Evolent slips after largest client claims state cuts could push it to insolvency

Shares of Evolent Health (EVH) are sliding after Passport Health, the former’s largest client, claimed in a lawsuit that Kentucky state rate cuts have affected the company so dramatically that it could be insolvent by March and subject to state takeover. Commenting on the news, Piper Jaffray analyst Sean Wieland said he sees Evolent Health’s guidance as potentially at risk, but believes the shares are likely oversold on the lawsuit news. PASSPORT SUES STATE OVER MEDICAID CUTS: Passport Health Plan has claimed in a lawsuit that Kentucky state rate cuts have affected it so dramatically that the Medicaid managed care company could be insolvent by March and subject to state takeover, Louisville Courier Journal’s Deborah Yetter reported. The abrupt filing of the lawsuit Friday in Franklin Circuit Court signals the collapse of extensive efforts to resolve a dispute with the state Cabinet for Health and Family Services over the cuts enacted last year to the company’s Medicaid business, Yetter wrote. EVOLENT’S GUIDANCE MAY BE AT RISK: After Evolent Health’s largest client sued Kentucky agencies over the capitation rate cut for Region 3, where two-thirds of Passport members are based, Piper Jaffray analyst Sean Wieland noted that Passport represents about $80M in revenues for Evolent. If it is assumed that Evolent loses Passport as a client, Wieland believes Evolent’s 2019 guidance is at risk. However, he also estimates that losing the contract entirely would amount to a $3 per share impact to valuation, stating that Evolent shares are likely oversold on the lawsuit news. Wieland has an Overweight rating on Evolent Health shares. WHAT’S NOTABLE: An article late last month from Insider Louisville reported on the financial challenges of Passport Health and pinned the blame on Evolent Health, Piper Jaffray’s Wieland told investors in a research note on January 31. The article, titled “Passport’s finances being dragged down by $220M in ‘management fees’ to Evolent Health,” suggested Evolent was largely to blame for Passport’s financial challenges, explained the analyst. However, after catching up with Mark Carter, CEO of Passport Health, Wieland learned that the Evolent Health relationship was going well and meeting objectives.

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