Evolent Health: An Unhealthy Situation
Updated: Sep 10, 2019
Things seem to have gone from bad to worse for Evolent Health, with the once ambitious health company stuttering since purchasing one of its biggest clients.
On Friday, June 15th 2015, Evolent Health (NYSE: EVH) debuted on the New York Stock Exchange, raising $195 million and closing with a market cap of $1 billion — an incredible journey for a small for-profit health organization founded just 4 years earlier.
Fast forward to June 2019 and the state of the once-promising healthcare service firm paints a sorry picture indeed. It is not so much that it is constantly in the news for the wrong reasons, but more so that since its acquisition of Passport Health, its biggest client, in May of this year, there has been nothing but stagnation for the firm.
As news broke about Evolent’s purchase back in May, its stock tanked overnight as investors saw the acquisition as a risk due to Passport’s poor performance in the market and the fact that it was one of Evolent’s biggest customers. The deal involved a $70 million investment from Evolent, which gave it 70% ownership of the second-largest state Medicaid insurer. Medicaid is a federally funded health insurance for those with limited income.
$70 million is a large investment in a company that had been losing money at alarming rates. Passport’s troubles began a couple of years before, as it were already paying Evolent $220 million in non-employee management fees, dwarfing its own administrative overhead. As well as this, Passport was battling Kentucky’s state government, which recently changed the way it distributes the federal Medicaid dollars. Since the changes, the for-profit providers have received more money while Passport has received less, which, the nonprofit’s leaders have said, is threatening “its solvency and continued existence.”
Evolent may well have stretched beyond its means with this acquisition, as it took on additional responsibilities in Passport’s day-to-day operations, including health plan management, administration and financial operations. Its market cap has been hovering around the half-billion mark for some time now, almost half of its original cap when it filed for an IPO. Passport itself has not fared well since its partnership with Evolent began in 2016, with employee count decreasing rapidly and investment meant declining.
The warning signs were already there for Evolent before purchasing its client, as it had already dropped roughly $400 million in value over 3 years by the time of the acquisition, and were hoping they could both boost each other with a partnership.
However, the agreement with Passport sees Evolent take management seniority for the next 10 years, so it may be a slow process with which investors may not see results for some time. It may not be time to panic yet for shareholders, but they will certainly need to keep an eye on the company’s progress.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Evolent Health. Read our full disclosure policy here.