The Complaint brings forth claims for violations of the Securities Exchange Act of 1934 against Evolent Health, Inc. (“Evolent” or the “Company”), and certain of its senior executives. The Complaint alleges that Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects on behalf of all persons or entities that purchased or otherwise acquired Evolent common stock during the Class Period.
Evolent provides healthcare delivery and payment services to provider-sponsored health systems across the Medicaid, Medicare, and commercial markets. As represented in its SEC filings, Evolent’s business model was predicated on the Company’s supposed ability to dramatically reduce its clients’ healthcare and administrative costs. By the end of 2018, Evolent had contractual relationships with over 35 operating partners. Many of these partners were either related parties, or companies in which Evolent had significant ownership or had provided financing at the onset of the relationship. Evolent’s largest and most important partner was University Health Care, Inc., d/b/a Passport Health Plan (“Passport”), which represented 20% of the Company’s revenues.
Specifically, the Complaint alleges that during the Class Period, Defendants mispresented and failed to disclose that: (1) Evolent’s partnership model did not align the Company’s interests with those of its partners, as the model was designed to inflate the Company’s revenue by extracting enormous administrative and management fees at the expense of its operating partners such as Passport; (2) Passport was struggling financially, particularly after Kentucky cut its reimbursement rates, and imposed high monthly penalties on Passport, so that the partnership between Evolent and Passport had become increasingly unsustainable; (3) Evolent was draining Passport of functions, employees and money, to such an extent that Passport was left on the verge of insolvency; and (4) Passport was conducting a bidding process for several months to sell itself to prevent liquidation.
After Evolent took over Passport’s claims administration, the Company grossly overcharged Passport hundreds of millions of dollars for basic healthcare management services that Passport had previously been performing in-house. Evolent had absolutely no experience in processing complex individual medical claims, and as a result, Passport began receiving monthly penalty letters from the Commonwealth of Kentucky addressed directly to Passport’s CEO for failing to comply with the most basic requirements of its Medicaid contract, resulting in tens of millions of dollars in penalties. By April 2019, Kentucky had imposed staggering penalties of nearly half a billion dollars on Passport precisely because Passport was unable to properly and timely submit encounter data. Kentucky had also decided to cut Passport’s reimbursement rates due to these claims administration failures. Then Evolent realized that Passport would likely need a bailout. On May 29, 2019, Evolent made the shocking announcement that Passport’s financial state was so dire that the Company had no choice but to acquire Passport in a last-ditch effort to save its most important client and revenue stream. In response to this news, Evolent’s stock price collapsed, losing nearly 30% of its value in a single day, failing from $14.15 to $10.01 per share —a decline of more than 65%. During an investor call the very next day, Defendants admitted it had known of the risk it would have to bail out Passport no later than January 2019. In November 2019, Kentucky announced it would not renew Passport’s Medicaid contract, further disclosing how poorly it had been run by Evolent.
On November 12, 2019, the Court appointed Plymouth County Retirement System and Oklahoma Police and Retirement System as Lead Plaintiffs, and Saxena White P.A. as Lead Counsel. Lead Plaintiffs filed an Amended Complaint on January 10, 2020.
On July 17, 2020, the briefing schedule for Defendants’ Motion to Dismiss was completed. Defendant, Evolent, then filed a Notice of Recent Events on August 20, 2020, announcing that the Company had sold Passport to Molina Healthcare Inc. On August 26, 2020, Lead Plaintiffs filed their response to Evolent’s Notice.
On March 24, 2021, the Court issued a 76-page order granting in part and denying in part Defendants’ Motion to Dismiss the Second Amended Complaint (“SAC”). In its opinion, the Court sustained four allegedly false statements, two concerning Evolent’s ability to cut costs for its most important client, Passport, and two concerning whether and to what extent Evolent was considering whether to financially bailout Passport in order to protect the health plan from imminent insolvency. The Court dismissed the remainder of Plaintiffs’ allegedly false statements for failure to adequately plead falsity. Regarding the element of scienter, the Court found relevant Plaintiffs’ allegations concerning the Individual Defendants’ executive positions and Evolent’s governing role at Passport, coupled with Defendants’ receipt of “‘monthly deficiency letters imposing nearly half a billion dollars of penalties’” on Passport. According to the Court, these particularized allegations, further supported by reliable confidential witness testimony, sufficiently alleged “‘[t]he presence of ‘red flags’” evidencing “significant problems for Evolent,” such that “Defendants ‘must have been aware’ . . . that Evolent had not been successful in cutting costs for its most important client.” Finally, the Court found Plaintiffs sufficiently alleged loss causation, among other reasons, because Evolent’s stock dropped significantly on the first trading day after Passport disclosed it was teetering on the brink of insolvency and then again when Defendants announced Evolent would “‘urgently acquire a 70% interest in Passport.’” Thus, the Court found the SAC adequately pled that Defendants’ fraud caused the harm suffered by Lead Plaintiffs and the putative class.
Both the Defendants and Lead Plaintiffs filed motions for partial reconsideration of the Court’s Order. The briefing schedule for these motions concluded on April 21, 2021 with the Court’s decision still pending.
Lead Plaintiffs will file their Motion for Class Certification on or before October 19, 2021. Defendants will file their Opposition to this motion on or before November 23, 2021. Lead Plaintiffs will file a Class Certification Reply to Defendants’ Opposition on December 21, 2021. Fact discovery will be completed on January 14, 2022.