EVH – Evolent Health – June 02, 2022

The United States has one of the highest costs of healthcare in the world. In 2021, it is projected U.S. healthcare spending reached $4.1 trillion, which averages to over $13,000 per person. As a clear outlier on enormous spending versus other wealthy countries that is unfortunately not delivering better patient outcomes, one company is finding a way to improve the quality of patient care while making healthcare simpler and more affordable. Evolent Health works with hospitals to attempt this seemingly impossible task by delivering clinical and administrative solutions to payers and providers.

The company supports health systems and physician organizations as well as health plans to move their business models from traditional fee-for-service reimbursement to value-based care. Evolent operates through two segments – Health Services and Clinical Solutions. Its Health Services segment houses its administrative simplification solution and certain supporting population health infrastructure, while its Clinical Solutions segment includes its specialty management and physician-oriented total cost of care solutions through its New Century Health and Evolent Care Partners brands.

By deploying doctors and clinical experts to find improvements in the way the hospitals provide care, coupled with the use of advanced data analysts to better assess health risks for patients, Evolent is on a mission to help address the $1 trillion of annual waste in U.S. healthcare and give every patient higher quality care at lower costs. The company also dispatches management consultants to help hospitals establish their own insurance plans or broker partnerships with insurers, ultimately building financially aligned partnerships that give communities more value for their health care dollar.

Evolent is on a rapid growth trajectory, generating significant revenue increases year-on-year off the back of several new operating partnerships, coupled with expanded offerings underpinning its comprehensive strategic plans.

Evolent was founded in 2011 by members of the current management team, UPMC, an integrated delivery system, and The Advisory Board Company, to enable healthcare providers to pursue a value-based business model and evolve their competitive position.

Over the years, the company has grown both organically and through numerous acquisitions including:
• Valence Health which provided TPA services, value-based administration, population health and advisory services with a particular focus on the Medicaid and pediatric markets
• Aldera, a key vendor and the primary software provider for the Valence Health TPA platform
• New Century Health, a national population health leader in managing specialty care for Medicare, commercial and Medicaid members under performance-based arrangements, focused primarily on oncology and cardiovascular care
• Vital Decisions, a leading provider of technology-enabled advance care planning services

After maintaining a heavy early focus on revenue generation, the company debuted on the New York Stock Exchange in 2015 whilst raising almost $200 million. The IPO came at a time when the U.S. government, which accounts for more than half of health care spending, committed to dramatically increasing the proportion of value-based spending on healthcare, which has seen the company consistently increase its revenues each year since going public.

Evolent’s senior leadership team has extensive experience in the healthcare industry and a track record of delivering clinical, financial, and operational improvements for healthcare providers and payers. Co-founder and chief executive officer, Seth Blackley, has served as the company’s president since 2011 and has been instrumental in directing Evolent to leverage artificial intelligence and other technology investments to scale high-volume transactions activity more efficiently for the benefit of providers and health plan partners.

Evolent markets and sells its services to payers and providers throughout the United States, with its sales team working alongside subject matter experts to foster long-term relationships, and in turn, long-term contracts. A business development team also works closely with partners to identify additional service opportunities on a continuous basis.

In the Clinical Solutions space, Evolent Care Partners allows independent physicians to join Evolent’s Accountable Care Organization (ACO) network to generate incremental income, improve patient outcomes, limit downside risk, and ease administrative burdens. While New Century Health offers a simplified path to improved outcomes and reduced costs in specialty care, packaged into an integrated solution. In order to guarantee cost savings, Evolent partners with payers to take on full financial and clinical responsibility for managing oncology and cardiology lines of business.

In the Health Services segment, Evolent partners with health plans and risk-bearing provider organizations to simplify administrative and clinical operations to make processes more autonomous and less error-prone, with a next-generation administration system that converts data into actionable insights.

The business is predicated on strategic partnerships with healthcare payers and providers that are attempting to evolve how they deliver care and how they are compensated for it. The partnership model enables cultural alignment, integration into the care delivery and payment workflow, contractual relationships, and a cycle of clinical and cost improvement with shared financial benefits. Furthermore, Evolent has sought to focus these partnerships on payers and providers in sizable markets that benefit from secular transitions to value-based care.

At the end of 2021, Evolent had contractual relationships with 44 operating partners within state-level geographies generating fees based on covered lives or capitation per life under management.

Evolent is currently undertaking a comprehensive strategy with multiple avenues for growth across both its addressable market and its overall share, whilst leveraging several transformational industry trends.

In particular, the transformation of the care delivery and payment model in the United States has been rapid, but it is still in the early stages. Approximately 20% of health care payments were paid through performance or value-based care programs in 2020 and it is estimated that this number will continue to grow. As a result, Evolent is targeting existing partners which it believes still represent a small fraction of providers and payers that could benefit from its solutions. To facilitate this, the company has embedded multiple drivers of growth through increases in covered populations, partners expanding into new lines of value-based care, cross-selling additional solutions, as well as capturing value through a variety of risk-sharing arrangements.

The company also sees significant market opportunities in its total cost of care and specialty care management services solutions. At the end of 2021, the TCC solution served less than 1% of the Medicare Shared Savings Program ACO-assignable population. Furthermore, as populations covered by Centers for Medicare and Medicaid Services (CMS) ACOs continue to grow, the TCC solution will be relevant to private payer value-based arrangements.

While for New Century Health’s specialty care management services solution, which served approximately 1.4 million Medicaid Managed Care and Medicare HMO patients out of a total population of approximately 70 million, it is anticipated that spending in specialty care areas is likely to grow at a rate exceeding overall health care spending. Making the company’s specialty care management solution scalable to Medicaid and other lines of business.

Evolent is also planning to capitalize on growth in government-driven programs. As the number of people managed by these programs in the United States has seen significant growth since 2016, specifically, the number of Medicare beneficiaries which reached 62 million in 2021, the nature of Evolent’s variable fee economic model enables them to benefit from this growth in government-managed lives.

Due to capturing only a portion of the addressable clinical and administrative dollars in the market through its current solutions, Evolent believes there is a significant opportunity to capture an increasing share of the medical dollar over time, namely portions of premium dollars that go to medical expenses. Consequently, it is focusing on business models that allow it to participate in savings generated through a variety of risk-sharing arrangements that align incentives to reduce costs and improve quality outcomes.

Evolent will also continue to expand its offerings to meet evolving market needs as partners adjust to operating in a value-based care environment. Examples of new services are likely to include:
• Physician employment
• Pharmacy Benefit Manager expansion to include additional specialty pharmacy management capabilities
• Additional specialty lines of business beyond oncology and cardiology, including kidney, musculoskeletal, and fetal-maternal medicine care
• On-site or specialty clinic services
• Consumer engagement and digital outreach

More broadly, With the industry in the early stages of its life cycle, multiple firms are attempting to capitalize on the transformation of the care delivery model and the various forms of new profit pools. Evolent anticipates that partners will require an end-to-end solution facilitated by acquisitions of niche vendors boosting technical capabilities.

The first quarter of 2022 marked a strong beginning of the year for Evolent on the heels of a successful 2021 with continued growth, margin expansion, and strategic product innovation. For the period, Evolent reported total revenue of $297.1 million, achieving growth of 38% over the first quarter of 2021, driven by particularly strong performance in New Century Health and Evolent Care Partners.

The increase was also a result of year-on-year growth in lives on platform, with the company ending the quarter covering 20.3 million lives on all of its platforms compared to 11.6 million one year ago. In addition, revenue was boosted due to a mix shift to performance suite solutions along with higher unit per member per month pricing. The strong result brought the company’s trailing 12-month revenue to $989.9 million, exceeding its record 2020 year of $924.6 million by 7%.

Supported by margin expansion in Health Services coupled with continued cost management and operating leverage efforts, Evolent also achieved an adjusted EBITDA of $24.3 million, representing growth of 63% over 2021.

Looking ahead, Evolent is forecasting a solid jump in full-year 2022 revenue, which is expected to be in the range of approximately $1.16 billion to $1.21 billion to deliver year-on-year growth of 32%. While adjusted EBITDA is expected to be in the range of approximately $85.0 million to $95.0 million. After a modest EPS result of $0.02 in 2021, consensus EPS growth is expected to soar 1423% to $0.30.

With the healthcare industry subject to extensive, complex, and rapidly changing federal and state laws and regulations, various agencies have the discretion to issue regulations and interpret and enforce health care laws. As a result, Evolent may be open to federal and state legislatures enacting various regulatory changes that could materially impact certain aspects of Evolent’s business, albeit like its industry peers.

The market for healthcare solutions is fragmented, competitive, and characterized by rapidly evolving technology standards, with Evolent’s competitors ranging from smaller niche companies to large, technologically-sophisticated entities. However, Evolent’s solutions compete based on several factors, including breadth and quality, namely the ability to holistically deliver clinical, financial and operational performance improvements, along with reliability, ease of use, and integration simplicity.

Delivering rapid revenue growth in the last half a decade, Evolent Health appears to be taking full advantage of secular trends supporting a growing move to value-based medical care. Equipped with a comprehensive strategy and multiple avenues to future growth, coupled with only capturing a small fraction of the addressable market, the company is well-positioned to extend its share of an enormous opportunity.