Evolent Health at TD Cowen Conference: Strategic Adjustments and AI Integration

On Tuesday, 04 March 2025, Evolent Health (NYSE: EVH) presented its strategic initiatives at the TD Cowen 45th Annual Healthcare Conference. The company is navigating challenges in oncology cost trends while embracing AI to enhance operational efficiency. Despite potential risks from Medicaid redeterminations, Evolent Health remains focused on product development and margin improvement.

Key Takeaways

• Evolent Health is transitioning to a capped model in its Performance Suite to manage oncology costs.
• The company expects $2 billion in revenue for 2025, with a significant portion from Medicaid and exchanges.
• AI integration is projected to deliver up to $50 million in annualized benefits over two years.
• Evolent Health is managing risks from potential Medicaid cuts and membership declines.
• The company aims to exit 2025 with a $20 million annualized benefit from Auth Intelligence.

Financial Results

• 2025 Adjusted EBITDA Guidance: $135 million to $165 million, accommodating oncology trend variations.
• 2025 Revenue Expectation: Approximately $2 billion.
• Cancer Trend Impact: A 2% improvement could yield a $12 million EBITDA benefit, while a 2% worsening could result in a $9 million EBITDA headwind.
• Medicaid/Exchange Revenue: 50% of revenue expected from these sources; a 25% reduction could impact revenue by $250 million.
• Membership Declines: Anticipated $20 million EBITDA headwind due to declines, equally affecting Performance Suite and tech services.

Operational Updates

• Performance Suite Transition: Shifted to a capped model to better manage oncology cost trends.
• Auth Intelligence: AI integration expected to generate $50 million in benefits over two years, starting with $20 million by the end of 2025.
• AI Investment: $10 million net investment in AI for the year, with efficiencies expected in the latter half.
• Claims Issue Resolution: Enhanced protocols to prevent recurrence of prior claims issues.
• Scope Narrowing: Adjustments for complex care and advanced imaging clients affecting revenue recognition.

Future Outlook

• Growth Opportunities: Stronger value creation within the Performance Suite and faster implementation of growth strategies.
• Margin Improvement: Anticipated increase in gross margin for tech and services, currently around 50%.
• New Clients: Positive feedback on the enhanced Performance Suite contract structure expected to drive acquisitions.
• Capital Allocation: Focus on internal product development and deleveraging.
• Oncology Trend: Operating within forecasted ranges, impacting 2025 performance.

Q&A Highlights

• Impact of Medicaid Cuts: A 25% membership reduction is considered manageable.
• Customer Transition: One large customer reverted to tech and services but may return to Performance Suite.
• Claims Audit: $1 million in out-of-scope claims addressed in final 2024 results.
• Auth Intelligence Cadence: Investments to result in a $20 million run rate value by year-end.

For further details, readers are encouraged to refer to the full transcript provided below.

Full transcript - TD Cowen 45th Annual Healthcare Conference:

Operator: Good afternoon, and thanks for joining us for our next session.

And we’re pleased to have with us Evolent Health. And presenting for the company is John Johnson, chief financial officer. And, you know, and, you know, really happy to have you here. Thanks, John.

John Johnson, Chief Financial Officer, Evolent Health: Thank you for having us.

Operator: Yeah. You know, maybe, you know, I think the question that everyone’s, like, really focused on, obviously, is performance suite. And, you know, obviously, the last year has been challenging, for for Evelyn. You’ve taken actions at the start of this year, right, to convert, it was a three quarters of the performance suite revenue, to an enhanced model, which obviously sort of changes the risk profile for that, both on the upside, but obviously protects you on the on the downside. You know, maybe talk to a little bit about how that model works and how that differs from what you had previously.

And and and I guess in that sense, you know, what is it about this that now gives you, I I guess, greater confidence, or that increases at least your confidence in taking risk in in specialty in the specialty model.

John Johnson, Chief Financial Officer, Evolent Health: Yeah. Thanks again for having us. As we think about how to capture the value that we know we’re creating in the Performance Suite relationships. We can look at, for example, authorization data and compare initially submitted requests for a particular therapeutic regimen with what was eventually and finally approved. And in that data, we see very consistently improvements of six, eight, 10, sometimes even 12% across a book for a particular partner.

So we know that the core value creation is there, and that drives not just better costs, but that is fundamentally better adherence to best evidence medicine. It’s driving quality for the members. One of the things that we saw happen during 2024 was at the same time as we’re creating that fundamental value, the underlying oncology trend, the pace of growth in oncology expenses was vastly exceeding the rate at which we were creating value. That’s something that, in a lot of cases, is fundamentally out of our control. That’s driven by number of patients who have cancer, for example, not something we control by mix of disease, not something that we control, etcetera.

And so one of the things that we’ve sought to do, in particular, as you note, over the last few months, is to transition our performance suite from a model that we had entering 2024 where the majority of the revenue in the performance suite was uncapped, meaning we could be running an 18% medical margin, in on the positive side, but there was no cap on our losses. Seeking to migrate that into more of a model where we are capped on both the up and the downside. And so we are capping our losses and also sharing more of the savings with our partners on the upside. That was a very deliberate trade off that we made as we came into 2025 to seek to align the value creation that we know we are executing on, because we can see it in the detail, to align that with our economics that are indexed on total cost for our scope within cancer.

Operator: And it’s it’s fair to think that, I think, you know, when when you give guidance previously or, you know, and and within the guidance to, you know, for ’25, it’s always been sort of within that band of, within the band of upside and downside relative to where those caps, which were a lot wider before to to where they are. So it’s not to say that because we’re capped, it it limits necessarily upside to to results. Is that a fair way to

John Johnson, Chief Financial Officer, Evolent Health: think of it? I do think that’s a fair way to think of it in particular relative to where we are today. Yeah. Alright. We noted, that our as an example, right, relative to these caps, our forecast for the midpoint of our guide for 2025 is a hundred and 50,000,000 that assumes a 12% year on year cancer trend.

So increase in expenses per member adjusting for Medicaid redeterminations. Because of where we are in these corridors with some of our customers, there’s some asymmetric upside to us, where if trend is 2% better, 10% instead of 12, that is a $12,000,000 good guy to EBITDA. But if trend is 12 or 2% worse, 14% instead of 12, then we estimate that is a $9,000,000 EBITDA headwind. So that’s sort of how we think about where we are within those ranges.

Operator: Yeah. Yeah. That’s helpful. And you brought up, obviously, we’re kind of getting through Medicaid determinations, but Medicaid continues to be in focus, under some administration, you know, sort of expectations potentially for cuts. Just how much of a potential impact should we think of it for you guys?

Obviously, you know, that large customers are in that space.

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So look, here’s a way to range bind it, right, which is to say we have about 50% of our revenue this year that we expect would be in Medicaid and the exchanges. If there were a dramatic cutback to those populations, call it a 25% reduction in Medicaid and exchange membership, which would be massively dislocating for the entire country. But let’s take a downside case. That’s a 12.5% revenue hit to us.

If we’re assuming about $2,000,000,000 of revenue this year, that’s about $250,000,000 of revenue. A lot of that’s in the performance suite with relatively small margins. The marginal impact of that then to us on the EBITDA line is very digestible based on our midpoint of a hundred and $50,000,000 of EBITDA this year. It would be disappointing. But I’m also wanting folks to sort of get a sense for where those numbers are, and ensure that there’s an understanding that that’s not a an existential issue for Evelyn here.

Operator: Yeah. Yeah. Well well, let me come back to that again in a little bit, but, wanted wanted just to just jump back to performance suite, if I could. You know, you also talked about one of the when your larger customers that you have transitioned, to this enhanced performance suite, it actually elected to I’m sorry. Instead of moving to an enhanced performance suite, you kind of elected to go back to tech and services.

But you did note that there’s a potential to go back to performance suite in the beginning. Maybe talk about sort of the background of that. Like, why would a client who chose to go back to tech and services then wanna move back to performance suite? So kinda what gives you the confidence that that could happen?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So there are two different operating models. And as we’ve talked about before, within the tech and services suite, we’re generally investing less of Evolent’s dollars in operating and driving outcomes in that market than we are in the performance suite, because we’re not getting paid to do it. And so that is one reason why a plan might be interested in moving back into a risk model, because fundamentally, we are investing more in the network, in those relationships, and we’re driving, therefore, better outcomes. I think in a lot of circumstances across the managed care industry coming into this year, there were a number of health plans that had meaningful changes in their underlying membership.

And that gave some plans pause to say, let’s figure out what’s gonna happen this year. What is the membership profile of our plan gonna be like in 2025 after some of the changes that, we saw through AEP and redeterminations, for example. And and then let’s pull up and see once we know what the baseline spend is, and see if there’s a a risk deal to be done.

Operator: So is it is it the right way to think of it then, you know, this customer it’s not so much that they didn’t find value in Performance Suite. They recognize just with all the moving pieces, it’s hard to price a business that way.

John Johnson, Chief Financial Officer, Evolent Health: You got it.

Operator: Yeah. You know, I think on on the last call, you also talked about, the narrowing of scope for one complex care client and one advanced imaging client. You know, I I think people were trying to understand a little bit more about that and, you know, what’s the reason behind making this kind of change, you know, in in these instances? Because it’s a little bit different than, you know, what we just talked about

John Johnson, Chief Financial Officer, Evolent Health: earlier. Yeah. Yeah. And they’re quite different contracts, Charles. So, as you noted, neither of these contracts is within our core of oncology and cardiology performance suites.

We have one advanced imaging performance suite contract, one complex care, sort of total cost of care performance suite contract. Because of the structure of both of those, again, n of one contracts in each case, when we went to implement one of our priorities coming into this year across the performance suite, which was to narrow the possible range of outcomes, when we when we went to implement those changes for those two particular contracts, which again are structured differently than our standard, oncology and cardiology contracts, it’s our expectation that those changes will result in a change in the revenue recognition for those two clients. And so just to be really explicit, if we were previously recognized $100 of revenue, $90 of medical expenses, and $10 of medical margin Under our expected recognition in ’25, we will just recognize $10 of revenue and medical margin. So that’s all that’s happening, and it’s isolated to those two contracts, again, just because of the nature and somewhat unique nature of those two contracts.

Operator: Got it. Okay. Also, you know, one last thing just going back, and this kind of goes back to the the third quarter, right, when when you kinda talked about having a whole bunch of claims come in that, may or may not be within the scope. I’m not sure that you kind of gave a final, kind of verdict on, you know, what what ended up happening? Were were they mostly within scope in the end or were they some some not?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So we completed that audit as we were closing the books for 2024. We saw about a million dollars within that pool of claims that ended up not being within our scope. It was captured within our final 2024 results. But the vast bulk of those claims did turn out to be part of our scope.

Operator: Now is that just an issue on the client side on systems to get that information to you in a timely fashion or just it just wasn’t submitted early enough, I guess?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So our clients in the performance suite

Operator: Yeah.

John Johnson, Chief Financial Officer, Evolent Health: Where they’re paying the claims, which is the case in these two contracts, They are contractually obligated to send us a full accounting of what they paid each month. And what we learned, in as we were closing q three, is, for these two clients, there were certain paid claims that they had not been sending to us. That was a massive problem. We’ve done two things, to ensure that that’s not going to happen again. The first is we’ve sought to insert into our contracts teeth that limit our liability in the event that claims that are paid are not delivered to us on time.

And the second and more important change is to assert a requirement with our partners that we have more direct conversation and interaction between the medical economics teams at Evolent and at the partner to do much more frequent reviews and comparing, for example, here’s what we’re seeing in the lag triangles based on the claims that you’re sending to us. Is that consistent with what you’re seeing? Now that requires deep, relationships that we’ve built with these plans over time, and it requires an investment of time on the part of the plan partner. But it’s something that we’ve been able to demand given what happened last year, and we therefore are much more comfortable as we come into this year, that we have foreclosed on that possibility.

Operator: And have you so far, you know, we’re here at the March. Have has that been invoked? And are you already kind of reviewing Yes. You know, claims and okay. So it feels like it’s fair to say then your partners are are pretty much on board with this and

John Johnson, Chief Financial Officer, Evolent Health: Yes. That’s right.

Operator: More unlikely than not, that we’ll have a a similar repeat of of the claims issue.

John Johnson, Chief Financial Officer, Evolent Health: That’s right.

Operator: Okay. I wanna talk about auth intelligence. You know, so for MachineFi, can you talk about this integration of this with actually, the integration of auth intelligence, and give us some details on how the implementation of AI I think you talked about generating up to 20,000,000 of annualized benefit. How how does that come about? Like, what what is it what’s driving that kind of benefit?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So if you go into the operations, you know, we employ 1,500 clinicians, three fifty doctors, close to a thousand nurses, therapists, social workers, etcetera. And a lot of their day to day work is building administrative sort of support for then making a clinical decision. Ultimately, that clinical decision is typically made by the doctor. But there’s a tremendous amount of work that goes into some of these cases that can be quite complex, Where we see a real opportunity to deploy the generative AI or or other sort of leading technologies is in the compilation of that data and the removal of some of the administrative work that is required in this particular niche of health care.

That can mean making those reviewers more efficient. It can also mean eliminating upfront work because maybe the data wasn’t transmitted correctly the first time. And can we leverage auth intelligence or other platforms that we’re building out to ensure that we’re catching early an incomplete submission or something else. That’s the opportunity.

Operator: Yeah. So within that context then, I think you guys talked about $10,000,000 adjusted EBITDA impact from investments this year relative to the $20,000,000 in efficiency expected realized by the year end. Maybe give us a sense on sort of the cadence of that. Is it really think of it more in the in the first half of this year versus the back half? Anything that’d be helpful there.

John Johnson, Chief Financial Officer, Evolent Health: Yes. The way to think about it is the 10,000,000 in investments this year is a net number. And so we are investing more than 10,000,000,000 and expecting to recognize some of those efficiencies, in particular, as we get into the back half of this year, such that we are exiting with that $20,000,000 benefit as we move into next year. So we’ll see a nice year on year improvement as a result of making those investments. Some of those investments are one time in nature.

They won’t recur. And then, seeing the $20,000,000 run rate value exiting this year.

Operator: So we should be exiting at a $20,000,000 run rate value, but when we think about the investments relative to the benefit, net for the full year should be a $10,000,000 investment. That’s correct. Okay. I think you’ve talked about auth intelligence. You know, we’ll be able to generate, you know, up to 50,000,000 in annualized benefits.

What’s the timeline we should think of that way? If we’re exiting at 20,000,000 Mhmm. Is that maybe another two years after that? Is that Yeah.

John Johnson, Chief Financial Officer, Evolent Health: I think that’s right. You know, it’s, it’s certainly a multiyear trajectory. And I think importantly, we think of that as a net number, right, because we don’t exist in a static market, and it’s our intention to be able to use a leadership position in using this kind of technology to lower the administrative burden of health care. It’s our intention to be able to use that to gain share also. Right?

And so it’s not just a margin a gross margin improvement, lever, although that’s an important one. It’s also potentially a growth stimulant.

Operator: Does that does this change then the margin profile, for the T and S business? You know, I think we we have historically thought of it sort of like a a 50% margin business. Obviously, a little bit lower when NIA comes into it. Right? But, should we then think with this like most of this is just going to margin in that sense.

Should we the margin should be ticking up then?

John Johnson, Chief Financial Officer, Evolent Health: Yes. We fully anticipate that the gross margin of that business over time will increase from where it is today, which is about 50% as you note. Now it’s not going to go to 75%, right? Because we’ll seek to balance, as I noted, the pricing element of this as well and where we see an opportunity to drive share growth through being extremely competitive on price because we’ve done this work on our own unit costs, then we will take that opportunity.

Operator: Got it. I want to touch on guidance here. You introduced 2025 earlier when you guys reported fourth quarter. And within that, you had an adjusted EBITDA guide of $135,000,000 to $165,000,000 and you noted that the bottom end primarily reflected a buffer for the scenario. We’re trying to accelerate further in ’twenty five and that was sort of the 12% going to ’fourteen percent right when you talked earlier about oncology.

Can you maybe speak to the top end of the range? And what kind of gets you to a hundred 65,000,025? And is it really just simply where trend comes out? Or are there other factors that can help you get there?

John Johnson, Chief Financial Officer, Evolent Health: Mhmm. Yeah. Three factors, one of which is trend. And so a potential slowdown relative to the what we think is a pretty aggressive assumption of a 12% trend, and that’s higher than what we saw in q four, which is the highest we’d ever seen. That’s one.

Two is stronger underlying value creation within the performance suite. There’s real value to be had there. That’s something we focus on every year, but an opportunity to outperform there. And third is a faster implementation timeline of new growth, both in terms of what’s currently contracted and slotted across the year and in terms of potential outperformance on that growth. That’s most likely, even if it does lead to modest outperformance this year, it’s most likely to translate into a really nice setup for ’twenty six.

Operator: So of the three, you’d say that would be probably the least impactful on 2025.

John Johnson, Chief Financial Officer, Evolent Health: That’s probably right.

Operator: Then between the other two, which is the which which has the potential for the biggest impact? Is it just trend then, would you say? Or

John Johnson, Chief Financial Officer, Evolent Health: Yeah. I don’t think that’s the biggest variable. I think the offset to that are the initiatives, the value based work that we do put into place that’s responsive to that trend.

Operator: Any any is it too early at this point to see how trends are shaping up in oncology in the first quarter?

John Johnson, Chief Financial Officer, Evolent Health: Yes. It’s the short answer. The slightly longer answer is so far, the leading indicator data that we’ve been able to see is suggesting that we’re within our forecasted ranges. And so can no change to our expectation right now.

Operator: Any any reason and I I know I I think I’ve asked you this in the past as well. Any sense on why we’re seeing this elevated rate of change? Because, you know, this when you think about sort of the traditional or the historical rate of incidence of cancer, it’s not double digits. Right? And so it it does seem out of place.

And and now it’s been going on for, you know, more than a year. Mhmm. Any thoughts as to what’s at the root cause of that?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. So, you know, we think of this as, in two key drivers. There’s prevalence, which we define as number of active patients per thousand in a given month, and there’s cost per patient per month. And as you multiply those two together, you get total cost. We’ve seen meaningful acceleration within both of those metrics, significant spikes in prevalence that are not explainable by traditional factors.

The most obvious answer to that question is in some way related to the pandemic, delayed testing or something else. I don’t have a good exam a good explanation for why now, but that’s the best answer there. Within the cost per case metric, you know, that is driven by mostly new drugs and indications, so more use of checkpoint inhibitors, for example. That’s both an opportunity and a a a hit to us. Right?

That it’s a trend that we have to deal with within our performance suite, but it’s a dominant trend for, everybody who’s dealing with oncology expenses. And we think we are able to inflect checkpoint inhibitor expense, for example, towards best evidence care, much more effectively than any of our other competitors.

Operator: Is that also a function where they’re kind of related because if you are catching things later, you’re forced to treat more advanced stages cancer, which are by definition then more expensive treatments?

John Johnson, Chief Financial Officer, Evolent Health: Yes. Yes. I believe that’s a it is hard to isolate mathematically how much that’s contributing to the trend. But yes, I believe that is happening.

Operator: Yeah. We we touched on a little bit earlier. So you’re saying at least so far sort of that initial prior auth data that you’re coming through kind of says that you’re sort of in line with what you’re kind of expecting. Is that across just oncology or is it across cardiology as well? What are you seeing here tracking so far in the first quarter?

John Johnson, Chief Financial Officer, Evolent Health: Yep. Across cardiology as well. So the full performance suite based on again, this is all leading indicator data and it’s I’m always cautious about claiming that six weeks of data makes a line. So but with that proviso, so far across the full book, operating right within our forecasts.

Operator: Got it. Another piece that factors into sort of the guidance is an assumption on the impact for membership losses at some of your clients. And obviously within the MA space, all the players that, you know, membership has been sacrificed for margin, you know, its benefits have been cut. You know, we we start to see sort of the membership files come out of CMS. Just trying to get a sense on as you’ve kind of surveyed the impact relative to your your customers that are, you know, cutting members.

Mhmm. How is that tracking relative what you’re kind of putting out there?

John Johnson, Chief Financial Officer, Evolent Health: Exactly online with what we expected. So we put out JPMorgan a $20,000,000 headwind from EBITDA from membership declines, and that underlying membership change is exactly what we saw in the files that CMS released last

Operator: week. And is it is it fair thing that when we think of the membership impact, is that all in MA or is it across both

John Johnson, Chief Financial Officer, Evolent Health: The vast majority is in MA. That’s right.

Operator: Okay. And then if we think about it between Performance Suite and well, I guess it’s all tech and services now at this point. Right? So it’s I don’t know.

John Johnson, Chief Financial Officer, Evolent Health: It’s, it’s both. It’s both. You know, from a EBITDA perspective, that 20,000,000 is about half and half Performance Suite and tech and services.

Operator: Okay.

John Johnson, Chief Financial Officer, Evolent Health: Obviously, the revenue impact is much more dominant on the Performance Suite side, but the EBITDA is split fifty fifty.

Operator: Okay. You know, in a in a couple minutes that we have left, want to talk about, obviously, one of your customers. Right? You’re one of your big partners, you know, they have an issue with stars and they’re trying to get their star ratings back. And that, you know, obviously will have an impact on ’26.

So when we think about the membership impact that we’ve talked about this year, do we face another membership impact potentially in ’26? Or is that this is sort of encompassing both?

John Johnson, Chief Financial Officer, Evolent Health: It’s a good question. And I think the honest answer is it’s too early to know. You know, one of our core principles for this is we need to be a diversified business, such that if we’re growing over here or if one customer is seeing a headwind over here, then we can grow with this customer over here. And that’ll continue to be our goal.

Operator: And then maybe that’s a nice segue into sort of, you know, what’s the pipeline looking like for new customers? Obviously, you announced a couple on the fourth quarter here. Mhmm. You had a great year in signing new partners last year. Maybe you get a sense.

Has this new enhanced contract structure, as you’ve kind of now pitched that into the market, has that had a more positive impact on how partners are looking at it?

John Johnson, Chief Financial Officer, Evolent Health: Yeah. I mean, the flip side of having a tough year last year on the the medical expense ratio side is that every other, entity out there who’s managing oncology risk also had a tough year. And that made for a very productive selling season last year, best business development year we’ve ever had, and it’s shaping up to be a very good year this year, really across the book, both in tech and services and in Performance Suites. I think the reaction, as Blackley noted on the earnings call, the reaction to this two point zero model in the Performance Suite has been very positive. It’s a symmetrical change.

We need our losses capped, but we’re going to share more of the upside with the partner. And that seems to have some resonance.

Operator: And if you were looking to sub capitate risk anyways, it’s not like you necessarily wanna bring it back to begin with. Right? There’s a whole reason you’re looking to to subcapitate it out. Right? So That’s right.

Okay. Well, we’re coming out of time. Last quickly, capital allocation, anything that, you know, to think about here?

John Johnson, Chief Financial Officer, Evolent Health: Yep. No. Priorities haven’t changed, which is we invest in internal product development. We will continue to do that this year and then a sort of firm commitment this year to deploying free cash to delever, which we will do.

Operator: Sounds good. John

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