Evolent Health, Inc.

Welcome to the Evelyn Earnings Conference Call for the second quarter ended June 30th, 2024. As a reminder, this conference call is being recorded. Your hosts for the call today from Evelyn are 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 titled Investor Relations. I will now hand the call to Seth Frank, Evelyn's Vice President of Investor Relations.

Thank you, and good evening. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. 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 second quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the investor relations section of our website or in the company's press release issued today and posted on the IR section of the company's website, ir.evalent.com, and the form 8K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and the supplemental investor presentation. And now I'd like to hand the call over to Evelyn's CEO, Seth Blackley.

Good evening. Thanks for joining the call. Tonight, I'll go through the headline results for the quarter and update you on our three pillars of shareholder value creation before handing it to John to speak more about our financials and outlook. Evaluant delivered revenue just above our anticipated range, while profitability came in within our expected range for the second quarter. Today, we're updating our full-year 2024 adjusted EBITDA guidance. We're also reiterating our confidence in our $300 million 2024 year-end exit run rate target. To put the results and our outlook for the year in perspective, we have a number of important updates to share today. First, recall in the first quarter of this year, we noted a few performance suite markets with higher than expected medical costs due primarily to higher prevalence of disease. We also noted that our contracting model allows us to update our capitation rates to reflect these changes. Today, we're pleased to update you on our progress regarding rate increases from these performance suite customers. Specifically, we have aligned with our partners on new rates which we expect will contribute approximately $60 million in additional revenue on an annualized basis. We expect to capture approximately $35 million of this rate benefit in 2024. Based on the partnership dynamics with our payers in an environment where they are under pressure, we have prioritized setting the correct rates for the balance of 2024 and for 2025 over retrospective rate increases. Given that, we anticipate the majority of the economic benefit of these rate increases to begin in the third quarter of 2024 and not retrospectively. 2024 came in slightly lower than the midpoint, but we now have high confidence in reaching our target year-end exit run rate of $300 million in adjusted EBITDA, as well as a strong setup for 2025. More importantly, we believe this outcome clearly underscores the fundamental value creation our solutions deliver to our customers. With respect to overall utilization trends in our performance suite, expenses were in line with our expectations for Q2 and were consistent with elevated levels suggested by the leading indicators previously noted in March. We saw these same leading indicators decline in Q2, suggesting potential utilization improvement into Q3. However, our full year guide assumes baseline third and fourth quarter utilization trend levels will remain consistent with Q2 levels. That is, we are assuming trend to be stable, neither improving nor deteriorating. And to achieve our $300 million adjusted EBITDA exit run rate, we are assuming normal margin maturation improvements consistent with our historical experience. As John will detail in a moment, As normal course margin maturation, we expect to drive approximately $7 million in increased quarterly adjusted EBITDA by the end of the year. To achieve the top end of our range or higher, we need to slightly outperform our historical margin maturation pace or see utilization trends return to 2023 levels. However, because the rate increases are fully in effect by December 31st, 2024, we have high confidence in reaching the $300 million run rate exit EBITDA, even if utilization trends remain at the 2024 average levels and don't return to 2023 levels. Regarding Medicaid redeterminations, we believe we have substantially captured the impact of this process in our revenue and earnings through the second quarter, and this issue is now in the rearview mirror. Finally, I'm pleased to announce today four new revenue agreements from the second quarter, adding over $70 million in new annualized revenue bookings across performance suite and technology and services, with the latter closing out our tech and services new business EBITDA go-get towards our $300 million run rate target. Taken together, as a result of these factors, we have confidence in our path to significantly improve the performance suite and enterprise margins and adjusted EBITDA for each of the remaining quarters of 2024 within the range provided today. Evaluating where the business stands today, I continue to feel excited about Evelyn's future. We continue to see a strong pipeline, which we believe is reflective of high demand for our solutions from the leading payers around the country. We have a $150 billion addressable market and over $50 billion in cross-sell opportunity. We believe our portfolio consists of an attractive balance across different customer types and sizes and revenue models across fees and risk. With that, let me turn to the results. Second quarter 2024 revenue was $647.1 million. totaling year-over-year growth of 37.9%, all organically driven. We averaged 39.9 million unique members in the quarter, with an average of two products deployed per unique member, for a total of 79.9 million product members, a modest sequential decrease due to anticipated Medicaid redeterminations. Given that we'll start to recognize the majority of our anticipated rate increase in Q3 and not Q2, Adjusted EBITDA for the quarter was towards the lower part of the range, totaling $52 million. We ended the quarter with a strong cash position of $101 million in cash and equivalents after the outflow of $89 million in cash for the earn-out to the former owner of NIA. Turning now to our three pillars of shareholder value creation, I want to update you first on our organic growth. We're announcing today over $70 million across four new revenue agreements that we anticipate will go live in the coming months. Of the four new revenue agreements, two are performance suite and two are for specialty technology and services. The two performance suite expansions are for Medicaid and commercial in Ohio and Wisconsin for an existing performance suite customer, and they're expected to add approximately $60 million in new annual revenue. In specialty technology and services, we are seeing exciting growth and growing traction among Blue's plans around the country. In the quarter, we want an RFP to provide our comprehensive oncology technology and services solution for one of the five largest Blue Cross Blue Shield plans in the country. This plan was an existing NIA customer and has selected Evelyn to provide medical and radiation oncology services. as well as care navigation services across over 2 million of their members. We also expect this will be our first deployment under the Evalyn umbrella of the Careology care navigation product announced in May. Secondly, we secured a significant line of business expansion with the Midwest Blue Cross Blue Shield plan for MSK solutions within technology and services, expanding existing services to this client's Medicare membership. beyond existing lines including Medicaid and commercial. We expect these new agreements to contribute approximately $10 million in annual revenue when they go live, and these agreements close out the remaining new revenue bookings go-get towards our $300 million exit run rate. The four new revenue agreements announced today brings us to a total of 11 for 2024 sales cycle with one more quarter to go. Turning to operations, we completed a number of successful large-scale go-lives during the quarter. One example worth highlighting was implementation and deployment of our national radiation and surgical oncology solution to a large national health plan. This implementation marked the first time we rolled out our surgical oncology solution and the first time we implemented on a full 50-state basis in one go-live. Recall, we announced this agreement back in February where we already provide national medical oncology technology and services across several dozen states. In addition, we also had a successful rollout early in the quarter with our first cross-sell of an existing Evalent client with imaging solutions. One other successful large-scale implementation to highlight was with one of our national partners for the specialty technology and services in the Midwest, New products included medical and radiation oncology, as well as interventional cardiology for over a half a million numbers across all three major lines of business. We continue to be pleased with the progress of our services and solutions team has made in supporting higher scale and increasingly complex implementations. Looking at the sales pipeline, we see significant demand that we can anticipate to continue to drive meaningful top-line growth for Evelyn. In speaking with payers across the country, it seems clear to us that health plans increasingly need effective strategies to manage high-cost, complex, and rapidly evolving medical specialties. We understand and align with where healthcare is headed, moving beyond the limitations of traditional utilization management to providing advanced condition management solutions. We believe these solutions lower abrasion with providers, improve satisfaction for patients, and provide higher quality care. Taken together, our positioning and competitive advantage remain highly differentiated, and we're optimistic regarding the setup for a strong growth year in 2025. Let's turn now to our second operating priority of expanding profitability. Our profitability and our value proposition are built on our ability to drive more clinical value than anyone else in the market. I'd like to share a few examples of what our clinical value creation looks like in real life for our customers. First, in our work with one of the largest community-based cancer specialists in the country, located in the southeast, we drove a 77% decline in designated low-value regimens, which directly leads to higher quality and lower cost. We achieved this result using the full breadth of our performance suite model, alternative payment models, scorecarding, and direct peer-to-peer engagement. Another example of clinical value creation can be found in our cardiology performance suite in another state in which we were able to drive a 20% decrease in the interventional cardiology costs in year one of an implementation using optimal medical management and guideline-directed medical therapy. Importantly, these financial results also improve quality of care for patients. These examples demonstrate the way our scalable approach can drive value far beyond what is achievable through traditional models. In fact, we believe our approach of implementing clinician engagement strategies, such as peer-to-peer discussions and alternative payment models, help reduce denials. For example, in one Midwestern state, we recently demonstrated a denial avoidance rate of over 90% based on high-quality peer-to-peer consultations. We believe this is how healthcare should work for complex care. are world-class experts having thoughtful, data-driven conversations with the treating physicians about the right care for the patient. This model, we believe, improves the experience but also avoids delays, frustration, and red tape associated with the traditional payer utilization management model. Let's turn to our third principle of discipline to capital allocation. It's a good time to talk about our operating efficiencies. We're pleased to announce the closing of the Machinify transaction we announced back in June and are rapidly ramping integration and implementation activities across our product portfolio. We acquired the Machinify technology and team after a comprehensive search of competing AI technologies that were relevant to our products. We found the technology and platform deployed by Machinify to be the most advanced and the most consistent with our vision for AI and specialty condition management. As a reminder, we've described two immediate benefits of this technology to Evelyn. First, in scale deployments with a large payer, Machinify has demonstrated up to a 55% reduction in clinician review time. Evelyn will spend about $150 million this year on clinical staff with continued rapid growth forecasted in years ahead. Using this technology to streamline the workflow of our expert clinical teams, we believe will enable them to work at the top of their license, deliver incremental value to our members, and absorb our growth, which in turn should drive meaningful operating leverage for Evelyn. The second benefit is an expansion of our product offering for clients and prospects. The Machinify product provides a holistic solution for payers for specialties and general authorizations where we do not focus, including inpatient admission reviews, long-tail specialties, and other areas that require conformity to health plan medical policy. Machinify can be sold to our health plan partners as a SaaS solution, enabling our partners to cover the long-tail specialties with their in-house staff while Evelyn continues to manage the more complex specialties on an outsource basis. This combination model we believe allows Evelyn to serve our payer customers as a one-stop partner for the first time. At the moment, we're taking a measured approach to the implementation of this technology within our current development budget, though we do anticipate a lower capitalization rate of engineering resources as we start the integration. We continue to be excited about the potential of this technology and the impact we believe it will have as we target up to $50 million in annualized EBITDA improvement from the solution in the years to come. Looking ahead, our capital priorities remain the same. We continue to reinvest in the business, seek out accretive assets that accelerate our platform and maintain a strong balance sheet and prudent leverage ratio to maximize financial flexibility and strategic growth. Before I hand the call to John, I want to address a few issues on the policy front since we're in an election year and this topic will take on more oxygen as we get closer to November. In short, we're keeping our focus on the enduring theme of higher quality and lower cost, which is obviously has always enjoyed support by those on both sides of the aisle. Further, we believe our condition management model drives more of our value from patient navigation and provider engagement and further reduces any burdens on providers from the utilization management model. In fact, based on the examples we gave earlier and other data, we estimate that in oncology, over 80% of our value creation comes from actions outside of traditional utilization management, and we believe that percentage will go up in the time ahead. With that, I'll turn the call over to John.

Thanks, Seth. Let's unpack some of the key financial metrics for the quarter.

Revenue of $647 million outperformed our internal expectations. This included the recognition of approximately $5 million in higher revenue in the quarter related to the rate increases driven by elevated prevalence and acuity we experienced in our performance suite. This $5 million per quarter improvement will persist, contributing $15 million for the year. We anticipate new increases, totaling $10 million per quarter starting in July, for a total of $35 million for the year and $60 million annualized. Specific line of business trends were consistent with our expectations, including specialty tech and services revenue of $81.5 million, which was down $7.5 million sequentially, driven by a combination of Medicaid redeterminations and lower one-time quarterly revenue compared to Q1 2024. As expected, we did not receive any new data for the Medicare Shared Savings Program, and so did not book any incremental revenue in the second quarter, impacting comparisons to Q1 2024. In cost of revenue, we recognized approximately $10 million in favorable claims development from 2023 that was not offset by revenue refunds. This claims development represents about 1% of specialty performance suite revenue in 2023 and was consistent with our expectations. As a comparison, in Q2 of 2023, we recognized $6 million in favorable claims development from 2022, which was also about 1% of specialty performance suite revenue in 2022, for a $4 million net positive prior period development relative to Q2 a year ago, and $5 million more compared to Q1 of 24. This favorability was offset by continued elevated medical expenses during Q2 in certain of our performance suite markets, which I will discuss more. Overall adjusted gross margin in the quarter was 16.7%. an increase of about 30 basis points from the first quarter of 2024. This increase is attributable to favorable claims developments offset in part by not recognizing shared savings from MSSP in the quarter, as we mentioned would likely be the case. Adjusted SG&A of $56.1 million is down $13.7 million versus the same period last year. the result of strong execution of our one-evaluent M&A integration program. Capitalized software development expense was $5.8 million, about flat to the same period the prior year. Page 4 of the presentation posted on our IR website lays out the key drivers of change in adjusted EBITDA from Q2 of last year to Q2 of this year. First, we have overcome two time-bound headwinds totaling 10.5 in quarterly EBITDA impact. Recall, in Q1, we completed the planned wind-down of certain administrative services clients. Comparing versus Q2 of last year, this represented a $4 million headwind to adjusted EBITDA. Note that this represented a $7 million headwind to gross profits, which was offset by a $3 million reduction in SG&A. On Medicaid redeterminations, we ended this quarter in line with our expectations for a total impact of $6.3 million since Q2 of last year. Gross Medicaid membership declines were approximately 15%, consistent with our expectations. Based on stable authorization trends across the second quarter and into July, we believe Evelyn's Risk Business captures the impact of redeterminations within our Q2 results. Importantly, we believe these aforementioned headwinds to be complete as of the third quarter. The timing of revenue recognition for MSSP was a $7.6 million headwind comparing to the prior quarter. So keep in mind this is timing only and does not reflect the change in our outlook for that program. Consistent with expectations, Q2 captured approximately $6.7 million of synergies from the NIA acquisition, with the remainder on track to be in place by end of year. Additional SG&A reductions beyond what is included in the administrative services run-out and NIA synergies categories contributed an additional $3.5 million. Maturation of our performance suite added $5.5 million of EBITDA versus Q2 of last year, and other net growth added $6.6 million. In other words, the core organic drivers of our business, drove $12.1 million in adjusted EBITDA growth compared to the same period last year. Now let's pivot to cost trend within performance suite year-to-date. Recall, in Q1, we recognized higher medical costs in some markets based on data from prior authorizations. Specifically, we saw increases in disease prevalence, acuity, and estimated cost per encounter. Based on the most current data from our partners, These increases have translated into paid claims consistent with our reserves at the end of Q1. An overall utilization trend in Q2 was consistent with Q1 levels but down from the March peak and higher than 2023 trend levels. Therefore, we continue to believe these increases were due to changes in the underlying populations and not caused by broader macro trends in our specialty areas. Fortunately, we have mechanisms in our contracts to increase our revenues if there are changes in disease prevalence or acuity. During the quarter, we secured increased revenue for several of the impacted markets to cover the elevated costs we highlighted for March and into Q2. We have also reached alignment with our partners for higher revenue in the remaining affected markets that we expect to start to recognize in Q3. we are also enhancing the mechanisms by which we update these rates with our partners, giving us good line of sight for rate sufficiency into 2025 and beyond. With these last rate increases coming into effect this quarter, we believe we will have fully covered the underlying changes in prevalence and acuity for the year. While the timing of this revenue beginning in Q3 impacts our original full-year 2024 outlook, We believe our ability to rapidly capture these updates speaks to the value of the aligned partnership we have with our customers. Finally, as a part of our thoughtful approach to risk management, we have also agreed with certain partners to carve a select number of markets out of our scope for 2024, which will modestly reduce our full-year revenue with no expected impact to adjusted EBITDA. This reduction in revenue is more than offset we have discussed. Turning to other key financial metrics, we completed our repositioning work on schedule during Q2, expensing the remaining $670,000 in the program. Overall, these repositioning investments have been the principal driver of the $13.7 million year-on-year decline in adjusted SG&A versus Q2 of last year. Stock-based compensation of $12.7 million in the quarter was consistent with our expectations. We paid $88.75 million in the quarter to close off the earn-out for NIA, electing to fund that liability entirely in cash, which increased our net debt to 2.5 times adjusted EBITDA at the end of the quarter. Year-to-date cash flow from operations is $26.3 million, which includes $22.2 million of the earn out payment. Excluding this classification item, year-to-date cash flow from operations would be $48.5 million. We remain on track towards our target of generating $150 million or more in cash flow from operations this year. As an organization, Our financial north star for almost two years has been achieving $300 million in adjusted EBITDA on a run rate basis exiting 2024. We believe securing the rate increases in the back half of the year and other factors lend confidence to our tracking to this target. Let's go through the path from our Q2 results of $52 million to this target, and I'll reference page five in the presentation. Note that as we think about the starting point for this bridge, normalizing Q2 for a typical amount of prior year development is offset by also normalizing for an average quarter of MSSP revenue recognition. First, we expect to add an additional $10 million per quarter in revenue increases for performance suite markets beginning in Q3. Second, the remaining capture of NIA synergies adds $2 million. we have captured 6.75 of the original $8.75 million opportunity. Third, go live of the announced but not yet live new business adds $4 million by the end of the year. We have captured $5 million of this original $9 million in our Q2 baseline and do not require any new business to reach the run rate target. Finally, the continued margin towards our target expectations adds $7 million. We have captured $5.5 million of the initial $12.5 million target we had for the year. Overall, we are pleased with the consistency of our progress towards this run rate target. Our outlook for the rest of the year also includes the following assumptions. First, stable disease prevalence and acuity at the elevated levels we have seen since Q1. Second, the capture of the anticipated rate increases going live this quarter. Third, continued strong execution in our performance suite, driving quality up and medical expense down. Fourth, the go-live of announced new business. We do not require any additional new business to launch this year to hit this revenue or EBITDA range. And finally, we continue to expect similar economics from the Medicare Shared Savings Program as we had last year. For the third quarter of 2024, we are projecting revenues of $615 million to $635 million and adjusted EBITDA of $60 million to $68 million. This revenue outlook for Q3 is impacted by an expected one-time true down related to the narrower risk scope I mentioned earlier. For the full year, based on the anticipated rate increases and new go-lives, we are raising our revenue range to $2.56 billion to $2.6 billion. Beginning in August, as Seth noted, we are reallocating some engineering expenses towards the Machinify rollout. This will have a temporary effect of lowering our software capitalization rate and increasing our operating expenses by $5 million, with most of the impact in Q4. and which we do not expect will continue past December, and therefore will not impact our exit run rate adjusted EBITDA of $300 million. Our updated adjusted EBITDA range is $230 million to $245 million, given the timing of revenue increases for our performance suite mentioned earlier, and the $5 million that, on a cash-neutral basis, shifted out of CapEx to OpEx, as I just mentioned. Our revised expectation of cash for software development CapEx for the year is $25 million, down from $30 million, and we continue to expect cash flow from operations to exceed $150 million for the year.

With that, let's open it up for questions. We will now begin the question and answer session.

To ask a question, you may press star then 1 in your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We please ask that you limit yourself to one question in the interest of time.

At this time, we'll pause momentarily to assemble our roster. Our first question will come from Ryan Daniels with William Blair.

You may now go ahead.

Hey, guys, thanks for taking the question, and congrats on the progress towards the recontracting. Given I can only have one, I'll ask a multi-part one, which you'll probably get a lot tonight. Can you speak to a few things there? Number one, it mentions in the release that guidance is predicated on the anticipated rate increases to go live, so I'm curious how visible those are at this point that you'll actually get them, number one. And then number two, when you talk about updating the mechanisms to get these rate increases in the future, can you double-click on that? I'm curious if it's something that makes it a little bit more formulaic so that it'll just happen without having to go back to negotiations or what that really means. So just a little bit more color on all that. Thanks.

Yeah, thanks, Ryan. I'm happy to take those. So, look, on the first question, we've aligned with our partners. This is across several different health plans, first of all, and I'd say in about the $35 million we noted for this year, about 40% of that is papered contractually. About 60% of that we've reached, I'd say, what I call alignments on what the business terms are, and we expect to paper it over the next couple weeks. So, you know, it's in the final stages. We feel good about it. I think the thing that underlines The broader point, and this is the most important point for Evelyn more broadly, is that, you know, we do feel, Ryan, like we create really unique clinical value. And so when you get to these sort of moments in a relationship being able to know that clinically you feel like you're creating more value than the next best alternative is really important from our perspective. So that's kind of where we are in that process in terms of the formulas. A lot of that is in most of our contracts. There are a few places where we're adding some additional detail, as we noted on the call. And, you know, I don't think it's ever going to be fully formulaic, just how the world is. And, you know, These customer relationships have lots of different facets to them, and we, at the end of the day, are really dedicated to our customers succeeding, Ryan. So it's never going to be formulaic, and we're all about partnering with them, but I do think it helps to have a framework set up.

Okay. Congrats again on the progress. I'll hop back in the queue.

Thanks, Ryan.

Our next question will come from Ann Samuel with J.P. Morgan. You may now go ahead.

Great. Thanks. Congrats on the quarter. I was hoping maybe you could talk a little bit about the decision to exit certain markets, what went into that decision-making process, and then how to think about the revenue impact for next year, realizing that there's no EBITDA impact. Thanks.

Hey, Annie. So this is a couple of markets with one payer that we're working on updating our risk profile given the elevated prevalence and acuity that we saw in some of these areas. And, you know, one of the tools that we have, in addition to raising rates, is to narrow our scope. And we and the payer decided collaboratively to do that here for this year retro to 1.1. I think in terms of scope, you sort of saw our raised revenue guide for the year. It feels quite swallowable to us, and we don't think it impacts next year's growth either on the top or bottom line opportunity in any particular meaningful way.

Thank you. Our next question will come from Jeff Garrow with Stevens.

You may now go ahead.

Yeah, good afternoon. Thanks for taking the question. I was hoping you could provide a little more context on the margin maturation for the performance suite. So first of the 7 million remaining, maybe you could comment on visibility into contracts that have launched over roughly the last 12 months, hitting that kind of initial inflection point to, you know, in some cases, I know from contributing zero EBITDA to contributing some once you hit that first initial milestone. And then if you could also give some similar comments on the $5.5 million that you've already captured from the first time you provided that bridge. How much is from initial contracts hitting that initial milestone versus the more dated contracts performing better than expected or I guess better than in past years? Thanks. Yeah, good questions, Jeff.

You know, it's a little of both, and let me break it down a little bit. As you note, we sort of think about this margin maturation curve in two ways. One is the initial release of actuarial conservatism that we have right as we go live for the first few quarters of a partnership. And the second is driving the underlying clinical value through the network, which we've noted usually takes some time. As you think about the progress that we've made this year that underlines that $5.5 million that I noted, it is a combination of both of those factors. As we think about then what's in the $7 million, we still have a little bit of that initial actuarial conservatism from some of the most recent go-lives that we would anticipate releasing in the coming quarters. And the sort of normal sort of everyday business of the performance suite in the market driving quality up and cost down continues and represents the rest of that $7 million.

Great. Thanks again for taking the question. Mm-hmm.

Our next question will come from Charles Rye with TD Cohen. You may now go ahead.

Yeah, thanks for taking the question. John, I wanted to ask about sort of the timing impact of Medicare Shared Savings that didn't occur. That was last year, but not this quarter. Should we anticipate we could see that in the third quarter then? And is that in the guidance, or would that be on top of guidance? And then secondly, When you talk about the higher rates, sort of $60 million on the annualized basis, is that right then we should see that benefit on a year-to-year basis as we go into the first half of next year? Thanks.

Yep, you got it. So on MSSP, you're exactly right.

We would anticipate when we see the final settlement from CMS for PY 2023, we will expect to have a revenue true up there to the final settlement number. We also, as we talked about before, typically start accruing for the current performance year revenue, so that would be performance year 24, in Q3. But all of that is incorporated into our guide. On your second question, yes. On a sort of like-for-like basis, as we move into next year, the rate increases that we start to recognize here in the second half, based on our expectations, will be a bit of a tailwind for us going into next year.

Great. Thank you. Our next question will come from Kevin Caliendo with UBS.

You may now go ahead.

Good afternoon, guys. Thanks for taking my question. You said that the rate increases are expected to offset anything that you see in terms of the elevated incidence and prevalence or an acuity. I guess what I want to understand is what you've been seeing since 2Q in terms of acuity and incidence. I know you have slightly more exposure to Medicare versus Medicaid. And recognizing that not all utilization is the same, can you maybe frame the relative exposure there versus the other? And if what you're saying implies that what you've seen since you've gotten these rate increases or negotiated these rate increases hasn't increased further, if that makes sense.

It sure does, Kevin. And the headline is exactly that, which is, from a prevalence and acuity standpoint, we have seen consistent stats really since March. To dig a little bit deeper on the utilization question, though, let me give a little bit more color. If you think about our core leading indicator is an authorization, and that authorization might be, let's take a cancer case. It might be for a checkpoint inhibitor where the authorization covers 12 weeks of treatment with an infusion once every three to six weeks. And so said another way, that authorization is translating into costs, i.e., utilization, both in the current month and then often in the subsequent month or two. And so what we saw in the first quarter was a ramp in those leading indicators to a peak in March that then, as we have now seen, translated into sustained elevated claims into the second quarter. The good news, as Seth mentioned in his prepared remarks, is that we've seen those leading indicators trend down since the peak in March. We're not assuming that that trend continues in our guide. That could be potential upside. But we have seen that trend down over the course of, in particular, the last couple of months.

Our next question will come from Jaylandra Singh with Truist Securities. You may now go ahead.

Thank you, and thanks for taking my question. I actually want to follow up on Kevin's question. So it looks like the cost trends in Q2, or essentially the leading indicators in Q2, are trending better than what you flagged for March last quarter. So maybe in March you called out higher cardiology costs in Medicaid, higher oncology costs in Medicare in some of the markets. Maybe give some colors in a particular category or pair type. You're seeing that all those indicators improving. Was it across the board? And how do I reconcile this with the fact that for the March, you called out 5 million headwinds from higher costs. You're getting around a 5 million monthly rate adjustment, which would imply the cost in 7 million range and the rule of thumb of 70% cost relief. Just hope those numbers make sense. Trying to reconcile that trends improving, but your rate update is actually reflecting higher cost trend.

Yeah. So here's what I'd say on that, Jalendra, and I'd go back to my point here that a leading indicator is just that, right? It's a leading indicator of costs that we expect to incur in the coming weeks and months. And so while we have seen a decline in the leading indicators, In particular, at the back part of the second quarter, the costs remained elevated, all right, and were only partially covered by the increase in rate, $5 million in the quarter that we noted. Hopefully that makes sense.

Anything you can call out on the type of pay or type of category you're seeing the improvement on those leading indicators? Sorry, that part was not answered.

Nothing in particular to call out there. It's pretty diverse, Jalendra.

Thank you. Our next question will come from Jessica Tassin with Piper Sandler.

You may now go ahead.

Hi, guys. Thanks for taking my question. I was just curious if you could maybe comment on any automatic triggers in your risk-based contracts that allow your rates to keep up with cost trend just because we've heard about the high single-digit trend in Medicare Advantage, and I'm curious to know if your contracts just automatically recalibrate to accommodate that trend, irrespective of kind of the acuity mix, or how that works on an annual basis. Thanks. Bye.

Yeah, Jess. So, you know, as I was mentioning earlier, it's not uniform across all clients. In certain cases, we do have... negotiated provisions that do automatically adjust the rates in certain other situations. It's more of a broad change event conversation that you didn't sit down with the client. So, you know, it's yes in some cases, no in others. Again, I think the fundamental issue as we do sit down, whether those exist or not, it's always a broader conversation with these clients because there's usually opportunities to grow. right, into new markets to add different lines of business and the like. And so these things do end up being, you know, broader conversations. And, you know, some of them are more automatic and some of them are broader, more integrated conversations.

Our next question will come from Richard Close with Canaccord Genuity. You may now go ahead.

Yes, thanks for the questions. Seth, I think in your comments you talked a little bit about the rate increases, and I think you said something with respect to 2025. Can you go over that again for us, please?

Yeah, so... You know, the way we characterized it, Richard, was around the portion of the rate increase, $35 million that affects this year. When you annualize that and go into a full run rate for $25, it's about $60 million. And so, you know, that's sort of the way we think about it. Some of those rate increases kick in kind of right at the end of the year going into January, and some of them are, you know, across this fall.

Okay, thank you. You're welcome. Our next question will come from Stephanie Davis with SVB Lear Inc.

You may now go ahead.

I see we have a throwback on the call. Very exciting. Guys, thank you for taking my question. Congrats on throwing the needle this quarter. I have a bit of a multi-parter. But in your prepared remarks, you talked of continuation of the environment. So to the extent that utilization is higher for longer, How are you thinking about how this factors into your pipeline and conversations with payer clients around specialty care management? Is it more attractive on a relative basis or is there more distraction so there's just less conversations to be had? And in terms of how it could impact the forward model, is there anything left to do in a hire for longer environment beyond the recontracting that's behind you?

Yeah, so first of all, on the pipeline, you know, this has been a theme for a while, multiple quarters, I would say, that the pressure on the payer side is a positive for us on the pipeline side. And, you know, I think when you think about the ways that payers manage costs, the specialty I'd say is very, very high, number one, number two on the list for many payers that we talk to, Stephanie. So we're seeing a lot of inbound demand for our products. You know, oncology has been an evergreen issue. The cardiology of late has been a pain point for a lot of payers in managing that one, but even MSK and down the line. So I think that's, you know, that's certainly... going to be part of the model going forward. I think, you know, to the extent that utilization ramped back up in some way, you know, we obviously have the ability to go back to and have those conversations that we talked about. And I think, you know, we also have additional clinical levers that we continue to pull in this current environment. We can continue to pull in that environment too, Stephanie. So I think, again, our job from our perspective is to be able to help drive clinical value that's in excess of what our payer partners can do on their own. And I think our view is if we're able to do that, which we think we can, you know, the kind of balance between rate and fairly sharing that, you know, increased value creation sort of takes care of itself over time. And I think that kind of goes to both of your questions, both on the pipe side, but also how we'd address it if it, you know, kind of ramped back up again.

Very helpful. Thank you. Our next question will come from Daniel Grosslight with Citi. You may now go ahead. Pardon me, Daniel, your line may be muted.

Daniel Grosslight Oh, sorry about that. Hey, guys, thanks for taking the question. You mentioned that around 60 percent of the 35 million of cap rate increases this This year, you have alignment with the payer, but it hasn't yet been papered. I'm curious, you know, what's preventing, I guess, that contractual obligation? And is there any risk that some of that either slips a little later or there's some disagreement or is it pretty much over the finish line at this point? And then secondarily, are you all done with cap rate increases at this point in time, or are there still some stragglers out there where you're still hoping to get a little more of a rate increase, and that could potentially be some upside either this year or early next year?

Yeah, Daniel, on your first question, the kind of 60% that's not yet papered. We feel good about the alignment that we've reached with our partners, and these things just take a little bit of time to get formally contracted, and usually when you do an adjustment like this, you might make a few other changes that need to be made at the same time, and these things just take a little while to paper, but we feel fundamentally good about the alignment that we have. You know, on your second question, no, there really aren't any stragglers. We've got our hands around the things that we need to have our hands around to drive towards the rest of the year guidance that we've provided.

Thank you. Our next question, pardon me.

If you have a question or a follow-up, please press start on one. Our next question will come from Jack Wallace with Guggenheim. You may now go ahead.

Yeah, thanks for taking my question. Just a quick question on the third quarter revenue guide. It looks like it's down slightly over $20 million at the midpoint. It should be, let's call it, an 80-ish run rate. But you're getting a 60 run rate back from the rate increases. At least in the press release, you talked about being mostly related to the one-time true down of the risk scope. But, you know, is there also an element there of just kind of a lower jumping-off point from the Medicare redeterminations? How should we just think about the kind of the bridge to the 3Q guide? Thank you.

Yeah, Jack, the principal driver there down from 647 in Q2 to the guide for Q3 is three-quarters of that retro true down for that risk scope narrowing.

Got it. Appreciate it. Our next question will come from Sean Dodge with RBC Capital Markets.

You may now go ahead.

Hey, good afternoon. This is Tom Scalera for Sean. Congrats on the positive update here, and thanks for taking the question. Just going back to the performance margin ramp, you've said 12% to 18% is possible there as those mature. How do some of those other capabilities you've acquired, like palliative care and genetic testing, play into that? as you build those into those engagements, does that help you get to the higher end of that range? And I guess maybe ask in a more straightforward way, is it possible to achieve and kind of stay at the 18% margin level there, or do you kind of have to maintain a strict alignment around 15%? Thanks.

Yeah, look, I mean, I think the mid-teens number that we've had on performance, we does require continued work. All of these things require continued work to continue managing, um, That's our clinical innovation. That's the thing that we're doing every year to improve our product. I think that also makes us better on the pipeline side. And, you know, with respect to the end-of-life piece, that, you know, is sort of built into that range that we think about as we continue to manage towards those targets. And, you know, I don't think I would characterize that as a source of upside necessarily for the $7 million of this year, but it is part of our multi-year plan to you know, continue to drive really strong clinical value back to our partners.

Thanks. Appreciate it, Kelly. Our next question will be a follow-up from Richard Close with Canaccord Genuity.

You may now go ahead.

Yeah, thanks for letting me get back in. Seth, on Machinify, you talked about I guess allowing customers to use the tool to analyze like inpatient and some other items there. When is that like actually live? And, you know, I think with all the managed care talking about higher inpatient trends, that that would be significant demand there.

Yes.

Yeah, I agree, Richard. That part of the tool is live today with Machinify's customer that we are working across there that they have when we acquire their assets. And it's available for us to bring out to the market. I just say in general, a lot of demand around that platform right now, Richard. There's a lot of payers that I think are looking for creative ways like this to... manage the long tail of specialties on a more innovative basis that are easier for the doctors to deal with and better for patients. And so I think, you know, that combined with our ability to kind of outsource and drive the really complicated specialties we think is going to be a pretty unique combination. And we're out in the market pretty aggressively right now with that platform, that demo, and having conversations right now.

Okay, thank you. It appears we have no further questions.

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

All right. Thank you for joining us tonight. We'll look forward to connecting over the coming days.

Thanks for the time. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.