Q3 2024 Evolent Health Inc Earnings Call
Speaker Change: Welcome to the Evelyn Earnings conference call for the third quarter ended September 30th, 2024. As a reminder, this conference call is being recorded. Your hosts for the call today from Evelyn are Seth Blackley,
Speaker Change: Chief Executive Officer and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the rest of the week via the webcast on the company's website in the section titled Investor Relations.
Speaker Change: I will now hand the call over to Seth Frank, Evelyn's Vice President of Investor Relations.
Seth Frank: 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.
Seth Frank: The 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.
Seth Frank: For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today.
Seth Frank: Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct, comparable GAAP measure are available in the summary presentation, available in the investor relations section of our website.
Seth Frank: or in the company's press release issued today and posted on the Evelyn Investor Relations section of the company's website, ir.evelyn.com and the Form 8K filed by the company with the SEC earlier today.
Seth Frank: In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental master presentation.
Speaker Change: And now, I'd like to turn the call over to Avalanche CEO, Seth Blackley.
Good evening and thank you for joining the call.
Speaker Change: Earlier this afternoon we released third quarter 2024 earnings and a revised 2024 outlook that fell short of our expectations for adjusted EBITDA.
Speaker Change: While we remain confident in Evelyn's underlying fundamentals and positioning in a fast-growing market, as evidenced by our record new signings in the quarter, we take our commitment seriously and the team and I are disappointed in our revised near-term earnings expectations and our earnings results this quarter.
Seth Frank: Anytime Evelyn falls short of the expectations we set, that's ultimately on me as the CEO.
Seth Frank: Let me give an overview of the impacts in the quarter and how we're addressing them beforehand and to John to go through the financial detail.
Seth Frank: I will conclude our prepared remarks by talking about a significant number of exciting new business signings this quarter and the pipeline outlook, and then we'll take your questions.
Seth Frank: Outside of our specialty performance suite, our Q3 results were roughly in line with what we had expected when we set out the third quarter 2024 guidance.
Seth Frank: Our Q3 2024 adjusted EBITDA of $31.8 million was impacted by approximately $42 million in higher than expected medical costs in our specialty performance suite business.
Seth Frank: versus our forecast for the quarter when we set our Q3 guidance in early August.
It's included two components.
Seth Frank: First, new claims data we received and processed from September through early November from some of our partners that included much higher pay claims expense from prior quarters.
Seth Frank: This factor drove $24 million and higher net expenses in the quarter related to prior periods versus our expectations.
Seth Frank: And second, we experienced an acceleration in medical costs in August and September after a period of relatively flat experience between March and July.
Seth Frank: This new acceleration drove an additional $18 million in increase in medical expense for the third quarter compared to our expectations.
Seth Frank: We believe the unusually high medical cost of solution in the third quarter in our specialty performance suite was driven by a confluence of factors.
Seth Frank: including significant increases in disease prevalence, Medicaid determination driven adverse selection, rapid increases in unit costs, post COVID acuity increases, and provider coding intensity.
Seth Frank: We are not alone in experiencing significant spikes in medical expenses in our industry as many of the country's largest insurers noted a third quarter acceleration in specialty pharmaceutical costs where the majority of our company's oncology capitation risk lies.
Seth Frank: This quarter's spike in medical expenses is unlike anything we've experienced since launching the performance suite offering six years ago.
Seth Frank: We're moving rapidly to take four actions to address this issue.
Seth Frank: First, we're working closely with our partners to update reimbursement rates according to our contractual provisions.
Seth Frank: We successfully negotiated and captured incrementally higher rates of approximately $35 million relative to our initial expectations for the year, consistent with what we communicated on the August call, and 100% of those increases were signed by the end of August.
Seth Frank: Based on the data from our partners we had as of August, we believed those rates would be sufficient to cover the increased medical expense experienced earlier in the year.
However,
Seth Frank: Based on the data we now have received, we are currently seeking an additional $100 million in annualized rate increases with a target of January 1st, 2025 to effectively align with the elevated prevalence
Seth Frank: Acuity, Unit Cost, and Overall Expense seen in the new data we received since our last earnings call.
John will provide additional detail on this plan shortly.
Seth Frank: Second, we are carefully auditing the new data that was submitted to us to confirm that it accurately matches our contractual obligations to our partners.
Third, we continue to aggressively manage our own cost structure.
Seth Frank: And fourth, if we can't come to agreement on terms with the small number of partners driving high medical loss ratios regarding what we believe are appropriate
Seth Frank: rates in the context of the most recent claims data, we have the contractual ability to exit our risk arrangements or shift our products to our fee-based technology and services model.
Seth Frank: Again, these exit provisions are in place for rare moments like this and we always have that lever if we can't align our rates.
Seth Frank: We estimate that our quarterly adjusted EBITDA would be approximately $50 million a quarter if we converted our money-losing performance-sweep market to technology and services.
Seth Frank: We believe we have exceptional products that can drive favorable member outcomes and lower costs and the most complex specialty areas, we are well capitalized and cash flow positive and kept weather challenging industry dynamics.
Seth Frank: Therefore, we are reaffirming today, our long term expectations of growing annual adjusted EBITDA by at least 20% on average.
Seth Frank: However, given the unprecedented increase in medical expenses experienced by the industry in 2024.
Seth Frank: This growth will be off of a lower reference point. Furthermore, given the industry context, we believe we have a unique opportunity to capture share in a challenging time for our partners and intend to focus principally on driving long term adjusted EBITDA expansion.
Seth Frank: We're also reaffirming our long term expectations for revenue growth of 15% plus accepting any onetime chefs from risks and on risk relationships I mentioned earlier.
Seth Frank: We will update the market on our nearer term expectations, including our 2025 outlook and a revised estimate of when we will achieve our $300 million run rate target. When we report our Q4 results in February.
Speaker Change: Now going to hand, the call over to John to get into the financial details.
John Johnson: Thanks, Jeff.
John Johnson: On our second quarter call in early August we set out and expected margin expansion pass at that time for the rest of the year driven by four factors organic growth clinical value creation.
John Johnson: Normalized prevalence in acuity patterns and new reimbursement rates.
John Johnson: We are ahead of our previously set expectations on three out of four of these drivers.
John Johnson: Progress was offset by higher than expected medical costs.
John Johnson: Let's review each in turn.
John Johnson: First we executed ahead of expectations on implementing new business in the quarter.
John Johnson: <unk> services across eight implementations, including at least one new launch in all 50 states.
John Johnson: Our tech and services products continued to outperform our forecasts for both top and bottom line contribution.
John Johnson: Second we continue to execute on our targets to lower medical expenses, while increasing quality as our underlying goal.
John Johnson: For example by Q3, we had reduced the frequency of newly prescribed low value regimens by over 50% versus a baseline and a recently launched market.
John Johnson: We believe this highly differentiated model creates significant value for our clients for our members and for element.
John Johnson: Third we are pleased that our differentiated model has enabled us to capture significant rate increases during what has been the most challenging year for managed care in our recent history.
John Johnson: We announced on our August call that we had aligned with partners on new rates.
John Johnson: To capture approximately $35 million of new revenue in 2024 beyond what we had forecasted coming into the year.
John Johnson: All of these agreements are now in place with aggregate 24 impact in line with what we communicated on the August earnings call.
John Johnson: As expected we recognized a one time true down in the quarter related to a narrow in scope and select markets retroactive to the beginning of the year.
John Johnson: The final revenue impacts of this production was approximately $20 million per quarter modestly higher than originally anticipated, resulting in a revenue for the quarter being in the lower part of our range.
John Johnson: As expected we also drew down our first half accrued medical expenses by the same amount, resulting in no material impact to adjusted EBITDA from the street out.
John Johnson: Fourth while we believe our overall clinical value creation for our partners was in line with expectations medical costs exceeded our expectations and the performance there.
Therefore rates that were based on data as of our August earnings call did not reflect the higher medical cost experienced in the third quarter.
John Johnson: This is caused by the two factors Seth previewed and acceleration in medical costs that began late in the third quarter.
John Johnson: And new data received from our partners and processed across September and November.
John Johnson: Let me discuss the isolating the impact of these issues for Q3 and for prior periods.
John Johnson: On the first recall that our third quarter and full year guidance assumed the disease prevalence and acuity remained stable at the average levels experienced during the second quarter.
John Johnson: This was informed in part by July authorization data, which in aggregate had the lowest volume we had seen since March on an adjusted basis.
John Johnson: As the third quarter progressed, we saw a significant spike in volumes.
John Johnson: This was particularly acute for oncology in Medicaid, which experienced a 9% increase in seasonally adjusted authorizations for Canada versus the second quarter with relatively minimal changes in membership.
John Johnson: This contributed to an estimated $18 million increase in claims expense in Q3 on a like for like basis versus Q2.
John Johnson: This amounts to about a 500 basis point step up in specialty performance fee MLR in the quarter.
John Johnson: The second factor was revised claims files received and processed from September through the beginning of November from certain of our partners that included higher claims paid in prior periods and the files. They had previously submitted.
John Johnson: To be precise. These files included claims paid in prior months that were not previously submitted not just normal course claims development.
John Johnson: Fences incurred in prior periods.
John Johnson: We are actively auditing these claims submissions to understand the changes and confirmed that they are appropriately match, our scope of services as Seth noted.
John Johnson: Based on our initial analysis of this data over the last several weeks, we have identified possible mismatches between what was submitted in our scope.
John Johnson: Which could have a net favorable impact on our adjusted EBITDA.
John Johnson: At this point, we have only concluded our internal review and less than 10% of these mismatches.
John Johnson: While the reviews are ongoing we are taking a conservative stance and we believe we have booked the full impact of this new data in the quarter and are incorporating it into our guidance.
John Johnson: I E. Our Q3 results and 2024 outlets do not presume upside from this exercise.
John Johnson: We estimate that relative to our expectations. These new claims submissions drove a $24 million increase in claims expense that revenue adjustments or data service prior to Q3.
John Johnson: Note that this impact is almost entirely from 'twenty to 'twenty four service.
John Johnson: We believe these results are fundamentally a reimbursement issue not an underlying value creation issue.
John Johnson: For example in one of the market in question, we estimate that our clinical interventions through 930 created a 14% reduction in spend relative to an unmanaged benchmark.
John Johnson: This represents a doubling of the savings delivered by Avalon and the prior year.
John Johnson: This sample analysis was across over 400 cancer patients in this market is treatment. This year, we believe was better aligned with the best and latest evidence of efficacy and toxicity.
John Johnson: Despite this primary value creation, the underlying change in cancer prevalence in this market has increased year over year by 30% with August running 50% higher than the prior year average outpacing the rate of savings from our clinical interventions.
Speaker Change: As Seth mentioned, we are exercising our contractual rights to adjust our rates for these changes any underlying population.
Speaker Change: We are seeking approximately $100 million beyond the rate secured this summer and beyond our normal escalators.
Speaker Change: We estimate that nearly half this amounts are $45 million will come from purely mathematical and contractual annual rate adjustments. It will take effect January.
Speaker Change: These mathematical concepts are automatic and self executing and do not require negotiation.
Speaker Change: However, since those contractual provisions used full year prevalence mix and other factors to calculate the following year's rates.
Speaker Change: They do not capture the full impact that we are now seeing in Q3.
Speaker Change: We are therefore, seeking an additional $55 million and rate increases targeting a January one 2025 effective date to.
Speaker Change: To match the shifts we have seen in the expense base.
Speaker Change: While we believe strongly in our ability to drive value for our partners. Currently we do not expect any of these increases to come into place until January 25.
Speaker Change: Leading to a significant forecasted mismatch between elevated expenses and rates for the rest of 2024.
Speaker Change: As a result, we are revising our outlook for the year for adjusted EBITDA to be between 160 and $175 million with corresponding Q4 guidance of between 22 and $37 million.
Speaker Change: Our updated outlook for 2024 assumes elevated medical expenses that we saw in August and September persist for the rest of this year.
Speaker Change: It does not continue to accelerate.
Speaker Change: The lower end of this guidance contemplates that clinical costs continue to rise on a seasonally adjusted basis in the fourth quarter, even off was the highest since Q3.
Speaker Change: In either case assumes we receive any incremental rate increases until January 25.
Speaker Change: Regarding revenue, we are updating our annual expectations to between 2.55 billion and $2 $5 75 billion, reflecting the impact of go lives timings and the updated narrowing of scope I mentioned earlier.
Speaker Change: The corresponding outlook for Q4 at $642 million to $667 million.
Speaker Change: Switching now to the balance sheet, we remain well capitalized with a strong liquidity profile.
Cash from operations was $18 7 million in the quarter.
Speaker Change: Excluding the impact of earn out payments year to date cash from operations was $67 2 million.
Speaker Change: Across the last eight quarters, we have generated $312 million in cash from operations before paying interest and earn outs.
Speaker Change: Which represents 85% adjusted EBITDA during that timeframe.
Speaker Change: As we look forward, we anticipate continued strong cash flow generation from our operations.
Speaker Change: In a hypothetical scenario, Seth mentioned, where we exercised our right to exit risk in markets, where we were losing money.
Speaker Change: The resulting estimates that $200 million and adjusted EBITDA would cover our current annual cash interest obligations of $20 million many times over.
Speaker Change: With that said, we observed a slowdown in collections from our health plan partners in September and October leading us to draw on our revolving credit facility in late October.
Speaker Change: We believe this slowdown is temporary based on the turmoil in the managed care industry.
Speaker Change: And while we are not concerned from an overall collectability perspective, we want to be prepared in the event the experience longer collection cycles in the coming months.
Speaker Change: Or in the event, we see opportunities to accelerate profitable growth during this unique moment.
Speaker Change: To that end, we have obtained $250 million in incremental committed financing from our existing lender subject to customary conditions.
Speaker Change: In the form of an increase to our revolving credit facility.
Speaker Change: New $125 million term loan and a $75 million delayed draw term loan.
Speaker Change: If this facility works any fully drawn we estimate our total annual cash interest expense will increase to about $43 million.
Speaker Change: Still we believe a small fraction of our overall annual cash generating power.
Speaker Change: This commitment is available to us through January.
In addition to providing a buffer for potential slower cash receipts. This committed financing, but also provide a proactive path for our 2025 convertible note maturity.
Speaker Change: Finally, as a part of this commitment we expect to amend our existing credit agreement and related documents to permit the board to launch a share buyback program. If we were to choose to do so expanding the levers we have to drive shareholder value.
Speaker Change: Let me hand, the call back to Seth to talk about our new business announced in the quarter and some market demand commentary.
Seth Frank: Thanks, John.
Seth Frank: Despite the near term reimbursement rate issues, we just discussed elements market position is strong and we believe our solutions help our whole plan solve their most important issues as they manage this challenging underwriting cycle.
Seth Frank: For the third quarter of 2024, we announced six new revenue agreements exceeding our new agreement revenue growth target for the quarter six agreements the largest number of new revenue agreements, we've announced in one quarter since founding the company 12 years ago.
Seth Frank: These six deals bring our total for the year to 17, our highest new revenue agreement count ever and a year peers.
Seth Frank: Here's a summary of our new signings.
Seth Frank: First we executed a letter of agreement for the oncology performance suite for a large state with a top five national payer in the country and are finalizing the details to go live with that partner for over 200000 Medicare advantage members in 2025.
Seth Frank: We're extremely excited to announce this deal and we look forward to working with this industry industry, leading payor on additional opportunities across the country.
Seth Frank: Yeah.
All five of the other agreements announced the corridor for specialty technology and services products as follows.
Seth Frank: And our second agreement, we expect to go live with a new expanded relationship with a south central Regional health plan.
This existing customer, who we provide oncology technology and services and advanced care planning solutions for both commercial and Medicare advantage lives. The business will now expand to include multiple specialties, including cardiac imaging advanced imaging and a variety of musculoskeletal solutions.
Seth Frank: Our third agreement.
Seth Frank: Was with one of our largest clients a Medicaid health plan, which will now grow its existing footprint without want to include radiology advanced imaging and Moscow skeletal services.
Seth Frank: Our fourth agreement is with a former N I a client to now include select muscular skeletal solution across commercial and Medicaid lines of business for a regional health plan and the eastern Great Lakes region.
Seth Frank: This new agreement is scheduled to go live in the second quarter of 2025 subject to regulatory approval.
Seth Frank: In addition, we anticipate adding Medicare lives to the muscular skeletal solution in 2025.
Seth Frank: But we are expanding our relationship with a large national Medicaid health plan beyond our existing footprint to now include general radiology across nine states predominantly the Midwest and southeast.
Seth Frank: Sixth and finally, we're excited to announce multiple element specialties were included by our current of Blue Cross Blue shield customer to help them win a large scale self funded a ASO request for proposal covering 250000 members and their families.
Seth Frank: This marks a significant entry into the employer market for evident and we believe there'll be a long runway ahead for continued growth in the self insured employer market.
Seth Frank: In addition to six new signings just covered within the surgical management solution, we signed a significant large renewal with an anchor client.
Seth Frank: The next three years across the South East, we expect disagreement wall allow everyone to continue to build new momentum in the active Florida market for surgical management solutions focused on site of care optimization.
Seth Frank: As a reminder, surgical management is generally a commercial line for us helping to add some additional diversity to our revenue and earnings and the government payer space.
We anticipate continued growth as there continues to be a proliferation of new de novo ASC facilities as well as existing facilities looking for new opportunities to grow as surgical volumes for health plans side of care shifts remains critical particularly in the commercial space to help manage the cost of care and optimize.
Seth Frank: Surgical resources.
Seth Frank: Finally, I want to point to the press release issued today, confirming our national surgical in radiation oncology technology and services agreement with Humana, We announced back in February of this year.
Seth Frank: With regard to complex care in the Medicare shared savings program.
You know CMS recently provided its final data for the 2023 performance here.
Seth Frank: Once again everyone's E C O had a strong performance year delivering significant value to CMS and other provider partners here a couple of highlights.
Seth Frank: Evidence ACO ranked as the 12 largest ACO by total spend placing us in the top 3% of always Acos, we ranked as the eighth highest honor insured savings.
Seth Frank: In the top 2% of Acos consistent with our results in the last performance here.
Seth Frank: We ranked third among acos designated as focused on independent primary care physicians.
Seth Frank: Finally, we continue to see strong growth opportunities for our complex care solution targeting approximately 25000 to 30000, new members for the 2025 performance year, the highest growth in the history of that solution.
Seth Frank: Let me provide some color now on the status of our sales pipeline going into 2025.
Seth Frank: We believe that health plans number one pain point and specialty medical cost trend as frequently reference on their Q3 earnings calls.
Seth Frank: Well that pain, obviously affected our earnings in the quarter the demand for our products is high this backdrop of cost concerns that created pressure as employers and government entities alike seek solutions to manage specialty costs.
We see market wide operational challenges with managing specialty cros across all three major lines of business. As a result health plans of all sizes are expressing their interest and creative partnerships, including sub capitation to address trend, especially in the big three specialties were evident focuses.
Seth Frank: I want to close with a couple of comments on Apple its position in the market.
We believe our core products clearly create value are market, leading and are in high demand as payers work to manage specialty medical cost.
Seth Frank: Everyone has less than 5% market share in most of our specialty products.
Seth Frank: We believe this situation the leading specialty product special.
Seth Frank: Specialty cost pain, and low current market share sets us up for continuing to build a durable business in the years to come.
Seth Frank: We're focused first on our near term earnings, but we strongly believe in the large and long term opportunity.
Speaker Change: As we navigate this time ahead, the board and I will continue to evaluate all strategic options to maximize shareholder value, including share buyback program, while keeping consistent with our priorities for capital allocation.
Speaker Change: With that well.
Speaker Change: We will open it up for questions.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two please.
Speaker Change: Please limit yourself to one question.
Speaker Change: The first question comes from Charles right with TD Cowen. Please go ahead.
Speaker Change: Oh yeah.
Speaker Change: Thanks for taking the questions.
Speaker Change: You you noted that.
Speaker Change: Basically all of the expenses that you've reviewed so far how how I think you said, maybe 10% of them.
Speaker Change: How how much were outside of the scope, so far and maybe you could give a little bit more color on what kind of expenses there were submitting.
Speaker Change: And.
Speaker Change: You know and maybe what percent.
Speaker Change: Pharmacy revs does the small number of partners that are driving this high MLR represent.
Speaker Change: Yeah, I'll take that one Charles this is Jon.
Speaker Change: Let me give you a sense for how this works.
Speaker Change: This claims audit process as part of our normal course operation, where when our customers pay the claims themselves and we receive claims files from them. We run those files through our own internal claims to stop which is tailor built to process specialty claims.
And that.
Speaker Change: The analysis is going to flag areas for further investigation and that's what we're highlighting here.
Speaker Change: Well this has been an ongoing and recurring part of our business for many years, what we've seen this quarter in particular with this new data that is quite a bit higher than what we've seen before and for example, the total number that we're reviewing right now as it's grown tenex versus or more.
Speaker Change: [noise] than 10 X versus last year.
Speaker Change: Got it.
Speaker Change: In Q3, so a lot to look at.
What we typically see is these flags might be.
Speaker Change: Originations that have variety of units.
Speaker Change: Claims that are processed without authorizations.
Speaker Change: Or other ideas or other oh.
Speaker Change: Claims like that.
Speaker Change: Once those are identified when we start the process of discussing those with our partners and identify or are there other.
Speaker Change: Components of this claim that were not included in what we sent to us.
Speaker Change: That would change the point of view.
Speaker Change: Or other factors like that.
Speaker Change: I would underline that we're early on in this analysis given the volume that we are reviewing I mentioned that we bought only reviewed a little less than 10% so far.
Speaker Change: And we believe that we're being pretty conservative and the impact here.
Speaker Change: Both our Q3 results and our forward guidance.
And the small number of partners driving the higher MLR like what percent of performance reps do they represent.
Speaker Change: In total Charles its probably 40% to 50%.
Speaker Change: Got it okay.
Speaker Change: I appreciate it thanks.
Speaker Change: And the next question comes from jail, Indra sign with Truest Securities. Please go ahead.
Yes. Thank you. This is <unk> Singh from <unk> Securities.
Speaker Change: I wanted to kind of follow up on your <unk> hundred million, albeit adjustments you expect a 125, so if I look at your EBITDA guidance lowered by $70 million.
Speaker Change: Look at the pieces, we disclose it seems like Youre seeing expecting medical expense higher by a $28 million in Q4 is that the baseline you're using when you're thinking about $100 million adjustments next year. How much of this 100 million is related to retroactive payments to reflect 2020 Ford experience with.
How much is flawed underlying cost trend you expect next year in your core business.
Speaker Change: Yep.
Speaker Change: Let's start with that last one.
Speaker Change: Hey.
Speaker Change: Anything that we're talking about here is prospective and so the $100 million in rates that we mentioned that we are seeking to go lives and effective.
Speaker Change: In January of next year.
Speaker Change: Prospective based.
Speaker Change: Based on changes in the population and the trend that we're seeing this year.
Speaker Change: Two other important things to note.
Speaker Change: One is that $45 million, we estimate.
Speaker Change: Of that 100.
Speaker Change: Is mechanical based on the way that these contracts are structured.
Speaker Change: And so there is a prospective annual rate increase.
Speaker Change: Adjustments in some of these contracts that automatically adjusts the next year's rate for the current year's prevalence and mix and so on.
Speaker Change: So we feel very positive that a significant portion of that 100 million is already accounted for in our rates on our contracts.
Speaker Change: The second thing that I'd note is we have other provisions in our contracts as well in addition to these purely mechanical ones that.
Speaker Change: As an example, we talked about exercising over the summer.
Speaker Change: And we were successful in exercising this capturing as we mentioned the $35 million in in year revenue increases relative to our initial expectations that we said we would capture on the Q2 earnings call.
Speaker Change: So both of those mechanics exists and we're optimistic that we'll be able to execute on that path.
Speaker Change: As we move into next year.
Speaker Change: Sorry, one clarification, if I can have here.
Speaker Change: If you're a beta partners are willing to compensate for this additional $55 million.
Speaker Change: I mean shouldn't you be like reworking all your contracts to make sure. The majority of these adjustments will become optimized against Celtic excluding our U S.
Speaker Change: As you're signing these new contracts are you taking that into consideration.
Speaker Change: Absolutely.
Speaker Change: Today about 50% of our performance suite revenue in.
Speaker Change: Clues these mechanical.
Speaker Change: Contract protections that's up from what it was a year ago as a percentage and we anticipate continuing to refine and update these contracts as we were.
Speaker Change: Work to.
Speaker Change: Execute on this path for next year.
Speaker Change: Thank you.
Speaker Change: And the next question comes from Jeff Garrow with Stephens. Please go ahead.
Speaker Change: Yeah. Good afternoon, thanks for taking the questions.
Speaker Change: I'll continue on the performance suite and ask how we should think about the margin performance from the mature cohort of contracts there maybe.
Speaker Change: Clients that you were live on in 'twenty, 'twenty, two or prior help us.
Speaker Change: Thinking about the progression from.
Speaker Change: 2022 at the Investor day in May of 'twenty three was when we last got an update there on how that cohort had performed so if you could translate that from then until 'twenty 'twenty four expectations that would be helpful.
Speaker Change: And then if you could help frame up how we should think about what an achievable long term margin target is for the performance suite business as they are underwritten today. Thanks.
Speaker Change: Yes, great questions Jeff.
Speaker Change: Look on the cohort side, what I would say is the.
Speaker Change: The spike in trend that we have seen in Q3 and really the industry has seen in oncology over the recent time period has applied to all of our cohorts, that's both Medicaid and Medicare advantage.
Speaker Change: Old and new so it doesn't appear to be localized.
Speaker Change: And the way that the spike that we talked about for example earlier this year was quite localized.
Speaker Change: On the second question.
Speaker Change: What is the right long term mature margin within the performance fees.
Speaker Change: We firmly believe based on years of evidence here that the value creation opportunity supports our mid teens margin target.
Speaker Change: One of the things that of course, we will be evaluating.
Speaker Change: As we work with our partners towards these rate increases for next year.
Speaker Change: Is whether there is a symmetric corridor that might be smaller.
Speaker Change: It may lower our long term.
Speaker Change: Mature margin.
Speaker Change: Well also trading off protection on the downside beyond what we have today.
Speaker Change: That's an evaluation that will make together with our partners as we work towards the right sustainable model here, which just to reiterate what Jeff said during the prepared remarks, we continue to believe firmly in the underlying value.
Speaker Change: We'll take the next question operator.
Speaker Change: And the next question comes from Jessica <unk> with Piper Sandler. Please go ahead.
Speaker Change: Yep no growth from the health care end market baked into your guidance for this year has that changed.
Speaker Change: Recently things that might be another conference call, yes, we've definitely seen.
Speaker Change: And our outlook.
Speaker Change: Definitely there is.
Speaker Change: As we look at our expectations today for their expertise operator, let's go to the next we've definitely been marginal improvement there.
Speaker Change: The next question comes from Stephanie Davis.
Stephanie Davis: With Barclays. Please go ahead.
Hey, guys. Thank you for taking my question.
Speaker Change: But I also have some noise in some of the airport.
Stephanie Davis: But.
Speaker Change: Talk about a minority of your clients driving already this quarter.
Speaker Change: So I was hoping you could expand upon that a bit more are we talking about one or two clients.
Speaker Change: Handful of clients and how deep relationship.
Speaker Change: I think difficult to unwind or it could be done.
Speaker Change: Yeah.
Speaker Change: Hey, Stephanie it's it's a so it's a handful of clients and you know these are relationships that we've had for <unk>.
Speaker Change: Many years and have good relationships with and are in constant contact and so you know I think this will be a pretty rapid process to have the conversations and again I think frankly links back to lenders comment and question Jeffs comment which is.
Speaker Change: You can't have your cake and eat it too and life, if we want to narrow the volatility a little bit on a given contract by having a corridor you may be trading off something for another item and that's sort of how these protections work it needs to be symmetrical with fair for the client and so I think we'll figure this out pretty quickly it's a small handful.
Speaker Change: Appalachian chips that we have obviously very deep personal relationships with then a lot of trust built up so a fair bit of confidence, we'll be able to move forward in a car.
Speaker Change: Conversations in a short period of time.
Speaker Change: I guess following up on that it sounds like you've got a lot on your plate.
Speaker Change: Does it give you any pause.
Speaker Change: And in fact, the vertical really executing on further for pharmacy wins.
Speaker Change: Yeah look I think it's a good question, obviously, we announced one in this quarter and I think there's a healthy tension there because the market demand is very high right now right because all the health plans are really struggling with this generally I think it was an interesting article in the Wall Street Journal last week or the week before about just how com.
Speaker Change: Kate It is to manage cancer, if you're a patient right now the same thing if youre. The oncologist just using that specialty as a for instance, so I think there's a tremendous opportunity right now we want to make sure we capture that opportunity at the same time, yes, we are going to be very prudent and thoughtful about what terms are in those agreements and other things.
Speaker Change: That are in the pipeline right now would reflect all of those contract terms that we feel like we need to have to protect ourselves.
Speaker Change: Thanks, so much.
Speaker Change: And the next question comes from Ryan Daniels with William Blair. Please go ahead.
Ryan Daniels: Yeah, guys. Thanks for taking my question.
Speaker Change: Can you hear me.
Speaker Change: Yes.
Speaker Change: Okay churn some background noise.
Speaker Change: I just wanted to go back to the contract renegotiation to make sure I understand this perfectly so $45 million of the 100 <unk> you said, it's automatic and mathematical and it sounds like that is based on perhaps the current year mix and prevalent so I'm thinking the entire kind of year to date performance you get that 45.
Speaker Change: But is the $55 million incremental then based on the most current data. So if that would be kind of run rate to say look we're not accounting for what is currently going on in that $45 million and in order to actually account for the current prevalence rates it would be another $55 million on top of that.
Speaker Change: But that's not in the contract so you need to kind of renegotiate that and get agreement on it is that a right way to think about it.
Ryan Daniels: Yeah, I think you've described it well Ryan.
Ryan Daniels: Okay and then another thing you said I'm not sure if I heard you correctly did you say in some markets that you've seen.
Ryan Daniels: Cancer prevalence increases of up to 50% year over year can.
Speaker Change: Can you go through that yes that was pretty stark data. Thank you.
Speaker Change: Yeah that is that specific example, I believe was the August prevalence relative to the average from last year and it's a true stat, obviously that one's pretty extreme but we're seeing an increase in cancer prevalence across the book.
Speaker Change: I will note that some of that of course was expected because of the mechanics of Medicaid redetermination.
Speaker Change: But this is above and beyond what would be easily explainable by that dynamic.
Speaker Change: Yeah.
Speaker Change: And the next question comes from Matthew Gillmor with Keybanc. Please go ahead.
Matthew Gillmor: Hey, guys I was hoping you could help us think through the sort of EBITDA run rate as were entering 2025.
Speaker Change: You've got your guidance of 160 to $1 75.
Speaker Change: <unk> got sort of an accelerating trend. So I was curious if that was.
Speaker Change: The right baseline or if there was some more cost we needed to add back and then hopefully we get that $100 million.
Speaker Change: On top of that would say with the contract renegotiations, but just wanted to see if you could sort of help us think through the run rate.
Speaker Change: Hopefully grow into next year.
Speaker Change: Yeah, It's a good question Matt.
Speaker Change: Here's the thing that I will go back to I guess, you mentioned during the prepared remarks, which is if we took the business today and those markets, where we are currently underwater in the performance suites and slipped those into the tech and services products. We would see we believe an EBITDA of around <unk>.
Speaker Change: $200 million per year. So we would think of that as sort of the core earnings power of the business today, if we were to take that action.
Speaker Change: Of course that action doesn't happen overnight.
Speaker Change: The other thing that I would say is if we're retaining those markets in the performance fees.
Speaker Change: And obtain the revenue that we believe is commensurate with the populations that we're managing and continue to drive the clinical improvements that we know we can do in the market to improve both the quality and the margin in those markets. The earnings power of the business will be quite a bit high.
Speaker Change: Here in 200.
Speaker Change: So that's how we think about it of course will give more specific guidance for 2025.
Speaker Change: On our Q4 call in February.
Speaker Change: Yeah.
Got it that's helpful. Thank you.
Speaker Change: And the next question comes from Adam Samuel with Jpmorgan. Please go ahead.
Speaker Change: Hi, This is colleague man on for any Tonight I wanted to ask you about the new partnerships announced in the quarter and if you go into detail about the expected financial contributions of both of those and should we expect all of these to go live sometime in 2025.
Speaker Change: Hey, Scott Hey in total I think we've scoped it at around $200 million.
Speaker Change: Annualized revenue across the six announcements a asia breaking that down further the tech and services.
Speaker Change: I announcements that we made today in total across the five for around $10 million in total revenue and once they are fully up alive.
Speaker Change: Of course, the performance suites and yes, we do expect all of that has to go live sometime next year.
Speaker Change: Alright, and then just a quick follow up I wanted to ask about the accounts receivable dynamics. If you could provide more color on what's exactly going on there your expected timeline of recovery and your confidence in that timeline.
Speaker Change: Yeah.
Speaker Change: Yeah.
So look I think what we're what we've seen has been specific to a couple of partners.
Speaker Change: We have pretty good insight into those dynamics.
Speaker Change: Before.
Speaker Change: And we have no concerns around overall collectability of that they are at the same time and recognizing.
Speaker Change: The need and a desire to proactively create a pathway for our 2025 convertible notes that are due next October we went ahead and secured this incremental committed financing.
Speaker Change: Of $250 million against both of those eventualities.
Yes.
Speaker Change: Amazing Thank you.
Speaker Change: And the next question comes from Richard close with Canaccord Genuity. Please go ahead.
Speaker Change: Yes, maybe going back to matts quant.
Speaker Change: Jen.
Jen: And John you talked a little bit about performance week going down to the tech and services can you talk a little bit about how you know what their process is like you said you know it doesn't happen overnight.
Speaker Change: I guess, that's my first question is a follow up to it.
Speaker Change: Are you guys thinking about.
Speaker Change: You said that there's a performance suite in the pipeline you just signed one as well you know maybe taking.
Speaker Change: Pumping the brakes, a little bit on performance.
Speaker Change: You go in with the Tech and services for a while until.
Speaker Change: There is.
Speaker Change: Better dynamic with respect to medical cost trends, just how are you thinking about that would be helpful.
Speaker Change: Yeah, Hey, Richard itself that can I can take both of those so I think on both questions.
Speaker Change: The overriding message is that we continue to think the performance suite is the best model for patients for our customers for oncologists Rabblement financially.
Speaker Change: And so we still believe in it and yet to your point, we have to be thoughtful about how we how we handle it in this environment. So on your first question that if we needed to get into flipping something from performance suite to the technology and services side that was contractually typically your or could be short as 30 days <unk>.
Speaker Change: As long as 150 days the average is.
Somewhere in between so it's not very.
Speaker Change: Very long period of time couple months typically.
Speaker Change: And then on your second point on the pipeline I think look this quarter.
Speaker Change: Flex pretty well, how we're thinking about it we've always had this idea of balanced right. We've always had a tech services and performance, we 70% of the EBITDA coming into the year is actually from Tech services that we've always said, we'd like that and I think even in this quarter.
Speaker Change: Five out of the six deals being in Tech services I think is a good mix.
Speaker Change: We still feel like when there is an opportunity to serve in this case one of the top five payers in the country, who really wants our help in a certain area. We think we can help those patients and those physicians and we think we have the right underwriting terms to your point.
Still makes sense to do but we are going to put.
Speaker Change: I'd say I'm, you know heightened scrutiny around all of those things that you're talking about given this environment. So I think there is a form of.
Speaker Change: Hitting the brakes based on just sort of how we execute on that but we want to be balanced about making sure we continue to.
Speaker Change: Serve the market in the long term as well.
Speaker Change: Thanks.
Speaker Change: And the next question comes from Sean Dodge with RBC capital markets. Please go ahead.
Speaker Change: Yes. Thanks.
Speaker Change: Maybe just on the Q4 EBITDA guidance and just bridging.
Speaker Change: What was implied for Q4 before was close to $70 million to now you're saying, 20% to 37% was the difference you would take of $40 million at the midpoint it sounds like based on $100 million of.
Speaker Change: Price that youre looking to negotiate the kind of a quarterly cost trend here is about $25 million higher. So just just maybe if you could still in it.
Speaker Change: The kind of a difference in the Q4 outlook are you assuming that this kind of cost trend intensifies.
Speaker Change: Before it gets better just any anything else that's been built in there.
Speaker Change: Yeah, It's a good question.
Speaker Change: Two things that I'd say.
Speaker Change: And we are assuming in the guide as I noted.
Speaker Change: Space for possible worsening of <unk>.
Speaker Change: <unk> in Q4.
Speaker Change: The second piece as well.
Speaker Change: The 100 million dollar number is above and beyond what we would normally expect.
Speaker Change: It is not the only annual rate change that we have in fact as we've talked about before we tend to have very significant annual insulators in this business.
Speaker Change: On the performance fee side, and so beyond the 100 that we're.
Speaker Change: Talking about Tonight.
Speaker Change: We would anticipate at least $50 million of incremental revenue beginning on January 1st for just our normal course escalators.
Speaker Change: And those bridge the rest of that gap.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Jessica <unk> with Piper Sandler. Please go ahead.
Speaker Change: Oh, Hi, Thank you guys for taking the question.
Speaker Change: I'm, just hoping you can help us frame the 100 million.
Speaker Change: Hum.
Speaker Change: I thought after price increases versus that kind of minus 10% risk corridor that you have historically pointed out to you and can you just help us understand like that.
Speaker Change: Whether those price increases.
Speaker Change: Got me back from the minus 10%.
Speaker Change: At the low end of the corridor to where you would have otherwise been and Ah in that and that kind of timeline of that contract.
Speaker Change: And that's been first had the.
Speaker Change: Adverse threat not prevent that thanks.
Jeff Garrow: Yes, it's a good question Jeff.
Speaker Change: And it is more of a ladder right that $100 million is what we believe we need to.
Speaker Change: I'll get back in the black as it were and.
These couple of markets and back on track with our normal course margin maturation.
Speaker Change: Got it and then I'm just curious and this is a somewhat longer term.
Term question, but just with with part.
Speaker Change: Travelling negotiation under the inflation reduction Act I think there is an expectation that payments to providers.
Speaker Change: First of all it's great that are based on ASP, plus six 5% are going to come down meaningfully is that a tailwind for Avalon or do you have to do those savings are practically password you're paying customers.
Speaker Change: The lower P. M. P M pricing for you all or or how how would that work.
Speaker Change: Yeah at this point that's a good question at this point, we anticipate very minimal impacts on Avalon from the inflation reduction Act, but we generally don't take risk in part D. As in dog and so it's not a big issue for us.
Speaker Change: I think I'll I'll ask follow up offline. Thank you.
Speaker Change: And the next question comes from Kevin Caliendo with UBS. Please go ahead.
Kevin Caliendo: Hey, guys. Thanks for taking my question.
Kevin Caliendo: Is it wrong to just I think Brian kind of asked this question, but I, just maybe I'm going to try to ask it again, a little bit different.
Kevin Caliendo: Is there any reason not to take.
Kevin Caliendo: The 167 midpoint grow it by 15% and then add back 100 in terms of EBITDA for next year like are there any other puts and takes to that.
Speaker Change: Does that mean I am just thinking is that the right way to start.
Speaker Change: Okay.
Speaker Change: I Love the question, Kevin I don't I'm, not going to guide for 'twenty five.
Speaker Change: I say that obviously those are the key building blocks one that we don't know today is medical trend and one that we don't know today is ultimate growth for next year.
Speaker Change: And so.
Speaker Change: I'll go back to.
Speaker Change: Where what we reiterated in the.
Speaker Change: It doesn't have the seats in the prepared remarks.
Speaker Change: Our ongoing expectation of being able to grow the top line of this business, 15% in the bottom line adjusted EBITDA line at 20% on an average.
Speaker Change: The basis annually.
Speaker Change: And then obviously from a different base now.
Speaker Change: We firmly believe in those opportunities.
Speaker Change: So.
Speaker Change: Maybe a follow up is the 15% part of.
Speaker Change: The abnormal escalators are part of that $100 million because of the normal escalator.
Speaker Change: Is that part of the math here that I'm not maybe understanding.
The 100 million.
Speaker Change: That we're talking about a new rates for next year. So we are saying.
Is above and beyond the normal escalators.
That's helpful and then just one sort of cliff.
Speaker Change: Clinical question, if I can sneak it in.
Speaker Change: It's interesting that we're seeing so much activity in oncology acquisitions, right and now you're saying, there's a spike in oncology.
Speaker Change: Costs that are happening here, whether it's COVID-19 related or whatever there's clearly something happening in the marketplace, that's attracting a lot of interest.
Speaker Change: From a from a market perspective, a wall Street perspective is there something that's happening in terms of changing of protocols to treat oncology, that's driving utilization not necessarily are driving cost of care higher incidents.
Speaker Change: Incidents I'm just wondering because it just seems odd to me that you are seeing so many clinics being acquired at the same time that we're seeing the spike in oncology trends drug cost trends have spiked as well.
Speaker Change: And I'm just wondering if there's some some different type of care protocol thats going on it just costs more.
Speaker Change: Yeah. It's a good question and then I'll I'll start in southern China.
Speaker Change: At least something out.
Speaker Change: It's clear to us based on our overview.
Speaker Change: Millions of members on the oncology platform here and that there are changes in the.
Speaker Change: The nature of cancer treatment.
Speaker Change: Some of the things that we've seen beyond just increases in prevalence in acuity was talked about earlier.
Speaker Change: I include more frequently using multiple therapies at one time.
Speaker Change: And we've also seen an extension in longer duration treatments to somebody for example on Keytruda for two years.
Speaker Change: A checkpoint inhibitor. So those are some of the trends that we've seen that it clearly.
Speaker Change: It contributed to the elevated expense that we're seeing I think those are the sorts of trends wherever it takes to take a step back and look at the oncology program overall that we have here at <unk>. We believe we can bring a differentiated point of view an outcome to our health plan partners on how to best NAV.
Speaker Change: Those trials.
Speaker Change: Yeah.
Speaker Change: Yeah, the only thing I'd add right as did this this has been since we've been doing this starting in 2018 immuno therapy was ramping through that period of time, so keytruda hold the PD ones, but you've got cell therapy and gene therapy in car T and there's a number of new innovation categories.
Speaker Change: That have either come are coming.
Speaker Change: And it is just sort of the core point of the business and there are corollary examples in other specialties, which it but I think its highest in oncology to your point, which is this is a category of extreme complexity is changing so much that up to a third of the time based on the data we have the patience diagnosis.
Speaker Change: Treatment plant or incorrect.
And that is the fundamental opportunity for everyone is to help that patient and that oncologists. In this example.
Speaker Change: Get the therapy, right and sometimes more expensive usually use less expensive. That's how we create value. We think we're the best in the world at this.
Speaker Change: So yeah, we have an underwriting pricing issue over the next two this quarter and next quarter that we believe will be fixed going into next year as we talked about with the $100 million.
Speaker Change: But I think the fundamental multi decade.
Speaker Change: Decade, plus opportunity. That's ahead for this business is still really intact and exciting and it gets to you know, making sure were thoughtfully managing and trading off these choices that are driving what you've described.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: The next question comes from Daniel Grossly with Citi. Please go ahead.
Speaker Change: Hi, guys. Thanks for taking the question I could go back to the $55 million of non mechanical rate increase for next year. I guess the question really is around how much flexibility in negotiation is there in that $55 million I suppose the first I should ask is it are you going back to the same payers.
Speaker Change: Is that you've got the 35 million this year, because perhaps maybe they'll say when you come back for 55 million that theyre, a little less willing to make that rate increase in the negotiation might be a little bit tougher if you understand what I'm, saying so.
Speaker Change: So really the question is how much negotiation is there in that non mechanical piece of the rate increase.
Dan: Yeah look I think I'd say two things Dan.
Dan: Clearly, it's a negotiation there managed care company, that's what they do.
Dan: And it's not a mechanical.
Dan: At the same time the trend is incontrovertible and is based on very clear metrics that our population driven.
There are changes in the number of people that have cancer changes in the mix of cancers things that we can point to that are very clearly out of our control.
Dan: And so that foundation.
Dan: As long term sustainable partnership in our experience.
Dan: It has been.
Favorable.
Our ability to negotiate appropriate reimbursement rates.
Speaker Change: Got it and are you asking the same payers for a rate increase.
Speaker Change: For next year that you did this year or is it a different set of players.
Speaker Change: Little column, a little Combi.
Speaker Change: Thank you.
Speaker Change: Welcome.
Speaker Change: The next question comes from David Larsen with.
Speaker Change: With B T. I G. Please go ahead.
Speaker Change: Hi, can you talk a little bit about your expectations for premium increases in 2025, and I'm, assuming you would get a part of that right. So I'm thinking mid to high single digits as normal and then just any thoughts on the election and what impact if any that might have on your book. Thanks a lot.
Speaker Change #100: Hey, David.
Our rates are not linked to plan premiums and so we wouldn't expect anything specific there. We can have normal horse escalators that we've been talking about it.
Speaker Change #101: We are targeting this $100 million based on the change of the population and I'll, let Jeff take the electric.
Jeff Garrow: Yeah, David So I don't think the outcome of the election changes very much forever, one wouldn't have one way or the other I think you know.
Jeff Garrow: There are some possible changes on Medicaid membership, we think the HCA will stay in place.
Jeff Garrow: So there could be some membership changes over time I think the major overriding dynamic for CMS for state Medicaid plans for.
Jeff Garrow: Medicare advantage plans commercial et cetera is still to support ability issue.
Jeff Garrow: And you know, whether it's CMS on a policy basis or just the kind of the market as it is.
Jeff Garrow: It's all going to come down to our ability to set up thoughtful reasonable contracts to manage that well, but other than the tech services, our performance suite side and the.
Jeff Garrow: A specific party in office won't change that very much.
Thanks very much appreciate it.
Speaker Change #102: This concludes our question and answer session I would like to turn the conference back over to Seth Blackley for any closing remarks.
Seth Blackley: Alright, thanks for joining us Tonight, everybody have a good night.
Speaker Change #104: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.