Evolent Health, Inc.

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, 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. I will now hand the call over 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. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measure 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 Evalent investor relations 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 supplemental investor presentation. And now, I'd like to turn the call over to Avalyn's CEO, Seth Platt.

Good evening, and thank you for joining the call. Earlier this afternoon, we released third quarter 2024 earnings and a revised 2024 outlook that fell short of our expectations for adjusted EBITDA. As we will discuss, these results are driven by several factors, most notably a rapid increase in oncology costs, referenced frequently by the managed care companies over the last several weeks. 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. Anytime everyone falls short of the expectations we set, that's ultimately on me as the CEO. Let me give an overview of the impacts in the quarter and how we're addressing them before handing it to John to go through the financial details. 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. 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. 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 versus our forecast for the quarter when we set our Q3 guidance in early August. This included two components. 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. This factor drove $24 million in higher net expenses in the quarter related to prior periods versus our expectations. And second, we experienced an acceleration in medical costs in August and September after a period of relatively flat experience between March and July. This new acceleration drove an additional $18 million in increase in medical expense for the third quarter compared to our expectations. On an incurred basis in the quarter, some markets with a small number of customers had medical expense ratios over 100%. We believe the unusually high medical cost inflation in the third quarter in our specialty performance suite was driven by a confluence of factors, including significant increases in disease prevalence, Medicaid determination-driven adverse selection, rapid increases in unit costs, post-COVID acuity increases, and provider coding intensity. 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. This quarter's spike in medical expenses is unlike anything we've experienced since launching the performance suite offering six years ago. We're moving rapidly to take four actions to address this issue. First, we're working closely with our partners to update reimbursement rates according to our contractual provisions. 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. 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, 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 1, 2025, to effectively align with the elevated prevalence, acuity, unit cost, and overall expense seen in the new data we've received since our last earnings call. John will provide additional detail on this plan shortly. 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. 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 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. 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. We estimate that our quarterly adjusted EBITDA would be approximately $50 million a quarter if we converted our money-losing performance sweep markets to technology and services. This opportunity creates, we believe, a theoretical adjusted EBITDA floor for the business before any new growth or successful performance suite rate increases of over $200 million per year, all of the things being equal. While this fourth lever of terminating risk arrangements is an available option, we continue to believe the performance suite is the most attractive model for both our partners and for Evelyn. We continue to believe that performance suite model drives leading clinical results and that our customers recognize the differential value we create. Based on past experience, we're optimistic and believe that we will be able to align on rates with these partners. Before John goes through the details of the quarter, I want to communicate where we are on our multi-year outlook. While we're disappointed in our revised outlook for adjusted EBITDA in 2024, we intend to use this moment of industry dislocation to maximize Evelyn's long-term enterprise value. We believe we have exceptional products that can drive favorable member outcomes and lower costs in the most complex specialty areas. We are well-capitalized and cash flow positive and can weather challenging industry dynamics. Therefore, we are reaffirming today our long-term expectations of growing annual adjusted EBITDA by at least 20% on average. However, given the unprecedented increase in medical expenses experienced by the industry in 2024, 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. We're also reaffirming our long-term expectations for revenue growth of 15% plus, except in any one-time shifts from risk to non-risk relationships I mentioned earlier. We will update the market on our near-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. I'm now going to hand the call over to John to get into the financial details.