Earnings Call Transcript - EVH Q3 2020

Operator, Operator

Welcome to Evolent Health's Earnings Conference Call for the Quarter Ended September 30, 2020. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Seth Blackley, Chief Executive Officer of Evolent Health. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations. Here are some important introductory information. This call contains forward-looking statements under the U.S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainty can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to the second quarter news press release issued earlier today. As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website ir.evolenthealth.com and the 8-K filed with the company with the SEC earlier today. At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Seth Blackley.

Seth Blackley, CEO

Thank you, and good evening. I'm Seth Blackley, Chief Executive Officer of Evolent Health; and I'm joined by John Johnson, our Chief Financial Officer. We hope that you and your families are remaining healthy and safe. Thank you again for those that were able to join us virtually for our fifth annual Investor and Analyst Day on September 29. For those of you that were unable to join, the webcast replay and presentation are available on the Investor Relations portion of our website. I'll open the call this evening with a summary of our recent results including an update on the key elements of our strategic plan communicated at the Investor Day which are: one, strong organic growth in the core; two, scaling our EBITDA margins; and three strategic portfolio and balance sheet optimization. Next I'll provide an update on the market and the macro environment including our thoughts on the election. After that I'll share a few highlights from each of our three solutions: our specialty platform, New Century Health; our total cost of care solution, Evolent Care Partners; and our administrative solution, Evolent Health Services. I'll then hand it to John to take us through a more detailed financial review of the third quarter as well as provide guidance. We'll close with a summary of our key messages. As always we'll be happy to take questions at the end of the call. In terms of our results for the quarter, we're pleased that we have exceeded the midpoint of our range on the top and bottom line. Total revenue for the quarter was $264.6 million, up 20.2% as compared to the third quarter of 2019. Adjusted EBITDA for the quarter was $12.7 million. As of September 30, 2020, we had approximately 3.5 million total lives on the platform. And as John will discuss later based on our performance and momentum, we now expect adjusted EBITDA to be at the higher end of our previously raised, full year guidance range for 2020. With respect to our first focused theme of strong organic growth, we continue to be on or ahead of our plan for growth objectives as we utilize our core solutions to serve as a bridge between healthcare providers and payers. As we mentioned at our Investor Day, we signed two new partners in the third quarter. Additionally, we are excited to announce an agreement we recently signed with Florida Blue Medicare for our specialty management platform New Century Health. This brings our total new partners for the year to eight at the high end of our previously communicated range of six to eight new partners expected for 2020. Florida Blue Medicare is the Blue Cross Blue Shield plan of Florida and is a highly innovative organization. They're one of the largest Blue plans in the country and serve more than five million members in the state. So this is an important announcement for us and we'll discuss it in more detail later. Further, the momentum in our pipeline remains strong as our solutions are increasingly necessary in the market and we continue to anticipate six to eight new partnerships per year going forward and a long-term target of mid-teens organic top line growth. In addition to adding new customers, we are seeing strong engagement across our partner network. And as a result, we continue to drive strong same-store growth. We've made continued progress with national partners such as Molina and Centene, who are both utilizing our newly announced New Century technology-enabled solution. For states where we are live we are seeing strong return on investment for our planned partners and we are seeing positive provider feedback. Those outcomes give us confidence that we'll have the opportunity to continue expanding the new states in the future. Additionally, I'm excited to announce that we have expanded our partnership with Somos to include Medicaid innovator contracts with two new large payers in New York State. These two arrangements represent the maturing of the value-based care model in New York from an upside-only model funded by the delivery system reform initiative to more fulsome value contracts. Next with respect to our second theme of driving enhanced margins, we continue to make strong progress. The dedicated overhead cost initiative led by John and his team that we launched at the beginning of the third quarter are accelerating and the results thus far are exceeding our expectations. Further, we're seeing expanding gross margins and fixed cost leverage and continue to have confidence in reaching our medium-term goal of mid-teens EBITDA margins. And with respect to our third theme, I want to provide a short update on our balance sheet and our strategic portfolio review. We previously communicated our intent to monetize our health plan assets and use that capital to delever and also to focus on our three core solutions. As we previously announced, we have closed the Passport transaction and the Lighthouse health plan has signed a definitive agreement with Anthem. We also continue to make progress on our exploration of strategic options for True Health New Mexico and are hopeful that we'll have an update there soon. Passport continues to perform well. The lives have been moved to Molina and we expect to receive $130 million to $170 million of return of capital. Obviously, capital return from other planned assets would be in addition to this $130 million to $170 million. We continue to be on track for the deleveraging that we mentioned at the Investor Day and we continue to feel confident that in aggregate the capital return from all health plan investments will well exceed the capital invested. So we've made a lot of progress on our three focused objectives that helps set up 2021. Based on this strong execution we now have visibility to our goal of mid-teens growth on our services business excluding Passport’s, which as we've discussed would translate to in excess of $900 million of revenue for 2021 with services revenue in the $800 million range. With the contracts signed in place, we also have high visibility into these numbers. Further on the margin side, we do expect reasonable adjusted EBITDA margin expansion versus our 2020 results. This margin expansion is due both to our targeted overhead cost initiative as well as expanding gross margins. So the business is scaling, and we look forward to continue building towards a strong 2021, and we continue to have confidence in reaching mid-teens adjusted EBITDA margins in the medium term. Before providing highlights from each of our businesses, I'd like to provide an update on the overall macro environment. We obviously just had an election in the United States. And as we mentioned at our Investor Day, everything we do is towards the goal of controlling healthcare costs and addressing the $1 trillion of waste in the U.S. health care system. This work is bipartisan. And to be clear we are confident in our medium-term targets and our outlook regardless of the policy outcomes, regardless of who wins the White House or who controls the Senate. And if either a Trump or a Biden administration accelerated the pace of value-based care there is upside to our medium-term revenue and EBITDA targets. If you step back and think about the pace of the move to value-based care, a lot of the work we do is with managed care organizations or around evergreen programs with providers. To that point, less than 10% of our current pipeline is dependent on the pace of value-based care. That said, there are three macro themes that we do believe are incredibly important and will support our business in the years ahead. First, we believe the pressure we're seeing on state, federal and employer budgets, which have been exacerbated by COVID, will cause purchasers of healthcare services to continue to enhance their focus on cost and value. This will continue to sustain a pipeline of opportunities to expand our payer and provider partner base as industry players look for value-based arrangements to diversify their revenue models and reduce healthcare spending growth. Second, any policy-based acceleration and the shift to value would open up additional opportunities for us and could accelerate our targets. But again, our targets are intact regardless of the pace of value-based care adoption and regardless of who controls Washington. For example, while it's not part of the pipeline today, given the nascency of the program, the Trump administration's direct contracting model could be an accelerator for our total cost of care solution, Evolent Care Partners. And there certainly would be policy accelerators if Biden wins the White House. So, policy is for us mostly upside and limited downside. And third, we're starting to see increased pressure on managed care plans as the impacts from COVID and unemployment continue and even accelerate into the future. This pressure is creating sales opportunities for all three of our solutions as those managed care plans look for ways to contain costs and improve quality by collaborating with providers. And with respect to COVID, we continue to feel that a prolonged pandemic will be neutral to slightly positive for our business. In summary, the macro environment will continue to reward any organization that can be disruptive in attacking the $1 trillion of waste in the healthcare system. Organizations like Bright Health and Clover are gaining traction as disruptive health plans. Organizations like Oak Street have established themselves as disruptive providers. And we continue to feel, we are the market leader for payer-provider enablement creating disruptive results by enabling collaboration between payers and providers. Shifting gears, I want to spend some time highlighting the great work from the leaders, who deliver on our three solutions. First, New Century Health, our specialty management offering has seen strong growth with regional and national payers with solid potential to continue to build across geographies, membership and through cross-sell. As shared at IR Day, the differentiation of this solution continues to be very strong and we are extending our market leadership through the results across 2020. We're particularly excited about the relationship with Florida Blue Medicare. Under the terms of our partnership, we'll be supporting approximately 125,000 medical lives with our New Century oncology platform. While we expect contracted revenue to ramp across the year after we go live during Q1, we expect this relationship to exceed $75 million in annualized run rate revenue by the second half of the year just on the Medicare population and just with the oncology solution. So this partnership reinforces the large market size we communicated at the IR Day. This partnership is also important, because it is our first Blue Cross plan on the New Century platform, and we believe that we've now opened up that segment for New Century Health. There are 36 total Blue Cross plans in the country serving 106 million members and we look forward to the opportunity to add additional Blue Cross plans in the future. But for now, we are laser-focused on delivering excellent results for our partner, Florida Blue Medicare. Second, Evolent Care Partners, our total cost of care management offering had two partner wins in the quarter, driven by a strong track record in Medicare ACOs and provider engagement performance. Our differentiation in the market, particularly with independent physicians is strong and we see an exciting run ahead for this solution. Further, our operational results continue to be strong. For example, through Q2, 85% of Evolent Care Partner practices were meeting or exceeding their performance targets. We're able to reach these levels on key operational indicators based on our proven clinical programs, our proprietary technology platform Identifi, and based on our efficient services platform. With respect to Identifi, we did recently release an important update for our Identifi practice module. By tightly linking to provide our workflows and by rigorously prioritizing targeted interventions, our Identifi practice module allows us to reach leading engagement levels with our 600 primary care providers in our Evolent Care Partners Network. Last but not least, Evolent Health Services, our administrative simplification offering is continuing to perform well. I mentioned the expansion of Somos earlier. The Somos partnership highlights the unique ability of our Evolent Health Services platform to serve as the bridge between payers and providers, including enabling true delegation of functions like claims payment, utilization management and care management to Somos in order to unlock superior performance. I'm also happy to share that Maryland physicians care implementation is on track to go live at the beginning of 2021, to support more than 200,000 Medicaid beneficiaries in Maryland. Overall, we feel very good about our performance thus far in 2020 and have strong momentum heading into 2021. With that, I'll turn it over to John to give some more details about our financial performance in the quarter as well as to provide guidance.

John Johnson, CFO

Thanks, Seth, and good evening, everyone. Our third quarter results were right in line with our expectations on revenue and adjusted EBITDA, largely as a result of strong performance across our customer base, the strength of our performance-based arrangements, and our overall cost reduction efforts. We now expect to be at the higher end of our previously increased guidance range on adjusted EBITDA for the full year. This quarter's strong results demonstrate that we are executing on our attractive financial model as we continue to build momentum into 2021. We drove 33% organic services revenue growth in the third quarter relative to the same quarter last year through our focus on multiple channels of growth. We have executed on new partner wins having now signed up eight in the year and continue to drive strong same-store growth as demonstrated by the expansion with Somos. Our growth combined with our cost control drove adjusted EBITDA margins in the quarter of 4.8% of revenue, up about 100 basis points from Q2 and over 300 basis points from the third quarter of 2019. We also continue to make progress on our strategic review of health plan assets while we focus squarely on our three core services. As Seth mentioned, we recently partnered with Florida Blue Medicare and will initially be supporting over 125,000 Medicare Advantage members with our New Century oncology platform beginning next year. We will earn fixed per member per month fees on that membership. As the first Blue Cross plan that we have added as a partner for our specialty care solution this further expands our differentiation serves as an important validation of the strength of our model and lays the foundation for future expansion not just in oncology, but in cardiology as well. Finally, we continue to focus on operational discipline and again drove positive cash flow for the quarter. We continue to expect cash flow to be positive for the full year of 2020. We also continue to make progress on the additional efficiencies we mentioned at Investor Day which we expect to contribute at least another $20 million to $25 million of gross SG&A savings by 2021. With regard to the COVID-19 pandemic impact on our operating results, we experienced modest net positive increases in our Medicaid membership across the quarter principally as a result of new state prohibitions on revalidation of Medicaid enrollees that were put into place during the declared public health emergency. We continue to be focused on serving our members and our partners during this unprecedented time. Now let me take you through our detailed results for the quarter before turning to guidance. Beginning with our consolidated results, revenue increased 20.2% year-over-year to $264.6 million driven by growth in core services. Adjusted EBITDA grew to $12.7 million, up from $3.3 million in the third quarter of 2019 benefiting from top line growth and operational discipline. Adjusted loss attributable to common shareholders was minus $2.7 million or minus $0.03 per common share for the quarter compared to minus $7.7 million or minus $0.09 per common share in the third quarter of 2019. Turning to our segment results. In our services segment third quarter revenue increased 33.2% to $239.7 million up from $179.9 million in the third quarter of 2019. The increase was primarily driven by new partner additions and cross-sell expansions within our existing partner base. As of September 30, we had approximately 3.5 million lives on our full services platform which excludes members covered by our life service offering. Our average PMPM fee for the quarter was $23.73 compared to $16.20 in the third quarter of 2019 and $21.92 in the second quarter of 2020. Adjusted EBITDA from our services segment for the quarter was $13.8 million compared to $3.1 million in the prior year. As we continue to progress on our strategic review of our health plan assets including True Health New Mexico this quarter, we had premium revenue of $29.5 million down $14.3 million from the same quarter last year a decrease principally driven by the termination of a reinsurance agreement we had during 2019. Claims expense as a percentage of premium revenue was 72.1%. Adjusted EBITDA from True Health for the quarter was a loss of $1.1 million. As expected upon the close of the sale of certain of Passport's assets and transfer of the plan membership to Molina on September 1 we consolidated the remaining assets of Passport into Evolent's reported financials. The plan continues to perform well with 9/30 year-to-date operating income margin of 2% excluding certain wind-down accruals. Statutory capital in the plan on September 30 was in excess of $140 million. We have begun the process to return capital out of the regulated entity to enable debt pay down according to our plans and we continue to expect a portion of the cash to transfer this fall with the remainder coming in the spring. Turning to the balance sheet. We finished the third quarter with $387 million in cash and cash equivalents and investments which included $228 million in cash held in regulated accounts related to the wind-down of Passport. Excluding cash held for Passport, this represents an increase of $43.8 million relative to the end of the second quarter principally driven by our adjusted EBITDA results and working capital dynamics. Cash deployed for capitalized software development was $5.6 million. In terms of cash uses going forward we plan to prepay our senior term loan with proceeds for the Passport transaction. We have minimal other maturities due for 2024 and continue to expect adjusted EBITDA less CapEx to be positive in 2021 and beyond which will give us the ability to invest in differentiating our core services and maintain a strong balance sheet. Overall, we are pleased with our progress against our financial objectives for the year so far. We now expect total adjusted revenue to be in the range of $1 billion to $1.014 billion for the full year 2020. The components of full year 2020 adjusted revenue are as follows. We expect adjusted services revenues to be in the range of $903.3 to $913.3 million. We are forecasting True Health segment revenues of $116 million to $120 million and we are forecasting intercompany eliminations of minus $19.3 million. With respect to full year adjusted EBITDA, we are now forecasting a range of $35 million to $38 million. For the fourth quarter specifically we are forecasting total adjusted revenue of $249.5 to $263.5 million. The components of adjusted revenue for the third quarter of 2020 are as follows. We expect adjusted services revenues of $225 million to $235 million. We are forecasting True Health segment revenues of $28.5 to $32.5 million. We are forecasting intercompany eliminations of minus $4 million. And for the fourth quarter we are forecasting adjusted EBITDA of $10 million to $13 million. With that I will turn it back over to Seth.

Seth Blackley, CEO

Thanks John. I'd like to close by quickly reiterating the three main takeaways from our recent Investor Day. First, we have confidence in our organic growth strategy and our mid-teens growth target. Signing Florida Blue Medicare and opening up the Blue Cross segment is an important step and the outlook for New Century Health is strong. Our other two solutions are also making important contributions highlighted by our expansion at Somos, as well as the two new physician group partners announced in the quarter. Second, the business is scaling. The cost initiative has been a success and we see a clear path to mid-teens adjusted EBITDA over time starting with margin expansion in 2021. And finally we are efficiently deploying capital as evidenced by the focused effort to monetize our health plan assets and use the capital to delever as communicated at IR day. So in summary, we are executing and you can see that the company is at an inflection point. I'm proud of our talented and committed team and I'm excited about the bright future we have ahead of us, particularly with the strong momentum that we are seeing headed into 2021. Thanks everyone for participating in tonight's call. And with that, we'll end our formal remarks and we're happy to take questions.

Operator, Operator

Thank you. Our first question comes from Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels, Analyst

Yes, guys. Thanks for taking the question and all the details thus far. I want to hit a little bit more on the Blues win that you announced tonight. Obviously, there's a significant market potential there more broadly. And I'm curious, how you think about targeting that opportunity kind of across the country if this is something where an initial Blues relationship can be leveraged or if you'll need some time to kind of ramp this up and get case studies with the Blues that they can share with other plans. And then any particular sales force investments you might make to target that big opportunity?

Seth Blackley, CEO

Thanks, Ryan. It's Seth. I'm happy to take that one. Look the Blues segment is one where I think having a proof case with the Blue is helpful. And so I think just the fact that we have had this relationship in place with Florida Blue Medicare will be certainly helpful. I'd say second though that for some time now we've been developing those relationships. And probably the most important thing is frankly being able to show and prove that the outcomes are robust from other partners around the country. And we have a lot of that data now and feel very good about being able to share that data. And so I think the combination of those two things gives us pretty much everything we need with our existing sales force and an approach. Certainly, there are some things that we're doing incrementally that are what I would think of as blocking-and-tackling sales and marketing activities to get those executives together share the quality and value stories that we are seeing. But in general, I think we have everything we need to pursue that segment aggressively at this point.

Ryan Daniels, Analyst

That's helpful color. And then pipeline commentary sounds good as it's been most of the year. I'm curious if you could dive into a little bit more detail in regards to the three offerings and kind of, which of those in your view is seeing the most momentum or has the most potential for either net new client growth or for same client growth as we head into 2021? Thank you.

Seth Blackley, CEO

Sure, I'm happy to give you more insight. There is a macro factor affecting all three of our solutions, which is our mission to enhance cost and quality. We observe about $1 trillion of waste in the healthcare system, presenting a continual opportunity. The COVID situation is putting additional pressure on healthcare buyers, including state governments, the federal government, and employers. While COVID is challenging for patients, it is also generating tailwinds for our overall pipeline. Regarding our differentiators, New Century Health stands out due to our proven results, particularly in oncology and cardiology. We have robust data showing we can provide better care at a lower cost, which is clinically differentiated thanks to our clinical intellectual property, technology, and service deployment. This presents ongoing opportunities. For Evolent Health Services, market pressure definitely plays a role, but we also have substantial evidence indicating that regional plans and providers seeking to manage value should consider us as an ideal partner. Our work with Maryland Physicians Care is a strong example of this. With Evolent Care Partners, our differentiation comes from our technology, clinical approach, and service model. Importantly, the value-based care landscape is becoming more significant to providers, especially as some are recognizing the importance of this model during COVID. This has led to an increase in interest in our pipeline. I believe that under a Biden administration, there could be additional accelerators that further enhance our outlook.

Ryan Daniels, Analyst

Yes. Great. I appreciate all. Thanks, guys.

Operator, Operator

Your next question comes from Robert Jones with Goldman Sachs. Please go ahead.

Robert Jones, Analyst

Great. Thanks for the questions. I guess, maybe just to go back to the Florida Blue win I think you mentioned 125,000 lives and you also said the plan, I think in totality is like 5 million lives. So just curious about the opportunity as far as go forward and thinking about a ramp into a bigger portion of that population? And then just relatedly based on the math you shared, Seth it seems like the PMPM there would be quite a bit higher than average if I'm thinking about it correctly. Just curious if a, if that's right; and b what might be driving the better PMPM dynamics around that customer?

Seth Blackley, CEO

I will address the first part of your question and then let John handle the second. Regarding Florida Blue, we are looking at 125,000 lives, primarily in Medicare and oncology, which we expect to ramp up in the first part of the year. As I mentioned earlier, we anticipate an annualized run rate of at least $75 million by the second half of the year, based solely on the Medicare lives and oncology. There is certainly an opportunity to expand into additional lives, whether in commercial sectors or other populations, and we see potential for growth in cardiology as well. Speaking for the New Century Health team, we have a high regard for the Florida Blue Medicare team and Florida Blue as a whole; it's a strong and innovative plan. Our priority is to deliver and execute effectively, and we are very focused on that. Now, I'll let John address your other question.

John Johnson, CFO

Hey, Bob. You're right on the math. The PMPM is a little higher and that's largely driven by the aggregate scope that is in this initial contract with Florida Blue Medicare. Just a little bit more expensive than some of the other New Century arrangements.

Robert Jones, Analyst

Okay. No, that's helpful. And I guess just John maybe one more quick one just on the guidance. It seems like there's, obviously, momentum in the business. And if I just look at the implied 4Q guide on both revs and EBITDA, it seems like it's calling for a sequential downtick from what you posted this quarter. Just curious if there's any timing dynamics anything around churn just what might help bridge that gap from what you posted in 3Q to what you're pointing to for 4Q.

John Johnson, CFO

Yes, yes. Good question. It's all about timing of some one-time revenues. I think I might have mentioned this in the August call. We had some visibility into one-time revenue that we expected to hit in either 3Q or 4Q and it did hit in 3Q. That's why you see the slightly higher revenue here. Nothing else really going on between third and fourth quarters.

Robert Jones, Analyst

Okay, great. Thanks so much.

John Johnson, CFO

Yes, thanks.

Operator, Operator

Our next question comes from Matthew Gillmor with Baird. Please go ahead.

Matthew Gillmor, Analyst

Hey thanks. Just a couple of clarifications. I think on some of the 2021 commentary I believe you said that you continue to expect revenue in excess of $900 million, but the Florida Blue and maybe some of the other pipeline activity enhances your visibility around that. Is that how we should be thinking about sort of the 2021 view at this point?

John Johnson, CFO

You got it, Matt. This is John. Obviously, it's still too early to guide. But as we've gone across the year I think the continued strong performance on the growth front has given us incremental confidence in starting to exceed that $900 million number.

Matthew Gillmor, Analyst

Okay. I believe there was a mention of an additional $25 million or $20 million to $25 million in expense savings. Is that separate from what you have discussed before? Could you remind us how those savings are generally categorized?

John Johnson, CFO

Yes, not incremental. We talked about that a little bit at the end of September at the IR Day. And it's principally related to getting the cost structure in the right place after the exit of Passport. And so most of those costs are related to the areas that were serving that business.

Matthew Gillmor, Analyst

Okay, great. Thanks a lot.

John Johnson, CFO

Thanks Matt.

Operator, Operator

Our next question comes from Sean Wieland with Piper Sandler. Please go ahead.

Jessica Tassan, Analyst

Hi, thanks for the question. It's Jess standing in for Sean. We were curious if you could discuss the dynamics behind the lives on the platform year-to-date, specifically the sequential drop from Q4 to Q1 and then the growth from Q2 to Q3. Is this primarily due to the suspension of Medicaid reverification, and are the Passport lives still active on the platform, and to what extent?

John Johnson, CFO

Yes, the lives on the platform throughout the year have closely matched our initial expectations, which indicated a low point in Q2 followed by growth in the latter half of the year. The main difference between Q2 and Q3 was mainly due to new go-lives, particularly the launch of the Neighborhood Health plan in New England. There was a slight increase of a couple of percentage points attributed to the Medicaid reverification factor I mentioned, but the majority of the change was due to the new go-lives.

Jessica Tassan, Analyst

Got it. And then just a quick follow-up on the Centene lives on platform. Did those come out of the lives on platform number versus Q2 or Q1 just in light of the fact that they're now on NCH light product?

John Johnson, CFO

Yes, you are correct. We do not include the lives from the Centene relationship in our reported lives number because they are part of this light model. So, there is no change in that aspect.

Jessica Tassan, Analyst

Got it. Thanks. That's helpful.

Operator, Operator

Next question comes from Charles Rhyee with Cowen. Please go ahead.

Charles Rhyee, Analyst

Yes, thanks for taking the questions. Seth I just wanted to ask you I think you guys might have talked a little bit about it at Analyst Day which is direct contracting. And just curious I think it's supposed to start sometime next year was it April? And curious as to sort of the appetite within your current customer base in entering that program. And do you expect that to be something that your clients are going to be participating in next year?

Seth Blackley, CEO

The direct contracting program is not currently part of our outlook. We find the program intriguing, but it's still in the early CMMI phase within CMS. Based on our experience over the last eight years, programs typically mature during the first couple of years. It could be quite interesting for us in the coming years. Right now, our focus is on delivering what we have with the existing Evolent Care Partners Network. However, as the program matures, it may become more relevant. This is an example of several policy accelerators that are not included in our current outlook. They are interesting and reflect CMS's direction. We will monitor this program and others closely.

Charles Rhyee, Analyst

So, is it something that you'd want to see how the first year or so kind of works out in the experience you watched from a distance before maybe developing a program around it for your clients? Is that the right way to think of it?

Seth Blackley, CEO

Yes, that's the right way to think about it. And just a little more detail on it is that the programs always have a set of rules that are attached to them. And those rules tend to come out in draft form and they get comments and then they harden over the first year or two and they become more evergreen. And that's sort of what we're watching right now, but I do think it could be quite interesting as those get firmed up.

Charles Rhyee, Analyst

Great. And just a follow-up. I don't know if you guys mentioned it, but did you guys give the lives on a True Health for the quarter?

John Johnson, CFO

It's about 24,000 Charles.

Operator, Operator

Our next question comes from Sandy Draper with Truist. Please go ahead.

Sandy Draper, Analyst

Thank you very much. I’d like to clarify the situation regarding the Passport sale. The deal has been finalized, but the balance sheet still reflects Passport. Will the statutory capital remain on your balance sheet? I'm trying to understand how that works now that it's no longer part of the business. Additionally, could you explain the expected decline in revenue? As you mentioned previously, John, we shouldn't anticipate a sudden drop in Passport revenue on January 1st; instead, there may be a gradual decrease, possibly affecting us more significantly in the second quarter. Can you help me understand these two aspects related to Passport?

John Johnson, CFO

Yes, happy to Sandy. So, first on the balance sheet, look the way to think about it is to focus on the statutory capital number that I mentioned which is a little over $140 million on 9/30. As you think about capital return to Evolent that's sort of the starting point. And then we have an opportunity as we've talked about to earn an additional amount from Molina based on membership retention into next year. The mechanics of that capital return will be subject to regulatory approval and just moving the cash from the regulated entity into the parent entity at which point we could proceed with our plan to use that cash to pay down the debt. That's the balance sheet there. And I apologize, Sandy I forgot your second question. Could you ask?

Sandy Draper, Analyst

Regarding the revenue, all passport will not disappear on January 1st. How should we approach the winding down process throughout the first half of the year?

John Johnson, CFO

Yes. Good. The net change in passport revenue from 2020 to 2021 is likely around $230 million, with a little more than half of that expected to be cut off immediately on January 1st. As usual, there will be a smaller amount in the first quarter, which will be less than a typical quarter. After that, it will gradually decrease. That's how to approach and model it.

Sandy Draper, Analyst

Okay, that's helpful. If I can squeeze in one more question, probably for Seth regarding the Blue Cross Blue Shield deal. When you approach a new client, are you focusing specifically on the Medicare portion? Is their Medicare plan having significant issues with oncology costs, leading them to discuss only that aspect? Are they not considering a broader agreement because of this? I'm trying to understand the sales dynamics. Do you typically identify a pain point that the customer is facing, such as challenges with cardiology or oncology, and then expand from there? Could you share specific examples related to this substantial deal?

Seth Blackley, CEO

Yes. Generally speaking, if we look at Managed Care organizations, Medicare is a good example. Cardiology and oncology account for 25% of their total premium and are among the specialties with higher trends. This isn't limited to any one payer, as oncology, for instance, is significantly affected by new FDA developments and innovative treatments for patients. However, this creates a challenging situation for any plan to ensure that each patient receives the best care while also managing costs. Excessive spending on treatments that lack value or could harm patients detracts from funds available for coordinating care for other vulnerable individuals. This is a common issue across nearly every health plan in the country, including Florida Blue, but applicable to others as well. While cardiology has unique aspects, similar dynamics exist. The prevalence of cardiology and oncology issues may vary depending on trends or specific challenges faced each year. Notably, 25% of the premium for Services is significant, and any efforts made together to enhance patient care while lowering costs align with their mission of using funds to support care coordination for vulnerable patients. Overall, there is considerable opportunity in this area. Specific challenges can shift between oncology and cardiology from year to year, but what matters for both Evolent and New Century is delivering exceptional results. Much of our progress has stemmed from word-of-mouth and previous successful experiences. This creates a considerable opportunity, and the market presents broad chances without particular nuances.

Sandy Draper, Analyst

Okay. That’s really helpful color. Thanks, Seth.

Seth Blackley, CEO

You're welcome.

Operator, Operator

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

Seth Blackley, CEO

Thanks everybody for the time tonight. Stay safe and we look forward to connecting over the days and weeks ahead.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.