What happened

Shares of Evolent Health (NYSE:EVH) are up 20.4% at 3:23 p.m. EDT after the company announced that Passport Health Plan, one of Evolent Health's biggest customers, is being sold to Molina Healthcare (NYSE:MOH).

Last month, Evolent fell substantially after disclosing that Passport didn't get its Medicaid contract with the state of Kentucky renewed for 2021. The sale of Passport to Molina rescues some of Evolent's lost business and will put some money in the company's pockets since it had statutory capital tied up in the health plan.

Handshake

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So what

Molina's total payment for acquiring Passport is partially based on Passport's performance for the remainder of this year and how many members are retained when Molina takes over the contract in 2021. But based on current forecasts, Evolent expects to get between $130 million and $170 million when the deal is completed, which includes the repayment of a $40 million surplus note. Even at the low end of the estimate, that's not too shabby of a return considering that Evolent invested $110 million in Passport last year.

Starting in 2021, Evolent won't be doing as much for Molina's Kentucky Medicaid plan as it was doing for Passport. At this point, Molina has only retained Evolent to provide specialty care management services for cardiovascular care in Kentucky. But Molina is a much larger company than Passport, and management noted that there's a possibility that Molina may contract with Evolent to provide services for plans Molina runs in other states.

Now what

Evolent has certainly made lemonade out of the lemons that Kentucky's Medicaid program handed it. And the healthcare company could even end up coming out ahead if it can capture more of Molina's business. Beyond Molina, management has a goal of capturing six to eight new customer contracts this year, which should diversify its revenue stream and reduce the risk associated with relying on a few contracts for a bulk of its income.