HMS Holdings Helps Hold The Line On Health Care Waste

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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 ( HMSY ) 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 health-care fraud.

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 insurance coverage.

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.

Implementing Expansion

"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 2013.

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.

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 that.

The company is also well positioned from a competitive point of view.

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 carriers.

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.

Largest Clients

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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