Q3 2020 HMS Holdings Corp Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the H. in Q3 Twentytwenty Conference call.

At this time all participants are in listen only mode. After.

After the speaker presentation, there will be a question answer session.

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I would now like to hand, the conference over to your speaker today Robert Archer.

VP of Investor Relations. Thank you. Please go ahead.

Thank you Brandy and good morning, everyone join.

Joining me are below <unk>, our chairman Chief Executive Officer, and Jeff Sherman, Our Chief Financial Officer.

This call is being webcast and can be accessed via the Investor Relations section of our company's web site at H.M.S. Dot com.

Today's press release, highlighting our financial results is also poised posted on our IR website.

Bill Angelic first provide their perspectives on our recent financial and operating results and business outlook. Then we'll open the line for questions. We ask that you. Please limit yourself to one question and one follow up so we can get through the full queue in a timely fashion.

I'd like to remind you that the financial results reported today and in this mornings press release are preliminary and are not final until our form 10-Q for the third quarter and nine month periods ended September Thirtyth 2020 is filed.

Some of the statements we will make today are forward looking in nature based on our current expectations and a view of our business as we see it today.

Such statements, including those related to the timing and effect of circumstances surrounding COVID-19, our full year 2020 guidance and future financial and operating performance and our future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially.

As a result, they may be considered in conjunction with the cautionary statements in today's press release and the risk factors described in the company's most recent SEC filings, including our form 10-K, and subsequent form 10-Q reports.

Finally, we may refer to certain non-GAAP measures. This morning reconciliations of these measures to comparable GAAP measures are included in our press release posted on our website.

With that I'll now hand, the call over to Bill.

Thank you Robert and good morning, everyone.

HMS experienced a solid rebound in the third quarter with revenue rising 15.8% sequentially from the second quarter, and increasing 12.5% when compared with the third quarter last year. This is a testament to the resiliency of our strategy.

And ability to deliver strong value for our clients.

Our significant financial strength positions us to continue to invest in the go to market strategies and product innovations that will fuel our growth through the remainder of 2020 and well into the future.

Our performance was in the midst of the many external challenges continuing to face our nation and the entire health care system.

We had another quarter of strong sales growth and an expanding sales pipeline.

We released product enhancements and new product introductions.

And we focused on driving further client benefit through enhanced product yields.

As we mentioned last quarter nearly all of our lower Q2 revenue was related to the effects of COVID-19.

At that time, we were confident in our positive business outlook, given the improving trends we were saying.

This perspective became a reality during our third quarter as clients begin to lift the audit work pauses enacted during the COVID-19 emergency period.

In other business lines regained a more normalized run rate.

Additionally, we began to realize the impact of rising Medicaid enrollment.

Organic CRB revenue growth of 9% over last year's third quarter was driven by increases in prospective CRB.

Improvement in claim volumes related to retrospective recovery work.

Incremental revenue from yield initiatives and implementation of new client contracts signed over the past nine months.

We believe the underlying market dynamics will continue to be a positive driver for our CRB business with Medicaid enrollment trends, increasing again in the third quarter and both traditional fee for service and managed Medicaid.

In addition states responding to a recent industry survey currently expect Medicaid enrollment jumped 8.2% in fiscal year 2021 with.

With Medicaid spending growth anticipated to accelerate to 8.4%.

These trends position us for favorable growth in the fourth quarter and well into the 2021.

Payment integrity revenue was also experienced strong growth of over 55% on a sequential basis from Q2 to Q3 as CMS and a number of states and commercial clients began to lift pauses that were in place to temporarily each hospital administrative burdens.

During the pandemic.

From a sales perspective, we've seen a significant increase in new and expansion sales and payment accuracy and the first nine months of 2020 compared to the same period last year. As a reminder, payment accuracy includes both see Ob and T I.

Our go to market initiatives continue to highlight our significant capability and delivering meaningful and measurable savings for our clients.

During Q3, we signed new payment accuracy contracts with 14 clients, including six new logos.

Based on current implementation Timeframes time frames, we would expect revenue generation from these contracts to begin to be recognized in 2021.

Our capabilities are seen that's especially important to states facing significant budget pressures due to lower tax revenues and higher Medicaid unemployment costs.

In addition, we continue to scale, our Medicare to commercial and commercial the commercial see it'll be solutions, which are helping to drive incremental revenue opportunities.

Our concerted cross selling efforts.

Year to date, we have been able to cross sell asset services and the six of our commercial clients, including commercial CRB and SUS irrigation solutions.

In addition, our annual momentum client conference. This past September generated strong interest in our product capabilities and thought leadership initiatives.

Even though this year's event was virtual it was a resounding success as we doubled our client attendance and stimulated both lead generation and engagement on industry wide initiatives.

We also continue innovate and are regularly adding new and enhanced solutions to our comprehensive business lives.

A key component of our strategic growth plan.

Is the gain a greater foothold in the Medicare advantage market, which will continue to be the fastest growing segment of the health care market.

Our ability to configure our existing products for Medicare advantage plans has led to further penetration into the Medicare market.

This year, we have signed new contracts or executive or executed scope expansions with eight Medicare advantage plans are.

Our solution set for this market includes Medicare secondary payer premium protection part.

Part D cost avoidance and recoveries.

Clinical claims review.

Payment analytics and fraud detection and investigative support.

Our full suite of population health management services, including analytics care management and member engagement also actively address the Medicare advantage marketplace.

PHN revenue increased from the second quarter, but did decline on a year over year basis, as we continue to build a stronger sales pipeline and recover from some of our clients shifting focus during the fact that the pandemic.

There clearly been some COVID-19 related timing challenges and our sales initiatives during the second and early third quarter for our Phs business as our clients clinical leaders, we're focused on the medical response to the pandemic.

As the third quarter progressed, we saw sales momentum in P.H.M. was closed sales in the quarter greater than the first two quarters combined.

During the quarter. We also had three clients go live on our new integrated platform.

Which combines elie risk analytics with our set care management solution.

This provides real time data and information sharing to help improve members clinical outcomes.

We believe the integration of these solutions and the ability to now inform member care plans from a continuous feedback loop.

We will enable our clients to better manage medical costs and improve outcomes.

In summary, we delivered a solid quarter of revenue growth and strong profitability in Q3, and we believe there is more to come.

Importantly, we maintained healthy cash flows and a solid capital structure that we expect to fuel our growth.

Strong cost containment and clinical outcome capabilities should continue to grow in importance both during and after this health crisis.

This will likely help states and their efforts to close budget gaps as they deal with fiscal pressures due to lower revenue and higher Medicaid costs.

In addition, we believe increasing Medicaid enrollment and health care utilization trends should be beneficial for our business over the coming months and quarters.

This combination of macro trends sales performance and product innovation couple.

Coupled with our financial strength and business resilience create.

Creates a strong platform to capitalize on the many opportunities for our business.

Jeff will now provide additional details on our third quarter performance and outlook for the remainder of the year Jeff.

Thank you Bill and good morning.

We continue to execute on our growth strategy in the third quarter, while effectively managing our operations and costs in the midst of the pandemic.

Our growth has been powered by an expanding product and value proposition.

New client wins and contract expansions with strong financial position and breadth of capabilities that enable us to help our clients meet their most pressing needs.

We experienced a significant rebound with sequential revenue growth from Q2 to Q3 across our business lines.

As Bill mentioned this was due to temporary client work pauses being lifted the positive impact of increasing Medicaid enrollment and health care utilization rates, reaching closer to pre COVID-19 levels.

She will be ready in Q3 Rose 6.66, 0.7% sequentially from Q2 increased 20.3% from the third quarter last year or a 9% increase organically if you exclude accident revenue.

As Bill also noted this performance was led by strong results in perspective, CRB improvement in claims volumes in recoveries related to post payment work continuous yield initiatives and recently implemented new client contracts.

We expect continued growth in the fourth quarter and anticipate RCB business momentum will continue into 2021.

We may experience some quarterly revenue variability as we have referenced in prior quarters, but expect the momentum in order to be business to continue in the coming quarters.

Payment integrity, having significant rebound in Q3, I expected it P.I. revenue, increasing 55.6% sequentially from Q2 and up 2.6% from the third quarter last year.

During the third quarter many of our P.I. clients started lifting the work pauses enacted during the COVID-19 emergency period.

However year over year growth continued to be restrained by the lingering effects of COVID-19 circumstances.

For example in P. <unk>, the Medicare RAC contract did not restart until the end of August, causing a negative impact of approximately three and a half million dollars.

Another 2.5 million impact was related to state RAC contracts that restarted during the quarter or early in Q4, and the Cobi 19 impact for our commercial business line was approximately $3 million due to client won't policies. We do expect some of this delayed revenue will be recovered in the fourth quarter and into.

21.

Hey, Tim Ramey also recovered in Q3 was up 6.2% sequentially.

On a year over year basis, while Phs revenue declined 11.9%, we expect stronger sales in Q3 will help to drive incremental revenue growth in Q4.

Adjusted EBITDA in the third quarter increased 33.5% from a year ago. It was up more than 57% sequentially from Q2.

Our results demonstrated strong operating leverage in the third quarter.

Total revenue was up $23 million from the second quarter with only a 1 million dollar increase in operating costs.

Adjusted EBITDA margin of 26.5% was up 420 basis points from a year ago. When you exclude the 7.7 million dollar gain on investment in Q3 last year and was up by 700 basis points from the second quarter.

We recognized other expense of $1.1 million in the quarter related to the mark to market fair value of our amended advisor investment.

So this was a million dollar drag on our adjusted EBITDA and one cents in adjusted EPS in Q3 versus the benefit in Q2.

Third quarter adjusted EPS of 30 cents per diluted share was up 20% from the 25 cents per diluted share reported in Q2, a year ago, excluding the gain on investment in the third quarter of 2019.

Our business is maintaining healthy cash flows and a strong balance sheet with more than $211 million in cash and total net debt of less than $30 million or <unk> 0.2 times trailing 12 month adjusted EBITDA.

This enables us to continue to invest in our product and stws sales capabilities support and enhance our IP infrastructure and advance our internal and external growth initiatives.

Turning now to our financial guidance.

Given our updated analysis of the business, we are maintaining our full year.

And adjusted EBITDA guidance.

Revenue is now trending towards the low end of our guidance range and 680 $690 million.

This represents growth of 10.5% to 12.1% compared to last year. When you exclude the Medicare RAC reserve release from 2019.

The market environment is still evolving in the midst of the continuing COVID-19 circumstances, and the extent timing and duration of covert nineteens impact on our operating and financial performance will continue to be driven by many factors. This includes the length and severity of the continuing pandemic and the related impact.

Hi, medical utilization any new client weren't pauses Medicaid enrollment and state budget pressures.

That being said, we currently expect our performance to improve again in the fourth quarter with momentum continuing into 2021.

We recognize our full year guidance implies a sizable sequential increase in revenue from Q3 to Q4 and are confident in our outlook for the remainder of 2020 for the following reasons.

First the encouraging underlying market trends Bill noted earlier, including significant increases in medical and Medicaid enrollment during 2020 and rising utilization any claims volumes.

Second new client contracts signed in Q1, and Q2 that had been implemented and are now beginning to generate revenue.

Third our Medicare and state rack product lines are now running at a full revenue run rate in the fourth quarter with accent continuing to ramp up.

Fourth we continue to have success with yield initiatives in our payment achary accuracy solutions.

And finally, our fourth quarter is typically our strongest quarter of the year for all three business lines and we currently expect this trend to continue.

I'd also note that revenue increased sequentially each month during the third quarter and we view the month of September as a good run rate to grow off of as we move through Q4.

We believe these business drivers position HMS for healthy topline growth in 2021, especially given the current level demand for our solutions the positive trajectory of our sales pipeline and recently closed sales in active implementations.

Given the expected revenue increase in Q4, and our continued success in managing cost effectively our adjusted EBITDA guidance range remains unchanged at 177 $287 million for 2020, this would be year over year growth of 7.9% to 14% given the improved operating.

<unk> expense trends now forecasted for the remainder of the year.

As with revenue we are normalizing the 2019 adjusted EBITDA for comparison purposes to exclude $8.2 million on Medicare RAC reserve release, as well as a 7.7 million dollar investment gain.

Bill will now offer some concluding remarks, and then we'll be ready for questions Bill.

Thank you Jeff we.

We believe strong cost containment and clinical outcome capabilities are going to grow in importance both during and after the self crisis.

This trend along with the trajectory of our sales pipeline close sales and active implementations are all positive indicators of the potential.

For our future success.

All of these trends make us confident in our business outlook and we remain focused on supporting our clients and protecting our employees health and safety.

We will continue to invest in our people processes and technology to sustain future growth and deliver strong client value to meet the industry is evolving needs.

I continue to be thankful for the support and commitment of all HMS employees and very appreciative of the active collaboration with our clients to drive enhanced value through our partnerships.

We would also be remiss, if we didn't continue to thank our nation's frontline health care workers for what they do every single day. Thanks.

Thank you.

Operator, we are now ready for the first question.

Your first question comes from the line of Jaylen Brasil with credit Suisse.

Hi, Good morning, everyone. Thank you actually I want to talk about Oh your shares were watered down yesterday. After went up your competitors in the health care technology made comments that you placed a major competitor had a blues plan and signed two significant Medicaid CBDV I don't know how much you can comment on individual contracts wins.

It also but I was wondering if you can talk about just the competitive landscape in Medicaid. So you will be given the strong foothold and market share do you have.

Yes, so we're not aware of any HMS contract transition related to this a competitor and we do not know the size scope or specific product the company was referring to.

Well, we don't know any details we do believe the blues contract for their coding advisor product would not be related the C. O V at all but the prepayment claim editing rugs.

Regarding the Medicaid CRB contracts mentioned the company did not describe the CRB contracts as being with either Medicaid MCR was or states.

We've not competed with change healthcare for a state TPL contracts since 2016.

At that time, we were awarded one of their state TPL contracts. One it was up for Reprocurement and we have maintained that contract since 2016 without disruption.

And were unaware of change health care participating in any state TPL competitive procurements as a head to head competitor with HMS.

Okay. That's helpful. One follow up.

I understand again, you cannot comment on all the market speculation and such a bold, but I was wondering if you can discuss <unk> financial flexibility.

More than 200 million cash and balance sheet and but she is trading at these levels why not get more aggressive on share buyback and can you remind us roughly how much cash you need to have on balance sheet to do it on day to day operations.

Oh sure. This is John I mean, you know obviously, we have still have a significant amount of liquidity available both with the cash on our balance sheet and our undrawn revolver. So in terms of cash on the balance sheet. I mean, we could clearly operate with cash anywhere between $30 million to $50 million on or about.

Balance sheet and operate very effectively still acknowledging that we have the credit line that that we can go out you know that we can utilize if we need it.

We do have a share buyback authorization in place. It is one of the tools that we use we've been opportunistic buyers of our shares over time, we continue to have that flexibility, we're not going to comment on any specific you know share repurchase strategies, but as we think about capital deployment.

And you know our first priority has been investing in our business. We continue to do that you know.

Roughly $30 million to $35 million a year in Capex second priority has been strategic M&A. Obviously, you know we did have a big acquisition in the fourth quarter of last year, we had been rebuilding cash. Since then so we will continue to evaluate our priorities for capital deployment share buyback remains one.

Those than we have been opportunistic buyers in the past and that remains an opportunity for us going forward.

Alright, Thanks, a lot.

Your next question comes from the line of Matthew Gilmore with Baird.

Hey, Thanks for the question I, just wanted to ask about the guidance ramp and into the fourth quarter.

I think if I did the math right on the low end you need about $35 million.

Higher revenues sequentially. So can you can you help us think through sort of what are the more important drivers on a sequential basis and I know you mentioned that.

Remember being a better month. So you ended the quarter well and then you also get normal seasonality, but.

But it capex that you could quantify any of that or just provide some additional details I think that would be helpful.

Sure Matt So first just kind of reiterating a few of my comments in terms of the drivers Medicaid enrollment is certainly a driver for sequential improvement you can see most of the publicly traded a Medicaid MTO companies have.

Reported Medicaid enrollment growth of over 10% from Q1 to Q3, Oh, so that that will be an important driver for our C will be business as we exit Q3 and into Q4 or we have signed new contracts and I noted in Q1 and Q2 that reading implemented.

The Medicare and state rock product lines now you know returning to a more normalized full run rate, we had state contracts both from on the U.R. side as well as rock contracts that pause work during the second quarter those were lifted during the third quarter and.

Yeah in terms of the seasonality Q4 has always been been our strongest.

Our strongest quarter. So just kind of this specific business lines. I'd also mention we did have roughly about two and a half million dollars that pushed from Q3 to Q4 and don't see Ob and <unk>. So two and a half million total that's just the normal revenue quarterly variability.

We experienced but in terms of Bucketing. This the largest driver of the sequential growth. This year will be recovery revenue and our CRB build claims that we send out for recovery.

Over 40% in Q3 versus Q2, so as to claim utilization volume trends.

Materialize and again, we are on a lag basis anywhere between 60 to 90 days or longer we saw April being the low point in terms of build claims and with the significant increase we saw in Q3 and we have a detailed statistical model that really is the liquidation curb on when we expect to collect those bills.

So the single biggest driver of the sequential growth is just collecting on the claims that we sent out in the third quarter that was up significantly from Q2. The Medicaid lives growth continues to drive perspective, she will be revenue as we expected as I said with Medicaid lives up over 10% sequentially from the first quarter.

That will continue to drive revenue and that piece of the business on the <unk> side with both the Medicare RAC in state contracts ramping back up that is a big driver and I noted about nine and a half $10 million of continued negative impact in Q3, most if not all of that on a comparative basis is.

Lifted in Q4.

And finally, I would say we continue to see progress in accent accent had challenges in collecting dollars from from providers. So we're seeing some return in collections as well as some higher claim volumes there and then finally on the P.H.M. side, we see increasing sales growth in Q3.

To help drive revenue in Q4, so a lot of moving parts. The single biggest driver will be she will be followed by payment integrity return you know basically ramping up on the contracts restarting a and a sequential increase in P.A. Jim.

Got it and then one follow up just on Medicaid enrollment obviously that's a.

You know an important driver.

In a 2021 and I would assume for you all as well, but for these new people that are hitting the system did do they are there any different in terms of their make up relative to the existing Medicaid population I guess, specifically I was curious do they have a higher or lower propensity to have other forms of coverage.

Just so we can think about you know its enrollment goes up 8% just because.

It might help us think through.

What that means in terms of revenue, yeah, yep higher lower propensity to have other property.

So Matt so far during our.

Our review of that data and we you know we look at this monthly there as a percentage of employer sponsored coverage remains about the same so there there's not been any large swings in a new enrollees, who have third party coverage. In fact this year, we've been a little above the baseline.

Line of people, having dual coverage now.

There's been a lot of talk about the impact of employer sponsored insurance.

But it has been the impacts been lower than anticipated.

Because it's primarily impacted its concentrated on lower income populations and this could be a positive for us on the recent study from Robert Wood Johnson Foundation found that 48 million Americans or maybe about 14.5% of U.S. population are.

In a family in which at least one worker losses job.

But there there are other members covered in that family and they can get coverage from a family members employer sponsored insurance plan. So I think thats diminishing the decrease in what we what you might think as a rate of other coverage.

Now about 28% of those in that study about 20% of those who lose their coverage will enroll in Medicaid, but think about them enrolling in Medicaid, but from a third party perspective, they are on their spouses coverage as well and that's a win win for HMS.

I would also say that as people re enter the workforce, it's anticipated that many may be under employed.

And still qualify for Medicaid as well as regaining employer sponsored insurance coverage. So we believe all of this leads to what might be an incremental tailwind for C. O be revenue over time as of course health care utilization continues to rise and our work is.

Accomplished based on eligibility and utilization.

And the only thing I would add to that is obviously given the state fiscal pressures a work, we're still expecting that to be a tailwind as well as they look to us to drive you know for help and saving more dollars and helping to cover either tax revenue shortfalls or their share Medicaid enrollment costs.

Okay. Thanks, a lot.

Your next question comes from the line of Ryan Daniels with William Blair.

Hi, guys. Thanks for taking the question Bill in your prepared comments. It seemed like you were more focused this quarter on product innovation and some new products can you talk a little bit more about kind of what product expansions, you're doing and new products. Both in regards to specifically what those are focused on and then number two.

What market it sounds like those might be more M&A oriented, but I want to make sure that's correct. Thanks.

Sure. Thanks, Ryan So we've been innovating in each product line. So in C. O b last year reintroduced our coverage on demand product, which can be used.

Which is being used by a health care dot Gov. It can be used by any state exchange.

And we have two states that have agreed to start using that so that's.

Identifying third party coverage at the point of enrollment it could be done at the point of service.

But really any point in the food chain him and we believe that will get wider adoption. After clients can figure out how to integrate with us in a just in time process. It's just an <unk> to our services.

We have some other see you'll be innovations coming along as well as making sure that we.

We sell as many of you to our existing clients the accent product lines looks like we've said we've sold six or within the first nine months of the of the acquisition.

And payment integrity, we continue to move more of our services upstream and more clients are buying our prepayment clinical claims review.

With additional implementations happiness happening this quarter as well as continuing to ideate in that area. So we have very strong a movement in terms of getting new innovative audit scenarios in front of our customers and then in P.H.M. not only have we integrated Ellie and.

And lies a but we are now on the path of integrating I mean elina set we are now on a path of integrating the lies into that so we believe we will be the only organization that with one set of tools you can identify your highest risk members you can engage them electronically or in a digital fashion and you can manage.

Them through our care management platform. There's also additional versions of the lives that are planned for launch in 2021. So a lot of work on that we did I won't say shift our focus but we put a lot of focus on Medicare advantage, because our products are configured.

Trouble for that market and as we said in the prepared remarks, we had quite a bit of success in selling into the m- marketplace. This year.

And we'll continue to see that we continue to see that in our sales Q. So the innovation is going to be coming across all of our product lines and our product management function has been very active in both the seal beside the payment integrity side and on the.

[noise] P.H.M. side.

Okay very helpful. And then one quick follow up on the pauses in work have all of those effectively been removed at the state and Medicare level are there still some outstanding work pauses.

Both for rack and then broader program integrity. Thanks, guys.

Go ahead Joe.

Yeah, I think at the state level and at the CMS RAC contract called the pauses I had been lifted I think we'd still have one commercial line Ah that Ah, where hopefully expecting that that that pause to be lifted but other than that I think all of them.

So that impact that work will see the impact starting in Q4 and into Q1.

Because of the less.

And your next question comes from the line of Stephanie Davis with S. C.

<unk>.

Hey, guys. Thank you for taking my question. So your prepared comments indicate some demand spikes from states looking to close budget gap.

Can you give us some color on the inbound or from the state conversation there anyway to quantify the impact for quotes you are 2021.

Yeah. So let me I'll give you a couple examples we.

I'm not going to name state clients, but we had one of our long term clients reach out to us and ask us to submit as many proposals as possible to help them with their upcoming budget crisis, I'd say since that happened, which was very early on.

The pandemic, we've had significant inbounds and of course, we're actively talking to.

Very senior level people across state Medicaid programs about what can be done to further.

[noise] further protect their budgets.

What it is as an expansion in both our rack our state rack T I work.

And also regulatory processes that we're helping them with the further protect their rights to recover a Medicaid Medicaid third party liability.

[noise].

Were also on the Medicaid Reform Commission I'm not quite sure I have that correct in New York State and a number of the initiatives that we propose were adopted by the state. Obviously, that's a very large Medicaid program. So inbound activity has been strong interest.

Seemingly enough outbound activity has been a little easier because it's easier to get very senior level people at state government take a meeting virtually then.

With all the hassle of travel and trying to coordinate schedules. So it's been a very active period for sales.

Alright, that's super helpful. And then kind of related to that could you walk us through some of the ph.

Mentioned and Mark what gain traction what pushed folks over the finish line, giving budgets are a little bit tighter right now.

Well, so the P.H.M. wins on the ones, we mentioned about better and implementation. This quarter are the three integrated OSAT and Ellie solutions.

Now what happens every year and it's happened last year is happening this year after our momentum client conference and people get a chance to see the ability of.

Set and Ellie integrated we typically get sales and lead generation from that so those wins have been around that those product lines and of course. This is the time of year, where.

Even though there are still some concern about the pandemic a lot of our clients are still very interested in making sure that their client their members get in for childhood immunizations, well baby visits mammograms.

Anything or post hospital discharge programs that we run all the things that help them not only improved quality, but continually help them make sure that people with chronic conditions are.

Our stable.

So this is the time of year, where we were typically.

Doing more allies, the campaigns and they usually it's usually the fourth quarter, where we have the the highest number of and I wouldn't say there are new logos that it's our typical clients who are doing more campaigns as we close the year, we've had the new logos in the OSAT and Elie side of the business and.

Lease sales are growing rapidly.

Hi, how are.

Thank you Bill and team.

Your next question comes from the line of Donald Hooker with Keybanc.

Great. Good morning. Thank you for the question. So I guess that I guess the last question was sort of highlighted I think some of the positive.

Demand from sort of state Medicaid programs or is there any kind of real score.

I'm on the other side to the extent that there's there's so many moving parts here with you know with the snapper and with with the public health emergency period potentially winding down at some point.

As you look forward I mean are there potential in your sort of macro view of the world or is there.

Are there any concerns or or thoughts around maybe a kind of <unk>.

Reductions in Medicaid spending over time or sort of more tight eligibility is there any is there any risk that that could backfire against you.

With things going really well right now.

You know I guess.

I mean, I don't see a.

Tightening of Medicaid eligibility of course, it does depend on the outcome of the election, what directions, we may Medicaid may take but.

In reality, we don't really see any reductions in.

Eligibility or stricter eligibility requirements as you know the work requirements have not been a wildly accepted both by states or in court.

And I guess the other side of the question is.

Many years ago, we used to be counter cyclical so when the economy was bad and more people are on Medicaid we grew.

When states had rainy day funds, maybe they didn't ask as much from us that is not the case anymore.

All of our clients are pretty voracious about saving money.

And typically once they started an initiative with us.

And the money starts flowing in they do not turn it off now that's a little different than in the commercial world where.

P. I can be an arms race right that client may fixate payment analytics issue and then we're on to presenting three more to them, but but we don't see that happening in the state market States are.

Going to be impacted by the pandemic and the budget pressures for sometime to come and don't have a lot from a Medicaid perspective don't have a lot of other levers to pull and we don't think they want to make.

Make eligibility even harder during a horrific pandemic.

Okay, well, thanks for your perspective, and maybe HM No. Other question in terms of as I said, the it sounds like you're getting some synergies there which is wonderful to hear and I know you provided some detail on kind of growth expectation when profitability a few quarters ago now with this thing under your belt for a year or.

We're still on track in terms of what kind of growth outlook for for that set of businesses going forward. What's the what's can you update us on your with your updated thoughts on growth and profitability for a sense as a standalone business well.

Well, let me let me I'll answer it first from a what the opportunity is and then Jeff can talk about it from a financial perspective, so accent was.

You know obviously also impacted because a lot of their work is recovery from providers in the commercial the commercial see Ob space and.

Collecting from providers during the pandemic was a little more difficult.

However, we're seeing that start to rebound.

The most important thing about it is that we have completed the integration we have a path for the technology integrate the technology is all on HMS data centers now, but we have completed the roadmap for how the different technologies will be integrated and I think the real.

Success about the growth of this business underneath us is that Weve already cross sold out there six.

Claude existing HMS clients with access products and then we are in the process of selling accent clients with HMS products. So we believe that it's been to date, a successful integration the employee engagement scores that accent or higher than they've ever been and we.

We did all the storing a pandemic, where we're all working from home Jeff do you want to talk about the financial outlook on accident.

Sure. Thanks, Bill So as Bill noted so we're down we're down.

Where we originally expected to be a we think most of that is timing related for the year as Bill noted so I think with the six cross sales that we have so far with accent that are that will be ramping up and adding revenue as well as our accent teams merging with with our HMS team can really.

Eating and using our analytic capabilities on both sides.

We're confident that our original expectations for Frac sand aren't going to materialize. We do have all the integration costs. This year that as Bill noted really finished in the third quarter. So those are those would be gone as we exit.

We move into Q4.

And will help be driving our earnings next year. So I think nothing has changed from our original optimism about what accident is going to do either cross sells activity as well as the opportunity to use technology to help things, how do things more effectively and more efficiently on x. and also.

Margin opportunity. So I think what we're pleased where we're at now.

910 months or 10 11 months into this and see a lot of good growth for centric potential from here.

Thank you and congrats.

Thank you. Our next question comes from the line of Sean Dodge with RBC capital markets.

Thanks.

Good morning, maybe going back to the guidance can.

Can you can you talk about the margin profile or mix of the incremental revenue you expect to come on in the fourth quarter were maybe are there. There are some investments you're we're spending you expect to ramp I'm looking at the contribution margins implied in the guidance and there's not as much improvement.

Implied an EBITDA sequentially, you typically been able to generate in the past given kind of this amount of progression in revenues or anything on spending in the fourth quarter margins, while et cetera.

Oh, Hey, Hey, Sean. So so you know as I said, we didn't give out specific drivers see Ob I'm <unk> are the two biggest drivers. So on the CRB side, we tend to have more more automation there so from a margin profile perspective on that.

P.I. side. There are there are you know more costs associated with driving.

Oh revenue. So we do have some additional investments planned as.

We're adding some costs in the fourth quarter I don't expect them to be very material to the overall that to the overall.

Cost structure Oh, we do also just one other point I point to make is you know we record our our bonus accrual based upon relative earnings.

In each quarter, so with more earnings expected in Q4 that will drive just higher.

Bonus accrual on a sequential basis.

The second or third quarter. So other than that I think it's more just resources that that we need to drive incremental revenue.

And you know are expecting obviously, if you looked at our guidance range a significant lift in adjusted EBITDA in the fourth quarter and higher margins in the fourth quarter to get to our overall guidance number.

Okay. That's helpful. Then on.

On the Medicare RAC restart when we think about the impact that can have on revenue that did there've been Medicare claims continuing to be generated over the time it was halted.

Can that help get revenue off too.

Quicker starter or maybe help it reached a little bit about higher plane for a period of time, because you've got that big backlog or bullets, you can work through initially.

Or does it not work like that.

So we don't have we don't have a clarity yet on whether we will be able to audit claims during from the pandemic period. So the work we are doing it you know that we didnt third quarter are doing now are still offer a pre pandemic claims.

But we obviously had claims that were not a correct requests that were outstanding.

When the pause happened.

In the first quarter.

We were doing work on those and in the second quarter and into the third quarter and when when when the opportunity was was restarted when CMS allowed us to reap start recapturing those dollars that that's what hit in Q3.

We are sending out more medical record requests, but that didnt start until <unk> until August when the pause was lifted.

So so right now our guidance is not you know.

Incorporate any any additional claims from the pandemic period that potential upside although at this point I don't think we would expect any any definitive answers on that I'll, probably before we exit the year. So we are hopeful that we'll be able to audit claims during the pendency period, you as we move.

Forward.

Okay.

Very good thank you.

Your next question comes from the line of Dave Windley with Jefferies.

Hi, Thanks for taking my question I wondered its come up several times, but I wondered if you could quantify.

The revenue opportunity the revenue contribution from these six axis Cross X cents excuse me cross sales.

And you also mentioned the integrated a couple of integrated PHN platform sales could you give us revenue size on those or if not just kind of what you think that broader opportunity could be.

Yeah, I don't I.

I don't think we typically.

I think we've said in the past that when we sign a contract for really any of our work it takes quite a while for not about not the implementation period, but also for it to ramp up.

So I don't think Weve, we actually give out detailed contract size, but we consider the addition of the accent product line into HMS to be able to allow us to offer a comprehensive C. O V solution.

For all lines of business, Medicaid Medicare and commercial that no one else has under their umbrella. So we think thats, a very competitive advantage, Jeff anything else on on the revenue contribution or.

Yeah, I mean, it's you know I would say it's in the millions in terms of annual contract value that we're expecting for those sales getting getting more granular, but but but could be to bill's point I think having the platform to continue that cross sell and seeing seeing those implemented over.

Her time, you know well, we will certainly help us drive revenue I mean, as we think about our forecasting we're always looking at multiple drivers you know one on fuel be side. We're looking at lives. We're looking at claims.

Coming in now sometimes sometimes when those claims get paid causes variability. So that's that's why we tend to talk about our revenue in terms of all the annual <unk> versus quarter and and we do what we do do a detailed forecast you know really by by client by product.

On a monthly basis and update that real time, obviously, there's processing delays and things happened in that forecast I can move revenue.

But but over time when you look at it on a rolling four quarter basis, you know weve usually been failed.

Fairly accurate in terms of how we capture those revenues in our forecast and then we also have to close sales that moved that move into implementation and we track that by client byproduct as well. So I have a pretty good handle on when closed sales are going to be generating revenues.

Got it. Thank you I don't really think there's over.

Really extended period of time, there's been talk about kind of developing and driving active.

Products perspective.

Uh huh.

Oh, that's in and analyses.

Where does.

Mix of prospective versus retrospective stand and is that is.

Is that still a push and from thing that that your clients.

Have strong appetite for as a way to kind of minimize provider abrasion.

Yes so.

And payment accuracy, obviously nclb half of our revenue is prospective and we're trying to work with our clients to make that even more real time, we can do it it's whether they can ingest export and adjust the appropriate npis on the on the payment attach.

Pretty side, there continues to be a strong desire, particularly in the M. Sio space for prepayment.

Because it does it is less provider abrasion and so and that space. We've also launched and audit a clinical claims review audit that based on the AI capabilities in our review and looking at an entire episode of care.

Where we do not need a medical records that can be done pre or post even if it's done post payments of clinical review and the medical records only required if the provider appeals. It. So there is a strong there's a strong market demand for moving as much upstream as possible.

So that a they're not chasing the dollars afterwards, and the providers are getting getting appropriate claims paid and adjusted at the time of adjudication.

Got it last question for me there.

There was a headline not too long ago about a strategic alternative review.

Can you lend any credence to that or or give any comment at all about so whether that's ongoing.

Yes, so we don't we.

We have a pretty strong policy about not commenting on rumors then reality, we as a business have always are always looking for the best alternatives for our organization, but we're not going to we're not going to comment publicly on on rumors that come out of that.

For us.

Got it okay.

I figured as much thank you very much.

Your next question comes from the line.

Steve Halper with Cantor Fitzgerald.

Hi, good.

Good morning could you just talk to that.

Impacts on operating cash flow in the quarter it looks like it declined from.

Two levels, specifically on the receivables side.

You know anything to read and read read in there.

No. The only thing I would say is we obviously, we had a big lift big jump in revenue you see even in Q3 and so you know we will be we will look to be collecting that as a as we progress I mean, we had strong very strong cash collections in the second quarter from a strong first quarter. So I'd expect to see.

Similar pattern to occur.

As we move into Q4.

Great. Thank you.

Your next question comes from the line of Daniel gross light with Citi.

Hi, guys. Thanks for taking the question here, maybe a bigger picture question for you.

Once all the noise passes with Kobe <unk>. It seems like there are some pretty big Tailwinds Digest so.

I think previously you had said that the analytic segment payment integrity, and PHN could grow kind of double digit and she'll be could grow.

Turning to mid single digits do you are you still thinking about longer term segment growth in that way and what are some of the drivers of upside and downside because some of those longer term projections.

[noise] you when they start bill Yeah, why don't you start.

Yeah.

So you know well first I'd say, yes, we will give guidance for fourq or for 2021 as we as we report our fourth quarter remarks.

What I would say is as we think about a couple of drivers obviously, adding accent into our CRB capabilities gives us more optimism about the growth potential and our CRB business on the payment integrity side. You know we grew at double digit in 2019, we had a very strong Q1.

In 2020 and payment integrity, and obviously you have had to adjust.

For the pandemic, but we clearly think that that's a double digit grower over time and then finally on P.H.M. You know we are also had impact related to our two two cobot on PPA, Tim and Weve also spent a lot of time, you know reconstructing and rebuilding a salesforce.

Really to deal with it the inherent complexities of our payment integrity product suite.

And and have seen success with that it's it's taking time as those new people have come on over the last three four quarters and are building their sales pipeline. We did see some evidence of that in Q3, as well and I would say on T.H.M. in terms of we really did see almost a halt.

Sales activity in the second quarter as the clinical leaders that we typically interact with really weren't entirely focused on the pandemic would which made sense I think as we exited the second quarter into the third quarter and it was clear that cobot was going to be around for a longer period of time I think we started to see re engagement on the sales side and actually saw that.

Saw that driving.

Driving sales. So I don't think anything has changed from our perspective, we still think we can see it will be growing over time in that mid single digit.

Perspective, and then double digit growth for <unk>, and P.H.M., and obviously, given our leverage our ability to gain leverage on that we think that bodes well for earnings and cash flow growth.

With that type of revenue growth.

Got it okay. Okay, and then on the accident business, if I'm looking at it correctly it looks like a little bit of the sequential decline. This this quarter, although pretty much flat you know as we think about the fourth quarter and heading into 2021, how should we think about the.

Ramped up sequentially over Q and no way I get that it was difficult to collect came in from providers in into Q. It but I would have expected at least some sequential increase in Threeq you. What do you think is when it had limited that in in the third quarter.

I mean some of it is is as Bill noted it was providers that were Furloughing staff or we're really focusing on a you know managing their cash flow and so I think you know we acknowledge that we are dealing with our clients to try and get those recovery.

It's not a question of if the dollars are owed it's a question of timing of collection.

And so I think we will weak and Q4 tends to be seasonally a stronger quarter for accident has been historically as well. So we would expect to see sequential growth in accent again, where we have findings and oh.

Really it's a it's a matter of timing of collections not not if we did see yeah. We did see some lower claims volume also impact accent. So as the pre pre cobot are as big as the.

Utilization levels.

Start to have increased we would expect that to drive more dollar more claims volume tied to drive revenue there as well and then into 2020, we should 2021, we should expect those.

Those cross sales to be begin to generate more revenues as well.

And expect to see good growth in accident.

We'll provide our guidance for 2021.

Got it thanks guys.

Your next question comes from the line of Charlie Strauzer with CJS.

Hi, good morning.

So bill this is a quick one for you just in terms of your questions talking about the helping states with their budgetary pressures no. You know historically some states have kept the few of the process in house have you heard or had conversations with any of these states that maybe could loosen that up and maybe.

Oh, yes.

Hello.

Look at the time outsourcing going forward.

Oh, yes. So we did this year, we did win a state that has never outsourced C O V in the past.

That was won I think maybe in Q1 or Q2, we continue to have the outbound into states that.

Don't outsourcing you'll be work.

Now some may plan to put out competitive procurements, others may not we also do some C. O V work for states that have not put out a C O V or TPL procurement through our state RAC contracts.

Of course, it's in our best interest at this point, particularly during a point where states have severe budget shortfalls to both up sell to our existing clients, which there has been significant activity in the state market.

And then look to these open states to.

To do procurements.

So we're active in that arena, but I did as I said, we did add one new state clients. This year and I will say was pretty interesting about our state government market as it continues to grow even though a percent of the lives are in managed care. So we have a lot of stickiness.

And upsells with the state with our state Medicaid clients.

Yeah.

Great. Thank you very much.

And that does conclude the question and answer portion that one now hand, the call back over to Bill.

Well. Thank you so much everyone for attending our call. We appreciate your continued interest in HMS and we look forward to talking to you at our fourth quarter full year 2020 earnings call in February Thanks, and have a wonderful weekend.

This concludes today's conference call you may now disconnect.

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