Evolent Health, Inc.

Welcome to the Evalent Earnings Conference Call for the second quarter ended June 30, 2026. As a reminder, this conference call is being recorded. Your hosts for the call today from Evalent are Seth Blackley, Chief Executive Officer, and Mario Ramos, 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. This conference call will contain forward-looking statements under 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 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 Thank you for joining us. and now I will turn the call over to Evelyn's CEO, Seth Blackley.

Good morning and thank you for joining us. Today we reported a strong second quarter with results that reflect our continued ability to execute on our commitments. In a dynamic healthcare environment, our performance underscores the mission critical nature of our business, the dedication of our team and what we believe is the continued value of our solutions to our customers. For the quarter, Avalent reported total revenue of $653 million, up 31% versus Q1, and adjusted EBITDA of $28 million, a 27% increase versus Q1. Our Q2 2026 medical expense ratio, or MER, was 95% compared to 93% in Q1, reflecting the expected impact of the launch of Highmark on May 1, 2026. Given our performance in the first half of the year and our current visibility into the remainder of 2026, we're increasing our full year revenue guidance range to $2.6 to $2.7 billion and increasing the midpoint of our adjusted EBITDA guidance by narrowing the range to $120 to $135 million. We continue to expect a full year MER of approximately 93% and believe we are well positioned to build on our progress in the quarters ahead. Mario will walk you through our financial results in more detail in a few moments, but I first want to provide you with updates in three key areas of one, growth and renewals, two, our new performance suite oncology arrangements, and three, are AI platform and related cost improvement opportunities. First, regarding revenue growth, we continue to see a very positive sales environment. To that end, we have two partnership announcements today. First, we're preparing for the go live of an oncology performance suite partnership with an existing advanced imaging client. The partnership will cover approximately 1.5 million lives across Medicaid and Medicare populations spread through 11 states. We currently expect this business to launch by December 2026, subject to certain regulatory approvals, and to generate approximately $300 million in annualized revenue. As with other recent performance suite arrangements, this relationship includes the full enhanced contractual protections we've discussed on previous calls. And second, a current regional Blue Cross plan and former NIA customer has signed an agreement to broaden its use of our Evaluant specialty technology and services platform by adding new products and extending existing products to additional populations. We expect these implementations to occur during the third and fourth quarters of this year. While the total annualized revenue from this contract extension is less than $5 million, we expect to generate strong adjusted EBITDA from the contract. Contracts like these continue to prove out the cross-sell opportunity available to us across our entire customer base. Taken together, these announcements demonstrate that our customers are increasingly choosing to expand their relationships with us by adopting additional products and expanding current products across existing populations. As important as our new customer growth is the strength of retention of our existing customers. 2026 has been an outstanding year for renewals, as we have successfully renewed three of our largest customers. These renewals, combined with our Aetna and Highmark contracts, which launched this year, not only give us confidence about the strong foundation of our business, but they also provide us with significant visibility into our 2027 outlook. Next, I want to update you on our 2026 performance suite launches with Aetna and Highmark. We had a successful launch with Highmark on May 1, supported by strong collaboration between our teams. While we're only a few months into the launch, we are encouraged by the positive early indicators. Currently, clinical engagement rates are trending above our targets, and provider engagement has exceeded our initial go-live expectations. We expect to have greater visibility into claims performance over the next few months, but we're incredibly happy with our progress so far. With respect to Aetna, which launched earlier this year, we continue to see strong clinical engagement results, also above our targets, and initial claims-based performance that is in line with our expectations. Given the scale of these two partnerships and their importance to our 2026 and 2027 P&Ls, The strong execution is an important additional data point supporting the overall strength of our business. Finally, I want to update you on our continued efforts around AI and automation through our off intelligence platform. We remain focused on our long-term objective of automatically approving 80% of authorization volume, simplifying the prior authorization experience for providers and patients. We believe Q2 is a tipping point in our AI journey. as we saw these efforts take root and accelerate past the pilot phases and to a point of meaningful scale with a clear line of sight to more. The results and impact of these AI-enabled capabilities, which are built on our 2024 Machinify acquisition, are at the high end of our expectations, giving us increased confidence in our 2027 outlook. We also believe we have been improving our performance as we scale. Among customers where these models have been deployed, we are seeing auto approval rate improvements of up to 20 percentage points. For example, auto approval rates that were 55% are now 75% with no degradation to clinical quality or value to our partners. And as a reminder, Evalyn has a hard and fast rule that a clinician is always making any recommendation to change treatment and as AI is only used to speed up the process or to approve a case. Importantly, we're seeing the cases approved through our AI models are completed within minutes instead of days, improving timeliness and we believe reducing administrative burden for providers and for patients. We're also seeing a large benefit for our employees who are able to spend more of their time practicing at the top of their license and getting patients faster answers both of which are important to the job satisfaction of our team. Today, more than one-third of our authorization volume that was previously requiring manual clinical review is now being evaluated through our off-intelligence platform. We continue to believe this platform will be a key element of our ability to meet our long-term margin targets and our customer needs. Finally, Auth Intelligence will be aggressively deployed in Q1 2027 as part of one of the major renewals I mentioned earlier in the call. In closing, let me touch on how we're currently thinking about 2027. First, we expect strong revenue growth supported by the strength of our renewing business and the continued growth of our new business. At the same time, we're committed to delivering strong adjusted EBITDA growth in 2027 against the backdrop of year one investments that come with new performance suite growth, AI investments, and expected membership declines in Medicaid and the exchange. We feel confident in committing to strong adjusted EBITDA growth in the year ahead despite those headwinds based on the proven performance of our auth intelligence platform, A highly disciplined approach to managing our operating expenses and what we expect to be the stability and performance of our performance suite book of business. With that, let me turn it over to Mario.

Thank you, Seth. And good morning, everyone. We delivered solid second quarter financial results that were above our expectations and the outlook we discussed on the Q1 2026 call in May. Total revenue was 653 million, up 31% versus Q1 2026. And adjusted EBITDA was 28 million, up 27% quarter over quarter. The outperformance in adjusted EBITDA versus expectations was driven by the recognition of prior year development in Q2 that we had previously anticipated or recognized in Q3. Given this Q2 timing favorability, we now expect the previously discussed Q2 to Q3 adjusted EBITDA increase of $10 million to $15 million to be more modest. I will address this in more detail later in the call. Turning to revenue by product type, performance rate revenue was $485 million, up 50% quarter over quarter. driven primarily by higher membership from the launch of Highmark on May 1st. Specialty tech and services revenue totaled $78 million, a decrease of 3% compared with the first quarter. The revenue decline was driven by code review scope changes as part of AHIP commitments and not by client attrition or pricing pressure. on administrative services, revenue declined by 3% sequentially to $48 million, largely due to a prior year reserve true-up recorded in the first quarter. Our medical expense ratio, or MER, for Q2 was 95%, approximately 200 basis points higher than Q1 2026, but in line with our expectations, primarily due to the impact of the Highmark launch and its associated higher reserves. Please note that we did see higher acuity in our exchange populations consistent with Q1. However, as we discussed during the Q1 call, our contracts are structured to protect against changes in prevalence. Adjusted cost of revenue, excluding medical claims but including medical device costs and adjusted SG&A, totaled 163 million for the quarter, improving 5% sequentially. The improvement versus the prior quarter was driven primarily by previously discussed expense management. We ended Q2 with 115.7 million in unrestricted cash and 808.3 million of net debt. We took the opportunity to pay down the ABL revolver by 10 million to bring the balance to its minimum draw of 62.5 million. As expected, cash decreased from our Q1 2026 balance, reflecting approximately 10 million of cash used in operating activities and approximately 7 million of capital expenditures during the quarter. As a reminder, operating cash flow this quarter was unusually low due to the repayment of pass-through PBM proceeds which had positively impacted Q1 2026 by approximately 20 million. Without this pass-through payment, we would have generated approximately 10 million in operating cash flow for the quarter. Turning to full-year 2026 guidance, as Seth noted, we are increasingly confident in our ability to deliver on our goals for 2026 and therefore are raising our 2026 revenue guidance from the previous range of 2.4 to 2.6 billion to 2.6 to 2.7 billion. We're also tightening our adjusted EBITDA guidance range from the 110 to 140 million to 120 to 135 million. We continue to expect MER for the full year to be approximately 93%. On revenue, we expect Q3 and Q4 to be meaningfully higher than Q2, driven primarily by performance suite revenue. In Q3, we will benefit from another quarter of high market revenue, along with the launch of several markets associated with the performance suite expansion we highlighted last quarter. On medical claims cost, we continue to expect our MER to be higher in Q3, as we see a full quarters impact of the Highmark launch. From there, we continue to expect MER to improve meaningfully into Q4 as we see the impact of our clinical programs begin to take effect and favorable contractual true-ups flow through. Finally, on the quarterly adjusted EBITDA cadence, we are refining our sequential improvement for the second half given the timing of favorable PYD moving from Q3 to Q2. We now expect a more modest Q2 to Q3 increase in the range of approximately 4 to 7 million and an increase from Q3 to Q4 in the range of 7 to 15 million. A few additional items related to our full year outlook. We continue to expect adjusted cost of revenue, excluding medical claims but including medical device costs, plus adjusted SG&A of approximately $675 million for the year. As we enter the second half of the year, we remain encouraged by the momentum we are seeing in operational efficiency across the business. We continue to expect cash flow from operations for the year of $10 million to $20 million, after approximately 60 million of annual cash interest expense. We continue to expect 25 million to 30 million in software development and capital expenditures for 2026. Let me close with some early perspectives on 2027 and how we will address our leverage and refinancing of our debt. Based on the revenue currently under agreement and customer renewals already completed, We expect revenue growth of more than 25% in 2027. Any new contract signings over the next few quarters would further increase this number, and we expect to achieve this 25% growth while absorbing ongoing membership headwinds for Medicaid work requirements and client-specific market exits and attrition. On earnings, We remain committed to delivering meaningful adjusted EBITDA growth in 2027 and beyond. Improved performance suite care margins coupled with significant cost reduction and productivity initiatives underpin our expectation that the midpoint of our 2027 adjusted EBITDA outlook is expected to be at or above $150 million. That's 150. This outlook incorporates the significant headwinds for Medicaid, further exchange membership attrition, and some expected client-specific membership attrition. For example, our midpoint reflects both the revenue and acuity impacts that large Medicaid and exchange-focused managed care companies have noted over the last several weeks. Our midpoint also assumes the earnings drag from signing additional performance suite contracts over the coming months, which would likely drive 2027 revenue growth even higher than the 25%. One driver of adjusted EBITDA growth in 2027 will be additional OpEx reductions. We have launched a comprehensive review of our cost structure across the enterprise to ensure spending is aligned with our strategic priorities. focus on the highest return opportunities and driving greater efficiency at scale. This may include modest additional investments in additional operating expenses in Q3 and Q4, all of which are contemplated in our 2026 guidance to drive additional cost savings in 2027 and beyond. We also believe this return to earnings growth will drive meaningful improvement in operating cash flow conversion in 2027. As I have discussed previously, our 2026 operating cash flow has been impacted by approximately 20 million of one-time items. As we move beyond the majority of those items, we expect cash flow performance to improve. We expect to deliver this earnings growth while also accelerating AI and technology investments which will have a significant ROI across the enterprise in 2027 and beyond. As Seth mentioned earlier, the testing of the next phase in AI and technology investments is already producing encouraging results. Now let me address the issue that I'm personally most focused on, which is our capital structure. We have identified several different ways to improve our capital structure and address our 2029 maturities. This will be through a combination of adjusted EBITDA growth, improved cash flow conversion, disciplined capital allocation, and via the pursuit of capital markets and strategic options available to us. Taken together, we see a clear path to significantly improving our leverage ratios and our maturity profile within the next 12 to 24 months. While it is too early to determine what the ultimate path will be, We are actively advancing this work. This will enhance financial flexibility and free capital to pursue several opportunities that we believe can create significant long-term shareholder value. To wrap up, we're pleased with our second quarter execution and the momentum we're seeing across the business. Our results year to date, combined with increased visibility into the second half and a clear roadmap for 2027, give us confidence in our outlook. We remain focused on discipline execution, delivering on our commitments, and creating long-term value for our clients and shareholders. With that, operator, please open the call for 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're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question comes from Kevin Caliendo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my question. I wanted to talk a little bit, Mario, I just want to ask you, you went through a whole process with your contracting and how you thought about reserving for it. And now that we're sort of four or five, six months into that process, how is that looking? Do you feel like you've like reserved properly and accounted for these properly? Is it conservative? Just wondering how you view the way you approached it now, now that you have, you know, A handful of months of experience there. That's my first one. And then the second one is talking about just sort of anything that you're seeing from a utilization perspective. There's a lot of changes going on with ASP rules and things like that. And I'm wondering if there's been any effect on behavior one way or the other, particularly in Part B drugs like oncology and the like, and if if it's affecting your ability to understand trend in any way, shape, or form, or if anything's changing, if you're seeing anything different.

Yeah, thanks, Kevin. I think on the first question, I would say we're probably in line with everything that I've seen in the industry where, you know, we are, we're definitely, if I look at, you know, favorable prior period development as a way to think through whether we're over or under reserving, you know, we've all experienced and I think the whole industry is headed in the right direction and we're We certainly fit that bill. So that's how I would put that. But as you guys know, that could change in any quarter. But we feel good as we sit here today. The second question is, we're a little bit unique in the sense that we have some very specific markets with some incumbent clients, let's say, or older clients. And then we have some really new markets. I would say as a blanket statement, when you cut through things like mix, where we have to really isolate different markets and contracts and take out things like prevalence, right? The headline sort of trend number doesn't really work for us in making those comparisons. When we kind of pull back the layer and we're seeing the data come in, again, we're not seeing anything different than the broader industry where where we're seeing populations that are consistent and haven't changed acuity. Trend has continued to modulate and improve. We unfortunately have some noise in some of the markets we serve because clients have made decisions around how they're going to serve certain markets. And so prevalence we talked about can be very different. So that's really, I would say unique to us and our clients, and if you look at some of the calls from our clients, they're saying the same thing, which is they're still making adjustments, membership is changing, mix is changing, so they're walking through their numbers in that context, and I think we're no different in that regard.

Thank you. The next question comes from John Stancil with JP Morgan.

Please go ahead.

Great. Thanks for taking the question. I just want to talk about when we think of the 27 guidance or directional commentary at this point, I appreciate the greater than 25% growth on the top line. It feels like margins might take a bit of a step down there. And I hear everything about, you know, the large contracts you've launched this year improving. Sounds like some operational improvements as well. Can you just talk through kind of puts and takes on the margin side entering 27 and what you're seeing? Thanks.

I think the biggest change that you guys are going to see is, obviously, as you've seen it this year, the performance suite business has a much smaller margin. It's just the way the business works, right? You have this very large amount of revenue from our capitated agreements. And on a per member, we make even more money. We've talked a lot about that. But when you accelerate growth in that business, because you're talking about single digit margins, the average margin of the business is going to look like it's compressing. But when you take a look at the performance rate independently, that's the opposite is happening. We're maturing some of the contracts, so the margin... is expanding in that business, which is a large part of why we feel confident about the number we are providing the outlook in 2027.

Matthew Gilmore Thank you.

The next question comes from Matthew Gilmore with KeyBank Capital Markets.

Please go ahead.

Matthew Gilmore Hey, good morning. This is for Matt. I appreciate you taking the question. So it sounds like trends kind of in line with your expectations. If we dig into oncology, can you remind us what percentage of your oncology costs are drugs versus procedure or surgical volumes? I guess just curious to see if there's been any discernible change in how those costs have trended between drugs and surgical services. Thanks.

Yeah, drugs are, you know, I'd say about 75% of the total cost in oncology. That's not really changed. It might be going up a little bit, but that continues to be. The main lever that we're addressing, that's really why these clients are hiring us, is to help manage that. No, there's really not a change, as Mario said. In the first few questions, I think we've been appropriately conservative around how we thought about trend and reserving and all these sorts of things. And that's part of the reason you're seeing our commentary on where we're looking for 26 and 27, as we feel really good about where we sit today.

Thank you. The next question comes from Jalindra Singh with Truist.

Please go ahead.

Hi, guys. Thanks. This is Eduardo Owen for Jalindra. Again, really appreciate the commentary on the greater than 25% revenue growth for 2027 and that your customers are still in flux a bit on their plans. But hoping you could help us quantify, I guess, the top line headwinds you're expecting on the Medicaid side from work requirements and on the exchanges from the customers potentially exiting some markets. and bifurcate that, I guess, versus the growth side where maybe it's the Medicare Advantage side of the business and these new contracts, just trying to frame how we should think about that.

Yeah, so I think there are a couple of things. One, there's industry driven, which I can talk about more freely. We're looking at probably 20% decline of Medicaid expansion members, which I think it's a number that after talking to a lot of clients and industry people feels like a good number. And so that roughly translates to 4% to 5% membership in Medicaid for us, Eduardo. I think beyond that, the challenge to talk specifically with numbers is There are a lot of client-driven assumptions that we're making. We are trying to stay really close to our bigger clients. You know who they are, and if you listen to their calls, you could probably get some guidance on what they're saying and apply it to us and our membership book. But again, I think it wouldn't be appropriate for us to go into more detail because then we'd be talking about client-specific sort of assumptions. But we do think TNS next year will probably be flat to down a bit because of the membership headwinds. But the flip side of that is we're really excited about performance week. We should be adding, as we said, a large portion of that growth is performance week business. The pipeline looks strong. So It's unfortunate that we have these industry-wide headwinds and client-specific headwinds, but beyond that, we're really confident with how we're executing and growing the performance rate in particular.

Thank you. The next question comes from Charles Rhee with TD Cowan.

Please go ahead.

Hi, this is Lucas for Charles. Thanks for taking the questions. Wanted to ask specifically about the other client-specific membership declines you're expecting in 2027 in that framework. Can you unpack this a little bit? Are these customers that have indicated to you that they intend to exit certain markets? We've heard some MCOs talk about exiting certain Medicaid states separate from the work requirements. Is this what you're referring to? And then can you kind of help us understand, you know, are these clients providing you with any advance notice on their decisions to exit these markets?

Yeah, that's primarily what we're talking about. I think there's, again, there are several large clients of ours that are going through this process. It's not new. We are staying close to them. And, you know, I think they're also looking... at their own numbers for 27 and trying to figure out what the right answer is. We're trying to stay close. We have monthly business reviews with them where this often comes up. But I think at this point, we're taking all data that we have available to us to figure out what the right assumptions are. We think membership will be under pressure. Again, a lot of this is industry, but a lot of it is client specific. We don't believe that's going to continue on 27, I think the industry is very far into sort of the rationalization that they've all talked about in the last 12 to 18 months. So we are staying very close to clients as much as we can.

Yeah, and maybe just, you know, to pile on to that question and Eduardo's question, I think You know, Mario's giving you some of the building blocks of the components of the headwind on membership side. The reason we're growing despite all that is, if you could back up a little bit, is we're, we have 6.7 million lives in the performance suite. It's less than 2% of the country. We are getting a lot of demand to do more of that. And so I think just, you know, reframing and reminding ourselves that we have actually a very small market share and a big opportunity. And so We feel very good about being able to grow past these couple headwinds that Mario discussed that are out there for the industry. And as they burn off over the next few years, I think the market growth opportunity will still be there.

Thank you.

The next question comes from Daniel Grossleit with Citi. Please go ahead.

Hey this is Luis on for Daniel and thank you for taking my question. I know you briefly touched on the pipeline and I think last year you sized the way to pipeline at $650 million and obviously since then you've announced several very large deals. But my question is like as we see here today has this pipeline refilled and what does the current size look like? Thanks.

Yeah I mean it's very similar to the comments I was just making. The pipeline has refilled. We have a pretty small market share in a very big market, so there are a lot of opportunities left. Those spread across regional blue plans and regional plans. We also have a couple of the top 10 plans in the country that we don't yet have that are now in the pipeline that previously weren't, that have come into the pipeline over the last six months. So it does feel really good. I think particularly in oncology, as you can see, I think we have the leading product in the market and continue to get a lot of traction and would expect to continue to have more announcements like we did this quarter where we're able to bring on attractive new contracts.

Thank you.

Welcome.

Thank you. The next question comes from Ryan Daniels with William Blair. Please go ahead.

Hi, everyone. This is Dustin. I'm for Ryan. Thanks for taking our question. Oncology gets a lot of focus. It's good to see growth there, driving the favorable 27 outlook. But just wondering if you can talk about some of the other conditions like Cardio, MSK. What are you seeing in those states as it impacts your business? Thank you.

Dustin. Actually interesting, one of the two announcements today, the second one, the tech and services one includes MSK and Cardio, and we are continuing to see real demand for that. I think the way that this often plays out, and it's the case in the announcement we made today, is oncology may be the tip of the spear, and it is the first product that comes into a new account, but once we start working with a partner I'm really proud of our team. We are consistently getting, you know, high marks from them on, hey, we like working with you. You're doing a good job. What else can you do for us? And that playbook is really strong. If you're imagine you're a client dealing with, you know, 12 or 13 specialty conditions, would you prefer to do it with 12 or 13 best in class providers? Or would you rather have a couple key strategic partners? And, you know, definitely the latter is true. and so we're going to get a lot of benefit of the doubt if we deliver and so we're very focused on you know all of our clients but we get a new client in particular make sure we're delivering and then you'll get the right to add these other ones and we are seeing that I think it's going to be more in this pull-through category you've also seen this with you know one of our both of our big MCO Medicaid partners have pulled through lots of different products so I think that's going to be the pattern but those products are doing great there's a lot of demand for them and our teams at Apple are doing a great job managing those products.

Thank you. The next question comes from David Larson with BTIG.

Please go ahead.

Hi. Congratulations on the good quarter. Can you talk a little bit about the performance suite revenue wins? The sequential increase in revenue from 1Q to 2Q was, I thought, very, very good. and then can you talk about the PMPM rate in performance suite? It came in above our expectations and then also are you finding the need to basically call on like the bands, the risk bands that you have with certain performance suite customers? Are costs coming in too high in some cases and you gotta enforce sort of that band or are costs coming in sort of like in line with your expectations? Thanks a lot.

So on the sequential increase, David, that was driven primarily by the Highmark launch. We had two months only of Highmark. It launched May 1st, so that was the big driver. We will also obviously see a good pop of that in the Q3 because of the third month wrapping in to the third quarter. And similar on the PMPM, Hi, Mark. Having a lot of Medicare members typically has a higher PMPM, and so that drove the PMPMs higher for the quarter.

And on your last question, David, I think contractual protections, I think the way to think about that is less that we have to go call on them. They're more mechanical, and they flow into contracts. Each contract based on a schedule that's set up and there's an actuarial process that goes back and forth and it just rolls in. So I think those are, you know, standard fare at this point and people are used to them and they can go both directions, right? It's a mechanical thing that depends upon what's acuity, what's price, these things that we don't control. And that process is a pretty well oiled machine at this point.

Thank you. The next question comes from Ryan Halstead with RBC.

Please go ahead.

Hi Tim, this is Kevin on for Ryan. I was just curious if you guys are seeing any shift in the acuity of your Medicaid membership pool, and if so, if you guys could talk to that.

Much less so on Medicaid. I think the acuity shifts that we've seen have been more on the exchange side. There have been some on the Medicaid too, but I would caution again because I think maybe specific to our clients and our markets. So I don't know that that's a representation of the general market, but certainly we've seen some of that in both exchange and Medicaid, more so on the exchange side.

To David's point, that's one of the automatic adjusters that just rolls in and it can go in either direction. Right now, it's a positive cap rate adjustment to the upside because the acuity is going up. If it goes in the other direction, it will go in the other direction. That system is working well to make it fair. I think that's the right way to think about it, fair for us and fair for the clients so that our work Our clinical work and the value we capture from it is tied directly to the things that we do.

Thank you. The next question comes from Jessica Tesson with Piper Sandler.

Please go ahead.

Hey, it's Sahil on for Jess. Thanks for taking the question. Mario, I wanted to come back to the medical expense ratio. I think if I net the prior period items in the reserve table, I think I get to roughly around sort of three points of the 95% you reported, which would put the current period ratio kind of closer to 98%. And I completely understand that the launch size of Highmark kind of gets reserved conservatively by that design, so not super surprised by that gap. But I think you've also talked about holding the full year at 93%, and I think you've said the third quarter kind of steps higher than the second. So can you sort of like help us understand with the fourth quarter, what number actually kind of gets you there to average out to 93%? Thanks.

Yeah. No problem. I think you generally have it correct in terms of the order of magnitude of the prior period impact. Again, we fully expected the MER to be where it is when we launch. We have a very elevated level of MER. Highmark is very unique because it's a very high percentage of our performance suite business, even with only two months in the quarter. So it is driving and Aetna is not fully, you know, not even close to fully mature. We just launched in January. And so that's not a That's also a contributor to that. We went up 200 basis points. I think our expectation for the fourth quarter, and if you go back to our Q1 call, we referenced this. We're probably expecting a gradual improvement of about 250 basis points by the fourth quarter. and that's driven partly by the reserves being the reserve process being complete. There will be some clinical improvement in there with particularly Aetna that should be long enough that we're making an impact. But also we do start reversing some of the new business loads that we typically have in the beginning of the contract. So with Highmark, there'll be a little bit of a Taya Wynn on the reserving side in the fourth quarter as well. So directionally, you have those numbers right.

Thank you. The next question comes from Ali Khan with Crow Holding. Please go ahead. Hello, your line is open.

The next question comes from Matthew Shea from Piper Sandler. Please go ahead.

Hey, this is Matthew Shea with Needham. Thanks for the question and congrats on a really nice quarter here. Hopping over from another call, so apologies if this got hit on, but wanted to touch on Medicaid in 2027. You know, with redeterminations and the shorter retroactive eligibility windows, there's concern members will cycle on and off Medicaid plans more often. Seth, you've talked about the importance of continuous data feeds from a plan to drive your clinical intervention rates and that engagement rates are ultimately a good indicator for savings. Does that Medicaid turnover plus the fragmented claims data and shorter retroactive eligibility windows that come with it, does that degrade your ability to identify and engage members early enough to hit your, you know, targeted clinical savings in Medicaid? And if so, like, how are you reflecting that in your savings assumptions or reserving, if at all? Thanks.

Yeah, let me take the first part of that.

Mario can answer the second on reserving. It really doesn't change our ability to do the interventions. I think unlike what the industry might call care management, which might be a three, six, 12-month process to engage a patient in a program, enroll them, work through lots of different things. Ours is more, hey, somebody's getting a cancer treatment over the next 90 days or 180 days. They typically stay on their plan, by the way, while they're in those treatment bands. and our engagement is, you know, around the selection of the therapeutic medication. It's around the surgical intervention and it's not a long-term, you know, process. So we don't feel like that affects it. I do think you weren't on for this part, I think, earlier, but there's a lot of adjustments that you do have to make if the risk pool is changing. If you're getting a more sick population, acuity is going up or vice versa, you got to make adjustments for that. But that's... What our contracts do, it's a mechanical process so that we can isolate, hey, what is the cost per case on an apples-to-apples basis, and what value are we creating through our work? And I think we've got a well-honed process to do that. I'll let Mario comment on the reserves, but I think it'll be the same theme.

Yeah, no, and I think the reserves follow that process you just talked about, and we take all that into account, and what, you know, What we're looking at in the data, what is contractually available to us, which tends to protect from these swings that we don't control. So it's an extension of what Seth said, basically.

And look, I mean, one of the things that a lot of the questions today have hit on, which I'll just step back a little bit and reiterate, if you're any of these health plans, what's your number one problem right now? It's probably part B as in boy, therapeutics. and most of that is in oncology. So whether it's Medicaid or commercial or Medicare Advantage, cancer is a giant driver of trend. And the sophistication of the drug pipeline that has been coming out for the last 10 years and is gonna come out for the next 10, probably AI led drug development and testing is gonna accelerate that. They do not have a good way to manage that. Part B is not covered by their PBM. Part B runs through the distributors and straight down to the oncologists. It's sort of the Wild West, right? And they don't have a good way to manage it. I think we have over now 15 years developed a very sophisticated way of doing it that I think is the best in the industry. I think we're taking share because we're good at it. I think we're able to negotiate contract terms that are fair to them and us because we have good demand for the product. and I don't see that stopping for a long, long time because, you know, we have small market share and oncology is a big problem and so that's, you know, you guys have heard us now for multiple years be very focused on this and I think the MERs, the client growth are both, you know, pointing to the ability to do that and being a long-term cycle for us.

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

Thanks for the time this morning. We look forward to talking to each of you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.