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Evolent Health, Inc.
2/20/2025
Welcome to the Evelyn Earnings Conference Call for the fourth quarter and year-end December 31st, 2024. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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. 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 fourth 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 investor relations 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 will turn the call over to Evelyn's CEO, Seth Blackley.
Thank you for joining us this evening. Earlier today, we released our earnings for the fourth quarter and full year 2024. We've also provided our financial outlook for 2025. Both our 2024 results and our 2025 outlook are consistent with our expectations, and we're happy with the progress we've made over the last three months. To review, we ended 2024 with revenue of $2.55 billion, with growth of 30% versus 2023. Adjusted EBITDA of $160.5 million was within, but the low end of our guidance range provided in November. impacted by continued elevation in oncology expenses in our performance suite. Tonight, I will comment on our progress within our three pillars of stakeholder value creation of one, growing the business organically, two, expanding our profitability, and three, allocating capital to increase shareholder value. Then I'll update you on operational initiatives, which we believe will enhance our visibility into earnings, including in evolving our performance suite products. John will then go through the numbers for 2024 and our 2025 outlook, and we'll open it up for questions after that. Beginning with the first pillar of strong organic growth, the 2025 outlook we established today guides to a growth rate of approximately 15 to 18 percent after adjusting for one-time contract conversions and revenue recognition impacts. which John will go through in detail. According to the announcements today, we have high visibility in achieving this range based on both contract and business and strength of our pipeline. Now let's turn to the details of the revenue agreements and significant expansions we're announcing today. This quarter, we have two new revenue announcements to share. The first is a technology and services contract with a large health plan in New England, serving approximately 2 million members across multiple states. This plan, which is a legacy NIA customer, renewed its relationship with Evelyn, and importantly expanded our agreements to include new members, geographies, and lines of business, including Medicare Advantage. As part of the expansion, we also increased our scope of services and product offerings. For 2025, we'll cover an additional 1.9 million tech and services product members across cardiology, MSK, and imaging at typical PNPS. Second, I want to highlight a large primary care practice in the mid-Atlantic region that joined our complex care ACO for the MSSP performance year 2025. This group came from another ACO, and so the competitive win continues to demonstrate the strength of our work in this area. The practice will be using our complex care services for over 15,000 MSSP patients across 40 provider offices in their catchment area. In terms of other highlights, Our surgical management MSK offering had a strong growth quarter due to significant expansion with a large existing payer client in the Midwest and strong seasonal performance in the final quarter of the year. The sales pipeline continues to be strong and there are a number of deals we anticipate closing in the first half of the year with a strong outlook for further geographic and specialty expansion with a number of longstanding clients as well as newer organizations for both tech and services and the performance suite. Early sales results from our adjusted performance suite model suggest it will be well positioned for what the market is demanding. Finally, we're proud of our clients' satisfaction and renewal results for 2024. Despite a challenging environment and a number of performance suite renegotiations, we had a 100% logo renewal rate for our top customers in 2024, which together represent more than 90% of our Importantly, we recently extended our contract with Centene for an additional year. We believe this relationship extension represents the confidence and value that Centene sees in our partnership. The extension also includes several contract adjustments that will allow us to bring to bear important patient and physician-friendly automation initiatives to benefit our P&L in 2026 and beyond. Turning to our second pillar of margin expansion, I want to update you on both the performance suite and the technology and service businesses. As noted on slide five of the presentation issued today, we set a goal in November to quickly renegotiate three performance suite contracts to cover the unusual escalation in cancer medical costs we experienced in 2024. In January, we disclosed two of three contracts were fully secured for over $100 million in earnings improvement through improved rates and moving one contract for the time being to the technology and services suite. Today, we're reporting that we have now also signed the third agreement. Across all three agreements, we secured $115 million in projected adjusted EBITDA improvement compared to our Q4 exit run rate, higher than the total we previewed at an investor conference in January. We believe the rate increases along with enhanced go-forward contractual protections, restores Evelyn's oncology performance suite portfolio to profitability for 2025, and sets the table for additional margin expansion over time with approximately 300 basis points of additional margin maturation available on our current book of business. Consistent with our prior disclosures, we continue to forecast oncology cost increases in 2025 to be 12% at the midpoint of the range. As John will discuss later, we feel confident that this assumption creates a conservative starting point for 2025 guidance. Regarding our technology and services business, we continue to invest in automation and efficiencies to drive increased margins and better patient experience. We have integrated the Machinify auth assets acquired in 2024 into our platform, now rebranded Auth Intelligence. The platform is on track and is live in our first new test markets. Based on early returns of this and our other efficiency work, we are currently expecting to achieve an improvement in our direct costs exceeding $20 million annualized by the end of 2025 relative to our run rate coming into the year. Longer term, we continue to expect the net value of these efforts will be over $50 million annually once fully ramped up. Importantly, we believe this is more than cost efficiency. This innovation fundamentally reflects faster and more effective service to physicians, health plans, and patients that reinforces our strong position in the market. While meaningfully accretive to 2026 and beyond, we do expect net implementation costs for this AI-based automation work to be a drag on 2025 adjusted EBITDA of approximately $10 million, and that one-time investment is reflected in our outlook today. Finally, regarding our third pillar of efficient capital allocation, our priorities are unchanged, primarily investing in internal product development and reducing leverage. The executive team is highly focused in the near term on executing our growth objectives and accelerating operational excellence. Longer term, we expect M&A to be a component of our strategic growth plans as well. Before I hand it to John to go through the numbers in detail, let me step back and highlight the bigger picture as we see it today. After a tumultuous year in the healthcare industry in 2024, we believe Evelyn enters 2025 in a position of strength. We have a solution to an important and growing problem facing Americans. We have contractually improved our ability to forecast earnings with narrowed ranges for our performance suite business. And we're pursuing a clear shareholder value creation plan. The need for condition management in complex conditions like cancer and cardiovascular disease has never been greater. To give an example, in oncology, the United States is expected to see over 2 million new cancer cases this year, a record high, surpassing the 2 million mark for the first time. The growth in cases is due to increased diagnoses from many common cancers, as well as the aging and growing population. Incredible advances in targeted therapies have contributed to significantly extended lifespan for many cancer patients. At the same time, the cost of these therapies can be staggering. For example, a year's worth of checkpoint inhibitor infusion can cost Medicare nearly $200,000. For certain indications, the therapy provides a clear benefit. For others, the science is less clear, instead resulting in patients wasting precious time pursuing treatments that are unlikely to work. We believe that patients and physicians deserve access to the best clinical information that is available today. Providing that information is core to our mission. We do believe Evelyn provides a clinically driven model that supports treating physicians and their patients with these conditions, seeking to offer guidance through both our technology and physician peer-to-peer interactions. In 2024, Evelyn physicians conducted over 240,000 peer-to-peer conversations to understand nuanced patient needs, and to provide evidence-based guidance to treating physicians. That's close to 1,000 physician-to-physician touch points each day. Our team of over 350 physicians are able to review and analyze significant volumes of the latest, most relevant clinical evidence, providing real-time clinical recommendations on an individualized basis. Our clinically focused approach, we believe, positions us well in a world of rapid scientific and technological advancements. This model also has outstanding results today. We've demonstrated that our work often increases adherence to best evidence by over 20% in key conditions. For example, in cancer care, we often see average adherence to our best evidence of approximately 65% before everyone enters the market. at above 80% after Evelyn has engaged in that market for at least a year. This improvement increases the quality of care for the patient and, on average, reduces the cost to patients and payers. At the same time, Evelyn's satisfaction scores from physicians and staff have historically been in the 80% range, demonstrating our ability to drive change through collaboration and clinical credibility. We pursue this aim guided by our values at Evelyn. At the core of our values and our mission is to ensure that patients are receiving the same care we would want for our own family members. In an era of national debt crisis and high annual healthcare premium increases hitting all Americans, we also believe that we have to be able to balance affordability on these complex treatments. For example, a recent study by the Blue Cross Blue Shield Association showed that removing work similar to what Evelyn does for patients and physicians would cause immediate health care cost inflation of up to 10%. Because of this delicate tension, the need to manage health care affordability, but do it through collaboration with physicians and with patients' best interests first, we believe Evelyn will be a durable, growing, and important part of the health care system for many years to come. With that, let me turn it over to John, who will review the financial highlights and our 2025 outlook.
Thanks, Seth. Revenue in Q4 was $646.5 million across an average of 83.5 million product members. Our product membership was up by 4% year-over-year, despite a 6% estimated headwind from Medicaid redeterminations. Q4 adjusted gross margin of 11.9%, represented steady state margins in our tech and services business, offset by a lower performance suite margin of 3%, dominated by losses of negative 7% in our oncology book. Adjusted SG&A of $54.4 million was seasonally higher than Q3 and approximately $3 million lower than typical due to lower incentive accruals. On the balance sheet, we ended the quarter with cash and equivalents of $104 million. Cash used in operations was $26.2 million, driven by working capital needs as we initiated reconciliations for certain loss-making performance suite contracts that have since been restructured. Net leverage on 1231 was 3.6 times. Note that our 2025 convertible notes due this October are now reflected as current in the accrued liabilities line. As planned, we borrowed our available credit facility at the end of January. and adjusting for that transaction, cash on 1231 would have been 300 million, leaving significant available cash for liability management across 2025. Our claims reserve into the quarter at 318 million, modestly up from the Q3 balance despite lower performance suite revenue, reflecting our conservative reserving approach. Prior year development in the quarter was minimal. Let's go to our 2025 outlook. We are projecting organic growth of 15 to 18% off the 2024 reported revenue results adjusted for one-time contractual updates, which we refer to as adjusted revenue in the accompanying presentation. These adjustments result from changes to three performance suite contracts. First, the conversion of one large oncology performance suite contract to technology and services as discussed in January. Second, we are making changes to the contractual terms of two additional specialty performance suite contracts, one in complex care and one in advanced imaging. We expect these changes will result in net revenue recognition for these two contracts, as opposed to current gross revenue recognition. This will also have the effect of simplifying our performance suite revenue reporting to focus on our core of oncology and cardiology. Importantly, Neither our 2025 expected profitability nor our long-term margin expectations for these two contracts are impacted by these changes, and this revenue recognition change does not affect any oncology or cardiology contracts. We will continue to report these contracts in our performance suite as the bottom line opportunity is unchanged. As page five of the presentation shows, these two contracts are separate from the three performance suite renegotiations And again, the only material impact from these changes will be on the revenue recognition front. In total, across the one performance suite flip to T&S, plus these two revenue recognition changes, these conversions represent a one-time reduction of approximately $765 million in revenue across three clients for an adjusted baseline of $1.79 billion. Our 2025 revenue guidance is therefore 2.06% to 2.11 billion. As you can see on page eight of the presentation, this forecast assumes one-time headwinds from membership changes in 2025 of 7%, offset by expected growth of 22 to 25%. We are projecting similar top line revenue in MFSP as experienced in 2024. On the bottom line, we are projecting adjusted EBITDA between 135 and 165 million. The presentation shows a bridge from Q4 actuals to the midpoint of this range. Normalizing Q4 for seasonality and incentive accruals and adding in the benefit of the 115 million in improvements from our performance suite negotiations results in an exit run rate of about 178 million. As previewed at the investor conference in January, we are forecasting approximately $45 million in headwinds this year, including $20 million from partners exiting certain of their health plans, mostly in MA, and $25 million from our assumption of elevated trend in oncology. In addition, as Seth noted, we are accelerating our work in automation this year to capture significant benefits in 26 and beyond, which will impact our 2025 EBITDA by approximately $10 million from one-time investments. Finally, our guidance midpoint contemplates adjusted EBITDA expansion from organic growth of 25 million, which is inclusive of items that have been announced but not yet implemented. At the midpoint of our guidance, we project 20% of profits to come from our performance suite and 80% to come from our fee-based business. Page six in the deck shows additional detail regarding the oncology trend for 2025. In Q4 of 2024, we estimate that the experienced year-over-year growth of 11% in oncology expenses after adjusting for the impact of Medicaid redeterminations. As we previously noted, our historical annual oncology cost increase has been approximately 8% under normal conditions. Based on the acceleration we experienced across the fall and the desire to ground our outlook in an appropriate level of conservatism, we are assuming oncology cost growth in 2025 of 12%. Besides this for you, our 2024 performance suite margins declined by approximately 800 basis points relative to our six-year historical average. We project that the rate increases and contractual updates that Seth mentioned offset by this higher cost trend will recover about half or approximately 400 basis points of that decline. While the adjusted performance suite features will cap our medical expense ratio in high-cost environments and put a floor on it in lower-cost environments, we do believe that a stabilization of trend will enable at least 300 basis points of additional margin over time in the performance suite as compared to our 2025 guide. I'd like to give a concrete example of how we deliver on bending the cost trend each year. As Seth mentioned earlier, checkpoint inhibitors are one of the fastest growing categories in cancer therapy, delivering incredible outcomes for certain categories of tumor types with specific profiles. They are also one of the biggest cost drivers, with over $25 billion of spending growth from 2019 to 23 alone. However, a recent study estimated that while 56% of cancer patients are now eligible for a CPI treatment, only 20% are likely to respond. Working closely with the treating oncologist to identify early those patients who are non-responsive to a CPI requires deep clinical expertise and credibility, enabling rapid action to shift to a different therapy that is more likely to be effective for that patient. As an example of this approach in action, for a large Medicaid plan that went live in 2023, evident interventions during 24 led to a 10% decrease in total checkpoint inhibitor expense relative to initial treatment plans, actions that bend the cost curve in a way we believe no other entity can do at scale. We believe this results in more effective care for the member and more sustainable expense outcomes for the system. Finishing with cash, we anticipate working capital will be a modest drag on cash this year as we finalize client reconciliations from 2024 for underperforming risk contracts that have since been restructured. We expect to deploy approximately $35 million in capitalized software development, and we plan to deploy free cash generated by operations towards liability management and debt pay down, including our 2025 convertible notes and then our senior term loan. For the first quarter of 2025, we anticipate revenue of between 440 million to 470 million. We anticipate the first quarter of 2025 adjusted EBITDA will be between 31 million and 37 million. And in terms of earnings cadence, we anticipate that about 48% of our adjusted EBITDA will be generated during the first half of 2025. With that, I'll hand it back to Seth.
Thank you, John. In closing, I want to summarize our long-term value creation plan. Please take a look at slide four in the presentation for a summary. First, we plan to continue to grow our business organically at 15% per year or better off of the adjusted 2024 revenue baseline. Second, we plan to expand our margins through automation and efficiency enabling us to grow our adjusted EBITDA earning stream at at least 20% per year off of our 2025 results. And third, we will continue to allocate capital with discipline to support our growth strategy and drive strong cash flow over time. Based on the industry-wide challenges of the previous year, we have made strong progress on a fourth pillar of value creation. which is to enhance the visibility and consistency of our earnings by evolving our performance suite, as discussed earlier in the call. We reset our profitability baseline and have quickly migrated certain performance suite partnerships to a narrower, more predictable economic model, one where we are providing more upside for our clients and placing a cap on Evelyn's downside risk. To be clear, this is a trade-off as our long-term performance week margins in this evolved risk structure are lower than our traditional performance week. Needless to say, 2024 was a difficult year. As such, we understand the importance of reestablishing trust and credibility with our stakeholders. This begins with establishing an outlook that we can meet or see even in the face of historic cost trend headwinds. We believe we have done that, and we believe that the benefits of this approach to both our customers and our investors will become evident as we report results over the ensuing quarters. The team and I are proud of the rapid progress we've made entering this year, and we remain committed to delivering strong results across 2025 and beyond. With that, we'll open it up for your questions.
We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset, pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Matthew Gilmore with PPIC. Please go ahead. Please go ahead.
Hey, guys. Thanks for the question and all the details. Seth, it seems like you're trying to signal a degree of confidence with the assumptions on the 2020 time guide. Is it fair to say that confidence is coming from the oncology trend? in the higher weighting of even out of tech services and then the changes you've made on performance. Is that kind of how to think about it or are there other areas of service that you need to call out for us? Hey, Matt.
Yeah, I think that's the right way to think about it.
Yes.
And that is our intent. You're right to come into the year with a lot of confidence for the reasons I said at the end of the call of being very committed to being able to hit and you know, hopefully exceed our expectations throughout the year. And I'll let John talk a little bit about, I think it's an important data point, Matt, around what would happen if trend was higher or lower. And I'll let John talk a little bit about that, which I think is part and parcel to your point. Yeah.
Hey, Matt, just maybe to put some sizing around that 12% oncology trend. If you look at the size of that book this year, it was smaller than it was last year. And the corridors that we've put into place, we see some asymmetry here to the upside, where, for example, a 14% trend applied across the book, 2% higher than our forecast, would be a $9 million estimated hit to adjusted EBITDA. And a 10% trend, 2% better than our 12% forecast, would be $12 million to the good. So that hopefully bounds the level of volatility there a little bit for you.
Yeah, that's great. And then one clarification. You had mentioned 300-billion sort of margin maturation of performance suite. And separately, you had mentioned $50 million of efficiency for the longer term. Are those discrete items or does the 300 basis points encompass $50 million?
Yes, good question, Matt.
Those are discrete items. Great. Thank you.
The next question comes from Charles Rhee with TD Cowen. Please go ahead.
Please go ahead. Yeah, thanks for taking the questions. Maybe just a little digging into sort of the economy trend again. And John, I appreciate you kind of bounding the sort of the ranges on the volatility here. But if we think about that now you have about 75% of your performance suite revenue covered by sort of these enhanced features, including sort of rate adjustments for prevalence. Is it still right to think that the comparison between the 11% in 4Q of 24 and a 12% of 25 trend. Are these still really apples to apples comparison when we think about sort of the potential impact for you guys? And then I have one quick follow-up.
Yeah, it's a good question, Charles, because I think that they are different, right? If you look at the incremental protections that we've negotiated for this business beginning this year that, as you know, cover the majority of our performance suite revenue. And so, while there's certainly still motion within that book in terms of where does Med-X land unmanaged and how do we manage it down, the corridors on both the
CAP and the other side found that range a little more than we experienced last year.
Got it. And then as a follow-up, just wanted to hear a little bit more of an update on cardiology, just sort of the trends that you're seeing here given that, you know, I think it was Cigna that called out cardiac trend pressure on their call just the other week. So just trying to get a little bit of a better sense of what you're seeing here in this area. And then just as an aside, Seth, I just want to wish you a happy birthday as well.
That's how I've always wanted to spend my birthday, Charles.
Thank you. Yeah, cardiology, I'll take that one to start. It's a smaller trend, clearly, than in oncology. And while we saw a bit of elevation across 2024, most of that was explainable by our sort of prevalence metrics and so on. I will say that, you know, consistent with the oncology approach and our overall sort of outlook here, we are taking, we think, a conservative approach for cardiology trend as well in our forecasts for 2025. sort of modestly above what we experienced in 24. And it's certainly not nearly as large of a move here, Charles, as we're seeing in oncology.
But it's right to think that the way the contracts are always structured, it includes both oncology and cardiology in terms of sort of the narrower kind of risk corridors that you're facing.
That is correct.
Got it. All right.
Perfect. Thanks a lot. Thanks, Charles.
The next question comes from Andrea Alfonso with UBS. Please go ahead.
Hi. Thanks, everybody. And thank you, Charles, for flagging Seth's birthday. So happy birthday to you. I guess I just wanted to follow up and sort of just thinking about the puts and takes to EBITDA guidance for 25. You know, just curious which inputs, you know, could screen most conservative to you, such that it would represent the greatest swing factor, you know, to the downside. Because I'm sort of just looking at the bridge inputs and stress testing. I'm curious what really gets you to that lowest end of the $135 million ballpark, particularly after signing, you know, the new contracts. Is it just sort of a lack of organic growth? Is it, you know, oncology spend being just far worse than expectations? Thank you so much.
Yeah, it really is around feeling a desire to have a buffer for surprise medical cost inflation that is meaningfully beyond our current expectation. We feel, and so can comment on this, really good about what's in the bag and what's in the pipeline in terms of organic growth this year. And a lot of the other items that you see on the page are knowable. So that's really the source of potential variability in the year. The next question comes from Jalinder Singh with Truist Securities. Please go ahead.
Yeah, thank you. And thanks for taking my question. So I want to go back to the 12% growth in oncology trends expected in 2025. So on slide nine, when you talk about 25 million impact from that, that's just reflecting the annual impact of the trends you saw in late Q4, right? I'm assuming the late Q4 was higher than 11% you're talking about in Q4. So essentially, your guidance does not assume trends get any worse than where you exited 2024. And to that point, can you talk about oncology trends you have seen in 2025 thus far?
Yeah. So let me be really explicit here that the Q4 is our jumping off point, right? So if you look at the actual projected year-on-year trend for Q1, it is significantly higher than 12%. In large part because of Medicaid redeterminations. So just to be really precise there, the Q4 number is the jump off point here.
I guess that's the main answer.
And so the trend and anything so far to share for 2025, that's all?
2025. So as you can imagine, we don't have a lot of claims completion at this point. for the first six weeks of the year. But what we have seen so far in our leading indicator data, the authorization information, is consistent with what we would expect given this forecast.
Male Speaker 1 Okay. And then I missed the first few questions because there was some feedback. But on the one-third of your performance sweet book, which have not been part of your recent negotiations, it seems because they're running at matured margins. Can you provide any update on that book? And why do you not see a risk of higher cost trends impacting that book? Just trying to understand why not get proactive in terms of having some downside protections for those contracts as well?
Yeah, Jalinder, so the way we approached the renegotiations is really focused on where we felt like we had the most urgent need to make changes And in other cases, either because the original contract structure or protections or the way those given markets were running, you know, we didn't feel like the risk-reward on opening up the contract made sense. We always have that option, you know, in the future. And we would certainly look for opportunities to add those protections in when we feel like the risk-reward tradeoff is, you know, the right one.
Got it. Thanks, guys. Welcome.
The next question comes from Ryan Daniels with William Blair. Please go ahead.
Yes, Seth, I'll add to the happy birthday chorus, and thanks for taking the questions. Maybe a big picture one. I'm curious why you decided to narrow the scope for some of the solutions outside of the core onco and cardiology, you know, and simplifying reporting there. Was that getting ahead of any potential issues from lessons learned with what occurred last year with oncology, or was it a client request to simplify reporting? Just curious, what drove that, given that there's kind of not a bottom line impact?
Yeah, it's a good question, Ryan. Look, I'll say two things. One is driven by us, and it is principally around focus, right? As we are deploying our operating resources And the way that you're doing that ends up impacting on your accounting treatment and some of these capitation contracts. That is the rationale.
Yeah, and Ryan, I just added that, right? It's part of the whole theme. I hope everybody's feeling from this call and everything you put out, which is around consistency of results and narrowing any volatility in those results and say that those changes were consistent with that same theme, right?
And maybe I could ask a follow-up to that exact point to put a finer point on that. You mentioned earlier in the call that a 200 basis point uptick under the new contract terms would hit EBITDA by about $9 million. If we go back to the start of last year and I told you you were going to see a 200 basis point uptick off oncology trends, how would it have then impacted EBITDA? So it's $9 million now. How big of an impact would that have been before you did all this to kind of show us how much more visibility you have?
Yeah, it would have been 20 to 25, right?
It does tie to that. Okay. And then maybe last question, just the $10 million in kind of operational investments and platform, is all of that isolated to 2025 so that we should think of, you know, a $10 million hit this year? but then a $20 million yield in automation and AI next year, leading to a $30 million increase on a net-net basis for 2026? Is that fair or too aggressive?
That is approximately correct, Ryan. Without guiding for 2026, that is how we're thinking about it.
Okay, perfect. Thanks for the color. Again, happy birthday, Seth.
Thanks, Ryan.
The next question comes from Jeff Garrow with Stevens. Please go ahead.
Yeah, good afternoon. Thanks for taking the question. I want to ask about the $25 million in core organic growth in the FY25 bridge detail. I want to ask more detail on both timing and mix. So first on timing, we would assume that would be front half loaded, but want to check in there. And then on mix, we would normally assume zero profitability contribution from year one performance suite, but want to see if that assumption should change given some of the enhanced contractual features you guys have been implementing. Thanks.
Yeah, good question. So on timing first, you're right that The bulk of this will be driven by both annualizing some of last year and the go-lives that are principally already happened or are in process of happening during the first half of the year. So the bulk of the EBITDA will be driven by deals that are going live earlier in the year. On the top line, You know, the bulk of the growth there, on the prior page, is, of course, driven by performance suites. It should go live a little later in the year. And there, while we haven't changed our expectations for initial profitability of performance suite contracts, that is to say we don't expect much EBITDA from those go-lives this year, we do anticipate a faster ramp to the new mature margins, where prior we had talked about a three-year ramp to mature margins.
We now see that in, call it, 18 months.
Yeah, I'll just answer a question that hasn't exactly been asked that's related, which is, you know, the new performance relationships that we plan to go live with this year. And going forward, we'll have
So, Leonard, to your point, all the protections that we've been talking about. Great.
And then one specific follow-up there, I guess, would be the top five national plan performance suite win that was announced last quarter. Just any incremental update on the timing of that, I think, would be helpful given the size of it. Thanks.
Yeah. I mean, we would expect, you know, mid-year performance. towards the middle of the year when that starts to go live and we're, you know, everything feels like we're moving in the right direction.
Got it. Thanks again.
The next question comes from Anne Samuel with J.P. Morgan. Please go ahead.
Hi. Thanks so much for taking the question. I was hoping maybe you could just speak to your, you know, kind of pipeline for 2025 new partnerships and perhaps... You know, just given some of the pressure that you experienced this year, you know, what is your aptitude for adding more performance week contracts?
Yeah. And so, pipeline goes very good, as I mentioned in the script. I think any time you have this sort of dislocation that's existed in the market over the last year or two on cost and, you know, each plan tries to manage this tension around affordability and their pricing and membership and all of these dynamics, it's made for a really, really good sales environment. And that continues to be the case. I'd say our new performance suite model, right, that is narrower, shares more of the ups with the clients and has more protection for us, feels like it is working. And it feels like that, you know, is sellable in the market and meets the issues and demands of the marketplace. In terms of the specifics of, you know, this year and into next year, we continue to have a good mix in of, like, performance suite with the protections and tech and services, and I think that will continue. You know, in terms of this year specifically and the guidance for this year, we have, I think, really good line of sight, as I mentioned in the script, you know, doing the things we need to do to achieve the growth rates that we guided to.
Great. Thank you.
The next question comes from Richard Close with Canaccord Genuity. Please go ahead.
Yeah, thanks for the questions. You know, I understand the 25 guidance contemplates the MA market exits, but I'm curious how you're thinking about, you know, potential policy changes on the Medicaid side, maybe a cut in FMAP. you know, what that maybe does to your business from enrollment declines there. So, you know, that's 33% of revenue in 24. So just thoughts there. It's probably more a 26 impact if anything happens, but how are you thinking about it?
Yeah. Yeah. So look, I think you hit on one of the points, which is it's a diversified business. We've got a lot of Medicare, a lot of commercial as well. I mean, I think, With respect to Medicaid and really any line of business where you have pressure and compressed funding in some different way, it compresses the P&L or profitability of any given plan, that does have a negative on us. It flows through the membership in the short term. The flip side of it will be, I think, sales momentum around initiatives to help drive profitability back into the business. I think it'll be one of those yin and yang type issues. And obviously, we can't forecast where that is going to go specifically, when and how and the like, but that's how I'd answer it. And then the last thing I'd say is, again, whether it's Medicaid or any other line of business, you know, this far societal thing that's going on right now around healthcare, the debate of affordability and quality, I do think solutions like ours where we can help drive affordability and improve quality at the same time, you know, setting aside given changes in one year and the next, I think are going to have a tailwind to them, you know, over time because of the ability to achieve both of those objectives.
Okay. And maybe a follow-up, Seth. You mentioned the Centene contract extension and some adjustments there. Can you go over those adjustments and, you know, what is the benefit to you guys?
Yeah. Yeah, look, I mean, with all of our major key partnerships, Centene included, you know, we're always seeking to balance what's the right thing for the partner, what's the right thing for us. And I think we identify, you know, always with our partners are there opportunities to do something together that creates more value for both of us. I think the changes that we made collectively to this partnership are an example of that. We're going to be investing more in 25, for instance. But the things that we're doing with that, I think, create fundamental value for both of us. And we can share that value over time. And having an extra year on the relationship is part of making that equation work for them and us and making it the best possible partnership it can be in terms of efficiency and good for patients, good for physicians. So think of it as us investing more this year. particularly around some of these automation things and things that are better for patients and for physicians. And that then yields positive results for RPNL over time, and then there's an additional year added to the end of the contract.
That's really the summary of it. Okay, thank you. Thank you.
The next question comes from Jessica Tasson with Piper Sandler. Please go ahead.
Hi, guys. Thanks very much for taking the question, and happy birthday, Seth. So I guess I'm curious to know what percent of the performance suite book ultimately ended up being profitable in 2024? And just the questions really, you know, given the fourth quarter acceleration, was there an increase from that 50% of performance suite that was profitable as a 3Q to something less than that for the year? And then I have one quick follow-up.
That's a good question, Jess. The mix is about the same.
So the overall profitability curve shifted down, but those contracts that were underwater remained underwater, and those that were profitable remained profitable just slightly less so.
Okay. That's really helpful. And then just for the portion of the business that was profitable in 2024 and essentially wasn't subject to rate revisions or enhanced corridors, does that EBITDA level contract in 2025 because you're seeing trends accelerate and you're not protected by rate revisions? or enhanced corridors, or is there some other protection that we should be aware of there? Thank you, guys, again.
Yeah. There is modest contraction there, Jess, and that's a part of what I mentioned in my prepared remarks around seeing an 800 basis point decline, but then recapturing 400 basis points of that decline in 2025.
Got it. All right. Thank you.
The next question comes from David Larson with BTIG. Please go ahead.
Hi. Happy birthday, Seth. Can you maybe talk a bit about what your expected pricing increases are going to be in 25 and going forward? Because it seems to me like a 12% trend in oncology is not your new normal. And it also seems like a lot of the plans are raising premiums by anywhere from 10 to 15%. So I would think your starting point for any year going forward would be at least 10% growth in the PMPM rates you're collecting from plans. And then also in the three, two transcripts on page 17, it says that you were going to get 50 million of price increases in addition to the a hundred million. renegotiations, I would have thought that that $50 million would have offset the estimated impact of $25 million from the 12% oncology trend. So just any color on expectations for your price increases that you're going to see going forward, especially if 12% is your new normal. Thank you.
Let me say a couple of things and Seth may fill in as well. The first thing, whether it's in our business, narrow to oncology and cardiology, or in the broader managed care market, there's no world in which 10% to 12% annual healthcare inflation is sustainable. And so that's part of what we're seeking to do as part of the mission of the company. I do not believe, sitting here today, that a 12% annual oncology trend is the new normal. I don't think there's another forecast out there that would suggest that. It certainly, though, is what we are projecting for 2025 based on a variety of factors. How do we handle that from a pricing perspective? As we've talked before, you can think of this in two buckets. We have a standard annual inflator. that is based on a typical discount to a typical trend. So that might be 6% or 7% or 8% annually. And then we have a mechanical and formulaic update each year based on changes to the population that happened in the prior year. And so that might translate in a year like we're having this year to a 12%, 14%, 15% increase.
But I wouldn't expect that that is a new normal going forward.
Yeah, David, look, the only thing I'd add to it, right, is the way our business works, whether it's in a season like it, if we have now with higher inflation, lower inflation, we have to be able to be better than the next best alternative for our partners. And I think that's where we have a lot of confidence. We can then price to you know, whatever that delta is. And, again, the key to that is our ability to have the best clinical teams with the best evidence, technology, the right interventions, and the like, and they can remain really confident that, you know, we're going to fix the pricing in this case, but the fundamental value creation is going to always be a delta between what we can create and what, you know, a normal plan can create for our other competitors. And that's the key to, you know, our value propositions.
Great. Just one more quick one, if I can. Let's say there's an adjustment during budget reconciliation where Republicans ease up the pressure on the V-28, and there's a benefit to the plans. Is there anything in your contracts that will enable you to capture some of that benefit? Thank you.
There is no direct linkage between plans premium and our fees. So, no, although it's always easier in life to have happy partners.
Thanks very much.
The next question comes from Daniel Grosslight with Citi. Please go ahead. Hi, thanks for taking the question. Just had one about how to think about profitability in 2026. You've given us a few kind of factors here. The 30 million swing from investment in client efficiencies from 25 to 26, potentially 300 basis points of performance improvement if trend remains stable. I'm just trying to square that with the longer-term growth target of 20%. For 26, should we think about growth being a bit higher because 25 is so depressed, or are you saying for 26, we should really view $150 million or so as the right baseline and grow that 20%? Thank you. Yeah, let me start so I can fill in. What you're hearing us say today, Dan, is a core mission we believe right now is rebuilding trust with our stakeholder community. And part of doing that, we believe, is putting out an outlook that is highly achievable. And so we're not going to comment on 26 right now, other than to say we feel really good about what we're pulling out today and our ability to grow at 20% plus per year on top of that. Got it. Okay. Okay. And then as we think about the MA headwind to revenue and profitability as well, can you help us think through the impact on or the split between performance suite, and tech and services?
Yeah.
It's certainly across both, right? And you can sort of see that by the implied math of losing $20 million in EBITDA and $125 million in revenue. So it's both some longstanding performance suite clients that were operating at mature margins and a slew of tech and services clients as well.
Got it. Thank you. The next question comes from Matthew Shea with Natum.
Please go ahead.
Yeah, happy birthday, Seth, and thank you for taking the questions. You know, you guys are moving more aggressively to scale implementation of Machinify or AuthIntelligence. Curious, does this change or accelerate your expectations around gross margin benefits from AI, I know you're still orienting us towards 2026 to begin seeing improvement, but given this was sort of the prior expectation and now you're stepping on the gas, wondering if we can maybe see some benefits come through earlier than expected.
Yeah, so we're live in a few markets, as we mentioned in the prepared remarks, and the early returns are pretty positive, both in terms of overall efficiency, but more importantly here for customers and partner satisfaction, et cetera. So we're excited about this, and that's one of the reasons why we are, as you know, putting our foot on the gas on implementing this across the book this year and pulling forward some of that overall gross margin improvements that we've been projecting.
Okay. And then maybe just quickly on the selling environment, sounds like demand is remains high headed into 2025. Aside from demand generally being up, is this demand creating faster deal cycles or deal velocity? Wondering if giving the rising needs for solutions to control costs, if you're seeing deals get approved quicker, just anything to call out in terms of time to close the deal?
Yeah, I don't think it's changed dramatically on the sales cycle duration. Maybe slightly better, slightly faster, but The overall scope of the pipeline, I think, is what has really expanded and feels quite good right now.
Understood. Thanks, guys.
Seeing that there are no further questions, this concludes our question and answer session and the conference call. Thank you for attending today's presentation. You may now disconnect.