HMS Holdings Corp
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the HMS Q4 and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I'd now like to turn the call over to Mr. Dennis Oakes. Sir, you may begin.

[Dennis Oakes:]

Thank you, Chelsea. Good morning, and welcome to the HMS fourth quarter and full-year 2017 earnings conference call. Joining me are Bill Lucia, our Chairman and Chief Executive Officer; and Jeff Sherman, our Chief Financial Officer. This call is being webcast and can be accessed through the Investor Relations section of our company Web site at hms.com. Today's earnings release as well as an investor slide presentation containing supplemental information are also available on our IR Web site. Bill and Jeff will provide their perspective this morning on our fourth quarter and full-year financial results as well as our financial outlook for 2018. Following their remarks, we will open the line for questions. We ask that you kindly limit to one question and one follow-up, so we can get through the full list in a timely manner. Before we get started, I want to remind you that some of the statements we are making today are forward-looking, and based on our current expectations in view of our business as we see it today. Such statements, including those related to our full-year 2018 financial outlook, future performance, and our future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, it should be considered in conjunction with the cautionary statements in today's earnings release, and risk factors described in the Company's most recent SEC filings including our Form 10-K. The financial results in today's earnings release reflect preliminary results, which are not final until our 2017 Form 10-K is filed. Finally, we may refer to certain non-GAAP measures this morning. A reconciliation of those measures to GAAP is included in both our earnings release and our investor presentation. We're now ready to begin. Bill?

[William C. Lucia:]

Thank you, Dennis, and good morning, everyone. Our fourth quarter financial performance represents a strong finish to the year, and it sets the stage for across the board growth in revenue and profitability in 2018. Total company commercial, state government and coordination of benefits revenues were all at record levels in the fourth quarter. We saw the sequential quarterly rebound that we expected in COB and payment integrity revenue and both were up double-digits compared to the third quarter. We also finished rebuilding the Eliza sales team in the quarter, so it is fully staffed for the year ahead. And finally, we made additional progress in our effort to put in place and sustain higher throughput in our payment integrity business. We entered 2018 with a favorable macro environment for our business, including an aging population, significant spending growth projected at Medicare and Medicaid over the next decade and employer sponsored health insurance is still covering half of the U.S population, despite the growth of those government programs. Perhaps most importantly, from our perspective, there's an increased focus throughout the entire healthcare industry on enhancing the consumer experience and improving clinical outcomes by better engaging individuals in managing their own health. Along with those macro factors, our focus on technology based solutions aligns with many of the common themes for healthcare in the United States, identified by key industry observers, such as Gartner, PWC and Deloitte. They highlight the increasing influence of artificial intelligence ,a growing focus on price transparency. Heightened recognition of the importance of social determinants, an increasing impact of big data and analytics on real health outcomes, and continuing financial pressure on the healthcare delivery system due to chronic disease and aging population, expensive drug therapies and unmet social needs. We believe HMS is well positioned to take advantage of these multiple healthcare marketplace tailwinds to grow our revenue in 2018 and beyond. It's not surprising to us that payers are increasingly motivated to gain further insights into the health of their members and do effectively engage them. 5% of the population still generates more than 50% of medical cost. We understand that member satisfaction is a key to retention. And that large employers are demanding more effective cost management, and improved HEDIS scores and star ratings lead the higher reimbursements for government sponsored health plans. This increasing focus on understanding and engaging the consumer has been building over the last few years and our acquisition of Eliza in April of last year combined with the Essette purchase the previous September, fulfilled a significant strategic objective we have for 2017 to build out a care management and consumer engagement platform. This vertical leverages three principle HMS assets, data, analytics, and an expansive customer base, and now positions us partner with customers as they formulate plans to become more consumer centric in all of their activities. Rather than our historic contingency fees, this new business can be sold utilizing a more predictable recurring revenue model on a monthly or annual per member basis, which is another big plus. In order to maximize the growth potential of our care management and consumer engagement vertical, we recently recruited a new leader to oversee all of our population management initiatives. Ed O'Gara, joins us with over 25 years of experience in the healthcare payer, provider and employer markets. He has a strong technology and healthcare analytics background and is based in the HMS Eliza office in Massachusetts. We believe we now have all of the needed elements in place to cross-sell Eliza's sophisticated analytics, patented technologies and multichannel outreach capabilities to the expansive HMS customer base and particularly the midsize and regional Medicaid managed care plans. As a result, we currently expect our first full-year of Eliza ownership will be a significant contributor to our projected year-over-year revenue growth in 2018. Returning now to our Heritage business, 2017 sales of payment integrity and COB solutions to new and existing customers were strong, with increasing product penetration among the independent blues and regional managed care plans. Based on both recent customer visits and our sales activity, interest in our solutions to eliminate waste and errors in healthcare payments appears to be undiminished as we enter the new year. In fact, many customer discussions are focused on adding additional HMS services and one of our largest customers recently asked us to come back with a plan to increase their annual savings by 30%. Recognizing the need for enhanced execution to complement strong sales, we believe we now have the right people and improved processes in place to substantially reduce the backlog of already sold business, expand the scope of our PI work within our existing customer base and continue to leverage our analytics and technology tools to increase productivity. Jeff will now provide additional detail about our fourth quarter performance and our outlook for 2018. Jeff?

[Jeffrey S. Sherman:]

Thank you, Bill, and good morning. The leverage inherent in our business model was evident in the fourth quarter as revenue of approximately $148 million resulted in adjusted EBITDA of $40 million and an operating margin of 13%. View from a market perspective, state government revenue increased by 24% compared to the third quarter and commercial revenue was up over 14% sequentially. We also finished the year strongly from an operating cash flow perspective with $31 million in the fourth quarter, producing a full-year total of $86.5 million. Investments we made in people, technology, process improvement and innovation throughout 2017 were more evident in our fourth quarter results. The snapback, in coordination of benefits revenue last quarter to a record $106 million was 17% higher than the prior quarter and contributed to full-year of COB growth in excess of 8%. The increase was consistent with the view we expressed on our last earnings call, as the third quarter declined in COB revenue was timing related and that our yield improvement activities would shine through in succeeding quarters. Payment integrity revenue was also up over 12%, and Eliza revenue increased 30% sequentially in the final quarter of 2017. Payment integrity revenue was higher following implementation of enhanced analytics which resulted in a substantial increase in medical records requests and findings, beginning in September [technical difficulty] quarter. We believe this higher level of activity will be sustainable throughout 2018. Additionally, using artificial intelligence, machine learning and natural language processing, we were able by year-end to handle the increased workload with lower incremental costs. We expect to get further benefits utilized in these techniques and the year ahead, which should also contribute to greater audit volume and higher PI revenue this year. Eliza revenue of $12.9 million in the fourth quarter was in line with our expectations as we finished rebuilding the sales force to full strength. The Eliza and HMS sales teams completed outreach to more than 60 potential Eliza cross-sell customers during the fourth quarter, which has already resulted in several newly signed Eliza relationships. Understandably a number of the customers contacted, expressed interest, who wanted to renew discussions after completing various year-end activities, so many of those meetings are taking place this quarter. We’ve also targeted additional customers in the new year and that outreach is underway. COB remained over 70% of total revenue in the fourth quarter. But we expect a relatively faster growth of Eliza, payment integrity, and Medicare RAC revenues in the year ahead, will push 2018 analytical services revenue above 30% of the total, which will be a positive result of the revenue diversification arising from the growth of our care management and consumer engagement vertical. Adjusted EPS of $0.49 per diluted share in the quarter included a noncash tax benefit of $0.25 per diluted share as the new corporate tax rate based on the federal tax legislation signed into law last December caused a favorable revaluation of the company's deferred tax balances. This is an accounting adjustment which arose, because we’ve deferred income taxes, which have future tax consequences due to the temporary timing differences between the financial statements and tax basis of assets and liabilities. Prior to the new federal legislation we had a net deferred liability carried on our books at an assumed federal tax rate of 35% which we revalued downward creating the benefit in the quarter. Going forward, we currently estimate that our effective tax rate for 2018 will be in the range of 28% to 30%. We will be beneficiaries of the 14% reduction in the federal rate, but we will also lose certain deductions, such as the domestic manufacturing deduction, which will reduce the net benefit. We've estimated our effective tax rate in a range because actions which throughout the coming year, and reactions to changes in the federal tax law could impact our state taxes. We do expect our tax liability will decline this year by approximately $3 million to $4 million, which equates to an adjusted EPS benefit of roughly $0.03 to $0.04 per diluted share. Three factors cause operating cost to increase sequentially in the fourth quarter

[William C. Lucia:]

Thank you, Jeff. We have several important strategic objectives for 2018. First, we are seeking to boost organic revenue growth across all of our products, but particularly payment integrity. Second, we will continue to take advantage of technology, innovation and the scalability of our business model to expand margins. Next, we are intensely focused on maximizing the cross-sell opportunity of our care management, analytics and consumer engagement platforms within our existing customer base. Fourth, we intend to continue leveraging technology to maximize the value of our data and analytics. Fifth, we will remain -- we will maintain a sharp focus on customer satisfaction and HMS employee engagement. Both annual measures have continued to increase year-over-year, but we set our sights higher again this year. And finally, maximizing total shareholder return which benefits all of the company's stakeholders is a top priority in the year ahead. Our ability to achieve the strategic objectives [technical difficulty] successfully meet our performance goals in the year ahead, relies on our innovative and industry-leading cost-containment and consumer engagement solutions, but it is dependent upon the dedication and hard work of my highly engaged colleagues throughout HMS. We are intensely focused on execution this year and I am confident the entire organization is up to the task of delivering enhanced value for both our customers and our shareholders. We are now ready for the first question.

[Operator:]

[Operator Instructions] Thank you. And our first question comes from the line of Jamie Stockton with Wells Fargo. Your line is open.

[Jamie Stockton:]

Hey, good morning. Thanks for taking my questions. I guess, maybe the first one COB, since it seem to be so strong in Q4. It sounds like you guys are assuming that a decent amount of that was catch-up and then maybe as we get to Q1, that benefits kind of go away. Can you just talk about how much of the real [indiscernible] of revenue in Q4 was stuff that had slipped out of Q3 versus process improvements or yield improvements that might be more sustainable?

[Jeffrey S. Sherman:]

Hi, Jamie. This is Jeff. So we were up 7% in COB revenue year-over-year through the third quarter. And as I said in my prepared remarks, roughly $6 million to $8 million of Q4 we'd attribute more to Q3, which kind of gives you a normalized run rate coming out of Q4 of $90 million to $100 million. But again, Q4 always tends to be our strongest quarter for the year, so we will expect a proportion of the decline in Q1 in relation to the numbers I gave for the overall revenue decline. But we are continuing to focus on yield improvement for COB. Our Big Data investments and a lot of our efficiency efforts in technology spend that we’re doing is continuing to help us drive further yield improvements and expect to see some of that flow through to 2018 as well.

[Jamie Stockton:]

Okay. And then, maybe just one follow-up, Jeff, the Eliza business obviously we didn't have it in Q1 last year. Seasonality in that business from Q4 to Q1, is there any notable step down that rebuild throughout the year?

[Jeffrey S. Sherman:]

There is. I would characterize Eliza is fairly typical to the overall HMS pattern, where the first half of the year is lighter and it builds into the second half of the year, particularly, where we're looking to help -- help find customers close gaps in care, which tends to happen more in the third and fourth quarter. So I will say Eliza's revenue trend overall aligns fairly well with the legacy HMS revenue trend.

[Jamie Stockton:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Nicholas Jansen with Raymond James. Your line is open.

[Nicholas Jansen:]

Hey, guys. I appreciate the comments. First, maybe for you, Jeff, if we think about the visibility into guidance to start the year this year versus last year, how of you kind of handled the learnings from the 2017 moving parts as you frame 2018? And on that point, just kind of looking at the EBITDA guidance for '18, certainly in '17, you had some one-timers for audit costs and deal related dynamics and maybe there wasn't less bonus accrual. But just trying to get your thoughts on EBITDA margin expansion in '18 versus '17? Thanks.

[Jeffrey S. Sherman:]

Thanks, Nick. So I think first we wanted to pull out a number based on revenue, which we had solid visibility on. As a result, we’ve been measured in our estimate of full-year revenue really based on a careful analysis that utilize the bottom up approach. I think we’ve gotten much more granular in our forecasting at both the client and a detailed level. And it's been a fair amount of time in 2017, we’re finding our forecasting process to get there. So I think we’ve very good visibility coming out of 2017, going into 2018 at a more granular level, both at a product and a customer level. And so I think that gives us confidence in the revenue range we put forward. In terms of margin expansion, you are correct. Based on 2017 performance in our overall comp costs related to bonus, although they were higher in Q4 or still down for the year, so we’re going to see some higher cost related to that in 2018. And the level of margin expansion, we are guiding to is consistent with a measured approach that we are taking in all aspects of our projections for 2018. It's based on financial performance. We believe we’ve solid visibility on and translating into expectations that we think are both realistic and achievable. So we said a 50 basis point improvement in our operating margin is achievable, so we do think we are going to get leverage on that. You have a little bit of noise with the stock comp going down from an adjusted EBITDA calculation. But if you looked at our overall EBITDA range, we guided to revenue growth of 7% to 9% and EBITDA -- if you just took our EBITDA range, you had 7.5% to 12.3%. Adjusted EBITDA is a little lower because stock comp is declining.

[Nicholas Jansen:]

Very helpful. And maybe one for you, Bill, in terms of what we’re seeing with work requirements in some of the states testing that out based on some of the changes in [indiscernible] late in '17. Just your thoughts on the opportunities there? The risk associated with enrollment, just share your broader thoughts on some of the moving parts in the Medicaid landscape? Thanks.

[William C. Lucia:]

Sure. Well, work requirement is depending on the states approach whether it's you have to be working or you have to be pursuing work. Anybody who is joining a employer and taking employer-sponsored benefits is a positive for us. So Medicaid member who is now employed and has employer-sponsored insurance is just positive for our core COB business. Of course, at Eliza, we have the capabilities to help individuals whether its notify them of local job fairs or ask them the pertinent questions about their job search at the states that’s measuring that -- from that perspective. And then, lastly, I'd say that many states -- all states have the access to what’s called the health insurance premium payment program and that's really where Medicaid subsidizes paying the employees portion of employer-sponsored insurance. And some states utilize HMS to manage that benefit. It's a very, very good program and that Medicaid can pay those premium dollars, make sure that that employee stays using that much broader and maybe more managed care commercial network and Medicaid does what it's supposed to do and just pay coinsurance and deductible and act more like a wraparound coverage. So all of those from our perspective provide real opportunities for HMS.

[Nicholas Jansen:]

Great. Thanks. I will hop back in queue.

[Operator:]

Thank you. And our next question comes from the line of Sean Dodge with Jefferies. Your line is open.

[Sean Dodge:]

Yes, good morning. Thanks. So, Jeff, going back to the comment you made on the improvement in the implementation processes, most of the big problems there have been solved now or maybe how much of what you're doing there, the roadblocks that you’ve been encountering or actually within your control? I’d imagine these implementations require a lot of coordination or cooperation from your client. Are you always getting that and is there -- is that what’s been driving some of the kind of friction there, that we’ve been seeing?

[Jeffrey S. Sherman:]

Yes, I think as we went through 2017, we spent a lot of time breaking down our whole implementation process top to bottom. As I said in my prepared remarks, as we went through the list and what was causing delays, we certainly determinedly focused on the things that were causing delays and things we could control. And some of that was in our control, I think we worked on that and have been able to reduce those numbers quite a bit for things we are waiting for. So we might be waiting for data, they still might be in the queue, so I do think we made success -- we had a lot of success in doing that in 2017. We're always going to have customer issues. Our goal -- I think the other thing we did is we reprioritized the whole process and looking at both customer needs and the opportunity to drive revenue, that’s going to have the biggest impact and realign that in the third quarter as well, so that we know we’re getting the biggest bang for the buck in terms of the efforts put forth. It is an area where continued investments in technology and adding just more people helps and we certainly done some of that and we will look to continue to do that going forward. But I think the major issues in defining and understanding what was happening, I think we made a lot of progress on -- in our goal as we enter 2018 is to get to a more sustainable level and balance our resources appropriately to keep implementations at an appropriate level, and then continue to focus on shortening that time to drive revenue quicker after a sale.

[Sean Dodge:]

Okay. And then, maybe one on Eliza. You mentioned a quickstart for the rebuild sales efforts there and already having signed a couple of new deals. Those implementations happened pretty quickly, if I remember correctly. Is that the case and is it something we should see beginning to contribute positively pretty early in the year?

[Jeffrey S. Sherman:]

Yes. I mean, Eliza implementations can be anywhere between 45 to 90 days or sometimes even less. And so, we do like the ability to sell and implement fairly quickly, analyze it. So, as we think about our Eliza growth in 2018 and seeing strong growth there, sales that are occurring in the third and fourth quarter can even be implemented and start producing revenue in 2018. So that is part of our revenue growth expectations for Eliza.

[Sean Dodge:]

All right. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Mohan Naidu with Oppenheimer. Your line is open.

[Mohan Naidu:]

Thanks for taking my questions. Bill, on the population held offerings, can you comment on who you’re seeing in the competitive landscape in your -- going into the customers and what has been the customer reception so far, given the different priorities they all have -- seem to have?

[William C. Lucia:]

Yes, thank you. So it's very interesting. The -- so we have three product offerings. One, of course, very new, which is our member analytics -- risk analytics product. But between Eliza and Essette, they’re really different competitors. Essette Care Management Suite competes with a number of companies that have been in that space for quite some time, including Casenet and ZeOmega and others. We do believe that technology has the most user friendly, it was built from a care manager's view and workflow from ground up. And of course its integrated with EMRs and lab systems and highly functional automated utilization management in pre-op. So we're very excited about that. And then, of course, Eliza, there's a couple of companies we compete with, [indiscernible] might be one that will come to mind, but in reality, as we mentioned, Eliza has significant number of patents around their technology and process specifically around the work related to both understanding the members preferred method of communication as well as the IVR analytics and a special use of IVR that we do. But the interesting thing is applying these two and HMS's member analytics software together. And that's what’s resonating in the market now is people looking at what we call sort of the triple aim and that running the analytics to understand the either riskiest members or those who will become emerging risks which we're able to do. Moving them into the Essette Care Management platform which really acts as the care management, air-traffic controller, so to speak, and of course integrating clinical data, so you can better manage them and then for those who need intervention doing that through the Eliza outreach. So we find that while each one of the products may have competitors, that the integration of the three is extremely compelling, particularly, for the small to medium plans, the care management providers in the space who maybe taking post-acute care, risk, many entities providers who take risks. We are a very unique integrated offering.

[Mohan Naidu:]

Got it. Maybe on the sales schemes that you talked about that is fully staffed now, how much time do you think you need for the sales teams to be fully productive as you expect?

[William C. Lucia:]

Well, I mean -- so there is -- part of our model is and part of significant growth in the company, of course, I think it's almost an 80-20 just from existing customers. So the beauty of that is we have account managers throughout the nation in both our commercial and government business who are out talking about both the Eliza Engagement Services and the Essette Care Management System on a regular basis. So they are bringing those leads into the company and then we’re assigning sales to that. And of course we have subject matter experts throughout the organization that help on those deals. So I think our model having that expansive account management team helps us to get that sales activity generating pretty quickly. And I think in just the -- in 2017 alone, we were able to sell to about six HMS, existing HMS accounts going from small to -- multimillion member Medicaid plans and to some -- and one was a care management company. So we really are expanding our ability just from within to be able to do up-sells where I think we’re going to see a lot of positive momentum.

[Mohan Naidu:]

Okay. Thank you. Thanks, Bill.

[Operator:]

Thank you. And our next question comes from the line of Ryan Daniels with William Blair. Your line is open.

[Ryan Daniels:]

Yes, guys. Thanks for taking the questions. A lot of the bigger ones have been asked, so little bit nuance to your [indiscernible]. The CMS RAC, both you and your peers have highlighted kind of a lack of momentum there urgency, so I'm curious if you had any incremental conversation with CMS about expanding the program and really driving greater recoveries for the Trust fund?

[William C. Lucia:]

Hi, Ryan. This is Bill. We have -- look, we have ongoing dialogues with CMS, because we view the RAC contract as important to protecting the Medicare Trust Fund and we believe both the administration and CMS is interested in this as a vehicle going forward. They have some of their own challenges. They’ve been sued by the American Hospital Association and so they -- I think there's just going to trend lightly for a while, but they have even slowly have approved new audits. We’ve submitted a number of new audits and algorithms and we're processing. So, while it’s not at the pace it has been in the past, we are doing audits and we're hopeful based on both the President's budget and the goals they are trying to achieve to close the gap in closing out improper payments in healthcare fraud that -- this will at some point grow. But right now, our forecast is based on what we know.

[Jeffrey S. Sherman:]

Yes, and I’d just add to that, Ryan, as you look at the last reported CMS put out. They’re still roughly $40 billion of payment errors in the last fiscal year, roughly about 10% of claims are paid in there. So we certainly still think there's a big opportunity there. We came into 2017, guiding the $6 million to $8 million. We finished the year at about $3 million, so we did have $2 million in the quarter. I think we’ve been fairly active in submitting audits and new edit scenarios. For approval, with CMS and we’re seeing traction there, but we’re winding down an old contract and ramping up a new contract. And so, I think that’s part of it as well. But we see the ability to do more audits, it's kind of key to the overall revenue potential in this contract. And so if the ADR limit is expanded, we think that could be good upside for us and certainly we’re focused on making the case with a 10% error rate and $40 billion of claims paid in error, that the ADR limit should be increased and if we're successful in doing that, that could lead to some upside revenue for us.

[Ryan Daniels:]

Okay. That’s helpful color. And then, as my follow-up, I know earlier last year you were talking about maybe more proactively selling some of your program integrity solutions to states as well. Perhaps under the Medicaid RACs, I believe. So I'm curious if you made any progress through 2017 on that? And if that's still a opportunity for 2018 or maybe less so and more of a sales focus on other areas at this point. Thanks.

[Jeffrey S. Sherman:]

Yes, Ryan, we did make some progress in 2017 on that and still expect to see growth in 2018 on that. And so we’re really -- we’re focusing on the 12 or 13 states that are probably most focused on actually seeing recoveries come out of it. And I think we are having good discussions and we’re getting some traction and have some -- and have sold some expanded scope. So part of our revenue -- we will expect to see revenue growth in that in 2018. That’s obviously a -- it's a small number. But we are expecting to see pretty significant percentage growth in our state RAC business in 2018.

[Operator:]

Thank you. And our next question comes from the line of Matthew Gillmor with Robert Baird. Your line is open.

[Matthew Gillmor:]

Hey, thanks for the question. Maybe following up on some of the visibility comments and more specifically I wanted to ask how the implementation backlog plays into the revenue visibility for '18? You’ve obviously signed a lot of COB and PI business that hasn't been implemented yet. I was curious if, Jeff, could characterize the guidance in terms of how much revenue from COB and PI comes from business that’s already been signed and waiting to be implemented versus what needs to be signed and implemented in the year? And is that any different in terms of how you construct a guidance in prior years?

[Jeffrey S. Sherman:]

Matt, yes, I would say we’ve good visibility in a significant portion of our -- expected revenue growth has been sold and it just need to be implemented throughout 2018. As I said, obviously, with Eliza given that we can sell and implement in a fairly short period. Part of Eliza's growth is going to come from 2018 sales. But on the legacy, COB and payment integrity, a fair amount of revenue growth is going to be based on sales that have already been made as well as continuing to drive yield improvement for our existing customers.

[Matthew Gillmor:]

Okay. That’s helpful. And then as a follow-up probably for, Bill, but I wanted to ask about some of the third-party liability provisions that were included in the recent budget compromise that was signed in the [indiscernible] it seemed like it’s strengthened TPL in a number of areas, especially chip, but can you maybe just give us a sense for how that impacts the business? Is this a really meaningful change and how long that would take to actually flow into state policy and ultimately things and activity at your level?

[William C. Lucia:]

So we're actually measuring now the timeframe that it will take state-by-state. Some states that has managed chip under the single agency umbrella, we had already done some work for from a coronation of benefits perspective even without the supporting law. But now with the legislation we are analyzing state-by-state both fee-for-service and Medicaid managed care which was in fact our commercial business which states have supporting legislation, which ones of our data match partners will of course just not require any state legislation and just do this, because it's good. It's good business and it's good for the government and then roll this out. I mean net-net it is incremental to HMS versus our typical baseline. And it's good for the program that chip is now also viewed as a payer of last resort like Medicaid.

[Matthew Gillmor:]

Okay. Thanks very much.

[Operator:]

Thank you. And our next question comes from the line of Stephanie Davis with Citi. Your line is open.

[Stephanie Davis:]

Hey, Bill. Hey, Jeff. Thank you for taking my questions. Congrats on the quarter.

[William C. Lucia:]

Thank you.

[Jeffrey S. Sherman:]

Thanks.

[Stephanie Davis:]

This was touched on a bit in the prepared remarks, but could you talk to some of the drivers with the strong commercial growth this quarter? And maybe how you’re seeing that demand environment shape up for the coming year?

[William C. Lucia:]

Well, the -- so, most of the growth is a combination of Eliza and of course bouncing back from Q3 to Q4 on our payment integrity and coordination of benefits. I would say that the growth we expect in the coming year for commercial buyers of our services is going to be organic growth coming out of our COB business, but more continued up-sells expansion of audits that we are already doing in the payment integrity space for existing logos, the sale of some new logos that are -- and through the implementation -- going through the implementation process now, our approach to selling through benefit advisory firms to very large self-funded insurers, who are bringing these services to their administrator and then lastly in that payment integrity. And then lastly the impact of selling Essette and Eliza services, the population management and care management services to commercial buyers of our services. That's what we really see as the components that built into that.

[Jeffrey S. Sherman:]

And I think, overall, we still look at the commercial marketplace. Remember in 2016, it was the first year that it surpassed our state revenue. We still think we’re in an early innings of tapping into the commercial opportunity in front of it. Adding Eliza and the Essette Care Management suite which were entirely commercial focused, helps to broaden that as well. We did pick up 2 of the top 10 largest health plans that we weren't servicing with Eliza. So from an overall coverage standpoint with us being in 23 to top 25 plans, as Bill said previously, that cross-sell opportunity really represents a significant opportunity process and we're going to be spending more time. And then both from different outreaches and different ways to approach the market with benefit advisors, starting it have the true commercial space which hasn't been is focused historically and saving money is another area where we think we’re going to start seeing traction in that -- starting to see some traction. And then adding the Eliza and Essette product suite over that, I think what we will expect to see strong commercial growth in 2018.

[Stephanie Davis:]

All right. It makes sense. And then thinking a little bit more about the Eliza and the Essette acquisitions. Could you [indiscernible] maybe what you’re seeing as a low hanging fruit in this consumerization trend, just given the recent deals?

[William C. Lucia:]

Well, there's -- I don’t know about the low hanging fruit, but I would say that there is a broad swap of what I'd say is a smaller to mid size Medicaid plans. Most of them regional, some of them like in California County based, that just happened to had the attention from the more sophisticated vendors and analytics companies like ourselves to deliver these consumer engagement solutions. Whether it's in electronic health risk assessment, which by the way we -- we have a very strong closure rate on that. Very good to get that date electronically then determine where do you really need to do a physical assessment. So anything between that to member satisfaction and retention to all of the 200 plus programs that Eliza offers, we see that market as a significant opportunity because they're just underserved. All of the -- obviously, all of the players in the space are focused on the big and Eliza did, as HMS did when we first entered the commercial space. But we're now very focused on that. You know 200 plus health plans that’s sit in that, small to midsize space, that we believe are underserved. And those are who we're speaking to on a daily, weekly basis to sell our Eliza services into.

[Jeffrey S. Sherman:]

And I think having the claims information as a starting point is a big advantage and then being able to restratify patients in a consistent manner across different health plan. We think it's very important and once that is done, being able to use our care management platform with Essette and our outreach platform with Eliza we do believe we have a unique offering in the marketplace and we’re getting I think fairly good traction our conversation of putting all that together in our total population management approach, and that’s where we see I think good opportunities as well.

[Stephanie Davis:]

All right. [Indiscernible]. Thank you, guys.

[Operator:]

Thank you. And the last question comes from the line of Frank Sparacino with First Analysis. Your line is open.

[Frank Sparacino:]

Hi, guys. Just sort of quick, I wanted to be clear you haven't given us specific range for commercial in terms of 2018 growth, correct?

[William C. Lucia:]

That is correct. But obviously, to get to our revenue growth targets we talked about, Frank, what we said state is going to be low single digits. We are expecting double-digit growth for commercial, but that obviously includes the full-year of Eliza and the growth in Eliza but we're overall guiding to overall revenue guidance of 7% to 9% and have given that commentary on the breakdown.

[Frank Sparacino:]

Great. And then, one last one, Analyzer. Maybe, Bill, could you talk about given the pricing model historically for them was more transaction driven and you’re trying to convert to a more predictable PMP [ph] or PMP1 [ph] model. What is the risk or what's the opportunity up as you try to convert those accounts from an economic standpoint.

[Jeffrey S. Sherman:]

Well, Let me start, Bill can add it. So, we said roughly a quarter is in the PMP but I want a stretch. We had 8 of the top 10 health plans in Eliza, and a lot of transaction was recurring every year. And so, I think our goal over time is to move that more into a PMPM model of approach, but generally we are going to start with transactions and we’re selling Eliza into new customers. It’s unlikely we’re going to jump into a PMPM relationship first. Generally, we start running a transactional type approach, our client fee, the benefits of that, they add more and we tend to bundle. It's a bundled approaches and then ultimately we get to the point where we want to help them both target and run the programs throughout the year. So I think that’s where our focus is as we go into 2018 and we’re seeing I think good traction. But a lot of Eliza's revenue that’s transactional in nature, we'd still characterize as recurring, because it's done every year by the same customer base which has been very steady and continues to grow.

[William C. Lucia:]

Yes, and I think the other thing that we are very focused on is, all of the products that meet that triple aim that I talked about, we are focused on selling and a subscription based model. So we think that’s the way health plans like to buy, it's very budgetable from their perspective, its actuarially where they go, whether its -- whatever dollars per month per month for year, it's very -- we get -- we can get longer term contracts, great visibility in the future revenue. And we think we can provide significant value for those prices. So it starts to derisk some of the things that happen and quarterly swings on the contingency fee based revenue. So I think you will see us as we rollout more products in this new vertical for the company, focused on subscription based revenue.

[Frank Sparacino:]

Thank you, guys.

[Operator:]

Thank you. And I’m showing no further questions at this time. I’d now like to turn the call back to Bill Lucia for closing remarks.

[William C. Lucia:]

Well, I want to thank you all for your continued interest in HMS. We look forward to speaking to you on our next quarterly earnings call and wish everyone a wonderful day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.