Evolent Health Inc
NYSE:EVH
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
10.71
34.72
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Evolent Health Inc
You don't have any saved screeners yet
Welcome to Evolent Health Earnings Conference Call for the quarter ended September 30, 2018. 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 securities 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 third quarter news press release issued earlier today.
As a reminder, reconciliations of non-GAAP measures discussed during today's call to 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.
Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health, and I'm joined by Nicky McGrane, our Chief Financial Officer.
I'll open the call this evening with a summary of our financial performance for the quarter and share our perspective on the overall market and our pipeline. I'll then hand it to Nicky to take us through a detailed review of our third quarter results, and I'll close with an update on our organization as well as an update on our implementation process with Florida Medicaid. As always, we're happy to take questions at the end of the call.
In terms of our results for the quarter ended September 30, 2018, total adjusted revenue increased 38.6% to $150.2 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended September 30, 2018, was $4.8 million compared to $2.6 million from the comparable quarter of the prior year. As of September 30, 2018, we had approximately 3.1 million total lives on the platform. To date, we've welcomed a total of 9 new partners to the Evolent national network this year, including Lee Health, Torrance, Baptist Health Care, Nicklaus Children's Health System and SOMOS IPA, a top-performing innovative provider network in New York City.
Just recently, we were delighted to learn that SOMOS IPA achieved formal designation by the New York State Department of Health as a value-based payment innovator, opening the door for them to pursue delegated risk arrangements with MCOs throughout the region. I'll touch on this in more detail later, but this represents a very exciting opportunity for Evolent and SOMOS to dramatically improve community health in the New York metropolitan area while also significantly expanding the number of lives under value-based arrangements.
Overall, we're pleased with our results having met our strategic and financial objectives for the quarter.
In terms of what we're seeing in the overall market, this is the time of year where we gather significant market intelligence from our partners and other key industry stakeholders. To that end, we've just completed several dozen site visits as well as our Annual Executive Summit event in mid-October, where we convened 200 senior executives from 75 leading provider organizations, including existing and prospective partners. In this intimate and unique forum, we were able to hear directly from the market leaders in value-based care as they shared best practices and highlighted the key areas of focus driving their value-based care strategies.
Accordingly, there were 4 pretty clear conclusions from the intelligence-gathering process. First, amongst the health policy experts and industry luminaries at the summit, there was an overwhelming sense that the shift to value-based care is accelerating. A recent report published by the Health Care Payment Learning and Action Network supports this conclusion, highlighting that the percentage of health care payments tied to value-based care is approaching 40% in 2018, up from 23% in 2015. Second, some of the attendees pointed to a few factors that were driving increased focus on the move to value. One of the biggest factors is the rapid shift in demographics as the population moves to Medicare and Medicaid, which represent lower payment rates in the commercial side. Add on the impact of volume pressure due to narrow networks and lower cost sites of service, and both physician groups and health systems are facing increasing margin pressures on the fee-for-service side.
One of the ways to stem the tide of decreasing margins is to move into value-based arrangements where you can be rewarded for managing the total cost of care. Given the increasing pressure on federal and state budgets as a result of health care cost inflation, a vast majority of providers are accepting the fact that value-based care is here to stay and that it's time to move rapidly into risk-bearing arrangements in order to build much-needed competencies in the future. We've observed these shifting dynamics over the course of the year as we continue to generate substantial interest from physician networks, health systems and payers. Third, another important item that emerged from our discussions was that provider-led value-based care actually works in driving demonstrably better outcomes. We can see that our own network where our most committed and long-standing partners are improving year-over-year as they take on greater downside risk and move towards scale. Furthermore, leveraging in-depth clinical data and supporting clinicians with integrated care teams allows for early and more effective interventions, particularly with high-cost patient populations.
It was amazing to see the level of sophistication across the Evolent network in leveraging high-powered analytics, sophisticated engagement methodologies and cutting-edge clinical program development.
The experience across our network has also been supported by recent observations coming out of CMS, which recently shared data that provider-led ACOs save the government well over $1 billion and that organizations that have the most downside risk and cumulative experience are delivering significantly better outcomes. This recent experience is confirmation of a critical component to the Evolent market thesis that engaged clinicians with high-powered clinical informatics, infrastructure and team support can drive higher-quality, lower-cost health care.
To that end, the results of a fourth consistent message from providers that they simply didn't have the expertise, knowledge base and population health, supporting infrastructure or administrative capabilities to take on significant downside risk. Consistently, we heard partners in [ pro skip backs ] discuss the critical importance of gaining the operational know-how and clinical expertise required for success. We were delighted to hear many of our partners share that they wouldn't be where they are today without the Evolent platform.
The key themes from our summit have also been reinforced by our ongoing discussions with policymakers on Capitol Hill and recent directives coming out of HHS and CMS. We've been very encouraged by recent actions that the administration has taken to accelerate market adoption of performance-based risk arrangements. For example, in August, CMS announced significant new rule changes to the Medicare shared savings program. The redesigned program, Pathways to Success, discontinues the upside-only MSSP Tracks 1 and 2. It also reduces the amount of time an ACO can remain in the program without taking on risk from 6 years, down to at most 2 years. As we shared in our public comments to CMS, Evolent supports the redesign of MSSP to accelerate the ACO transition to performance-based risk, and we also support time limiting the proposed basic track and requiring all MSSP participants to accept 2-sided risk by 2021. We expect these changes will provide greater stability and predictability and will help more providers benefit from qualifying as advanced alternative payment models.
In terms of timing, ACOs will likely make their final program participation decisions in early 2019, given the anticipated July implementation date for these changes to take effect.
From a macro perspective, we see this change to MSSP as well as the general philosophy of the administration to be advantageous to our market and strategy over the long term. Encouraging providers to take on performance-based arrangements with significant downside serves as a catalyst for providers to leverage our unique platform so they can drive significant clinical savings and ultimately be successful financially.
On the Medicaid side, the administration has recently made it easier for states to submit innovation waivers, which encourages innovation and ultimately more creative, provider-driven approaches. The combination of these market dynamics in both Medicaid and Medicare continues to drive positive momentum in our pipeline. We come into the end of the year with 9 new partners at the high end of our range as well as a strong and diverse existing pipeline. In particular, we're pleased to see our Medicaid strategy continuing to pay off over the course of this year as we added 4 new Medicaid partners and now have more than 1.5 million total Medicaid lives under management. We look forward to continuing this expansion as we enter 2019 with the addition of Medicaid plans in 5 regions in the state of Florida.
Our investment in the Medicaid Center of Excellence and growing reputation nationally have been critical to helping us grow our existing pipeline, and we're hopeful we can close an additional Medicaid opportunity or 2 by early 2019.
In general, we feel good about our overall pipeline, both in terms of breadth and depth, as we head into the end of the year.
In terms of the overall environment around same-store growth and renewals, we generally feel good about our positioning heading into the end of the year. As we discussed earlier, we continue to deliver strong clinical and financial results across our network and see a number of our partners gaining confidence in their value-based care strategies. For example, recent data shows that our Next Generation ACO cohort is performing well, and we're trying to build on that momentum in planning for 2019. Outside of our cohort, we're also working with a number of provider partners looking to expand into new risk arrangements for 2019.
On the other side of the ledger, as we've discussed throughout this year, we do anticipate some continued softness in the provider-sponsored Medicare Advantage Plan segment. This segment represents a small portion of our current revenue, and as a result, we anticipate a modest impact heading into next year.
All in all, the Evolent network feels reasonably stable with a number of clear opportunities for expansion, a few areas of contraction and favorable tailwinds emerging in the macro policy and provider landscape.
In terms of expansion opportunities, a prime example heading into 2019 is our announcement today that Evolent will support the SOMOS IPA network in operating as a value-based payment innovator in the New York State Department of Health's innovator program. Earlier this year, we announced our new partnership with SOMOS to support its district work in New York. SOMOS' recent acceptance to the innovator program opens the door for SOMOS to pursue delegated risk arrangements with MCOs that currently manage well over 1 million members.
Over the coming months, SOMOS intends to contract with each of the major Medicaid MCOs in the region to take delegated capitation and bring an entirely new approach to population management and value-based care. Over the long term, SOMOS' designation as an innovator strengthens its brand equity in the market and positions it well for significant growth as the state and regional payers look to contract with physician-driven, high-performance networks.
In terms of an example on the Medicare side, we believe our recent acquisition of New Century Health will open up substantial growth opportunities in serving national and regional payers as well as provider organizations. As a reminder, NCH is a technology-enabled specialty managed care company focused on managing high-cost, complex populations in oncology and cardiology for risk-bearing payers and providers. The company's proprietary technology platform brings together analytics, clinical protocols, pharmacy management, physician engagement and network management to coordinate care and improve quality in a cost-effective fashion.
Traditionally, payers have struggled to manage high-cost specialty areas like oncology and cardiology, particularly given the amount of variation that can occur in clinical pathways, prescription drug use and other factors. Over the past 15 years, NCH's clinically driven approach has delivered strong results from both a clinical quality and financial standpoint. As such, New Century Health helps us address a large, growing market with a proven solution and presents a significant, long-term opportunity for Evolent. This acquisition also expands our access to the payer market directly and allows us to facilitate collaboration between payers and providers. Already, our partner development and New Century Health teams are hard at work identifying a number of cross-sell and market expansion opportunities that we want to pursue in the coming months.
In summary, we're happy about our performance thus far in 2018, and we feel good about our position as we head into next year. Over the next several weeks, our teams will focus on forwarding opportunities in the current pipeline, meeting operational milestones for the Florida health plan launches and finalizing 2019 plans with each of our partners.
With that overview, I'll turn it over now to Nicky to touch on our financial performance for the quarter.
Thanks, Frank, and good evening, everyone. Thanks to the dedicated efforts of our teams across the company, we're pleased to report third quarter 2018 results that reflect solid execution against our previous guidance.
Beginning with the consolidated third quarter results. Adjusted revenue increased 38.6% year-over-year to $150.2 million through a combination of continued growth in our services segment as well as the introduction of our True Health segment.
Adjusted EBITDA increased $2.2 million year-over-year to $4.8 million, driven by strong revenue growth and 0.8 points of margin expansion. Adjusted loss available for Class A and Class B common shareholders was negative $3 million or negative $0.04 per share for the quarter compared to negative $3.2 million or negative $0.04 per share in the same period of the prior year.
As of November 5, 2018, there were 78.4 million shares of our Class A common stock outstanding and 3.9 million shares of our Class B common stock outstanding.
Within adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $90 million or 59.9% of adjusted revenue for the third quarter compared to $65.7 million or 16.6% of adjusted revenue in the same quarter of the prior year. Adjusted SG&A expense increased to $55.4 million or 36.9% of adjusted revenue for the third quarter compared to $40 million or 37% of adjusted revenue in the same quarter of the prior year. The increase in both adjusted cost of revenue and adjusted SG&A expense year-over-year was due primarily to the costs assumed from the assets acquired as part of the True Health 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 declined to 96.8% in the third quarter of 2018 compared to 97.6% in the same quarter of the prior year.
Sequentially, total adjusted cost of revenue and adjusted SG&A expenses grew from $139.6 million or 96.6% of total adjusted revenue in the second quarter to $145.4 million or 96.8% of the total adjusted revenue in the third quarter. This increase was primarily due to implementation and prelaunch activities across 3 Medicaid plans we are providing services to in Florida, continued hiring in other parts of the organization unrelated to Florida as well as an increase in reserves for certain of our performance-related arrangements. These expense increases were partially offset by lower claims expenses incurred at True Health relative to second quarter.
Now I will take you through the third quarter results by segment. We have delivered strong execution against our plan for the first 3 quarters of the year with both segments managing to meet or perform above our previously provided guidance ranges.
In our services segment, third quarter adjusted services revenue before intersegment eliminations increased 21% to $131.1 million, up from $108.4 million in the same period the prior year. Adjusted transformation revenue accounted for $9.2 million or 7% of total adjusted services revenue for the third quarter compared to $8.2 million in the same quarter last year.
Adjusted platform and operations revenue accounted for $121.8 million or 93% of total -- of our total adjusted services revenue for the third quarter compared to $100.2 million in the same quarter last year. On a year-over-year basis, the increase in adjusted services revenue was primarily driven by new partners that went live in the first and second quarter as well as growth from existing markets, particularly with Passport and Cook County.
Relative to our previously provided guidance for the third quarter, the outperformance in adjusted services revenue was primarily driven by 2 key items. First, we saw higher-than-anticipated completion rates across the implementation work being performed in Florida, which boosted our transformation revenue relative to expectations. And second, we recognized a modestly higher amount of performance-related revenue than what we have previously assumed will be available for recognition.
As of September 30, 2018, we had approximately 3.1 million lives in our services platform. Our average PMPM for the quarter was $13.05 compared to $12.20 for the same period of the prior year. Adjusted EBITDA from our services segment for the quarter was $4.1 million, up $1.5 million from $2.6 million in the prior year. Sequentially, adjusted EBITDA from our services segment was down $1.6 million due to the net impact of these aforementioned cost increases we experienced in the quarter.
Turning to our True Health segment. True Health served an average of approximately 19,000 large and small group members in New Mexico, producing third quarter premium revenue with full intersegment eliminations of $22.8 million. Adjusted EBITDA from True Health for the quarter was $0.7 million.
Our medical cost ratio was 74.4% in the third quarter compared to 71% and 80.3% in the first and second quarters, respectively.
On our last call, we guided to medical costs that would normalize between the first and second quarter results for the remainder of the year. As such, performance in the third quarter was within these expectations.
We continue to see favorable utilization trends and improvement in the risk mix of the plan versus 2017 and are comfortable with our IBNR reserve exiting the quarter, which totaled $10.3 million. Through 3 quarters, cumulative adjusted EBITDA from True Health was $0.9 million, just slightly ahead of our full year guidance of breakeven contribution for this segment.
Turning to the balance sheet. We finished the third quarter with $221.8 million in cash and cash equivalents, an increase of $23.9 million relative to the end of the second quarter. This increase was primarily due to several items influencing cash provided by operations this quarter that were timing-related and are likely to reverse in Q4.
Long-term debt at quarter end consisted of $122.1 million net carrying value of our 2021 convertible senior notes. Subsequent to the end of the quarter, we closed on both our acquisition of New Century and the pricing of $172.5 million aggregate principal amount of 1.5% convertible senior notes due 2025. Pro forma for both of these events, we have approximately $270 million in cash and cash equivalents on hand.
For the third quarter, cash provided by operations was $22.3 million. Cash used in investing activities during the quarter was $5.6 million and largely attributable to approximately $8.9 million of capitalized software development expenses and purchases of PP&E, offset by $6 million of principal repayment of the implementation funding loan we extended to Cook County. Cash used by financing activities during the quarter was $4.3 million and largely comprised of decreases through restricted cash account held on behalf of our partners for claims processing purposes.
Finally, let's turn to guidance. The fourth quarter will be the first time that we will include the results of New Century Health subsequent to the closing on October 1. For the fourth quarter of 2018, we are forecasting adjusted revenue to be within the range of $185 million to $190 million. The components of adjusted revenue in the fourth quarter are as follows. Adjusted service revenue is forecast to be in the range of $167 million to $171 million. True Health premium revenue is forecast to be within the range of $22 million to $23 million. And intersegment eliminations are forecast to be approximately negative $4 million. Adjusted EBITDA in the fourth quarter is forecasted to be within the range of $5 million to $7 million. Again, these estimates include the projected results of New Century Health, which are included in our services segment. Within services, we are forecasting the contribution from New Century Health to be within the range of $44 million to $46 million, and adjusted EBITDA from New Century Health is forecast to be approximately $4 million in the quarter.
For the full year, we are forecasting adjusted revenue to be within the range of $624 million to $629 million. The components of full year adjusted revenue are as follows. Adjusted service revenue is forecasted to be within the range of $548 million to $552 million. True Health premium revenue is forecasted to be within the range of $91 million to $92 million. And intersegment eliminations are forecasted to be approximately negative $15.5 million.
Adjusted EBITDA for the full year is forecasted to be within the range of $22.5 million to $24.5 million.
In summary, we enter Q4 focused on closing on another successful year with a continued emphasis on driving long-term, profitable growth into 2019.
With that, I will turn it back over to Frank.
Thanks, Nicky. I want to close with a few updates on our organization and our implementation work with our Medicaid partners in Florida.
With the acquisition of New Century Health, Evolent now stands at more than 3,700 employees. As an organization that has grown so much over the past 7 years, we wouldn't be where we are without a truly engaged leadership team and employee base. Despite a rapid pace of growth, our employee engagement has trended positively over the last 24 months, up several points year-over-year.
I'm also proud to report that we've been able to retain over 90% of our top performers across the organization, which is critical to our ability to develop and support future leaders throughout the organization.
Ultimately, we believe our strong culture and high levels of employee engagement are driven by our focus on the things that really matter: strong career paths and support for individual development, investment in management and leadership development and consistent communication and recognition of employee contributions.
The investments have also helped Evolent become a top destination for talent. We anticipate receiving more than 110,000 resumes by the end of the year, nearly double what we received last year.
Building a top destination for talent has made it possible for us to respond to significant opportunities this year. As I touched on earlier, our teams have been working closely with our new Medicaid partners in Florida, Lee Health, Baptist Health Care and Nicklaus Children's Health System, to prepare for the state regulators' readiness requirements for each Medicaid plan.
Our team's unique ability to deploy quickly, partner effectively and scale operations has put us in a strong position to serve 5 regions in one of the largest Medicaid states in the U.S.
In closing, we're pleased with our results for the third quarter and remain focused on meeting our strategic and financial objectives as we close out 2018.
Thank you again for participating in this evening's call, and we're happy now to take your questions.
[Operator Instructions] And our first question comes from Robert Jones of Goldman Sachs.
I guess, just the first one on the numbers, looking at the 4Q implied guidance. If I try to look at it, a legacy Evolent, so excluding the health plan and New Century, it seems like you're pointing to slightly lower revenues and EBITDA, at least sequentially, in 4Q. Just I was wondering, is there anything specific worth highlighting there? Or is this just maybe directionally some conservatism?
Bob, this is Nicky. I would say this is what we talked about in Q2 when we talked about Q4 and the outlook for the back half of the year. Specifically, the Q4 impact is related to Florida. We're standing up the health plans beginning in December through February, but we're incurring costs ahead of that to staff up for it. So it's directly related to Florida. You see some of that impact in Q3, but fundamentally, the impact in Q4 is related to that. So it's very specific, and it's what we called out at the end of Q2 as well.
Got it. That's helpful, Nicky. And then, I guess, just maybe taking a step back, and Frank, understanding that you highlighted again that many of these systems out there that are contemplating value-based arrangements probably we won't be likely to make those types of decisions until early next year. As you take a step back, though, and just think about the major puts and takes for 2019 relative to 2018, clearly, Florida will be a meaningful year-over-year contributor. It sounds like SOMOS has a bigger opportunity than originally thought. Anything else beyond those 2 that we should have on our radar, at least based on what you know as you sit here today?
Well, I'd just say I think we feel pretty good about our position heading into the end of the year. We tend to think about same-store growth as one very important component of '19. You look across our network of 35 partners, and I think we've had strong clinical and financial performance across that group of providers. I think that's building confidence in their value strategy. So when we look to overall plans, you have SOMOS as an example, as you mentioned. We have a number that are looking at expansion into the Medicare-based programs. And then you look at the 9 new partners we brought on this year, and that gives us a great setup, and many of those are beyond Florida, but a nice set up for, I think, what we want to do in 2019. If you couple that with, I think, some really important signals that we began to receive with more intensity this summer on the policy side, with the government moving away from MSSP Tracks 1 and 2, making clear statements about the stronger outcomes with providers that are in downside risk, the continued support for Medicare Advantage, the Medicaid waivers and just a sense across the provider community that value is here to stay and we need to build up competencies and get experience, it's going to be a critical part of our growth strategy. I would say that overall backdrop gives us a really nice setup for '19 with, again, a number of our partners looking at new delegated risk arrangements, looking at expansion into Track 3 and other programs. And so -- and then you take New Century and just sort of looking at their base and pipeline and potential there, and I think, again, we feel very good about that organization being part of our portfolio as well.
Our next question comes from Jamie Stockman (sic) [ Stockton ] of Wells Fargo.
I guess, maybe the first one just as a quick follow-up to what Bob was asking. The MSSP, the final rule, I mean, is there a best guess on when that comes out, given that the timing of it might be important as far as catalyzing some opportunities in the pipeline?
Yes. Our anticipation is that it will really come out or apply in the middle of '19. So roughly July '19, providers will have made a decision prior to that time for participation in those programs. And so, again, it would have some impact on '19. I wouldn't say that's the bulk of our pipeline but, obviously, could be a nice add as providers launch in that program in the second half of next year.
But I guess what I'm wondering, is that whether you think the government will actually have a final rule out.
Yes, I absolutely do. Yes.
Did you say maybe this year?
Yes.
I'm not sure it will be by the end of this year, but it will be, if not at the end of this year, at the beginning of next year and definitely in time for the move that I talked about in July of '19.
Okay. And then just quickly on SOMOS. I think when you guys originally announced that you talked about it, it was an IPA with value-based contracts covering roughly 300,000 lives. Can you just help us juxtapose kind of what they're doing in their value-based contracts today versus what the potential is with the new arrangement that they have and kind of as far as what services or technologies they're engaging Evolent for, what that means today versus what things might look like a year from now?
Sure. Currently, they have been working in the district program, which is really intended to save cost in the state's Medicaid system. They work on about 300,000 lives. It is not full cap in terms of its delegation. So they don't have a tremendous amount of risk there, but they do get paid significant bonuses if they perform well in that program. So it's a really nice base to start with. It's enabled us to get our identified platform in place, to really be working with them on the care coordination with patients. It's a very engaged physician network, very high performing, so very strong base in which to go into more intensive value-based arrangements. If you think about this latest announcement, it is really the state -- New York state Medicaid agency wanting to really innovate in the way that they're delivering care in various communities in New York. They really want to address social determinants of health. They want greater partnerships between MCOs and provider-driven organizations. This is truly a transference of risk. So it would amount to very significant upside abilities as well as downside risk, more responsibility for certain delegated functions and total episode of care management. And again, it could cover an additional several hundred thousand lives that would be at a much higher premium rate. So the way I see it is our hope is that we're able to negotiate a few of these arrangements, which would have some impact on '19. But we also believe that, ultimately, we could have several hundred thousand lives under almost full-risk arrangements working very closely with SOMOS and an engaged network of docs, our clinical stack, which we believe is highly differentiated, our work in Medicaid, which really is addressing social determinants of health. And this could be quite a powerful relationship and market for us in the broader New York metro area.
Our next question comes from Ryan Daniels of William Blair.
Frank, one for you. I know that Medicare Advantage in related to a provider-sponsored health plan is a pretty small piece of your revenue. But in your view, with the success you've seen with NextGen ACOs and Medicare with all the managed Medicaid and other shared savings arrangements, what is it in the Medicare Advantage Plan that they've had difficulty with? Is it just a more competitive environment? Is it a scale issue? Can you give us a little bit more color on that?
Yes. Just to be clear, we see Medicare overall as a very strong growth market for us. You referenced some of the ACO programs. We think the government will introduce some new programs with significant downside risks. So the ACO side of that represents a very attractive market. You also have payers delegating risk to providers and us supporting providers in those arrangements. Again, that's a very attractive market. And we think MA for provider-oriented groups is also attractive. I think the nuance we've referred to is we did have some early customers that were health systems that, one, did not make the investments to really get to scale beyond some of the early enrollments. And also, if you look inside of service issues and the way that they actually priced their own services relative to those plans, they gave them a pretty significant financial disadvantage in the marketplace versus pure health plans operating in that arena. So it's really from those early clients where you see some of the softness that we've talked about. I mean, one of the adjustments we've made is making sure that, one, there's a commitment to the right transfer pricing, the right network and setting up the plans, that there's a multiple-year investment cycle to make sure that you get to scale. We have a number of physician-based organizations, which don't have that foot in 2 canoes problem that really do want to get into Medicare Advantage as well as other provider-sponsored health plans. So we do see it as a big growth avenue for us, but it's one that we need to manage very carefully upfront so we're setting up the plans for success.
Then my follow-up question will just be in regards to the Next Century Health acquisition. Want to get a little bit of an update there, perhaps, regarding the early feedback you're hearing as you approach cross-sells into your client base. And then want to confirm -- I think this is probably the case because you indicated the pipeline looks good, but still that you anticipate that can generate mid- to high single-digit growth for next year. So maybe $190 million-ish or a little bit above revenue stream, if that's still the case.
Yes. On New Century, I think one of the reasons we were so attracted to the opportunity is that it's a very clear value proposition. Oncology, cardiology are specialty areas that are very high growth in terms of costs and saddling a number of MA plans in particular with increasing costs that they, frankly, can't manage. And that's largely because there's new treatment modalities, there's new drug therapies coming out. It's hard for anyone who's not a deep expert in those areas to manage, and so one very strong value proposition. We actually, at our summit, had the New Century people there and presenting on some of their capabilities. Very strong interest across our network. We've already brought the sales forces together and have a target list of cross-sell across our existing networks as well as what I think was already a pretty strong pipeline for New Century. So we feel really good about the long-term growth potential of this asset, particularly given the pressure that we see in the broader MA market. And then it does apply to Medicaid and other populations as well. I would say, on 2019, that's really the nuance of the lag time you have between negotiating today to close out some of these contracts when they actually get implemented. And something that we closed by the end of the year most likely wouldn't start really until the second half of '19. So based on that, while we have a strong pipeline, it will most likely have an impact in late '19 and going into '20. And just based on a number of dynamics of the business in '18, we think the mid- to single digits is the right marker for '19, but we would expect teens growth going into 2020 and beyond.
Our next question comes from Sean Wieland of Piper Jaffray.
So continuing on New Century. How will the operating metrics be impacted beginning in Q4? Number of lives, the PMPM that you're reporting. Are you going to fold that in?
Yes. So we said the last day, they have about 460-plus thousand lives, so they'll be included. The PMPM will go -- will follow that in. So you'll see a PMPM north of $15 on a pro forma basis in Q4. So yes, and it will be included in P&L revenue.
Okay. And so now with New Century integrated into the model, can you update us on what your overall mix is of Medicare and Medicaid in commercial members?
So -- go ahead, Frank.
Yes, I'd say it would probably be roughly 50% in Medicaid, 30% to 35% in Medicare and with the remainder on the commercial side. We can get you more precise numbers, but it's roughly in that range.
Right. Okay. And so if I remember correctly, a large portion of these lives are managed by Humana. That said, maybe an interesting difference in the business. And can you just tell us a little bit about what you've learned there and how that -- and how you're managing that business?
Yes. I would say we did very extensive diligence in our process in evaluating whether we wanted to move forward with an acquisition. In all my years of doing diligence on companies, that's both in the tech world and sort of in the value-based care world, I would say it was probably the strongest set of references that we've ever received. We've got a lot of strong relationships at Humana, so we were able to go deep with people that are involved there and it worked directly with New Century. They feel very strongly about the value proposition. They were quite happy to hear that they would have a home with Evolent, given our broader platform and ways we could enhance their value proposition. Beyond Humana, I would say they have very strong customer relationships. And again, it's tangible. I mean, you literally see, in some cases, 15% to 20% savings over previous spend and really controlling the growth in costs related to both oncology and cardiology. I think that's one piece of it. But also they're providing great service to patients. They work very collaboratively with providers. They're bringing very deep clinical expertise. And I think as a result of that, we feel a very strong set of relationships across the payers that they work with. We also think it opens up a channel for Evolent, given that we serve as a conduit as well between risk, delegation and providers with a lot of payers wanting to increase the amount they're delegating in terms of risk but not feeling that providers have the infrastructure to manage that effectively. And so it could open up a cross-sell opportunity for us, and we also see the ability to sell New Century into our network as well.
Our next question comes from Matthew Gillmor of Robert W. Baird.
I wanted to ask about the Medicaid opportunities that Frank referenced that could sign, I think you said in early 2019. I was hoping you could characterize those conversations and those potential clients, and was especially interested if those were existing health plans that would drive revenue in '19 or start-ups that would drive revenue in the future.
Yes. So I would say we have both in the pipeline. The ones that I was referring to specifically are existing provider organizations that have some form of Medicaid risk. So we would be serving those organizations. There will be some implementation time line before they would come on to our P&L line item, but they would definitely have an impact on '19. And again, we have to close those out. And I -- we're fairly late stage in discussions there and have a reasonable amount of confidence that, surely, we'll close one of those. And then also to your point, we've been working on some longer-term relationships with potential provider networks and states where we see specific opportunity. That would lead to implementation revenue going into next year but most likely wouldn't hit our recurring revenue line until January 1 of 2020.
Got it. And Frank, you also mentioned the financial success of your clients helping to catalyze some of the conversations in some of your pipeline. I was hoping you could characterize the financial performance of your client base with their value-based care models this year versus the years past. And are we at a point where your clients are generating a positive return on these initiatives? Or are we still just sort of in line with targets but not yet positive?
Yes. I would say one of the most important things that has advanced this year, and obviously, we've had success in past years but pretty dramatic this year is the consistent performance of our clinical program. So we are seeing reductions in hospitalization in a number of our programs of 25%, 30%, reductions in total cost out the same vector and really building confidence with a number of our partners that our provider-driven model can actually deliver tremendous value if you're leveraging clinical data and engaged positions. So if you think about the broader movement to value, the most important part of the thesis was the ability to manage MLR successfully. And I would say we've built up an evidence base at this point that gives us and our partners great confidence that you could do that. On the financial front, that usually translates into pretty strong financial performance or at least, as you suggested, versus the investments they've made getting above water in terms of beginning to generate a financial return and getting confidence that they can cross the chasm as they move from fee-for-service over to value. And I would say we've made positive progress along that journey with a number of our partners gaining confidence in really wanting to move and potentially get into other population areas and increase the penetration of their overall value-based business. So I wouldn't say that it's entirely new this year, but I would say more progress, increasing confidence, a number of our partners really sort of gaining more momentum across our executive team and in the boardroom. And then we still have some that are still fighting to get to scale. I mean, this a new business launch. It's a new business model. We all know that it's going to take a couple of years to sort of get through that. But again, I would say, across the overall network, we feel pretty good about results on both the clinical and financial side.
Our next question comes from Sandy Draper of SunTrust.
My question is really about True Health and whether -- when you think about that business, are you really trying to grow it and invest in it? Or is it really just to learn from it? Just thinking longer term if this is something we should think about as a growth opportunity or a learning opportunity for you guys?
Yes, Sandy. I would say we see both sides. So one, I think in year 1, we wanted to make sure that we had strong operations, stable financial performance, that we continue to build out the team in New Mexico and, to your point, that, that served as a real learning lab for us, a place where we can say, "We're walking the walk, we're managing a real plan and we're building a team that can share that expertise across our broader network." And so from that perspective, we still have to close out the year, but I would say 2019 has been very successful thus far, and that team deserves a lot of credit for the job they're doing in managing the plan. Once we actually have the plan stabilized, as we mentioned before, we saw a number of attractive segments in which we could grow the plan. One is expanding our presence in the commercial segment that the exchange segment has continued to be relatively interesting in that market and could potentially also be a source of growth and then think about our investment in the Medicaid Center of Excellence and the fact that New Mexico has close to 60% of its population in Medicaid, again, along with opportunities in Medicare Advantage, et cetera. So I think we're trying to be thoughtful, somewhat measured about growth there. We want to be very careful. We want to perform well financially and to build confidence in our capabilities. I think we're on our way there, but we're also going to look for a selective opportunities to grow where we feel very confident that we can grow both the top and bottom line. And I don't think you'll see massive amounts of investment there, but a really nice learning lab and growth engine in a market that we felt was an important one to be in.
Our next question comes from Anne Samuel of JPMorgan.
Could you speak to how the addition of New Century will impact the different margin components as it integrates into the P&L? Any opportunities for expansion over time? And then how should we think about how it impacts your trajectory toward your longer-term margin targets?
I think, if I heard the question, it was around the impact of New Century on sort of the overall financial profile of the business and margin profile. If it wasn't, correct me once I finish here. But if you think about what we've been trying to do since we started the business, it's invest in world-class infrastructure that can help provider organizations, payer organizations, manage health care costs more effectively and handle all the administration, the financial work that you need to do along with that. As we all know, that's a massive investment if you think of all of those functions and capabilities that you need to develop. If you look at New Century, they've built very deep clinical capability in cardiology and oncology. There's an ability to take what they've done and leverage that across our existing network and Medicare book of business. There's the ability to expand into other specialties. There are a lot of shared functions from actuarial to clinical program development to network to sales that helps at scale to our overall business to get more leverage from G&A to perform better in the performance-based side of our business. So that ultimately would contribute to higher margins. So I think one of the reasons for doing the deal is we feel very confident that it's going to be highly accretive, both in terms of its long-term growth potential but also its contribution to the bottom line and really helping us get to scale. And if you think about it, we'll have a very sizable business next year, surely, north of $800 million in revenue. And again, G&A as a portion of that is a much smaller portion of that over time as we continue to grow. So that was one of the reasons for doing the deal, plus the fact that we see a strong demand in the market for their service offering, given the issues that you see in these high-cost specialty areas.
Our next question comes from Charles Rhyee of Calvin.
I just had a couple follow-ups maybe on -- first on New Century Health. Can you give a sense on how we should think about the cadence of revenue and EBITDA for New Century as we think about 2019? Should it be more even across the 4 quarters? Or is there some seasonality that we want to think about for New Century? And maybe start there.
I would just say, historically, if you look at their financials, they've had seasonality quarter-to-quarter. Again, very consistent performance on an annual basis. So in some ways, a lot of predictability with that business. But for various reasons, contract terms, when the actuarial analysis gets conducted, when payments are triggered and all of those sorts of reasons, you will have both revenues and costs move quarter-to-quarter. So I think you'll see a little bouncing around there. We'll try to take that into account as much as we can when we're giving some indication of forward-quarter guidance. But you'll see a little bouncing around. Not huge, but again, not a consistent layout throughout the year.
Okay. Is it fair to think, when you think about how managed care -- seasonality in managed care revenues and premiums is not necessarily linked up to that because of the way their contracts work?
That's correct.
Okay. And then in terms of the guidance. I know, Nicky, you mentioned before, obviously, when you back into the fourth quarter, it reflects what you talked about in terms of the Florida contract. And I think you guys said you expected 2 of them to go live in late 4Q '18. Is that still the plan?
Yes.
Our next question comes from David Larsen of Leerink.
Can you talk a little bit about the performance fees that you earned this quarter? Really, just like if you can describe the nature of those performance fees, what allowed you to earn them. And will they be sort of consistent heading into next year? What percentage of revenue generally is the performance fees?
David, it's Nicky. Yes. I mean, the nature of those are primarily related to the Next Gen program. And so a lot of this, in this quarter, would allowed us to earn it. This is a largely a '17 performance. And so we've got a clear line of sight to where the outcome is, and we kind of recognize the revenue now. I would say, when you step back, it's a couple of points of revenue in aggregate in the total cost of full year related to performance related. On a net effect, it's not a material contributor on a net basis. And I would expect, for all the reasons Frank cited about the clinical side, we would expect to continue to derive performance-related fees in the same order of magnitude into next year.
Is there potential for downside risk in those fees?
Yes. So the way it works is we do record -- we accrue expenses in this year to ensure that we're covered on the downside. So when we assess each and every arrangement, we record expenses to ensure that we don't have surprises in the future. So in '18, there is expenses running through the P&L to account for the current relationships. And then next year, we would assess where they come out and, as we did this year, hopefully have upside to take into the P&L from that. But yes, it's a balanced relationship where we assess the top and bottom line. That's what I'm saying. The net impact is not terribly significant over the course of the year. It's an important tool we use in the marketplace, but financially, it's a relatively small part of the equation on that basis.
And David, I would just add that this has been a good news story for us in the sense that it has aligned us with our client base. So it really feels like long-term partnership when we're adding this component. And I would say, overall, if you look at our historical experience, our margins are higher in these performance-based arrangements than when we're simply taking fees. So to Nicky's point, we want to be thoughtful about it, we want to learn from it, very careful in terms of how we structure them, but really helps us set up the business, I think, in the way that we want in terms of the alignment with our clients and then ultimately can be a real contributor to margin growth over time.
Okay. And then if we distinguish between, like, true risk and then value-based care, obviously, a large portion of the market is moving toward value-based care. I think United, at one point, said, like, 40% to 50% of their claims are in value. Is there a need for Evolent services in the identified platform for value-based care component and assuming that like a provider isn't taking pure risk?
Yes. What I would say there, from our experience, we have a very sophisticated platform. It's integrated. It cuts across multiple population areas. It combines clinical, financial and administrative. It can really enable a provider to perform well in these arrangements. We tend to apply it in areas where providers have some downside risk. So what I would say is, yes, we could be used in a shared savings-only arrangement. I think most payers and the government are moving away from those. But in most cases, someone might say, "Look, I don't have any downside. I'm not sure I need a highly sophisticated platform to manage that type of arrangement." However, we're going to expose ourselves to real downside. Again, where you see United, where you see CMS and others moving, we really have to perform. Then we're going to want the sophistication of identifying. We're going to want to have the clinical programs. We're going to want to have support and understand the financial implications of what we're doing month-to-month. And so that's why this recent set of policy discussions, we do think service is a really nice tailwind for us because as providers move into more downside risk arrangements, both on value and into full-risk plans, then they need a sophisticated infrastructure to support them.
Our next question comes from Mohan Naidu of Oppenheimer.
I apologize. Frank, can you hear me?
Yes.
Sorry about that. Frank, on the proposal from Health and Human Services about moving now the ACOs to 2-sided risk, how are the prospects and providers responding to this? Initially, it felt like there was some pushback, but it looks like there is more acceptance now. Do you think majority of them could move to the 2-sided risk in the proposed time frame, 2 to 3 years out?
I don't know if I'd say the majority. I mean, if you think about it, there's 5,000 health systems in the United States, along with hundreds of at-risk physician groups across the country. So I don't know if half the market will move in that direction. And if you think about our goal of adding 8, 9 partners a year and the ability to get a large number of them to move in this direction because they see where CMS is going, where their paying partners are going and they recognize that the fee-for-service world is having increasing pressure in that they have to begin to make this work if they're going to grow and maintain their margins, I do think that it is a catalyst for a good cross-section of the market to move. And for us, if that's 30% of the market that currently hadn't moved, that's massive in terms of the number of prospects and organizations that will want support for what they're going to be doing. So I don't know if it'll be -- some people may stay in fee-for-service. I mean, we do see real providers, providers in certain geographic areas that just decide they're going to stay in fee-for-service. But I think this will be a massive sort of kick in the pants for a number of providers that have been on the fence sort of wondering what was going to come out of the new administration to say, "Okay, it's pretty clear." It's pretty clear on both sides of the aisle, by the way, of where this is headed, and we need to build this competency.
That's very helpful, Frank. And maybe extrapolating that. I mean, as these providers make the decision to move towards double-sided risk, can at least some of them just continue the path that they are in right now on one-side risk and expand on that versus coming out and seeking external help? How do you think about the mix there?
Yes. Sure, of course. I mean, some organizations may say, "Look, we've been doing those, and we have reasonable confidence. And we're going to move forward." If you think about the provider community, you take physician at-risk groups, you take a number of health systems, there is a lot of trepidation about risk. In some ways, the early experience also helps them realize what they don't know. They're actually becoming more sophisticated consumers of the services we provide. They recognize that they don't have extensive and deep clinical programs, that they can't predict with great accuracy the people that are about to get very sick in the coming year that they don't know the right engagement modality to engage those patients, that they haven't effectively engaged their physicians in all elements of total episode of care, that they don't have the sophisticated infrastructure to now take on what is significantly more downside risk. So I'd say the good news is what we've seen from our time in the market is when providers begin to stare over a more significant downside cliff, they -- a lot of them step forward and say, "Look, we get it. We actually need support through this next phase if we're going to be successful." Some may not, of course, but we think it will open up pretty significant opportunity for us in the market.
Our next question comes from Stephanie Demko of Citi.
Just given the expansion to a market with a higher value prop via the New Century acquisition, could we see an uptick in your new deal target versus the current 7 to 9 new wins goal? And as a follow-up to that, how should we think about the sales and ramp-up cycle for these wins?
Yes, good question. I mean, I think, by definition, as I mentioned, you add all this up and we'll most likely be over $800 million in revenue next year. I think, by definition, if you're adding in the New Century piece and assuming that they may add some new clients and partners, that our target would move up. We haven't set that yet until we sort of look at overall where we are. But if we were running in the 7 to 8 range, and I could see of us surely being in 8 to 10 or 8 to 11 or somewhere in that range, just given where we are and the size of our organization and the New Century components, I feel like just looking at New Century's track record, they've got a very strong team. They've grown their revenues very consistently historically. There usually is a relatively significant amount of time that happens through the early prospecting process and negotiating final contract because you need to get the analytics right. You need to get the terms right. You need to have enough time to build out the network to really engage the physician network before you go live. And so if you add that up, they've got a couple things in the pipeline that could close in the first half of next year. Those are then going to take time to implement. We feel like we've got a strong cross-sell opportunity and a number of things we're going to pursue that most likely would close in the first half of next year. But then you have an implementation cycle that probably really doesn't have much of an impact on revenue until the fourth quarter of '19 or really in 2020. And then with all of that working and running well, again, I think they're going to be a strong contributor to our overall growth rate, to our margin profile and an ability to add new clinical areas, which would enhance our overall differentiation and value proposition.
Got it. The nice re-additive could be a little bit more of an out year just as they ramp up.
Exactly.
And then one other follow-up. Just given the CMS proposal and MSSP redesign, are you seeing any early inbounds or providers in the pipeline that are starting to move towards the finish line just after seeing this kind of activity?
Yes. Yes. So I would say we have seen a lot of inbound. If you think about the deadline getting pushed more to the middle of the year next year, it does take away an immediate urgency to close all of those out. We still feel very confident that it's going to be -- that specific program area's going to be a catalyst for us. But again, there's no urgency in having to make the decision this month, but there will be in the beginning of next year.
This concludes our question-and-answer session. I would like to turn the conference back over to Frank Williams for any closing remarks.
Thank you. We appreciate everyone participating on the call. I think we'll see a number of you out on the road and in a few conferences coming up. And we appreciate again you participating. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.