HMS Holdings Corp
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the HMS Q4 and Full Year 2015 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. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Dennis Oakes. Sir, please go ahead.

[Dennis Oakes:]

Thank you, Liz. Good morning and thank you, everyone, for joining us for the HMS fourth quarter and full year 2015 earnings conference call. With me today are Bill Lucia, our Chairman and Chief Executive Officer; and Jeff Sherman, our Chief Financial Officer. As you know, we distribute our earnings release through our website at hms.com under the Investor Relations tab. We also post an investor presentation each quarter containing supplemental information, but we will not make specific reference to it in our prepared remarks. This call is being webcast and can be accessed via the Events & Presentations tab on our Investor Relations website. And a replay of the call will be posted later this morning. Please remember that some of the information discussed on the call today, including the company's future expectations, plans, and prospects, is considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, and actual events may differ materially from those expectations. We refer you to the company's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Those filings identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. All information on this call is as of today, February 26, 2016, and the company disclaims any intent or obligation to update any forward-looking statements as a result of developments occurring after today's call. Finally, we may refer to certain non-GAAP measures during the call. Our earnings release includes a reconciliation of those measures to GAAP. For the Q&A session, we ask that you limit your inquiries to one question and one follow-up, so that we can get through the full list in a timely fashion. We're ready to begin. Bill?

[William C. Lucia:]

Thank you, Dennis, and good morning, everyone. My remarks today will be focused primarily on the year ahead. But let me start with a brief look back in 2015. We began last year with 40% of our state Medicaid TPL revenue scheduled for re-procurement, uncertainty about when new Medicare RAC contracts would be awarded and an ambitious goal to increase our commercial health plan revenue by 20% year-over-year. As we entered 2016, our historically strong state Medicaid TPL presence remains solidly in place. Our health plan growth came in as expected with record revenue in the fourth quarter, and the future of the Medicare RAC program is no more settled than it was one year ago. As we discussed throughout 2015, five of our top 10 state accounts, by revenue, were scheduled to issue RFPs last year. Four states, Florida, New Jersey, New York and Tennessee completed their rebids and Massachusetts decided to extend its contract with us until the end of this year. We received a notice of a three-year contract award from Tennessee in the fourth quarter and we won Florida and New York earlier last year, both for five-year based contracts. As everyone who follows HMS knows, the New Jersey contract was awarded to another bidder last summer. After our prolonged period of dialog with the state regarding public records we sought an order to prepare our protest. We filed it two weeks ago today, and are now awaiting a decision or further action from the state agency considering our protest. We have continued our work to recover erroneous payments and identify savings opportunities for the state throughout and remain confident that we will ultimately prevail in our protest. The magnitude of the state re-procurement picture for 2016 is now dramatically different, as we expect the contracts representing only about 12% of our 2015 state business will be up for bid. The potential revenue impact this calendar year is much smaller than that, likely under 4% of state revenue, or about 2% of total HMS revenue, because the two largest TPL contracts to be re-bid are Massachusetts, which expires December 31; and Ohio, which does not expire until June of next year. We have multi-year contractual relationships in place with 45 states in the District of Columbia, which means our state business will continue to be a very important component of our annual revenue and profitability long into the future. Unfortunately, it's not really possible to make similar projections about the future of the Medicare RAC program. Though CMS did release a request for proposals last November and questions from prospective bidders were submitted shortly thereafter, there has been no activity since. Independent of the RFP process, CMS imposed new medical record request limits as of January 1 under existing RAC contracts, which we estimate will effectively reduce audit opportunities by as much as 90%. We continue to believe that a rigorous RAC program is essential for the long-term viability of the Medicare Trust Fund, so do hope CMS will make changes to the program pursuant to the RFP process or otherwise. I now want to spend the bulk of my time this morning, however, discussing our work on behalf of commercial health plan customers, which is clearly the driver of our current growth and the engine of continued revenue expansion over the next several years. 2015 was a breakout year for our commercial health plan business. We added a dozen new customers and now work with well over 250 health plans nationally. We sold incremental products to current customers last year covering approximately 12.6 million lives and full-year revenue of $203 million was $32 million, or 19% higher than the prior year. Most impressively, fourth quarter health plan revenue of $58.5 million was nearly 30% higher than the year-ago quarter. We enter 2016 with strong momentum and very good visibility on revenue growth in the year ahead based on already closed but not yet implemented sales, and a very strong sales queue. As a result, we expect 2016 growth in our commercial health plan business at a level similar to last year. That means that projected health plan revenue this year should surpass revenue generated by our state Medicaid business for the first time in company history. Our sales team continues to produce great results. Production in the fourth quarter included a combination of sales covering 490,000 new members and the sale of new products to 5 million existing lives within our health plan customer base, which now contains more than 85 million unique lives. Strong sales are only part of the revenue production story. The other chapters relate to onboarding new customers and implementing those new sales. Throughout last year, we hired personnel and reengineered the entire implementation process. Early in 2015, we established new, dedicated implementation teams to increase output and scalability. We created more measurable standards for quality improvement, enhanced our performance tracking, and moved the entire process upstream, so customer discussions about data requirements and scope of work are now occurring much earlier in the sales cycle. The result was a doubling of project implementations in the fourth quarter compared to the prior-year fourth quarter and a more than 20% increase in projects implemented on a year-over-year basis. Despite our significant progress, we do enter the new year with an implementation backlog. We added some additional resources in January and are adopting new efficiency features, so plan during the course of this year to largely eliminate the existing backlog. We also expect our ongoing operational capacity for new project implementations this year will be about double the quarterly average for 2015. There are several factors which add to our confidence that the health plan business can grow in the range of 20% again this year. In addition to expanded sales and the internal steps we have taken to increase efficiency, both in terms of the implementation process and the profit yield on each dollar of incremental sales, there are powerful macro forces creating a tailwind. One of the most significant continues to be the Affordable Care Act, which will boost annual Medicaid enrollment and spending. Aging baby boomers are a second factor. Medicare rolls are projected to swell by more than a quarter over the next eight years, adding 14 million new members, the majority of whom are expected to enroll in Medicare Advantage programs. The increasing complexity of payment models, including the gradual move toward pay-for-performance is making payment accuracy more of a focus. High-cost health exchange members, together with ACA-imposed taxes and fees, are adding to a sense of urgency among payers to find new ways to control costs. Finally, we see evidence that the frequency and magnitude of high-profile healthcare data breaches is pushing health plans in the direction of sharing their members' personal health information with fewer trusted partners and making sure those few meet high data security standards. All of these factors combined play to our strengths, as many of our customers seek to consolidate their business among fewer and much more substantial service providers. Quite simply, our products and services save our customers money. With an ever-increasing array of cost pressures, our top customers are regularly buying more and more products from us. The best evidence of that is a recent internal analysis which shows that our largest health plan customers purchased an average of seven products from us at the end of last year while the average across the balance of our health plan client base is still closer to two products. So not surprising, this finding suggests the magnitude of upside in our existing customer base alone. Ongoing product innovation, such as our prepay clinical reviews further enhances the growth opportunities with our largest customers and creates an entrée for discussion with others. Our sales team is now actively marketing the prepay clinical product and any sales closed early in the year should be revenue-producing in the second half, although we expect a greater revenue impact next year. Looking ahead, we also see opportunities for new products and new business relationships, as growing attention is paid to population health management, member health profiling, and individual risk assessments. We have an internal innovation team exploring how our massive eligibility and paid claims database, sophisticated data analytics capacity, and uniquely broad distribution channel may position us to play in each of those arenas. Another frontier, which we expect is not too far over the horizon, is data sharing across payers, which we believe can provide extensive benefits. We anticipate that there will be growing interest among multiple payers to develop applications with us to look across entire population in a given geography, not just on an individual plan basis but via a consortium of payers. Opportunities to identify and eliminate fraud is one of the most obvious areas of mutual benefit from such cooperation. In fact, the CMS-led Healthcare Fraud Prevention Partnership is a voluntary public/private effort among federal and state government officials, law enforcement, commercial health insurance plans, and healthcare anti-fraud associations. HMS is a trusted third-party participant in the group's activities, which are focused on the detection and prevention of healthcare fraud for data and information sharing and analytics. Before turning the call over to Jeff, I want to touch on the prospects of adding an inorganic growth component to our view of 2016. Making an acquisition that would leverage our large installed customer base and complement our core competency, expand our data analytics capabilities or supplement our capacity to address fraud, waste and abuse remains a strategic priority for the year ahead. We have intensified our efforts to find an attractive acquisition but have not relaxed our discipline and standards with regard to identifying an appropriate fit or evaluating a fair price. We have built a robust pipeline, have a clear lens through which we are viewing targets and have a growing sense that the spread between bid and ask is narrowing sufficiently, so making an acquisition at a reasonable valuation is achievable. Jeff will now touch on a few of the financial highlights of our fourth quarter and full-year 2015 results before focusing on our 2016 guidance. Jeff?

[Jeffrey Scott Sherman:]

Thank you, Bill, and good morning, everyone. 2015 was a year of solid revenue growth, strong cash flow, improved efficiency, and increased profitability. Adjusted EBITDA for the full year of $112.5 million was 11% higher than the prior year. Full-year operating income grew by 39% to $47.6 million. Operating cash flow of $30.3 million in the fourth quarter capped a strong year, which gave us the capacity to buy back $50 million of our shares during the third and fourth quarters. We ended the year with $145.6 million in cash, an increase of $12.5 million compared to the prior year-end. Our purchase of approximately 4.7 million shares reduced outstanding shares at 12/31 by about 4.5% compared to the prior year-end even including the usual equity-based comp shares issued during the year. We currently have $25 million of remaining buyback authority. As we did last year, we will purchase our shares opportunistically as we continue to view them currently as undervalued. Our strong liquidity, existing credit facility availability, and ongoing cash generation will allow us to simultaneously pursue acquisition, which is our top priority for capital deployment. Before providing our guidance for 2016, I want to review the projections we made last year at this time as 2015 played out essentially as we expected. Full-year revenue, excluding Medicare RAC, of $454 million was 7.7% higher than the prior year, so it was at the midpoint of our 7% to 9% projection. Our 2015 revenue estimate was based on an expectation of 20% growth in our commercial health plan business and state revenue that was flat with 2014. As Bill mentioned earlier, our health plan revenue was up 19%, while state Medicaid revenue for the full year was just 0.1% higher than the preceding year. With uncertainty about when new contracts might be awarded, we estimated Medicare RAC revenue would be approximately $3 million per quarter. We were able to do somewhat better than that, generating full year RAC revenue of $20.5 million last year compared to $22 million in 2014. 2015 growth in our two major product categories was roughly equal on a percentage basis with coordination of benefits revenue up 8% and payment integrity revenue, excluding Medicare RAC, up 7%. Through November 30 of last year, a total of 3.7 million new Medicaid enrollees entered our customer eligibility files, which was certainly a contributing factor to our COB growth. Consistent with our expectations, 2015 showed continuing progress in a multi-year effort to improve organizational efficiency. It includes the intense focus on speeding up new sales implementations, as well as improving product yield and reducing overall operating expenses. We expected a full year normalized tax rate of 42% last year, but the one-time tax benefit as well as changes to certain state apportionment and permanent differences resulted in a fourth quarter effective rate of 32% and a full year rate of 38.4%. Over the past 18 months, we have treated legal expenses in connection with our disputes with Public Consulting Group as an ongoing operating expense. We spent $1.4 million or about $0.01 per diluted share after-tax in the fourth quarter, and a total of $5.6 million on a full year basis. With the Texas trial expected to start in April and the New York trial scheduled in June, we now anticipate any material level of legal expense in connection with current PCG matters will end this year. As a result, we plan to begin disclosing any such expenses as non-recurring in future period. They will be added back to our quarterly adjusted earnings, which means the numbers we report will appropriately reflect the ongoing earnings power of the company. Turning now to our view of the year ahead, we are providing the following guidance based on what we know or can reasonably expect as of today. We are projecting commercial health plan growth in the range of 18% to 20% and have good visibility on much of that growth based on sales completed in 2015. The balance will come from incremental business sold in the first half of this year and implemented before yearend. Other contributing factors include increasing sales of our payment integrity products, which we anticipate will account for a larger percentage of newly generated revenue, a reduction in the number of sold-but-not-yet-implemented accounts, expanded yield across all products sold at commercial health plans, and the focused efforts to sell our prepaid clinical review solution to existing and new customers. Over time, we view our state Medicaid business as a low-single-digit grower. Excluding New Jersey, we expect our state business in 2016 to be flat to up 2%. The lower end of our projection is based on the fact that we saw a spillover benefit of several million dollars early last year from the 2014 Affordable Care Act expansion, which will not be repeated this year. We have excluded New Jersey from our state guidance because it is not possible to project revenue from the state's TPL business with any certainty much beyond the first quarter. We are in the process of finalizing an extension of our current contract through the end of March, but there is no way to predict how long it will take for our protests to be resolved. Though we remain confident we will ultimately prevail in our protest, we think this conservative approach is the proper one based on all the information available to us today. We are taking a similar view of Medicare RAC revenue due to the lack of progress on the new RFP and the limits on record request or ADRs, which went in to effect January 1. We currently project only $8 million of Medicare RAC revenue through the expiration of our current contract on July 31. The final component of our annual revenue is additional federal programs, such as the VA and other miscellaneous revenue, which totaled approximately $24.5 million in 2015 and we expect it to come in at a similar level this year. Before moving on to the other components of our 2016 guidance, I want to remind everyone that we have experienced a seasonal revenue decline from the fourth quarter to the first quarter in each of the last several years and we expect that to occur again this year. Anticipated decline from the fourth quarter level in our commercial health plan revenue of approximately $5 million to $6 million and state Medicaid revenue is expected to be $3 million to $4 million lower next quarter. During 2016, we estimate the run rate for commercial health plan revenue is approximately $55 million per quarter based on existing revenue-generating business. Though we project somewhat lower revenue in the first quarter, we then expect a steady rise in commercial health plan revenues throughout the year, with the second half being meaningfully higher than the first half based on planned implementations. With regards to other aspects of our expected 2016 financial performance, we anticipate continued strong operating cash flow on the order of $20 million to $25 million per quarter and capital expenditures for the full year of approximately $20 million. Those capital investments will be primarily focused on IT infrastructure and product development. Our internal plan calls for keeping total operating costs roughly flat excluding non-recurring legal costs by continuing to achieve operating efficiencies which should offset investments in innovation and the planned growth in our commercial health plan business. Finally, we anticipate an effective tax rate of approximately 40% for the year. Bill will now have some concluding remarks and then we'll be ready for questions. Bill.

[William C. Lucia:]

Thank you, Jeff. Reliable estimates suggests that erroneous payments across all payers and programs in 2015 were close to $170 billion and that apparently does not include any estimate of the financial impact of fraud, unnecessary medical services or other waste. The bottom line is that the addressable error opportunity to which our services can be applied is virtually unlimited and growing annually as the number of insured lives increases and healthcare expenditures continue to rise unabated. With ROIs of 10 to 1 and higher, we have a proven record of helping our customers bend the healthcare cost curve. Against that backdrop, I want to close this morning by highlighting our market leading position as a data analytics company performing cost containment services on behalf of our state Medicaid and commercial health plan customers. Our contractual relationships with 45 states and over 250 health plans gives us access to an unparalleled Medicaid eligibility and paid claims database for our existing product lines as well as expanding opportunities with Medicare Advantage, at-risk commercial plans and other risk-bearing entities. The depth, breadth and multiyear history of that data contribute significantly to the sophistication of our proprietary matching algorithms and clinical analytics. Our extensive customer base also provides a powerful distribution channel for new products such as our prepay clinical review solution. We enter 2016 with renewed confidence in our business model, our strategic priorities, financial strength, hardworking employees and experienced executive team. Consistent with our double-digit growth objective over time, and our commitment to maximizing shareholder value, we will focus in the year ahead on execution, implementing sold business and delighting our customers with excellent service; innovation to stay ahead of the competition and create opportunities for new product sales; efficiency and cost reduction through process engineering; maximizing commercial health plan growth via new and expansion sales, and making an acquisition when we identify the right asset at a fair price. Operator, we are now ready for the first question.

[Operator:]

Our first question comes from the line of Dave Windley with Jefferies. Your line is now open.

[David Howard Windley:]

Hi. Good morning. Thanks for taking the questions. Bill, I want to start on your last point, the M&A. It seems to be a definitive kind of a marked point of conversation in the prepared remarks this morning. Could you talk about the nature, type, size, any parameters you can provide us around the type of transaction, type of asset you're looking for, please?

[William C. Lucia:]

Yeah. Thanks, Dave. Well, first, I'd like to say I'd characterize the pipeline as robust and deal flow of the company has picked up. As we've mentioned in the past, we hired somebody in corporate development to work on this full time last year. And now that we have very strong deal flow, we have senior executives of the company engaged in that. We have looked at companies that one would consider small but tuck-in and services we could sell across our broad channel to what would be larger, potentially transformational acquisitions and really everything in between. The color and flavor of those businesses are primarily in the markets we serve today obviously with a bend towards expanding the products that we serve to the commercial health plan business and all of them are some offshoot or addition or expansion of actionable data analytics which is really what the company's product line to-date have been.

[David Howard Windley:]

Okay. Thank you for that. Wanted to switch gears just for the follow-up to state-based revenue and understand a little bit of maybe seasonality where if I look in 2014 I think the seasonality was a little stronger in the second half. In 2015, it was kind of the reverse of that. In the prepared remarks the spillover revenue into the first quarter was called out. I guess, if total state revenue is flat year-over-year, you hadn't gotten that spillover revenue; it would actually have been a little bit lower. Said differently, the fourth quarter was the lower number than we thought in light of the fact that New Jersey was still in there. If you could help with kind of what's going on with seasonality and maybe why the fourth quarter wasn't stronger with New Jersey still included.

[Jeffrey Scott Sherman:]

So, as we've looked historically on seasonality just in Q4 to Q1 in over the last four years, on average, our state revenue has declined roughly about 7% from Q4 to Q1. Now, that's an average over the last several years. As we noted in our prepared remarks, Q1 of last year was fairly strong, and we did see spillover from the Affordable Care Act expansion from 2014. And so, as expected, as we entered 2015, that trailed off in the second half of the year. And as we see the seasonality now, we're just anticipating from the fourth quarter our typical seasonal decline in the first quarter. There's a lot of moving parts on the state revenue with contracts and work done in any given year, and the scopes change, but the trend has been pretty consistent from Q4 to Q1 declines over the past several years.

[David Howard Windley:]

So, Jeff, if I could just clarify on that. So, was there, say, a state other than New Jersey, was there some component of the state business that was kind of surprisingly weak that offset what would have seemed to have otherwise been a stronger result because, again, you still have New Jersey in the numbers.

[Jeffrey Scott Sherman:]

No, I think, I'm balanced. Again, we always have pluses and minuses and changes in scope in contract. But as we look at 2015, excluding New Jersey, there was really no other significant change on the state.

[David Howard Windley:]

Okay. All right. Thank you. I appreciate it.

[Operator:]

Our next question comes from the line of Ryan Daniels with William Blair. Your line is now open.

[Ryan S. Daniels:]

Yeah. Good morning. Thanks for taking the question. Bill, one for you. The data that you analyzed regarding your largest customers, and in effect, they purchased seven products versus two across the broader base. That obviously shows a lot of upside in the existing business. I'm curious if you could maybe compare and contrast those large customers, meaning, is there anything unique about their size, their tenure with HMS, their product lines that has allowed this that might not translate or creates a blueprint for growth into the rest of the market?

[William C. Lucia:]

Thank you, Ryan. That's a good question. I can't say that other than the largest customers, the largest customers for HMS in the commercial health plan market today are the obvious national multi-line carriers. And what I mean is they're in commercial revs (32

[Ryan S. Daniels:]

Got it. That's very helpful color. And then just as a big picture follow-up. You had in your prepared comments some thoughts on data sharing across payers. Can you talk a little bit more about the longer-term opportunity for HMS there? And then, I guess, more importantly what it would take to actually make that a reality from a cooperation or maybe even a regulatory standpoint to allow that? Thanks.

[William C. Lucia:]

So, I think the first step that has made this more visible in the marketplace is CMS' efforts with the healthcare private-public partnership on fraud and the trusted third-party procurement they did last year where we are a subcontractor, really managing the enrollment of new plan and state members into that partnership, as well as bringing our Medicaid expertise to the table. That's heightened the awareness that looking across the landscape at healthcare claims, can both identify fraud but may even help better understand the risk of a member. What I think keeps us today from doing, from actually executing on the promise of that is really the data use agreements we have with our customers today, though, we're out talking to our customers and other stakeholders in the industry about the need to start to look at that using a trusted third-party, a highly secure entity like HMS, to look across providers or members in a given geography and identify the patterns that would – where we could identify fraudulent providers, or in the case of members, be able to identify the risk of a member who's moving in and out of the Medicaid program through different health plans or fee-for-service. What's unique about HMS today is that no one else can replicate the 90% of the Medicaid population and the activity that population has had over the vast number of years. That's what the unique asset we have that we would surely like to use on behalf of benefiting the Medicaid program and ultimately other programs across the nation. So, we're in the process of implementing, meaning, we are out talking to customers, we have the data warehouse and statistical analytics ready to go, and are looking for those, what we call, lighthouse accounts to start the process.

[Ryan S. Daniels:]

Great. Okay. Thanks for all the color.

[Operator:]

Our next question comes from Stephen Lynch with Wells Fargo. Your line is now open.

[Stephen B. Lynch:]

Hey, guys. Thanks for taking the questions. Could you talk about what drove the acceleration in Medicare RAC revenue in the quarter? According to the CMS data, it looks like total corrections for HDI were about flat from Q3 to Q4. So, I was wondering if you could just talk about what drove the uptick in the fees you got there.

[Jeffrey Scott Sherman:]

Yeah. So, there's always work in the queue when we're doing Medicare RAC revenue. So, the timing of quarterly revenue recognition may not exactly coincide with any specific quarterly information. So, we did have some additional work in the fourth quarter based on prior work that was in the queue that was actually completed in the fourth quarter. As we move into next year, starting on January 1, with the restriction in the number of medical records requests that we can actually ask for and do work on, that's why we're seeing it trending down quite a bit as we go into 2016.

[Stephen B. Lynch:]

Got it. And just as a follow-up, that's a nice segue. On the ADR limits, can you just talk about what would revenue from a full contract look like in the future versus maybe what you're able to do in your prime in 2013 under an old contract? In other words, how big of a haircut does the document limit put on a potential new contract in a new RAC world?

[Jeffrey Scott Sherman:]

Well, we're not certain it would roll into a new contract. But I think, as we said, I mean, if you just start with the 2% request limit going to 0.5%, I mean, that's a 75% reduction in the number of requests. There's some other intricacies in how they do the count based upon what's on a medical campus that actually increases the reduction to the 90%. So, I wouldn't speculate on the RFP because it's still in process. They have asked for questions from the RAC providers. We have provided those questions and certainly our input on our desire to do more audit work. But until we have clarity and answers to those questions, it's really difficult to predict what the long-term revenue impact would be.

[Stephen B. Lynch:]

Okay. Thanks.

[Operator:]

Our next question comes from the line of Mohan Naidu with Oppenheimer. Your line is now open.

[Mohan Naidu:]

Thanks for taking my questions. Bill, maybe one to start with on the prepay clinicals. Can you update us on what's going on there, what's that option so far, and how the feedback has been?

[William C. Lucia:]

Yes. Thank you, Mohan. So we still have our first account, which recently extended that contract. We have not expanded it yet to a fuller population, but it's moving along well and we're having great returns. All the things that we said, minimized irritation with the providers, faster to revenue for us, and then we have the two sales that we are in implementation with, one on Medicare Advantage and one in Medicaid managed care. I will say that our pipeline for prepay clinical is robust. We've not closed another account through the balance of 2015 but, again, have a strong pipeline for it. It is a product that needs a lot of pre-sale activity and discussion with the customer because we're talking about a very, very tight technology integration. We're not getting – in our typical business, we're getting a batch load of files, claims and eligibility and provider data typically weekly, sometimes monthly, depends on our client. Here we're getting it nightly and they're having to ingest our results nightly. So, much tighter IT integration, usually takes our clients longer to do that, so the planning in the sales cycle is longer. But we're very optimistic with the sales queue that we have, that we'll have more clients adopt this product. And it's usable across really any organization that pays claims. So it could be commercial health plan on commercial risk, could be Medicare Advantage, Medicaid managed care, could be a third-party administrator, any of those organizations could use this to their benefit.

[Jeffrey Scott Sherman:]

And again, doing the work upfront eliminates a lot of the back-end administrative processing burden on actually recouping the money – having to go after the money, recouping the money and getting the money back from providers. Actually doing the work upfront is a much improved cash flow benefit both for our customers and for us because then we'll be paid based on the current contract, based on our savings within a 30-day or 45-day period versus having to wait six or eight or nine months for providers to actually pay the money back.

[Mohan Naidu:]

Okay. That's great color. Maybe one just quick follow-up around the commercial health plan. So the growth rate around 18% to 20% for 2016. You guys are going into 2016 with good momentum coming from 2015. So how much of that is already booked then, it's just a carry-forward from the new population that you have already implemented versus what needs to be booked and converted into revenue into 2016?

[Jeffrey Scott Sherman:]

So, as I've said in my prepared remarks, Mohan. And so if we look at it and say, basically, we have a $55 million commercial run rate exiting the fourth quarter, realizing we have some seasonality in the first quarter, that kind of gives you $220 million run rate. We're projecting 18% to 20% growth, roughly $40 million. So, about half is kind of based upon the existing run rate, work that's already been done. In terms of the other half would come from new sales or implementations that have been sold – product that have been sold but not implemented yet throughout 2016. And again, we also continue to see opportunities for yield improvement as well, just getting better results for our client base, we continue to refine and improve our analytics, which is also part of that 20% – 18% to 20% growth rate.

[Mohan Naidu:]

All right. Thank you very much, Jeff. Thanks, Bill.

[Jeffrey Scott Sherman:]

Thanks.

[Operator:]

And our last question comes from Matthew Gillmor with Robert Baird. Your line is now open.

[Matthew D. Gillmor:]

Hey, good morning, and thanks for taking the question. I want to ask a follow-up on the M&A front. Can you give us a sense for how you are thinking about return thresholds on potential deals? And would you expect, if you did a deal that would be accretive in year one, or would you accept some dilution to adjusted earnings if they were strategic enough?

[Jeffrey Scott Sherman:]

Yeah. Matt, this is Jeff. On balance, we're looking for deals to be accretive within the first year of operation, and so certainly we're looking at return thresholds. We have discussed those publicly. But our expectation is, given our liquidity profile and our ability to do acquisitions we believe quickly and more importantly or equally importantly, the ability to ramp up acquisitions into our existing customer base with 250 commercial health plan in over 45 states that we can add value to acquisitions quickly, and that will help return thresholds as we do acquisition.

[Matthew D. Gillmor:]

Got it. Thanks. That's helpful. And then, maybe just one on ICD-10. I know some states were prepared, and other states weren't. Just curious if the transition had any impact on either your revenues or your costs during the quarter?

[Jeffrey Scott Sherman:]

So we went into fourth quarter highlighting that there was some risk to that just because we weren't certain if everyone would be ready. We did have a few states that weren't fully prepared. But on balance, there wasn't any material impact to revenue in the fourth quarter. We could have some impact in 2016, but we think it would only be on a quarterly basis. You could have some revenue potentially pushed from one quarter to the next. It's not any number that I would call out as material at this point, but you could see some movement of revenue from quarter to quarter. But we didn't see any significant or material disruption in our revenue.

[William C. Lucia:]

And ultimately, we believe that it becomes a tailwind because the chance for errors are greater. And while CMS has basically given the physicians a year to continue to learn how to code correctly, we've already seen through our systems inaccurate coding from an ICD-10 perspective. So we expect that we'll be able to use that to our advantage in identifying additional errors by the time we close 2016.

[Matthew D. Gillmor:]

Okay. Great. Thanks a lot. Appreciate all the color.

[Operator:]

I'm showing no further questions in queue at this time. I'd like to turn the call back to Bill Lucia for closing remarks.

[William C. Lucia:]

Well, I want to thank all of our shareholders for your continued interest in HMS, and we look forward to speaking again on our first quarter call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.