Evolent Health(EVH) - 2020 Q4 - Annual Report

Form 10-K Details This Annual Report (Form 10-K) for the fiscal year ended December 31, 2020, is filed by Evolent Health, Inc - This is an Annual Report (Form 10-K) filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2020[4] - The registrant is Evolent Health, Inc., incorporated in Delaware, with Commission File Number: 001-37415[4] - The company's Class A Common Stock (EVH) is registered on the New York Stock Exchange[3] Registrant Information Evolent Health, Inc. is a well-known seasoned issuer and a Large Accelerated Filer, compliant with SEC reporting requirements - Evolent Health, Inc. is a well-known seasoned issuer and is required to file reports under Section 13 or 15(d) of the Act[5] - The registrant has filed all required reports during the preceding 12 months and has submitted all Interactive Data Files electronically[5] - Evolent Health, Inc. is classified as a Large Accelerated Filer[6] Market Value and Shares Outstanding As of the most recent second fiscal quarter, the market value of non-affiliate common equity was $540.0 million, with 86,091,822 Class A common shares outstanding - The aggregate market value of voting and non-voting common equity held by non-affiliates was $540.0 million as of the last business day of the most recently completed second fiscal quarter[8] - As of February 22, 2021, there were 86,091,822 shares of Class A common stock outstanding[9] Documents Incorporated by Reference Selected portions of the Proxy Statement for the Annual Meeting of Shareholders on June 10, 2021, are incorporated into Part III of this Form 10-K - Selected portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled for June 10, 2021, are incorporated by reference into Part III of this Form 10-K[11] Explanatory Note & Definitions Evolent Health, Inc. operates as a holding company through its subsidiary, Evolent Health LLC, with key industry terms defined within the report - Evolent Health, Inc. is a holding company, and its operations are conducted through its subsidiary, Evolent Health LLC[14] - The report defines key terms such as ACA, ACOs, ASO, capitated arrangements, CMS, HIPAA, IPO, performance-based contracts, PBM, population health, and value-based care[15][16] Forward-Looking Statements - Cautionary Language The report contains forward-looking statements subject to risks and uncertainties, including reliance on partners, regulatory changes, and the COVID-19 pandemic - The report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially from predictions[19][20] - Key risks include reliance on large partners, evolving value-based care market, regulatory uncertainty, ability to offer new products, acquisition risks, and the impact of the COVID-19 pandemic[20][21] - Investors are cautioned not to place undue reliance on forward-looking statements due to the rapidly changing and competitive environment[22] Market Data and Industry Forecasts and Projections Market data and industry forecasts are based on public sources and internal estimates, with no assurance of accuracy due to various influencing factors - Market data and industry forecasts are based on publicly available sources, independent industry publications, and internal research/management estimates[23] - The accuracy of forecasted amounts is not assured, as forecasts are subject to change based on various factors, including those described in the 'Risk Factors' section[23] PART I Item 1. Business Evolent Health provides technology-enabled clinical and administrative solutions for value-based care, supporting health systems and payers in managing patient populations through recurring contracts and strategic divestitures Market Opportunity The $4 trillion U.S. healthcare market is rapidly transitioning to value-based care, driven by cost pressures and technology, requiring integrated clinical and administrative platforms - The U.S. health care market is projected to approach $4 trillion in spending during 2020, with less than half tied to value-based care models[26] - The shift to value-based care is accelerating due to price pressure in traditional fee-for-service (FFS) healthcare, incentivizing policies, and innovation in data and technology[26] - Providers and payers need infrastructure for clinical value creation (lowering cost, improving quality) and an administrative platform to operate value-based businesses[29] Our Business Founded in 2011, Evolent Health delivers integrated, technology-enabled services to healthcare providers and payers, expanding through acquisitions and recent divestitures like Passport and True Health, leading to a 2021 segment reorganization - Evolent was founded in 2011 to enable providers to pursue a value-based business model, growing organically and through acquisitions[30] - Key acquisitions include Valence Health (TPA services, 2016), Aldera (software provider, 2016), True Health (commercial health plan, 2018), and New Century Health (specialty care management, 2018)[30] - In 2020, EVH Passport sold certain assets, including its Medicaid contract, to Molina Healthcare, Inc., and EVH Passport began winding down its business[33] - Effective Q1 2021, the Services segment will bifurcate into Evolent Health Services (Administrative Simplification, population health infrastructure) and Clinical Solutions (specialty management, total cost of care solutions)[35] Services Overview Evolent's Services segment provides clinical and administrative solutions, generating 87.3% of 2020 revenue from recurring multi-year contracts driven by member count and service depth, with growth expected from existing and new partners - The Services segment includes clinical (total cost of care, specialty care management) and administrative (comprehensive health plan administration) solutions[36] - Platform and operations services accounted for 87.3% of consolidated revenue in 2020 (up from 77.9% in 2019), providing strong visibility into future revenue[40] - Revenue from platform and operations contracts is typically driven by the number of members managed, population types (Medicare, Medicaid, Commercial), and the breadth of services utilized[40] Clinical Solutions Evolent offers Total Cost of Care and Specialty Care Management solutions, leveraging proprietary technology like Identifi® and CarePro™ to deliver cost-effective, high-quality care in markets with significant addressable potential Total Cost of Care Management Solution This solution helps providers manage populations under value-based contracts, aiming to reduce total cost of care through targeted interventions and primary care coordination, with an estimated $60 billion addressable market - This solution enables providers to manage populations under value-based or ACO contracts, aiming to reduce total cost of care through targeted interventions and primary care coordination[46] - The economic model is primarily performance-based, aligning incentives with partners, and the estimated total addressable market is approximately $60 billion[46] - Core elements include Identifi® (proprietary technology for data aggregation, care workflows, patient engagement), population health performance, and delivery network alignment[47][48][50][51] Specialty Care Management Services Solution Derived from New Century Health, this solution focuses on oncology and cardiology, using clinical analytics and proprietary pathways (CarePro™) to deliver high-quality, affordable care, with an estimated $50 billion addressable market - This solution, based on the New Century Health acquisition, focuses on oncology and cardiology markets, managing specialty care for Medicare, commercial, and Medicaid members[52][53] - It uses clinical data analytics, predictive modeling, and proprietary clinical pathways (CarePro™) to deliver higher quality, more affordable care[53][59] - The estimated total addressable market for New Century Health is $50 billion[53] Administrative Solution: Comprehensive Health Plan Administration Services Evolent provides comprehensive health plan administrative services, including TPA, enrollment, and PBM, to support value-based care and health plan operations for providers and regional payers, with an estimated $23 billion addressable market - This solution helps providers and regional payers build infrastructure for value-based care and health plan operations, primarily on an ASO or fee-based model[61] - Services include health plan administration, risk management, analytics and reporting, leadership, and integrated pharmacy benefit management (PBM)[61][63] - The estimated total addressable market for this solution is $23 billion[61] True Health True Health, a New Mexico physician-led health plan, contributed 11.5% of consolidated revenue in 2020 and served approximately 24,000 members, with an agreement for its sale expected to close in the first half of 2021 - True Health is a physician-led health plan in New Mexico, offering various insurance products[64] True Health Revenue Contribution | Year | % of Consolidated Revenue | | :--- | :------------------------:| | 2020 | 11.5% | | 2019 | 20.3% | - As of December 31, 2020, True Health served approximately 24,000 members[67] - An agreement to sell True Health to Bright Health Management, Inc. is expected to close in the first half of 2021[34][74] Significant Activities Recent significant activities include the issuance of $117.1 million in 3.50% Convertible Senior Notes due 2024, the sale of EVH Passport assets, repayment of the Credit Agreement, and an agreement to sell True Health for $22.0 million - Issued $117.1 million aggregate principal amount of 3.50% Convertible Senior Notes due 2024 in August 2020, partly by exchanging 2021 Notes[70] - Completed the sale of EVH Passport's assets, including the Passport Medicaid Contract, to Molina Healthcare on September 1, 2020, leading to EVH Passport's consolidation as a wholly-owned subsidiary[71][72] - Repaid and terminated the Credit Agreement with Ares Capital Corporation for $98.6 million and settled outstanding warrants for $13.7 million on January 8, 2021[73] - Entered into an agreement on January 11, 2021, to sell True Health to Bright Health Management, Inc. for $22.0 million plus excess risk-based capital, subject to closing conditions[74] Financing Strategy Evolent's financing strategy maintains liquidity through a mix of debt and equity, with $263.3 million in long-term debt, net of discount, outstanding as of December 31, 2020 - The capital structure utilizes a mix of debt (convertible debt, lines of credit, long-term credit agreements) and equity (common stock issuance) to maintain liquidity[75] - As of December 31, 2020, the company had $263.3 million of long-term debt, net of discount, outstanding[75] Competitive Strengths Evolent Health's competitive strengths include its early innovation in value-based care, differentiated specialty solutions, comprehensive offerings, deep market experience, proprietary technology, provider-heritage brand, and partnership-driven model - Early innovator in comprehensive value-based care solutions, founded in 2011 before the rapid expansion of programs like Medicare ACOs[77] - Offers a differentiated, performance-based solution in high-cost oncology and cardiology markets, managing over 3.6 million lives as of December 31, 2020[78] - Leverages integrated proprietary technology (Identifi® and CarePro™) to deliver a connected delivery ecosystem and scale value-based services[82][83] - Provider-heritage brand identity and partnership-driven business model differentiate the company, fostering cultural alignment and shared financial benefits[83][84] Growth Opportunities Evolent Health aims for growth by expanding within its existing partner base, cross-selling solutions, capturing value through risk-sharing, capitalizing on government programs, and pursuing strategic acquisitions and new specialty lines - Growth avenues include increasing lives in existing covered populations, expanding into new value-based care lines, cross-selling solutions, and participating in upside risk-sharing arrangements[86] - Significant market potential in specialty care management, with less than 5% penetration in Medicare and less than 1% in Medicaid and Commercial markets as of December 31, 2020[89] - The company aims to capitalize on the growth of government-driven programs (Medicare, Medicaid) and capture additional value by participating in medical savings through risk-sharing arrangements[93][94] - Future expansion includes PBM capabilities, additional specialty lines (kidney, maternity, end-of-life care), physician employment, on-site/specialty clinic services, and consumer engagement[95] Sales and Marketing Evolent Health markets its services to payers and providers across the U.S. through a dedicated sales team that builds long-term relationships and identifies new service opportunities - Sales and marketing efforts target payers and providers throughout the United States[99] - The sales team works closely with leadership and subject matter experts to build long-term relationships, while a business development team identifies new service opportunities[99] Services Partner Relationships Evolent's business relies on strategic partnerships with over 37 operating partners, with an average contract length of 5.1 years, involving monthly payments and some risk-sharing, though contracts may be terminable for convenience - The business model is based on strategic partnerships with leading payers and providers, aiming for cultural alignment and shared financial benefits[100] - As of December 31, 2020, Evolent had contractual relationships with over 37 operating partners, with an average contractual relationship of 5.1 years[101] Significant Services Partners Revenue Contribution | Partner | 2020 Revenue % | | :------------------------------------ | :-------------:| | Cook County Health and Hospitals System | 20.3% | | Passport | 16.8% | - Contracts typically involve monthly payments based on member count and service utilization, with some including risk-sharing or performance-based components[102] - Contracts may be terminated for convenience (with fees), failure to meet performance metrics, or other specified events, and often include exclusivity or restrictive provisions[103][106][107] Competition The market for Evolent's solutions is fragmented and highly competitive, with rivals ranging from niche companies to large entities, and competition based on product breadth, quality, performance, and price - The market for Evolent's solutions is fragmented, competitive, and characterized by rapidly evolving technology standards and customer needs[109] - Competitors include smaller niche companies, large well-financed entities, and potential insourcing by partners[109] - Competition factors include product/service breadth and quality, ability to deliver clinical/financial/operational improvement, reliability, ease of use, brand recognition, integration, price, and aligned performance relationships[109] - True Health competes with local and regional health plans, large commercial insurers, health system-owned plans, and new market entrants[110] Health Care and Insurance Laws and Regulations Evolent's business is subject to extensive and complex federal and state healthcare and insurance laws, including the ACA, Stark Law, Anti-kickback Laws, HIPAA, and Medicare/Medicaid regulations, with non-compliance posing significant risks Health Care Reform The Patient Protection and Affordable Care Act (ACA) has significantly reshaped the health insurance industry, with potential future changes from the Biden administration creating regulatory uncertainty for Evolent - The Patient Protection and Affordable Care Act (ACA) has substantially changed the health insurance industry, with provisions like employer mandates, prohibitions on pre-existing conditions, and medical loss ratio requirements[112] - The regulatory framework is uncertain, with potential changes from the Biden administration regarding the ACA and its implementation, making the impact on Evolent's business unpredictable[115] Stark Law The federal Stark Law prohibits physician referrals to entities with financial relationships, requiring Evolent to design arrangements to satisfy exceptions or waivers - The federal Stark Law prohibits physicians from referring Medicare/Medicaid patients to entities with which they have a financial relationship, unless an exception applies[116] - Evolent designs its investment and compensation arrangements to satisfy Stark Law exceptions or Medicare Shared Savings Program waivers[116] Anti-kickback Laws Federal and state anti-kickback laws prohibit remuneration for patient referrals under federal healthcare programs, with violations leading to severe penalties, which Evolent mitigates through safe harbors - Federal and state anti-kickback laws prohibit offering or receiving remuneration for patient referrals or health-related business under federal healthcare programs[117] - Violations can lead to criminal penalties, civil sanctions, and exclusion from federal programs. Evolent evaluates arrangements to fall within safe harbors or waivers to mitigate risk[117] Antitrust Laws Antitrust laws prevent price fixing but permit collaborative efforts to reduce healthcare costs and improve quality if networks are financially or clinically integrated, which Evolent ensures for its partners - Antitrust laws prevent price fixing, but allow collaborative efforts to reduce healthcare costs and improve quality if networks are financially or clinically integrated[118] - Evolent focuses on network size, composition, and contracting policies to ensure partner networks meet the 'rule of reason' test for pro-competitive activities[120] Federal Civil False Claims Act and State False Claims Laws The federal civil False Claims Act imposes liability for knowingly presenting false claims to federal healthcare programs, potentially scrutinizing Evolent's sales, marketing, and risk adjustment solutions - The federal civil False Claims Act imposes liability for knowingly presenting false or fraudulent claims for payment by federal healthcare programs, including 'qui tam' (whistleblower) provisions[121] - Evolent's sales, marketing, and provider-led risk adjustment solutions may be subject to scrutiny under these laws[121] HIPAA, Privacy and Data Security Regulations Evolent is subject to HIPAA and HITECH Act obligations for protecting individually identifiable health information, with non-compliance or security breaches risking significant penalties and reputational harm - Evolent is subject to HIPAA and HITECH Act compliance obligations for processing individually identifiable health information as a 'business associate' and 'covered entity' (for True Health)[122][123] - Failure to protect privacy and security could lead to contract breaches, investigations by the OCR, civil/criminal penalties, and reputational harm[123] HIPAA Health Care Fraud Standards The HIPAA health care fraud statute prohibits schemes to defraud health care benefit programs and false statements related to health care payments, with entities aiding violations punishable as principals - The HIPAA health care fraud statute prohibits schemes to defraud health care benefit programs and false statements related to health care payments[124] - Entities aiding or abetting violations are punishable as principals[124] Medicare and Medicaid Evolent's involvement in Medicare and Medicaid programs increases its vulnerability to policy changes, governmental audits, and potential sanctions for non-compliance, with uncertain impacts from new legislative initiatives - Evolent's exposure to Medicare and Medicaid businesses increases its vulnerability to changes in government policy and regulation[125] - Services may be subject to governmental surveys and audits, with potential sanctions for non-compliance, including premium refunds or program exclusion[126] - Uncertainty exists regarding the impact of new programs (e.g., block grants for Medicaid) and legislative changes on business operations and financial results[127][130] Consumer Protection Laws Federal and state consumer protection laws regulate the collection, use, storage, and disclosure of personal information and direct marketing practices, impacting Evolent's operations - Federal and state consumer protection laws regulate the collection, use, storage, and disclosure of personal information and direct marketing practices[131] State Privacy Laws Some states have privacy and security statutes more stringent than HIPAA, requiring Evolent to modify operations and potentially face additional sanctions for non-compliance - Some states have privacy and security statutes more stringent than HIPAA, requiring operational modifications and potentially leading to additional sanctions for non-compliance[132] Other State Laws State insurance laws mandate licenses for health plan administrative activities and govern prompt payment obligations, with subsidiaries like True Health subject to specific state regulations including minimum capital requirements - State insurance laws require licenses for health plan administrative activities (e.g., TPA, UR agent) and govern prompt payment obligations for healthcare services[133] - Insurance subsidiaries and investees, like True Health and EVH Passport, are subject to specific state regulations, including minimum capital requirements[134] Intellectual Property Evolent protects its intellectual property, including Identifi® software and CarePro™ platform, through copyrights, trademarks, and trade secrets, but faces risks from competition, infringement, and third-party claims - Evolent protects its intellectual property (Identifi® software, CarePro platform) through copyrights, trademarks, trade secrets, licenses, and contractual rights[135] - Inability to obtain, maintain, and enforce IP rights, or third-party infringement claims, could adversely affect the business, financial condition, and results of operations[135] Research and Development Evolent's R&D focuses on enhancing Identifi® software and developing care delivery efficiency programs, capitalizing software development costs for both internal products and acquired entities - R&D expenditures primarily involve enhancing Identifi® software and developing programs for care delivery efficiency and effectiveness[137] - Software development costs related to Identifi® and products from acquired entities (New Century Health, Accordion, Valence Health, Aldera) are capitalized[137] Human Capital Management Evolent Health manages its approximately 2,900 global employees through competitive compensation, training, comprehensive well-being benefits, and strong Diversity, Equity, and Inclusion initiatives to reduce care costs and improve quality Employee Compensation and Incentives Evolent attracts and retains talent through pay-for-performance compensation, annual pay equity assessments, and efforts to reduce unconscious bias in hiring, reviews, and promotions - Evolent aims to attract and retain top talent through pay-for-performance compensation, annual pay equity assessments, and efforts to reduce unconscious bias in hiring, reviews, and promotions[138] Employee Training and Career Development The company provides training programs via a company portal and launched an internal mobility initiative in 2020 to offer visibility and opportunities for career growth and increased diversity in senior roles - The company provides training programs via a company portal and launched an internal mobility initiative in 2020 to offer visibility and opportunities for career growth and increased diversity in senior roles[139] Employee Well-Being Evolent offers comprehensive benefits including medical, dental, PTO, 401k, and parental leave, with a robust COVID-19 response that included 100% work-from-home and additional mental health support - Comprehensive benefits include medical, dental, vision, PTO, 401k, paid maternity/parental leave, fertility support, and diabetes/hypertension programs[140] - COVID-19 response included 100% work-from-home, additional mental health offerings, office setup support, and holistic wellness initiatives[140] Diversity, Equity and Inclusion In 2020, Evolent refocused on DEI initiatives, including leadership training, hiring a Head of DEI, and an internal review of pay, job descriptions, recruiting, and career pathing - In 2020, Evolent refocused on DEI initiatives, including leadership training, hiring a Head of DEI, and an internal review of pay, job descriptions, recruiting, and career pathing[141] Information about our Executive Officers Evolent Health's executive leadership team, as of February 25, 2021, comprises experienced professionals in healthcare, driving clinical, financial, and operational improvements Executive Officers as of February 25, 2021 | Name | Age | Position | | :-------------- | :-- | :-------------------------------------------- | | Seth Blackley | 42 | Chief Executive Officer | | John Johnson | 37 | Chief Financial Officer | | Steve Tutewohl | 48 | Chief Operating Officer | | Jonathan Weinberg | 53 | General Counsel | | Aammaad Shams | 37 | Principal Accounting Officer and Corporate Controller | | Frank Williams | 54 | Executive Chairman | - Seth Blackley, co-founder, became CEO in October 2020, previously serving as President since 2011[145] - John Johnson has served as CFO since July 2019, with prior roles in corporate performance and strategy[146] Corporate Information Evolent Health, Inc., incorporated in Delaware in December 2014, completed its IPO in June 2015, with its Class A common stock listed on the NYSE under 'EVH', operating as a holding company - Evolent Health, Inc. was incorporated in Delaware in December 2014 and completed its IPO in June 2015[152] - The Class A common stock is listed on the NYSE under the symbol 'EVH'[152] - Evolent Health, Inc. is a holding company, with Evolent Health LLC conducting substantially all operations[152] Website to Access Our Reports Evolent Health's official website (www.evolenthealth.com) and Investor Relations website (ir.evolenthealth.com) provide corporate governance information, financial data, and SEC filings free of charge - The company's website (www.evolenthealth.com) and Investor Relations website (ir.evolenthealth.com) provide corporate governance and financial information[153] - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are available free of charge on the website after SEC filing[154] Item 1A. Risk Factors Evolent Health faces significant risks including reliance on key partners, regulatory uncertainty, integration challenges from acquisitions, operational growth management, public health emergencies, financial underwriting, data security, intellectual property, and stock price volatility Risks relating to our business and industry Evolent's business and industry risks include significant revenue concentration from major partners, an evolving value-based care market, regulatory uncertainty, challenges in product innovation and acquisitions, dependence on partner growth, and the impact of public health emergencies like COVID-19 - Significant portion of revenue derived from largest partners; loss or renegotiation of contracts with Cook County Health and Hospitals System (20.3% of 2020 revenue) or other major partners could negatively impact results[160][161][162] - The evolving market for value-based care and uncertain healthcare regulatory framework make forecasting demand and adapting to changes difficult, potentially impacting financial performance[167][169] - Inability to offer new and innovative products or keep pace with industry advances could lead to partner terminations and revenue loss[174][175] - Acquisitions, investments, alliances, and joint ventures (e.g., Passport, GlobalHealth) may be difficult to integrate, divert management resources, result in unanticipated costs, or dilute stockholders[177][179][184] - Dependence on partner growth and success, which is unpredictable and subject to external factors like governmental funding reductions, can impact Evolent's revenues[187][188][192] - Failure to accurately underwrite performance-based contracts (e.g., New Century Health's specialty care management) could reduce profitability due to unpredictable healthcare costs and pricing pressures[193][194] - Ineffective management of growth and cost structure could harm business and operations, as significant expansion places demands on management, systems, and resources[195][196] - Public health emergencies like COVID-19 could disrupt operations, impact partner payments, increase security risks, and affect capital market access, though Evolent's financial impact has not been severe to date[197][199][200] - Inability to contain health care costs for its health plan business (True Health), implement timely premium rate increases, or maintain adequate reserves could adversely affect profitability[204][206][207][209] - Loss of key executive officers or inability to attract and retain skilled employees could adversely affect the business due to intense competition for talent[212][213][214] - Significant goodwill ($354.7 million as of Dec 31, 2020) is subject to impairment, as seen with $199.8 million (2019) and $215.1 million (2020) charges related to Passport, which could negatively affect results[215][217][219] - Need for additional financing may result in dilution of ownership or unfavorable terms, and existing indebtedness could limit financial flexibility[220][221][222] - Past net losses and potential future operating losses may continue if revenue growth and cost management objectives are not met[224][225][227] - Litigation, government inquiries, or audits (e.g., class action lawsuit regarding Passport) could result in significant defense costs, judgments, or adverse business impacts[228][229] Risks Related to Data Protection Privacy, Cybersecurity, Intellectual Property and Technology Evolent faces risks related to data protection, cybersecurity breaches, intellectual property infringement, reliance on third-party technologies, and the potential for unrecovered upfront costs in partner relationships, all of which could harm its business and reputation - Significant upfront costs in partner relationships may not be recovered if relationships do not grow over time, impacting operating results[230][231] - Failure to attract new partners and capture new opportunities could prevent achievement of revenue projections[232][233] - Increasing risk-sharing arrangements with partners could limit revenues and profitability due to potential losses from underwriting or capital contributions[235][236][237] - Inaccurate estimates of target market size could impact future growth rates[238][239][240] - Failure to maintain and enhance reputation and brand recognition could harm business and results of operations[241][242] - Consolidation in the healthcare industry could reduce demand for services, lead to fee reductions, or result in competitors developing similar products[243][244] - Intense competition could limit market share expansion and adversely affect business and operating results[245][247][248] - Offerings could be subject to audits by CMS and other governmental payers, and whistleblower claims under the False Claims Act, potentially impacting business and reputation[250][251][252] - Exclusivity and right of first refusal clauses in contracts may limit ability to partner with other providers, restricting growth[253][254][256][257] - Subject to privacy and data protection laws (HIPAA, HITECH Act, state laws); non-compliance or security breaches could lead to significant liabilities, reputational harm, and business disruption[258][259][260][261][262][267][268][269][270][272] - Data loss or corruption due to system failures or service disruptions at data centers could adversely affect reputation and partner relationships[264][265][266] - Inability to obtain, maintain, and enforce intellectual property protection (trademarks, trade secrets, copyrights) could allow competitors to commercialize similar technology, harming competitive position[273][274][275][276][277][278] - Third-party claims of intellectual property infringement could be costly to defend, divert resources, and lead to substantial damages or injunctions[280][281][282] - Use of 'open source' software could require public disclosure of proprietary code or lead to litigation for non-compliance with license terms[283][284] - Dependence on licensed technologies (e.g., from UPMC) means loss of rights or disputes could prevent development/commercialization of products[287][288][289][290] - Restrictions on data use or failure to license data and integrate third-party technologies could materially affect business, financial condition, and results of operations[291][292][294][295][296][297] - Reliance on Internet infrastructure, bandwidth, data center providers, and internal systems means any failure or interruption could lead to litigation and negatively impact partner relationships[298][299][300][301][303][304] - Reliance on third-party vendors to host and maintain the technology platform (Identifi®) means deterioration of relationships or termination of agreements could disrupt operations[305][306][307] - Past material weaknesses in internal control over financial reporting, though remediated, indicate future weaknesses could impact ability to produce timely and accurate financial statements[308][310][311][312][314][315] Risks relating to our structure Evolent's structural risks include substantial payments to pre-IPO investors under a Tax Receivables Agreement, potential non-reimbursement for disallowed tax benefits, and accelerated payments that could impact liquidity - Required to pay pre-IPO investors for certain tax benefits (e.g., tax basis increases, NOLs) under a Tax Receivables Agreement (TRA), with payments potentially substantial ($101.7 million estimated)[316][318][319][321] - No reimbursement for TRA payments if tax benefits are disallowed, potentially leading to payments in excess of cash tax savings[324][325] - Inability to realize all or a portion of expected tax benefits from Class B Exchanges and TRA payments could negatively affect cash flows and stockholders' equity[326][327] - TRA payments may be accelerated or exceed realized tax benefits in certain cases (e.g., change of control, early termination), impacting liquidity[328][329] - Agreements with pre-IPO investors may contain terms less favorable than those with unaffiliated third parties due to affiliated relationships[330][331] Risks Relating to Our Convertible Notes Risks related to Evolent's convertible notes include potential cash settlement requirements upon conversion, higher non-cash interest expense due to accounting methods, and adverse impacts on reported EPS from changes in accounting standards - Conditional conversion feature of 2025 Notes, if triggered, could require cash settlement, adversely affecting liquidity[332][333] - Accounting method for convertible debt (ASC 470-20) requires separate accounting for liability and equity components, leading to higher non-cash interest expense and potentially lower reported net income[334][335] - Changes in accounting standards (e.g., ASU 2020-06) could impact the use of the treasury stock method for diluted EPS, potentially adversely affecting reported EPS[336] Risks relating to ownership of our Class A common stock Ownership risks for Evolent's Class A common stock include price volatility, exposure to securities class action litigation, potential dilution from convertible notes, anti-takeover provisions, and the absence of anticipated cash dividends - Stock price is expected to be volatile due to economic conditions, financial results, new products, competitor actions, regulatory developments, and litigation[337][338] - Subject to securities class action litigation (e.g., regarding Passport business), which could result in substantial costs and divert management attention[342][343] - Market price could decline due to large number of shares issuable upon conversion of convertible notes or substantial sales of Class A common stock[344][345] - Provisions in Delaware law and charter documents (e.g., staggered board, no written consent, 'blank check' preferred stock) may deter third parties from acquiring the company[346][347][348][350] - Charter provisions renounce Evolent's interest in certain corporate opportunities identified by pre-IPO investors (e.g., UPMC), potentially leading to lost business opportunities[351][352] - Delaware courts are designated as the sole forum for certain stockholder actions, potentially limiting stockholders' ability to choose a favorable judicial forum[353][354] - No cash dividends are anticipated in the foreseeable future, meaning capital appreciation is the sole source of investment gain[355][356] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - Not applicable[357] Item 2. Properties Evolent Health's corporate headquarters are in Arlington, Virginia, occupying approximately 91,000 square feet of leased office space, with other leased facilities in the U.S. and India, incurring $21.2 million in rental expense for 2020 - Corporate headquarters are in Arlington, Virginia, occupying approximately 91,000 square feet of leased office space[359] - The company leases all its facilities, including offices in the United States and Pune, India, and owns no real property[359] - Total rental expense on operating leases, net of sublease income, was $21.2 million for the year ended December 31, 2020[359] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 10 – Commitments and Contingencies – Litigation Matters in the Financial Statements and Supplementary Data section - Information regarding legal proceedings is detailed in 'Part II – Item 8. Financial Statements and Supplementary Data - Note 10 - Commitments and Contingencies - Litigation Matters'[360] Item 4. Mine Safety Disclosures This item is not applicable to Evolent Health, Inc - Not applicable[360] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Evolent Health's Class A common stock trades on the NYSE under 'EVH', with 48 record holders as of February 22, 2021, and no cash dividends anticipated, while a performance graph compares stockholder returns against market indices Market Information Evolent Health's Class A common stock is traded on the New York Stock Exchange under the symbol 'EVH' - Evolent Health's Class A common stock is traded on the New York Stock Exchange under the symbol 'EVH'[363] Holders As of February 22, 2021, there were 48 holders of record of the company's Class A common stock - As of February 22, 2021, there were 48 holders of record of the company's Class A common stock[363] Dividends The company has not declared or paid any cash dividends on its common stock and does not anticipate doing so in the foreseeable future, with future decisions dependent on earnings and financial needs - The company has not declared or paid any cash dividends on its common stock and does not anticipate doing so in the foreseeable future[364] - Future dividend decisions depend on earnings, financial condition, cash flows, and financing needs[364] Performance Graph A graph compares the cumulative total stockholder return of Class A common stock for the last 5 years ended December 31, 2020, against the NASDAQ Health Care Index and NYSE Composite Index, noting historical performance is not indicative of future results - A graph compares the cumulative total stockholder return of Class A common stock for the last 5 years ended December 31, 2020, against the NASDAQ Health Care Index and NYSE Composite Index[365] - Historical stock price performance is not indicative of future performance[365] Recent Sales of Unregistered Securities, Purchases of Equity Securities by the Issuer or Affiliated Purchases or Other Stockholder Matters This section is not applicable to the current report - Not applicable[367] Item 6. Selected Financial Data This section, typically containing selected financial data, has been omitted from this report - This section is omitted[368] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Evolent Health's financial condition and results for 2018-2020, detailing the COVID-19 response, significant transactions, a repositioning plan, key financial indicators, accounting policies, liquidity, and cash flows, noting strong services revenue growth offset by goodwill impairments INTRODUCTION The introduction outlines Evolent Health's holding company structure, its response to the COVID-19 pandemic, significant transactions like the Passport sale and True Health divestiture, and a repositioning plan for operational efficiency and profitability, leading to a 2021 segment reorganization - Evolent Health, Inc. is a holding company, with operations primarily conducted through Evolent Health LLC[371] - The COVID-19 pandemic has not materially impacted financial condition or results of operations to date, but long-term impacts remain uncertain[374] - Key transactions include the sale of EVH Passport assets to Molina (September 2020), resulting in consolidation of EVH Passport, and the agreement to sell True Health (January 2021)[387][393] - A Repositioning Plan, initiated in Q4 2020, aims to improve operational efficiency and profitability through organizational changes and cost-reduction initiatives, expected to continue through Q4 2021[396][397] - Effective Q1 2021, the Services segment will bifurcate into Evolent Health Services and Clinical Solutions[403] Critical Accounting Policies and Estimates Evolent's financial statements rely on critical accounting policies and estimates for goodwill impairment, revenue recognition, income taxes, and claims reserves, with significant charges recorded for Passport and new accounting standards adopted for credit losses in 2020 - Goodwill is reviewed annually for impairment, with interim assessments if triggering events occur. A $215.1 million impairment charge was recorded in Q2 2020 due to EVH Passport's Medicaid contract non-renewal[407][408][410] - Revenue recognition for the Services segment follows a 5-step model, differentiating between transformation (fixed fee, recognized over time) and platform/operations (variable fee, multi-year arrangements)[415][416][417][418] - True Health segment revenue is derived from premiums earned over insurance policy terms[421] - Significant judgment is required for income taxes, deferred tax assets/liabilities, and valuation allowances. The company's tax status changed to a disregarded entity in 2019[422][423][425][429] - Reserves for claims and performance-based arrangements are estimated using actuarial principles, assumptions, and completion factors, reflecting inherent uncertainty[430][431] - Adopted ASU 2016-13 (Financial Instruments-Credit Losses) effective January 1, 2020, changing the approach for measuring and recognizing credit losses[432] RESULTS OF OPERATIONS Evolent Health's consolidated results show 20.8% total revenue growth in 2020 to $1.02 billion, driven by 35.4% growth in platform and operations services, despite a $215.1 million goodwill impairment and a 31.7% decrease in True Health premiums, resulting in an operating loss of $(270.6) million Key Components of our Results of Operations Key components of Evolent's results include revenue from transformation, platform and operations services, and premiums, alongside cost of revenue, claims expenses, and selling, general, and administrative expenses - Revenue sources include transformation services (implementation, wind-down activities), platform and operations services (multi-year clinical and administrative solutions), and premiums earned (True Health segment)[436][437][438][440] - Cost of revenue includes direct expenses, shared resources, employee-related costs, TPA support, professional fees, and in some cases, claims and capitation payments[444] - Claims expenses are direct medical expenses for the health plan, recognized when services are provided, including paid and estimated incurred but not reported claims[445] - Selling, general and administrative expenses cover employee-related costs for various corporate functions, professional fees, centralized infrastructure, and R&D[446] Evolent Health, Inc. Consolidated Results Evolent Health's consolidated results show total revenue of $1.02 billion in 2020, an operating loss of $(270.6) million, and a net loss attributable to common shareholders of $(334.2) million, with a basic and diluted loss per common share of $(3.94) Consolidated Financial Highlights (in thousands) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------------------------------ | :------------ | :------------ | :------------ | | Revenue: | | | | | Transformation services | $11,990 | $15,203 | $32,916 | | Platform and operations services | $893,066 | $659,438 | $500,190 | | Premiums | $117,377 | $171,742 | $93,957 | | Total Revenue | $1,022,433| $846,383 | $627,063 | | | | | | | Expenses: | | | | | Cost of revenue (exclusive of depreciation and amortization) | $701,373 | $513,059 | $327,825 | | Claims expenses | $87,951 | $135,774 | $70,889 | | Selling, general and administrative expenses | $222,600 | $257,046 | $235,418 | | Depreciation and amortization expenses | $61,475 | $60,913 | $44,515 | | Loss (gain) on disposal of assets and consolidation | $698 | $(9,600) | $— | | Goodwill impairment | $215,100 | $199,800 | $— | | Change in fair value of contingent consideration and indemnification asset | $3,860 | $(3,997) | $(4,104) | | Total Operating Expenses | $1,293,057| $1,152,995| $674,543 | | Operating Loss | $(270,624)| $(306,612)| $(47,480) | | | | | | | Net Loss Attributable to Common Shareholders of Evolent Health, Inc. | $(334,246)| $(301,971)| $(52,658) | | Basic and Diluted Loss per Common Share | $(3.94) | $(3.67) | $(0.68) | Comparison of the Results for the Year Ended December 31, 2020 to 2019 In 2020, total revenue increased by 20.8% to $1.02 billion, driven by 35.4% growth in platform and operations services, while claims expenses decreased by 35.2%, and a $215.1 million goodwill impairment was recorded Revenue Comparison (2020 vs 2019) | Revenue Type | 2020 ($M) | 2019 ($M) | Change ($M) | Change (%) | | :--------------------------- | :-------- | :-------- | :---------- | :--------- | | Total Revenue | 1,022.4 | 846.4 | 176.1 | 20.8% | | Transformation services | 12.0 | 15.2 | (3.2) | (21.1)% | | Platform and operations services | 893.1 | 659.4 | 233.6 | 35.4% | | Premiums (True Health) | 117.4 | 171.7 | (54.4) | (31.7)% | - Platform and operations services revenue growth was driven by membership growth with existing partners, cross-selling, and new partner additions. This growth is expected to be negatively impacted in 2021 by the wind-down of EVH Passport's operations[452][453] - Premiums decreased primarily due to the termination of the quota-share reinsurance agreement with NMHC in Q4 2019[455] - Cost of revenue increased by 36.7% to $701.4 million, and as a percentage of total services revenue, it rose from 76.0% to 77.5% due to a shift towards lower gross margin services (New Century Health)[457] - Claims expenses decreased by 35.2% to $88.0 million, mainly due to the termination of the NMHC reinsurance agreement and savings from COVID-19 related non-essential service cancellations[458] - Selling, general, and administrative expenses decreased by 13.4% to $222.6 million, primarily due to a $31.8 million reduction in employee headcount and cost-saving initiatives[459][461] - Goodwill impairment of $215.1 million was recorded in 2020, related to the value of the investment in EVH Passport[463] - A $5.7 million bargain purchase gain was recorded from the consolidation of EVH Passport in 2020, following the Molina Closing[465] - A net loss on extinguishment of debt of $4.8 million was recorded in 2020 due to the exchange of 2021 Notes for 2024 Notes[466] Comparison of the Results for the Year Ended December 31, 2019 to 2018 In 2019, total revenue increased by 35.0% to $846.4 million, with platform and operations services growing by 31.8%, and a $199.8 million goodwill impairment recorded related to the EVH Passport investment Revenue Comparison (2019 vs 2018) | Revenue Type | 2019 ($M) | 2018 ($M) | Change ($M) | Change (%) | | :--------------------------- | :-------- | :-------- | :---------- | :--------- | | Total Revenue | 846.4 | 627.1 | 219.3 | 35.0% | | Transformation services | 15.2 | 32.9 | (17.7) | (53.8)% | | Platform and operations services | 659.4 | 500.2 | 159.2 | 31.8% | | Premiums (True Health) | 171.7 | 94.0 | 77.8 | 82.8% | - Platform and operations services revenue increased due to the New Century Health acquisition, new partner additions, cross-selling, and 35.5% enrollment growth in lives on platform[472] - Premiums increased significantly due to the quota-share reinsurance agreement with NMHC, which was terminated in Q4 2019[473] - Cost of revenue increased by 56.5% to $513.1 million, and as a percentage of total services revenue, it rose from 61.5% to 76.0% due to integrating new businesses acquired in 2018[474] - Claims expenses increased to $135.8 million, primarily due to the NMHC quota-share reinsurance agreement[475] - Selling, general, and administrative expenses increased by 9.2% to $257.0 million, driven by business growth from 2018 acquisitions[476] - Goodwill impairment of $199.8 million was recorded in Q4 2019, related to the value of the investment in EVH Passport[481] - A non-cash gain on disposal of assets of $9.6 million was recorded in 2019 upon the GlobalHealth joint venture arrangement[480] Discussion of Non-Operating Results Non-operating results include decreased interest income, significantly increased interest expense from new convertible notes, a $47.1 million impairment of the GlobalHealth equity investment, a $4.8 million loss on debt extinguishment, and an income tax benefit in