Welcome to the Evolent Health, Inc. earnings conference call for the first quarter ended March 31, 2025. As a reminder, this conference call is being recorded. Your host for the call today from Evolent Health, Inc. 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. This conference call will contain forward-looking statements under U.S. Federal Law. 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 first 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 the website or in the company's press release issued today and posted on the Investor Relations website ir.evolent.com and the Form 8-K filed by the company with the SEC earlier today. In addition to these 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 Evolent Health, Inc.'s CEO, Seth Blackley. Good evening, everybody.

And thanks for joining the call. I'm happy to be here tonight to discuss Evolent Health, Inc.'s strong start to 2025 with Q1 financial results at the high end of our expectations and a favorable outlook for the rest of the year. As is typical, our prepared comments are structured around our three shareholder value creation focus areas of one, organic growth; two, expanding profitability; and three, optimal capital allocation. Starting with organic growth, we believe we are positioned as one of the largest and most effective providers of specialty condition management in the country, with 84.8 million product lives on the platform. We believe health plans, providers, and members all demand and deserve a clinically oriented approach that encourages a holistic view of a person's journey through cancer, cardiovascular disease, or musculoskeletal conditions. We think Evolent Health, Inc. is uniquely positioned to offer those solutions. The strength of our offering led to five new revenue agreements this quarter, covering each of our three major condition areas as follows. First, we have two new health plans that are rolling out our surgical management solutions for commercial lines of business. One is a Blues plan located in the South, and one is a large national plan rolling out the solutions initially to two of its large southern states. We are particularly excited to add these contracts as they are both first-time logos, and we look forward to the opportunity to expand with these partners over time. Third, we expanded the geographic reach of our existing medical oncology technology and services solution with one of our national payer clients to cover an additional 800,000 Medicare Advantage lives. Fourth, an existing partner in the Southern State will be adding technology and services solutions for advanced imaging and cardiac imaging for approximately 100,000 lives…

Thank you, Seth. I will comment on four areas this evening before turning to guidance. One, revenue dynamics affecting actual results in the quarter as well as associated PMPM trends. Two, medical cost trend in our performance suite. Three, our outlook for cash generation in 2025. And four, sizing potential policy impacts on our near and medium-term outlook. First on revenue, Q1 revenue of $483.6 million in the quarter was impacted by two partially offsetting items. Without these items, revenue would have been approximately $450 million in the middle of our guidance range. First, recall that we anticipated that contractual changes would shift the accounting for two Performance Suite contracts from gross to net. Those contractual changes are now complete, with one effective on January 1, and the second effective April 1. Therefore, the extra quarter of gross revenue recorded in Q1 for the contracts that converted on April 1 contributed approximately $55 million in revenue with no impact on adjusted EBITDA. The second revenue item in the quarter was related to true-ups for Performance Suite launches during 2024. In all new performance suite launches, we true up our capitation rate to reflect actual experience immediately prior to our go-live date. We finalized these true-ups for 2024 performance suite launches during the first quarter and experienced final capitation rates that were on average lower than our initial estimates. In total, we recognized a retroactive revenue impact of minus $12.9 million and released associated claims reserves of $13.4 million for a favorable net adjusted EBITDA impact of $400,000 in the quarter from prior year development. Finally, the updated capitation rates for 2024 launches lower our estimated revenue for 2025 by approximately $33 million, including $8.4 million in Q1, again on an EBITDA neutral basis. Note that as previewed on our last…

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. We ask that you please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kevin Caliendo with UBS. Please go ahead.

Yeah. Hey, guys. This is Jackson. I'm done for Kevin. Thanks for taking the questions. In your prepared remarks, you mentioned a sequential decline in Performance Suite PMPM due to a lower mix of MA revenue in the Performance Suite segment. Given this is, I mean, previously announced contractual, like, membership changes, is this PMPM level a good baseline going forward? Or maybe how should we think about this for the remainder of the year? Thanks.

Hey, great question. This is a good baseline level for now. We have previously announced a rather large new performance suite go-live later this year, which is in MA for oncology. So when that goes live, I would expect it to tick back up a little bit.

The next question comes from Matthew Gillmor with KeyBanc. Please go ahead.

Hey, guys. Thanks for the question. I wanted to ask about the visibility you have to the oncology trend. John, can you give us a sense for, you know, how complete the paid claims are? I would assume that's through February. Then can you give us a sense for the leading indicators you track to sort of what the nature of those indicators are? That'd be great. Thank you.

Yeah, it's a good question, Matt. So, let me highlight two things. The first is on the leading indicators. These are authorizations that happen before the service is performed. That gives us prospective insights into the level of utilization. And that is down a little bit relative to our forecast of being up by 12%. Now we make a second assumption there, which is the rate at which those authorizations translate into claims over time. And that's the thing that is ultimately proven out in the claims when we receive them. When we close a quarter, we are typically about 55% to 60% complete for that quarter, meaning that the claims that are incurred on our income statement for the quarter, the total claims expense is 55% to 60% actual claims and the balance IV and R. That was true and consistent for this quarter. So that's the level of visibility that we have. I think you heard us in the prepared remarks be pretty bullish on what we're seeing so far and wanting to see some incremental claims completion relative to what we have now to affirm that off to claim completion rate.

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

Yes, guys. Thanks for taking the questions. Congrats on the solid start to the year. Wanted to go into a little bit more detail on the expansion of the oncology product. So I'm hoping you could tie into, you know, the existing products, how the navigation solution will work, and kind of what value multiplier you might see by adding that. And then as a derivative there, I'd also like to talk a little bit about how you could potentially tie that into your broader PS contracts over time, you know, to help with oncology cost trends there with this novel solution set? Thanks.

Yeah. Thanks, Ryan. So let me start by just saying a little bit about the market. Ryan, which is the selling environment feels really good, as I mentioned. Our weighted pipeline for the performance suite overall has more than doubled from what it was a year ago, which I think is really indicative of the demand and the opportunity and a lot of that around oncology. And if you think about the demand in the market, I think a lot of that is around helping manage the cost and the clinical decision support we talked about and the provider alignment. But I think there is a, for a whole host of reasons, interest and demand in this third leg of the stool on the navigation side. And so we've obviously officially launched that. I'm really excited about it. The team's excited about it. I think it's going to have a really helpful impact on the sales environment. And then onto your point, I do think it increases probably a reasonable estimate by 10% to 20% the value or savings opportunity that you might see by adding the ability to engage the patient in the way that I described during the prepared remarks. And a lot of that starts to get at the Part A savings in particular, whereas our traditional solution has been more Part B, as in boy focused. So, you know, I think it's in the context of this market opportunity, which is really attractive, we think, right now. Increases, I think, our ability to translate pipeline to close deals, and I think will also increase our ability to drive total savings dollars.

The next question comes from Jessica Tassan with Piper Sandler. Please go ahead.

So I was just hoping on two things you might be able to clarify. We were a little bit off on our first quarter performance suite lives estimate. So I'm just wondering, can you describe the quarter over quarter cadence of performance suite lives and what was the gross reduction from recontracting versus any offsetting growth? And then secondarily, just on the retained profitable performance suite business in 2025, I think our understanding is that that business would be priced to normal trend. So I guess margins would degrade slightly in that portion of the business year over year. When would you expect to be able to reprice that profitable and retain performance suite business? Such that you kind of recapture at least our trending on a PMPM basis back in line with the annual trends you're observing? Thanks.

Yeah. Great question. So, the first one, we had about 600,000 lives convert out of the performance suite into technology and services. There was additionally a few tens of thousands of lives that were a result of partner plan exits, as we previewed at the beginning of the year. Those two items are offset by other growth in the line. Now that's the answer to the first question. On the second question, on sort of overall performance suite contracting timing and cadence, you know, we really think of that on an annual cycle. Where each year, because of the structure of our arrangements, we are now seeing automatic increases or changes in our capitation rate as the population changes. So to the extent that there is an increase in cancer mix, for example, towards a more expensive set of diagnoses, that would result in a year-over-year increase in our revenue. So that's the cadence upon which we think about it.

The next question comes from Jeff Garro with Stephens. Please go ahead.

Yes. Good afternoon, and thanks for taking the question. Wanted to ask about any potential variation in Performance Suite gross margins, either by payer mix or by geography, and then given the results, I'm presuming you haven't hit the lower or upper bounds of any of the new risk corridors on renegotiated arrangements. But want to confirm that as well. Thanks.

Yeah. Let me take those in reverse order. You are right. Not currently sitting in any corridor positions this early in the year. On the gross margin variation, I'll say a couple of things. At any individual rate cell level, so that might be, you know, TANF, for oncology in a particular state, a particular payer, there is some variation at that level of granularity. At the more macro level, are there variations between state A or state B that are predictable and consistent for between line of business A or line of business B, generally, we do not see that. We see consistent margin opportunity sort of both across the country and also across lines of business. And I thought percentage basis, of course, in MA, the PMPMs are higher. So the PM, the dollar opportunity is a little higher than it is in Medicaid. But consistent percent savings opportunities across all of our populations.

The next question comes from Anne Samuel with JPMorgan. Please go ahead.

Hi, thanks for taking my question. This is Kyle Aikman on Annie. I was curious if you could dig more into the oncology cost trend you experienced in 1Q. You noted cost trended below 12%. What was your original assumption for trends in the quarter? Was it the same as the 12% for the year or other comparison nuances there? And on that lower than expected cost, would you say that's driven by changes in prevalence or cost of care? Or is there any bifurcation there? Thanks.

Yep. All of the trend numbers that were given tonight are in reference to that 12%, which we would think of as the normalized trend excluding Medicaid redeterminations, which last year was a unitary event. And on the sources of variation, the highlighted two, the first is on prevalence, which is generally up, but it is up less than we expected it to be. Again, this early in the year, but it is nice to see. The second area is around cost per case, which is also up a little less than we had forecast it to be based on our leading indicators. And, you know, I think a couple of things there. There's some sort of local dynamics that contribute to that. But as we evaluate the data, a fair bit of that outperformance seems to be coming from, you know, real success at our clinical interventions, at guiding practicing oncologists towards what we believe to be the highest quality, lower cost options. And so we're really proud of that and excited to keep pushing that across this year.

The next question comes from Matthew Shea with Needham. Please go ahead.

Congrats on the quarter. Nice to see two more wins in the commercial space. Understanding commercial and employer, the newer end market. Curious what demand has been like there. Are you seeing interest primarily in surgical management solutions? Or what does the scope of discussions look like? And has this end market for commercial and employer required incremental sales capacity, or are you targeting these deals with existing staff? Would be good to just understand what sort of investments you're making as you penetrate the employer space. Thanks.

Great. Yeah. Thank you for the question. So, think on your first one, the market, I'd say, the board, Medicare, Medicaid, and commercial, particularly for oncology, I'd say is very strong right now. In some of the other categories like surgical, musculoskeletal, cardio, I think there's also strength. And I think the surgical one in particular has been strong on the commercial side. So it's been a pretty broad base and consistent across these different lines of business. Not that surprising, right? The pain points that are created for Medicare Advantage plan also exist for a commercial plan. I would say most of these opportunities that we're seeing, not all, but most are on the fully insured commercial side. So they're going through larger health plans. And to answer your second question, therefore, we don't really see a need to increase staffing on the sales to address those opportunities because they're part of our same, you know, conversations with the, you know, the larger plans around the country. The last thing I'd say is we, you know, I did just recently see a survey about top issues for self-funded employers. ASO accounts, and oncology is right at the top of that list. And it is an area that we're exploring a little bit of thinking about ways to better and more fully address that area, although that's reflected in the announcements today as all those were fully insured.

The next question comes from Constantine DeVis with Citizens. Please go ahead.

Thanks. Just wanted to maybe drill into some of the AI automation investments Seth, you referenced earlier, maybe just a little bit more color on how those are impacting efficiencies in some of the early engagements. And just your updated expectations around sort of spend there and impact as we exit the year. Thanks.

Great. Yeah, good question. So I'll just kind of start with the headline first, which is continue to see a very significant opportunity here on AI and automation. Know, rolling into '26, I think it will be a, you know, material, very significant contributor. And, we're very focused on it. Kinda consistent with our original plans that we laid out, you know, last year when we kind of first announced this. There are two pieces of it that I would just, you know, break the opportunity into two. One is around making the experience for the provider and the patient, the member, and our internal reviewer more efficient. Right? So fewer number of minutes spent getting to an answer, shorter amount of time getting to an answer. And that is absolutely playing out of what we're seeing already. And then the second one is I think, in a lot of ways, more exciting, which is the ability to get immediate resolution or which, you know, you think of as automation right, of the review full automation where a physician or one of our viewers doesn't need to touch it, and that's great for the patient and the provider and the treating provider. They get the answer immediately. And that would be sort of auto authorization. So it's the combination of those two things. Both are really important to us. And we're really excited about what we're doing. The last thing I'd note, just in case it isn't obvious, is that everything we're doing with AI automation is only on the approval side. So we never use AI to deny care. Or restrict care in any way. And everything we're doing, we're trying to work through a model that gets the right savings for the system but in a way that gets patients and physicians immediate answers, the care they need as fast as possible.

The next question comes from Charles Rhyee with TD Cowen. Please go ahead.

Yes. Thanks for taking the question. Maybe just going back to sort of oncology trend and right now, you're running below sort of what you initially expected. Would you imagine that some at what point do you think that that sort of sort of the ongoing trend? And maybe any color in that regard as what you've seen so far in April in regards to authorizations?

Yeah. So on April specifically, we're seeing similar patterns on the leading indicators that we saw during the first quarter. On experience, I would look to Q2 for an update on that. Implicitly, based on my comments earlier that we're 55% complete as we close Q1. We've got about a month and a half of claims. increase. And after another quarter here, that will significantly therefore giving us meaningfully more data to update these forecasts.

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

Congrats on the strong quarter here. Was wondering if you could talk a little bit about how the competitive environment has evolved recently, particularly as you limit how much risk you'd take in your performance. We clearly there's still a lot of demand for the performance suite despite the corridors. But curious if you're running up against managed care solutions like Caroline Specialty or Evicor more often, and if there's been any shift in win rates or anything like that with the new version of performance suite. Thank you.

Great. Thanks, Daniel. I'd say the short answer is it really has not changed very much over the last couple of years on the competitive environment. I think the things that we are doing I'd say particularly in oncology, but across the board, feel really unique. The win rates and conversion rates have been consistent with what they've been over the last few years, even as if we have shifted the performance suite model and narrowed the corridors in both directions. There's some benefits to the plan too, right, in that new model. And so, no, it really has not shifted. I think that comment I made earlier about the performance suite weighted pipeline being over twice as big as it was a year ago points to that. And we just I think some of that, again, is the market is struggling how to manage the oncology spend in general. And I think some of it is the competitive differentiation. That is not going to be a static picture. Obviously, we're going to continue to innovate every quarter, every year. I think the navigation work that we announced today is part of that. Our ability to automate more and make lives better for the treating provider's part of that. We're going to continue to try to stay ahead, but I feel like we're ahead right now. And that's translating to the weighted pipelines and conversion rates that we've been indicating.

As a reminder, if you have a question, please press star, then 1 to be joined into the question queue. The next question comes from David Larsen with BTIG. Please go ahead.

Hi. Can you please talk a bit about the potential impact of 25% tariffs across the pharma industry? How would that impact your model, if at all? Would increase your own COGS? And then could you pass that through to your plan clients? Just any color there would be very helpful.

Generally, in our performance suite arrangements, we have clauses that allow us to update our capitation rates in the event of a significant change in unit costs, which a tariff like you indicate would certainly count as. And so I would not expect a meaningful impact on our profitability from something like that if it were to come to pass.

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

All right. Thanks for joining tonight, everybody. We look forward to connecting over the next few days. Have a good evening.

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