Evolent Health Inc

NYSE:EVH

Earnings Call Transcript 2019-Q2

[Operator]

Welcome to Evolent Health Earnings Conference Call for the quarter ended June 30, 2019. As a reminder, this conference call is being recorded.

Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evolent Health. 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 entitled Investor Relations.

Here is some important introductory information. This call contains forward-looking statements under the U.S. Federal Security 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 the current and periodic filings. For additional information on the company's results and outlook, please refer to its second quarter news press release, issued earlier today.

As a reminder, reconciliations of non-GAAP measures discussed during today's call for the most direct comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the 8-K filed by the company with the SEC earlier today.

At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams.

[Frank Williams, Co-Founder, CEO & Chairman]

Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health; and I'm joined by John Johnson, our Chief Financial Officer; and our Executive Vice President of Corporate Performance.

I'll open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and progress on Evolent's key strategic priorities for the year. I'll then hand it to John to take us through a more detailed and financial review of the second quarter. I'll close with a summary of our key differentiators and how they drive tangible value for our partners. And as always, we will be happy to take questions at the end of the call.

In terms of our results, total adjusted revenue for the quarter ended June 30, 2019, increased 32.9% to $192.1 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended June 30, 2019, was negative $7.7 million compared to $4.9 million for the quarter ended June 30, 2018.

As of June 30, 2019, we are approximately $3.5 million total lives on the platform, and with 3 partner additions this quarter, we welcomed 6 new partners to the Evolent National Network already this year. Overall, we're pleased with our top line results for the second quarter and the progress we've made in meeting our key strategic objectives for 2019.

With strong operational and clinical performance across our network, we're seeing solid same-store growth as well as one of the strongest new business pipelines in our history. As a result, we entered the second half of the year with increasing visibility and the significant growth, both on the top and bottom line, as we head into 2020.

In terms of the macro environment, we're pleased to see continued strong momentum in the core markets that we serve. In Medicaid and Medicare, the administration's actions demonstrate a core commitment to moving the market to value-based reimbursement. Over the past 9 months, CMS rebound it's Medicare shared savings program, pathways to success, launched the primary care's initiative and is in the final stages of creating a direct contracting model with providers. All of these offerings create several forward for providers interested in pursuing risk-based reimbursement for their Medicaid patient populations.

On the Medicare Advantage side, where total enrollment is expected to double over the next decade, we continue to see strong policy support program improvements and consistent annual rate increases from CMS. Our Health policy team continues to serve as a convenient for our partner network to work closely with the administration on new program concepts as well as modifications to existing programs that will encourage broad industry participation.

For example, we're currently weighing on the next version of CMS's oncology care model, which aims to provide higher quality, integrated oncology care at a lower-cost the Medicare. Based on our extensive experience in cancer care with New Century Health, we had an exciting opportunity to drive financial and clinical results for organizations participating in the oncology care model, and we look forward to driving demonstrable improvements in clinical and financial outcomes.

We're also seeing the same trend in specialty care management with national and regional payers. Both cancer and cardiovascular care represents significant pain points for payers that struggle to manage a broad network of positions, complex drug regimens, rapidly evolving clinical pathways, and appropriate site of service given the high variability in cost.

This centuries deep expertise in total cost of care management, through innovative data analysis, pathway development and specialist-to-specialist engagement offers a unique solution to address rapid increases in medical trend and sub-optimal clinical outcomes.

Given the market dynamics, in fact that oncology and cardiology represent 25% of Medicare spend, we expect government policy will continue to be an additional catalyst inspiring ongoing demand for these services in the market.

It's the combination of increasing cost pressure, administrative and clinical complexity and the inability to effectively engage providers and patients that's opening up significant opportunities for Evolent across all lines of business. The breadth of our current offering, which serves the population health, health plans services and specialty care management markets has doubled our total addressable market more ensuring, we have multiple entry points and cross-sell opportunities across our partner network.

We can see the diversification of our solutions reflected in several of our last partnership announcements. A Blue Cross plan were helping the management exchange population, existing Medicaid plans were providing our full suite of health plan services. Medicare ACOs that need to integrate solutions to effectively engage patients with chronic conditions, and comprehensive Oncology Specialty Management Services for Medicaid plan with rapidly rising drug costs and above market cost trends.

As a result, the breadth of our offering and market leadership position have translated into one of the largest weighted pipelines in our history with several opportunities either recently closed or in late stage evaluation.

In terms of new partners, one area of recent focus has been identifying high-performing physician groups in markets where we can add a significant number of lives and leverage our integrated platform to deliver market-leading clinical and financial performance.

The new ACO program sponsored by CMS are an excellent catalyst for market expansion, and to that end, I'm excited to announce new partnerships with 3 provider organizations: Michigan Health professionals, Integrated ACO and the South Bend Clinic. These organizations are high-performance provider groups that have a line of sight to significant Medicare lives in their respective markets.

Michigan Health Professionals is a network of nearly 400 independent physicians in the Detroit area, to support nearly 25,000 Medicare beneficiaries in its Medicare ACO. Integrated ACO is a network of 55 physician practices spread across several major markets in Texas. Over the years, Integrated ACO is under strong reputation for delivering efficient, high-quality care to more than 10,000 Medicare beneficiaries and significant growth opportunities in the Austin and San Antonio markets.

The South Bend Clinic is an independent employee provider group in Indiana that currently manages over 7,000 Medicare beneficiaries in its Medicare ACO. Also in the Medicare ACO segment, WakeMed Key Community Care has decided to evolve its partnership with Evolent by agreeing to enter MSSP into next year. Over the last several years, WKCC has earned a fantastic reputation as a market leader that consistently provides high-value care to the population it serves. Entering the Medicare ACO program is not only a vote of confidence in our partnership, we'll also make a significant impact on the lives of Medicare beneficiary in North Carolina. Across those 4 partners in 2020, we anticipate supporting more than 60,000 lives initially in CMS's Pathways to Success program and expect to substantially increase the number of Medicare risk lives under management across the next several years.

Along with the WKCC, we're currently in the midst of one of the largest same-store growth cycles in our company's history as several partners are expanding their service base with Evolent or adding new populations. This obviously represents an exciting vote of confidence in our partnership model as well as the broader movement to value-based care. A few examples includes: 2 partners entering the Medicare Advantage segment leveraging Evolent's platform to support market entry in operations, a large ACO having several payer delegated risk arrangements to substantially expand total premiums under management, addition of well over 300,000 Medicare lives for New Century Health across several markets for both oncology and cardiovascular services, supporting an existing health system partner to develop a clinically integrated network to rapidly expand its value-based footprint.

Having this level of same-store sales and new partner relations at this time in the year gives us high visibility into an exciting revenue outlook for next year. To that end, in terms of setting up 2020 for strong revenue and margin expansion and solidifying our market leadership position, we've made steady progress towards our 3 clear priorities for the year: Driving top line growth, stabilizing and improving performance of Passport Health Plan and aligning our cost structure to reflect our approach to the market.

On the top line, our focus for the year has been to achieve double-digit year-over-year growth by Q4, and set up a resumption of mid-teens organic growth in 2020. Given the positive market dynamics that I referenced earlier and a great effort by our business development team, we're on track to achieve those goals. In the fourth quarter, we expect our top line to be north of 10% growth versus Q4 of last year, and we have high visibility given that over 90% of our estimated revenues for Q4 are currently under contract. The building blocks of the sequential growth in the year includes: higher transformation revenues, as we expect the stepup and implementations in Q3 and Q4 as we prepare for ACO and Medicare Advantage launches in 2020. Continued ramp-up of partnerships already announced this year, empower River City Medical Group and Primera, were all be fully operational by the fourth quarter and these three partners were out of 375,000 lives for the platform.

Same-store sales across our partner network, most notably with New Century, successfully cross-selling into Passport and other clients in Q4, Passport kicked off on August 1 and will be fully up and running in the fourth quarter. Lastly, we have a few late stage pipeline opportunities that we expect to start within the calendar year. All in, we have a diverse and balance set of new business coming on in the second half and Q1 of next year that sets us up well for of mid-teens growth in 2020.

Our second priority has been around returning Passport to profitability and responding to the recently released Medicare RFP. As of June, we have seen an 8 percentage point improvement in margins and anticipate an additional 4 points of improvement to continue in the third quarter. The improvement has been generated through multiple medical expense initiatives, higher payment rates, lower admin spending and a more integrated approach to behavioral health, dental and pharmacy. We've also been in privately positive feedback from members, which as a reminder as to why Passport has consistently strong member satisfaction scores over the years, according to consumer assessment of health care providers at survey system data.

We've also seen incredibly positive service feedback for members, which is the reminder as to why Passport has had consistently strong member satisfaction scores over the years, according to consumers assessment that health care providers and systems survey data. As we look to Q4 and our goal of positive contribution, we will have an additional modest rate increase effective in Q3, as well as the full complement of medical expense initiatives in place. Improvement in both of these metrics gives us a clear line of sight for meeting our goal of driving a positive margin in the plan.

In terms of the RFP, Passport submitted a comprehensive response on July 3, and anticipates the award decision to come in the month of October. Last week, the Attorney General announced for his office as approved the transaction, and while other approvals are still needed, we remain on track to close the deal in Q4 of this year. Lastly, Passport's board announced that they are dropping their lawsuit with the state regarding retroactive rate release, which we believe is a very positive step in establishing a collaborative and productive relationship with the Commonwealth. Clearly, an incredible effort and tremendous progress by the team in the short period of time with an exciting opportunity to build on Passport's 20-year history as a leading Medicaid plan in Kentucky.

Our last objective for this year has been entered 2020 with a leaner cost structure, which combined with strong top line growth will drive significant margin expansion. Across this year, we worked to streamline operations, eliminate unnecessary redundancy, leverage AI and machine learning in our core processes and focus on improved contract profitability with select partners. As we look to Q4, we remain focused on achieving a run rate adjusted EBITDA of $40 million to $50 million, which implies a $20 million improvement versus the second quarter. The sources of that improvement are twofold: First, our Q4 top line forecast is substantially contracted with $40 million higher revenue than in Q2, and we expect to see a flow-through of approximately 25%. That implies the 1/2 of the EBITDA improvement in the back half of the year is coming from revenue growth.

The other half of the EBITDA improvement is coming from cost initiatives through Q2 that have already lower operating expenses by $11 million in the quarter and will contribute roughly $10 million of additional improvement with a full quarter impact by Q4. All-in-all, we are well on our way to achieving our key objectives for setting up 2020 with mid-teens growth in strong margin expansion. With 6 new partners this year, a stronger partner pipeline and strong same-store growth, we feel very good about our overall growth strategy and continued position as a market leader.

We've also made excellent progress with Passport providing significant cost reductions, strong clinical outcomes and high levels of service satisfaction for its members.

That overview, I'll turn it over to John to speak about our financial performance on the quarter and our outlook for the remainder of the year.

[John Johnson, CFO]

Thanks, Frank, and good evening, everyone. Today, I will cover our financial results for the second quarter of 2019, and will finish with an overview of our 2019 outlook. Overall, as Frank mentioned, we made significant progress during the second quarter towards our goal of $40 million to $50 million in run rate adjusted EBITDA by the end of the year. And our second quarter results tracked according to our expectations across revenues, operating expenses and adjusted EBITDA. Beginning with our consolidated second quarter results, adjusted revenue increased 32.9% year-over-year to $192.1 million, mostly to the impact of New Century acquisition, as well as growth within our True Health segment from the previously announced reinsurance agreement with New Mexico health connection. Adjusted EBITDA decreased $12.6 million year-over-year to minus $7.7 million. Adjusted loss available for Class A and Class B common shareholders was minus $21.4 million or minus $0.26 per share for the quarter compared to minus $2.3 million or minus $0.03 per share in the same period of the prior year.

As of August 5, 2018, there were 83.8 million shares of our Class A's common stock outstanding and 0.7 million shares of our Class B common stock outstanding. Within consolidated adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $142.7 million or 74.3% of adjusted revenue for the second quarter compared to $86.6 million or 59.9% of adjusted revenue in the same quarter as the prior year. Adjusted SG&A expenses increased to $57.1 million or 29.7% of adjusted revenue for the second quarter compared to $53.0 million or 36.7% of adjusted revenue in the same quarter of the prior year. The increase in both adjusted cost of revenue and adjusted SG&A expenses year-over-year was due primarily to the cost assumed from the assets acquired as part of the New Century transaction as well as additional personnel costs and third-party support services across the organization.

Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percentage of total adjusted revenue increased to 104% in the second quarter of 2019 compared to 96.6% in the same quarter of the prior year. Now I will take you through the second quarter results by segment. In our Services segment, second quarter adjusted services revenue increased 19.4% to $149.7 million, up from $125.4 million in the same period of the prior year. Adjusted transformation revenue in the second quarter accounted for $1.9 million or 1.3% of our total adjusted services revenue for the second quarter compared to $8.2 million in the same quarter last year.

Adjusted platforms and operations revenue accounted for $147.8 million or 98.7% of our total adjusted services revenue for the second quarter compared to $117.2 million in the same quarter last year. On a year-over-year basis, the increase in adjusted services revenue was primarily driven by the impacts of the acquisition of New Century. As of June 30, 2019, we had approximately 3.5 million lives on our services platform. Our average PMPM for the quarter was $14.22 compared to $13.24 in the same period of the prior year. Adjusted EBITDA from our Services segment for the quarter was minus $8.8 million, down $14.4 million from $5.6 million in the prior year. Our performance in the second quarter was on track relative to our expectations with adjusted EBITDA increasing by $6.7 million sequentially versus the first quarter.

As a combined effect of revenue growth and the impact of cost reduction effect, we expect to achieve a run rate target of $40 million to $50 million in adjusted EBITDA by Q4, driving the material turnaround and profitability in the first half of the year. Turning to our True Health segment, we had premium revenue of $45.8 million in the second quarter, up $22.8 million from the same quarter last year, largely due to the amended reinsurance agreements with New Mexico Health Connections entered into during the fourth quarter of 2018.

Our own health plan, True Health served an average of just 17,000 large and small group members in New Mexico in the quarter generating $22.4 million of the total $45.8 million of premium revenue in the quarter. Adjusted EBITDA from True Health for the quarter was $1.1 million. Our combined medical cost ratio was 78.8% in the second quarter and in line with the 79.8% MCR we experienced in the first quarter. Turning to the balance sheet, we finished the second quarter with $110 million in cash and cash equivalents and investments, a decrease of $74.7 million relative to the end of the first quarter of 2019. The principal uses of cash in the second quarter were $40 million loans to Passport Health and a $15 million health investment in our True Health JV with Global Health in Oklahoma.

With regard to Passport, commensurate with formerly filing the RFP, which choose to increase our planned advantage to $40 million to put some extra cushion on the balance sheet. Long-term debt at quarter end consisted of $225.6 million net carrying value [indiscernible] 2021 and 2025 convertible senior notes. For the second quarter, cash used by operations was $13.5 million. Cash used in investing activities during the quarter was $65.3 million and largely attributable to approximately $8.3 million of capitalized software development expenses and purchases of PP&E, $3.3 million of purchases of investments, $15 million of investments associated with the previously announced Global Health partnerships and $40 million advanced to Passport for regulatory capital requirements.

Cash used by financing activities during the quarter was $11.4 million, and predominantly due to decreases to restricted cash accounts held on behalf of our partners for claims processing purposes. In summary, as Frank laid out in his comments, we are on track to achieve our top line and adjusted EBITDA targets for the fourth quarter, thus marking a material improvement over the first half of the year. However, timing delays on contract start date and realization of cost savings is impacting on our third quarter invest full year outlook, and we are adjusting our guidance accordingly. We are now forecasting total revenues of $825 million to $850 million for the calendar year 2019. The components of revenue are as follows:

For the full year 2019, we expect adjusted services revenues to be the range of $664 million to $684 million. For the full year 2019, we are forecasting True Health segment revenues at $175 million to $180 million. For the full year, we are forecasting intercompany eliminations of minus $14 million. With respect to full year adjusted EBITDA, we are now forecasting a range of minus $10 million to minus $2 million. For the third quarter specifically, we are forecasting total revenue of $213.5 million to $225.5 million. The components of revenue are as follows: For the third quarter of 2019, we expect services revenues of $175 million to $185 million. For the third quarter of 2019, we are forecasting True Health segment revenues of $42 million to $44 million. For the third quarter, we are forecasting intercompany eliminations of minus $3.5 million. We are forecasting adjusted EBITDA of $2 million to $6 million.

With that, I will turn it back over to Frank.

[Frank Williams, Co-Founder, CEO & Chairman]

Thanks, John. I want to close with a brief recap of our primary sources of differentiation, the drive value for our partners and establish our position as a leader in the market. First a level of clinical administrative and operational integration in our core platform is highly unique in what is a very fragmented industry. If you're provider of health plan managing a value-based risk business, it's critical to have an integrated platform that pulls in a variety of data to drive clinical workflow, including claims and comprehensive medical information on the population that you're serving. For instance, if you have members of risk for any acute care episode or you able to identify them early and then provide the appropriate level of support and follow-up to avoid a hospital stay or further deterioration. The ability to have a consolidated view into claims, individual benefits information, an important clinical details allows you to take the right action in a matter of hearts in sort of weeks.

This ability to pull together comprehensive datasets in one easy place to drive clinical workflow and prospectively impact the course of care has been a struggle historically for most payers. The issues even more difficult for providers that many times have completely different systems and reporting requirements for the variety of payers that they serve. Having an integrated platform is a one-stop shop that can work across payers pulling critical claims and clinical data and essentially act as a connector between payer and provider is a real differentiator and drive significant improvements in clinical and financial performance.

Second, Evolent brings several of our health plan clinical and operational expertise in serving Medicaid, Medicare, commercial and exchange populations, experience with the serving over 35 partners and 3.5 million lives. The uniqueness in our role and acting as a bridge between payers and providers to facilitate much more collaborative and effective approaches to managing complex patient populations.

This takes deep expertise, experience working with both providers and payers and collaborative solutions, which balance the objectives of payers, providers and patients. Our employee base over 3,000 strong is one of the most talented group assembled in the health care services world and is absolutely committed to improving the health of the partner communities we serve.

Lastly, patients with chronic conditions drive the substantial portion of health care spending in the U.S. and require a thoughtful and evidenced based approach, driven by sophisticated data analytics, comprehensive clinical program development and unique modalities for effective provider in patient engagement. Across the last 8 years, Evolent has developed deep expertise in managing chronic condition patients and driving improved health outcomes and significant reductions in total cost.

In part, this is the result of our continued investment in sophisticated analytics, protected patient identification and selecting the correct modality to most effectively engage and graduate patients in our clinical programs.

These are critical competencies to managing large complex patient populations, and ultimately, represents the difference in market leading performance in the health care world increasingly focused on driving reimbursement systems based on demonstrable outcomes.

Thank you, again, for participating in tonight's call. With that, we'll end our formal remarks and take your questions.

[Operator]

[Operator Instructions]. And our first question comes from Ryan Daniels of William Blair.

[Ryan Daniels, William Blair & Company]

I wanted to dive into the pipeline and a little bit more color. Frank, I think, you've talked about the weighted pipeline being the largest and one of the largest in company's history. I'm curious, they can talk about that in several aspects: One, is it really around care management, PPA? Two, is the kind of a core Evolent and more of the New Century? And then three, any specific payer categories that you are seeing particular strengthen?

[Frank Williams, Co-Founder, CEO & Chairman]

Great. Thanks, Ryan. So one of the things that we've talked about recently is the fact that we really have diversified our service portfolio. If you think about our regional market being in population health, that's obviously very fit out a lot of infrastructure and capability, still a lot of growth and momentum with -- what's going on with the CMS ACO programs and new launches they are. We also have the health plans aside, which service existing provider plans as well as regional health plans. And then we have specialty care management, which goes all the way from provider plans to regional plans and national plans. With that's effectively done is increased our addressable market and obviously given us a much more the worst approach to the market.

If you step back one, obviously you feel good about the back that we have 6 partners and again very diverse set of partners in the beginning of the year across that spectrum that I just mentioned. And then if you look in the late stage pipeline and sort of what you see there, I would say across all of, so we still have a number of organizations that are interested in the government ACO programs, and see that as a good way to enter Medicare. We have organizations focused on Medicare Advantage and see possibilities of their between now and at the end of the year. On the health plan services side, continued opportunities with regional Medicaid plans that already have lives and scale, but want greater sophistication in terms of infrastructure and clinical tied that we have to the identified platform. And then if you look at New Century, I would say a very diverse pipeline, really standing Medicaid and Medicare, which is nice because that has been a new addition since the acquisition seeing very strong application in Medicaid. But also across both regional and national plans.

So if you step back and again, look at the weighted type and how we think about it, I would say, one, we've already closed enough business to give us a very strong confidence in mid-teens growth for next year. So that's highly visible based on where we sit today. And then when you look at the additional things we have in the pipeline and I would say, we closed a few of what are very large opportunities in late stages, and we see even accelerated growth over that level. So we don't need to sweep the pipeline -- when you basically have nothing to add or a very little to add to feel very confident that mid-teens and I would say a few of the things in the pipeline get close would give us confidence to go beyond that going into next year.

So I would say one of the best 6 months that we've had from a pipeline perspective. And also what I feel good about is the fact that a lot of it is coming from our existing partner base. So to have substantial growth that NCH across a few of our Medicaid partners across several hundred thousands of lives, that's a big add in terms of revenue. I mentioned the Medicare Advantage additions with 2 of our partners, some delegated risk arrangements. So very diverse across almost all segments that we serve and again, very strong disability going into next year.

[Ryan Daniels, William Blair & Company]

Okay. Very helpful color. And then as a follow-up here, and just maybe difficult to discuss on a public earnings call. But largest pipeline, you've seen one of the best same-store growth outlook in company history, which is the great data point. Passport clearly improving, yes there stock is sitting here at all-time lows. So I am curious, what the Board has thought of potential strategic alternatives and ways to clear value, share repurchases, anything of that nature that you can share with the investment community?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I think we've been very focused, obviously, on a specific agenda we have this year. One was our returning top line growth to double-digit growth by the second half of the year and teens growth next year, driving significant margin expansion. If you do all of that, you have a service business approaching $1 billion in revenue which, again, we believe on a comparable basis, surely drives a lot of equity value. Second, we realized there was a lot of questions about the investment in Passport, whether that was a shift in strategy, whether that was going to be a good investment for us, we believe we're proving out the thesis that we can drive strong financial performance that she really the investment from a value perspective. Passport wins the RFP it will be seen as a very strong investment and obviously a lot of strategic options as to how we evolve our relationship there. How we leverage the network. How we continue to collaborate with our provider partners. But we think it's a very valuable asset in Kentucky and that can have a massive economic benefit for us over time. So our immediate focus has been executing on that, and we feel very strongly that as we deliver against that, it will see a rebound in the stock price and generally in investor confidence. And then hopefully some of the things we are talking about on the call today in terms of visibility and really achieving the main tenants of our plan by the fourth quarter into next year it will help to gain that confidence.

What I would say is, we are always mindful of lifting up our heads and seen where we've said strategically in the market. Where are we from a value perspective, where do we sit vis-à-vis with various players in the market. We are building a valuable and differentiated assets, are we thinking to the options for how to take advantage of that monetize that. Then I would just say, we've got a Board that is obviously highly experienced. And if -- we didn't see a rebound to the equity, and we have the strong performance that we anticipate, then that obviously that might open up the various options and some of the ones that you described whether that's a strategic positioning of the company, with that's stock repurchase, all of those things would be on the table based on where we sit. But right now, I think, it's been building confidence in our plan, executing on it getting to where we wanted to get by the fourth quarter, setting up a service business approaching $1 billion in revenue with mid-teens, potentially higher growth and strong margin expansion, and then having demonstrated that we could invest in an asset that we believe is a very valuable asset and began the demonstrate that value, and it obviously has its own stand-alone asset value, and I think as far as investor will look at that and check out of these pieces particularly, relatively to comparable companies in the addressable markets that Evolent has, and we will be back to where we want to be from a stock price perspective. So that's right now our current focus.

[Operator]

Our next question comes from Robert Jones of Goldman Sachs.

[Robert Jones, Goldman Sachs Group]

Frank, just wanted to go back to your expectations from mid-teens growth next year. Clearly, it sounds like a lot of confidence, good line of sight into getting to, at least, that number. But I wanted to ask and a few of those assumptions behind and key things and factors. So maybe just throw [indiscernible] you guys are thinking as far as, how they play out relative to that expectations? I guess, the first obvious one just would be Passport and the success level assumed in the Kentucky RFP process? I know it's mid-year, but I'm sure would have some impact on next year. The other one would be just be, what are you assuming around the incremental Medicaid enrollment Florida? And then, just the last one would be around the expectation around Beacon Health in light of the proposed acquisition of that plan? So just kind of -- even directly how are you think about those three factors relative to that mid-teens growth, be helpful?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. Great question. First on Passport. If we win the RFP based on what we've seen today was largely things that are contracted, we would be at high-teens, potentially higher, with Passport winning. With Passport losing, we'd be more in the neighborhood of low teens. So either way, we still see very strong revenue growth heading into next year.

With Florida, we do believe that we have the opportunity to increase membership growth there, we're not assuming that in any of the assumptions that I just give you about growth. So any upside there would be upside on the numbers that I just gave you. And then on Beacon, Beacon has reiterated their commitment to Evolent and our partnership. We work together in several markets where value -- were viewed as a very important strategic partnership for them. We actually work together as Passport, which is as imagine is a very large contract, that they would be part of our RFP response. We work with them in -- work with them in New York. So we see that as something that has been going well, and that will expand over time. We obviously want to make sure that we have a very integrated approach with our offering. So that's very important, we are delivering seamless service to members that will be innovative they are. So there's a lot of we ask of them in terms of how they evolved and obviously we need to work together well that we see that is a very strong relationship and anything that's been reiterated since the acquisition. So that hopefully gives you a sense. We're not, again, depending on a bunch of new and different things together where we need to get to from a revenue perspective for 2020.

[Robert Jones, Goldman Sachs Group]

No. No, that makes a ton of sense. No, I guess, just on the EBITDA and clearly the confidence to exit the year at the run rate that you guys pointing to. But you know obviously, you had in the quarter, you are lowering the expectations for the year, next quarter, I think, looks based on the guidance, not as robust as where you expected to be in the 4Q. Can you maybe just talk a little bit about how EBITDA has played out? And what's kind of been impacting the profitability causing a little bit more volatility? And then obviously it's related to that what gives you the confidence that the year-end exit rate is still a very much intact?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I'll start and then I'll have John comment on specifics. And if you think about where we started the year, we had a relatively ambitious agenda. We wanted to get to double-digit growth and $40 million to $50 million in contribution by the fourth quarter. That was really are going and what we really care about is the setup for 2020, ongoing growth and margin expansion. I think the message is getting on the call is, we're very confident in our path towards our objectives in 2020, and then we feel very good about Q4.

What you see in our business, when you're driving that kind of inquiries from Q1 to Q4, is as you're bringing on new top line revenue, start date really matters. So we had couple of contracts that we expected to start mid-Q2, one at bringing of Q3, and those moved to a couple of months because of regulatory approvals against the things out outside of our control.

So you have a couple of things moved that are fairly large opportunities. We have another thing again, expected to start with Q3, which will start at the beginning of Q4. And that can getting influenced the flow of EBITDA in Q2 and Q3. The good news is, all of those things are contracted. We had a clear line of sight on start dates. There is no ambiguity of those starting and running through Q4. And then John will comment on this, but on the cost side, you will also have some things that you anticipate you're going to be fully in place by the second quarter and a certain part of it looks into the third quarter, so we have a little bit of that in the middle of the year. I would say on overall targets on what we needed to do, we obviously took a lot of the beginning of the year, and I felt very good about where we are, that you will see some of those quarter-to-quarter fluctuations. John, anything you want to add to that?

[John Johnson, CFO]

Yes. I just want to add one piece -- color around the cost side. If you look at the OpEx and services line from Q1 to Q2, what we saw $11 million sequential improvement there, that is not fully reflects the full impact of the initiatives and actions that put in place during the quarter. And so as Frank indicated, we will see incremental improvements early in Q3 and then, again, into Q4 from actions that have already been taken.

[Operator]

Our next question comes from Jamie Stockton of Wells Fargo.

[James Stockton, Wells Fargo Securities]

Maybe just one more on where Bob started as far as to the kind of mid-teens. Outlook for next year, the premium piece of the revenue, is it reasonable to assume that in mid-teens growth number that you're assuming that the premium piece is really just growing in mid-single digits or something like that?

[Frank Williams, Co-Founder, CEO & Chairman]

So on the premium piece, we're not assuming significant growth on the premium piece. So I wouldn't -- really, when we are talking mid-teens growth, we are really talking the service part of our business on the New Mexico side, we do anticipate some growth, but I'm not really factoring that in into the mid-teams probably talking about the core service business.

[James Stockton, Wells Fargo Securities]

Okay. That's great. And then my other question is about the balance sheet. I think John may out like $110 million cash number. You guys haven't closed the Passport deal, which is going to be $70 million. If you could just talk about how -- what are your thoughts on how kind of you manager balance sheet from here? Obviously, you are seeing an improvement in adjusted EBITDA, which presumably is going to have an beneficial impact on kind of what for the cash flow looks like, but just what your thoughts are on the balance sheet, will be great?

[Nicholas McGrane, EVP, Corporate Performance]

Jamie, it's Nicky. I would say on that point two things: One is, as you said, we would expect cash flow neutral between the remainder of the year based on an dynamics in the business, that's one thing. And secondly, as we talked about before, we would look to replenish the balance sheet and more cash to the balance sheet we've looked at debt options and debt. With the Passport timing likely in Q4 event, that action up with closer to the timing there. we're comfortable with where we sit is what the outlook on the cash flow basis for the year-end and our options replaced the balance sheet. So all-in-all, we feel comfortable with

[Operator]

Our next question comes from Sean Wieland of Piper Jaffray.

[Sean Wieland, Piper Jaffray Companies]

So I'm going to kind of follow-up on Bobs line of questioning on the growth rate. You characterized Passport as taking you from the high-teens growth to a low teens growth, which -- it as may be 500 basis points of revenue, would size Passport in the maybe $40 million to $50 million range. I thought it was more than that. And so -- can you on that?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. And John can chime in. If you think about Passport, we've added New Century as you go into next year. We've also expanded our service offerings. So that's an increase of our base. So that contract in total was well over $150 million in revenue. If we lose the RFP Passport, we still sold out the membership to the middle of the year. So you still get 50% of your full run rate revenue for the year. And you still have some run out probably of revenue. So you have a portion of that revenue come of, and that's the difference between our high-teens and our low-teens range.

[Sean Wieland, Piper Jaffray Companies]

Okay. Got it. So but the overall Passport contribution of revenues and the $150 million -- will be [indiscernible] built out?

[Frank Williams, Co-Founder, CEO & Chairman]

It could be higher than that. I mean, we're just starting out contract in August. So we need to see the number of lives that the NCH services supply to, and we have better visibility on that as we get towards the end of the year. But we sort of set our base as our number was in the $80 million, $90 million range. Initially, we thought New Century as well as some of the additional services, we are adding this year, would add for that, and so I would think about it as well over $150 million. But in that zone, with potential of the growth beyond that as we go into next year.

[Sean Wieland, Piper Jaffray Companies]

Okay. And is it fair to ask what the contribution EBITDA is?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I would say, on EBITDA, it has a similar contribution margins to our overall business. So I mean, John, you can -- just in terms of overall contribution margin similar kind of outsized contract from that perspective. And if you are on the math that, obviously, is important from a contribution margin perspective.

[Sean Wieland, Piper Jaffray Companies]

Okay. And one more if I could. What was the $9.6 million gain in the quarter. Did I missed something?

[John Johnson, CFO]

That was related to the global transaction and then gain on the assets that we contributed to the JV.

[Operator]

Our next question comes from Matthew Gillmor of Robert Baird.

[Matthew Gillmor, Robert W. Baird & Co.]

I wanted to get an update on Passport's financial position. You made some comments about their margin trajectory that seemed very positive. Where those profitability metrics on an EBITDA basis or net income? And then you also talked about the $40 million plan advance. Just given their trajectory on margins, can you give us some sense of when you recoup that one?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I would say, the plan is a nonprofit. So they are not a taxpayer. If you look at the margin improvement that's occurred, it's been about 8 points of improvement, if you look at January run rate to June run rate, so that's pretty significant. Some of that coming from the rate increase that was effective April 1., the other portion coming from expense initiatives, clinical programs that we put in place, which are engaging a higher proportion of patients and therefore, having an impact on hospitalization and medical cost. We expect an additional 4 points of margin improvement coming into this quarter. Some of that is based on a small rate improvement, that will be effective in Q3. So additional one that happened in April will also have a full quarter of over expense reduction initiatives coming in for the quarter and the New Century, which will take a little while to ramp, but launched August 1. So we probably won't get a full benefit of that until the fourth quarter.

But right now, we're feeling pretty good about exiting Q3 and breakeven, at least, and then as we head into Q4 with New Century taking hold on a few other initiatives being at a positive contribution levels. So I would say, right on plan. The team is very focused. We've built a lot of confidence just in terms of the expertise we brought were working closely with Passport team. And again, we feel very good about where we are.

On your last question, going into the RFP, I think, we wanted to top off the balance sheet so that we have appropriate cushion there from a capital perspective as we entered that process. And as we began to generate positive contribution on a monthly basis that would obviously some of the level of ongoing balance sheet support. We won't likely close the transaction until the very end of the year. And -- so we got sort of balances two things, and we would be at roughly where our original estimates were in terms of capital contribution.

[Matthew Gillmor, Robert W. Baird & Co.]

All right. Fair enough. And then the pipeline side, Frank, you mentioned there are several sort of late stage deals that could close in potentially get launched. It sounds like this relatively chunky opportunities. Can you, at least, give us some sense of sort of where they will sit on the business that is more on the health plan, services side or more specialty management or Pop health?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. And just to be clear, what we've said is that 95% of our Q4 run rate is contracted. So high visibility -- those are contracts that we know are starting in between now and fourth quarter. we're really talking about a small amount of incremental revenue in terms of our Q4 run rate. we're really referring to as is, we want to have additional growth in setting up '20 and '21 beyond mid-teens, it's been looking towards in the late stage pipeline. And I would say there a combination of a few things, a few existing plans that are looking to improve the sophistication of their health plan services platform that want that tie into identify so then they can continue to identify clinically, and those makeup the deal and some of those are Medicare oriented and also in Medicare. And then the second piece is New Century, where I would say for what has been a short time since we acquired the business in the fourth quarter of last year, I think, we put a pretty strong team against it. We've leveraged our existing network as we talk about and have been also been thought about the margin approaching I would say we have a very strong pipeline there as well. So those opportunities, because you're working with existing original plans that have a large number of lives have the potential to be quite significant in terms of the revenue contribution that generally have an implementation cycle. So those probably wouldn't implement until the end of the first quarter of next year, but those could be a substantial contributors to '20 and 2021.

[Operator]

Our next question comes from Richard Close of Canaccord

[Richard Close, Canaccord Genuity Corp.]

Just on the same-store growth, I was wondering, Frank, if you could just maybe talk a little bit about the total number of lives that you were talking about with all that business? And maybe the timing of when all that comes on?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I would say, if you look at a few segments the MA lives is with 2 partners that I mentioned would come on in January. I don't have an exact estimate, but again, they are going to be ramping new plans, probably it would be under 10,000 lives, but they are Medicare lives, so high PMPM, probably about 10,000 there. I mentioned that we have some that we've already announced, which are over 300,000 lives, which will come on by the fourth quarter, actually some of those are new, so if there are not same-store.

If you look at MCH, at Passport and the couple of the other opportunities we see in the Medicare segment, with one of our Medicare clients, it's probably 300,000 lives over 300,000 lives across those plans, that's obviously higher PMPM. So that's a substantial revenue generator. And then we have a partner in ACO that's expecting to add pretty substantial book of delegated risk lives that could be, again, hard to estimate, but that could be over 100,000. It could range from 50,000 to 150,000 lives from that perspective.

So if you add all that app, it's substantial growth in the next year coming from same-store, which, again, we feel very good about. It's obviously easier to scale when you already have the relationship. And then with 6 new additions this year on the new side as well as the pipeline that I just referenced, we have the potential to go beyond that growth estimate for next year.

[Richard Close, Canaccord Genuity Corp.]

Okay. And then a follow-up, maybe on the pathways program. How are you seeing that takeout? Obviously, you have some success in adding new people or new clients this quarter. How do you think that trends as we enter 2020?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I will just say, our plan has been to be highly selective, in terms of new partners we add in that program, and the ACO programs in general. We want partners that have a strong historical track record of MLR performance with their Medicaid populations that have a long geographical area of potential population to scale to, that potentially have interest in other population. So we don't in a situation where we are working with 5,000 lives and we're really not driving scale in those markets.

So we wanted to be working with winners that ultimately can add tens of thousands of lives over 50,000 lives, over 100,000 lives in their markets across time. And so I would say we're less focused on numbers there, number partners, but selecting the right ones and having ones that's successfully scale and grow over time. So I think you'll see some additional announcements there, as we continue to add top organizations to that program. But we're not planning on building a very large cohort of ACOs that have a small number of lives, that's not where our business focus is.

[Operator]

Our next question comes from Mohan Naidu of Oppenheimer.

[Mohan Naidu, Oppenheimer]

Frank, first on the pipeline trends, then the 6 partnerships that you have signed so far. Can you talk about your integration capacity if you have handle that? And especially as you seen more pipeline converting towards the second half of this year?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. That's a good question. Obviously, when we have this kind of growth to accommodate across a variety of different segments, we need to make sure we're ready to launch that we have the capacity that we can hit the ground running on day one. I would say, we feel good about our capacity at this point and an ability to deliver based on the opportunities that I just talked about. I would say if we got additional wins we probably will need to think about staffing up for those implementations that have the accurately time because we obviously stretched to accommodate the growth into next year. So that something that we don't look in the past we obviously have a very strong pipeline in our overall recruiting efforts and feel like we can accommodate that, but we need to respond quickly. And we definitely, we need to do some incremental hiring as we head into next year.

[Mohan Naidu, Oppenheimer]

Maybe one quick one on CountyCare. Any updates on the program position? What you're seeing in that program so far? And given that the state budget position is not such an position right now, how do you see that program sustaining?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. I would say, we really have had a strong relationship with CountyCare. They got a really strong leadership. We've expanded our relationship across time. I think they are very highly regarded plan in the community. And we think that they will continue to be a great partner for us going into the future. The state is obviously under economic pressure. There's been a lot of speculation of what's going to happen the state Medicaid plan, et cetera. It's our believe that it's a very important community asset, it could lead to a lot of brought health system, that it's incredibly important the beneficiaries in the county and has a lot of critical support. And we think they will be a strong plan going forward. And I think if you ultimately look at how they are performing, how they contribute to the overall health system that they are part of, they make a very important and significant contribution. If you look at the full picture of the economics, they drive for the health system.

So I think a very valuable asset. Again, when we had a strong working relationship with. Obviously, we want them to be sufficient as the can. And that's one of the reasons we have the partnership with you, because of the scale we bring the additional ways we can add value for them, thinks like New Century, which frankly, for all of our partners that are in the risk business can add value over time And looking for those types of opportunities. But again, strong relationship, and we think that will be around for a long time.

[Operator]

Our next question comes from Charles Rhyee of Calvin.

[Charles Rhyee, Cowen and Company]

Just had a quick question. I think you talked about investing capital of $40 million into Passport, is that separate from the $20 million line of credit that was announced in the original deal? And then secondly, any kind of color you can give around sort of the bid submission? I guess, I see from this investment as line of credit you met with any kind of requirements needed for bidding on Passport?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. Just to clarify, the $40 million is inclusive of the $20 million. The RFP happened after we announced the deal. Going into the RFP, I think, we wanted them to have some more balance sheet question and then we put additional $20 million commensurate with the RFP process, and then RFP responses were due July 5, as for submitted competence of response. We expect to hear in the October timeframe based on what we've heard from the Department of Medicaid. No comment on the potential winners or anything like that we don't obviously have an information or any comment on that. We obviously feel that Passport is a real asset in the community, strong track record across the last 20 years, incredible member satisfaction ratings. We think that it's an important plan that's having a really important impact on the Medicaid recipients that they serve. we're hopeful and looking forward, to try to build on that, but no specific comments on the RFP.

[Charles Rhyee, Cowen and Company]

Great. If I can just follow-up. You talk about one of the investments we are making that also help drive the growth next year as well. When the investments we're making on the Passport side. Is that captured of income statement sort of as part of equity line? Or is that, are you carrying costs on sort of the Evolent income statement P&L that would benefit sort of the Passport side? Just to generally understand a little bit?

[Frank Williams, Co-Founder, CEO & Chairman]

Yes. No, right now, we don't own the brand choice, and investments are on our side of the ledger. And obviously, this is in the context of the services we provide today. So as we -- clinical programs, the NCH's success, as what a normal course in our line of business and then in our side of the ledger.

[Charles Rhyee, Cowen and Company]

So then would that change versus a transition closes in the fall. Let's assume that Passport gets a renewed with some caring on the term and side because that shift over could be extensively part of operating the plan?

[Frank Williams, Co-Founder, CEO & Chairman]

Again, I think, I mean, probably not just because these are services, we're service provided to them that we keep that relationship. So I would say those capabilities would sit on our side.

[Operator]

Our next question comes from Stephanie Demko of Citi.

[Stephanie Demko, Citigroup]

Just kind of dove down on the strategic alternatives question from the Board. Is there anything structurally or philosophically that you would do from same private like an advantage voting of the public buyer?

[Nicholas McGrane, EVP, Corporate Performance]

Yes. Stephanie, this is Nicky. We are not going to comment on this point in terms of. I think Frank talked about earlier with as part of Ryan's question about how we look at the world and how we think about it, where we're focused right now, but in terms of structural order issues, and that's not really something we comment on just as Frank said, we had down focus on delivering value we got a lot in front of us, that is what we are focused on today and not really something we can comment on.

[Stephanie Demko, Citigroup]

Understood. So is there something that is the only public buyer are selling today?

[Nicholas McGrane, EVP, Corporate Performance]

No. There's nothing about that. No. Nothing, specific like that. No.

[Stephanie Demko, Citigroup]

Okay. Understood. And then just kind of last question on the [Technical Difficulty] that how we would have thought about that [Technical Difficulty].

[Nicholas McGrane, EVP, Corporate Performance]

I would say that, if I go back to John's comment, sort of looking at the -- [Technical Difficulty] the point we are referring here in Q3, and that's the timing, primarily to see without these contracts started. So yes, I mean, I think you are seeing some impact in Q3 of the combination effect of when the contracts started and some of in the expenses that went against them, we're sort of ready to go expenses in place to contract on the revenue recognition gain a little taxes later than we expected. So it is a combination, it's really just to do with the timing and I don't think, there is an undue level of investment in the Passport that was not anticipated, just more just to do with the when these contracts started up, and you are seeing the Q3 when we are seeing the impact of that primarily versus Q4, we have contracts up and run for the fourth quarter check are. So I think more timing than investment would be the issue at hand in Q3.

[Stephanie Demko, Citigroup]

Got it. Understood that's helpful. One last quick one, just given some of the attrition that you could see earlier this year. Do we still think about that 7 to 9 new wins as this number, do you think your growth target is or is that for future?

[Frank Williams, Co-Founder, CEO & Chairman]

This is Frank. I mean, I would say, we've made a pretty clear, we don't really need a lot of new wins to hit our growth target and our setup for next year, we obviously want to keep growing our partner network, given the fact we're at 6 for the year. I think we and our range into the 8 to 10 range, just given our overall size. So right now, we feel comfortable being in that range of 8 to 10 across this year.

[Operator]

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

[Frank Williams, Co-Founder, CEO & Chairman]

We appreciate everyone participating in the call. We obviously see many of you at up-and-coming conferences on the road across the next couple of weeks. And again, thanks for participating.

[Operator]

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