Evolent Health, Inc. - Annual Report: 2019 (Form 10-K)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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•	“2021 Notes” means the $125.0 million aggregate principal amount 2.00% Convertible Senior Notes due 2021, issued by Evolent Health, Inc. in December 2016;

•	“2025 Notes” means the $172.5 million aggregate principal amount 1.50% Convertible Senior Notes due 2025, issued by Evolent Health, Inc. in October 2018;

•	“ACA” means the Patient Protection and Affordable Care Act;

•	“Accordion” means Accordion Health, Inc.;

•	“accountable care organizations,” or “ACOs,” means organizations of groups of doctors, hospitals and other health care providers which have come together voluntarily to provide coordinated care to their Medicare patients;

•	“ASO” means administrative services only, which refers to contracts with our partners wherein Evolent provides certain services on a fee-basis but does not assume responsibility for the cost of care;

•	“Aldera” means Aldera Holdings, Inc.;

•	“ASU” means Accounting Standards Update;

•	“capitated arrangements” means health care payment arrangements whereby providers are paid a fixed amount of money per patient during a given period of time rather than on a per-service or per-procedure basis;

•	“CMS” means the Centers for Medicare and Medicaid Services;

•	“DGCL” means General Corporation Law of the State of Delaware;

•	“EMR” means electronic medical records;

•	“Evolent Health Holdings” means Evolent Health Holdings, Inc., the predecessor to Evolent Health, Inc.;

•	“Exchange Act” means the Securities Exchange Act of 1934, as amended;

•	“FASB” means the Financial Accounting Standards Board;

•	“FFS” means fee-for-service;

•	“founders” means the Advisory Board Company (“The Advisory Board”), and the University of Pittsburgh Medical Center (“UPMC”);

•	“FTC” means the United States Federal Trade Commission;

•	“GAAP” means United States of America generally accepted accounting principles;

•	“GPAC” means Georgia Physicians for Accountable Care, LLC;

•	“health insurance exchanges” means organizations that provide a marketplace for individuals to purchase standardized and government regulated health insurance policies;

•	“HIPAA” means The Health Insurance Portability and Accountability Act;

•	“HITECH Act” means The Health Information Technology for Economic and Clinical Health Act;

•	“IPO” means our initial public offering of 13.2 million shares of our Class A common stock at a public offering price of $17.00 per share in June 2015;

•	“LSU” means leveraged stock unit;

•	“New Century Health” means NCIS Holdings, Inc.;

•	“NMHC” means New Mexico Health Connections;

•	“NOL” means net operating loss;

•	“Note” means notes to consolidated financial statements presented in “Part II – Item 8. Financial Statements and Supplementary Data;”

•	“NYSE” means the New York Stock Exchange;

•	“Offering Reorganization” means the reorganization undertaken in 2015 prior to our IPO where our predecessor, Evolent Health Holdings, Inc. merged with and into Evolent Health, Inc.;

•	“partners” means our customers, unless we indicate otherwise or the context otherwise implies;

•	“Passport” means University Health Care, Inc. d/b/a/ Passport Health Plan;

•	“Passport Buyer” means Justify Holdings, Inc., a Kentucky corporation and a previous subsidiary of the Company

•	“performance-based” means risk-based contracts with our partners wherein Evolent assumes financial responsibility for the cost of care, which may range from upside and downside gain share to all, or substantially all, of the responsibility for the cost of care within a defined scope subject to Evolent management controls and contractual protections;

•	“pharmacy benefit management,” or “PBM,” means the administration of prescription drug programs, including developing and maintaining a list of medications that are approved to be prescribed, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers and processing prescription drug claim payments;

•	“PMPM” means per member per month;

•	“population health” means an approach to health care that seeks to improve the health of an entire human population;

•	“Ptolemy Capital” means Ptolemy Capital, LLC;

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•	“RAF” means risk-adjustment factor;

•	“RSUs” means restricted stock units;

•	“SEC” means the Securities and Exchange Commission;

•	“Securities Act” means the Securities Act of 1933, as amended;

•	“Series B Reorganization” means our reorganization undertaken in 2013 in connection with a round of equity financing;

•	“third-party administration,” or “TPA,” means the processing of insurance claims or the administration of certain aspects of employee benefit plans for a separate entity;

•	“True Health” means True Health New Mexico, Inc., a wholly-owned subsidiary of Evolent Health, Inc.;

•	“TPG” means TPG Global, LLC and its affiliates including one or both of TPG Growth II BDH, LP and TPG Eagle Holdings, L.P.;

•	“TRA” means the Income Tax Receivables Agreement. See “Part II – Item 8. Financial Statements and Supplementary Data - Note 12” for further details of the Tax Receivables Agreement;

•	“UR” means utilization review;

•	“Valence Health” means Valence Health, Inc., excluding Cicerone Health Solutions, Inc.;

•	“value-based care” means a health care management strategy that is focused on high-quality and cost-effective care with the goals of promoting a healthy lifestyle, enhancing the patient experience and reducing preventable hospital admissions and emergency visits;

•	“VIE” means variable interest entities; and

•	“Vestica” means Vestica Healthcare, LLC.

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•	the significant portion of revenue we derive from our largest partners, and the potential loss, termination or renegotiation of our relationship or contract with Passport or another significant partner, or multiple partners in the aggregate;

•	uncertainty relating to expected future revenues from Passport, and the value of our investment in Passport, including as a result of the ongoing Medicaid request for proposal process in the Commonwealth of Kentucky;

•	the structural change in the market for health care in the United States;

•	uncertainty in the health care regulatory framework, including the potential impact of policy changes;

•	uncertainty in the public exchange market;

•	the uncertain impact of CMS waivers to Medicaid rules and changes in membership and rates;

•	the uncertain impact the results of elections may have on health care laws and regulations;

•	our ability to effectively manage our growth and maintain an efficient cost structure;

•	our ability to offer new and innovative products and services;

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risks related to completed and future acquisitions, investments, alliances and joint ventures, including the partnership with GlobalHealth, the acquisition of assets from New Mexico Health Connections (“NMHC”), and the acquisitions of Valence Health Inc., excluding Cicerone Health Solutions, Inc. (“Valence Health”), Aldera Holdings, Inc. (“Aldera”), NCIS Holdings, Inc. (“New Century Health”), and Passport, which may be difficult to integrate, divert management resources, or result in unanticipated costs or dilute our stockholders;

•	our ability to consummate opportunities in our pipeline;

•	risks relating to our ability to maintain profitability for our total cost of care and New Century Health’s performance-based contracts and products, including capitation and risk-bearing contracts;

•	the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control, including governmental funding reductions and other policy changes, enrollment numbers for our partners’ plans (including in Florida), premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce health care costs;

•	our ability to attract new partners and successfully capture new growth opportunities;

•	the increasing number of risk-sharing arrangements we enter into with our partners;

•	our ability to recover the significant upfront costs in our partner relationships;

•	our ability to estimate the size of our target markets;

•	our ability to maintain and enhance our reputation and brand recognition;

•	consolidation in the health care industry;

•	competition which could limit our ability to maintain or expand market share within our industry;

•	risks related to governmental payer audits and actions, including whistleblower claims;

•	our ability to partner with providers due to exclusivity provisions in our contracts;

•	restrictions and penalties as a result of privacy and data protection laws;

•	adequate protection of our intellectual property, including trademarks;

•	any alleged infringement, misappropriation or violation of third-party proprietary rights;

•	our use of “open source” software;

•	our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;

•	our reliance on third parties and licensed technologies;

•	our ability to use, disclose, de-identify or license data and to integrate third-party technologies;

•	data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;

•	online security risks and breaches or failures of our security measures, including with respect to privacy of health information;

•	our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;

•	our reliance on third-party vendors to host and maintain our technology platform;

•	our ability to contain health care costs, implement increases in premium rates on a timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider agreements;

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•	True Health’s ability to enter the individual market;

•	the risk of a significant reduction in the enrollment in our health plan;

•	our ability to accurately underwrite performance-based risk-bearing contracts;

•	risks related to our offshore operations;

•	our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;

•	the impact of additional goodwill and intangible asset impairments on our results of operations;

•	our indebtedness, our ability to service our indebtedness, the impact of covenants in our credit agreement on our business, our ability to access the delayed draw loan under our credit facility and our ability to obtain additional financing;

•	our ability to achieve profitability in the future;

•	the impact of litigation, including the ongoing class action lawsuit;

•	our obligations to make payments to certain of our pre-IPO investors for certain tax benefits we may claim in the future;

•	our ability to utilize benefits under the tax receivables agreement described herein;

•	our ability to realize all or a portion of the tax benefits that we currently expect to result from exchanges of Class B common units of Evolent Health LLC for our Class A common stock, and to utilize certain tax attributes of Evolent Health Holdings and an affiliate of TPG Global, LLC (along with its affiliates, “TPG”);

•	our obligations to make payments under the tax receivables agreement that may be accelerated or may exceed the tax benefits we realize;

•	the terms of agreements between us and certain of our pre-IPO investors;

•	the conditional conversion feature of the 2025 Notes, which, if triggered, could require us to settle the 2025 Notes in cash;

•	the impact of the accounting method for convertible debt securities that may be settled in cash;

•	the potential volatility of our Class A common stock price;

•	the potential decline of our Class A common stock price if a substantial number of shares are sold or become available for sale;

•	provisions in our second amended and restated certificate of incorporation and second amended and restated by-laws and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;

•	the ability of certain of our investors to compete with us without restrictions;

•	provisions in our second amended and restated certificate of incorporation which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;

•	our intention not to pay cash dividends on our Class A common stock; and

•	our ability to remediate our material weakness and to maintain effective internal control over certain instances of one of our claims processing systems.

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(1)	Identifi®

•	Data and integration services: Data from disparate sources, such as EMRs, and lab and pharmacy data, is collected, assembled, integrated and maintained to provide health care professionals with a holistic view of the patient.

•	Clinical and business content: Clinical and business content is applied to the integrated data to create actionable information to optimize clinical and financial performance.

•	EMR integration: Data and clinical insights from Identifi® are fed back into partner EMRs to improve both provider and patient satisfaction, create workflow efficiencies, promote clinical documentation and coding and provide clinical support at the point-of-care.

•	Applications: A suite of cloud-based applications manages the clinical, financial and operational aspects of the value-based model. Our applications are individually purchased and scale with the clinical, financial and administrative needs of our provider partners. As additional capabilities are required by our partners, they are often deployed as applications through Identifi®.

(2)	Population Health Performance

•	Clinical programs: Care processes and ongoing clinical innovation that enables providers to target the right intervention at the right time for a given patient.

•	Specialized care team: Multi-disciplinary team that is deployed telephonically from a centralized location or throughout a local market to operate clinical programs, engage patients and support physicians.

•	Patient engagement: Integrated technologies and processes that enable outreach to engage patients in their own care process.

•	Quality and risk coding: Engagement of physicians to identify opportunities to close gaps in care and improve clinical documentation efforts.

(3)	Delivery Network Alignment

•	High-performance network:  Supporting the capabilities needed to build, maintain and optimize provider- and clinically-integrated networks.

•	Value compensation models: Developing and supporting physician incentive payment programs that are linked to quality outcomes, payer shared savings arrangements and health plan performance.

•	Integrated specialty partnerships: Supporting the technology-enabled strategies, analytics and staff needed to optimize network referral patterns.

(4)	Integrated Cost and Revenue Management Solutions

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Pharmacy benefit management: Our team of professionals support the drug component of providers’ plan offerings and bring national buying power and dedicated resources that are tightly integrated with the care delivery model. Differentiated from what we consider to be traditional PBMs, our solution is integrated into patient care and engages population health levers including generic utilization, provider management, and utilization management to reduce unit pharmacy costs.

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Risk adjustment: Our provider-led risk adjustment solution leverages Identifi® and integrates with partners’ EMRs to minimize disruption to the physician practice and maximize physician engagement. Our prospective and retrospective risk adjustment offerings utilize comprehensive data sources to capture medical history and sophisticated analytics and workflow tools with the aim of increasing the accuracy and efficiency of retrieval and documentation. We believe that through better provider engagement and intelligent use of data, our integrated model drives more accurate documentation of patient acuity, which optimizes reimbursement and improves the quality of care.

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(i)	High performance provider networks

•	Direct contracts with specialists facilitates ease of care.

•	Comprehensive specialty networks include multiple downstream subspecialists.

•	Dedicated provider operations provide staff to support practices.

•	Clinical response team provides clinical education on-site to practice staff.

•	Dedicated central call center facilitates referrals and helps to resolve claims issues.

•	Established system of ongoing provider education and training.

(ii)	Design evidence-based clinical pathways

•	Reduce unnecessary clinical variation.

•	Support physician clinical decision making of evidence-based therapies.

•	Facilitate total cost-of-care management.

(iii)	Leverage proprietary specialty care management technology

•	Decision support portal delivers specialty specific clinical experience based on assigned roles (e.g. cardiologist vs. oncologist).

•	Custom-built rules engine allows flexibility for multiple specialties and automated decisions based on clinical relevance, considering, for example, rigor levels based on specified payers and providers.

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•	Workflow capability facilitates a seamless collaboration within and across organizations, connecting payers and clearing houses for systematic data exchange.

•	Nurse triage system leverages proprietary technology infrastructure.

•	Overall flexibility enables a new business launch of existing specialty within 60 days.

•	Health plan services: A comprehensive suite of services including third-party administration, enrollment and billing support, medical and utilization management, third-party payment and program integrity support and provider network contracting services. Other health plan related services include sales and marketing, product development, actuarial, and regulatory and compliance.

•	Risk management: The capabilities needed to successfully manage risk for payers, including analysis, data and operational integration with payer processes, and ongoing performance management.

•	Analytics and reporting: The ongoing and ad hoc analytic teams and reports required to measure, inform and improve performance, including population health analytics, market analytics, network evaluation, staffing models, physician effectiveness, clinical delivery optimization and patient engagement.

•	Leadership and management: Our local and national talent assist our partners in effectively managing the performance of their value-based operations.

•	A statewide network of primary care and specialty providers, with an emphasis on primary care coordination.

•	Extensive care management and prevention capabilities leveraging diagnostic and actuarial analysis to drive care and health metrics.

•	Focus on community partnerships, both medical and socioeconomic, to improve individual and population health status and promote trusted collaborations with clinicians in facilitating access to care and working through insurance issues.

•	Advanced analytics aim to avoid costly interventions and complications in the future by focusing on preventative care.

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•	growth in lives in existing covered populations;

•	partners expanding into new lines of value-based care to capture growth in new profit pools;

•	cross-selling additional solutions to existing partners; and

•	capturing value created through a variety of value-based arrangements by participating alongside our partners in upside risk sharing arrangements.

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•	PBM expansion to include additional specialty pharmacy management capabilities;

•	Additional specialty lines of business beyond oncology and cardiology, e.g., kidney, maternity, end-of-life care etc.

•	on-site or specialty clinic services; and

•	consumer engagement and digital outreach.

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•	difficulty converting platforms or integrating the purchased operations, products or technologies;

•	substantial unanticipated integration costs, delays and challenges that may arise in integration;

•	assimilation of the acquired businesses, which may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;

•	the loss of key customers who are in turn subject to risks and financial dislocation in their businesses;

•	the loss of key employees, particularly those of the acquired operations;

•	difficulty retaining or developing the acquired business’ customers;

•	adverse effects on our existing business relationships with customers, suppliers, other partners, standing with regulators;

•	challenges related to the integration and operation of businesses that operate in new geographic areas and new markets or lines of business;

•	unanticipated financial losses in the acquired business, including the risk of higher than expected health care costs;

•	failure to realize the potential cost savings or other financial benefits or the strategic benefits of the acquisitions, including failure to consummate any proposed or contemplated transaction; and

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•	liabilities, including acquired litigation, and expenses from the acquired businesses for contractual disputes with customers and other third parties, infringement of intellectual property rights, data privacy violations or other claims and failure to obtain indemnification for such liabilities or claims, and distraction of our personnel in connection with any related proceedings.

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HIPAA expanded protection of the privacy and security of personal health information and required the adoption of standards for the exchange of electronic health information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security, electronic signatures, privacy and enforcement. Privacy regulations under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. As a provider of services to entities subject to HIPAA, we are directly subject to certain provisions of the regulations as a “Business Associate.” We are also directly subject to the HIPAA privacy and security regulations as a “Covered Entity” with respect to True Health. If we are unable to properly protect the privacy and security of protected health information entrusted to us, we could be found to have breached our contracts with our customers and be subject to investigation by the U.S. Department of Health and Human Services Office for Civil Rights (“OCR”). In the event the OCR finds that we have failed to comply with applicable HIPAA privacy and security standards, we could face civil and criminal penalties that could have a material adverse effect on us. In addition, OCR performs compliance audits of Business Associates in order to proactively enforce the HIPAA privacy and security standards. OCR has become an increasingly active regulator and has signaled its intention to continue this trend. OCR has the discretion to impose penalties without being required to attempt to resolve violations through informal means; further, OCR may require companies to enter into resolution agreements and corrective action plans which impose ongoing compliance requirements. OCR enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources.

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The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the “Stimulus Bill,” effective February 22, 2010, set forth health information security breach notification requirements and increased penalties for violation of HIPAA. The HITECH Act requires individual notification for all breaches, media notification of breaches for over 500 individuals and at least annual reporting of all breaches to the Department of Health and Human Services. Failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.

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Numerous other federal and state laws may apply that restrict the use and protect the privacy and security of individually identifiable information, as well as employee personal information. These include state medical privacy laws, state social security number protection laws and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies, creating complex compliance issues for us and our partners and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.

•	Federal and state consumer protection laws are increasingly being applied by the FTC and states’ attorneys general to regulate the collection, use, storage and disclosure of personal or individually identifiable information, through websites or otherwise, and to regulate the presentation of website content.

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•	the scope of rights granted under the license agreement and other interpretation-related issues;

•	whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;

•	our obligations with respect to the use of the licensed technology in relation to our services and technologies, and which activities satisfy those obligations;

•	whether our activities are in compliance with the restrictions placed upon our rights to use the licensed technology by our licensors; and

•	the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.

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•	damage from fire, power loss and other natural disasters;

•	telecommunications failures;

•	software and hardware errors, failures and crashes;

•	security breaches, computer viruses and similar disruptive problems; and

•	other potential interruptions.

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•	incur or guarantee additional debt;

•	incur certain liens;

•	merge or consolidate;

•	transfer or sell assets;

•	make certain investments;

•	pay dividends and make other distributions on, or redeem or repurchase, capital stock; and

•	enter into transactions with affiliates.

•	finance unanticipated working capital requirements;

•	develop or enhance our technological infrastructure and our existing products and services;

•	fund strategic relationships, including joint ventures and co-investments;

•	fund additional implementation engagements;

•	respond to competitive pressures; and

•	acquire complementary businesses, technologies, products or services.

•	make it difficult for us to satisfy our obligations, including interest payments on any debt obligations;

•	limit our ability to obtain additional financing to operate our business;

•	require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital expenditures and working capital and other general operational requirements;

•	limit our flexibility to plan for and react to changes in our business and the health care industry;

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•	place us at a competitive disadvantage relative to our competitors;

•	limit our ability to pursue acquisitions; and

•	increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy.

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•	economic and political conditions or events;

•	market conditions in the broader stock market in general, or in our industry in particular;

•	actual or anticipated fluctuations in our quarterly financial reports and results of operations;

•	our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

•	indebtedness incurred in the future;

•	introduction of new products and services by us or our competitors;

•	issuance of new or changed securities analysts’ reports or recommendations;

•	sales of large blocks of our stock;

•	additions or departures of key personnel;

•	regulatory developments; and

•	litigation and governmental investigations.

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•	divide our board of directors into three staggered classes of directors that are each elected to three-year terms;

•	prohibit stockholder action by written consent;

•	authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive;

•	prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

•	provide that special meetings of the stockholders may be called only by or at the direction of the board of directors, the chairman of our board or the chief executive officer;

•	require advance notice to be given by stockholders for any stockholder proposals or director nominees;

•	require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to amend certain provisions of our second amended and restated certificate of incorporation and any provision of our second amended and restated by-laws; and

•	require the affirmative vote of holders of at least 75% of the voting power of our outstanding shares of stock to remove directors and only for cause.

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•	Identify the contract(s) with a customer

•	Identify the performance obligations in the contract

•	Determine the transaction price

•	Allocate the transaction price to performance obligations

•	Recognize revenue when (or as) the entity satisfies a performance obligation

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•	Expected volatility - Expected volatility is based on the historical volatility over the most recent period commensurate with the estimated expected term of the Company’s awards due to the limited history of our own stock price.

•	Expected term - The expected term of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based on the midpoint convention.

•	Dividend rate - The dividend rate is based on the expected dividend rate during the expected life of the option.

•	Risk-free interest rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant.

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•	We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair values and carrying values of each of its reporting units, such as controls related to management’s selection of the discount rate, revenue growth rates, and weighting assumptions related to the future resolution of Passport’s RFP.

•	We evaluated management’s ability to accurately forecast future revenues by comparing actual results to management’s historical forecasts.

•	We evaluated the reasonableness of management’s revenue forecasts by comparing the forecasts to:

–	Historical revenues.

–	Internal communications to management and the Board of Directors.

–	Forecasted information included in the Company’s press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

•	We evaluated the impact of changes in management’s forecasts from the October 31, 2019 annual measurement date to December 31, 2019.

•	We assessed the reasonableness of the weighting of fair values considering future resolution of the Passport RFP by:

–	Obtaining and evaluating management’s documentation that articulates the rationale for the weightings applied.

–	Considering the sensitivity of the goodwill valuation model to changes in the weightings applied.

–	Conducting interviews with both internal and external individuals.

–	Obtaining public, third-party documents, and evaluating for contradictory evidence.

•	With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:

–	Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.

–	Developing a range of independent estimates and comparing those to the discount rate selected by management.

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•	We tested the effectiveness of controls related to the reserve for claims, including management’s controls over the development and reporting of the IBNR reserve.

•	We evaluated the actuarial methods and assumptions used by management to estimate the reserve for claims by:

–	Testing the underlying data that served as the basis for the actuarial analysis, including claims lag triangles and membership data, to test that the inputs to the actuarial estimate were complete and accurate.

–	Comparing management’s September 30, 2019 assumptions of expected development and ultimate cost of claims to actuals incurred during the fourth quarter of 2019 to identify potential bias in the determination of the reserve for claims.

•	With the assistance of our actuarial specialists, we evaluated the reasonableness of the actuarial methods and assumptions used by management to estimate the IBNR reserve by:

–	Developing an independent estimate of the IBNR reserve and comparing our estimate to management’s estimates.

–	Comparing the paid claims data and membership provided at December 31, 2019 to the data provided at September 30, 2019.

•	We tested the effectiveness of controls related to the initial and subsequent accounting of equity method investments.

•	We evaluated the Company’s consolidation analysis by performing procedures including, but not limited to:

–	Obtaining and reading the purchase agreements.

–	Engaging in conversations with management about the composition and governance of the entity, board of directors, and management.

–	Inquiring of individuals outside the Company to the extent necessary.

•	With the assistance of professionals in our firm with expertise in consolidation accounting, we evaluated the appropriateness of the consolidation model being used and the reasonableness of management’s judgements related to the determination of whether the investee is a VIE or a VOE and whether the Company has a controlling financial interest.

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•	Identify the contract(s) with a customer

•	Identify the performance obligations in the contract

•	Determine the transaction price

•	Allocate the transaction price to performance obligations

•	Recognize revenue when (or as) the entity satisfies a performance obligation

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•	Remove transaction costs related to the New Century Health transaction of $1.6 million recorded during 2018 and reclassify such amounts to 2017;

•	Record amortization expenses related to intangible assets beginning on January 1, 2017, for intangibles acquired as part of the New Century Health and True Health transactions;

•	Record revenue and expenses related to the NMHC MSA beginning January 1, 2017;

•	Record stock-based compensation expense beginning on January 1, 2017, for equity awards granted as part of the New Century Health transaction; and

•	Record the issuance of Class B common shares as part of the New Century Health transaction as of January 1, 2017.

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•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $13.35 per share for a consecutive ninety day period;

•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $16.43 per share for a consecutive ninety day period; and

•	one-third of the shares subject to the option award will vest in the event that the average closing price of the Company’s Class A common stock on the NYSE is at least $19.51 per share for a consecutive ninety day period.

•	50% of the shares subject to the option award vested on March 1, 2019, and

•	50% of the shares subject to the option award will vest on March 1, 2020.

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•	If the stock price has increased by 33.3%, 75% of the shares will vest

•	If the stock price has increased by 50%, 100% of the shares will vest

•	If the stock price has increased by 100%, 150% of the shares will vest

•	If the stock price has increased by 200%, 200% of the shares will vest (this is the maximum possible vest amount)

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(1)	Amounts charged to other accounts includes an increase of $4.5 million and a decrease of $32.6 million and an increase of $34.2 million charged to additional paid-in-capital for the years ended December 31, 2019, 2018 and 2017, respectively.

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•	Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date;

•	Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date and the fair value can be determined through the use of models or other valuation methodologies; and

•	Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability.

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(1)	The risk-adjusted recurring revenue CAGR is calculated over the five-year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenue of $1.0 million, resulting in a higher growth rate.

(2)	Equity volatility based on Evolent’s daily stock price returns for a look-back period corresponding to the time until the Second Test Date. The large one-day stock price drop on November 27, 2019, was excluded from the volatility calculation. The contingent liability expires on June 30, 2020.

(3)

These amounts represent 1) the probability that New Century Health will achieve at least the minimum level of operating results in 2019 to earn any contingent consideration (39.0%) and 2) the probability that New Century Health will achieve 2019 operating results in excess of the maximum amount of contingent consideration payable (24.0%). The risk-neutral probability rates were determined by projecting theoretical 2019 operating results using a simulation with one-million trials.

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•	Services, which consists of our technology-enabled clinical solutions including total cost of care services and specialty care management services and comprehensive health plan administration services; and

•	True Health, which consists of a commercial health plan we operate in New Mexico that focuses on small and large businesses.

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(1)	The True Health segment was created in January 2018.

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(1)	The following financial statements of the registrant and report of independent registered public accounting firm are included of Item 8 hereof:

(2)	All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission either have been included in the Financial Statements, are not required under the related instructions, or are not applicable and therefore have been omitted.

(3)	The Exhibits listed in the Exhibit Index below are filed with or incorporated by reference into this report.

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