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Welcome to the Evolent Earnings Conference Call for the Third Quarter Ended September 30, 2024. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent are Seth Blackley, Chief Executive Officer; and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the rest of the week via the webcast on the company's website in the section titled Investor Relations. I will now hand the call over to Seth Frank, Evolent's Vice President of Investor Relations.

Thank you and good evening. This conference call will contain forward-looking statements under the U.S. Federal 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 our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measure are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Evolent Investor Relations section of the company's website, ir.evolent.com, and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now I'd like to turn the call over to Evolent's CEO, Seth Blackley.

Good evening, and thank you for joining the call. Earlier this afternoon, we released third quarter 2024 earnings and a revised 2024 outlook that fell short of our expectations for adjusted EBITDA. As we will discuss, these results are driven by several factors, most notably a rapid increase in oncology costs, referenced frequently by the managed care companies over the last several weeks. While we remain confident in Evolent's underlying fundamentals and positioning in a fast-growing market, as evidenced by our record new sign-ins in the quarter, we take our commitment seriously and the team and I are disappointed in our revised near-term earnings expectations and our earnings results this quarter. Anytime Evolent falls short of the expectations we set, that's ultimately on me as the CEO. Let me give an overview of the impacts in the quarter and how we're addressing them beforehand and to John to go through the financial details. I will conclude our prepared remarks by talking about a significant number of exciting new business signings this quarter and the pipeline outlook and then we'll take your questions. Outside of our specialty performance suite, our Q3 results were roughly in line with what we had expected when we set out the third quarter 2024 guidance. Our Q3, 2024 adjusted EBITDA of $31.8 million was impacted by approximately $42 million in higher than expected medical costs in our specialty performance suite business versus our forecast for the quarter when we set our Q3 guidance in early August. This included two components. First, new claims data we received and processed from September through early November from some of our partners that included much higher pay claims expense from prior quarters. This factor drove $24 million in higher net expenses in the quarter related to prior periods versus our expectations. And second, we experienced an acceleration in medical costs in August and September after a period of relatively flat experience between March and July. This new acceleration drove an additional $18 million in increase in medical expense for the third quarter compared to our expectations. On an incurred basis in the quarter, some markets with a small number of customers had medical expense ratios of over 100%. We believe the unusually high medical costs inflation in the third quarter in our specialty performance suite was driven by a confluence of factors, including significant increases in disease prevalence, Medicaid redetermination-driven adverse selection, rapid increases in unit costs, post-COVID acuity increases, and provider coding intensity. We are not alone in experiencing significant spikes in medical expenses in our industry. As many of the country's largest insurers noted, a third quarter acceleration in specialty pharmaceutical costs where the majority of our company's oncology capitation risk lies. This quarter's spike in medical expenses is unlike anything we've experienced since launching the performance suite offering six years ago. We're moving rapidly to take four actions to address this issue. First, we're working closely with our partners to update reimbursement rates according to our contractual provisions. We successfully negotiated and captured incrementally higher rates of approximately $35 million relative to our initial expectations for the year, consistent with what we communicated on the August call, and 100% of those increases were signed by the end of August. Based on the data from our partners we had as of August, we believed those rates would be sufficient to cover the increased medical expense experienced earlier in the year. However, based on the data we now have received, we are currently seeking an additional $100 million in annualized rate increases with a target of January 1st, 2025 to effectively align with the elevated prevalence, acuity, unit costs, and overall expense seen in the new data we received since our last earnings call. John will provide additional detail on this plan shortly. Second, we are carefully auditing the new data that was submitted to us to confirm that it accurately matches our contractual obligations to our partners. Third, we continue to aggressively manage our own cost structure. And fourth, if we can't come to agreement on terms with the small number of partners driving high medical loss ratios regarding what we believe are appropriate rates in the context of the most recent claims data, we have the contractual ability to exit our risk arrangements or shift our products to our fee-based technology and services model. Again, these exit provisions are in place for rare moments like this, and we always have that lever if we can't align our rates. We estimate that our quarterly adjusted EBITDA would be approximately $50 million a quarter if we converted our money-losing performance suite markets to technology and services. This opportunity creates, we believe, a theoretical adjusted EBITDA floor for the business before any new growth or successful performance suite rate increases of over $200 million per year, all of the things being equal. While this fourth lever of terminating risk arrangements is an available option, we continue to believe the performance suite is the most attractive model for both our partners and for Evolent. We continue to believe the performance suite model drives leading clinical results and that our customers recognize the differential value we create. Based on past experience, we are optimistic and believe that we will be able to align our rates with these partners. Before John goes through the details of the quarter, I want to communicate where we are on our multi-year outlook. While we're disappointed in our revised outlook for adjusted EBITDA in 2024, we intend to use this moment of industry dislocation to maximize Evolent's long-term enterprise value. We believe we have exceptional products that can drive favorable member outcomes and lower costs in the most complex specialty areas. We are well capitalized and cash flow positive and can weather challenging industry dynamics. Therefore, we are reaffirming today our long-term expectations of growing annual adjusted EBITDA by at least 20% on average. However, given the unprecedented increase in medical expenses experienced by the industry in 2024, this growth will be off of a lower reference point. Furthermore, given the industry context, we believe we have a unique opportunity to capture share in a challenging time for our partners and intend to focus principally on driving long-term adjusted EBITDA expansion. We're also reaffirming our long-term expectations for revenue growth of 15% plus, except in any one-time shifts from risk to non-risk relationships I mentioned earlier. We will update the market on our near-term expectations including our 2025 outlook and a revised estimate of when we will achieve our $300 million run rate target when we report our Q4 results in February. I'm now going to hand the call over to John to get into the financial details.

Thanks, Seth. On our second quarter call in early August, we set out an expected margin expansion path at that time for the rest of the year driven by four factors. Organic growth, clinical value creation, normalized prevalence and acuity patterns, and new reimbursement rates. We are ahead of our previously set expectations on three out of four of these drivers, but progress was offset by higher than expected medical costs. Let's review each in turn. First, we executed ahead of expectations on implementing new business in the quarter, launching services across eight implementations, including at least one new launch in all 50 states. Our tech and services products continue to outperform our forecasts for both top and bottom line contributions. Second, we continue to execute on our targets to lower medical expenses while increasing quality as our underlying goal. For example, by Q3, we had reduced the frequency of newly prescribed low-value regimens by over 50% versus a baseline in a recently launched market. We believe this highly differentiated model creates significant value for our clients, for our members, and for Evolent. Third, we are pleased that our differentiated model has enabled us to capture significant rate increases during what has been the most challenging year for managed care in recent history. We announced on our August call that we had aligned with partners on new rates expected to capture approximately $35 million of new revenue in 2024 beyond what we had forecasted coming into the year. All of these agreements are now in place with aggregate ‘24 impact in line with what we communicated on the August earnings call. As expected, we recognized a one-time true down in the quarter related to a narrowed scope in select markets retroactive to the beginning of the year. The final revenue impact of this reduction was approximately $20 million per quarter, modestly higher than originally anticipated, resulting in our revenue for the quarter being in the lower part of our range. As expected, we also true down our first half accrued medical expenses by the same amount, resulting in no material impact to adjusted EBITDA from the true down. Fourth, while we believe our overall clinical value creation for our partners was in line with expectations, medical costs exceeded our expectations in the performance suite. Therefore, rates that were based on data as of our August earnings call did not reflect the higher medical costs experienced in the third quarter. This is caused by the two factors Seth previewed, an acceleration in medical costs that began late in the third quarter and new data received from our partners and processed across September and into November. Let me discuss both isolating the impact of these issues for Q3 and for prior periods. On the first, recall that our third quarter and full year guidance assumed that disease prevalence and acuity remained stable at the average levels experienced during the second quarter. This was informed in part by July authorization data, which in aggregate had the lowest volume we had seen since March on an adjusted basis. As the third quarter progressed, we saw a significant spike in volumes. This was particularly acute for oncology in Medicaid, which experienced a 9% increase in seasonally adjusted authorizations per capita versus the second quarter with relatively minimal changes in membership. This contributed to an estimated $18 million increase in claims expense in Q3 on a like-for-like basis versus Q2. This amounts to about a 500 basis point step up in specialty performance suite MLR in the quarter. The second factor was revised claims files received and processed from September through the beginning of November from certain of our partners that included higher claims paid in prior periods than the files they had previously submitted. To be precise, these files included claims paid in prior months that were not previously submitted, not just normal course claims development for expenses incurred in prior periods. We are actively auditing these claims submissions to understand the changes and confirm that they appropriately match our scope of services as Seth noted. Based on our initial analysis of this data over the last several weeks, we have identified possible mismatches between what was submitted and our scope, which could have a net favorable impact on our adjusted EBITDA. At this point, we have only concluded our internal review on less than 10% of these mismatches. While the reviews are ongoing, we are taking a conservative stance, and we believe we have booked the full impact of this new data in the quarter and are incorporating it into our guidance, i.e., our Q3 results and 2024 outlook do not presume upside from this exercise. We estimate that relative to our expectations, these new claims submissions drove a $24 million increase in claims expense net of revenue adjustments for dates of service prior to Q3. Note that this impact was almost entirely from 2024 dates of service. We believe these results are fundamentally a reimbursement issue, not an underlying value creation issue. For example, in one of the markets in question, we estimate that our clinical interventions through 9/30 [ph] created a 14% reduction in spend relative to an unmanaged benchmark. This represents a doubling of the savings delivered by Evolent in the prior year. This sample analysis was across over 400 cancer patients in this market, whose treatment this year we believe was better aligned with the best and latest evidence on efficacy and toxicity. Despite this primary value creation, the underlying change in cancer prevalence in this market has increased year-over-year by 30%, with August running 50% higher than the prior year average, outpacing the rate of savings from our clinical interventions. As Seth mentioned, we are exercising our contractual rights to adjust our rates to these changes in the underlying population. We are seeking approximately $100 million beyond the rates secured this summer and beyond our normal escalators. We estimate that nearly half this amount, or $45 million, will come from purely mathematical and contractual annual rate adjustments that will take effect in January. These mathematical constructs are automatic and self-executing and do not require negotiation. However, since those contractual provisions use full year prevalence, mix, and other factors to calculate the following year's rates, they do not capture the full impact that we are now seeing in Q3. We are therefore seeking an additional $55 million in rate increases targeting a January 1, 2025 effective date to match the shifts we have seen in the expense base. While we believe strongly in our ability to drive value for our partners, currently we do not expect any of these increases to come into place until January of 2025, leading to a significant forecasted mismatch between elevated expenses and rates for the rest of 2024. As a result, we are revising our outlook for the year for adjusted EBITDA to be between $160 million and $175 million, with corresponding Q4 guidance of between $22 million and $37 million. Our updated outlook for 2024 assumes that elevated medical expenses that we saw in August and September persist for the rest of this year, but that it does not continue to accelerate. The lower end of this guidance contemplates that clinical costs continue to rise on a seasonally adjusted basis in the fourth quarter, even off of the highs of Q3. Neither case assumes we receive any incremental rate increases until January ‘25. Regarding revenue, we are updating our annual expectations to between $2.55 billion and $2.575 billion, reflecting the impact of go-live timings and the updated narrowing of scope I mentioned earlier. The corresponding outlook for Q4 is $642 million to $667 million. Switching now to the balance sheet, where we remain well capitalized with a strong liquidity profile. Cash from operations was $18.7 million in the quarter, excluding the impact of earn-out payments, year-to-date cash from operations was $67.2 million. Across the last eight quarters, we have generated $312 million in cash from operations before paying interest and earn-outs, which represents 85% of adjusted EBITDA during that time frame. As we look forward, we anticipate continued strong cash flow generation from our operations. In the hypothetical scenario Seth mentioned, where we exercise our right to exit risk in markets where we were losing money, the resulting estimate of $200 million in adjusted EBITDA would cover our current annual cash interest obligations of $20 million many times over. With that said, we observed a slowdown in collections from our health plan partners in September and October, leading us to draw on our revolving credit facility in late October. We believe this slowdown is temporary based on the turmoil in the managed care industry. And while we are not concerned from an overall collectability perspective, we want to be prepared in the event we experience longer collection cycles in the coming months, or in the event we see opportunities to accelerate profitable growth during this unique moment. To that end, we have obtained $250 million in incremental committed financing from our existing lender subject to customary conditions in the form of an increase to our revolving credit facility, a new $125 million term loan, and a $75 million delayed draw term loan. If this facility were to be fully drawn, we estimate our total annual cash interest expense would increase to about $43 million. Still, we believe a small fraction of our overall annual cash generating power. This commitment is available to us through January. In addition to providing a buffer for potential slower cash receipts, this committed financing would also provide a proactive path for our 2025 convertible note maturity. Finally, as a part of this commitment, we expect to amend our existing credit agreements and related documents to permit the board to launch a share buyback program if we were to choose to do so, expanding the levers we have to drive shareholder value. Let me hand the call back to Seth to talk about the new business announced in the quarter and some market demand commentary.

Thanks, John. Despite the near-term reimbursement rate issues we just discussed, Evolent's market position is strong, and we believe our solutions help our help plan solve their most important issues as they manage this challenging underwriting cycle. For the third quarter of 2024, we announced six new revenue agreements, exceeding our new agreement revenue growth target for the quarter. The six agreements is the largest number of new revenue agreements we've announced in one quarter since founding the company 12 years ago. These six deals bring our total for the year to 17, our highest new revenue agreement count ever in a year. Here's a summary of our new signings. First, we executed a letter of agreement for the oncology performance suite for a large state with a top five national payer in the country and are finalizing the details to go live with that partner for over 200,000 Medicare Advantage members in 2025. We're extremely excited to announce this deal, and we look forward to working with this industry-leading payer on additional opportunities across the country. All five of the other agreements announced in the quarter are for specialty, technology and services products as follows. In our second agreement, we expect to go live with a new expanded relationship with a South Central regional health plan. This existing customer who we provide oncology technology and services and advanced care planning solutions for both commercial and Medicare Advantage lines of business will now expand to include multiple specialties, including cardiac imaging, advanced imaging, and a variety of musculoskeletal solutions. Our third agreement was with one of our largest clients, a Medicaid health plan, which will now grow its existing footprint with Evolent to include radiology, advanced imaging, and musculoskeletal services. Our fourth agreement is with a former NIA client to now include select musculoskeletal solution across commercial and Medicaid lines of business for a regional health plan in the eastern Great Lakes region. This new agreement is scheduled to go live in the second quarter of 2025, subject to regulatory approval. In addition, we anticipate adding Medicare lives to the musculoskeletal solution in 2025. Fifth, we are expanding our relationship with a large national Medicaid health plan beyond our existing footprint to now include general radiology across nine states, predominantly the Midwest and Southeast. Sixth and finally, we're excited to announce multiple of Evolent's specialties were included by a current Evolent Blue Cross Blue Shield customer to help them win a large-scale, self-funded ASO request for proposal covering 250,000 members and their families. This marks a significant entry into the employer market for Evolent, and we believe there will be a long runway ahead for continued growth in the self-insured employer market. In addition to six new signings just covered in the surgical management solution, we signed a significant, large renewal with an anchor client the next three years across the Southeast. We expect this agreement will allow Evolent to continue to build new momentum in the active Florida market for surgical management solutions focused on site of care optimization. As a reminder, surgical management is generally a commercial line for us, helping add some additional diversity to our revenue and earnings in the government payer space. We anticipate continued growth as there continues to be a proliferation of new de novo ASC facilities as well as existing facilities looking for new opportunities to grow surgical volumes. For health plans, site of care shifts remain critical, particularly in the commercial space, to help manage the cost of care and optimize surgical resources. Finally, I want to point to the press release issued today confirming our national surgical and radiation oncology, technology and services agreement with Humana that we announced back in February of this year. With regard to complex care and the Medicare Shared Savings Program, as you know, CMS recently provided its final data for the 2023 performance year. Once again, Evolent's ACO had a strong performance year delivering significant value to CMS and other provider partners. Here are a couple highlights. Evolent's ACO ranked as the 12th largest ACO by total spend, placing us in the top 3% of all ACOs. We ranked as the 8th highest earner in shared savings in the top 2% of ACOs, consistent with our results in the last performance year. We ranked third among ACOs designated as focused on independent primary care physicians. Finally, we continue to see strong growth opportunities for our Complex Care Solution, targeting approximately 25,000 to 30,000 new members for the 2025 performance year, the highest growth in the history of that solution. Let me provide some color now on the status of our sales pipeline going into 2025. We believe that Health Plan's number one pain point is specialty medical cost trend, as frequently referenced on their Q3 earnings calls. While that pain obviously affected our earnings in the quarter, the demand for our products is high. This backdrop of cost concerns created pressure as employers and government entities alike seek solutions to manage specialty costs. We see market-wide operational challenges with managing specialty costs across all three major lines of business. As a result, Health Plans of all sizes are expressing their interest in creative partnerships, including sub-capitation, to address trend, especially in the big three specialties where Evolent focuses. I want to close with a couple of comments on Evolent's position in the market. We believe our core products clearly create value, are market-leading, and are in high demand as payers work to manage specialty medical costs. Evolent has less than 5% market share in most of our specialty products. We believe this situation, the leading specialty product, specialty cost pain, and low current market share sets us up for continuing to build a durable business in the years to come. We are focused first on our near-term earnings, but we strongly believe in the large and long-term opportunity ahead. As we navigate this time ahead, the Board and I will continue to evaluate all strategic options to maximize shareholder value, including a share buyback program, while keeping consistent with our priorities for capital allocation. With that, we'll open it up for questions.

[Operator instructions] The first question comes from Charles Rhyee with TD Cowen. Please go ahead.

Yeah, thanks for taking the questions. You noted that – basically of the expenses that you've reviewed so far, how – I think you said maybe 10% of them set – how much were outside of the scope so far? And maybe you could give a little bit more color on what kind of expenses they were submitting. And maybe what percent performance revs does the small number of partners that are driving this high MLR represent?

Yes, I'll take that one Charles. This is John. Let me give you a sense for how this works. This claims audit process is part of our normal course operation, where when our customers pay the claims themselves and we receive claims files from them, we run those files through our own internal claims system, which is tailor built to process specialty claims. And that analysis is going to flag areas for further investigation, and that's what we're highlighting here. While this has been an ongoing and recurring part of our business for many years, what we've seen this quarter, in particular with this new data, is quite a bit higher than what we've seen before. For example, the total number that we're reviewing right now has grown 10x versus – or more than 10x versus last year in Q3, so a lot to look at. What we typically see, is these flags might be authorizations that have run out of units, claims that are processed without authorizations or other ideas for claims like that. Once those are identified, we start the process of discussing those with our partners, and identify are there other components of this claim that were not included in what was sent to us that would change the point of view, or other factors like that? I would underline that we're early on in this analysis, given the volume that we are reviewing. I mentioned that we’ve only reviewed a little less than 10% so far. And we believe that we're being pretty conservative in the impact here, on both our Q3 results and our forward guide.

And the small number of partners driving the high MLR, like what percent of performance revs do they represent?

In total Charles, it's probably 40% to 50%.

Got it. Okay, I appreciate it. Thanks.

And the next question comes from Jailendra Singh with Truist Securities. Please go ahead.

Yeah, thank you. This is Jailendra Singh from Truist Securities. So I wanted to kind of follow-up on your $100 million rate adjustments you expect of $125 million. So, if I look at your EBITDA guidance lowered by $70 million. If I kind of look at the pieces you disclosed, it seems like you have raised – you are seeing, expecting medical expense higher by $28 million in Q4. Is that the baseline you are using when you are thinking about $100 million adjustments next year? How much of this $100 million is related to retroactive payments to reflect 2024 experience? And how much is your underlying costs that you expect next year in your core business?

Yes. I mean I'll start with that last one. Everything that we're talking about here is prospective. And so the $100 million in rates that we mentioned that we are seeking to go-live and effective in January of next year, it would be prospected based on changes in the population and the trend that we're seeing this year. And two other important things to note. One is that $45 million we estimate, of that $100 million is mechanical based on the way that these contracts are structured. And so there is a prospective annual rate increase or adjustments in some of these contracts that automatically adjusts the next year's rate for the current year's prevalence and mix and so on. And so we feel very positive that a significant portion of that $100 million is already accounted for in our rates or in our contracts. The second thing that I'd note is we have other provisions in our contracts as well, in addition to these purely mechanical ones, that as an example we talked about exercising over the summer. And we were successful in exercising those, capturing as we mentioned, the $35 million in in-year revenue increases relative to our initial expectations that we said we would capture on the Q2 earnings call. So both of those mechanics exist, and we're optimistic that we'll be able to execute on that path as we move into next year.

Sorry, one clarification, if I can here. If your payer partners are willing to compensate for this additional $55 million, I mean, shouldn't you be like reworking all your contracts to make sure the majority of these adjustments become automatic and self-executing. I mean are you – as you are signing these new contracts, are you taking that into consideration?

Absolutely, Jailendra. Today, about 50% of our performance suite revenue includes these mechanical contract protections. That's up from what it was a year ago as a percentage. And we anticipate continuing to refine and update these contracts as we work to execute on this path for next year.

Thank you.

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

Yeah, good afternoon. Thanks for taking the questions. I want to continue on the performance suite and ask how we should think about the margin performance from the mature cohort of contracts there, maybe clients that you were live on in 2022 or prior. Help us think about the progression from 2022 at the Investor Day. In May of ‘23 was when we last got an update there on how that cohort had performed. So if you could translate that from that until 2024 expectations, that would be helpful. And then if you could help frame up how we should think about what unachievable long-term margin target is for the performance suite business as they are underwritten today? Thanks.

Yes. Great questions, Jeff. Look, on the cohort side, what I would say is, the spike in trend that we have seen in Q3, and that really the industry has seen in oncology over the recent time period, has applied to all of our cohorts. That's both Medicaid and Medicare Advantage, both old and new. So it doesn't appear to be localized in the way that the spike that we talked about, for example, earlier this year, what was quite localized. On the second question, what is the right long-term mature margin within the performance suite? We firmly believe, based on years of evidence here, that the value creation opportunity supports our mid-teens margin target. One of the things that, of course, we will be evaluating as we work with our partners towards these rate increases for next year, is whether there is a symmetric corridor that might be smaller. It may lower our long-term mature margin, while also trading off protection on the downside, beyond what we have today. That's an evaluation that we'll make together with our partners as we work toward the right sustainable model here, which just to reiterate what Seth said during the prepared remarks, we continue to believe firmly in the underlying value of. We'll take the next question operator.

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

…declined about, no growth from the healthcare end market baked into your guidance for this year, has that changed recently, I think?

That might be another conference call.

Yeah, we've definitely seen stability in our health system business over the past year. And so if we look at our expectations today versus our expectations.

Operator, let's move on to the next question.

The next question comes from Stephanie Davis with Barclays. Please go ahead.

Hey, guys. Thank you for taking my question. I apologize, but I also have some noise as I'm in the airport. But you've talked about a minority of your clients driving the majority of this quarter's issue. So I was hoping you could expand upon that a bit more. Are we talking about one or two clients? Are we talking about a handful of clients? And how deep are these relationships? Would this be something difficult to unwind or it could be done in a more rapid fashion?

Hey Stephanie, it's Seth. So it's a handful of clients, and these are relationships that we've had for many years and have good relationships with that are in constant contact. And so I think this will be a pretty rapid process to have the conversations. And again, I think frankly this links back to Jailendra's comment and question and Jeff's comment, which is you can't have your cake and eat it too in life, if we want to narrow the volatility a little bit on a given contract by having a corridor you may be trading off something for another item, and that's sort of how these protections work. It needs to be symmetrical and fair for the client, and so I think we'll figure this out pretty quickly. It's a small handful of relationships that we have. Obviously, very deep personal relationships with and a lot of trust built up. So a fair bit of confidence, we'll be able to move forward and have conversations in a short period of time.

I guess following-up on that, it sounds like you've got a lot on your plate and kind of go through this cleanup. Does it give you any pause on expansion and to start their verticals or really executing on further performance fee wins?

Yes. Look, I think it's a good question. Obviously, we announced one in this quarter and I think there's a healthy tension there, because the market demand is very high right now, right, because all the health plans are really struggling with this generally. I think there was an interesting article in the Wall Street Journal last week or the week before about just how complicated is to manage cancer if you are a patient right now. The same thing if you are the oncologist, just using that specialty as a for instance. So I think there's a tremendous opportunity right now, and we want to make sure we capture that opportunity. At the same time, yes, we are going to be very prudent and thoughtful about what terms are in those agreements. And the things that are in the pipeline right now would reflect all of those contract terms that we feel like we need to have to protect ourselves.

Thanks so much.

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

Hey guys. Thanks for taking my question. Can you hear me?

We can.

Yes.

Okay, thought I heard some background noise. I just want to go back to the contract renegotiations to make sure I understand this perfectly. So $45 million of the $100 million you said is automatic and mathematical. And it sounds like that is based on perhaps the current year mix in prevalence. So I'm taking the entire kind of year-to-date performance, you get that $45 million. But is the $55 million incremental then based on the most current data. So if that would be kind of run rate to say, look, we're not accounting for what is currently going on in that $45 million and in order to actually account for the current prevalence rates, it would be another $55 million on top of that, but that's not in the contract, so you need to kind of renegotiate that and get agreement on it. Is that the right way to think about it?

Yes. I think you described it well, Ryan.

Okay. And then another thing you said, I'm not sure if I heard you correctly. Did you say in some markets that you've seen cancer prevalence increases of up to 50% year-over-year. Can you go through that please? That was pretty stark data? Thank you.

Yes, that specific example, I believe, was the August prevalence relative to the average from last year and it's a true stat. Obviously, that one is pretty extreme, but we're seeing an increase in cancer prevalence across the book. I will note that some of that, of course, was expected because of the mechanics of Medicaid redeterminations, but this is above and beyond what would be easily explainable by that dynamic.

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

Hey, guys. I was hoping you could help us think through the sort of EBITDA run rate as we're entering 2025. You've got your guidance of $160 million to $175 million, but you've got sort of an accelerating trend. So I was curious if that was sort of the right baseline or if there were some more costs we needed to add back. And then hopefully we get this $100 million back on top of that, obviously, with the contract renegotiations. But just wanted to see if you could sort of help us think through the run rate that we then hopefully grow into next year?

Yes, it's a good question, Matt. Here's the thing that I'll go back to, which we mentioned during the prepared remarks, which is if we took the business today and those markets where we are currently underwater in the performance suite, and flip those into the tech and services products, we would see, we believe, an EBITDA of around $200 million per year. So we think of that as sort of the core earnings power of the business today if we were to take that action. Of course, that action doesn't happen overnight. The other thing that I would say is if we are retaining those markets in the performance suites and obtain the revenue that we believe is commensurate with the populations that we're managing, and continue to drive the clinical improvements that we know we can do in the market to improve both the quality and the margin in those markets. The earnings power of the business would be quite a bit higher than $200 million. So that's how we think about it. Of course, we'll give more specific guidance for 2025 on our Q4 call in February.

That’s helpful. Thank you.

And the next question comes from Adam Samuel [ph] with J.P. Morgan. Please go ahead.

Hi. This is Kyle Aikman on for Anne tonight. I wanted to ask you about the new partnerships announced in the quarter. And if you’ll go into detail about the expected financial contributions to both of those, and should we expect all of these to go live sometime in 2025?

Hey Kyle. In total, I think we scoped it at around $200 million in annualized revenue across the six announcements. In breaking that down further, the tech and services announcements that we made today, in total across the $5 million or around $10 million in total revenue once they are fully up in live, with the rest of course the performance suites. And yes, we do expect all of those to go live sometime next year.

And just a quick follow-up. I wanted to ask about the accounts receivable dynamics. If you could provide more color on what's exactly going on there, your expected time line of recovery and your confidence in that time line? Thanks.

Yes. So look, I think what we've seen has been specific to a couple of partners, where we have pretty good insight into those dynamics. It happened before and we have no concerns around overall collectability of that AR. At the same time and recognizing the need and the desire to proactively create a pathway for our 2025 convertible notes that are due next October, we went ahead and secured this incremental committed financing of $250 million against both of those eventualities.

Amazing. Thank you.

The next question comes from Richard Close with Canaccord Genuity. Please go ahead.

Yes. Maybe going back to Matt's question. And John, you talked a little bit about performance week going down to the tech and services. Can you talk a little bit about how – what that process is like? You said it doesn't happen overnight. I guess that's my first question. And as a follow-up to it, how are you guys thinking about – you said that there's a performance suite in the pipeline. You just signed one as well. Maybe taking – pumping the brakes a little bit on performance suite going with the tech and the services for a while until there's a better dynamic with respect to medical cost trends. Just how are you thinking about that would be helpful?

Yes. Hey Richard, it's Seth. I can take both of those. So I think on both questions, the overriding message is that we continue to think the performance suite is the best model for patients, for our customers, for oncologists for Evolent financially, and so we still believe in it. And yet to your point, we have to be thoughtful about how we handle it in this environment. So on your first question, if we needed to get into flipping something from performance suite to the technology and services side, those contractually typically are – it could be short as 30 days. It could be as long as 150 days. The average is somewhere in between. So it's not a very long period of time, a couple of months typically. And then on your second point on the pipeline, I think look, this quarter reflects pretty well how we're thinking about it. We've always had this idea of balance, right? We've always had tech services and performance suite. 70% of the EBITDA coming into the year is actually from tech services, and we've always said we like that. And I think even in this quarter, five out of the six deals being in tech services I think is a good mix. We still feel like when there's an opportunity to serve, in this case, one of the top five payers in the country who really want our help in a certain area. We think we can help those patients and those physicians. And we think we have the right underwriting terms, to your point. It still makes sense to do, but we are going to put, I'd say, heightened scrutiny around all of those things that you're talking about given this environment. So I think there is a form of hitting the brakes based on just sort of how we execute on that, but we want to be balanced about making sure we continue to like serve the market in the long term as well.

Thanks.

And the next question comes from Sean Dodge with RBC Capital Markets. Please go ahead.

Yeah, thanks. Maybe just on the Q4 EBITDA guidance and just bridging what was implied for Q4 before it was close to $70 million to now you are saying $22 million to $37 million. So there's a difference, your take of $40 million at the midpoint. It sounds like based on $100 million of price that you are looking to negotiate, that kind of the quarterly cost trend here is about $25 million higher. So just maybe if you could fill in the kind of the difference in the Q4 outlook? Are you assuming that this kind of cost trend intensifies before it gets better? Just anything else that's being built in there?

Yes, it's a good question. Two things that I'd say. We are assuming the guide as I noted, the space for a possible worsening of trends in Q4. The second piece is, while the $100 million number is above and beyond what we would normally expect, it is not the only annual rate change that we have. In fact, as we've talked about before, we tend to have very significant annual inflators in this business on the performance suite side. And so beyond the 100 that we are talking about tonight, we would anticipate at least $50 million of incremental revenue beginning on January 1 from just our normal course escalators, and those bridge the rest of that gap.

Okay, thank you.

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

Hi. Thank you guys for taking the question. I'm just hoping you can help us frame the $100 million of sought after price increases versus just that kind of minus 10% risk corridor that you have historically pointed us to. Can you just help us understand, like does – whether those price increases get you back from the minus 10% at the low end of the corridor to where you would have otherwise been in the kind of time line of that contract had the adverse risk not presented?

Yes. It's a good question, Jess, and it is more the latter, right. That $100 million is what we believe we need to get back in the black as it were in these couple of markets and back on track with our normal course margin maturation.

Got it. And then I'm just curious, this is a somewhat longer term question, but just with Part C drug negotiation under the Inflation Reduction Act, I think there's an expectation that payments to providers for drugs right, that are based on ASP plus 6.5% are going to come down meaningfully. Is that a tailwind for Evolent or do you have direct – do those savings effectively pass through to your payer customers via lower PMPM pricing for you all, or how would that work? Thanks.

Yes. At this point – that's a good question. At this point, we anticipate very minimal impacts on Evolent from the Inflation Reduction Act, and we generally don't take risk in Part D, as in Dog, and so it's not a big issue for us.

Thanks. I'll follow up offline. Thank you.

And the next question comes from Kevin Caliendo with UBS. Please go ahead.

Hi, guys. Thanks for taking my question. Is it wrong to just – I think Ryan kind of asked this question, but I’ll just – maybe I'm going to try to ask it again a little bit different. Is there any reason not to take the 167 midpoint, grow it by 15%, and then add back 100 in terms of EBITDA for next year? Like are there any other puts and takes to that? Is that – I mean, I'm just saying, is that the right way to start?

I love the question, Kevin. I'm not going to guide for '25. I would say that obviously those are the key building blocks. One that we don't know today is medical trend and one that we don't know today is ultimate growth for next year. And so I'll go back to where – what we reiterated in the, within the release and the prepared remarks, as our ongoing expectation of being able to grow the top line of this business 15% and the bottom line adjusted EBITDA line at 20% on an average basis annually. And obviously from a different base now, but we firmly believe in those opportunities.

So maybe a follow-up. Is the 15% part of like the at-normal escalators or part of that $100 million because of the normal escalators. Is that part of the math here that I'm not maybe understanding?

The $100 million that we're talking about in new rates for next year that we are seeking, is above and beyond the normal escalators.

Okay, that's helpful. And then just one sort of clinical question, if I can sneak it in. It's interesting that we're seeing so much activity in oncology acquisitions, right? And now you are saying there's a spike in oncology costs that are happening here, whether it's COVID related or whatever. There's clearly something happening in the marketplace that's attracting a lot of interest from a market perspective, a Wall Street perspective. Is there something that's happening in terms of changing of protocols to treat oncology that's driving utilization, not necessarily are driving costs of care higher, just incidents. I'm just wondering, because it just seems odd to me that you are seeing so many clinics being acquired at the same time that we are seeing the spike in oncology trends. Drug cost trends have spiked as well, and I'm just wondering if there's some different type of care protocol that's going on that just costs more.

Yes. It's a good question, Kevin. I'll start and Seth can chime in if I leave something out. It's clear to us, based on our overview, millions of members on the oncology platform here, that there are changes in the nature of cancer treatments. Some of the things that we've seen beyond just increases in prevalence and acuity, which we talked about earlier, include more frequently using multiple therapies at one time, and we've also seen an extension in longer duration treatments to somebody, for example, on Keytruda for two years, a checkpoint inhibitor. So those are some of the trends that we've seen that have clearly contributed to the elevated expense that we're seeing. I think those are the sorts of trends, where if you take a step back and look at the oncology program overall that we have here at Evolent, we believe we can bring a differentiated point of view and outcome to our health plan partners on how to best navigate those trends.

Yes. And the only thing I'd add right, is that business has been up since we've been doing this, starting in 2018. Immunotherapy was ramping through that period of time, so Keytruda, all the PD-1s. But you've got cell therapy and gene therapy in CAR T, and there's a number of new innovation categories that have either come or are coming, and this is sort of the core point of the business and there are corollary examples and other specialties, which is – but I think it's highest in oncology to your point, which is this is a category of extreme complexity. It's changing so much, that up to a third of the time, based on the data we have, that patient's diagnosis or treatment plan are incorrect, right, and that is the fundamental opportunity for Evolent, is to help that patient and that oncologist in this example, get the therapy right. And sometimes it’s more expensive, usually it's less expensive. That's how we create value. We think we're the best in the world at this. So yes, we have an underwriting pricing issue over the next – this quarter and next quarter that we believe will be fixed going into next year as we talk about with the $100 million. But I think the fundamental multi decade-plus opportunity that's ahead for this business is still really intact and exciting, and it gets to making sure we're thoughtfully managing and trading off these choices that are driving what you described.

Thank you.

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

Hi, guys. Thanks for taking the question. I'd like to go back to the $55 million of non-mechanical rate increase for next year. I guess the question really is around how much flexibility and negotiation is there in that $55 million? I suppose first I should ask, is it – are you going back to the same payers that you've got, the $35 million this year, because perhaps maybe they'll say, when you come back for $55 million, that they are a little less willing to make that rate increase and the negotiation might be a little bit tougher, if you understand what I'm saying. So really the question is, how much negotiation is there in that non-mechanical piece of the rate increase?

Yes. Look, I think I'd say two things Dan. Clearly, it's a negotiation. They are a managed care company and that's what they do, and it's not a mechanical item. At the same time, the trend is incontrovertible, and it is based on very clear metrics that are population driven. Those are changes in the number of people that have cancer, changes in the mix of cancers, things that we can point to that are very clearly out of our control. And so that foundation of long-term sustainable partnership in our experience has been favorable to our ability to negotiate appropriate reimbursement rates.

Got it. And are you asking the same payers for a rate increase for next year that you did this year, or is it a different set of payers?

Little column A, little column B.

Thank you.

Welcome.

The next question comes from David Larsen with BTIG. Please go ahead.

Hi. Can you talk a little bit about your expectations for premium increases in 2025, and I'm assuming you would get a part of that, right? So I'm thinking mid-to high single digits is normal. And then just any thoughts on the election and what impact, if any, that might have on your books? Thanks a lot.

David, our rates are not linked to planned premiums. So we wouldn't expect anything specific there. We can have normal course escalators that we've been talking about it, are targeting this $100 million based on the change of the population. I'll let Seth take the election part.

Yes, David. So I don't think the outcome of the election changes very much for Evolent. It wouldn't have one way or the other. I think there are some possible changes on Medicaid membership. We think the ACA will stay in place. So there could be some membership changes over time. I think the major overriding dynamic for CMS, for State Medicaid Plans for Medicare Advantage Plans, Commercial, etc., is still the supportability issue and whether it's CMS on a policy basis or just the kind of the market as it is, I think it's all going to come down to our ability to set up thoughtful, reasonable contracts to manage them well, whether they are on the tech services or performance suite side, and the specific party and office won't change that very much.

Thanks very much. I appreciate it.

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

All right, thanks for joining tonight everybody. Have a good night!