As health care costs increase and the government makes more
health care programs available to a wider slice of the
population, companies such asHMS Holdings (
) stand to benefit.
The New York-based provider of cost containment services helps
states, government agencies and private health care payers
control and correct billing errors in the benefits they pay out
under programs such as Medicaid and Medicare.
HMS is the dominant player in the Medicaid market. It
currently has contracts with 43 state Medicaid programs and 137
Medicaid managed care plans. It also serves as a Recovery Audit
Contractor, or RAC, in 17 states for Medicare programs and in 14
states for Medicaid programs.
"Health care, Medicare, Medicaid and even the commercial side
of health care (are) fraught with improper payment, fraud, waste
and abuse," said Deepak Chaulagai, equity research analyst at
Dougherty & Co.
HMS estimates there were $36 billion and $48 billion in
Medicaid and Medicare payment errors in 2011, respectively. Of
that, the federal government recovered $4.1 billion in
In June, the Supreme Court upheld the Affordable Care Act and
most of the law's provisions as constitutional. As a result, in
states that choose to expand their Medicaid qualification
requirements under the act, more needy uninsured will have health
Most of that cost will be paid by the federal government
between 2014 and 2016, before a phase out toward the states. This
is a huge opportunity for HMS.
"We think at least 50% of the states will implement the
expansion and that is directly proportional to revenue growth for
HMS," said Chaulagai. This means 8 million more people coming on
the Medicaid roll, he added.
"Any expansion to the Medicaid program goes to HMS' core
business, the coordination of benefits business, so it's a
positive for them," Chaulagai said.
HMS derived 78% of its revenues from the coordination of
benefits, or COB, business in 2011.
Under COB, HMS ensures that claims are paid by the responsible
party. By law, Medicaid is the payer of last resort. As a result,
states have to make sure that liable third-party health plans
provide coverage to Medicaid beneficiaries first.
HMS does this on a contingency-fee basis, where it collects a
small percentage of the recouped cost. This is good for the
states since they see a tangible return by using HMS, while
incurring almost no risk and no upfront costs.
"They're the No. 1 player in that market and have realized
very solid growth over the years," said Richard Close, director
of health care equity research at Avondale Partners.
While that area has been growing at a 20% rate over the past
several years, Close expects a 14% to 15% growth in 2012.
The remaining 22% of HMS' 2011 revenues came from the program
integrity, or PI, business.
Here, HMS focuses on making sure the right services are
provided, the right amounts are paid and correct procedures are
followed. It involves more of an auditing role.
PI has been experiencing very strong growth, and analysts
expect this area to contribute 34% to HMS' revenue in 2012 and
Thanks to its recent acquisition of HealthDataInsights, HMS
has gained access to Medicare programs. It now oversees 17 states
and three territories and has the highest recovery and accuracy
scores of any of the Medicare RACs.
On the Medicaid RAC side, HMS sees this as a $100 million
opportunity. The company has been solely awarded 14 out of 23
states that have selected a vendor. The Affordable Care Act
requires use of a third party to identify and correct improper
payments, whether they are under- or over-payments.
In the program integrity area, "we're looking for a 100%-plus
type of growth this year because of the acquisition," said
Close estimates the total addressable market of $127 billion
in payment errors currently with that growing to more than $165
billion by 2015. HMS' current penetration is less than 2% of
The company is also well positioned from a competitive point
Most of its competition comes from internally developed
solutions as well as technology and consulting firms. Since HMS
is the dominant player in the COB market, it often gets
subcontracted for those services by other firms.
In addition, the tools and technology it has developed create
high barriers to entry into the market. HMS uses sophisticated
data mining techniques to locate other legal coverages. It also
has created and updates the National Eligibility Database that
provides eligibility data from more than 1,000 insurance
In 2011, the company helped recover more than $2 billion in
erroneous payments for its clients. HMS has developed long-term
relationships and provides visibility on a large portion of its
revenue at the start of every year.
However, in 2011, 18% of its revenue came from the three
largest clients, which makes it more susceptible to any
potential, though rather infrequent, client loss.
Another risk is that Medicaid programs are somewhat
counter-cyclical. As unemployment rates come down, there would
potentially be fewer Medicaid beneficiaries and thus less
spending. But thanks to HMS diversification into the PI area,
this kind of risk should be mitigated.
Finally, regulatory risks impact the environment in which HMS
operates and as a result its business.
"Fraud, waste and abuse, or improper payments will not go away
in health care. This is one of the few areas where there is
bi-partisan support ... I think HMS is positioned in a pretty
sweet spot, so we view it as one of the best growth stories in
health care," said Chaulagai.