Evolent Health, Inc.

Case Details

Class Period: March 3, 2017 - May 28, 2019
Date Filed: August 08, 2019
Case Number: 1:19-cv-1031
Jurisdiction: Eastern District of Virginia

Case Summary

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.   In truth, Evolent grossly overcharged Passport hundreds of millions of dollars during the Class Period for basic healthcare management services that Passport had previously been performing in-house.

Specifically, the Complaint alleges that during the Class Period,  Defendants misrepresented 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.   Between 2015 and 2016, Passport’s administrative expenses increased almost 60% in one year, rising from $107.5 million to $169.1 million, and by 2018 these expenses had spiked to $194 million.  In May 2017, Evolent announced that it would replace Passport’s long-standing third-party claims process with Evolent’s own medical claims processing platform, known as Valence.   After Evolent took over Passport’s claims administration with Valence, despite the fact that Evolent had absolutely no experience in processing complex individual medical claims, 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. By at least January through early May 2019, Evolent realized that Passport would likely need a bailout, while denying to investors that it was even being evaluated, or necessary to improve Passport’s financial performance and condition.  Then 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% from the price it traded at just eight months earlier.  During an investor call the very next day, Defendants admitted it had known of the risk that it would have to bail out Passport no later than January 2019.  Evolent’s stock price has since never recovered and currently trades well below its Class Period high.    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 (collectively the “Pension Funds”) as Lead Plaintiffs, and Saxena White P.A. as Lead Counsel.  Lead Plaintiff filed an Amended Complaint on January 10, 2020.

Then on May 7, 2020, Lead Plaintiffs filed their Motion for Leave to Amend the Amended Complaint, with a Memorandum in Support of this motion, based on recently discovered evidence from a confidential witness, a former senior Passport executive and Senior Director of Information and Technology, who further established claims that Defendants falsely represented that the Company’s services were creating cost-cutting efficiencies for Passport.  This confidential witness also collaborated Defendants’ knowledge of multiple issues regarding Valence in processing claims efficiently for Passport to the extent that Defendants agreed to “foot the bill” for Passport’s fines and penalties because they were “100%” due to Valance misrepresenting encounter data.  Defendants’ filed their Opposition to Plaintiffs’ Motion to Amend on May 21, 2020.

On June 5, 2020, the Court granted Plaintiffs’ Motion for Leave to Amend the Amended Complaint, and the Second Amended Complaint was deemed filed as of this date, with the Court finding Plaintiffs had “given sufficient grounds for amendment under … well established factors,” that the amendment was not “prejudicial” to the Defendants, that there was “no indication that the Plaintiffs … acted in bad faith,” in bringing their motion,  and that the amendment was “not futile.” Finally, the Court upheld Plaintiffs’ arguments that the new witness could “help them refute many of Defendants’ arguments at the motion to dismiss stage and demonstrate that Defendants made false and/or misleading statements to investors with scienter … the crux of their claims,” in holding, “Plaintiffs must be granted leave to amend.”  On June 22, 2020, Defendants filed their Motion to Dismiss the Second Amended Complaint.  On July, 6, 2020, Plaintiffs’ filed their Opposition to Defendants’ Motion to Dismiss.   A hearing concerning the Motion to Dismiss has been scheduled for August 26, 2020.