Evolent Health - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue of $483.65M beat S&P Global consensus by ~5% (actual $483.65M vs $460.28M estimate*) on contract-related gross-to-net timing and launch true-ups; adjusted EPS of $0.06 missed consensus of ~$0.10 as GAAP net loss widened from a one-time loss on option exercise.
• Adjusted EBITDA of $36.86M rose sequentially and margin expanded to 7.6%, while oncology trend indicators ran modestly below the company’s 12% assumption; EVH reiterated Q2 and full‑year 2025 revenue and Adjusted EBITDA guidance.
• Management announced five new revenue agreements across oncology, MSK, and imaging and launched an integrated oncology navigation solution; AI‑based “Auth Intel” processed >200K reviews, improving turnaround and productivity.
• CFO flagged revenue mechanics: ~$55M one‑time gross revenue from a contract converting to net on Apr 1 and a ($12.9M) retro revenue true‑up (EBITDA‑neutral), with FY’25 revenue reduced by ~$33M (EBITDA‑neutral) from updated capitation rates.
• Post‑quarter, EVH reiterated Q2 and FY Adjusted EBITDA and indicated top‑half Q2 EBITDA if favorable oncology trend persists through June, and secured optional non‑dilutive capital for 2025 converts (potential positive stock catalyst).

What Went Well and What Went Wrong

What Went Well

• Strong top‑line vs consensus and solid sequential profitability: Revenue $483.65M beat S&P consensus ($460.28M*) and Adjusted EBITDA improved sequentially to $36.86M (7.6% margin).
• Oncology cost trend moderation and positive leading indicators: management saw Q1 oncology trend “modestly lower” than the 12% assumption; authorizations (leading indicator) were down vs forecast, with similar April patterns.
• Commercial traction and innovation: five new revenue agreements, largest Performance Suite pipeline in firm history, and launch of integrated oncology navigation (expected live across 300K members by end‑May); quote: “our updated Performance Suite model…is getting great traction”.
  • Quote (CEO): “We deployed our…Auth Intel AI solution on over 200,000 reviews…leading to higher clinician satisfaction, faster patient response times and enhanced productivity.”

What Went Wrong

• GAAP net loss widened on non‑operational items: Net loss of $(72.25)M (−14.9% margin) was impacted by a $52.35M loss on option exercise and higher interest expense.
• Year‑over‑year declines: Revenue fell vs Q1’24 due to structural shifts (gross‑to‑net) and true‑ups, and Adjusted EBITDA decreased YoY to $36.86M from $54.10M.
• Performance Suite PMPM compression: Average PMPM declined to $15.57 (vs $21.19 YoY) due to mix (lower MA exposure from contractual changes), though “same‑store” PMPMs showed pricing strength; management expects some uplift later in 2025 with MA go‑lives.

Transcript

Operator (participant)

This is the Evolent Health Earnings Conference Call for the first quarter, ended March 31, 2025. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent Health are Seth Blackley, Chief Executive Officer, and John Johnson, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings.

For additional information on the company's results and outlook, please refer to our first quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of the website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com, and the Form-8K filed by the company with the SEC earlier today. In addition to these reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. I will now turn the call over to Evolent's CEO, Seth Blackley.

Seth Blackley (CEO, Co-founder and Board Member)

Good evening, everybody, and thanks for joining the call. I'm happy to be here tonight to discuss Evolent's strong start to 2025 with Q1 financial results at the high end of our expectations and a favorable outlook for the rest of the year. As is typical, our prepared comments are structured around our three shareholder value creation focus areas of one, organic growth; two, expanding profitability; and three, optimal capital allocation. Starting with organic growth, we believe we're positioned as one of the largest and most effective providers of specialty condition management in the country, with 84.8 million product lives on the platform. We believe health plans, providers, and members all demand and deserve a clinically oriented approach that encourages a holistic view of a person's journey through cancer, cardiovascular disease, or musculoskeletal conditions, and we think Evolent is uniquely positioned to offer those solutions.

The strength of our offering led to five new revenue agreements this quarter covering each of our three major condition areas as follows. First, we had two new health plans that are rolling out our surgical management solutions for commercial lines of business. One is a Blues plan located in the south, and one is a large national plan rolling out the solutions initially to two of its large southern states. We are particularly excited to add these contracts as they are both first-time logos, and we look forward to the opportunity to expand with these partners over time. Third, we expanded the geographic reach of our existing medical oncology technology and services solution with one of our national payer clients to cover an additional 800,000 Medicare Advantage lives.

Fourth, an existing partner in the southern state will be adding technology and services solution for Advanced Imaging and Cardiac Imaging for approximately 100,000 lives in their Medicaid line of business. Fifth and finally, we expanded our Musculoskeletal Services to the Medicare Advantage line of business for an existing partner in the northeast expected to add over 100,000 lives. Altogether, we expect these expansions to represent annualized Specialty Technology and Services revenue of approximately $10 million and new lives on the platform of approximately 1 million. Renewals with our existing customer base also continue to be very strong, with one of our top 10 customers recently renewing through the year 2030. More broadly, the selling environment continues to feel very good across both technology and services and the Performance Suite.

The Performance Suite pipeline, in particular, is the largest it's been in the firm's history, and our updated Performance Suite model with the additional protections and a narrow corridor is getting great traction in the market, and we are confident we'll be able to continue to have sales success with that new contract structure and with the Performance Suite more broadly. Finally, as a reminder, even with today's new announcements, Evolent remains less than 5% penetrated in its broader revenue opportunity across all products, including oncology. Given the current traction of our solutions and the challenges that payers face in managing these specialty costs, I continue to feel confident in meeting or exceeding our long-term growth targets. Turning now to our second pillar of expanding profitability, we're on track with both core initiatives, which are one, Performance Suite margin maturation, and two, AI-led automation within our Technology and Services Suite.

First, regarding the Performance Suite margin maturation, our leading indicators for the first quarter track slightly favorable to our expectations. As John will discuss in this section, we are not yet fully recognizing this favorability in our medical expense accruals, but the initial data is a promising sign for a potential faster return to higher Performance Suite margins. Second, regarding our automation efforts in the Technology and Services Suite, we deployed our Auth Intel AI solution on over 200,000 reviews during the quarter, leading to higher clinician satisfaction, faster patient response times, and enhanced productivity. While these initiatives are still early, covering a small fraction of our reviews completed during the quarter, I am encouraged by the results to date, and our outlook for the ultimate value of these efforts remains unchanged.

Moving to our third pillar of capital allocation, as we communicated at the beginning of the year, our primary use of capital during 2025 is balance sheet management, both debt paydown and the cash reconciliation of certain loss-making Performance Suite contracts from 2024 that have since been restructured. In addition, as I'll discuss in a moment, we are purchasing the oncology navigation assets of one of our joint ventures pursuant to a previously negotiated put-call structure to accelerate our oncology strategy. As John will discuss, we anticipate positive operating cash flow for the rest of the year, and we're well positioned to continue investing and driving organic growth into the future. While we continue to see M&A as an attractive way to accelerate our strategy in the long term, we do not currently anticipate any new transactions in the near term.

In addition to updating you on our three pillars of strategic value creation, I'd like to also highlight the early success of our work deploying a unique integrated condition management model in oncology. Let's first review how our existing operating model functions across our specialties using oncology as an example. We work with treating oncologists with a shared goal of improving adherence to evidence-based pathways, where we have a track record of consistently increasing adherence by 20 percentage points or more. While these interventions leverage the Utilization Management process to drive physician engagement, about 85% of our savings opportunity today in oncology is created through non-UM efforts like peer-to-peer consults, provider quality incentives, other practice transformation initiatives, and unique Evolent technologies, with the balance of 15% through utilization management.

We group these techniques into two broad toolkits of one, clinical decision support, which includes but is not limited to UM, and two, provider alignment and engagement. Given the work we are already doing with AI and automation on the first leg of the stool around clinical decision support, we expect that UM will continue to quickly shrink as a share of the value we create for our customers from 15% today to a much smaller number in the near term, while the total value we create across our platform for our customers will continue to go up. As we have previously discussed, we have also been making important investments to add a third leg to this stool, which is bringing innovative patient-facing navigation services to combine with our clinical decision support and provider alignment solutions. We believe this combination will be the most comprehensive solution to oncology management in the market.

To build this model, we have worked over the last 18 months with representatives from across the care continuum to find what works, and I'm pleased to announce the official launch of our oncology navigation solution that combines three important components. First, navigation protocols that we developed internally in close collaboration with one of our largest payers over the last 18 months. Two, we announced today that we are purchasing the assets of Oncology Care Partners through a previously negotiated put-call structure, bringing the best of what Oncology Care Partners developed with practicing community oncologists into Evolent's model. Three, as we have discussed on previous calls, we have the exclusive U.S. partnership license with Careology, whereby their digital cancer navigation app is integrated into our solutions.

We've been piloting this approach for some time, and by the end of May, we expect to be live with our integrated solution across 300,000 members. We are already seeing inspiring results. Let me give you a couple of examples of the power of this fully integrated approach. First, through an approach refined by Oncology Care Partners, we've been able to integrate our pathways directly into practice EMRs and support those pathways with innovative value-based compensation models. A study we published in the Journal of Clinical Pathways demonstrated significantly higher adherence to our value-based initiatives when these integrations are in place relative to a control group. We're excited to build on this foundation in the time ahead. As a second example, many cancer treatments leave members with a weakened immune system.

They and their caregivers live with a high level of uncertainty in which simple common cold symptoms might be fine or might be a severe or even life-threatening condition. A member and their caregivers need to decide in real time whether their symptoms are manageable at home or if they need to go immediately to the emergency department. Our solution, powered by the Careology platform and Evolent Care navigators, can use real-time member symptom information to trigger interventions and take the guesswork out of these decisions for the member. In this example, we're able to provide peace of mind to the member and the family, help ensure immediate action where clinically indicated, while also helping avoid unnecessary hospital visits. Going forward, we expect to deploy this platform to customers in both technology services and the Performance Suite models.

Under both models, we believe our oncology navigation solution will drive meaningful ROI to Evolent and our plans, in part by increasing the dollar pool of medical costs we can influence while also improving member quality and experience. This innovation is also an example of the differentiation we seek to drive across our platform, prioritizing care quality and focusing on creating clinical value for our members and health plan partners. Before I hand it over to John to go through the numbers, I want to recognize the efforts of the 4,500 professionals at Evolent who focus day in and day out on driving outcomes for our members and customers and ensuring that each of our members receives the care that we would want for our family members.

Our recent 2025 employee survey showed an engagement rate of 89%, which is a very strong score relative to benchmarks and one of the highest scores in our history. I also believe that engagement is a leading indicator of our ability to deliver for our customers, our patients and members, and our shareholders. We also continue our normal course board refreshment activities, and I'm excited by our recent board of directors nomination of Sean Gerton to stand for election at our annual shareholder meeting in June. Sean is an experienced healthcare executive with a career spanning some of the top brands in the industry, including most recently as the Chief Financial Officer of CVS, and we believe upon his election will be a significant value add to Evolent. With that, let me pass it to John.

John Johnson (CFO)

Thanks, Seth. I will comment on four areas this evening before turning to guidance.

One, revenue dynamics affecting actual results in the quarter, as well as associated PMPM trends. Two, medical cost trend in our Performance Suite. Three, our outlook for cash generation in 2025. Four, sizing potential policy impacts on our near and medium-term outlook. First, on revenue. Q1 revenue of $483.6 million in the quarter was impacted by two partially offsetting items. Without these items, revenue would have been approximately $450 million in the middle of our guidance range. First, recall that we anticipated that contractual changes would shift the accounting for two Performance Suite contracts from gross to net. Those contractual changes are now complete, with one effective on January 1 and the second effective April 1. Therefore, the extra quarter of gross revenue recorded in Q1 for the contract that converted on April 1 contributed approximately $55 million in revenue, with no impact on adjusted EBITDA.

The second revenue item in the quarter was related to true-ups for Performance Suite launches during 2024. In all new Performance Suite launches, we true-up our capitation rate to reflect actual experience immediately prior to our go-live date. We finalized these true-ups for 2024 Performance Suite launches during the first quarter and experienced final capitation rates that were on average lower than our initial estimates. In total, we recognized a retroactive revenue impact of minus $12.9 million and released associated claims reserves of $13.4 million for a favorable net adjusted EBITDA impact of $0.4 million in the quarter from prior year development. Finally, the updated capitation rates for 2024 launches lowers our estimated revenue for 2025 by approximately $33 million, including $8.4 million in Q1, again on an EBITDA-neutral basis.

Note that, as previewed on our last call, the contractual changes coming into this year, including the conversion of one Performance Suite contract to tech and services, affect our reported PMPM stats. In particular, our Q1 Performance Suite has a lower mix of Medicare Advantage revenue than last year and has a correspondingly lower average PMPM fee. To be clear, though, our same-store PMPMs demonstrate continued pricing strength. For example, on a same-store basis, our largest oncology contracts saw year-over-year increases of over 20% versus the first quarter of last year. Turning to medical cost trends, both leading indicators and claims completion for Q1 suggest an oncology trend that is modestly lower than our overall expectation of 12%. While we are pleased to see signs of trend moderation, we have not fully reflected this favorability in our results for the quarter.

We also are not yet updating our assumption in our guidance and continue to guide based on a 12% oncology trend for April through December. Favorability on these oncology trends is driven both by modestly lower disease prevalence and strong performance on our clinical management initiatives. Cardiology expense trends are tracking according to our expectations so far this year. Turning to the balance sheet, we ended the quarter with cash of $247 million and revolver capacity of $62.5 million for total liquidity of over $300 million, resulting in a net leverage ratio of 4.1 times our last 12-month adjusted EBITDA. We generated $4.6 million in cash from operations in the quarter, a result driven by strong customer collections and the timing of Performance Suite claims reconciliations.

Looking out across the rest of the year, we anticipate a modest increase in net debt across the April through December period, generating approximately $40 million in cash flow from operations after funding reconciliation payments for 2024 Performance Suite contracts that have since been restructured or converted to tech and services arrangements, and using $51 million to purchase the rest of Oncology Care Partners in Q2. Following the retirement of our 2025 convertible notes in Q4 of this year, we anticipate ending the year with cash in excess of $85 million and a net leverage ratio approximating our current level. After these liability management activities this year, we have no outstanding maturities until 2029. Regarding Oncology Care Partners, this joint venture had two components: a portfolio of oncology clinics and a member navigation and practice alignment arm.

As Seth mentioned, we are excited to integrate the member navigation and practice alignment capabilities from OCP into our condition management model and believe they will meaningfully enhance our differentiated approach to the market. Prior to bringing the JV fully in-house, we made the decision to close the oncology practices themselves to avoid both channel conflicts with our network providers as well as future capital investment requirements associated with brick-and-mortar models. Closing the clinics contributed to a one-time loss on our income statement during the quarter, despite the strategic value of the navigation and practice alignment work. As Seth mentioned earlier, the navigation and practice alignment capabilities we acquired will be very important to our oncology condition management model. Before turning to guidance, a few words on the impact of potential policy initiatives to get ahead of frequently asked questions. First, our business is generally unimpacted by tariffs.

In the vast majority of our contracts, to the extent that there is a significant change in pharma unit costs driven by international trade dynamics, our Performance Suite contracts contain clauses allowing us to update our rates accordingly. Second, regarding potential changes in value-based programs from CMS, the only program that we participate in today is the Medicare Shared Savings Program through our ACO Evolent Care partners. We see the commentary from CMS to date as largely encouraging for MSSP, which is a permanent program legislated by Congress as a part of the Affordable Care Act. Commentary from the administration around prioritizing affordability and clinical quality to us reinforces the importance of value-based contracting. Third, regarding potential changes to Medicaid, the policy briefings released in April by CMS leadership suggest that some form of work requirements may be implemented over time.

We have estimated the potential impact of work requirements on our book if rolled out across the nation at less than 5% of Medicaid membership, which would translate to $8-$10 million in adjusted EBITDA for us today. We believe that Medicaid is a critical program for tens of millions of Americans and remain steadfast in our support of these programs. Further, our diversification across Medicaid, Medicare Advantage, and commercial lines of business helps to insulate us from potential policy swings. Finally, we do not currently expect any prospective changes to Medicaid policy would impact our fiscal 2025 results. Now, let me go through guidance before we open it up for questions. While we are encouraged by the strength we saw in Q1, we believe it is important to see another quarter of claims completion data before altering our 2025 assumptions on cost trend or our full-year guidance.

As a result, we are reiterating our adjusted EBITDA outlook for 2025, that's between $135 million and $165 million. To be clear, this guidance continues to assume a 12% oncology trend for Q2 through Q4, despite Q1 coming in lower. Our revenue range for the year is also unchanged, between $2.06 billion and $2.11 billion, supported by planned go-lives in the Performance Suite in the back half of the year. For Q2 specifically, the EBITDA-neutral Performance Suite true-ups I mentioned earlier result in a top-line guide of between $440 million and $470 million in revenue, with corresponding adjusted EBITDA of between $33 million and $40 million. With that, we'll open it up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then two. We ask that you please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kevin Caliendo with UBS. Please go ahead.

Hey, guys. This is Jeff. I'm on for Kevin. Thanks for taking the questions. In your prepared remarks, you mentioned a sequential decline in Performance Suite PMPM due to a lower mix of MA revenue in the Performance Suite segment. Given this was, I mean, previously announced contractual and membership changes, is this PMPM level a good baseline going forward? Or maybe how should we think about this for the remainder of the year? Thanks.

John Johnson (CFO)

Great question. This is a good baseline level for now.

We have previously announced a rather large new Performance Suite go-live later this year, which is in MA for oncology. When that goes live, I would expect it to tick back up a little bit.

Operator (participant)

The next question comes from Matthew Gillmor with KeyBank. Please go ahead.

Matthew Gillmor (Director and Equity Research Analyst on Healthcare Services)

Hey, guys. Thanks for the question. I wanted to ask about the visibility you have to the oncology trends. John, can you give us a sense for how complete the paid claims are? I would assume that's through February. Can you give us a sense for the leading indicators you track, just sort of what the nature of those indicators are? That'd be great. Thank you.

John Johnson (CFO)

That's a good question, Matt. Let me highlight two things. The first is on the leading indicators. These are authorizations that happen before the service is performed.

That gives us prospective insight into the level of utilization. That is down a little bit relative to our forecast of being up by 12%. Now, we make a second assumption there, which is the rate at which those authorizations translate into claims over time. That is the thing that is ultimately proven out in the claims when we receive them. When we close a quarter, we are typically about 55-60% complete for that quarter, meaning that the claims that are incurred on our income statement for the quarter, the total claims expense is 55-60% actual claims and the balance IBNR. That was true and consistent for this quarter. That is the level of visibility that we have.

you heard us in the prepared remarks be pretty bullish on what we're seeing so far and wanting to see some incremental claims completion relative to what we have now to affirm that auth-to-claim the completion rate.

Operator (participant)

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

Ryan Daniels (Group Head of Healthcare Technology and Services)

Yeah, guys. Thanks for taking the questions. Congrats on the solid start to the year. I wanted to go into a little bit more detail on the expansion of the oncology products. I'm hoping you could tie into the existing products, how the navigation solution will work, and kind of what value multiplier you might see by adding that.

And then as a derivative there, I'd also like to talk a little bit about how you could potentially tie that into your broader PS contracts over time to help with oncology cost trends there with this novel solution set. Thanks.

Seth Blackley (CEO, Co-founder and Board Member)

Thanks, Ryan. Let me start by just saying a little bit about the market, Ryan, which is the selling environment feels really good, as I mentioned. Our weighted pipeline for the Performance Suite overall has more than doubled from what it was a year ago, which is really indicative of the demand and the opportunity and a lot of that around oncology. If you think about the demand in the market, a lot of that is around helping manage the cost and the clinical decision support that we talked about and the provider alignment.

There is, for a whole host of reasons, interest in demand in this third leg of the stool on the navigation side. We have obviously officially launched that. I'm really excited about it. The team's excited about it. It's going to have a really helpful impact on the sales environment. Onto your point, I do think it increases probably a reasonable estimate by 10%-20% the value or savings opportunity that you might see by adding the ability to engage the patient in the way that I described during the prepared remarks. A lot of that starts to get at the Part A savings in particular, whereas our traditional solution has been more Part B, as in boy, focus. It's in the context of this market opportunity, which is really attractive, we think, right now.

It increases, our ability to translate pipeline to close deals, and will also increase our ability to drive total savings dollars.

Operator (participant)

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

Jessica Tassan (VP and Senior Research Analyst)

Hi, guys. Thanks so much for taking the question. I was just hoping on two things you might be able to clarify. We were a little bit off on our first quarter Performance Suite lives estimate. I am just wondering, can you describe the quarter-over-quarter cadence of Performance Suite lives? Kind of what was the gross reduction from recontracting versus any offsetting growth? Then secondarily, just on the retained profitable Performance Suite business in 2025, our understanding is that that business would be priced to normal trend. I guess margins would degrade slightly in that portion of the business year over year.

When would you expect to be able to reprice that profitable and retained Performance Suite business such that you kind of recapture or at least are trending on a PMPM basis back in line with the annual trend you're observing? Thanks.

John Johnson (CFO)

Great question. On the first one, we had about 600,000 lives convert out of the Performance Suite into Technology and Services. There was additionally a few tens of thousands of lives that were a result of partner plan exits as we previewed at the beginning of the year. Those two items are offset by other growth in the line. That's the answer to the first question.

On the second question, on sort of overall Performance Suite contracting timing and cadence, we really think of that on an annual cycle where each year, because of the structure of our arrangements, we are now seeing automatic increases or changes in our capitation rate as the population changes. To the extent that there is an increase in cancer mix, for example, towards a more expensive set of diagnoses, that would result in a year-over-year increase in our revenue. That is the cadence upon which we think about it.

Operator (participant)

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

Jeff Garro (Managing Director and Equity Research Analyst on Healthcare IT)

Yeah. Good afternoon, and thanks for taking the question. I wanted to ask about any potential variation in Performance Suite gross margins, either by payer mix or by geography.

Given the results, I'm presuming you haven't hit the lower or upper bounds of any of the new risk corridors on renegotiated arrangements, but wanted to confirm that as well. Thanks.

John Johnson (CFO)

Let me take those in reverse order. You are right, not currently sitting in any corridor positions this early in the year. On the gross margin variation, I'll say a couple of things. At any individual rate cell level, so that might be TANF for oncology in a particular state for a particular payer, there is some variation at that level of granularity. At the more macro level, are there variations between State A or State B that are predictable and consistent, or between line-of-business A or line-of-business B? Generally, we do not see that. We see consistent margin opportunity both across the country and also across lines of business.

That's on a percentage basis. Of course, in MA, the PMPMs are higher. So the dollar opportunity is a little higher than it is in Medicaid. But consistent percent savings opportunities across all of our populations.

Operator (participant)

The next question comes from Ann Samuel with JP Morgan. Please go ahead.

Kyle Aikman (US Corporate Access Strategy and Specialist Sales Analyst)

Hi. Thanks for taking my question. This is Kyle Aikman on for Annie. I was curious if you could dig more into the oncology cost trend you experienced in Q1. You noted cost trend did below 12%. What was your original assumption for trend in the quarter? Was it the same as the 12% for the year, or are there comparison nuances there? And on that lower-than-expected cost, would you say that's driven by changes in prevalence or cost of care? Is there any bifurcation there? Thanks.

John Johnson (CFO)

All of the trend numbers that were given tonight are in reference to that 12%, which we would think of as the normalized trend excluding Medicaid redeterminations, which last year was a unitary event. On the sources of variation, I highlighted two. The first is on prevalence, which is generally up, but it is up less than we expected it to be, again, this early in the year, but it's nice to see. The second area is around cost-per-case, which is also up a little less than we had forecasted it to be based on our leading indicators. A couple of things there. There are some sort of local dynamics that contribute to that.

As we evaluate the data, a fair bit of that outperformance seems to be coming from real success at our clinical interventions, at guiding practicing oncologists towards what we believe to be the highest quality, lower-cost options. We are really proud of that and excited to keep pushing that across this year.

Operator (participant)

The next question comes from Matthew Shea with Needham. Please go ahead.

Matthew Shea (Equity Research Analyst on Digital Health)

Thanks for taking the question and congrats on the quarter. Nice to see some more wins in the commercial space. Understanding commercial and employer is a newer end market. Curious what demand has been like there. Are you seeing interest primarily in surgical management solutions, or what does the scope of discussions look like? Has this end market for commercial and employer required incremental sales capacity, or are you targeting these deals with existing staff?

It would be good to just understand what sort of investments you're making as you penetrate the employer space. Thanks.

Seth Blackley (CEO, Co-founder and Board Member)

Great. Thank you for the question. On your first one, the market, I'd say, across the board, Medicare, Medicaid, and commercial, particularly for oncology, I'd say, is very strong right now. In some of the other categories like surgical, musculoskeletal, cardio, there's also strength. The surgical one in particular has been strong on the commercial side. It's been pretty broad-based and consistent across these different lines of business. It's not that surprising, right? The pain points that are created for Medicare Advantage might also exist for a commercial plan. I would say most of these opportunities that we're seeing, not all, but most, are on the fully insured commercial side. They're going through larger health plans.

To answer your second question, therefore, we do not really see a need to increase staffing on the sales side to address those opportunities because they are part of our same conversations with the larger plans around the country. The last thing I would say is I did just recently see a survey about top issues for self-funded employers, ASO accounts, and oncology is right at the top of that list. It is an area that we are exploring a little bit, thinking about ways to better and more fully address that area, although that is not reflected in the announcements today as all those were fully insured.

Operator (participant)

The next question comes from Constantine Davides with Citizen. Please go ahead.

Constantine Davides (Managing Director)

Thanks. Just wanted to maybe drill into some of the AI automation investments, Seth, you referenced earlier.

Maybe just a little bit more color on how those are impacting efficiencies and some of the early engagements and just your updated expectations around sort of spend there and impact as we exit the year. Thanks.

Seth Blackley (CEO, Co-founder and Board Member)

Great. Good question. I'll just kind of start with the headline first, which is we continue to see a very significant opportunity here on AI and automation rolling into 2026. It will be a material, very significant contributor. We're very focused on it, kind of consistent with our original plans that we laid out last year when we kind of first announced this. There are two pieces of it that I would just break the opportunity into two. One is around making the experience for the provider and the patient, the member and our internal reviewer more efficient, right?

Fewer number of minutes spent getting to an answer, shorter amount of time getting to an answer. That is absolutely playing out in what we're seeing already. The second one is, in a lot of ways, more exciting, which is the ability to get an immediate resolution, which you think of as automation of the review, full automation where a physician or one of our reviewers doesn't need to touch it. That's great for the patient and the provider, the treating provider, because they get the answer immediately. That would be sort of auto authorization. It's the combination of those two things. Both are really important to us. We're really excited about what we're doing.

The last thing I'd note, just in case it isn't obvious, is that everything we're doing with AI automation is only on the approval side. We never use AI to deny care or restrict care in any way. Throughout everything we're doing, we're trying to work through a model that gets the right savings for the system, but in a way that gets patients and physicians immediate answers and the care they need as fast as possible.

Operator (participant)

The next question comes from Charles Rhyee with TD Cowen. Please go ahead.

Charles Rhyee (Managing Director and Senior Equity Research Analyst on Healthcare Technology)

Thanks for taking the question. Maybe just going back to sort of oncology trend. Right now, you're running below what you initially expected. Would you imagine at what point do you think that that's the ongoing trend?

Maybe any color in that regard is what you've seen so far in April in regards to authorizations.

John Johnson (CFO)

On April specifically, we're seeing similar patterns on the leading indicators that we saw during the first quarter. On experience, I would look to Q2 for an update on that. Implicitly, based on my comments earlier that we're 55% complete as we close Q1, means I've got about a month-and-a-half of claims. After another quarter here, that will significantly increase, therefore giving us meaningfully more data to update these forecasts.

Operator (participant)

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

Daniel Grosslight (Senior Research Analyst on Healthcare Technology)

Hi guys. Thanks for taking the question. Congrats on the strong quarter here.

Seth Blackley (CEO, Co-founder and Board Member)

I was wondering if you could talk a little bit about how the competitive environment has evolved more recently, particularly as you limit how much risk you take in your Performance Suite. Clearly, there's still a lot of demand for the Performance Suite despite the corridors. Curious if you're running up against managed care solutions like Carelon Specialty or Avicor more often, and if there's been any shift in win rates or anything like that with the new version of Performance Suite. Thank you.

Great. Thanks, Daniel. I'd say the short answer is it really has not changed very much over the last couple of years in the competitive environment. The things that we are doing, I'd say particularly in oncology, but across the board, feel really unique.

The win rates and conversion rates have been consistent with what they've been over the last few years, even as we have shifted the Performance Suite model and narrowed the corridors in both directions. There are some benefits to the plan too in that new model. It really has not shifted. That comment I made earlier about the Performance Suite-weighted pipeline being over twice as big as it was a year ago points to that. Some of that, again, is the market is struggling with how to manage the oncology spend in general. Some of it is the competitive differentiation. That is not going to be a static picture. Obviously, we're going to continue to innovate every quarter, every year. The navigation work that we announced today is part of that.

Our ability to automate more and make lives better for the treating providers, part of that. We're going to continue to try to stay ahead, but I feel like we're ahead right now. That's translating to the weighted pipelines and conversion rates that we've been indicating.

Operator (participant)

As a reminder, if you have a question, please press star, then one to be joined into the question queue. The next question comes from David Larsen with BTIG. Please go ahead.

David Larsen (Managing Director and Healthcare IT and Digital Health Analyst)

Hi. Can you please talk a bit about the potential impact of 25% tariffs across the pharma industry? How would that impact your model, if at all? Would that increase your own costs? Could you pass that through to your plan clients? Any color there would be very helpful.

John Johnson (CFO)

Hey, Dave. Generally, in our Performance Suite arrangements, we have clauses that allow us to update our capitation rates in the event of a significant change in unit costs, which a tariff like you indicate would certainly count as. I would not expect a meaningful impact on our profitability from something like that if it were to come to pass.

Operator (participant)

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

Seth Blackley (CEO, Co-founder and Board Member)

All right. Thanks for joining tonight, everybody. We'll look forward to connecting over the next few days. Have a good evening.

Operator (participant)

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