Item 1.
Business
Founded
in 1974, HMS is an industry-leading provider of cost containment solutions in the healthcare marketplace. We use healthcare data
technology, analytics and related services to deliver coordination of benefits, payment integrity, population risk intelligence,
care management and consumer engagement solutions to help payers reduce costs, improve healthcare outcomes and enhance member
experiences. We provide coordination of benefits services to government and commercial healthcare payers to ensure that the correct
party pays a claim, and payment integrity services to ensure the correct amount is paid. Our total population management solutions
provide risk-bearing organizations with reliable intelligence across their member populations to identify risks and improve patient
engagement and outcomes. Together these services help move the healthcare system forward for our customers and contribute to bending
the healthcare cost curve for the nation.
HMS
began its operations as Health Management Systems, Inc., which became our wholly owned subsidiary in March 2003 when we assumed
its business in connection with the adoption of a holding company structure. In recent years HMS has grown both organically and
through targeted acquisitions of businesses that helped expand our solution suite, including IntegriGuard, LLC (doing business
as HMS Federal) in 2009; HealthDataInsights, Inc. (“HDI”) in 2011; Essette, Inc. (“Essette”) in 2016;
and Eliza Holding Corp. (“Eliza”) in 2017. We currently operate as one business segment with a single management team
that reports to the Chief Executive Officer.
We
were originally incorporated in the State of New York in October 2002 and reincorporated in the State of Delaware in July 2013.
Our principal executive offices are located at 5615 High Point Drive, Irving, Texas 75038, and our telephone number is (214) 453-3000.
As of December 31, 2018, we had approximately 2,500 employees. Additional information about HMS is available on our website at
www.hms.com.
Copies
of our recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy
Statements, as well as amendments to these reports or statements, are available free of charge on our website through the Investor
Relations page, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. These materials,
as well as similar materials for SEC registrants, may be obtained directly from the SEC through their website at http://www.sec.gov.
The
content of any website referred to in this 2018 Form 10-K is not incorporated by reference into this filing unless expressly noted.
References to the URLs for these websites are intended to be inactive textual references only.
Our
Solutions
We
provide solutions that apply broadly across Medicaid, Medicare, commercial at-risk, and employer self-insured populations. Our
services span the payment and care continuum from an individual’s enrollment in a program before medical service is rendered,
to pre-payment review of a claim, through recovery where identification of improper payments is made via audit, and back to the
individual where our consumer-driven solutions allow health plans to manage their members on a personal level, and at scale, by
using actionable analytics that drive patients to take action to improve health outcomes. Our coordination of benefits and payment
integrity services ensure payment accuracy by addressing a wide spectrum of payment errors, including eligibility and coordination
of benefits errors, the identification and investigation of potential fraud, and the review of claims on a pre-payment and post-payment
basis. Our total population management services assist customers in managing quality, risk, cost and compliance across all lines
of business by engaging members, providing the tools to manage their care, and identifying existing or emerging health risk among
members. As a result of these services, our customers saved billions of dollars in 2018 through the prevention of erroneous payments,
improved clinical outcomes for their members, and reduced enrollment turnover; and they received billions more in cash recoveries
for improperly paid claims.
Our
comprehensive solutions offer value throughout the healthcare continuum and include the following:
Coordination
of Benefits (COB)
Our
COB services are provided primarily for state governments and Medicaid managed care plans, pursuant to Federal law which mandates
that Medicaid is the payer of last resort, and draw principally upon proprietary information management and data mining techniques
designed to ensure the correct party pays a healthcare claim. We offer cost avoidance services, which include providing validated
insurance coverage information that is used by payers to coordinate benefits properly for future claims. With validated insurance
information, Medicaid payers can avoid unnecessary costs by ensuring they pay only after all other insurance coverage available
has been exhausted. Nevertheless, due to a variety of factors, many Medicaid claims are paid even when there is a known responsible
third party. Our customers rely on us to identify Medicaid eligibility, before a claim is submitted, and retrospectively, for
those claims that were paid in error, and then recover these payments from the liable third party. We also provide services to
assist customers in identifying other third-party insurance and recovering medical expenses where a member is involved in a casualty
or tort incident. Lastly, for Medicaid agencies exclusively, we provide estate recovery services to identify and recover Medicaid
expenditures from the estates of deceased Medicaid members in accordance with state policies. For the years ended December 31,
2018, 2017 and 2016, our COB services represented 66.4%, 73.4% and 72.2% of our total revenue, respectively.
Analytical
services
Analytical
services consists of our payment integrity and total population management solutions.
Payment
Integrity (PI)
Our
PI services ensure healthcare payments are accurate and appropriate. These services are applicable to all customers HMS
serves, including federal and state governments, commercial health plans and other at-risk or self-insured entities. Our solutions
verify that healthcare services are utilized, billed and paid appropriately. We combine data analytics, clinical expertise and
proprietary algorithms and technology to identify and prevent improper payments on submitted claims to optimize savings before
a claim is even paid, and on a post-payment basis, to identify and recover overpayments and correct underpayments; detect and
prevent fraud, waste and abuse; and identify process improvements. For the years ended December 31, 2018, 2017 and 2016, our PI
services represented 24.1%, 20.0% and 27.6% of our total revenue, respectively.
Total
Population Management (TPM)
Our
TPM services consist of population risk analytics, consumer engagement and care management solutions, which are the result of
internal product development and our acquisitions of Essette in 2016 and Eliza in 2017. These solutions help customers better
manage quality, cost, compliance and patient outcomes and improve their members’ experience. The services span across the
care continuum. Our flexible, scalable architecture and modular platform integrates early risk identification, advanced analytics,
multi-channel outreach, social engagement and care management components to address our customers’ increased focus on consumer
engagement, performance management and program design—all key components of an effective population health management program.
Our Elli, Eliza and Essette solutions leverage HMS data and advanced analytics to support population risk management, member engagement
and care management, respectively, and provide customers with a tailored, integrated platform that addresses core healthcare industry
challenges on an enterprise scale. For the years ended December 31, 2018, 2017 and 2016, our TPM services represented 9.5%, 6.6%
and 0.2%, of our total revenue, respectively.
Intellectual
Property
Our
ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights
of others is important to our business and competitive position. We establish and protect our proprietary technology and intellectual
property through a combination of patents, patent applications, trademarks, copyrights, domain names and trade secrets, as well
as through contractual rights, including confidentiality, non-disclosure and invention assignment agreements, and other security
measures.
As
of December 31, 2018, our patent portfolio is comprised of approximately 60 domestic and international patents, and we are currently
pursuing several patent applications in the United States and around the world. Our principal trademarks are HMS
®
,
and the corresponding HMS + logo design mark, HMS IntegritySource
®
, Eliza
®
, Essette
®
,
and Elli
®
. We also hold copyrights relating to certain aspects of our solutions and services. While we consider
all of our intellectual and proprietary rights important to HMS, we believe our business as a whole is not materially dependent
on any particular patent, trademark, license or other intellectual property right.
Customers
We
provide our solutions to customers across a broad range of entities within the healthcare industry, including health plans, state
agencies, federal programs, private employers and other risk-bearing healthcare organizations. For the years ended December 31,
2018, 2017 and 2016, our total revenue was $598.3 million, $521.2 million and $489.7 million, respectively. No single customer
accounted for 10% or more of our total revenue during any period presented.
The
composition of our 10 largest customers changes periodically. For the years ended December 31, 2018, 2017 and 2016, our 10
largest customers represented 41.4%, 39.5% and 40.6% of our total revenue, respectively. We provide services under contracts (or
subcontracts) that contain various revenue structures, including contingent revenue and to a lesser extent fixed-fee arrangements.
The current terms of many of our federal and state government contracts range from one to five years, including renewal terms
at the option of the customer. In many instances, we provide our services pursuant to agreements that are subject to periodic
reprocurements. Several of our contracts, including those with some of our largest customers, may be terminated for convenience,
in whole or in part, by the customer. Because we provide our services pursuant to agreements that are open to competition from
various businesses in the U.S. healthcare arena, we cannot provide assurance that our contracts, including those with our largest
customers, will not be terminated for convenience or awarded to other parties. Additionally, we cannot provide assurance that
any contracts that are renewed will have the same fee structures as the expiring contracts or otherwise be on satisfactory terms.
The early termination of key contracts with significant customers, or the inability to renew such contracts on favorable terms
or at all, may have an adverse effect on our financial condition, results of operations and cash flows.
In
providing solutions and services to our customers, we rely heavily upon our technology systems and networks, as well as on those
of third-party providers, to process, transmit, maintain, store and host the confidential, proprietary and sensitive information
and data we receive from our customers and other data suppliers, including private insurance plans and financial institutions.
The secure processing and maintenance of this information is critical to our operations and business strategy. Although we have
spent significant resources to implement security and privacy programs and controls, train our workforce and augment our security
measures with the implementation of new technologies and processes, our information technology and infrastructure, and those of
third parties on which we rely could continue to be potentially subject to various forms of cyber-attacks, as further discussed
under the heading “Part I, Item 1A. Risk Factors.”
Healthcare
Landscape
The
market for cost containment solutions is large and growing, driven by increasing healthcare costs, rising program enrollment and
payment complexities. Established in 1965 under the Social Security Act, Medicaid provides health insurance and long-term care
services and support to low-income families and individuals with disabilities in the United States. Medicaid is funded jointly
by the federal and state governments and administered by the states. The Balanced Budget Act of 1997 created CHIP to help states
expand coverage primarily to children whose families earned too much to qualify for Medicaid, yet not enough to afford private
health insurance. Medicare is a federal program that is administered by CMS, and provides eligible persons age 65 and over and
some disabled persons with a variety of hospital, medical insurance and prescription drug benefits. All three of these programs
have opted to contract with managed care organizations in whole or in part as a means of delivering quality healthcare to program
beneficiaries and controlling costs.
By
law, Medicaid programs serve as the payer of last resort and all other sources of coverage must pay for medical costs incurred
by a Medicaid-eligible individual. The TPL rules of the Medicaid statute require, among other things, that states take reasonable
measures to identify potentially liable third parties and process claims accordingly. Since 1985, we have provided state Medicaid
agencies with services to identify third parties with primary liability for paying claims for Medicaid members, and since 2005,
we have provided similar services to Medicaid managed care plans.
The
Deficit Reduction Act enacted by Congress in 2006 contained provisions to strengthen the TPL rules and created the Medicaid Integrity
Program under the Social Security Act to increase the government’s capacity to prevent, detect and address fraud, waste
and abuse in the Medicaid program. Later that year, Congress passed the Tax Relief and Health Care Act of 2006, which established
the Medicare RAC program. These measures, at both the federal and state level, have strengthened our ability to identify and recover
erroneous payments on behalf of our customers. We also serve as a Medicaid RAC to certain states pursuant to provisions of the
ACA and became the Medicare RAC for Region D with our acquisition of HDI. We again were awarded a region under the new Medicare
RAC contracts in October 2016. Following the implementation of the new Medicare RAC contracts and completion of contract closeout
activities for RAC Region D, our original Medicare RAC contract expired on January 31, 2018.
The
ACA, generally referred to as Obamacare, was signed into law in 2010 and has made broad-based changes to the U.S. healthcare system,
including many provisions impacting healthcare delivery and payment programs, such as employer-sponsored health coverage, Medicaid,
Health Insurance Exchanges with premium subsidies and payment integrity efforts. The ACA also further expanded the recovery audit
contractor program to states. CMS and various states have proposed Medicaid program design alternatives and changes to enrollment
criteria which could impact future Medicaid enrollment. As ACA-related changes develop or are enacted, we will assess their potential
impact, including opportunities they may present for our customers and for us.
Industry
Trends and Opportunities
U.S.
healthcare expenditures continue to escalate and consume an increasingly larger proportion of the U.S. GDP, presenting challenges
for payers who wish to contain costs and promote quality healthcare outcomes. For 2019, Medicare and Medicaid are projected to
pay approximately 37.9% of the nation’s healthcare expenditures and serve over 136.3 million beneficiaries. Many of these
beneficiaries are enrolled in managed care plans, which have the responsibility for both patient care and claims adjudication.
The dual aims of cost containment and quality healthcare outcomes are the same across all at-risk entities, including commercial
health plans and government healthcare programs, such as Medicaid and Medicare.
Within
the commercial market, health plans sell policies directly to individuals (on the open market or via health insurance exchanges),
contract with employers to underwrite their employees’ care, or contract with self-insured employers to oversee benefit
administration for their employees. This market also includes a growing number of risk bearing provider-sponsored plans that operate
and market health plan benefits. According to CMS NHE projections, private health insurance covered approximately 197.5 million
individuals at a cost of approximately $1.24 trillion in 2018.
Several
commercial health plans also offer government-sponsored lines of business, including partnering with Medicare, Medicaid and CHIP
to oversee care delivery for beneficiaries enrolled in those programs. States continue to focus on improving value, quality and
outcomes through arrangements with MCOs. At the end of state fiscal year 2018, 47 states and the District of Columbia operated
with some form of managed care, and Alaska reported plans to implement a managed care program in 2019. Comprehensive risk-based
managed care continues to be the predominant delivery system for Medicaid services in the US. Among the 39 Medicaid programs with
comprehensive risk-based MCOs, 33 reported that 75% or more of their Medicaid beneficiaries were enrolled in MCOs as of July 1,
2018. Of the 32 states that had implemented Medicaid expansion pursuant to the ACA, 27 were using MCOs to cover newly eligible
adults as of July 1, 2018. Managed care health plans also continue to assume risk for a growing number of Medicare lives. Approximately
34% of all Medicare beneficiaries, or 20 million lives, were enrolled in Medicare Advantage plans in 2018.
HMS
continues to serve government agency fee-for-service programs at the state and federal level. These plans are generally reliant
on and susceptible to the government appropriations process that determines their budget and governs the number of beneficiaries
they serve. According to the CMS NHE projections, Medicare programs in 2018 covered approximately 59 million people at a cost
of approximately $748 billion and Medicaid/CHIP covered approximately 81.2 million people, costing approximately $641 billion.
Altogether, it is projected that the government programs we serve covered approximately 140.2 million people at a total cost of
nearly $1.39 trillion in 2018.
CMS
projects that Medicare enrollment growth will increase by 3.03% in 2019, with expenditures to increase by 7.95% in 2019 compared
to 2018; and Medicaid/CHIP enrollment growth will increase by 1.97% in 2019, with expenditures to increase by 5.5% in 2019 compared
to 2018. As commercial and government health plans focus on strategies to contain costs across their different lines of business,
HMS will continue offering solutions to meet their evolving needs.
Competitors
The
U.S. healthcare marketplace is a dynamic industry with a range of businesses currently offering cost containment services, both
directly or indirectly (through subcontracting), to some or all of the various healthcare payers, providers, employers and consumers.
In addition, with improvements in technology and the growth in healthcare spending, new businesses are incentivized to enter this
marketplace. Many customers also have the ability to perform some or all of the needed cost containment services themselves and
choose to exercise that option to varying degrees. Therefore, competition is robust as customers have many alternatives available
to them in their effort to contain healthcare costs.
We
compete based on a variety of factors, including our ability to provide a broad range of solutions that span the entire healthcare
claims payment and services continuum. These include payment accuracy solutions focused on COB and PI related functions, as well
as TPM solutions which support the ability of payers to better understand and engage consumers, perform effective outreach, and
impact both costs and health outcomes.
We
have a proven record of delivering results that optimize savings and recoveries, enabled by:
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in-depth
government and commercial healthcare program experience;
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clinical
staff expertise;
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expansive
data resources;
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an
extensive insurance eligibility database;
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extensive
relationships with customers and other industry stakeholders; and
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an
ability to provide customers with actionable intelligence to improve clinical outcomes,
optimize patient engagement, and better manage costs.
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Our
competitors range in size from large, diversified national companies, to small, specialized firms. Some of these competitors have
significantly greater financial and technical resources, and others have longer operating histories and greater name recognition
than we do in certain markets. Within our payment accuracy portfolio of products and services, we compete primarily with large
business outsourcing and technology firms, claims processors and PBMs, clearinghouses, healthcare consulting firms, and other
vendors who provide some or all of these solutions to payers. In addition, we frequently work with customers who may elect to
perform some or all of their cost avoidance and recovery functions in-house. Within the population health management sector, we
compete primarily with vendors who provide care management, consumer engagement, and related technology services. Companies with
whom we compete across our offerings include:
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Accenture plc
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CaseNet LLC
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Change Healthcare
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Cotiviti Corporation
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DXC Technology Company
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Equian, LLC
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EXL Service Holdings, Inc.
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Experian Health
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IBM Watson Health
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LexisNexis
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MedHok, Inc.
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Optum (subsidiary of UnitedHealthGroup)
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Performant Financial Corporation
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Welltok, Inc.
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ZeOmega LLC
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Business
Strategy
We
believe that the steadily increasing enrollment and rising expenditures for Medicare and Medicaid, with most new enrollees entering
managed care plans; an aging U.S. population with an increasing concentration of individuals with high cost chronic conditions
and often co-morbidities; and the overall complexity of the healthcare claims payment system in the U.S. all combine to create
substantial growth opportunities for the suite of cost containment solutions we offer.
We
also believe these factors present growth opportunities for our TPM services. We are focused on growing our business over the
course of 2019 and beyond, both organically and inorganically, by leveraging existing key assets (e.g., our data, analytics, in-house
expertise, and distribution channel) and pursuing a number of strategic objectives or initiatives, including:
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Expanding
the scope of our relationship with existing customers
–
by selling additional
solutions and services, including those designed to improve member engagement and improve
clinical outcomes.
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Adding
new customers
–
by marketing
to commercial health plans, including Medicaid managed care and Medicare Advantage plans,
at-risk group and individual health lines of business and ASOs; government healthcare
payers, including Medicaid agencies, state employee health benefit plans and CHIPs; at-risk
provider organizations and ACOs; and commercial self-insured employers.
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Introducing
new innovative solutions and services
–
through internal development initiatives designed to enhance or expand our existing suite
of cost containment solutions.
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Utilizing
technology tools to leverage a big data environment
–
to create a more nimble operating environment, create operating efficiencies, improve
the yield on our existing solution suite and identify new revenue opportunities within
our current service delivery models.
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Promoting
automation and innovation to improve the efficiency and effectiveness of our services
–
by continuing to implement new technology and process improvements designed to increase
recovery yields, increase customer satisfaction and achieve greater operating efficiencies.
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Prudent
deployment of capital
–
by investing in internal growth initiatives; selectively investing in capabilities, technologies,
and assets to complement our core cost-containment expertise; building care management
and care coordination adjacencies to complement the Essette and Eliza acquisitions and
our internally developed Elli risk intelligence product; and expanding our data analytics
capabilities. Our focus may include acquisitions that represent long-term growth potential,
target high-growth areas, are accretive to earnings, enhance our technological capabilities
and fill a strategic need in our business portfolio as we seek to provide increasingly
comprehensive solutions to our customers. We may also repurchase our shares, pursuant
to a two-year $50 million authority granted by our Board of Directors in November 2017,
which has a remaining unused authority of approximately $29.9 million.
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Item 1A.
Risk Factors
Our
business is subject to significant risks, including the risks and uncertainties described below. You should carefully consider
these risks, as well as the other information in this 2018 Form 10-K, including our Consolidated Financial Statements and the
related Notes. The occurrence of any of these risks could adversely affect our business, financial condition, results of operations,
and cash flows in a material way.
Risks
Relating to Our Company
Our
ability to expand our business will be adversely affected if we fail to implement our growth strategy.
The
size and scope of our business operations have expanded over the past several years, and we currently intend to continue our growth
and expansion into new healthcare areas and markets, however, our growth and expansion strategy carries costs and risks that,
if not properly managed, could adversely affect our business. Our future growth will depend on, among other things, our ability
to successfully execute our business plans, which includes penetrating new markets, broadening and deepening our customer relationships,
identifying and executing future acquisitions and strategic partnerships, and increasing the speed and scale at which we deliver
our services, all while remaining competitive. We must also be flexible and responsive to customers’ needs and changes in
the political, economic and regulatory environment in which we operate. The greater size and complexity of our expanding business
may put additional strain on our administrative, operational and financial resources and can make optimal resource allocation
more difficult to determine. It is possible that we may not be able to maintain or accelerate our growth. A failure to anticipate
or properly address the demands and challenges that our growth strategy and potential diversification may have on our resources
and existing infrastructure may result in unanticipated costs and inefficiencies that could negatively impact our ability to execute
on our business plans and growth goals, which may have a material adverse effect on our business, financial condition, results
of operations and cash flows.
If
we fail to innovate and develop new or enhanced solutions and services, or if these solutions and services are not adopted by
our customers, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Part
of our growth strategy depends on our ability to respond to the evolving healthcare landscape with new and enhanced solutions
and services that our existing and potential customers are willing to adopt. The development, marketing and implementation of
these solutions and services may require that we make substantial financial and resource investments. We face risks that our new
or modified solutions and services may not be responsive to customer preferences or industry changes, and that the solution and
service development initiatives that we prioritize may not yield the gains that we anticipate, if any. If we are unable to predict
market preferences or healthcare industry changes, or if we are unable to develop or adapt solutions and services that are responsive
to existing and potential customers’ needs, we may fail to expand our business, which could constrain our future revenue
growth and materially adversely affect our business, financial condition, results of operations and cash flows.
Our
acquisition strategy may subject us to considerable business and financial risk.
Historically,
to achieve our strategic goals, we have made a significant number of acquisitions that have expanded the solutions and services
we offer, provided a presence in complementary business lines, or expanded our geographic presence and/or customer base. We intend
to pursue future acquisitions that will continue to expand and complement our business and to periodically engage in discussions
regarding such possible acquisitions. We are subject to risks and uncertainties relating to our ability to identify suitable potential
acquisition candidates, to consummate additional acquisitions that will be advantageous to us, and to successfully integrate future
acquisitions. Future and potential business acquisitions involve a number of risk factors that could affect our operations, including,
but not limited to:
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diversion
of management’s attention and other resources;
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our
ability to successfully and timely integrate operational, accounting and technology functions,
policies, processes, systems and controls, and to implement these functions, policies,
processes, systems and controls, without incurring substantial expenses, delays, difficulties
or other issues;
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our
ability to integrate personnel and human resource systems as well as the cultures of
the acquired business;
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our
ability to retain or replace the key personnel of the acquired business;
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our
ability to maintain relationships with the customers of the acquired business;
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our
ability to expand and further develop the acquired business;
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our
ability to cross-sell our solutions and the solutions of the acquired business to our
respective customers;
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customer
dissatisfaction or performance problems with the acquired business;
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our
ability to comply with regulatory requirements and avoid potential conflicts of interest
in markets that we serve;
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the
misuse of intellectual property by the personnel of the acquired business;
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our
ability to successfully enter into unfamiliar markets or manage new business lines;
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assumption
of unanticipated legal or financial liabilities and/or negative publicity related to
prior acts by the acquired business;
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we
may become subject to litigation or other claims in connection with the acquired business,
including claims from terminated employees, customers, former shareholders or third parties;
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we
may become significantly leveraged as a result of incurring debt to finance an acquisition;
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the
acquired business may not perform as projected which could negatively impact earnings
or contingent consideration;
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we
may suffer impairment of goodwill and other acquired intangible assets; and
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we
may suffer dilution to our earnings per share.
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If
we fail to adequately address these risks, or to successfully integrate the businesses that we acquire, we may not realize cost
efficiencies, synergies or other benefits that we anticipated when selecting our acquisition candidates, and our reputation, business,
financial condition, results of operations and cash flows could be materially adversely affected.
We
face significant competition for our solutions and services and we expect competition to increase, which could materially adversely
affect our business, financial condition, results of operations and cash flows.
The
market for healthcare cost containment solutions is intensely competitive, driven by rapidly changing technologies, evolving industry
standards and customer demands to become more efficient. Our competitors range in size from large, diversified national companies
(some of which have emerged as a result of industry consolidation), to small, specialized firms. Some of our competitors may include
current or former subcontractors or teaming partners seeking to establish direct relationships with our customers and provide
similar services as the prime contractor, as well as current and prospective customers that elect to perform recovery and cost
avoidance functions in-house or to develop in-house capacities for solutions and services that we provide or seek to provide.
Consolidation among vendors and healthcare providers, as well as the merging of some of our competitors or formation of business
alliances with other competitors, have contributed to the increasingly competitive environment. For example, certain state customers
have combined or “bundled” TPL services under large-scale IT procurements, as they shift to implementing modular Medicaid
Enterprise Systems. As part of this modular approach, they may select a new or less experienced vendor to provide the TPL module
based on preferred relationships or favorable pricing. In addition, companies that have invested in proprietary technology different
from our own service offerings, such as front-end analytics, have emerged as new competitors due to the rapidly evolving healthcare
landscape. There is also increasing sophistication in the solutions and services that our competitors are developing that may
become more efficient or appealing to our customers. In order to remain competitive, we may need to quickly develop and market
new and enhanced solutions and services responsive to emerging technologies and changes in the healthcare industry, which may
require that we make substantial financial and resource investments.
We
may not be able to compete successfully against our existing or future competitors. Some of these competitors have significantly
greater financial and technical resources, and others have longer operating histories and greater name recognition than we do
in certain markets. They may be able to (i) offer lower prices or negotiate fee reductions on our current solutions and services,
(ii) respond more quickly than we can to new and emerging technologies and changing customer requirements, (iii) devote greater
resources to the sale of their products and the development and implementation of new and improved systems, solutions and services
for customers that we serve, and (iv) pursue various acquisitions that allow them to rapidly amass a wide array of capabilities.
We may be forced to lower our pricing, unexpectedly increase or enhance our technological or data capabilities, or modify our
solution or service offerings. Notwithstanding any changes we make in response to increased competition, the demand for our solutions
and services may decrease as a result of increased competition. A failure to be responsive to our existing and potential customers’
needs or the changing industry landscape could hinder our ability to maintain or expand our customer base, hire and retain new
employees, pursue new business opportunities, complete future acquisitions and operate our business effectively. Any inability
to compete effectively could materially adversely affect our business, financial condition, results of operations and cash flows.
You
will not be able to rely on our operating results in any particular period as an indication of our future performance because
they are subject to significant fluctuation which may cause the market price of our common stock to decrease significantly.
Our
revenue and operating results may fail to match our past or projected performance and could vary significantly from period-to-period
as a result of a number of factors, some of which are outside of our control. We have experienced fluctuations in our revenue
and operating results in the past and they may vary in the future for reasons that include, but are not limited to:
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fluctuations
in sales activity given our sales cycle;
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the
length of contract and implementation periods;
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the
commencement, completion or termination of contracts during any particular quarter;
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contract
costs and expenses, which may be incurred in periods prior to revenue being recognized;
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the
timing of period revenue recovery projects and third party payers’ claim adjudication;
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the
billing and budgeting cycles of our customers;
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the
timing of government procurement activities, including when contract awards are announced
and the time required to resolve bid protests;
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contract
renewal discussions, which may result in delayed payments for services already performed;
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changes
in the pricing structure or other significant terms in our contract, or the scope of
services we perform;
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technological
and operational issues affecting our customers, including delays in payment receipt for
previously recognized revenue due to certain customers delayed processing of our findings
through their systems, and restrictions on our ability to use or access certain data
or a lack of integrity or quality in the data or information we receive from certain
data sources;
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adjustments
to age/quality of receivables and accruals as a result of factors such as delays involving
contract limitations or changes, subcontractor performance deficiencies or managerial
decisions not to pursue identified claim revenue from customers;
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the
impact of service disruptions or delays in the systems or operations of subcontractors,
partners, vendors and other third party providers on which we rely on to deliver a single-source
solution or service to our customers;
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changes
in applicable laws;
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changes
in accounting policies or guidelines concerning the timing of recognition of revenue;
and
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regulatory
changes or general economic conditions as they affect healthcare providers and payers.
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We
cannot predict the extent to which future variations could occur due to these or other factors. In addition, occasionally our
state and federal customers are requested by third party payers to refund payments that we previously recovered for our customers.
If our state and federal customers choose to refund money in response to these requests, regardless of whether an error actually
occurred in connection with the payments, we may also be required to return contingent revenue which we were previously paid associated
with such refunded payment. Consequently, our operating results are subject to significant fluctuation for any particular quarter,
fiscal year, or other period, and may not be indicative of future periods. Our business is also subject to seasonal patterns resulting
from increased efforts at year-end by certain customers to generate additional savings, complete compliance obligations and close
gaps in care. However, taken as a whole, we do not consider our operations to be seasonal to any material degree. Due to all of
these factors, our revenue and operating results are difficult to predict and are subject to significant fluctuation, which may
cause the market price of our common stock to decrease significantly.
We
face challenges associated with forecasting the revenue under our contracts, and any failure to accurately forecast such revenue
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We
may not be able to accurately estimate the factors upon which we base our contract pricing, or the costs and timing for implementing
and completing our contracts. For a majority of our customer contracts, the payment of our fee is contingent upon the recoveries
received by our customers. We also have cost-plus or time-and-materials based contracts with the federal government where our
revenue is recognized based on costs incurred plus an estimate of the negotiated fee earned. Our ability to earn a profit on these
contracts requires that we accurately estimate the costs involved with these contracts and assess the probability of achieving
certain outcomes or milestones within the contracted time period. In addition, we cannot predict with certainty the costs or the
period in which implementation or contracts may be completed when we introduce new solutions into the marketplace. For our coordination
of benefits and payment integrity services, we may face a long implementation period with a new customer or a new contract with
an existing customer, making it difficult to reliably forecast revenue under those contracts. If we do not accurately estimate
the costs and timing for completing projects, or if we encounter increased or unexpected costs, delays, failures, liabilities
or risks, including those outside of our control, our contracts could prove unprofitable for us or yield lower profit margins
than anticipated. Although we believe that we have recorded adequate provisions in our financial statements for losses on our
fixed price and cost-plus contracts where applicable, as required under U.S. GAAP, our contract loss provisions may not be adequate
to cover all actual future losses.
System
interruptions or failures could expose us to liability and harm our business.
Our
data and operation centers are essential to our business and our operations depend on our ability to maintain and protect our
information systems. We attempt to mitigate the potential adverse effects of a disruption, relocation or change in operating environment;
however, the situations we plan for and the amount of insurance coverage that we maintain may not be adequate in every case. Despite
systems redundancy and security measures, our systems and operations are vulnerable to damage or interruption from, among other
sources:
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power
loss, transmission cable cuts and telecommunications failures;
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fire,
flood, earthquake and other natural disasters;
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hardware
failures or software defects;
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cyber
security breaches; and
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physical
break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events
beyond our control.
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In
addition, while there are backup systems in many of our facilities, an extended outage of utility or network services supplied
by third party IT vendors may delay or disrupt the delivery or performance of the services we provide for our customers. We also
utilize third-party cloud service providers to help us efficiently scale certain cloud-based solutions. If we or our cloud service
providers encounter a lengthy business interruption, or in the event our business continuity plans and business interruption insurance
coverage are not adequate or fail to compensate us on a timely basis, we could suffer operational disruptions, disputes with customers,
civil or criminal penalties, regulatory problems, increases in administrative expenses, loss of our ability to produce timely
and accurate financial and other reports, damage to our reputation or customer relationships or other adverse consequences, any
of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our
systems and networks and those of third parties on which we rely may be subject to cyber security breaches and other disruptions
that could compromise our information and harm our business.
In
the ordinary course of our business, we rely heavily upon our technology systems and networks, as well as on those of third-party
providers, to process, transmit, maintain, store and host the confidential, proprietary and sensitive information and data we
receive from our customers and other data suppliers, including private insurance plans and financial institutions. In addition,
subcontractors, teaming partners or other third-party vendors may receive or utilize this information on our behalf in support
of the services we perform for our customers. The secure processing and maintenance of this information is critical to our operations
and business strategy. Although we have spent significant resources to implement security and privacy programs and controls, train
our workforce and augment our security measures with the implementation of new technologies and processes, our information technology
and infrastructure, and those of third parties on which we rely, could continue to be subject to computer hacking or phishing
efforts, acts of vandalism or theft, introduction of malware, computer viruses or other malicious codes, employee error or malfeasance
issues, catastrophes, unforeseen events or other cyber-attacks. We may be unable to implement adequate preventive measures to
protect against such compromises in the future or to effectively adapt our security measures to evolving security risks. As a
result, our technology systems, including our data and our customers’ data, could be accessed improperly, made unavailable,
improperly modified, corrupted or otherwise breached or compromised, or we could suffer system disruptions, shutdowns and denials
of service. Similarly, we could be materially adversely affected by the loss of proprietary, trade secret or confidential technical
and financial data if our internal networks are compromised. The occurrence of any of these events could harm the market perception
of the effectiveness of our security measures, lead to reputational damage or the loss of our customers’ confidence in our
solutions, negatively affect our ability to attract new customers, cause existing customers to terminate or not renew their existing
contracts with us, or deter them from using our solutions or services in the future, all of which could reduce our revenue, increase
our expenses and expose us to potential liability under privacy, security or other applicable laws and regulations. We could also
be forced to expend significant resources in response to a security breach, including investigating the cause of the breach, repairing
system damage, remediating vulnerabilities in our security procedures, increasing cyber security protection costs by deploying
additional personnel and protection technologies, paying regulatory fines and penalties imposed by government regulatory agencies,
and damages and other substantial costs associated with litigation, indemnification obligations as well as increased cybersecurity
insurance premiums, and undertaking additional remediation efforts such as credit monitoring, all of which could increase our
expenses, divert the attention of our management and key personnel away from our business operations and materially adversely
affect our business, financial condition, results of operations and cash flows.
Any
failure to maintain effective information processing systems and the integrity of the data in, and operations of, those systems
could materially adversely affect our business, financial condition, results of operations and cash flows.
Our
ability to conduct our operations and accurately report our financial results depends on the integrity of the data in our information
systems and the processes performed by those systems. As a result of the services we provide, we process a number of complex transactions
that require us to access, store, retrieve, manipulate, manage and transmit the information and data of our customers’ and
external third parties, as well as our own data. Although we have invested a great deal of time and resources in developing systems,
processes and controls that protect the integrity of the data, such measures cannot provide absolute security. It is possible
that failures or errors in hardware and software, including those in third-party technology, or technical deficiencies in our
systems could result in data loss or corruption, or cause the data that we collect, utilize or disseminate to be incomplete or
contain inaccuracies that our customers regard as significant. In addition, these information systems and applications require
continual maintenance, upgrading and enhancement to meet our operational needs, satisfy customer requests and handle our expansion
and growth. Despite our testing and quality control measures, we cannot be certain that errors or system deficiencies will be
found and that remediation can be done in a timeframe that is acceptable to our customers, or that customer relationships will
not be impaired by the occurrence of errors or the need for remediation. In addition, implementation of upgrades and enhancements
may cost more, take longer or require more testing than originally expected. Situations may also arise in which the accuracy of
our data analysis or the content and quality of our work product is central to the disposition of claims, controversies or litigation
between our customers and third parties that would require us to allocate significant resources to fulfilling our contractual
obligations to provide our customers with full and complete access to records, analysis and back-up documentation of our work.
Assuring our capacity to fulfill these obligations as well as actually fulfilling them could impose significant burdens on our
infrastructure for data storage, maintenance and processing, and require us to incur increased costs to supplement our personnel,
data storage and computing resources, which could materially and negatively impact other business operations.
If
we are unable to protect our proprietary technology, information, processes, know-how, and other intellectual property and intellectual
property rights, or become subject to claims of infringing or misappropriating the intellectual property of third parties, the
value of our solutions and services may be diminished and our business may be materially adversely affected.
Our
success as a company depends in part upon our ability to protect our core technology and intellectual property. Our expanding
operations and efforts to develop new solutions and services also make protection of our intellectual property more critical.
We seek to protect our intellectual property and other proprietary information through a combination of patent, trademark, copyright,
trade secret and unfair competition laws, confidentiality agreements and invention assignment agreements with employees, consultants
and other third parties, as well as through the terms of our agreements with customers and vendors, and other security measures.
However, the steps we have taken to deter misappropriation of intellectual property may be insufficient to protect our proprietary
information. We may not always be successful at obtaining government registrations for our patents, trademarks, or copyrights
that we seek to register. Third parties may also attempt to misuse our company name or trademarks to engage in improper or illegal
conduct such as cyber-squatting or other cybercrimes using our marks, and we may not always be successful at quickly obtaining
relief from agencies tasked with enforcing parties’ rights, or stopping such conduct before harm to third parties occurs.
Similarly, misappropriation of our other intellectual property by third parties, or any disclosure or dissemination of our confidential
and proprietary trade secrets, business intelligence, queries, algorithms and other similar information by any means, could undermine
any competitive advantage we currently derive or may derive from that intellectual property. For example, our current or former
employees, consultants or other third parties may unintentionally or willfully disclose our trade secrets, know-how or other confidential
and proprietary information to competitors. Competitors have also attempted to use state and/or federal open records laws (such
as the federal Freedom of Information Act and analogous state laws) to obtain our proposal responses and other documents we provide
to our government customers. We cannot be certain that our efforts to protect the confidential and proprietary trade secret information
or intellectual property in these proposals or other documents will always be successful, due to the many factors underlying the
various state and federal decisions to release information in response to open records requests (even in spite of our objections
and efforts to protect such information). In addition, there remains the possibility that others will independently develop competing
technologies that may be equivalent or superior to ours. If our efforts to protect our intellectual property and other proprietary
rights are inadequate to prevent unauthorized use or appropriation by third parties or our employees, the value of our brand and
other intangible assets may be diminished and others may be able to more effectively compete with our business by offering solutions
or concepts that are substantially similar to ours, which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
In
addition, third parties may claim that we are infringing upon or misappropriating their intellectual property, or assert other
legal challenges to our intellectual property. Our exposure to risks related to the use of intellectual property may also increase
as a result of acquisitions because third parties may make infringement and similar or related claims after we have acquired technology.
Any of these situations could cause us to expend significant time and resources and to incur substantial costs associated with
litigation or legal proceedings that may be necessary to defend ourselves or to enforce our intellectual property rights, in which
we may not ultimately prevail, and could result in our being prevented from furnishing certain solutions and services.
Our
business could be materially adversely affected if we fail to maintain a high level of customer retention, if our customers elect
to reduce the scope of our contracts or terminate them before their scheduled expiration dates or if we fail to meet performance
standards under our customer contracts.
We
historically have derived and expect to continue to generate a significant portion of our revenue from a limited number of large
customers at the federal and state level. Our contracts with these customers are subject to periodic renewal and some permit them
to terminate their contracts on short notice, with or without cause. If a customer is dissatisfied with the quality of our work
or if we fail to meet performance standards under our contracts, or if our solutions, technical infrastructure or services do
not comply with the provisions of our contractual agreements or applicable regulatory requirements, customers might seek to reduce
the scope of the services we perform or prematurely terminate their agreements with us, or we could incur additional costs that
may impair the profitability of a contract and damage our ability to obtain additional work from that customer, or other current
or prospective customers. For example, some of our contracts contain liquidated damages provisions and financial penalties related
to performance failures, which if triggered, could materially adversely affect our reputation, business, financial condition,
results of operations and cash flows. We also may be required to disclose such liquidated damages or other financial penalties
assessed against us in connection with future bids for services with other customers.
In
addition, government customers are subject to financial pressures or pressure from stakeholders that may cause them to terminate
contracts for our services that may be regarded as non-essential or to redefine or reduce the scope of our contracts by, for example,
significantly reducing the volume of data that we are permitted to audit or renewing the contract at lower performance fee levels.
Despite our right to prompt and full payment under the terms of our contracts, we could face challenges in obtaining timely or
full payments for our properly provided services from our customers. If there is a substantial reduction in the scope of our services
under, or a termination of, any of our key contracts with our major customers, or if we are exposed to significant costs, liabilities
or negative publicity, our ability to compete for new contracts with current or prospective customer could be damaged and our
business, financial condition, reputation, results of operations and cash flows could be materially adversely affected.
We
depend on many different entities to supply information and an inability to successfully manage our relationships with a number
of these suppliers may harm the quality and availability of our solutions and services.
We
obtain the data used in our solutions and services from many sources, including commercial health insurance plans, financial institutions,
managed care organizations, government entities and non-government entities. From time to time, challenges arise in managing and
maintaining our relationships with data sources that are not our customers and that furnish information to us pursuant to a combination
of voluntary cooperation and legal obligations under laws and regulations that are often subject to differing interpretations.
If a number of our information sources become unable or unwilling to provide us with certain data under terms and conditions of
receipt, processing or use that are acceptable to us and our customers, or if laws and regulations for use and protection of this
data changes in a way that disincentivizes our suppliers, or imposes unacceptable or unreasonable conditions, costs, or risks
on us, we may not be able to obtain new or favorable agreements with alternative data suppliers. In addition, our ability to normalize
and fully utilize the information we receive from various data sources to enhance and improve current services for our customers
is an important component of our growth strategy. Although we believe that we have the legal and contractual rights necessary
to normalize and use the data we have obtained from these sources for potential or contemplated solution and service offerings,
we cannot provide assurance that these entities will permit the use of their data for these purposes. If we lose a number of our
data sources or our access to their data, and fail to identify and reach the requisite agreements with suitable alternative suppliers
or to successfully integrate their data into our solutions and services, or if there is a lack of accuracy or integrity in the
data that current or future suppliers provide, we could experience service disruptions, increased costs, reduced quality of our
solutions and services, or performance penalties under our customer contracts, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We
may rely on subcontractors and other third party providers to provide customers with a single-source solution or service or we
may serve as a subcontractor to a third party prime contractor. If these parties fail to satisfy their obligations to us or if
we are unable to maintain these relationships, our business, financial condition, results of operations and cash flows could be
materially adversely affected.
In
some areas of our business we may engage subcontractors, teaming partners, vendors or other third party providers to provide our
customers with a single-source solution for a broader range of service needs. These third parties include software vendors, utility
and network providers, cloud service providers and other information technology service providers and solution partners. Our ability
to deliver and implement solutions and serve our customers effectively depends on these third parties meeting our service standards
in both timeliness and quality, and in certain instances, on our ability to obtain customer approval for the use of these third
party subcontractors. While we believe that we perform appropriate due diligence on these third parties and take adequate measures
to ensure that they comply with the appropriate laws and regulations, we cannot guarantee that they will comply with the terms
set forth in their agreements with us. Performance deficiencies or misconduct by subcontractors, teaming partners, vendors or
other third party providers may be perceived as inadequacies in our solutions or services or cause us to fail to fulfill our contractual
obligations to our customers, which could materially adversely affect our customer relationships and reputation, result in termination
of a customer contract, and subject us to a dispute with our customer. In addition, if our third party service providers terminate
or refuse to renew their relationships with us or offer their products to us in the future on less advantageous terms, we may
not be able to perform or deliver solutions or services for existing customers as expected.
Similarly,
we are and may in the future be engaged as a subcontractor to a third party prime contractor. Subcontracting arrangements where
we are not the prime contractor pose unique risks to us because we do not have control over the customer relationship, and our
ability to generate revenue under such subcontracts is dependent on the prime contractor, its performance and relationship with
the customer, and its relationship with us. We cannot be certain that the prime contractor will provide adequate and timely services
to the customer, comply with the terms of its prime contract with the customer or its subcontract agreement with us, or that it
will construe its contractual rights and obligations in a reasonable way, act appropriately in dealing with us or customers, and
remain in compliance with the relevant laws, rules or regulations. Any failure of the prime contractor to adequately perform its
obligations under the prime contractor to comply with applicable laws, rules and regulations could materially adversely affect
our reputation and subject us to a dispute with the prime contractor or the customer. In the event a prime contract is terminated,
whether for non-performance by the prime contractor or otherwise, our subcontract will similarly terminate, and the resulting
contract loss could materially adversely affect our business, financial condition, results of operations and cash flows.
We
obtain a portion of our business through competitive bidding in response to government requests for proposals. Reprocurements
and future contracts may not be awarded through this process on the same level or our contract awards may be challenged by interested
parties which could materially adversely affect our business, financial condition, results of operations and cash flows.
In
order to market our solutions and compete for contracts with existing and potential state and federal customers, we are often
required to respond to government-issued RFPs. These responses typically require us to assemble and submit a large volume of information
within a rigid timetable, and to accurately estimate our cost structure for servicing the proposed contract, the time required
to establish operations and the likely terms of proposals submitted by our competitors. We may also be required to disclose the
occurrence of certain negative events suffered by our business, such as customer disputes, a government inquiry or an adverse
judgment or settlement in litigation or a legal proceeding, which could impair our ability to win the contract at issue or have
a material adverse effect on our reputation in the industry.
Even
if we win these contracts, we may fail to secure favorable contract terms and conditions, or a government’s determination
to award us the contract may be challenged by an interested party. Under the state and federal laws and regulations governing
procurements of goods and services, challenges and award protests may be filed even if there are no valid legal grounds on which
to base the protest. The filing of such challenges could potentially delay the start or implementation of the contract if the
government agency determines to withhold a contract award or suspend contract performance while the protest is being considered,
or to take corrective action on its own, such as soliciting new bids or terminating the contract award or current procurement.
In the event of irregularities, we perceive or learn of in the award or bidding process, we also may be forced to file protests
in response to RFP awards to other bidders. Resolution of a protest, even in our favor, could force us to expend considerable
funds in disputing the potential award or to incur additional expenses to maintain our ability to timely start implementation,
which may cause our actual results to differ materially and adversely from those anticipated. In addition, if we are unable to
win reprocurements or protests of particular contracts, we may be precluded from entering certain customer markets for the term
of the contract awarded to another party. Any failure to continue to obtain contracts in response to government RFPs, to design
proposals that result in profitable contracts, to win new contracts or re-procure current contracts after they expire or to prevail
in protests or challenges of contract awards could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
Adverse
judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash
flows.
We
are subject and may be a party to legal proceedings and claims that arise from time to time in the ordinary course of our business,
which may include, but are not limited to, those related to, claims brought by our customers in connection with billing and contractual
disputes, subcontracts and teaming agreements, protection of confidential information or trade secrets, claims relating to pending,
terminated or completed acquisitions or dispositions, adversary proceedings arising from customer bankruptcies, employment of
our workforce and immigration requirements or compliance with any of a wide array of state and federal statutes, rules and regulations
that pertain to different aspects of our business. We may also be required to initiate expensive litigation or other proceedings
to protect our business interests. There is a risk that we will not be successful or otherwise be able to satisfactorily resolve
any pending or future litigation. In addition, litigation and other legal claims are subject to inherent uncertainties and management’s
view of currently pending legal matters may change in the future. Those uncertainties include, but are not limited to, litigation
costs and attorneys’ fees, unpredictable judicial or jury decisions and the differing laws and judicial proclivities regarding
damage awards among the states in which we operate. Resolution may also require that HMS accept some amount of loss or liability
in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results. Unexpected outcomes in
such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings
(possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
We
may not be able to deliver our solutions and perform services efficiently if we are unable to attract and retain qualified employees.
Our
successful delivery of solutions and services and ability to maintain our productivity and profitability is dependent on our ability
to identify, recruit, employ, train and retain skilled personnel. The success of recruitment and retention strategies depend on
a number of factors, including the competitive demands for employees having the skills we need and the level of compensation required
to hire and retain such employees. Customers or competitors may seek to hire away qualified and seasoned employees, which could
reduce our ability to innovate and operate effectively. We may not be able to recruit or maintain the personnel necessary to efficiently
operate and support our business in the future, and even if our recruitment and retention strategies are successful, our labor
costs may increase significantly. Our inability to hire sufficient personnel on a timely basis without significantly increasing
our labor costs could materially adversely affect our business, financial condition, results of operations and cash flows.
Our
future success depends, in part, on the continued service of members of our management team.
Our
ability to execute on our business plans and future success requires that we attract, develop, motivate and retain experienced
and innovative executive officers and senior leaders who have successfully managed, designed, implemented and led government services
programs or information technology initiatives, or have relevant experience in other healthcare sectors, including data management
and analytics. These individuals are in great demand and are likely to remain a limited resource in our industry. The loss of
services of one or more members of our management team could adversely affect our business, financial condition, results of operations
and cash flows. In addition, to the extent we lose an executive officer or senior leader, we may incur increased expenses in connection
with the hiring, promotion or replacement of these individuals and the transition of leadership and critical knowledge.
Our
outstanding indebtedness could materially adversely affect our financial condition and our ability to operate our business, and
we may not be able to generate sufficient cash flows to meet our debt service obligations or capital requirements.
As
of December 31, 2018, the outstanding principal balance under our Credit Agreement was $240.0 million. Our Credit Agreement provides
for a senior secured revolving credit facility in an aggregate principal amount equal to $500 million and is secured, subject
to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all of our tangible
and intangible assets. Our outstanding indebtedness and any additional indebtedness we incur may have important consequences for
us, including, without limitation, that:
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we
may be required to use a substantial portion of our cash flow to pay the principal of
and interest on our indebtedness;
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our
indebtedness and leverage may increase our vulnerability to adverse changes in general
economic and industry conditions, as well as to competitive pressures;
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our
indebtedness may expose us to the risk of increased interest rates because certain of
our borrowings are and will be at variable interest rates;
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our
ability to obtain additional financing for working capital, capital expenditures, acquisitions
and for general corporate and other purposes may be limited;
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our
indebtedness and leverage may prevent us from taking advantage of business opportunities
as they arise or successfully carrying out our plans to expand our business; and
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our
flexibility in planning for, or reacting to, changes in our business and our industry
may be limited.
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Under
the Credit Agreement, we are also required to comply with specified financial and operating covenants, which may limit our ability
to operate our business as we otherwise might operate it. The Credit Agreement also contains (i) certain affirmative covenants
that impose certain reporting and/or performance obligations on us and our restricted subsidiaries, (ii) certain negative covenants
that generally limit, subject to various exceptions, us and our restricted subsidiaries from taking certain actions, including,
without limitation, incurring indebtedness, creating liens, engaging in mergers and consolidations, disposing of certain assets
or property, making certain investments and acquisitions, entering into certain transactions with affiliates, swap agreements
or sale-leasebacks, making certain restricted payments, including dividends and share repurchases, changing our fiscal year or
the lines of business that we or our restricted subsidiaries conduct to a material extent, and prepaying certain junior indebtedness,
(iii) financial covenants consisting of a maximum consolidated leverage ratio and a minimum interest coverage ratio, and (iv)
customary events of default for financings of this type.
Our
obligations under the Credit Agreement may be declared due and payable upon the occurrence and during the continuance of an event
of default, which includes, without limitation: non-payment of principal or reimbursement obligation when due; non-payment of
interest, fees and other amounts for a period of five business days after the due date; material inaccuracies of representations
and warranties; failure to perform or observe covenants, conditions or agreements (subject to any applicable grace periods); cross-defaults
to certain indebtedness; inability to pay debts; certain acts of bankruptcy or insolvency; certain ERISA events; failure to pay
certain material judgments; and a change of control as defined in the Credit Agreement. If not cured, an event of default could
result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable, and would
give our lenders the right to proceed against the collateral granted to them to secure the debt, which would require us to, among
other things, seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness,
sell selected assets, and/or reduce or delay planned capital or operating expenditures. Such measures might not be sufficient
to enable us to service our debt, and any such financing or refinancing might not be available on economically favorable terms
or at all. Our ability to make payments of principal and interest on our outstanding credit facility depends upon our future performance
and our ability to generate cash flows. If we are unable to generate sufficient cash flows to meet our debt service obligations
or are forced to take additional measures to be able to service our indebtedness, our business, financial condition and results
of operations could be materially and adversely affected.
Changes
in, or interpretations of, tax rules and regulations may materially adversely affect our effective tax rates.
We
are a United States-based company subject to various federal, state, U.S. Territory and local tax laws and regulations in multiple
U.S. jurisdictions that govern numerous aspects of our business. As we expand our business, we may perform services for new customers
located outside of the United States or in a U.S. Territory, which may subject us to foreign tax laws and regulations that could
increase our exposure to additional tax liabilities. Our future effective tax rates could be materially affected by various factors,
including changes in tax rates of jurisdictions in which we do business, changes in relevant tax and accounting rules, regulations
and interpretations, increases in expenses not deductible for tax purposes, including impairments of goodwill, and changes in
the valuation of our deferred tax assets and liabilities. For example, in December 2017, Congress enacted the 2017 Tax Act which,
among other things, reduced the U.S. corporate tax rate, modified limitations on certain deductions for executive compensation,
placed new limitations on interest deductions, repealed the Section 199 Deduction and certain capital investment deductions, and
shifted U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system. Any unanticipated
changes in our tax rates could affect our future results of operations.
In
addition, we are subject to the continual examination of our income tax returns by the IRS and other tax authorities. We regularly
assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes
and have reserved for potential adjustments that may result. The final determination of any of these examinations could have a
material adverse effect on our business, financial condition, results of operations and cash flows.
Our
health insurance coverage and self-insurance reserves may not cover future claims, which could materially adversely affect our
business, financial condition, results of operations and cash flows.
We
maintain various insurance policies for company employee health, workers’ compensation, general liability and property damage.
We are self-insured for our health plans, and have purchased a fully-insured stop loss policy to help offset our liability for
both individual and aggregate claim costs. We are also responsible for losses up to a certain limit for workers’ compensation,
general liability and property damage insurance.
For
policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred
and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and
factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when
warranted by changing circumstances. Our prior growth could affect the accuracy of estimates based on historical experience. Should
a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was expected, our accrued
liabilities might not be sufficient and we may be required to record additional expense. Unanticipated changes may also produce
materially different amounts of expense than reported under these programs, which could materially adversely affect our business,
financial condition, results of operations and cash flows.
Risks
Relating to Our Industry
Our
business could be materially adversely affected by changes in the U.S. healthcare environment or in laws relating to healthcare
programs and policies, particularly as they relate to the ACA and the Medicare and Medicaid programs.
The
healthcare industry in which we operate is subject to changing political, economic and regulatory influences that directly affect
the practices and operations of federal, state and commercial healthcare organizations in the United States. When the ACA was
passed, its emphasis on program integrity, cost containment and expansion of Medicaid created new opportunities to grow our business
and our service offerings. However, certain provisions of the ACA have yet to be implemented and there have been a number of judicial
and legal challenges to certain aspects of the ACA. In February 2018, 20 states filed suit in the U.S. District Court for the
Northern District of Texas alleging that the ACA is unconstitutional in light of the repeal of the penalties associated with the
individual mandate. On December 14, 2018, the Court issued a ruling that the mandate was no longer permissible under Congress’s
taxing power and was thus unconstitutional. As such, the Court further found that the entire ACA is deemed to be invalid because
the individual mandate is “essential” and inseverable from the ACA. Although, a stay and partial final judgment has
been issued, ensuring that the ACA remains in full effect for the foreseeable future, we cannot predict the outcome of the litigation
that has been filed relating to the constitutionality of the ACA. Additionally, since its adoption into law in 2010, there have
been continued efforts by Congress to amend, repeal or replace all or part of the ACA. For example, under the 2017 Tax Act, the
“individual mandate” introduced by the ACA was repealed effective January 1, 2019. Congress has introduced several
other bills to delay, defund or repeal implementation or amend significant provisions of the ACA, though none of these other bills
have passed the House and Senate. There have also been a number of proposed and adopted legislative initiatives and healthcare
reform proposals from the federal and state governments. These include (i) measures that would fundamentally change the financial
structure of the Medicaid program (currently funded jointly by the states and the U.S. Federal Government), which could result
in early termination, reduced scopes or non-renewal of our contracts with certain state government customers, and (ii) changes
at the federal level that would reduce reimbursement rates to states, establish new payment models, further limit the Medicare
RAC program, or otherwise change the operating environment for our customers and transform the government’s involvement
in healthcare. In addition to these legislative proposals, the President has taken several steps to limit the functionality of
the ACA and advocate for its repeal and replacement since taking office. During 2017, the President signed two executive orders
and other directives designed to waive, defer, grant exemptions from or delay the implementation of certain requirements mandated
by the ACA.
Another
variable that impacts our business will be how state programs, commercial health plans, private employers and other healthcare
payers will respond to changes during this continued period of uncertainty surrounding the ACA. These organizations may react
to such changed circumstances and financial pressures by taking actions to ramp up, curtail or defer their retention of cost containment
providers like us, which could impact the demand for our solutions and services and our ability to increase or maintain sales
of our existing solutions and services. While certain changes may present new opportunities to us, our business, financial condition,
results of operations and cash flows could be materially adversely affected if we are unable to adapt our solutions and services
to meet changing requirements or expand service delivery into new areas, or if the demand for our solutions and services is reduced
as a result of future legislative changes affecting Medicare, Medicaid or other publicly funded or subsidized health programs,
or efforts to waive, modify or otherwise change or invalidate the ACA. Although we will continue to evaluate the effect that the
ACA and its possible invalidation or repeal and replacement may have on our business, it is difficult to predict the full impact
and influence that the ACA and the varying healthcare reform measures may have on the U.S. healthcare industry or policy, and
any resulting changes may take time to unfold.
Healthcare
spending fluctuations, simplification of the healthcare payment process or other aspects of the healthcare financing system, budgetary
pressures and/or programmatic changes diminishing the scope of program benefits, or limiting payment integrity initiatives, could
reduce the need for and the price of our solutions and services, which would have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our
projections and expectations are premised, in part, upon consistent growth rates in the Medicare and Medicaid programs and government
spending on these programs, and the impact on the current healthcare financing system overall and need for our solutions and services
within that existing framework. Our continued success as a company is based in large part on offering solutions and services that
improve the ability of our customers to identify and recover revenue that would otherwise be lost often as a result of procedural
inefficiencies and complexities in the healthcare delivery and payment system. However, the need for our solutions and services,
the price customers are willing to pay for them and the scope and profitability of our contracts could be negatively affected
by a number of factors, including, but not limited to:
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a
lower than projected growth in Medicare and Medicaid program enrollment and expenditures;
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changes
in the level of federal government spending due to budgetary or deficit considerations,
including the continuance of existing programs, as well as budgetary pressures that may
drive changes at the state level;
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unanticipated
reductions in the scope of healthcare program benefits (such as, for example, state decisions
to eliminate coverage of optional Medicaid populations or services or shifting lives
into managed care plans);
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the
transition of healthcare beneficiaries from fee-for-service plans to value-based plans;
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modifications
in provider billing behavior and habits, often in response to the success of our solutions
and services or to changes that reduce healthcare spending;
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the
adoption of healthcare plans with significantly higher deductibles;
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customer
improvements and enhancements to their internal healthcare claims and billing processes;
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the
simplification of the healthcare benefit and payment system through legislative or regulatory
changes at the federal or state level (for example, legislative changes impacting the
scope of mandatory audits, including limits on the look-back period for review in areas
where we conduct audits);
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limits
placed on ongoing program integrity initiatives, including the Medicare RAC program and
state Medicaid RAC programs (for example, limitations or reductions in the amount of
reviewable claims we audit, such as the modified ADR limits and sliding scale policy
implemented by CMS for the current Medicare RAC contracts, which have a significant impact
on the volumes of claims that Medicare RACs are permitted to review for inpatient providers
and reduce their ability to identify overpayments and underpayments); and
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legislative
healthcare reforms and developments, including the absence of near-term compliance deadlines
effected by the ACA, the possible repeal or modification of the ACA, and other legislative
actions to reduce program eligibility or services, or reform Medicaid spending.
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occurrence of any of these events, or other changes to the funding of the Medicare and Medicaid programs or limitations in the
scope of program eligibility, benefits, initiatives and healthcare spending that materially reduce our revenue or profitability
with such programs may have an adverse effect on our future business, financial condition, results of operations and cash flows.
A
failure to comply with the laws and regulations that apply to companies in our industry regarding individual privacy and information
security could subject us to legal actions, fines and penalties and negatively impact our reputation and operations.
As
a cost containment service provider, we often receive, process, transmit and store sensitive data, including PHI and personally
identifiable information of individuals, as well as other financial, confidential and proprietary information belonging to our
customers, subcontractors, government agencies, data suppliers and other third parties from whom we obtain information. The use
and disclosure of that information is regulated at the federal, state, international and industry levels. For example, we are
subject to federal regulation under HIPAA, as amended by HITECH, and the Final Omnibus Privacy, Security, Breach Notification,
and Enforcement Rule, as well as various state laws. HIPAA also imposes standards and requirements on our business associates
(as defined under HIPAA). We are also obligated by our contractual requirements with customers, which may require that we comply
with additional privacy regulations imposed upon certain types of customers, such as the federal Gramm-Leach-Bliley Act and other
laws.
Even
though we take measures to comply with all applicable regulations and to ensure our business associates and subcontractors comply
with these laws, regulations and rules, we have less than complete control over our business associates’ and subcontractors’
actions and practices. We may be exposed to data breach risk if there is unauthorized access to one of our or our subcontractors’
secure facilities, or to third-party enterprise cloud storage and cloud computing application services that we use, or from lost
or stolen laptops or other portable media from current or former employee theft of data containing PHI, from computer hacking,
malware, computer viruses or other malicious codes, phishing or other cyber-attacks, from misdirected mailings containing PHI,
or other forms of administrative or operational error. If we or our subcontractors fail to comply with applicable laws; if unauthorized
parties gain physical access to one of our facilities and steal or misuse confidential information; if we erroneously use or disclose
data in a way that is inconsistent with our granted rights; or if such information is misdirected, lost or stolen during transmission
or transport, we may suffer damage to our reputation, potential loss of existing customers and difficulty attracting new customers.
We could also be exposed to, among other things, unfavorable publicity, governmental inquiry and oversight, allegations by our
customers that we have not performed our contractual obligations, costs to provide notifications or remediation (such as credit
monitoring) to affected individuals, fines or other penalties imposed by government regulatory agencies, or litigation by affected
parties and possible financial obligations for damages or indemnification obligations related to the theft or misuse of such information,
any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In
addition, laws, rules and regulations concerning the protection of personal information are subject to frequent change by legislation,
regulatory issuances or administrative interpretation. As regulatory focus on privacy issues continues to increase and these laws
and regulations continue to expand and become more complex, these potential risks to our business could intensify. Changes in
laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other
personally identifiable information, along with increased customer demands for enhanced data security infrastructure, could greatly
increase our cost of providing our solutions and services, and may subject us to additional liabilities.
We
are subject to extensive government regulation, including government and customer audits and investigations relating to our compliance
with the laws and regulations applicable to companies in our industry, and a negative finding or other adverse determination could
have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
A
significant portion of our business is regulated by the federal government and the states in which we operate. The laws and regulations
governing our operations are generally intended to benefit and protect individual citizens, including government program beneficiaries,
health plan members and their dependents. The federal and state governmental agencies administering these laws and regulations
have broad latitude to enforce them. As such, we are subject, on an ongoing basis, to various governmental and customer reviews,
audits and investigations to verify our compliance with our contracts and applicable laws and regulations, as well as legal actions
and enforcement proceedings. For example, because we receive payments from federal and state governmental agencies, we are subject
to laws, such as the Federal Acquisition Regulations, the U.S. Foreign Corrupt Practices Act, federal and state employment, equal
opportunity and affirmative action laws, federal and state prompt pay statutes, healthcare fraud, waste and abuse laws and similar
legislation. We are also subject to the Federal False Claims Act and similar state statutes, which permit government law enforcement
agencies to institute suits against us for violations and, in some cases, to seek double or treble damages, penalties and assessments.
In addition, private citizens, acting as whistleblowers, can sue on behalf of the government under the “
qui tam
”
provisions of the Federal False Claims Act and similar statutory provisions in many states.
As
we expand into new areas of the healthcare industry, we may develop new or enhanced solutions that may further expose us to requirements
under additional statutes and legislative schemes that have previously not been relevant to our business, such as the Fair Debt
Collection Practices Act and other banking and credit reporting statutes. For example, in connection with our acquisition of Eliza,
we became subject to the Telephone Consumer Protection Act of 1991, state and federal audio and telephone recording laws, and
other consumer laws and regulations as a result of the member engagement services that we perform. Our increased involvement in
population health services and penetration into new markets, such as ACOs, PBMs and commercial self-insured employers, could increase
the likelihood and incidence of our being subjected to regulatory scrutiny or legal actions by third parties other than our customers,
which may impose significant costs and strain on our resources.
These
laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer and
how we interact with customers, providers, other healthcare payers and the public. If the government discovers improper or illegal
activities in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative
sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions and
debarment from doing business with the government. Similarly, if our customers assert that we have failed to properly perform
or comply with our contractual obligations, or if the carriers to which we send billings assert that we have failed to properly
comply with applicable federal or state billing rules and regulations, we may be required to provide refunds or make payments
to resolve such issues. If we are found to be in violation of any applicable law or regulation, or if we receive an adverse review,
audit or investigation from a government agency or customer related to our compliance with such laws or regulations or the terms
of our government contracts, any resulting negative publicity, penalties or sanctions could have an adverse effect on our reputation
in the industry, impair our ability to compete for new contracts or bid in response to RFPs in one or more jurisdictions, and
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Federal
and state governments may limit or prohibit outsourcing of certain programs or functions, refuse to grant consents or waivers
necessary to permit private entities to perform such work, or impose other limitations on outsourcing or certain vendors that
may obstruct cost-effective performance of our contracts.
Federal
or state governments could limit or prohibit private contractors like us from operating or performing elements of certain government
functions or programs. As a condition of receiving federal funding, state, and local governments may be required to operate such
programs with government employees. Under current law, in order to privatize certain functions of government programs, the federal
government must grant a consent and/or waiver to the petitioning state or local agency. If the federal government does not grant
a necessary consent or waiver, the state or local agency will be unable to outsource that function to a commercial entity. Such
a situation could eliminate a contracting opportunity or reduce the value of an existing contract.
Similarly,
other state or federal limitations on outsourcing certain types of work to vendors that supplement our workforce could make it
more difficult for us to fulfill our contracts in a cost-effective manner. Certain areas of our operations use or involve vendor
or subcontractor personnel located outside of the United States, who may (under carefully controlled circumstances) access certain
PHI in the course of assisting us with various elements of the services we provide to our customers. The federal government and
a number of states have considered laws or issued rules, regulations, and orders that would limit, restrict or wholly prohibit
the use of offshore labor in performance of government contracts, or impose sanctions for the use of such resources. Some of our
customers have already chosen to contractually limit or restrict our ability to use offshore resources. Intensified restrictions
of this type or associated penalties could raise our costs of doing business, expose us to unexpected fines or penalties, increase
the prices we must charge to customers to realize a profit and eliminate or significantly reduce the value of existing contracts
or potential contract opportunities, any of which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
We
may be precluded from bidding on or performing certain work due to work we currently perform, which could materially adversely
affect our business, financial condition, results of operations and cash flows.
Various
laws, regulations and administrative policies prohibit companies from performing work for government agencies in capacities that
might be viewed to create an actual or perceived conflict of interest. In particular, CMS has stringent conflict of interest rules,
which can limit our bidding for specific work for CMS, or for other contracts that might conflict, or be perceived by CMS to conflict,
with contractual work for CMS. State governments and managed care organizations also have conflict of interest restrictions that
could limit our ability to bid for certain work and impede our overall sales strategy. As we continue to expand and diversify
our business operations, the likelihood that customers or potential customers will perceive conflicts of interest between our
various subsidiaries, solutions, services, activities and customer relationships may increase. Such conflicts, whether real or
perceived, could result in a loss of contracts or additional internal structural barriers that delay operational efficiency. We
may also need to divest certain existing businesses or reorganize our current management and personnel structure, as well as our
corporate organization and entity structure, in order to qualify for new contract awards or to appropriately mitigate conflicts
and otherwise accommodate the increasing complexity of our business. Our failure to devote sufficient care, attention and resources
to managing these adjustments may result in technical or administrative errors that could expose us to potential liability or
adverse regulatory action. In addition, conflict of interest rules and standards change frequently, and are subject to varying
interpretations and varying degrees and consistency of enforcement. We may not be successful in navigating these restrictions.
If we are prevented from expanding our business or are unable to effectively implement our strategic initiatives due to real or
perceived conflicts of interest, our business, financial condition, results of operations and cash flows could be materially adversely
affected.
Risks
Related to Our Common Stock
The
market price of our common stock may be volatile, and fluctuations in the price of our common stock may materially adversely affect
our business, financial condition, results of operations and cash flows and materially adversely affect our shareholders.
The
market price of our common stock has fluctuated widely and may continue to do so. During the 52-week period ended December 31,
2018, our common stock traded on the Nasdaq Global Select Market as high as $37.38 per share and as low as $15.06 per share. Our
stock price is subject to fluctuation as a result of a variety of factors, including factors beyond our control, such as the risk
factors described above and those which are related to:
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quarterly
or annual earnings results or those of other companies in our industry;
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changes
in estimates of our performance or recommendations by securities analysts or in the operating
and stock price performance of other companies that investors deem comparable to our
company;
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news
reports relating to trends, concerns and other issues in the healthcare industry, including
perceptions in the marketplace regarding us and our competitors;
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the
financial projections we publicly provide and any changes in or failure to meet those
projections;
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future
sales of shares of common stock in the public market by our executive officers or directors;
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any
changes in the number of our outstanding shares, including as a result of share repurchases;
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actual
or proposed changes in federal or state laws affecting the healthcare industry;
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changes
in accounting principles;
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the
public’s response to our press releases, or other public announcements, including
our filings with the SEC;
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securities
class actions, shareholder lawsuits or other litigation; and
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market
conditions in the industry and the economy as a whole.
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addition, the stock market often experiences significant price and volume fluctuations. These broad market fluctuations may materially
adversely affect the market price of our common stock regardless of our operating performance. When the market price of a company’s
stock drops significantly, shareholders may institute securities class action litigation against that company. Any litigation
against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise
harm our business.
Because
we do not intend to pay dividends, you will benefit from an investment in our common stock only if it appreciates in value.
We
have not paid or declared cash dividends on any of our capital stock to date and currently intend to retain our future earnings,
if any, to fund the development and continued growth of our business and repurchase shares opportunistically from time to time.
As a result, we do not expect to pay any cash dividends in the foreseeable future. The success of your investment in our common
stock will likely depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in
value or even maintain the price at which you purchased your shares.
Certain
provisions of our certificate of incorporation and bylaws could discourage unsolicited takeover attempts, which could depress
the market price of our common stock.
Our
certificate of incorporation authorizes the issuance of up to 5,000,000 shares of “blank check” preferred stock with
such designations, rights and preferences as may be determined by our Board of Directors. Accordingly, our Board of Directors
is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights,
that could adversely affect the voting power or other rights of holders of our common stock. In the event of issuance, preferred
stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control.
Although we have no present intention to issue any shares of preferred stock, it is possible that we will do so in the future.
In addition, our bylaws currently require advance notice of shareholder proposals for business to be conducted at meetings of
our shareholders and for nominations of candidates for election to our Board of Directors and provide for Delaware as an exclusive
forum for certain disputes with our shareholders, all of which could also have the effect of discouraging a change of control.