Evolent Health Inc (EVH) 2018 Q4 法說會逐字稿

Welcome to Evolent Health Earnings Conference Call for the quarter and year ended December 31, 2018. As a reminder, this conference call is being recorded.

Your host for the call today is Mr. Frank Williams, Chief Executive Officer of Evolent Health. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section entitled Investor Relations.

Here is some important introductory information. This call contains forward-looking statements under the U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in the current and periodic filings. For additional information on the company's results and outlook, please refer to its third quarter (sic) [fourth quarter] news release.

As a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the company's press release issued today and posted on the Investor Relations section of the company's website, ir.evolenthealth.com, and the 8-K filed by the company with the SEC earlier today.

At this time, I will turn the call over to the company's Chief Executive Officer, Mr. Frank Williams. Please go ahead.

Thank you, and good evening. I'm Frank Williams, Chief Executive Officer of Evolent Health, and I'm joined by Nicky McGrane, our Chief Financial Officer. I'll open the call this evening with a summary of our recent financial results as well as an update on the market, our current pipeline and overall performance across the Evolent network. I'll then hand it over to Nicky to take us through a more detailed review of the fourth quarter and full year 2018 results. I'll close with a summary of Evolent's key focus areas for 2019, and as always, we'll be happy to take questions at the end of the call.

In terms of our results for the quarter, total adjusted revenue for the quarter ended December 31, 2018 increased 69.6% to $193.3 million from the comparable quarter of the prior year. Adjusted EBITDA for the quarter ended December 31, 2018 was $5.6 million compared to $3.5 million for the quarter ended December 31, 2017. Adjusted revenue increased 44.9% to $632.4 million for the year ended December 31, 2018 compared to $436.4 million for the prior year.

Adjusted EBITDA for the year ended December 31, 2018 was $23.2 million compared to negative $2.2 million for the year ended December 31, 2017.

As of December 31, 2018, we had approximately 3.6 million total lives on the platform, an increase of 32.9% year-over-year. Overall, we're pleased that we met our key financial objectives for the year and delivered strong operational and clinical performance for our partner organizations.

In terms of some of the highlights, the number of lives on the Evolent platform crossed the 3.5 million mark, growing by over 30% across 2018. This growth was driven by our existing partners expanding their footprint, lives from new partners and the addition of New Century Health.

In terms of new business development, we came in at the high end of our anticipated range, welcoming 9 new partners, including Torrance Health IPA, Baptist Health Care, Lee Health and SOMOS IPA to name a few.

Even more importantly, across our partner base, our clinical programs played an important role in enhancing quality of care and reducing medical costs. Across the year, we estimate that our clinical interventions potentially kept people out of the hospital over 41,000 nights, serving as a proof point that engaged and aligned providers armed with high-powered clinical analytics and targeted interventions can drive substantial improvements in health outcomes.

Across the year, our clinical R&D efforts yielded over 25 new clinical programs, enhancements to our analytics and predictive modeling and significant upgrades to our core Identifi technology platform.

At the beginning of 2018, we welcomed new provider organizations to our Next Generation ACO cohort. Throughout the year, our partners gained significant experience in managing Medicare risk and shared clinical insights from the cohort, which should prove valuable as they work with us to evaluate the next step in their value-based care strategy.

Also, we continue to expand our footprint in Medicaid entering several new markets with provider-driven models. In Florida, we work with Baptist Health Care, Nicklaus Children's Health System and Lee Health to stand up 3 new Medicaid health plans covering 5 regions. Ramping up 3 new health plans in 6 months and meeting the state's readiness review represents a significant accomplishment and speaks to the investment we've made in our Medicaid infrastructure, capabilities and clinical knowledge base.

Also on the Medicaid front, we entered into an exciting partnership with SOMOS IPA, a top-performing innovative provider network in New York City. We're partnering with SOMOS to meet the performance goals of New York's DSRIP program for approximately 300,000 New York residents and to support its participation in the New York State Department of Health Innovator Program.

Our team is excited about building on our initial partnership to expand our collective impact on Medicaid beneficiaries in the New York Metro area.

Late last year, we acquired New Century Health, a specialty management company that works with payers and providers to manage the cost and quality of cardiac and cancer care, 2 specialties that account for about 25% of Medicare spending.

For nearly 15 years, NCH has proven they can drive significant cost savings in those populations while helping to improve quality of care. As I'll touch on later, NCH presents a strong growth opportunity for us and helps us address a critically important market need closely aligned with our mission.

Our True Health New Mexico business performed very well in 2018 on both the top and bottom line and is emerging as an asset we expect to be able to grow consistently and profitably. True Health also functions as a learning lab for managing the full scope of health plan administrative, clinical, financial and regulatory functions, which serves as a proof point for provider organizations that are evaluating Evolent for broad-based health plan support.

Before moving to specifics around financial performance in 2019, I wanted to comment on the overall macro environment related to delegated risk and value-based care. In terms of the health care market, we see recent changes in the policy arena around Medicare and Medicaid as quite favorable for Evolent over the medium term and aligned with our focus on collaborating with providers and payers to drive substantial improvements in clinical and financial performance.

On the Medicaid front, the administration continues to support innovation at the state and provider level, opening the door to provider-driven solutions to help states manage spiraling costs. As we've seen, this can take shape in a few ways whether it's providers launching new Medicaid plans, existing Medicaid plans looking for health plan services or the opportunity to carve out and serve specific complex populations. To that end, we're pleased to begin the year by welcoming 2 additional Medicaid partners to our national network, Empower Healthcare Solutions and River City Medical Group.

Empower Healthcare Solutions is a provider-led entity that serves high-need Medicaid enrollees in the state of Arkansas with behavioral health, intellectual and developmental disabilities. Through a contract with Beacon Health Options, one of the founding members of Empower, Evolent will support the launch of Empower's Medicaid managed care plan. Working under a fully integrated model with Beacon, Evolent expects to provide a wide range of ongoing health plan and other services after the launch. Our initial membership will be modest at approximately 15,000 members, but at a high PMPM given the medical complexity of the population being served.

We also secured a new partnership with River City Medical Group, one of the largest IPAs in California. We expect to establish a management services organization with River City Medical Group for managed-care entities in California.

Initially, the new MSO will focus on providing services, including claims management, utilization management and care management capabilities to their approximately 300,000 California Medicaid managed care members delegated to River City Medical Group by its health plan partners.

Evolent will provide the MSO with the Identifi platform to support health care operations, utilization management, reporting and other critical workflows. We look forward to serving California's Medi-Cal market and to explore opportunities with River City Medical Group to serve individuals in California's managed-care system across other lines of business. We expect both Empower and River City will be fully operational on the Evolent platform by the middle of this year.

On the Medicare front, we remain encouraged by our recent conversations with CMS and the administration's clear emphasis on accelerating the shift to performance-based arrangements with the Pathways to Success Program as a recent example.

CMMI is also interested in launching a direct contracting model, which we think would be very positive long term. Medicare Advantage continues to expand rapidly with favorable reimbursement and demographic dynamics as well as bipartisan policy support. Accordingly, we've evolved our Medicare strategy to meet the opportunity we see in the market.

First, we're moving away from fee-based relationships with single health system clients that enter the stand-alone MA business. These plans generally didn't achieve scale and ultimately were a drag on long-term margin expansion. Second, we see an opportunity in the new ACO programs coming out of CMS, particularly where we might have tight alignment with our partners in performance-based relationships. Because of the delay in the program rollout, we don't expect these opportunities to come on until the second half of 2019 or beginning of 2020, but the opportunity is promising long term.

Lastly, in Medicare Advantage, we're launching a targeted strategy in a few focus markets where the reimbursement and provider dynamics are favorable. While we're not focused on outright majority ownership in health plans, we are interested in exploring creative, aligned co-ownership arrangements where we can partner with providers to help them monetize clinical value through MA.

In the current pipeline, we have 2 to 3 markets in late-stage development that have completed, could launch in 2020 with a strong provider network as well as a financial partner. In this model, Evolent would operate the plan from an administrative and clinical perspective and have a minority ownership stake to drive alignment. We've made strong progress on our go-to-market plan for New Century Health, which has targeted both the MA and the Medicaid market. In just a few months, we have a very strong pipeline, including several opportunities that could launch as early as Q3 of this year.

NCH's ability to drive substantial cost savings in high-trend specialty areas such as cardiac and cancer care drives clear value for payers and opens up a significant market for Evolent.

All in all, the current pipeline is strong. We hope the breadth and depth of our pipeline provides meaningful growth opportunities in the second half of '19 as well into early 2020.

While we're quite encouraged by the positive policy environment, strength of our pipeline and favorable medium-term market outlook, we have a number of pressure points that impact near-term financial performance, particularly in the first half of the year.

First of all, the wind-down of our early provider-sponsored Medicare plans combined with McLaren's decision to in-source MDwise's health plan operations will drive lower same-store revenues in the first and second quarter. When we're supporting the wind-down phase of operations, we unfortunately incur largely the same operating costs on a significantly lower revenue base for the impacted clients, so we expect this to negatively impact earnings in the early part of the year.

Second, the launch of 3 new Medicaid health plans in 5 regions in Florida required significant investments in infrastructure to meet the state's readiness and operating requirements. At the same time, the auto-assignment process and the late addition of an incumbent in one region and the change of incumbency status in 2 other regions led to significantly lower member enrollment numbers for our partners' plans than we had expected. While we remain hopeful that the new plans will grow membership significantly due to provider brand equity as awareness is raised in the market, we expect it will take until the back half of the year to drive growth and to get our cost structure in line.

Third, while we have one of the most robust pipelines in our history, our new expected deal start dates are more back-weighted to the second half of this year. This is largely the result of CMS' July start date for its Pathways to Success program, which impacted our Medicare line of business as well as New Century's sales cycle relative to our October close date. The good news is we start the year with 2 closed deals in California and Arkansas, which we expect to fully ramp midyear and several late-stage deals, which if consummated would drive growth in the second half of 2019.

All in all, a favorable new business environment with significant market catalysts and strong pipelines in Medicare, Medicaid and New Century, however contract timing more back weighted than in previous years.

The fourth and final pressure point is related to Passport, a Medicaid health plan with over 300,000 lives that we support in the Commonwealth of Kentucky. Passport has been a valued partner since 2016, and we provide a range of support services, including third-party administrative claims processing, pharmacy benefit management and clinical program and care management support through the Identifi platform.

In September of 2018, the Commonwealth of Kentucky implemented bridge rates through the end of calendar year 2018 and retroactive to July 2018 that reduced rates in Region A of the state where Passport has 65% of its members. Given that Kentucky Medicaid represents virtually all of Passport's revenue, a rate cut can have an immediate and significant financial impact, particularly with limited advance warning if the rates are applied retroactively. Passport disputed these rates, which were then extended at the end of 2018 through March, and engaged in ongoing discussions with the Commonwealth.

In January, Passport announced that they'd begun formal administrative proceedings, which was then followed by a lawsuit filed on February 15 seeking an injunction to prevent the rates from taking effect and seeking retroactive rate relief. The hearing on the injunction is scheduled for March 5.

For historical context, Passport is the second-largest Medicaid provider in the Commonwealth with over 300,000 members. It has operated in Kentucky successfully for over 20 years, is the only local nonprofit plan in the Commonwealth and is viewed as a pillar in its local community.

Having worked across several states in Medicaid, we can attest to Passport's favorable reputation nationally and innovative approach to community, provider and patient engagement. Given their long history of working collaboratively to serve the Medicaid population, we're hopeful that Passport and the state Medicaid agency can work out a reasonable compromise on rates that works for both parties.

In the meantime, we plan to work closely with the Passport leadership team on a plan to drive strong operations, high-impact clinical programs and focused initiatives that drive both efficiency and high-quality patient care.

With that overview, I'll now turn it over to Nicky to speak about our financial performance on the quarter and the year, and then I'll close with a summary of our key areas of focus for setting up a strong second half in 2019 and into 2020. Nicky?

Thanks, Frank, and good evening, everyone. I will begin today by covering our fourth quarter and full year 2018 financial results and will finish with an overview of our 2019 outlook.

Before I get into details, I want to remind everyone that our fourth quarter results include a full quarter of impact from the acquisition of New Century Health, which is embedded within our overall Services segment results.

Beginning with the consolidated fourth quarter results, adjusted revenue increased 69.6% year-over-year to $193.3 million through a combination of continued growth in our Services segment, including the impact of the New Century acquisition as well as the introduction of our True Health segment.

Adjusted EBITDA increased $2.1 million year-over-year to $5.6 million. Adjusted loss available for Class A and Class B common shareholders was negative $5.4 million or negative $0.07 per share for the quarter compared to negative $3.1 million or negative $0.04 per share in the same period of the prior year.

As of February 22, 2019, there were 79.4 million shares of our Class A common stock outstanding and 3.2 million shares of our Class B common stock outstanding.

Fourth quarter results cap off a year in which we were able to meet the financial objectives that we set in the beginning of 2018. We achieved the high end of our anticipated range for new partnerships added, and we ended the year with approximately 3.6 million lives on our platform. We exceeded our initial guidance on the top line with adjusted revenue of $632.4 million, representing 44.9% growth on $436.4 million of reported adjusted revenue in 2017. Adjusted EBITDA for the year was $23.2 million compared to negative $2.2 million in 2017 and right at the high end of our initial 2018 adjusted EBITDA range.

Now let me provide some more details for the fourth quarter. Within consolidated adjusted EBITDA, adjusted cost of revenue, which includes claims expenses, increased to $130.6 million or 67.6% of adjusted revenue for the fourth quarter compared to $64.2 million or 56.3% of adjusted revenue in the same quarter of the prior year.

Adjusted SG&A expenses increased to $57.1 million or 29.5% of adjusted revenue for the fourth quarter compared to $46.3 million or 40.6% of adjusted revenue in the same quarter in the prior year. The increase in both adjusted cost of revenue and adjusted SG&A expenses year-over-year was due primarily to the costs assumed from the assets acquired as part of the True Health and New Century transactions as well as additional personnel costs from third-party support services across the organization.

Combined, our total adjusted cost of revenue and adjusted SG&A expenses as a percent of total adjusted revenue increased to 97.1% in the fourth quarter of 2018 compared to 96.9% in the same quarter of the prior year.

Now I'll take you through the fourth quarter results by segment. In our Services segment, fourth quarter adjusted services revenue increased 50.5% to $171.5 million, up from $114 million in the same period of the prior year, at the high end of our previously provided guidance of $161 million to $171 million. Adjusted transformation revenue accounted for $9 million or 5.2% of our total adjusted services revenue for the fourth quarter compared to $5.7 million in the same quarter last year. Adjusted platform and operations revenues accounted for $162.5 million or 94.8% of our total adjusted services revenue for the third quarter compared to $108.3 million in the same quarter last year.

On a year-over-year basis, the increase in adjusted services revenue was primarily driven by new partners that went live in 2018 as well as the impact of the acquisition of New Century. On December 31, 2018, we had approximately 3.6 million lives on our services platform. Our average PMPM for the quarter was $14.99 compared to $13.30 in the same period of the prior year.

Adjusted EBITDA from our Services segment for the quarter was $4.6 million, up $1.1 million from $3.5 million in the prior year.

Turning to our True Health segment. True Health serves an average of approximately 18,000 large and small group members in New Mexico, producing fourth quarter premium revenue of $25.4 million, up $2.6 million from the third quarter. The growth versus the third quarter is a result of an amended reinsurance agreement with New Mexico Health Connections entered into during the fourth quarter that, under GAAP, requires us to consolidate revenues and expenses associated with the revised contract.

Adjusted EBITDA from True Health for the quarter was $1 million. Our adjusted medical cost ratio was 74.1% in the fourth quarter and in line with the 74.6% medical cost ratio we experienced in the third quarter.

For the full year 2018, adjusted EBITDA from True Health was $1.9 million, finishing ahead of our full year guidance of breakeven contribution from the segment due to favorable utilization trends and risk mix of the plan that we enjoyed throughout 2018 relevant to 2017.

Before I move on, let me take a minute to elaborate on the amended reinsurance contract with New Mexico Health Connections as it will have a more meaningful impact on our full year 2019 financials. True Health New Mexico was formerly part of NMHC prior to the acquisition by Evolent. And today, NMHC is a strong-performing 17,000-member individual plan in New Mexico. The 2 plans share a network of independent physicians in the state, and we believe there are strategic reasons for us to continue to provide financial support to NMHC. Under the terms of the amended contract, which we began to recognize late in the fourth quarter, we will consolidate 90% of the premium revenue of NMHC and our insurance risk is capped at 5% on a consolidated contract.

Now let me turn to the balance sheet. We finished the fourth quarter with $238.3 million in cash, cash equivalents and investments, an increase of $16.5 million relative to the end of the third quarter. Long-term debt at quarter-end consisted of $221 million net carrying value of our 2021 and 2025 convertible senior notes. Claims reserves at quarter-end totaled $27.6 million, an increase of $17.3 million versus the third quarter due to the impact of claims reserves added from the New Century acquisition.

For the fourth quarter, cash used by operations was $25 million. Cash used in investing activities during the quarter was $135.4 million and largely attributable to the acquisition of New Century as well as approximately $10 million of capitalized software development expenses and purchases of PP&E.

Cash provided by financing activities during the quarter was $282 million and inclusive of $113.5 million of increase to restricted cash accounts held on behalf of our partners for claim processing purposes as well as $167.2 million of net proceeds from the issuance of convertible notes.

Finally, let me turn to 2019 guidance, where I will reiterate many of the points Frank previously commented upon. We are forecasting total adjusted revenue of $805 million to $880 million for calendar year 2019. The components of our revenue are as follows: our Services segment includes our transformation revenue and our platform and operations revenue, which as of the fourth quarter of 2018 includes New Century Health. For the full year 2019, we expect Services revenues to be in the range of $650 million to $710 million.

Let me break the guidance down further. We will see the impact of the issues Frank laid out above in the early part of the year and we expect that revenues in the first half of the year will account for between 44% and 47% of our full year estimate.

As we move into the second half of the year and add signed and late-stage pipeline deals, we will see sequential increases in our revenues and expect that revenues in the second half of the year will account for between 53% and 56% of full year revenue.

At the midpoint of our Services guidance range, our revenue run rate in the fourth quarter would translate to double-digit growth compared to our pro forma 2018 revenues of approximately $685 million.

Our True Health segment, which includes our commercial health plan in New Mexico and our amended reinsurance agreement with New Mexico Health Connections, for this segment, we are forecasting revenues of $170 million to $190 million for the full year. For the full year, we are forecasting intercompany eliminations of negative $15 million to negative $20 million.

And given the recent press coverage, we're going to provide a note on Passport. Revenues from Passport Health included in our guidance represents approximately 10% to 12% of our total adjusted revenues for the full year.

We're forecasting full year adjusted EBITDA to be in the range of breakeven to $15 million. We expect to incur negative adjusted EBITDA of approximately $20 million in the first half of the year, again due to the issues we've referenced before, but return to profitability by the third quarter. At the midpoint of our guidance range, our annualized run rate adjusted EBITDA in the second half of the year will be approximately $55 million. The growth in our profitability in the second half of the year is driven by the combined effect of revenue growth and a sustained effort to reduce our expense base.

Turning to the first quarter. We are forecasting total adjusted revenue of $188 million to $197 million for the first quarter of 2019. The components of revenue are as follows: we expect adjusted Services revenue of $149 million to $153 million; for the quarter, we're forecasting True Health segment revenues of $42.5 million to $47.5 million; we're forecasting intercompany eliminations of negative $3.75 million. And again, with respect to Passport, revenues from Passport Health included in our first quarter guidance represents approximately 12% to 13% of our total revenues for the first quarter. We're forecasting adjusted EBITDA of negative $14 million to negative $16 million for the quarter.

In summary, we continue to emphasize focused execution, working cross-functionally across the organization to drive improved performance and efficiency and actively pursuing the strategic initiatives to create value for our partners.

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

Thanks, Nicky. I want to close now with a summary of our key focus areas for setting up a strong second half in 2019 and into 2020. We came into this year with a clear goal of mid-teens growth in our Service business as well as a run rate EBITDA in the $50 million to $60 million range. Based on the first half pressure points that I outlined earlier, we'll not meet that objective across 2019, however we believe we have a visible path to get there on a run-rate basis by the second half of the year.

In order to get there, the leadership team is focused on the following 5 key areas. First, as we move away from our traditional fee-for-service provider-sponsored MA business, we're driving a leaner cost structure across our operations as well as reorienting our investment strategy towards what we see as higher growth opportunities.

Second, on the Medicaid front in Florida, we're working collaboratively with our partners on growing brand awareness and plan membership as well as rightsizing our supporting infrastructure to improve financial performance. We remain confident in the potential of these plans to grow market share and profitability, while providing a unique community-based model to Medicaid beneficiaries.

Third, we have a strong late-stage pipeline and are aggressively focused on deal closure across multiple segments. Medicaid continues to be promising as demonstrated by our 2 announced deals in this quarter as well as our Medicare ACO, New Century and Medicare Advantage opportunities.

In Medicare Advantage, specifically, we're working on a unique co-ownership structure with a financial partner that we believe will catalyze Tier 1 highly attractive markets and provider partners. Assuming a reasonable closure rate in our late-stage deals, we believe we can be back to double-digit growth territory on a run-rate basis by the second half of the year.

Fourth, as we've discussed across the last several quarters, we're actively evolving our business model into more aligned relationships that we believe will drive fundamentally better performance, better economics and longevity with our partners. This movement is a result of our experience across the last several years and a realization that greater control and ability to execute on all of the available performance levers is critical for success in value-based care. When we have relationships with an aligned structure, we attract the leading provider organizations to our model, have the basis for a true partnership and are able to meaningfully access the upside created in well-constructed risk arrangements.

Lastly, Passport is an important partnership for us, and we want to proactively support strong performance operationally, clinically and financially with the ultimate objective to most effectively serve Kentucky's Medicaid beneficiaries. Given Passport's long operating history in the state and strong reputation in the region, we're hopeful that Passport and the state can reach a financial compromise that works for both parties.

In closing, we entered 2019 with a positive overall health care environment and a strong and diverse pipeline. At the same time, we're working to transition away from our early fee-based health plan business to more aligned relationships reflective of the emerging market opportunity. We're confident that if we execute on the 5 initiatives that I outlined above, we can find ourselves in a strong position strategically and financially in the second half of the year.

Thank you again for participating in tonight's call. And with that, we'll end our formal remarks and are happy to take your questions.

(Operator Instructions) And our first question will come from Robert Jones of Goldman Sachs.

Frank, clearly some significant new wins, especially as you think about the opportunity you laid out in California. You also highlighted encouraging program developments in Medicaid, the government ACO programs, but really just trying to get a better sense of the setback in the profitability trajectory. If I just think about some of the comments you guys made in the prepared remarks, could you maybe just help us think through how much of the slower ramp in EBITDA is really timing related as some of these early customers, as you mentioned, roll off versus the need for increased spend required to support some of the customers and services that you have in front of you?

Yes. I mean, as we've talked about really across the last couple of months, I think the overall policy environment has shifted in a favorable direction, when we think about what's come out of CMS, that's both the new set of ACO programs, the support for MA, when we look what's going on at the state Medicaid agencies, I do think it's pushing towards value and pushing towards provider-driven models.

If you think about the end of this year, we had a confluence of events, which put pressure on the first half. First, the wind-down of provider-sponsored health plan segment, which we've been talking about for a while that's been under pressure. And again, we have to serve that business out, so we're not getting the same level of revenue and yet our costs are the same, so that put undue pressure on the first half.

Second is Florida. Florida, we put a lot against it, it was a relatively short time frame because of the delays in final decisions. So we really had 6 months to stand up 3 plans in 5 regions and then the rules changed in terms of allowing incumbents in, in several regions and so way under where we expected to be from a membership perspective. So I think that was a pretty significant hit that we really didn't discover until we got into the beginning of this year. And again, a lot of infrastructure in place and difficult to adjust that right away. So I do think in both of those areas, both in terms of driving growth in Florida and then just making sure on the wind-downs and in Florida, we get our cost structure in line, I think that will have an immediate impact as we get into the second half of the year just in terms of EBITDA expansion and the growth that we talked about.

On new business, we got a couple of deals that we already know are going to be coming live at about the midpoint of the year. So that will bring some natural growth in. And as we commented just now, our pipelines look very good. And not early-stage pipeline, I mean, that looks good, but what I'm most heartened by is our late-stage, in-final-negotiations deals look very, very good. So we believe with a normal closure rate, we'll see nice growth coming into the second half, so you take the cost realignment and the growth that we expect from closed deals and new, and I think we get back on track in the second half with double-digit growth and the level of EBITDA run rate that we want to have for the full year. So disappointed that it impacted the first half. I think we've got a clear path to getting where we need to get to, a lot of focus and that's what we're planning to do coming into the second half of the year.

So then, I guess it's safe to say then, Frank, that the message really isn't that the profitability on a customer-by-customer level has changed, it was really more specific to these items that you laid out?

That's correct. Absolutely correct.

And then I guess just a quick follow-up for Nicky. You mentioned, I think it was a $55 million run rate, I believe you said second half. So I just want to make sure I heard that correctly. And then I guess, importantly, as we look even just into the fourth quarter of '19, any sense you can give us on the expected exit EBITDA run rate as we think about moving out of 2019 into 2020?

Yes, Bob, you heard it right. We talked about, across the year, the $55 million is based on developing $27.5 million in this back half of the year, which is the midpoint, that -- which will put us at $7.5 million for the full year at the midpoint of guidance. And so, obviously, annualized that's $55 million. I would say, in general, there is a bias towards slightly higher in Q4 than Q3. We're still settling that out. So it will be in that range of $55 million, it could be a bit above that if the fourth quarter is higher, but that's the right way to think about it.

Our next question comes from Jamie Stockton of Wells Fargo.

I guess, maybe the first one. If we just think about Q1 versus Q4, it feels like there is a pretty substantial step down in revenue, even if we set aside like MDwise going away. And also, the impact of the step-up in the premium revenue. I'm really thinking about the core business. Should we really lay all of that at the feet of wind-down of some of these provider-sponsored health plans? And if that's the case, can you give us a ballpark dollar figure for what the headwind is there?

Yes, look, what I would say, just -- again, I'll cover the macro and Nicky can chime in on the numbers. But if you take the provider-sponsored segments and MDwise, those 2 together represent a pretty large block of revenue. And so one, I do think that's a pretty substantial part of the issue and obviously impacted same-store level revenue. So those 2 things are pretty significant.

Second, Florida, given all the implementation resources we put against it and all the focus we put against it and on some level, we have finite capacity, that came in much lower than we expected. So whereas we would have, again, expected maybe 60% of our growth to come from new clients and new partners, the fact that that came in substantially lower and again, we had pretty high expectations there, also made a pretty big difference.

Timing, which we talked about on some of the new business that we had visibility into, again, normally would be front weighted. If you think about a lot of our ACO launches over the last couple of years, they were actually in the first quarter and then just definitionally, we're taking a more conservative perspective on Passport for the year because we think that's appropriate. So if you take those 4 things, that's ultimately, really what makes up the delta. Nicky, do you want to comment at all on numbers?

Jamie, what I would say is looking at Q4 versus Q1, I would first like to point, let's focus on P&O revenue, the recurring part of the business. We are expecting to see transformation revenue lower this year than last year. It was $9 million in Q4. I think our run rate this year will be approximately $5 million. It could be a bit below that in Q4, but in that zone.

So if I zero in on the P&O piece, I'm down about 8% Q1 versus Q4. NCH had some ASO revenue, I'm excluding that. Putting that in dollar terms, you're looking at about a $13 million decline in Q1 versus Q4 of last year in P&O revenue. Obviously, that's a net number. As Frank said, our growth in Florida was lower than expected. So you're looking at a plus or minus about $70 million annualized of declines, which is running at $17 million, $18 million in the first quarter. And as Frank said, of that, you're looking at the PHSP segment we've talked about, about $30 million of that and plus or minus $25 million at MDwise and then modest attrition in other places, Passport being the -- a more conservative stance on Passport. So it really is in those areas, as Frank laid out, and then obviously, the impact of lower growth has compounded the challenges in the first quarter, but that would be sort of the numerical analysis on the quarter versus Q4.

Okay, that's great. And then maybe just one more as we think about kind of the range of guidance, it's a pretty big one. Obviously, you've got a lot of stuff that could fall in the second half of the year. If we think about the low end of the range, is a fair way to assess that, that you pretty much are able to get live the stuff you already signed and the high end of the range would be really flushing out a lot of the late-stage pipeline?

I would say that it obviously includes the things that we've already signed. If you take a normal closure rate, which I would say on a historical basis has been -- we've been fairly conservative about how we usually think about it in guidance, but a normal closure rate around the existing pipeline that we have, and again, that's looking at where things are in each stage of the deal negotiation process, I would say, we have reasonable assumptions, not "Hey, we're really going to stretch and close more of the pipeline than we normally would expect." So if you apply a normal closure rate with the pipeline that we see in front of us, do we feel we can get to the revenue levels we need to in the second half, and we do based on, again, a line-by-line analysis of where we are in that process.

Our next question comes from Ryan Daniels of William Blair.

Let me start, Nicky, a quick housekeeping one for you, and I apologize if you gave this, I got on a bit late. But do you have the revenue contribution for New Century Health during the quarter, number one? And then number two, regarding that asset, are you still anticipating kind of a mid-single digit growth in 2019 before that accelerates in the back half of the year and into 2020?

Yes. I'll take them in reverse order. Yes, mid-single-digits is still the right zone there. We feel good about it, as you mentioned going into 2020, very good about getting the growth -- double-digit growth there. In the fourth quarter, we had guided 44 to on 46 on New Century. They came in above 48. As I said, some of that was associated with some of the ASO business which will not recur next year, but they had solid performance in the fourth quarter.

Okay. That's helpful. And then I know you guys have talked about the MA plans, Medicare Advantage likely winding down as those haven't reached scale. And that probably derisks your revenue stream going forward as that exits. What type of revenue will be generated by those type of, I guess I would characterize them as riskier accounts or less scalable accounts as we enter the second half of the year?

Not sure exactly what you're referring to there, but I would just say when we think about our traditional fee-for-service Medicare Advantage business, particularly with single health systems, as we've talked about, those plans really struggle to get to scale. We also had difficulty forcing the sort of discipline in health plan operations that you need to have to make those successful, everything from network management to transfer pricing, et cetera.

I think as we think about our MA segment going forward, where we see lots of opportunity, we want to make sure that we have the right partners, very committed to scale in the value business, a clear agreement up front that we can pull the levers that we need to, to drive successful performance. Obviously, there is a certain set of services we provide that we'd be getting paid fees for. There surely would be a performance component to what we provide. And so I think you would see, again, a pretty normal stream of revenue but greater scalability and longevity in that segment as we move to that sort of model.

If you look across our other 35-or-so partners, that spreads across our health plan Services business, our value-based care business where we're serving ACOs. And again, we don't see any material change the economics there. Those businesses, we provide a set of services. We have some performance basis to those relationships, and we believe they have long-term profitability characteristics that are very positive. And then we now have New Century. And the good news with New Century is they have been in the business for 15 years. They have a lot of predictability with the way they manage the business, and so we think that will be a very profitable stream as well.

But could you characterize kind of the percent of revenue you think is going to be with these non-scalable plans? I mean, these are the ones you've talked about for a while. They have been winding down; they haven't reached scale. I'm curious how much revenue exposure as a percentage of your P&O sales will be still in them after these most recent wind-downs and kind of the growth in other areas of the organization. Just trying to get...

And I apologize, Ryan, I slightly missed your question. Specifically, it's a very small portion of our existing revenue base. So the good news from sort of accelerating the wind-down is we have much less exposure to that segment and as you described, sort of subscale value-based businesses. So that is a positive going forward.

Okay. And then final question from me, and I'll hop off. Just on Passport, I know we can't predict what's going to happen in the future. But do you have protection regarding kind of the center of excellence, the intellectual property or capital that's been created from that relationship such that you can continue to leverage that irregardless of the longer-term outcome there?

We do. I mean, those are assets that we acquired when we made the initial investments and obviously we've put in a lot in terms of technology, in terms of the claims platform, in terms of clinical program development, again we're applying that multiple markets, and we believe, very successfully. And those are assets that we do own and would continue in any scenario.

Our next question comes from Sean Wieland of Piper Jaffray.

So on Passport, can you give us any of your views on maybe likely scenarios that are going to happen? I know you can't predict the future and go into court, but just exactly how that is factored into guidance and how we should think about that as we form our estimates? And also what is the -- I know that you said, 10% to 12% of revenues -- but how are they on a profitability standpoint for you guys?

I think, as Nicky said, it's roughly 10% to 12% of revenues. It's average in terms of profitability and contribution, obviously an important partner for us. I would say it's pretty hard to speculate on the outcome. If you think about it, there is a lot of moving pieces as they work through the process, probably will take several weeks and months before it's settled. They've obviously got an injunction that's live that will be heard in early March.

The Board, the leadership team is highly engaged with the various constituencies in the Commonwealth. We're not directly involved in some of those processes, so we're not directly involved in the lawsuit or directly involved in some of the discussions with the state. So I think difficult for us to speculate. They have been in business for 20 years. They have a fabulous reputation in the market. I think there is obviously a lot that they have contributed to the Medicaid program and so our hope is that a reasonable compromise is developed between the Commonwealth and Passport. I think that's about the most we can say on it at this point.

Okay. And then maybe just a quick one on the Florida Medicaid. Can you -- I think you were expecting about 1 million new members from those 5 plans. Can you tell us about what that came in at?

I think we would -- there is a 1 million, little over 1 million members in aggregate across all 5 regions, Sean. We would have been hoping for 12-plus percent, 120,000, 140,000 in that ZIP code, so 10% to 12% share across the region. Sitting here today, we are below 50,000. We're in the high 40s in terms of membership across the regions. So as Frank alluded to, well below our expectations. Some of that was concentrated in the areas where the incumbents were -- got back into the market and therefore the membership that became available to new entrants was lower than we had expected. But in aggregate, we were 120,000 to 140,000 and we're in the high 40s sitting here today. We hope we can grow that across the year. We still in open enrollment in several of the regions, but obviously a tough start.

And to be fair, I think one of the main advantages of a provider-driven plan is they're a local brand in the marketplace. And if you just think about the tight time frame for launching and readiness, it was really hard to get those brands out in the marketplace in a way that would be meaningful versus some of the incumbents. So I think the short time frame, a lot of things happened. Originally, it was going to be decided earlier, and really didn't get settled until the summer. Then a rapid race to meet all the readiness requirements and again less of an ability and less time to really put the work in on the branding and obviously working across the network and physician community and everything else. Now we have that opportunity, and we do anticipate membership expansion and that really has full flow-through for us as we get that, but it's going to take some time across this year to get there.

Our next question comes from Matthew Gillmor of Robert Baird.

On the True Health revenue outlook, obviously a lot stronger going forward. You mentioned there's a change to the reinsurance arrangement. Can you flesh that change out a little bit better? I wasn't quite clear what changed in causing you to recognize a lot more revenue.

Yes. So we had been supporting them in the form of reinsurance, called a quota share reinsurance this past year. In working with the state, the nature of the reinsurance contract changed and under GAAP, we now consolidate it. So that's the driver. If I step back and look at the True business this year, as Frank said, very solid performance on top and bottom line. We see reasonable growth expectations going into '19 in the commercial business. The reinsurance contract, it will be a meaningful contributor across the year. We're not expecting much of any profitability out of the reinsurance contract, but we feel very good about the True business and the growth opportunities there. And it's really just the nature of the contract required us to consolidate in '19.

And then as a quick follow-up, I thought you all made a comment that the guidance assumes a little bit more conservatism with respect to Passport. And so I was just trying to understand what was assumed in the 2019 guidance with respect to the Passport revenue.

So we used a 10% to 12%, and if I look at total revenue that would imply sort of $80 million to $100 million range in Passport in the guidance. In full year '17 -- '18, excuse me, we were north of that number. And so relative to full year '18, it's lower and there's some -- there's a range of outcomes in our guidance and we just tried to be thoughtful about our -- Passport, what we've included in Passport for the year, given what's going on there sort of based on what we're seeing today. But it is below what we got last year and that's the reference to conservatism.

Our next question comes from Richard Close of Canaccord Genuity.

Obviously, a lot of headwinds here with Florida Medicaid, MDwise and Passport. I was wondering if you could just talk to us a little bit about the confidence in terms of getting the expenses out, I guess, on MDwise and provider-sponsored specifically and then the ramping or getting the costs out on the Florida Medicaid. Just your confidence levels in those areas?

I would say, on the cost side relative to MDwise and the provider-sponsored health plan segment, that's known. We're already underway. We've taken some significant actions and it's pretty direct. So we're very confident we're going to get costs out related to those segments.

Second, you asked about Florida. Frankly, we believe we can grow the membership there. We're not factoring a lot of that into our guidance this year, but we do think there is opportunity to meaningfully expand the membership. And again, on the cost side, again something we're already working on, but just looking at efficiencies across the regions and the plans, making sure our staffing levels are in line with the membership and the revenue ranges and again, we have a very clear sign of -- line of sight there. So those are not obscure targets for us. They are very clear on what we need to do and what we're pursuing, but for some of the reasons I mentioned, we couldn't do it all in the first quarter because we had to support some of this through the first half of the year.

So very a clear line of sight on those things. And then as I said, visibility with the 2 new clients that we announced today and then what I feel is a strong pipeline and again, with traditional closure rates where we should see a nice revenue pick-up in the second half. So we put this out there because we believe we can get to where we need to by the second half of the year and again, a lot of it based on very specific numbers and targets that we're actively pursuing.

Okay. I appreciate that. And then Frank, maybe as a follow-up, as we think about the model long term, I guess, your thoughts in terms of visibility of the business. Has anything changed there in terms of that and the long-term profitability target?

Yes. I would say that if you look at the history of the company since we started in late 2011, we've seen pretty consistent growth and very high growth, obviously, since that time. We generally have seen that growth come from our existing customer base and then a portion of it from new partners that we bring on. Over the last couple of years it's been a little more weighted towards new partners, so about 60% of our growth coming from that. And in general, we've been in that range year-over-year.

I would say this year we had a segment that we knew it was weakening that we have been talking about for a while. And so I think the combination of the wind down of that segment and then MDwise's consolidation issue, which we're going to have every couple of years. Sometimes that will benefit us, sometimes it won't. So I think an unusual confluence of events and then, obviously, a lot of eggs put in the Florida basket and a very rapid launch and not where we wanted to get to from a revenue perspective.

So as I look forward, I don't feel like the visibility characteristics have changed. We obviously have had strong recurring revenue in the business historically. We generally have brought on new partners relatively consistently and again, we've seen strong overall growth rates year-over-year. This year, unfortunately, we're not where we want to be. When we do come into the year, just by the very nature of our contracts, we usually have very high visibility into the forward year by the time we're giving guidance in February. So I believe the business will continue to have those characteristics. We believe the profitability characteristics have not changed. As a matter of fact, some of our moment towards performance basis, we think there could be some upside from a profitability perspective long term. So I don't think there is anything we're saying that's radically different about the business. We've just got some challenges in the first half that we need to work through and feel like we can be in a good place in the second half of this year.

Our next question comes from Charles Rhyee from Cowen.

Just wanted to ask on the consolidation of New Mexico -- NMHC, you said you have consolidated 90%, but you also mentioned you're capped on risk at 5%. Can you talk exactly -- is that sort of at the EBITDA line that you're capped at? Or is it at the premium line? Can you just -- sort of mechanics of that as we think about that?

Yes. We're just saying under the nature of the contract, our loss exposure at the EBITDA line is the way to think about it, is capped at the 5% level.

So is that -- are you going to -- so that we should think about -- was it like about 17,000 initial lives that we're going to be adding, when we think about against the premium guidance?

Yes. I mean this is a reinsurance contract more than the lives, but so yes, they have -- I would say you think about -- this could vary -- there's some variability in the number there, Charles, but I would say it's a $80-ish million revenue next year. We -- based on their underlying performance, we think that's a breakeven opportunity. We just put in the 5%. It is a capped arrangement, but we think there's breakeven opportunity for us next year within the context. So it's a reinsurance contract.

I do think in the passage of time, we look at that business as a solid business and then we continue to support it because we think there might be strategic opportunities there. So it's not just the financial arrangement today; there's operational synergies between the 2 businesses and in the passage of time, that is something that we're thinking about, if there's a way to bring those organizations together but for right now it's primarily a financial arrangement.

Okay. That's helpful. And then with the River City Medical, you talked about 300,000 lives and we're talking about sort of a back half of the year start. Is there a ramp-up period for those lives as well, or is -- or we should think about the 300,000 kind of coming on board all at once? And is that, sort of, how we get sort of this back half revenue mostly?

I mean, I think there will be some ramp up in the second half. I mean a lot of it is coming online towards the middle of the year, but some of the services get the sort of feathered in as we move into the third and fourth quarter. So it will be a strong add for us, but some of that, again, it probably won't be fully, fully operational until the third or fourth quarter.

Maybe one last one from me. On the Florida Medicaid, you said we're still in an open enrollment in a short window here. When would be the next open enrollment period? Would we just kind of go back to a normal cycle for people to kind of go into this? Or is just now more a rolling basis?

It's more of a normal cycle that we would come back into rather than a rolling basis.

Key point being that, Charles, 2 of the regions went live in February 1. So their open enrollment continues for some period of time -- 90 days after that. So we still got some time in the window, it's not all rolled into the second half, the second quarter.

Do you have any ability to influence this, like, or is it really up to these provider groups that helps us in Florida to do their own marketing, et cetera. Is there any way you can assist there? Or is it really just dependent upon how well they perform in terms of getting the enrollment?

Yes. We're obviously going to support them in the process. We need them on board and actively putting in the time and energy, there is a lot they can do influence this across the next several weeks and months. And so we're pushing hard and ultimately, we do it together, but as they get fact that this is a priority, I think they believe these are real strategic assets that they are building and obviously want to continue to grow the membership into '20, '21 and '22. So that's where we're going to support them in doing.

Our next question comes from David Larsen of SVB Leerink.

How many lives on platform are expected in 1Q of '19? And then how many lives do you expect to have on the platform by the end of the year?

I mean, I think we'll see a little fluctuation across the year. We're starting at 3.6 million. We've obviously got the wind-down of a couple of the contracts that I mentioned. So you'll probably see a little bit of dip in lives and then we'll also see a pickup in some of the out quarters. So I don't have precise numbers, but think of it this way. We're at 3.6, we'll probably see a little bit of a dip down and then a pickup in the second half of the year.

What I would like to add to that David is that, I think, on the growth, what you're going to see this year, to Frank's point, there's going to be some fluctuations down a couple hundred thousand into Q1, bounce around a little bit. I wouldn't say it will change tremendously from there. Of the growth, there is a good amount of cross-sell and growth from existing partners. And so you may see some higher PMPM or the growth may come in the form of higher PM necessarily than light growth in some of the opportunities we have.

Okay. And then with the $70 million of annualized revenue decline, you mentioned the $30 million provider-sponsored plans. Aren't a lot of your clients' providers that are sponsoring a plan, like a lot of these Medicaid deals in Florida, have IDNs that have created health plan, right? So just trying to get a sense for what's unique about this, you call it a segment, provider sponsor plan segment. What's unique about those customers relative to the rest of your customers?

Yes. I think what we're referring to is single health system plans almost exclusively focused on Medicare Advantage. And so what you have in those situations is you don't get to a large life count, you don't build a large revenue base and yet, you have a pretty significant infrastructure, particularly in MA and you're caught a little bit in not getting to scale. In the Medicaid situations that we're talking about, if you think about those plans, you have much larger number of lives. Many times it's multiple providers and health systems that are part of those networks and so you have scale in terms of revenue. And therefore, when you think about the infrastructure cost and the things that you're investing in you can actually generate a pretty significant return on the investment. So that's really the specific segment that we're talking about, single health systems, a lot of the -- most of the focus on MA that simply don't get to scale yes, you are correct, I mean a lot of the organizations we work with are potentially providers getting into the health plan business, but we're talking about over a much larger network. So you might have multiple health systems and provider groups that are part of the organization, again, covering a much larger geography and then doing it across multiple populations and particularly Medicare helps because you start out with the large number of lives.

And then for the $25 million from MDwise, is that all of MDwise? Or how much of MDwise is remaining? And what are your thoughts on that piece of the business, the rest of the business?

That's really all of MDwise. It will fully roll off and again, a pretty unique situation, acquired by McLaren which is an MSO provider of some of these services. For them, it was really make versus buy decision. And you can imagine they already have a build-up infrastructure and as a result, it made a lot of sense for them to put this onto their platform. They don't do the full set of things that we do, but when we looked at the sort of economic potential of what might be remaining, it didn't make sense for us. And so that will fully come off our platform.

Okay. And then just one last one from me. You talked about double-digit top line growth, I think, in the back half of the year. Is that the health services piece of the business? And does that include New Century Health? So on an organic basis, I imagine -- I mean, how would you expect revenue growth to trend?

Yes. So it is the health services part of the business. New Century, we're including their pro forma revenues in the base. So we're talking double-digit on services inclusive of New Century on a pro forma basis.

So it will be double-digits organically?

Yes.

Correct.

Our next question comes from Sandy Draper of SunTrust.

Most of my questions have actually been asked and answered. Maybe just one follow-up for you, Nicky, in terms of your comment on the PMPM and that was actually going to be one of my questions about the potential volatility there. You sort of commented around 14.50, 15 as being a fairly stable level. With some of these fluctuations this year, how big of a range should we be thinking about how much the PMPM could fluctuate and I realize that's as much of a math question, not that the business you're actually pricing differently but just the way the math calculates, but I'm just trying to get a sense of how that can fluctuate versus lives.

Yes. Sandy, I may want to follow-up rather -- I got do some more math. We ended the year at $15 Q4, pro forma. I think what we've seen in the last several years with the mix of business, it's not a -- it's a, I would say $1, $1.50 kind of range, if I were to speculate, 10% variability on it. You don't tend to see it vary that significantly. Obviously, on New Century, they're coming in at a higher PMPM. And so I would expect it to see trend up across the back half of the year, but not materially changing, if I look at the last several years of mix changes. So I would think 10% would be sort of a cap in terms of where it could go to.

Our next question comes from Mohan Naidu of Oppenheimer.

Frank, I want to go back to the Medicare Pathways to Success. Can you help us understand the magnitude of tailwinds we could see from this? You made some comments about the late-stage pipeline there that is helping. But are there sizable jump in early stage conversations you're having that you can point towards this? And could this be a much higher source of deal flow for you into 2020?

Look, I think as we talked about with the new administration coming in, we went through a period where there was a real uncertainty about the direction of health policy with the new administration, HHS, CMS kind of support value-based care, were they going to put the brakes on it. There was a relative silence for the year out of both of those organizations. And then I would say in the second half of last year, we saw a real pickup in communication and making it very clear that Medicare is

(technical difficulty)

that's both through MA and through the ACO program. They're talking about direct contracting models, seeing a lot more activity in Medicaid as well. And so if you're provider and you're sitting a bit on the sidelines wondering if you really need to move in this direction and now you see that the new administration is coming very aggressively with these programs and that's how you're going to need to qualify for MACRA and things that are really important for your physician partners, then for a lot of the market, you're recognizing you need to step forward into some form of risk and you need to get experience because it's going to be in your Medicare book, it's likely to be in Medicare and you're starting to see a little more pick-up on the commercial side. So I would just say it's a call to action for a lot of the markets to step forward and evaluate their risk strategy and how they're going to get experience and value. Not all of that will be in the Pathways to Success programs. Some might decide, look, we're actually going straight to Medicare Advantage and form a broader provider network and approach it that way. They might also look to Medicaid, they might look to delegated risk arrangements with payers which we support and have supported very successfully. But I think the general answer to your question is yes, I think it's going to represent a pickup in the market. It sends a very clear signal to physician IPAs and networks as well as health systems that this is where the market is going and ultimately you're going to have to gain experience if you're going to avoid margin compression and again, that helps set up a number of our conversations. So as I said before, great breadth and depth to our pipeline, I think that's going to continue into the second half of the year. I think we feel good about the tailwinds from a policy perspective and how that sets up 2020 and obviously we have to execute on it, but I would say the overall environment is very positive.

So Frank, a quick follow-up on the Next Gen ACOs that you have, I believe, you have 10 or so, do they need to change anything specific to these -- to move on to these new guidelines and potentially impact your revenues?

Well, at some point their run in Next Gen ACO will come to an end as they're

(technical difficulty)

[setting] that program. They have the opportunity to jump into the new Partners for Success program. There is a bunch of different variants in the way you can participate in that program. So they can clearly mimic some of the same structural aspects of the Next Gen probably with some improvements to the program. So we would think a number of our partners would evaluate leaping into those programs or if they've done well in the program, maybe even going further into MA delegated risk or MA programs.

Our next question comes from Steve Halper of Cantor Fitzgerald.

I don't mean to go through this again, but I just want some clarity. Could you just go through the mechanics of NMHC premium revenue that you're now including on the income statement, why that happened? And does that recur in 2020 as well?

So what had happened, Steve, as I said, if I go back to the fourth quarter of '17, this is a sort of a sister plan and we chose to provide some financial support to them. We were -- we chose and/were required to change the nature of the reinsurance which under the GAAP required to consolidated. Vis-à-vis the question of is this going to recur, I think the commentary we made we knew this would be the standout. This is a big number hitting our P&L and the reason we chose to do that because we do think going into 2020, there's 1 of 2 outcomes, either the reinsurance would stay in place or they might be some tighter strategic tie-in with these guys, with NMHC. So it was a choice we made to support them for current-day reasons in terms of shared physician infrastructure and whatnot that goes on today. And we think there is an opportunity in some shape or form to continue in this business in 2020 and beyond. So hopefully it's not a 1-year thing that sticks out, but we did it because we actually think this is a strategic rationale going forward.

No, I get that. So just to be clear. So the financial support from the time when you bought TrueCare that you were providing to the legacy plan, which was also a customer, is now considered a reinsurance policy for them, correct? And that's why you're consolidating the premium revenue?

Correct. The last one was a form of reinsurance but under GAAP, did not require us to consolidate. It's just that the GAAP -- as a form of reinsurance changed, we moved from an unconsolidated to consolidation form.

Our next question comes from Stephanie Demko of Citi.

On the Passport side, is there any balance sheet risk if they were to go insolvent? Or put another way, have your joint investments efforts at Passport given you any exposure in a tail event beyond the red?

No. No, we don't have any broader exposure.

Got it. And one follow-up that's a bit more conceptual. So in light of the Passport risk that's happening right now, has that had any impact or has it changed your philosophy towards the co-investing strategy?

No, I don't think so. I mean, again, this model has been something we've been working on for a couple of years. We have it in several situations in different forms. I would say, overall, we believe that segment has performed at very strong levels. We think there is a lot of sustainability to the clients and the value businesses that we're building. The situation, with Passport is pretty unique, having a retroactive rate situation and then again, this type of dispute with the state. We're obviously hopeful that it settles out in a positive direction for both the state Medicaid beneficiaries and Passport, but it really hasn't changed our strategy and if anything, we believe we can build a scalable, sustainable value business with great profitability and longevity. We're going to be very selective about how we do it and what our exposure is. So you'll see as being very careful about the way we invest and thinking throughout the cash flow, long-term cash flow of the relationships and returns that we have generated. And I think if you look at the average returns that we have generated, they have been high, again, if you look holistically at the relationship. So we want to make sure we're learning from every partnership that we do and very disciplined as to how we set up performance-based arrangements or use our balance sheet. I think we've done that. We're going to learn from every relationship, but there is no big change in strategy based on what we see happening with Passport specifically.

Understood. So with that in mind, this is the last one out of me, if there was a tail event for Passport, and given the importance of scale in your business, what would prevent you from potentially acquiring some of their assets if not the whole business?

Again, it's pretty hard to speculate on that. I don't think we've thought about acquiring a full Medicaid plan. It's just not in our strategic lens at this point. Again in our -- certain situations we've talked about co-ownership models, where we might have a minority stake in something, but related to Passport, that's not something that is currently being evaluated. As I said, there's lots of moving pieces relative to their business. They have a long history, they have an existing group of very supportive shareholders and that's just not been something that we've spent time on. We're really focused on supporting strong operations, clinical performance improvement, financial performance and doing everything we can to maximize that in the coming months, which I think is the right place for us to be focused.

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

Well, we appreciate everyone participating in the call, great set of questions. We'll obviously have the opportunity to see many of you out on the road at up-and-coming health care conferences, and we look forward to continuing the discussion. Thanks, again, for participating.

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