Evolent Healthcare 10K 2020

Messy company in a messier industry.

[disclaimer: Although 10Ks & S1s are snapshots of the company in question, I am interested in the nature of the business and economics of the industry / sector. These articles will not go into financial analysis of companies but highlight interesting business models, macro and microeconomic insights of the industry and companies, interesting accounting issues, risks and any interesting tidbits I can discern. These are not recommendations to buy or sell any securities of the company in question.]

There is probably no disagreement that the US healthcare is a complete mess as the ongoing Covid-19 crisis highlights. There are a fascinating new breed of companies whose entire business models are based on streamlining interactions between the patient, provider (doctors) and insurance companies. Evolent is an interesting company which seems to have started with this goal in mind but seems to suffer from a split personality. They seem to have veered away from their initial mission and acquired health plans in New Mexico, acquired a controlling interest in another in Kentucky and another speciality care manager for Oncology and Cardiology.

Learnings about the Industry / Sector

1. The 10K starts with almost two pages of Explanatory Notes which includes an alphabet soup of acronyms — many of these just show the absurd nature of the healthcare business in the US.
2. US Healthcare was a $3.8 trillion business in 2019.
3. Cardiovascular and Oncology accounts for 25% of all healthcare spending.
4. One of the major cost drivers is spending on oncology drugs which rose 60% from $38 billion in 2013 to $64 billion in 2017.
5. Most payments in the industry are based on the fee for service (FFS) model.
6. The Industry wants to move from a FFS model to what is termed value based care, where the emphasis is on quality of outcome rather than quantity of care.

Learnings about the Evolent Healthcare

1. Founded in 2011 after the Obamacare (ACA) was passed and came out of the University of Pittsburgh medical center.
2. The company was private equity backed, this probably explains the $293M debt (current market cap $851M)
3. The distinct feeling reading the 10K is this is a company that has not made up its mind if they are a technology platform for clinical and administrative solutions for lowering costs or are they running health plans and becoming an insurance player.
4. They have a pretty big presence in Pune, India. This is interesting for a player that deals with a lot of health information.
5. Some unusual issues with their stock restructuring which results in the cost basis increasing resulting in potential lower taxes. The private equity investors have made sure they get their pound of flesh and more with this company, there is an unusual Tax Receivables Agreement with the investors, whereby Evolent is obligated to pay to such holders 85% of the cash savings, if any.

Red Flags

1. The company identified material weaknesses in its internal control over financial reporting related to certain areas. They have issues with their claims processing systems inherited from an acquisition.
2. Company has made acquisitions and bought equity stakes creating variable interest entities making for messy accounting.

Conclusion

This is a messy company with messy accounting, overhang from private equity investors and an overall unclear mission and vision. But it is probably true the US healthcare business is even messier.