Q3 2023 Evolent Health Inc Earnings Call

Welcome to the Everland earnings conference call for the quarter ended September 30th 2023.

Your host for the call today from Evelyn our Seth Blackley, Chief Executive Officer, and John Johnson, Chief Financial Officer.

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.

I will now hand, the call to Seth Frank Vice President of Investor Relations. Please go ahead.

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.

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 third 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.

On the Investor Relations section of our website or the company's press release issued today and posted on the IR section of the company's website IR.

Dot com and the form 8-K filed by the company with the SEC earlier today and with that I'll turn the call over to everyone's CEO Seth Blackley.

Good evening and thanks for joining US Tonight, we're announcing another strong quarter of execution against our plan.

We exceeded our guidance for profitability.

To see strong business development and cash flow in the quarter and are tracking towards our short and medium term targets.

We believe we have the leading value based specialty care platform in the market.

Continue to believe we are set up for continued success.

Third quarter revenue of $511 million represents 44.9% reported growth in the quarter compared to Q3 2022.

Our specialty offerings, representing 87% of our total revenue grew 80% versus the same quarter last year with the Nia acquisition contributing approximately 24% of that 80% growth.

Adjusted EBITDA of $48 $7 million exceeded our guidance driven principally by strength in our maturing performance based arrangements. Our profitability is also translate into cash flow with cash from operations this quarter of $63 million.

We averaged over 78 million product lives during Q3, and we believe that we're still in the early days of capturing the market opportunity ahead of us as product life count is roughly flat with the second quarter of 2023, as we anticipated due to the offset of new lives added an impact of Medicaid redetermination.

Our shareholder value creation plan remains the same of one strong organic growth too.

Two expanding profitability and three disciplined capital allocation.

Let's review progress on each element of the plan before discussing the macro environment.

First our growth algorithm is simple and powerful side.

Signed new customers.

Spanned the number of products those customers use and convert customers from our technology and services product to our performance suite.

Today, we announced three new operating partnerships, bringing our total for the year to nine ahead of our annual target of six to eight.

First we are announcing today that we plan to launch our cardiology performance suite with Florida Blue for their Medicare advantage population in the first quarter of 2020 for expanding on our successful partnership in oncology.

We expect the current cardiology expansion to contribute over $75 million of revenue on an annual basis. This type of.

Expansion, which is a core part of our growth algorithm is made possible by strong performance at our existing partnership and we're excited to more comprehensively serve Florida Blue's Medicare members.

Within the performance suite, we also have opportunities to manage patients under our complex care area, formerly known as evident care partners and.

It's a 40 patient centered complex care, we take a similar approach to cardiology oncology or musculoskeletal care, but delivered through primary care physicians for the benefit of patients who are impacted by complex health conditions.

Within complex care, we added two new operating partners for 2024. The first is a multi specialty risk bearing group in Texas and the second is a medical group in the South East.

Finally on the heels of our successful rollout of our technology and services for oncology specialty care solutions across Centene and Wellcare is Medicare advantage members nationally.

Happy to announce the Centene has added our cardiology technology and services solution to these Medicare members across the country, demonstrating the value of Avalon solutions across multiple specialties.

Turning to our sales pipeline. We believe we are well set up heading into Q4 and 2024 across each element of the growth plan, we have large and interesting opportunities to expand the performance suite in our cardiology oncology and complex care.

Performance suite growth opportunities are usually within existing accounts, our technology and services suite opportunities are available for existing accounts as well as for new customers through Rfps.

More importantly, some of these new customer opportunities are ones that we were not able to respond to prior to the Nia in IPG acquisitions.

Today, we already serve many of the top health plans in the country, including 13 of the top 20 health plans in the country given.

Given the size of our installed base and that over one third of our total addressable market is addressable for cross selling opportunities. We continue to expect that the majority of new business going into 2024 will come from existing clients and we continue to feel confident about exceeding our growth targets in the time ahead.

Turning to our second theme of expanding profitability. Our diversified approach continues to expand our earnings growth, you'll recall that we typically generate about 75% of our earnings from our technology and services suite.

Non risk business at about 25% from our performance suite for our risk business.

Our large technology and service suite business gives us a firm foundation of earnings to drive quarter to quarter profitability with upside opportunities available from our performance suite.

We believe our results this quarter continue to validate our margin expansion model, where we continue to see strong results from the technology and services suite. In addition, our total adjusted EBITDA came in ahead of expectations because of our 2022 performance suite launches maturing slightly ahead of plan.

Our third investment theme is disciplined capital allocation, where our priority. This year has been to generate cash and delever. The business. John will go through more details here, but I'm pleased that since closing the Nia transaction in January we have lowered our gross debt by $71 $5 million made up of a.

$37 $5 million reduction to our revolver.

A $23 million reduction from the 2024 note conversion and another $10 million reduction in principal on our senior term loan.

In addition, after September 30th we repaid the remaining $1 million of our 2024 notes in cash.

Finally relative to the leverage targets, we laid out earlier. This year. We are on track for our annual cash generation objectives and are ahead of our targets for net leverage ratio.

Let's close of the macro view on our competitive position.

And focus on innovation, where we believe everyone is uniquely set up.

As the U S continues to manage through challenges of higher interest rates and continued economic uncertainty. We believe the health care ecosystem, particularly the U S. Government is the largest single payer for care as well as state Medicaid programs will be under even more pressure to identify opportunities for cost savings and looked.

Slow the current course of medical inflation.

Similarly, employers and in turn insurance companies are under increasing pressure to manage health care cost.

As pressure mounts levers like risk adjustment become less impactful and the cost of devices and drugs accelerate we believe that the industry is focusing more on managing specialty utilization.

Obviously this is what happen when it does we believe we are the market leader and reducing healthcare specialty costs, while improving patient quality and reducing physician friction.

We can do this work with a guaranteed savings approach to the performance suite or on a fee basis through our technology and services suite.

Investors, sometimes asked me, what's the difference about Avalon versus its competitors.

The legacy approach to managing specialty care through so called utilization management is generally disliked burdensome and often adversarial and not clinically oriented we've all experienced this in our personal lives as well, it's frustrating and only marginally effective.

Given our provider led heritage, even though we work for health plan customers, we have a deep understanding of physician needs and challenges when it comes to managing utilization.

<unk> model is clinically driven.

Lower friction and evidence based.

Everyone's Genesis historical provider heritage uniquely positions us to engineer solutions that engage physicians and patients in a better way, which I would describe as a clinical pathways model.

Under our pathways model, we provide choices to providers transparency and clinical evidence in real time.

This approach lowers friction with providers and it allows for more holistic patient centered thinking across the continuum of care.

Let me give you a few examples of what I mean by this.

First as we integrate Nia into Avalon, we're using expertise in areas like imaging and genetics to support holistic cancer orthopedic and cardiology care in ways that the market has not historically seen.

We don't think about a request for imaging or genetic tests in a silo, we think about it in the context of providing the best cancer cardiac or orthopedic care possible.

Another example is that once design of alternative payment models for specialists, which provide doctors with financial incentives to follow our pathways.

And the third example is in the area of artificial intelligence, we are where we are investing heavily in technology to reduce administrative burdens on providers, while also improving adherence to our pathways.

Last month <unk> hosted an artificial intelligence summit with a broad array of senior health plan executives.

During the summit, we provided a deep dive to both clients and prospects of our current AI enablement and the new capabilities, we are bringing to the market in the time ahead.

It was strong consensus that increasing AI based automation should help us with uneven create an even better lower friction model of care. These improved services to clients are not just ideas on paper. They include functionality that is already live.

As we have in other areas, we expect to aggressively innovate and AI and hope to take a leadership position in the value based specialty care market.

But as John will provide a more detailed commentary on the financial results for the quarter and an updated guidance.

Thanks, Ed since our last call in August we had a calendar full of investor outreach and it's been great to see many of you on the road and virtually before going through the numbers and our outlook I'll hit on a couple of key themes from those conversations with the benefit of an additional quarters worth of data.

First the impact of Medicaid Redetermination on our top and bottom lines has been a frequent question from investors.

I'll start by reiterating that our exposure here is limited by the fact that 62% of our revenue comes from Medicare and commercial lines of business and only 38% from Medicaid.

Our forecasts have called for a decline in our Medicaid membership of between 8% to 10% by the end of this year with an expected mid teens gross decline when the process is complete sometime next year.

So if all redetermination forecast, where it should be 420% instead of the mid teens that would represent the variance of only 2% in a year over year growth rate.

Second remember that we have regular dialogue with our partners regarding the soundness of our capitation rates and have specific contractual provisions that enable us to update our rates of disease prevalence changes.

As of September 30, we estimate that our Medicaid states were approximately 25% of the way through the Redetermination process.

Because in most of our Medicaid revenue comes from states pursuing a linear rather than frontloaded process and are generally deploying resources to assist members and retaining coverage as an example, according to the latest data from the Kaiser family Foundation, Our states reported an average 7% this enrollment rate versus a 10% rate.

Nationally.

Looking at our own numbers, which recall typically exclude the pediatric population our Medicaid membership declined approximately 4% on a gross basis, which was in line with our forecast.

If the linear trend continues this would put us at the favorable end of our 8% to 10% expectation for this year and in line with our total forecast for the end of the process next summer.

We estimate redetermination represented a revenue headwind of about $7 million in the quarter again, consistent with our forecast.

This consistency is one contributor to our upward revised revenue guide for the year, which is in the top half of the original range. We gave in February.

The incremental data also gives us additional confidence in our $300 million run rate target for adjusted EBITDA exiting 2024.

We also closely watch the impact of Medicaid Redetermination on our bottom line since members who are leaving the Medicaid program are thought to be lower cost than those who stay.

Recall that when we set our guidance for this year, we incorporated an estimate for this shift based on the underlying medical expense trends that we saw in the population.

This is also playing out as expected with modest increases in authorization rates at our Medicaid partners. During Q3 that are in line with our overall forecast in total we expect this to be a headwind to EBITDA of less than $5 million for the back half of this year unchanged from our initial forecast.

Second we continue to hear investor interest in the underlying progression of profit maturation in our specialty performance suite contract.

And the first three years after the acquisition of New century health, we launched over $400 million in annual performance suite revenue across multiple partners that we're managing today.

This cohort has been live for more than 24 months and the year to date is performing in our target mature margin range of 12% to 18%.

This is a function of execution on our clinical model skilled underwriting and in overall utilization and acuity environment that is tracking with our expectations as SAP address.

As a reminder, our approach for new performance suite launches is to remain Actuarially conservative until we have enough data to make a change to our assumptions.

So three to five quarters. After we go live with our clients for performance suite, we typically have enough actual performance data to shift from estimated medical expenses to actual claims expense in our financials. We will typically show a proportional increase in profitability as initial reserves are released to bring the cumulative contract period.

In line with actual experience.

As an example, our year to date adjusted EBITDA includes about $25 million from prior year claims development net of refunds to customers for outperformance, which.

Which is principally driven by this dynamic as it applied to the launch of several hundred million dollars' worth of performance fee contracts in 2022.

It is important to understand that this is not an unexpected or excess benefit but it is a natural part of our business as we grow.

And is incorporated into our annual and multi year outlooks.

So far in 2023, we launched another several hundred million dollars' worth of new contracts with this traditional conservatism.

All else equal we would naturally anticipate a similar release of initial actuarial conservatism for these contracts during 2024.

The third area of inquiry focuses on potential increases in medical expenses due to increased medical utilization.

Our largest category oncology represents about 65% of our specialty performance suite revenue.

At this stage the prevalence and disease acuity of that population is tracked consistently with overall trends in oncology for this year, we have not seen a spike or a decline across the population for this year.

The balance of our specialty performance suite or 35% is in cardiology, where we have seen modest increases in outpatient activity consistent with broader industry trends and all in line with our forecasts.

While we continue to watch this space closely these trends had minimal impact to our results in Q3.

Finally, we.

We get frequent questions regarding our balance sheet cash flow and capital allocation priorities.

Recall that we set a target for this year of adding $120 million or more and available cash before paying interest dividends are prepaying debt earn outs and acquisition costs.

Through September 30th where 80% of the way to that goal with strong cash performance in the third quarter and consistent with our expectations, we have ample cash flow coverage to pay our interest expense.

In terms of ongoing balance sheet management, we look to optimize three items for our business cash interest overall leverage ratio and common equity dilution.

Since the close of the Nia transaction on January 20th that this year, we've lowered our gross debt by approximately $71 5 million by proactively paying down debt and retiring our 2024 convertible notes, which we completed in October.

As a result, our net leverage ratio at the end of the quarter was two five times ahead of our target to be below three times by the end of this year.

In addition, after the quarter end to prudently manage against dilution, we elected to pay the remainder of our earn out obligation for the ITG acquisition in cash avoiding the issuance of equity at current market prices.

Now, let's go through the numbers before turning to our outlook.

In the quarter with $511 million, an increase of 44, 9% versus the same period in the prior year and $42 million versus Q2.

Sequentially exceptionally strong growth in our Medicare line of business was partially offset by expected declines in our Medicaid revenue.

In Medicaid the decline included about $7 million related to Redetermination, as I mentioned and about $7 million and customer refunds from reconciliations. These refunds were associated with some of the prior year development, we experienced in the quarter for a modest net EBITDA benefit.

We had an estimated 41 7 million unique members during the third quarter of 2023, and a total of $78 1 million product members for an average of one nine products per unique member. These membership numbers as a whole are approximately flat to Q2, representing new business growth offset by the impact of meta.

<unk> Redetermination.

At the product level, our performance suite membership stepped up to $3 9 million during the third quarter compared to $2 5 million in the same quarter last year, and a little less than 100000 higher than Q2.

As anticipated we saw an uptick in performance suite and specialty Tech and services <unk>. This quarter is a function of new business rolling on.

Average <unk> fee for the performance suite was $27 63.

Versus $27 <unk>, a year ago and up over $3 on average from Q2 as anticipated due to the aforementioned edition of Humana MA lives in the quarter.

As a reminder, fluctuations in average <unk> results from sales mix, depending on where growth is coming from allowing Medicare commercial and Medicaid lines of business with MAA typically associated with a larger P. M. P. M. Due to the prevalence in acuity of illness in that population.

Average product membership in our specialty technology and services suite was $72 4 million members during the third quarter compared to $14 9 million in the same period last year prior to the acquisition of NII.

Average PM Pmt's were 37 cents in the third quarter of <unk> 23 versus 29 in the third quarter of 22 and 35 in the prior quarter.

Product members for administrative services were $1 8 million compared to $2 1 million in the same period of the prior year and flat to Q2.

Average <unk> was $12 50.

Versus $16 41 in the third quarter of 2022.

Total quarterly cases associated with advanced care planning and surgical management totaled 15000 for the third quarter and average revenue per case totaled approximately $2 5000, both in line with seasonal expectations.

As a reminder, these metrics reflect build cases, only and do not include cases for our performance suite populations.

We continue to see some of these services increasingly deployed as part of our performance suite.

Our adjusted EBITDA result was $48 7 million versus $28 1 million in the third quarter of 22, reflecting organic growth maturation of our performance fee contracts and the addition of NII.

Adjusted EBITDA margin was nine 5%.

Our year over year margin expansion of 150 basis points due to performance suite maturation.

Mix of Tech and services from NII as well as organic growth in tech and services solutions year on year.

Turning to the balance sheet, we finished the quarter with $184 5 million of cash and cash equivalents, including approximately $12 2 million in cash held in regulated accounts related to the wind down of passport.

Excluding the cash held for passport, we had $172 3 million of available cash an increase of $41 8 million versus the end of the second quarter a strong performance.

Given the strong cash quarter, we reduced long term debt by approximately $10 million to a principal payment on our senior secured variable rate facility.

Cash deployed for capitalized software development in the quarter was $4 3 million.

Finally in October we closed out all remaining obligations under the 2024 notes.

Let me close with a quick housekeeping item on our filings you'll see today and tomorrow. Shortly after filing our Form 10-Q, we will be filing a form 8-K with NIH audited 2022 financials and associated pro forma financial statements along with a prospectus supplement to register the shares that were issued as part of the NIH.

Acquisition in January.

For clarity this process does not pertain to any other shares.

Turning to guidance.

Given our continued strong performance, we are increasing our full year outlook for revenue and adjusted EBITDA as follows we.

We expect revenues to be between $1 94, five and $1 96, 5 billion and we expect adjusted EBITDA to be between 192 and $200 million.

The associated quarterly guidance for Q4 is for revenues between 537, and $557 million and adjusted EBITDA between 45 and $53 million.

We now expect capitalized software development to be between 25 and $30 million as we have allocated certain engineering resources to non capitalized product development work.

And with that let's go ahead and open it up for Q&A.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

Yeah.

And our first question will come from Ryan Daniels of William Blair. Please go ahead.

Hey, guys. Thanks for taking the questions.

Maybe wanted to start with you appreciate all the details on the integrated product offering and you mentioned you are now able to participate in Rfps that maybe previously you could not respond to because you didn't have the breadth of offering you do today. So the question is number one how much of that expanded the potential growth opportunity and then number two is that.

The case anymore, meaning do you need any other ancillary service offerings or are you pretty comprehensive based on what youre seeing your client needs demand in these rfps.

Hey, Ryan Yes. So on the first question look I think it has certainly helped with the growth rate and in particular, if you look at the total addressable market right now that we have the inclusion of these other capabilities I think it has been part of why we've had a really strong year this year and part of why we.

We're really well set up going into next year. So I think the answer the first one is yes. The second one no I don't think we need anything else to participate in Rfps.

The things that we've acquired have been pretty strategically chosen right that fit really well with that are pretty focused set of really high cost important.

Specialty is Ryan and I don't think Theres anything else, we need to do to be able to be incredibly relevant for any RFP that comes out doesn't mean that we can cover everything and every RFP and I think we are a cover it enough that we're going to be well positioned to.

To win any RFP that comes out and then look I do think the question and the question of are there more things. We can do of course. There are there are other specialties that are interesting I think given the growth rates, we're seeing with what we have and also the reasonably low penetration of what we have we're really focused on.

And expanding what we have for right now versus adding new specialties.

Okay, perfect and then interesting color commentary about some of the pressures facing your end market customers with risk adjustment is higher interest rates, we're seeing higher utilization and mlr's in some of the Medicare advantage plans in particular and I think that is stimulating demand for your services I'm curious.

How much of that is kind of driven.

Driven an up tick in the pipeline and then maybe equally important is it shrinking at all the conversion cycles of Rfps to sales or your approach to customers and implementation given that maybe there's a more urgent need for cost containment and we've seen over the last two or three years.

Yes, I do think the answer is yes on both it is helping for sure on interest overall and I think it is in certain cases right. It depends on the situation where there is acute pain I think it is shortening the sales cycle, a little bit and I think the organic growth rate on the specialty side of it.

Over 50% as part of that what we've been seeing this year and it's been going on for some time I would say, it's not brand new the risk adjustment rule has been out for a while those sorts of things. So it does feel like we're starting to see it.

You know I think is going to be a ongoing issue for a while it doesn't feel like a 12 month and then done kind of thing. It feels like we will have pressure on the end market, which is good for us going into next year and beyond.

Okay. Thank you great quarter I'll hop in the queue.

Thanks, Brian.

The next question comes from Kevin Caliendo of UBS. Please go ahead.

Thanks, and thanks for taking my questions.

We heard from two large payers this week about new MAA enrollees, the older and maybe healing heidrick higher utilization from the star is that something youre seeing as well.

Maybe you can walk us through how those lives.

If in fact, they are happening starting to impact the mix within your existing business.

Hey, Kevin it's a good question.

I think as you look at our risk business right. It is.

Relatively narrow versus a at a total cost of care model in an mcl.

And as we look at acuity or other factors within oncology for example, we've not seen that dynamic.

That's not to say, we won't see it in the next year, but relative to that commentary.

From the Big MTO is it's not something that we've seen in our risk.

Okay. That's that's helpful and good to know this is more of a broad question more of a strategic question I guess.

When we initiated picked up coverage I was kind of surprised that you sort of weigh the stock was valued in a way way it's been trading.

And you guys again sort of hit your numbers, you've executed and the like Im wondering if youre contemplating anything strategic above and beyond what you can control, which is the operations, which you've done a fantastic job of hitting your targets.

Is there a way to change capital allocation or is there anything strategic.

Contemplated that might be able to create shareholder value or get the.

And the investment community to understand sort of the what you.

What you've built here with this business.

Yes, Kevin it's Seth I can take that.

<unk> way to answer it I would say is we're always open to anything that can be a catalyst.

And can create shareholder value I think in particular for this year and kind of what youre referencing with the stock over the last say six months as a for instance, they have been from our perspective, a couple of unique things going on with utilization concern and redetermination that have been.

Concerns for people at our view has been hey, let's get that data out there I think this call is part of that that we're continuing to feel really confident about our plan and if for some reason that doesn't begin to move the needle then our board, but always consider things that helped us fully recognized the value. We do think we have a really unique asset we think we are.

In early innings of a really big opportunity and so it does need to get recognized one way or the other and there's obviously a couple of ways to get at that to your point right. Now I think we're pretty focused on getting this data out there and continue to execute and.

We'll pull up on that question over time, if it doesn't doesn't work itself out.

I appreciate that thanks, guys.

Thanks, Kevin.

The next question comes from Jack Wallace of Guggenheim Partners. Please go ahead.

Hi, This is Mitchell on for Jack Thanks for taking my question.

Would you be able to help us better understand what the go get portion of the $300 million EBITDA run rate looks like now and what that largely come from new Tech and services deals. Thanks.

Hey, Mitchell has John it's a good question.

As we've laid out that path there are three core items.

One was growth as you noted mostly in the tech and services suite.

Second with the realization of the call.

Cost and revenue synergies within the Nia acquisition and the third was the maturation of our performance suite.

On the first one second services growth announcements like the ones that we made today expansion with Centene and so on.

<unk> place us nicely on track.

For for filling up that bucket by the end of next year.

On the second.

We will have a.

<unk> achieved as we've talked about in previous calls most of the cost work already within the Nia.

The synergy bucket the one that we've mentioned before that there is still a work in progress is on the technology side.

And lots of work going on in that now that visibility to completing that in Q1.

The final piece maturation of our performance suite.

I mentioned again on the call here.

And according to our expectations, so that feels pretty good.

We still have the opportunity to add more to that for example, the Florida Blue announcement today.

Bob will go lives, we expect in the Q1 of next year.

By the end of next year, we would expect it to be contributing some EBIT out here so feeling good overall.

Very helpful. Thanks, so much.

The next question comes from Charles <unk> of TD Cowen. Please go ahead.

Yes. Thanks for the question I wanted to follow up on the Florida Blue.

Expansion here in the cardiology and think about the ramp up John you said it likely starts in Q1.

Can you maybe talk about the regional density you might have in cardiology in Florida.

Is there already.

Any kind of performance with Florida in cardiology that could help maybe ramp it faster or this is relatively.

New market for Cardiology performance suite. So we would think of a more normal ramp up because if I recall you kind of said with oncology. If you have the regional density of oncologists using performance suite.

Adding on new lives can can ramp quicker to maturation. Thanks mhm.

Hey, Charles it's so look I think in general regional density is really useful right. So I think it's a good concept, we do strive to grow in ways that think first about existing markets before we jumped to a new state because we want to be very disciplined on the underwriting we understand the market we understand that providers we have relationships.

Chips, we have scale et cetera. So that's absolutely a strategic choice that we have been making we don't have a lot of cardiology risk business in the state. So I don't think it's like if we added it oncology relationship, but look we understand we know the multi specialty groups, we know the health systems.

So we I think do have familiarity of the markets I think of it as sort of somewhere in between.

Given those two factors, but it is overall.

Dynamic you wanted to see which is growing in markets, where we have relationships.

Great and then if I can just follow up but you had talked previously about building an at risk model for <unk> I think for 2025 any sort of update our progress on the development of this program in.

Any kind of more details you can sharen.

That risk model frame this came might look.

Yes.

I would say just in general it's going to look a lot like what we're doing in oncology and what we're doing in cardiology.

And so things like IPG begin to get folded into that in things like imaging get folded into that and physical medicine things that we brought from different places right. So I think the design of its pretty clear and the value proposition will be really clear as well in terms of timing Charles.

We're working on it it's not Super near term, we're not ready to kind of talk about a specific date, yet and I think the.

The big thing for US right is growing at 50% organically on the specialty side in the quarter. We have so much opportunity with what we have that we want to make sure we stay disciplined and.

When we roll new things out we don't need to take incremental risk on right now on the EMS K specialty fronts, we're going to do it thoughtfully and carefully in the timeline you laid out is probably a reasonable one.

As a starting point so.

Super near term item.

Okay, great. Thanks, I appreciate it welcome.

Welcome.

The next question comes from Jeff Garro of Stephens. Please go ahead.

Yes, good afternoon, thanks for taking the questions.

Some more positive comments on the pipeline so wanted to ask a couple there.

Rolling into one here just broadly any more color on the kinds of deals that you see youre seeing enter the pipeline and maybe more specifically you had previously talked about efforts to rebuild the NIH pipeline given the multiple changes in ownership of that asset. So I was hoping to get a progress update there.

Mhm sure let me let me just give you a couple examples Jeff that I think will answer your question, including the last question right, which is we have several things in the pipeline that are large performance suite opportunities right across oncology cardiology and even the complex care.

Yes.

And those are usually with existing customers. So let's say, we have a relationship with the customer and we're in some states, but not all of the states or where in one specialty and not the other there is a number of those that are in the pipeline and feel really good there are a number of opportunities with new logos that we're probably broader than maybe more tech and services oriented that might have mulch.

People specialties involved and then we're seeing a number of opportunities across a pretty large installed base for ni a magellan where.

Maybe we can bring in several additional capabilities or bring their capabilities into our footprint and I think that last example, does a pretty good job of answering the question Youre asking about Nia, which is rebuilding the pipeline a lot through cross sell frankly and.

And then related to that in the second category I mentioned of net new logos. When we respond to an RFP, we're going to be bundling in the imaging and physical medicine, and genetics and things like that and so I think I would say just as a holistic comment on your last question I feel like the pipeline is rebuilt at this point and we're kind of often running.

With the strategy that we had set out a year ago.

Great to hear.

For me on the new business side.

Civically about the Centene cardiology expansion.

Interesting to see the cadence given you have a longer history on the Medicaid and exchange line of businesses and it was just earlier this year that you expanded into MA with Centene and oncology. So I was hoping you could discuss what prompted the rapid adoption of your solution and MAA for <unk> and the potential for adding cardiology across multiple.

Lines of business.

Yes, So look I think it's similar to the last question Interestingly, which is most.

Partners that we work with would like to work with your vendors and fewer strategic partners on the specialty side right. So they might have five or six they work with today they'd love to consolidate that down and I think what youre seeing with a really good key partner in Centene has them starting to do that and it's good for them. It's really good for the patient right in the sense that hey, we.

Can start to integrate across these different specialties nobody wants to have one of their images and the request for an image reviewed in isolation.

Be understood as Hey, I'm, a human with a diagnosis of cancer, what's the right course of treatment for me has the image play into that right. In that example, and so I think what youre seeing the same thing would go with cardiology right. We're tying together imaging and imaging is a huge part of cardiology as a for instance, so I think this is the natural course of things.

I think it's better for the.

The partner to our clients. It's also better for the patient MAA why MAA versus others I think they're all opportunities I think a lot of plans right now we're focused on Medicare managing utilization in that line of business for the obvious reasons, but I think to your point this should be relevant for all lines of business over time.

Great. Thanks again.

Thanks.

The next question comes from Richard close of Canaccord Genuity. Please go ahead.

Yes, thanks for the question and I appreciate all the detail here today.

With respect to performance suite, John I was wondering maybe if you could talk a little bit.

On the ramp.

You said you moved from estimated.

Actual three to five quarters and I'm just curious.

How that's trended.

For different cohorts in terms of maybe the bottom end of the three or the top end.

Five.

And can you can you.

Shorten that timeframe at all in terms of have a better ramp any thoughts there.

That's a good question.

I'd say two things.

The the principal determinant of whether it's three quarters or five quarters.

Is the cadence of data that we're receiving from our partner.

And so what that can mean rate is as we are growing with existing partners, who are already accustomed to this sort of data transfer with the accustomed to the sort of scope that we do.

It can happen faster.

With a brand new partner would typically happen maybe on the longer end.

So that's the principal arbiter that'll take us and whether its three quarters or five quarters.

Overall, what we.

We have seen with these go lives.

Regardless of the specific timing is a pretty consistent way that it's playing out.

In terms of our our general reserving methodologies starting off on the Conservative end, which we feel is appropriate and then releasing some of that conservatism, which that when we have the actual claims data.

Okay. That's helpful and maybe a follow up on that.

I'm, just curious you're talking about a strong pipeline.

Obviously, you have existing customers that you have.

Long standing relationship with I am curious if you ever look at pieces of business and just say hey.

We don't want to necessarily do that in terms of just gauging in terms of what kind of line of sight do you have before you.

Sign another performance we contract.

Yes.

We absolutely have said that before.

The answer.

<unk>.

When we are underwriting a deal like that we'll review two to three years worth of claims and Youre looking at that data for that and what's the size of the risk pool, what's the volatility of the risk pool.

Is there a are there manageable levers that we know we can pull here.

Or are there or not.

And sometimes.

There are not and that's a great customer for tech and services.

Okay.

Helpful.

Thanks Richard.

The next question comes from David Larsen of <unk>. Please go ahead.

Hi, congratulations on the good quarter.

Some health plans.

We're talking about a few different things, obviously higher utilization.

I think we've been talking about <unk> diabetes obesity management.

And then also importantly, like for 2020 for the plan to talking about pricing have they fully accounted for the higher utilization levels and the pricing sometimes they have sometimes like having just any any thoughts or color on on how that.

Possible margin pressure that some health plans might see 124 may either benefit you because they need your services more or how you basically.

Get your fair share of the premium thanks.

Very much.

Yes, David look I think what you're highlighting whether its GOP, one or pricing or the age AGN question that we've talked about before the general.

Press towards slightly higher MLR is and I think the pressure that our customers are feeling is generally a positive thing for us and I think risk adjustment I'd put into that category too. David there is a set of factors that have created a little bit of pressure and the need to actually manage the thing that is driving a lot.

Lot of the costs, which is utilization.

In general and all these other factors is helpful to us we have as John mentioned earlier ways to manage our reasonably narrow risk and we have some contractual protections on that also think just the way we manage our risk is a little bit different and clinically manage it so.

I think part of the results we're seeing this year through this commentary by the plans, but also the business development pipeline that I talked about earlier is partially related to the question you're asking and it is a net positive for us.

And we can talk about the puts and takes on that if we want to but in general it's a net positive and I think it's going to continue for a while which.

Should be a positive for a while now and I'll just add one piece of detail to that which is the way that we price our performance suite is.

With dollars per member per month, not as a percentage of premium.

And so as plans are contemplating their benefit design their pricing that does not directly flow down to us.

Okay, and then I just wanted to confirm that what I heard was there is no unusual increase in oncology or cardiology or G. L. P. One related costs youre costs are coming in sort of in line with your own expectations is that correct that is correct.

Okay. Thanks, very much congrats on a good quarter.

Thanks, David.

The next question comes from Sean Dodge of RBC capital markets. Please go ahead.

Yes, Thanks, Jonathan I think you just kind of hit on it but I wanted to ask kind of the inverse of what I think.

David was asking which is.

So so on the Redetermination some of the MTO theyre talking about upcoming Medicaid rate updates and those in some cases building in perspective consideration for acuity changes in those populations and so if you've got a performance suite counterpart.

The higher rate from the state.

Winter, where theyre actually seen acuity changes.

Some of that flow through to Evelyn.

It does not Sean.

Okay, Okay alright.

Alright, that's clear and then.

Okay.

I apologize if I missed it but on the performance we had expansion with Florida Blue.

Are there any details you can share in terms of the number of lives involved in may.

Maybe expected revenue from that when it's fully ramped.

Yeah on the revenue side, we're expecting north of $75 million on an annual basis going live heavily in Q1 of next year.

That represents a little north of 150000 Ma lives.

Okay.

Thanks.

Thanks, Sean.

The next question.

Austin comes from Jessica pattern of Piper Sandler. Please go ahead.

Hi, Thanks for taking my question I wanted to start with just on the $25 million of prior year claims development.

Your Kid date that you mentioned is that related to MSP or SDH or is it kind of diversified.

Across the businesses.

Yes, it's a good question that is all the specialty performance fee so that does not.

<unk> include anything with MSP.

Okay Awesome and so is that against all of the risk contracts in our specialty business launched.

In 2022 or is it some subset.

That's the majority of it thats right as launches from 2022.

Okay got it.

And then just one quick one and then one sort of philosophical one should we think about the cardiology mch Tech and services contract with Centene is similarly sized versus the $5 million to $10 million run rate you gave us for the oncology launch.

Generally speaking cardiology is bit cheaper than oncology and MA and so it would be a little lower but same general ballpark.

Got it and then finally, hoping you guys can just describe the seasonality of the performance fee suite sale.

Sales and kind of launches around the Medicaid procurement cycles.

Kenny DH contracts be launched at any time during a Medicaid contract and just what would you or where the management team's philosophy around announcing those types of new partnerships in terms of yeah and in terms of timing. Thank you.

Yes, just on the last question there is not really.

Seasonality I Wouldnt say I think it really depends upon where the plan is in their own cycle of managing the cost structure of the plan clinically.

Sometimes they may be interested in doing it early in a new state launch, which we've had a couple of those right over time.

Sometimes it might just be with the plan that is already up and running in a year or two into the <unk>.

And into the contract. So I don't think there's much of a cycle our philosophy on announcing its generally going to be the quarter. After we sign it we generally.

Everybody now.

Great. Thank you guys and congrats on the results.

Thanks.

Once again, if you would like to ask a question. Please press Star then one.

Okay.

This concludes our question and answer session I would like to turn the conference back over to Seth Blackley for any closing remarks.

Thanks for everybody's time, we look forward to connecting a good night.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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