How Evolent Health grew to a billion dollar company and IPO in just four years

On Friday, June 5th, Evolent Health debuted on the New York Stock Exchange, raising $195M. Earlier this week, Evolent closed above a $1 billion market cap—a meteoric rise for a company that was founded in just 2011 with the backing of The Advisory Board Company and UPMC.

Shortly after the market closed on Tuesday, Rock Health spoke with Frank Williams, the CEO of Evolent Health, about the company and the market for value-based care. Few people understand how provider organizations are approaching the shift away from a fee-for-service environment better than Frank. A lightly edited interview follows.

[Malay Gandhi] Tell us about the formation of Evolent—what would you cite in the origination of the company that leaned the odds in favor of being successful and reaching this point?

[Frank Williams] A few things:

1. Really understanding the customer base deeply. We spent a lot of time with healthcare system executives through The Advisory Board Company to understand the issues they face, understand their vocabulary, and testing different solution concepts with them to get a reaction. We were in the field, getting real feedback—not in a lab.
2. Viewing talent as a strategic function, not an admin function. We made an early investment in a senior hire to build out our talent and career development capabilities. That enabled us to bring in a lot of incredible people and impress clients with these hires.
3. Getting revenue early. It’s always been my observation that people underinvest in the business development and revenue side early on. We’ve always had a focus on revenue, and a belief that if you can get revenue early, it builds confidence, and it becomes a self-fulfilling prophecy.
4. Execution. Early on, there’s so much to do, and so many things that could distract us. Our team really thought hard about the results we wanted to get out of the first customers, and obviously things weren’t always perfect operationally, but we had consistent results.

How were you and your early investors able to develop such conviction that the market was headed towards providers bearing risk and forming accountable care organizations (ACOs)?

Some of it comes from having worked in the industry for a long time. When I heard from health system CEOs that the economics of their current business were going to deteriorate rapidly, it was the first time in years I heard a real argument that standing pat wasn’t going to work. If physicians and health systems were worried about their future incomes, if the market wouldn’t let people continue to focus on fee-for-service, and if [health systems] couldn’t just rely on price increases—then that convinced me, for an industry that has been incredibly slow to change, that there were enough economic catalysts in place.

We have taken—maybe to a fault—a research-based approach for all new businesses. Everything is grounded in a real analysis of things—what’s going on with employers, or Medicare, or benefits managers. All of that feedback pointed to the market moving in this direction—and the market is so big, that even if only a portion of it moved toward performance-based payments, we’d still have a huge opportunity. Eighty percent of our [Advisory Board] customer base thought this offering would be really attractive to them and that gave us a lot of confidence.

Evolent is building off of what UPMC, Kaiser Permanente, and Geisinger have done well, and helping others also integrate and take on risk. What would it mean for the future of healthcare if there were many more clinically and financially integrated delivery systems across the country?

What we believed going into it was that these integrated clinical and financial delivery systems deliver better care and have higher satisfaction ratings from their members. If you really want to drive care management innovation and engage chronically ill patients, those that cost the absolute most—then you need to be able to change physician incentives, integrate their care teams, and give them better tools. Then physicians become engaged problem solvers and can spend two to three times more time with the high-risk patients, with all outreach going through their office rather than around the doctor. It was our belief that this model was far superior in terms of managing cost versus the traditional payer model.

What we discovered along the way is that not every system needs its own health plan. If a payer is willing to share a lot of clinical functions, share data, and share in the upside with providers—what we have found is at least 50% of the savings—then we don’t necessarily need to see a proliferation of provider-driven health plans in every market.

If payers are unwilling to partner with providers in sharing the risk, then providers should launch their own health plans because they’re unable to get payers to participate collaboratively. Providers are part of the equation too. They can’t ask for upside only and all the premium dollars and not take some of the downside. And then they have to be able to perform under these arrangements.

There has been a lot of M&A activity in the provider sector. Do you see consolidation of providers as a good or bad thing?

I would say it’s both. On the positive side, if you generally believe a shift towards electronic information is beneficial, then consolidation has allowed some provider organizations to make and rationalize certain technology investments, including EMRs—technology that they need to keep themselves competitive. Scale, in some cases, can also produce deeper specialization and better outcomes.

A negative is in the cases where providers consolidate to the point where they gain an amount of leverage that doesn’t necessarily translate into what’s best for the patients, even though it benefits the business. And in other cases, community health systems are worried that their mission will be set aside for a larger organization and they don’t want to consolidate.

Fortunately, Evolent’s model is an example of how organizations can access the benefits of consolidation while remaining independent. I’m very interested in businesses that help bring the benefits of scale—whether that’s in purchasing, or revenue cycle, or eICUs, or anything where many organizations can take advantage of common infrastructure—without having to go through a full consolidation.

HHS stated that they want 50% of Medicare payments to be valued-based by 2018. Do you think that’s a reasonable target? What will the mix of value-based models look like?

I think that it will take on a variety of forms. Medicare has a massive cost problem that could break the federal budget—and Medicare is clearly moving towards a preferred model of prepaid health care as a way to run at that cost problem. We’re going to see a lot of movement towards these prepaid models, whether that’s Medicare Advantage, Next Generation ACOs, [New] Track 3 ACOs, or shared upside/downside ACO models. I think by 2020, when you look at the $1.3 trillion in Medicare spend, any way you cut it, hundreds of billions of Medicare payments will be under these models. And that’s enough. It’s massive, no matter what—that’s the point.

You’ve created a clear revenue approach—services leading to the technology platform leading to upside if the technology performs well. Did you face any challenges explaining this to public market investors and managing their expectations accordingly?

Public market investors generally like to simplify where they can, because they are looking at so many companies. It was easy to put us into a technology bucket or a consulting bucket quickly. And we did face that challenge when we first started to share what we were doing.

So we worked to move the conversation to be focused on our customers. And when we took the time to actually tell that story, there was a shift in understanding. We started talking about what was needed to help our customers transform and get to 50% value-based payments by 2020—getting to scale across multiple segments, launching their own health plans, taking on delegated risk arrangements, understanding actuarial science and new economic models, and so on. We were able to show public market investors that the company was about more than a consulting business or a technology business—it was about our ability to improve business outcomes for our customers and there was a very large opportunity underneath that.

We also thought that getting out early and into a leadership position was important so we could tell our own story. We have a point of view about the market, and we wanted to define it because we have learned so much from our customers.

Evolent was one of the fastest-growing private companies prior to your public-market debut and you have always told me how important it was to manage the company’s culture. How are you managing it now that you’ve reached the IPO milestone?

We’re putting as much emphasis on employee culture as we always have. We’re firm believers that culture doesn’t change because ownership structure does. You can still be a very mission-driven company as a public company. We make sure our people understand that this is a moment in time on a long journey, and it’s not a time to sit around opening champagne bottles. This is only a step in the journey to impacting patient care in the U.S., and we have to stay really committed to that.

The IPO itself was messaged to our team around getting the capital and brand awareness we needed to actually make that impact. I feel we’ve done a great job, but culture building is never-ending. Every month we talk about it, and work on it. We survey and measure so we know where our gaps are and where to invest. It’s important.