember on the true health side that was largely largely a pass through or expense. We've done something that was in coordination with the state we anticipated doing it at the end of the year and it just made sense to end that within the quarter. So thats the plan.
Okay got it thank you.
Our next question comes from Richard close of Canaccord Genuity. Please go ahead.
Great. Thanks for the questions.
With respect a SGN a expenses, obviously take down the last couple quarters.
Can you give us any guidance in terms of where you expect those SDMA over the next several quarters is that going to continue to tick down.
Hey, Richard.
This has been a big focus of ours as we've been talking about over the course of the year to get the SGN, a and the right place for the company.
And without commenting specifically on the outlook for 2020, I think we would expect that as a percentage of revenue as you know we continue to decline.
Okay.
And then any update on Florida I know.
Obviously, not a big contributor, but as we think about 2020 and and that various regions. You have there or what are you thinking about Florida managed Medicaid in terms of maybe the ramp or just the status there.
Yeah, I think we've done a lot of work this year to get the cost structure in line.
We've now how to almost a year of operating experience under our belt of those plans are active in the market. The dock, obviously working with physicians in the community building their brand in the local communities that they serve.
Our hope is we have in enrollment period coming up theres, an opportunity to pickup membership we're not counting on that in terms of our forecast for next year, but.
Any incremental membership, but incremental revenue will be strong flow through in terms of profitability of that business.
And if we do that combined with the cost things that we've done I think it gets it to a good place going into next year. If for some reason we don't pick up the membership then obviously, we'll continue to look at the cost side to make sure that that.
Businesses is operating reasonably from a financial perspective, So we'll know a lot more in the January timeframe.
Lot of activity going on in the market as you can imagine and again much stronger brands than the rapid launch that that happened at the end of last year and I get we'll know a lot more.
Again, when we get into the February timeframe.
Would you potentially shut down any of the regions. If you don't get that membership pick up.
I mean look we're going to be aggressive at managing the plans to reasonable financial performance, we have partners there.
Theres all sorts of.
Things that we do to work together collaboratively to make those contracts work and I think we would be aggressive as to specifically, whether we would shuts something down I mean thats really.
Something that we discussed in collaboration with our partners, but we would surely want to make sure that our economics are reasonable.
Given our participation across those three regions again it helps to have.
Three regions and the ability to add some lives there, which I think will help we have a lower cost base I think we're optimistic about where that can get into next year.
And if it for some reason it doesn't then we're going to sit down with our partners and workout a reasonable solution and get that.
Business to to a reasonable plays from a financial perspective.
Okay. Thank you.
Our next question comes from Charles re of Cowen. Please go ahead.
Thanks for taking the question Frank wanted to go back to passport a little bit here again.
You talked obviously, you talked about that the strong improvement over the last couple of quarters.
When we look at the start falling as an understanding that the step filings are not saying the same as sort of GAAP reporting.
It looks like the MLR improved at passport.
But EBIT there at least according to findings were negative still.
Can you talk about sort of where the margin actually is in terms of because I think you guys were talking about at least when you.
Pardon me.
We call maybe like a one 2% margin was sort of what you want to trying to get to are we there with passport and then the improvements is it mostly coming in and Milongueros it and as Ginny.
Yes, I think the filings you may be referring to are going back to Q2.
I don't believe there been any new filing surely for the third quarter.
So really what we're referring to is going back to the first quarter, where there was a substantial loss, which I'm sure you saw in those filings.
Our goal was to get in Q3 to breakeven performance I think the good news as were above that were above 1%.
Operating margin there and again the drivers of that rate was a part of it.
As you got from the first quarter under the second quarter gave us.
Probably a third of the 14 point benefit came from the rate side.
And then if you break it down lot of things we've done clinically we have a very proactive care management model, we've rolled out significant programs. There in terms of complex care transitions care, we've looked at every contract.
That's the plan has and trying to make sure that the contract makes sense that the various organizations, we work where they're ultimately driving performance. We've looked at at every element of admin expense to try to be as efficient as we can.
But 14 point improvement from Q1 to Q3.
And any sort of health plan experienced that I've seen is incredibly impressive and surely on the right track now we're not declaring victory you've got to continue to drive performance improvement you're going to have different things that happen with trend in various areas and so we need to make sure that we're all over it in terms of the things that we're doing and we continue to be aggressive.
On all of those elements that I would say I feel confident that we have the right team in place feel really good that we've been ahead of plan.
We really didnt expect to get the positive operating margin until the fourth quarter. So I think that feels good but.
Work ahead, but I'm glad we're sitting where we're sitting today.
That sounds great.
One question I had as it relates to maybe also taskbar, but also your other Medicaid businesses.
Is obviously this year theres been a lot of talk about.
Medicaid.
Eligibility reach determinations as to having some impact on enrollment.
Can you can you talk about sort of.
Yes, well kind of impact you're seeing you made some comments just now earlier about Florida.
Is that having an impact to you in any of those dates that you're operating in and I guess in particularly as you think about the passport membership and also maybe even now when you're when you're looking at.
The Maryland partnership you just announced and could you talked about 20% growth with passport at least 10% without does that factor in all sort of the net impact you would expect from enrollment changes.
I think it does passport as generally retained its membership across this year, so generally strong.
Membership performance across the year.
Florida, we picked up some membership I wouldn't say there has been huge growth there, but some membership across the year.
When we've looked at various forecasts on work requirements issues. It does get put in place that would have some impact on membership again, we don't think it's dramatic and I don't think it would impact.
The topline estimates we've given for 2020, we feel comfortable estimates that we given.
Yes, the work requirements things are still going through a number of legislative in court hurdles and we need to see where those come out.
But for now I.
I think we feel like we have sufficient cushion in the forecast if we have some variations in membership related to the sorts of things that you're talking about.
Great. Thank you.
Thanks.
Our next question comes from Sandy Draper of Suntrust. Please go ahead.
Hi, Thanks, very much a lot of my question asked so maybe just one more.
I appreciate that you don't have being more information, but I just wonder idleness you are aware I.
Yes, there is some type of GA.
[laughter].
Kentucky Medicaid broadly and then just wondering if you when it is there any suggestion that fundamental approach that Kentucky is going to take the Medicaid or the way the pricing or something I wasn't clear what it is set up found out there's something going on that didn't know if you hadn't the information about that that maybe related to delay or how would impact your business.
Going forward if you want.
Yes, I was little hard for me to hear you on the specific question I think even if I heard it I can give you a generic answer that.
Is that Theres nothing that we've heard at this point, it's substantially changes our view.
Of the relationship passport would have with the state and how the Medicaid program would function in state.
Again based on everything that we've heard occasionally there will be some new ideas that come out.
Stayed around how they want to handle something we obviously make adjustments on and try to build on the infrastructure to support that but nothing we've heard to date that substantially changes our outlook going forward about how the program will operate.
Okay, Great. That's helpful. And then maybe to follow up just as a reminder, when you talked about in the three buckets.
Is that Identifi platform essentially the same apply to all three buckets, how scalable as it is across those I'm just trying to think as you grow in these different areas how much leverage you actually get on the technology across the three areas. Thanks.
Yeah, I would say you know if you think about our primary platforms identify really drives.
Clinical value largely around total cost of care so.
That integrates with our health plan services offering.
It also applies when we're working on total population health and total cost for Nch right now it really as a separate platform that we use in nch. That's due to the fact that we acquired Nch about a year ago, there are opportunities to integrate technology.
Are you there that's on our roadmap and something that we will do so you will see greater integration on that piece, but identify really applies to two of the three areas that we outlined.
My last year.
Yeah go ahead, please without a loss Andy there. Our next question comes from Stephanie Demko of Citi. Please go ahead.
Hi, guys. Thank you for taking my question.
Assuming that passport does have been this Kentucky Medicaid contract is there an opportunity for passport to expand beyond Medicaid.
Diversify their risk as a.
Broader institution.
I would say potentially of and right now we're pretty focused on.
Medicaid on the 300000 lives that we serve we see a tremendous opportunity in the work that we're doing we want to make sure. We're driving strong performance are right now the focus is on that and I think it will be for the foreseeable future to your point, you, obviously have a strong network or providers.
We have a great infrastructure in place there surely other things that you could potentially do across time, but for now our focus really is on the existing lives that were surveying and making sure were again driving strong performance.
Okay understood and then thinking about the cash on hand, I know that profitability is improving lately, but is this level of cash generation sustainable or will you have to look at the capital markets over the coming year any kind of deals on this passport Tehran.
Look I think what we've talked about is making sure we're always maintaining a healthy balance sheet that we've got appropriate cushion for our cash needs.
We've talked about the fact that if we were to do anything.
For our balance sheet perspective, it would be data oriented we believe we have flexible options. There so that would be our plan.
And that's really how were how we're thinking about it today and again it will be dependent as you said on.
Cash usage, and where the business sets, but any anything we're considering leased in the short term would be would be dead oriented.
Hi, Thank you thanks guys.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Frank Williams for any closing remarks.
Thanks, everyone for participating in the call appreciate all the questions on.
Look forward, obviously, having an opportunity to communicate over the coming weeks on.
Thanks again for everyone participating.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.