Evolent Health Inc

NYSE:EVH

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to Evolent Health Earnings Conference Call for the Quarter Ended September 30, 2021. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, 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 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 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. Seth Blackley. Please go ahead.

[Seth Blackley, Chief Executive Officer]

Thank you and good evening. I’m Seth Blackley, Chief Executive Officer of Evolent Health, and I’m joined by John Johnson, our Chief Financial Officer.

I’ll open the call this evening with a summary of our recent results, including an update on our key investment themes, which are: one, strong organic growth; two, expanding EBITDA margins; and three, efficient capital allocation.

Next, I’ll share highlights on innovations across the business. I’ll then hand it to John to take us through a more detailed financial review of the third quarter results as well as provide fourth quarter guidance. I’ll close with the summary of our key focus areas. As always, we’ll be happy to take questions at the end of the call.

We have shared a summary of our quarterly financials and highlights for your reference and a presentation available on the Events section of our IR website, IR.EvolentHealth.com.

Turning to the financial overview and results for the quarter. Total revenue for the quarter ended September 30, 2021 was $222.5 million. Adjusted EBITDA for the quarter ended September 30, 2021 was $13.8 million.

As of September 30, 2021, we had a total of 14.7 million lives on the platform, including approximately 3 million lives on the performance suite, plus an additional 11.7 million lives on our New Century Health Technology and Services Suite platform.

Overall, we’re pleased with our continued momentum on organic growth and earnings power. And we are raising the guidance across both revenue and adjusted EBITDA for the year. Turning to an update on our 3 investment themes, our revenue result represents year-over-year growth of 36.3%, which excludes divested assets, as we continue to deliver on our first investment theme of strong organic growth.

Today, I’m happy to announce 3 new partnerships, bringing our total this year to 10 new partners and exceeding our target of 6 to 8 new partners. We’re pleased to announce Evolent Care Partners continues to grow its ACO network, and has entered into 2 new agreements with Sunflower Medical Group, a medical group based in Kansas City, and Northern Medical Group, a medical group in the State of New York.

Together with the two provider groups announced in August, our Evolent Care Partners network on January 1, 2022 already be expanded by over 200 providers, a 20% growth from current levels with the opportunity to add additional partners before 2022. This strong growth is driven by Evolent Care Partners’ demonstrated ability to increase physician compensation and help providers deliver better care, not more care.

These drivers will continue as we expand into new markets and with new practices in 2022. Additionally, we’re excited to announce we entered into an agreement with Health New England, a leading not-for-profit provider-owned health plan to utilize our New Century Health’s Vital Decisions platform.

New Century through our Vital Decisions platform will be offering its telehealth and digital solutions to help New England’s Medicare, Medicaid and commercial members in Massachusetts and select neighboring states. The partnership went live on October 1, and over 180,000 Health New England members will have access to the Living Well program to work with our advanced care planning specialists, who ensure care preferences and goals of care are communicated to families and medical teams and are reflected in individuals’ care plans.

This signing along with the future possibility of further integrated New Century Health in this geography has been validation for the transaction rationale we laid out last quarter.

Second, we continue to deliver on our theme of adjusted margin expansion. Our adjusted EBITDA margin performance was on track and our adjusted EBITDA results for the quarter met expectations.

And third, we remain focused on disciplined capital allocation. As John will discuss in more detail, we generated significant cash flow from operations in the third quarter, are expecting continued cash generation for the balance of the year, and we end the quarter with a total available cash balance of $191 million.

Overall, we continue to execute on our key investment themes and are encouraged by our strong performance and momentum as we head into 2022. This momentum is driven by our execution, a diverse new business pipeline, expansion with existing relationships and a favorable macro-environment.

To close out this section, I do want to share a little more detail on the macro-environment. Value-based care continues to gather significant momentum. As an example, CMS recently released a new strategic plan, indicating the administration will be doubling down on the path to transforming value-based care.

One objective of the strategic plan is ensuring all Medicare and vast majority of Medicaid beneficiaries are in value-based relationships by 2030. As of today, we already have approximately 730,000 Medicare Advantage lives on our performance suite. And our opportunity in this market continues to expand as Medicare Advantage enrollment is forecasted to grow by approximately 8% a year through 2025.

Another focus of CMS’ plan is to potentially increase mandatory value models within the Fee-For-Service Medicare program, which would likely present opportunities for Evolent Care Partners and New Century Health. Equally, if not more importantly, we believe private payers will continue to turn to value-based models in primary and specialty care to solve longstanding cost and quality issues.

For example, oncology cost trends for payers exceed 10% annually, and the FDA pipeline is filled with high-cost oncology therapeutics, creating an ideal macro-environment for the expansion of New Century Health. These trends are strong tailwinds for Evolent, and we feel well positioned to play an ongoing role in this important transformation in healthcare.

Turning to the next section, I’ll provide updates on our 3 solutions. Our growth and profits are a direct result of the value we create in the form of higher quality care, better outcomes and lower costs in these 3 solutions. A core part of our capital allocation strategy is to continually innovate in these 3 focus areas, making sure we’re delivering on our mission. Let me give you a few examples of this focused innovation.

First, in our specialty solution area, New Century Health, it’s not an exaggeration to say that billions of dollars are poured down the drain each year in the form of drug vials that are opened, but that are eventually discarded. This money could have been spent treating other patients. For example, in 2018, close to $80 million was spent just on discarded units of Herceptin, a breast cancer drug that could have covered the Medicare spending to treat close to 2,000 additional women with Herceptin.

To address this issue, New Century developed a new program that automatically rounds therapeutic doses to the optimal amount within clinical guidelines and based on detailed review of literature, often creating opportunities to optimally treat a patient while opening one fewer vials of therapeutic. This dose rounding module has the effect of reducing waste, lowering clinical toxicity and lowering costs for our partners and their patients. We recently went live with this product module with both Centene and Humana.

We’re also happy to report that the acquisition of Vital Decisions closed on October 1, and is now part of the New Century Health organization. We believe that combination of Vital Decisions member engagement ability with New Century Health physician engagement ability will increase the breadth and quality of service we deliver to our partners and their members. Again, the partnership with Health New England is a great early indicator of Vital’s growth momentum. And while it’s still early, we are excited to welcome the talented Vital team to the Evolent family.

Next, I’d like to share a bit more about the innovation going on in the total cost of care section of our Clinical Solutions segment, Evolent Care Partners. As a reminder, we launched this solution in 2019 with simple idea to use the capabilities and expertise we developed over the last decade, and which are made available on a fee basis through Evolent Health Services to enable independent primary care physicians to succeed through our primary care risk model.

Through this evolution of Evolent Care Partners, we have the opportunity to serve a much larger market at higher margins by directly managing the premium dollar in Evolent Care Partners, as well as physician themselves as an ideal partner for independent primary care physicians looking for a risk arrangement. 2 years in, we’re very pleased with our early progress.

In September, CMS announced the results for our first year of operation, results to place Evolent Care Partners among the top 10% for first year scaled ACOs in the history of the ACO program. The business is built on 3 principles. First, the opportunity in primary care is large are approximately 500,000 primary care providers and just under half our members have smaller independent practices.

Second, based on our experience in value-based care, we know what works and we focus only on what works. Our proprietary Panel Insight solution, a module of Identifi, prioritize interventions for care managers and physician practices. Prioritize interventions are one instance of how we drive efficiency for our partners. For example, Evolent Care Partners recently completed a campaign to support our primary care providers and conducting more annual wellness visits for patients. These wellness visits came at no cost to patients and have been shown to have positive effects on quality, preventative care and chronic condition management.

In the first 3 months, the campaign led to a 22% increase in annual wellness visits. Based on our experience, these visits are critical to maximizing quality of care, and building the foundation for trusted long-term relationships between patients and primary care physicians. This relentless focus on efficiency and maximizing quality of care means that for each dollar invested in directly operating Evolent Care Partners, we delivered $7 of savings in year one, in the form of savings to Medicare, increased compensation to physicians, and Evolent profits.

We believe this efficiency is highly differentiated at national scale. Based on our experience over many years of operating ACOs, the savings rate should increase meaningfully over time. For example, our third year of operations with our partner ACOs served by the Evolent Health Services fee model resulted in an average savings of 6.9% as compared to 3.8% in the first year for Evolent Care Partners. This expected evolution to create tailwinds in both physician compensation and Evolent profits.

Third, we grow by affiliating with providers. This affiliate model means providers can partner with us without giving up their practice, changing their system with other unique undue burdens, and it means we can grow without significant capital investment. Overall, this model produced $21 million of gross savings for performance year 2020 for approximately 55,000 members. Today, we have 90,000 members with continued growth already contracted for next year. This growth combined with expected year-over-year expansions in the savings rates gives Evolent Care Partners strong momentum headed into 2022.

Finally, Evolent Health Services continues to provide unique value to health plans and risk-bearing providers by coupling our clinical solutions with our end-to-end administrative solution. This clinical platform is the same that is deployed in Evolent Care Partners with powerful results. ACOs supported by Evolent Health Services in 2020 saved a total of $106 million in Medicare programs. We believe this technology when integrated with our administrative solutions makes Evolent Health Services a leading platform for health plan operators and risk-bearing physicians.

We’ve been busy in this segment this year driving strong results for our existing partners and implementing our previously announced health plan partnership going live next year. We expect this important partnership to support 200,000 lives across multiple geographies as we provide our proprietary technology platform Identifi, as well as a broad array of other services. This partnership will have PMPMs consistent with other broad Evolent Health Services relationships, and importantly, as upside as the plan expands nationally.

Further, Evolent Health Services continues to provide important integration value across Evolent, supporting both Evolent Care Partners and New Century Health through technology, services, and cross-selling opportunities.

Overall, our decade of experience leading the market in value-based care, coupled with our clinical and technical innovations are major differentiators for Evolent. We believe our unique solutions deliver improved health outcomes, while lowering the cost of care continues to be a growing focus of the market. As we head into 2022, we are seeing strong momentum as our solutions are delivering differentiated performance for our partners, and we have very good traction with new partners.

I’ll now turn it over to John to give you more details about our financial performance in the quarter, as well as to provide guidance.

[John Johnson, Chief Financial Officer]

Thanks, Seth, and good evening, everyone. Our financial results for the quarter delivered on all 3 of our strategic goals with strong organic growth, profitability, and attractive cash flow. Let me say a bit about each before walking through results by segment and ending with guidance.

Our revenue year-to-date is now 35.6% higher than it was for the same period last year, excluding divested assets, demonstrating a consistent track record of growth since 2019 with a CAGR of about 34%. At the end of the quarter, we had 14.7 million members on our platforms and with the addition of Vital Decisions on 10/1, that number now exceeds $17 million. Our profitability in the quarter was strong, particularly in our clinical segment, and driven by shared savings for our Evolent Care Partners solution.

Let me comment briefly on how these shared savings translates to profits to Evolent, and I’ll reference Page 7 in the presentation. In 2020, we created $21 million of savings or about $32 per member per month across 55,000 lives. As Seth mentioned earlier, those 55,000 lives have grown substantially, and we would expect the $32 per member per month savings to also grow over time, creating the opportunity for revenue and earnings expansion each year. Of those savings, Medicare keeps the first 25% and we recognize the other 75% as revenue for Evolent Care Partners. We then share a portion of the savings after operating expenses with the physicians in the network, and the rest becomes Evolent profit.

The revenue in the shared savings models is recognized on a delay as we receive an analyze data on our performance. The bulk of the revenue recognized for that solution in Q3 was the Performance Year 2020. We expect this seasonality to persist into next year, leading to elevated Clinical Solutions revenue in Q3 versus other quarters.

Cash flow in the quarter was strong, driven by our EBITDA results and cash from timing of working capital. And we ended the period with $191 million in available cash, excluding cash held for Passport. Cash deployed for software development and purchases of PP&E was $7 million. Net debt, which we define as the face value of our convertible notes less available cash was $125.4 million at quarter end, resulting in a net debt leverage of 2x versus LTM adjusted EBITDA.

As we look at our balance sheet over the next 2 quarters, I would note 3 main items outside of normal operations: first, we deployed $42.5 million in cash in our purchase of Vital Decisions on 10/1; second, the $27 million in remaining 2021 convertible notes will mature this December, and the holders of those notes may choose either equity conversion or a cash retirement; and third, we expect a payment to us of $23 million in the first quarter of 2022 for the second half of our earn-out payments for Passport’s membership.

Now, let me take you through consolidated and segments specific results before ending with an update on guidance. Total revenue of $222.5 million in the quarter represents a decrease of 7.1% year-over-year. More importantly, revenue less divested assets of $218.9 million increased 36.3% from $160.5 million in the prior year due to growth from new partner additions as well as same-store sales growth. Adjusted EBITDA of $13.8 million with consistent with the same period of the prior year on a lower revenue base, the result of our margin expansion trajectory.

Turning to our segment results within our Clinical Solutions segment, revenue in the second quarter increased 13.9% to $159.6 million, up from $140.1 million in the same period of the prior year. Excluding revenue from divested assets, Clinical Solutions revenue grew 51.3%. Q3 adjusted EBITDA from clinical solutions was $23.9 million, compared to minus $1 million in the prior year. This strong EBITDA performance was largely driven by shared savings timing at Evolent Care Partners, with performance at New Century Health remaining consistent relative to performance during the first half of the year.

Looking at the year-over-year comparison, Clinical Solutions’ EBITDA in the same quarter of 2020, was impacted by elevated New Century Health costs related to COVID.

Membership in our performance suite for Clinical Solutions was 1.5 million, relative to 1.6 million in Q3 of the prior year, with a PMPM of $34.16 versus $29.92. Membership in our New Century Health Technology and Services Suite for Clinical Solutions was 11.7 million relative to 4.9 million in Q3 of the prior year. And with a PMPM of $0.36 versus $0.41 in the Q3 of the prior year.

The PMPM decline was in line with expectations consistent with strong growth in Medicaid and commercial membership, which has slightly lower PMPM than Medicare Advantage. Within our Evolent Health Services segment, third quarter revenue decreased 36.8% to $63.3 million. Excluding revenue from divested assets, Evolent Health Services revenue grew 7.8%.

Membership in our Performance Suite for Evolent Health Services was 1.6 million relative to 1.8 million in Q3 of the prior year, with a PMPM of $13.19 versus $17.64. Adjusted EBITDA from our Evolent Health Services segment for the quarter was minus $3.4 million, compared to $24.6 million in the prior year.

This segment EBITDA was driven by two factors. First, core Evolent Health Services EBITDA was consistent with the first two quarters of the year with continued strong execution. Second, as a part of our sale of Passport’s assets last year, we are eligible for an additional performance payments for 2020 based on plan operating results.

Our original estimates of this amount was $13 million to the positive. Based on updated run-out of claims, we are moving that estimated accrual to positive $5 million, which had an overall negative $8 million impact on the quarter. With well over $100 million of capital return to date, we remain pleased with performance of Passport, and they’re on track to meet or exceed the high-end of our estimates on capital return.

Finally, corporate costs decreased 31.6% to $6.8 million, down from $9.9 million in the same period of the prior year. This decrease was the result of continuing to execute on our commitment to reduce overhead, while still delivering strong operational and clinical performance for our partner organizations.

Turning to guidance, we are pleased with our progress against our financial objectives for the year. We now expect total revenue for the year to be in the range of $884 million to $900 million. We are forecasting full-year adjusted EBITDA to be in the range of $56 million to $60 million. For the fourth quarter specifically, we are forecasting total adjusted revenue of $225 million to $240 million. And we are forecasting total adjusted EBITDA of $14 million to $18 million.

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

[Seth Blackley, Chief Executive Officer]

Thank you, John. I want to close with a few words on our organization. First, across the organization, we’re excited to kick off our 5th annual Season of Giving program. Over the next 2 months, Evolent carves out space for employees to reflect, celebrate and give back. Through this tradition, community engagement, philanthropy and social impact have become a part of our collective DNA and culture.

Giving back to our communities is a natural extension of Evolent’s commitment to improving health equity and social equity in the communities where we live and serve. Second, I’m proud to report that our employee engagement scores remain at an all-time high of approximately 90%. And we have had employee retention rates that are consistent with our last few years or approximately 87%, even amidst a strong labor market.

And finally, I’m thrilled to welcome Dr. Tunde Sotunde, the CEO of Blue Cross and Blue Shield of North Carolina to our Board of Directors. Tunde adds a wealth of experience and important diversity to our Board.

In summary, we’re very proud of the value we’re creating for our partners and our communities. And we remain confident in the execution of our investment themes of, one, driving strong organic growth and achieving our mid-teens growth target; two, scaling the business to drive enhanced margins; and three, efficiently allocating capital.

Thanks, everyone. for participating in tonight’s call. Also, before we open the line for questions, I want to directly address the recent speculation regarding the company. I’m not going to comment on market rumors. What I will say is that we’re open to all paths of maximizing shareholder value. Our Board and management team have been committed to maximizing shareholder value since day-one, and this will continue to be our top priority.

With that, we’ll open it up for Q&A.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ryan Daniels of William Blair. Please go ahead.

[Ryan Daniels, William Blair]

Yeah, good evening. Thanks for taking the question and congrats on the continued momentum in the business. I wanted to talk a little bit more about Vital Decisions. Now that that has closed and kind of started the integration process, I’m curious what kind of conversations you’re having with your existing customers, especially on the New Century Health platform. Obviously, a lot of synergies there with that patient base and several of those disease categories and advanced planning. So I’m curious, what early feedback has been or what the pipeline is looking like since the deal closed.

[Seth Blackley, Chief Executive Officer]

Sure, Ryan. Thanks a lot. This is Seth. I’d just say in general the feedback has been very good. We’ve talked to most of our existing partners, and obviously, lots and lots of other potential partners out in the market about the opportunity for integration. And I think the biggest thing, Ryan, that stands out is just this fact that over 50% of the end-of-life opportunities are around oncology and cardiology.

And so, there’s such a high overlap with the work that we’re already doing. It’s just a very natural conversation. So that’s kind of point one. Point two, just validation that there’s incredible challenge here for families, for patients, for oncologists, cardiologists and other treating physicians, which is a pain-point, right, that is not being very well solved today by the solutions in the market.

So there’s been a feeling of, “Oh, thank goodness, you brought this up.” We’re interested in talking about it and we’d like to talk about it. And if you can integrate it with what you’re doing, because of the overlap that I just mentioned, that is fabulous. And so, those two themes have been the main two that we hear a lot.

I’d say, probably pleasantly surprised by how those conversations have gone that have further validated the thesis we had coming in, and it all just feels very good right now. Obviously, we just closed a few weeks ago, and lots of work ahead. But right now, it feels like it’s off to a very good start, Ryan.

[Ryan Daniels, William Blair]

Okay. That’s helpful. And then, as we think about the 10 new partners, obviously, nicely ahead of your guidance of 6 to 8 for the year, I’m curious if that’s just better conversion or quicker conversion in the pipeline, maybe just more opportunity or shots on goal, given the broader product offering or if you’ve pulled forward some partnerships that you would have anticipated might have closed in 2020 into 2021. So how do we think about that, and then the current status of the pipeline as we look at the potential for 2022 sales?

[Seth Blackley, Chief Executive Officer]

Yeah, another good question. Look, I think it’s the combination of a number of different factors in terms of the products that are creating differentiated value, Ryan. I think the teams are doing an excellent job. We’re fully staffed. We’re focused and are executing in a very high standard. And the macro-environment is really good.

So those are the main factors. There’s a little bit on mix too, right, when we think about how many of them are from Evolent Care Partners versus how many of them for New Century EHS. And that matters a little bit too, in terms of how many you might see in a given year. And obviously, we’ve had a few more this year and a handful more from Evolent Care Partners than maybe in the past. But generally speaking, I think it’s just things that are firing on all cylinders, and things are going well. And, what I wouldn’t say is that we pulled something forward from next year. That’s really not part of what’s happened in the remaining pipeline that we have to run after for the rest of this year and the next year is in a really good place.

[Ryan Daniels, William Blair]

Okay. That’s great. And then, just on the margin front, obviously, a good performance, especially given the revenue decline year-over-year, given the divested assets. I’m curious, if you could remind us kind of what the plan is or blueprint going forward. I know you’ve had some restructuring and synergies that you’ve achieved there. Also, you’re getting pretty good leverage on same-store growth. So what’s going to be the driver in 2022, as we think about the EBITDA performance? Are there more kind of corporate-level synergies to be had? Or is it mostly going to be the strong organic growth shining through, driving margin performance? Thanks.

[John Johnson, Chief Financial Officer]

Hey, Ryan. It’s John. Good question. So you may recall, we have 3 main margin improvement levers, cost improvements, the second is the maturation of our new clinical partnerships that mature over time and improving their flow through, and third is SG&A leverage. And what I’d say this year, and then as we look forward, obviously, we’re ahead of plan this year. Our midpoint of our guidance now is 120 basis points higher from a margin perspective than when we started the year. So we feel really good about that.

Largely that is a result of early capture of the cost savings work. So, as we look at moving into next year, the opportunity in front of us is principally driven by the maturation of the new clinical clients, and by continued SG&A leverage. Over time, we continue to target that mid-teens adjusted EBITDA margin by 2024, and feel good about getting there. With the pull forward of the cost reductions into this year, probably, the year-over-year expansion into next year is a little lower, since we’ve captured that already in this year’s result.

[Ryan Daniels, William Blair]

Okay, that’s very helpful color. Thank you so much.

[Operator]

The next question comes from Sean Wieland of Piper Sandler. Please go ahead.

[Sean Wieland, Piper Sandler]

Hi, thanks very much. So, we noticed that [C&C] [ph] is expanding into some new states for next year. Is that something that naturally you go along with? Or is that a new endeavor in every new market?

[Seth Blackley, Chief Executive Officer]

Hey, Sean, it’s an opportunity for us. As we have maybe talked about a couple of different times with that partner and several others, we have a handful of states that were already live in and then we have conversations more at the state-by-state level to expand. And so those will be new opportunities that just make that that opportunity expand their relationship with them bigger.

[Sean Wieland, Piper Sandler]

Okay, so those are – so that’s not included, right? And then…

[Seth Blackley, Chief Executive Officer]

Correct.

[Sean Wieland, Piper Sandler]

Okay. And then just follow-up on what Ryan was talking about, you’re at the upper end of your guidance range on new partnerships. Is there – I suspect that you’re not done yet for the year? And is there a reason to maybe revisit that guidance of where you’ll be by the end of the year?

[Seth Blackley, Chief Executive Officer]

I mean, I would just say in general, I’ll make a couple macro comment, Sean, and answer your question specifically. We have had a good year, the pipeline remains very strong and it feels good both on the new partners as well as same-store growth. We’re not changing any of the targets or metrics right now for a host of reasons. But we can we feel good about where we are, as we head into next year in February will obviously give guidance for the full year of next year, but we’re not changing the specific number right now.

[Sean Wieland, Piper Sandler]

Okay, thanks very much.

[Seth Blackley, Chief Executive Officer]

Sure. No problem.

[Operator]

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

[Charles Rhyee, Cowen Inc.]

Yeah, thanks for taking the questions guys. Just want to make a follow up of it, obviously, strong new partnership wins and when we look at the revenue growth performance particularly on the clinical side, extra deficit assets. Is this one of the right range of growth we should be thinking about, as we think about next year, because it looks like if we’re looking at Evolent Health Services kind of growing in the mid-high-single digits, but obviously much faster in Clinical Solutions, maybe help us think about given the partnerships you signed?

And then maybe similar to along on the EBITDA performance by segment. I understand, John, about the savings that are captured, but is when we’re talking about just absolute EBITDA dollars, will it be driven more by revenue growth, any kind of color there for now would be great?

[Seth Blackley, Chief Executive Officer]

Yeah, Charles, it’s Seth. I’ll take the first one, and John can take the second one. Obviously, not guiding today’s specifically, we’ve had this very, very high growth rates in clinical and then to your point high-single-digits on the administrative side, if you look at the last handful of signings, including the one we talked about a little bit today on the Evolent Health Services side, which we haven’t yet named, but we will in February name. I would expect in to next year, and the years after, there wouldn’t be such a huge difference in between the 2 segments, I still think clinical will grow really rapidly. But those numbers have come a little bit closer together over time, and obviously will provide more detail headed into next year. But that’s a qualitative answer for now. And I’ll pass it to John, for your other question.

[John Johnson, Chief Financial Officer]

Yeah. And, Charles, on EBITDA expansion for next year, I think, really looking at that in 2 ways. The first will certainly be flow through from the growth that we see in next year. In particular, is that also contributes to our SG&A leverage expansion. And then, second, we will anticipate some margin expansion from those clinical clients that went live this year. So it will be a combination of both of those.

[Charles Rhyee, Cowen Inc.]

Okay. And maybe just to follow-up on, John, your comment about this accrual for the past performance that you recently estimated at $30 million? Are there any other expected payments related to Passport either in the fourth quarter or that might trail into next year at all?

[John Johnson, Chief Financial Officer]

Yeah, good question. The principal one – the other one that I referenced, which is on the purchase price side, the $23 million payment for the second half of the earn-out, those are the 2 primary items that we anticipate from Passport at this time in terms of payments. And then, finally, as you know, as we continue to earn-out the balance sheets, we will be able to return the remaining capital that’s in the plan. Today, I believe that around $35 million back to Evolent over the next several quarters.

[Charles Rhyee, Cowen Inc.]

Thanks. And can you just remind me again, what are the timing for that $23 million earn-out, is that tied to a certain performance? Or is that a timing issue?

[John Johnson, Chief Financial Officer]

Just timing and we expect it in Q1 of 2022.

[Charles Rhyee, Cowen Inc.]

Okay, great. Thanks.

[John Johnson, Chief Financial Officer]

Yeah.

[Seth Blackley, Chief Executive Officer]

Thanks, Charles.

[Operator]

[Operator Instructions] And our next question will come from David Larsen of BTIG. Please go ahead.

[David Larsen, BTIG, LLC]

Hi, congratulations on the good quarter. Can you talk a little bit about the Vital Decisions win, I think, you mentioned in the press report of 180,000 members. Can you give any color around like what the PMPM rate might be there? And is there an in-sell opportunity for the performance services? We look at PMPM rate increase to, and of what period of time will that account roll onto the platform?

[Seth Blackley, Chief Executive Officer]

Yeah, sure, David, I can take that one. I think the first point just generally is that we’re excited about the signing into this confirmation for what we knew about Vital, which is growing business in and of itself. I think, as we talked about, we announced the transaction that the really important part of this transaction is about the integration with New Century. And, it’s tying back to all those same stats, I was mentioning earlier about, how much of this is cardio and oncology and the like, and that’s the big opportunity with Vital, right? And so that opportunities ahead of us with Health New England, not putting any timing on it, but that’ll be an opportunity.

The PMPM for the initial piece on just Vital is reasonably modest, if you remember when we talked about the PMPMs for Vital by itself, so the big opportunity is really around the conversion that you’re referencing. And, more broadly, if you think about what we’re doing with Vital, it’s very rarely going to be sort of taken in the market on a standalone basis and much more is going to be around linking it together with New Century. So that’s where our focus on your point that’s the big opportunity.

[David Larsen, BTIG, LLC]

So, if I do the math on that 180,000 lives, at let’s call at $13 per member per month, that’s almost $30 million, is that the potential?

[John Johnson, Chief Financial Officer]

The comparable, Dave, is the New Century Health Tech and Services suite, so this Vital PMPM is around $0.70 PMPM.

[David Larsen, BTIG, LLC]

Okay. The longer-term if you were to convert them to performance service customer?

[John Johnson, Chief Financial Officer]

Yeah, and I think, yeah, if you were thinking about it on a performance basis, David, the potential PMPM could be significantly higher than the $13 that you referenced on a full – for full performance basis. When you think about the New Century full PMPM, they’re sometimes 3, 4 times as high as the $13 that you referenced. So that’s really the longer-term opportunity.

And it’s similar to, I think last quarter, we talked about the conversion in Ohio, with Molina and what that looks like. And that’s the kind of opportunity that we’re really focused on to your point.

[David Larsen, BTIG, LLC]

Okay. And then just one more quick one, the revenue on a sequential basis, it was a little bit behind what I had been modeling. But the guide for the year was increased at the midpoint. John, did you mention there was a revenue headwind of like $8 million on the quarter related to some accounting adjustment?

[John Johnson, Chief Financial Officer]

You are correct. Yes, the updated accrual for this path toward shared savings in payments was a revenue item. So that hit revenue in the quarter.

[David Larsen, BTIG, LLC]

And that was for how much? $8 million?

[John Johnson, Chief Financial Officer]

Correct.

[David Larsen, BTIG, LLC]

So revenue would have been $230 million. Okay.

[John Johnson, Chief Financial Officer]

Correct.

[David Larsen, BTIG, LLC]

Okay, very helpful. Okay, helpful. And then, just but my last one, when I look at the year-over-year growth rate in revenue for 2Q of 2021, like last quarter, for example, I think it was up 42% organically. The reported was 2%. Is the delta there Passport and Lighthouse that are still included in the 2Q 2020 restated numbers, but True Health is excluded? Is that why we’re not seeing that 42% revenue growth rate?

[John Johnson, Chief Financial Officer]

So if you look at the numbers in the press release, all of those are excluding True Health, which is now in discontinued operations. But we do provide the revenue excluding divested assets, which to your point are Passport, Lighthouse and Miami Children’s, to give what we think is the best representation of the year-over-year growth of the organic business. Did that answer your question?

[David Larsen, BTIG, LLC]

Okay, so – it does. So when we look at 2021 to 2022, when it comes time to basically build our models, you’ve been talking about a mid-teens top-line growth rate, is sort of what the bogey is. But if you were to, say, deliver 30% organic revenue growth, we would see 30% revenue growth from 2021 to 2022, is that correct?

[John Johnson, Chief Financial Officer]

That is correct.

[David Larsen, BTIG, LLC]

Okay, thank you very much. Good quarter.

[John Johnson, Chief Financial Officer]

Thank you.

[Seth Blackley, Chief Executive Officer]

Thanks, David.

[Operator]

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

[Seth Blackley, Chief Executive Officer]

All right. Thanks for everybody’s time. We look forward to connecting soon. Have a good evening.

[Operator]

The conference is now concluded. Thank you for attending today’s presentation, and you may now disconnect.