Item 1. Business
Founded in 1974, HMS is a leading
provider of cost containment solutions in the U.S. healthcare marketplace. We use innovative technology, extensive data services
and powerful analytics, to deliver coordination of benefits, payment integrity and care management and consumer engagement solutions
to help healthcare payers improve financial performance and clinical outcomes. We provide coordination of benefits services to
government and commercial healthcare payers and sponsors to ensure that the responsible party pays healthcare claims. Our payment
integrity services ensure healthcare claims billed are accurate and appropriate, and our care management and consumer engagement
technology helps risk-bearing organizations to better engage with and manage the care delivered to their members. Together these
various services help customers recover erroneously paid amounts from liable third parties; prevent future improper payments; reduce
fraud, waste and abuse; better manage the care their members receive; engage healthcare consumers to improve clinical outcomes
while increasing member satisfaction and retention; and achieve regulatory compliance. We currently operate as one business segment
with a single management team that reports to the Chief Executive Officer.
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 product suite, including IntegriGuard, LLC (2009), HealthDataInsights, Inc.(“HDI”)
(2011), Essette, Inc. (“Essette”) (2016), Eliza Holding Corp. (“Eliza”) (2017) and others. The acquisitions
of Essette and Eliza significantly expanded the breadth of solutions we offer entities taking risk, creating a new care management
and consumer engagement vertical for HMS.
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, 2017,
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. You may also read and copy
materials we furnish to or file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
The content of any website referred
to in this 2017 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
Our services are applicable to federal,
state and commercial health plans and other healthcare entities taking payment risk. Our coordination of benefits and payment
integrity services are designed to address errors across the payment continuum, beginning with an individual’s enrollment
in a program before any medical service is rendered, to pre-payment review of a claim by a payer, through recovery where identification
of an improper payment is made via audit. Our services address a wide spectrum of payment errors, including eligibility and coordination
of benefits errors, the identification and investigation of potential fraud, and determinations that claim amounts paid were improper
and our services extend to most claim types. Our care management and consumer engagement services also assist customers in managing
quality, risk, cost and compliance across all lines of business. As a result of these services, customers received billions of
dollars in cash recoveries in 2017, and saved billions more through the prevention of erroneous payments, improved clinical outcomes
for their members, and reduced enrollment turnover.
In general, our range of products
and services include the following:
COB SERVICES
Coordination of Benefits
Our coordination of benefits services
are provided primarily for state governments and Medicaid managed care plans and draw principally upon proprietary information
management and data mining techniques designed to ensure that 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 that they pay
only after all other insurance coverage available has been exhausted, thereby complying with federal regulations that require Medicaid
to be the payer of last resort. Nevertheless, due to a variety of factors, some Medicaid claims are paid even when there is a known
responsible third party. Our government-sponsored program customers rely on us to identify those claims that were paid in error
and recover these payments from the liable third party. Further, 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, 2017, 2016 and 2015, our coordination of benefit
services represented 73.4%, 72.2% and 71.2% of our total revenue, respectively.
ANALYTICAL SERVICES
Payment Integrity
Our payment integrity services are
designed to ensure that healthcare payments are accurate and appropriate. These services are applicable to all customers that HMS
serves, including federal and state governments, commercial health plans and other at-risk entities. Our solutions are designed
to verify that medical services are utilized, billed and paid appropriately. We combine data analytics, clinical expertise and
proprietary algorithms and technology to identify improper payments on both a pre-payment and post-payment basis; identify and
recover overpayments/underpayments; detect and prevent fraud, waste and abuse; and identify process improvements. For the years
ended December 31, 2017, 2016 and 2015, our payment integrity services represented 20.0%, 27.6% and 28.8% of our total revenue,
respectively.
Care Management
and Consumer Engagement
Our care management and consumer
engagement solutions help our customers manage the care delivered to their members with a focus on improving clinical outcomes
and patient engagement. We offer a broad foundation of technology and service solutions to support a health engagement management
framework, which enable health plans and other risk-bearing entities to better manage costs and clinical outcomes and improve their
member experience. Our care management and consumer engagement vertical leverages HMS data and analytics with a combination of
Essette and Eliza solutions currently aimed at care management, risk management and member engagement in order to provide customers
with a tailored, integrated platform that addresses core healthcare industry challenges on an enterprise scale. For the years ended
December 31, 2017 and 2016, our care management and consumer engagement services represented 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 are 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, including know-how, confidentiality and
invention assignment agreements, security measures, non-disclosure agreements with third parties, and other contractual rights.
We own a number of patents and trademarks
that are important to HMS. As of December 31, 2017, our patent portfolio is comprised of approximately 50 domestic and international
patents, and we are currently pursuing numerous patent applications in the United States and around the world. We have a number
of registered trademarks, including HMS
®
, and the corresponding HMS + logo design mark, HMS IntegritySource
®
,
Eliza
®,
Essette
®
and other registered and common law trademarks. We also hold copyrights relating
to certain aspects of our products and services. While we consider all of these proprietary rights important in the operation of
our business, we do not believe any one individual technology is essential to our business.
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 at-risk providers. For the years ended December 31, 2017, 2016 and 2015, our total revenue was $521.2 million,
$489.7 million and $474.2 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, 2017,
2016 and 2015, our 10 largest customers represented 39.5%, 40.6% and 44.0% of our total revenue, respectively. The current terms
of our agreements with these customers have expiration dates ranging between 2018 and 2023. Several of our contracts, including
those with some of our largest customers, may be terminated for convenience. The early termination of a contract with one of our
significant customers may have an adverse effect on our financial condition, results of operations and cash flows.
We provide products and services
under contracts (or subcontracts) that contain various revenue structures, including contingent revenue and to a lesser extent
fixed-fee arrangements. Many of our state government contracts have terms ranging from three 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.
Because we provide our services pursuant to agreements that are open to competition from various businesses in the U.S. healthcare
insurance benefit cost containment arena, we cannot provide assurance that our contracts, including those with our largest customers,
will not be terminated for convenience, awarded to other parties, or renewed. Additionally, we cannot provide assurance that our
contracts, if renewed, will have the same fee structures or otherwise be on satisfactory terms.
Industry Trends
and Opportunities
U.S. healthcare expenditures continue
to escalate and consume a large proportion of the U.S. GDP, presenting challenges for payers who wish to contain and reduce costs
while also promoting quality healthcare outcomes. These aims 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 to 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 200.1 million individuals at a cost of $1.2 trillion
in 2017.
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. Government managed care grew out of pressures to contain the growth of state and federal
program spending and to address general concerns about healthcare access. In most states, managed care is currently the predominant
delivery system for Medicaid. As of July 2017, all states except three had some form of managed care in place, including the District
of Columbia. Among the 39 Medicaid programs (38 states plus the District of Columbia) with comprehensive risk-based MCOs, 29 states
reported that 75% or more of their Medicaid beneficiaries were enrolled in MCOs as of July 1, 2017. More states continue to carve-out
complex populations as well as behavioral health services into MCO contracts. Of the 32 Medicaid programs (31 states plus the District
of Columbia) that opted to expand Medicaid eligibility levels pursuant to the ACA, 27 states were using MCOs to cover newly eligible
adults as of July, 2017. Of those 27 states, 24 states covered more than 75% of beneficiaries in this group through risk-based
managed care. It is unclear at this time how, if at all, efforts in Congress to “repeal and replace” the ACA could
affect any of the state expansions or potential future growth of Medicaid lives and expenditures. As Congress continues to debate
proposals to repeal major portions of the ACA, including the ACA’s Marketplace and Medicaid coverage expansions, as well
as other proposals to fundamentally restructure Medicaid’s financing structure, the implications of these proposals remain
unclear.
Similarly, managed care health plans
also continue to assume risk for Medicare lives, with the Kaiser Family Foundation estimating that 33% of all Medicare beneficiaries,
or 19.0 million lives, were enrolled in a Medicare Advantage Plan in 2017. HMS also continues to serve government-sponsored agencies’
legacy 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 2017 covered approximately 57.7 million people at a cost of approximately $718.7 billion and Medicaid/CHIP
covered approximately 79.9 million people, costing approximately $604.1 billion. Altogether, it is projected that the government
programs we serve covered approximately 137.6 million people at a total cost of approximately $1.32 trillion in 2017.
CMS projects Medicaid spending and
enrollment will grow 6.0% and 1.7%, respectively in 2018 over 2017. CHIP spending is expected to grow 6.7% in 2018 over 2017,
and CHIP enrollment is expected to increase 3.5% in 2018 over 2017. As commercial and government health plans continue to focus
on strategies to contain costs across their different lines of business, we will continue to focus on serving them and meeting
their evolving needs. Regardless of the program, coordinating benefits among a growing number of healthcare payers and ensuring
that claims are paid appropriately represents an enormous challenge for our customers and an ongoing opportunity for us.
Regulatory Environment
The market for cost containment solutions
is large and growing, driven by increasing healthcare costs and payment complexities. For 2018, Medicare and Medicaid are projected
to pay approximately 45.3% of the nation’s healthcare expenditures and serve over 140.7 million beneficiaries. Many
of these beneficiaries are enrolled in managed care plans, which have the responsibility for both patient care and claim adjudications.
Since 1985, we have provided state Medicaid agencies with services to identify third parties with primary liability for Medicaid
claims, and since 2005, we have provided similar services to Medicaid managed care plans.
In 2006, Congress enacted the DRA
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. HDI was awarded one of the first contracts under the program. In October
2016, CMS made a new round of awards and we again were awarded a region. These measures, at both the federal and state level, have
strengthened our ability to identify and recover erroneous payments on behalf of our customers.
The ACA was signed into law in 2010.
It included many provisions impacting healthcare delivery and payment programs, including employer-sponsored health coverage, expansion
of the Medicaid program, health insurance exchanges with premium subsidies, and payment integrity efforts. In 2017, Congress considered
the revision or repeal of some or all of the ACA. Options that have been considered include issuing block grants or establishing
per capita caps for state Medicaid populations, and looking at program design alternatives for future enrollment criteria. We will
monitor ACA-related changes as they develop and assess their potential impact, as well as any opportunities they may present for
our customers and for us.
Competition
The U.S. healthcare insurance benefit
cost containment marketplace is a dynamic industry with a range of businesses currently able to offer cost containment services,
both directly or indirectly (through subcontracting), to some or all of the various healthcare payers. In addition, with improvements
in technology and the growth in healthcare spending, new businesses are incentivized to enter this marketplace. Many healthcare
payers also have the ability to perform some or all of these cost containment services themselves and choose to exercise that option.
Competition is therefore 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 perform a wide range of coordination of benefits and payment integrity related functions; proven
results to maximize recoveries and cost avoidance; our in-depth government healthcare program experience; clinical staff expertise;
extensive insurance eligibility database; proprietary systems and processes; existing relationships with various customers and
other industry stakeholders; and our ability to provide customers with actionable intelligence to improve clinical outcomes and
patient engagement.
Within our core coordination of benefits
services, we compete primarily with large business outsourcing and technology firms, claims processors and PBMs, clearinghouses,
healthcare consulting firms, smaller regional vendors and other TPL service providers. In addition, we frequently work with customers
who may elect to perform some or all of their recovery and cost avoidance functions in-house. The competitive environment for payment
integrity services includes some of the same companies that provide coordination of benefits services. Within the care management
and risk analytics sector, we compete primarily with vendors who provide these and other population health management technology
services. Companies with whom we compete across our product offerings include:
§
Accenture
|
§
Cotiviti Corporation
|
§
Inovalon
|
§
SCIO Health Analytics
|
§
CaseNet
|
§
Equian, LLC
|
§
LexisNexis
|
§
Verscend Technologies, Inc.
|
§
Change Healthcare
|
§
Experian Health
|
§
MedHok
|
§
Welltok
|
§
Cognizant/TriZetto Healthcare Products
|
§
Optum
|
§
DXC Technology Solutions
|
§
Conduent
|
§
IBM Watson Health
|
§
Performant Financial Corp.
|
§
ZeOmega
|
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 care management and consumer engagement solutions. We expect to grow our business over the course
of 2018 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:
|
§
|
Expanding
the scope of our relationship with existing customers
–
by selling additional products and services, including those designed to improve member engagement and improve clinical outcomes.
|
|
§
|
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 ASO; government healthcare payers, including Medicaid agencies, state employee health benefit plans
and CHIP; at-risk provider organizations and ACOs; and commercial employers.
|
|
§
|
Introducing
new “homegrown” products and services
–
through internal development initiatives designed to enhance or expand our existing suite of cost containment solutions.
|
|
§
|
Utilizing
big data
– to create a more nimble
operating environment, create operating efficiencies, improve the yield on our existing product suite and identify new revenue
opportunities within our current service delivery models.
|
|
§
|
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.
|
|
§
|
Building
out our new care management and consumer engagement technology platform
–
by continuing to grow a broad foundation of technology and service solutions to help customers better manage quality, cost and
compliance across all lines of business. Our first steps in this strategy were the acquisition of Essette and Eliza.
|
|
§
|
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 expanding
our data analytics capabilities. Our focus may include acquisitions that represent long-term growth potential, target high-growth
areas, are accretive to earnings, 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.
|
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 2017 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 the scope of our business
operations have expanded over the past several years, and we currently intend to continue to grow and expand into new areas of
the healthcare industry; however, such growth and expansion 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 retaining existing customers, attracting new customers and improving our operations, all while remaining competitive.
We must also be flexible and responsive to our customers’ needs and to changes in the political, economic and regulatory
environment in which we operate. The greater size and complexity of our expanding business puts additional strain on our administrative,
operational and financial resources and can make optimal resource allocation more difficult to determine. 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
and could negatively impact our ability to execute on our business plans and growth goals, which could 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. For example, we acquired IntegriGuard,
LLC in September 2009; Verify Solutions, Inc. in December 2009; Allied Management Group-Special Investigation Unit in June 2010;
Chapman Kelly, Inc. in August 2010; HDI in December 2011; MedRecovery Management, LLC in December 2012; Essette in September 2016;
and Eliza in April 2017.
We intend to pursue future acquisitions
that will continue to expand and diversify 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:
|
§
|
diversion of management’s
attention and other resources;
|
|
§
|
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;
|
|
§
|
our ability to
integrate personnel and human resource systems as well as the cultures of the acquired business;
|
|
§
|
our ability to
retain or replace the key personnel of the acquired business;
|
|
§
|
our ability to
maintain relationships with the customers of the acquired business and further develop the acquired business;
|
|
§
|
our ability to
cross-sell our solutions and services and the solutions and services of the acquired business to our respective customers;
|
|
§
|
customer dissatisfaction
or performance problems with the acquired business;
|
|
§
|
our ability to
comply with regulatory requirements and avoid potential conflicts of interest in markets that we serve;
|
|
§
|
the misuse of intellectual
property by the personnel of the acquired business;
|
|
§
|
our ability to
successfully enter into unfamiliar markets;
|
|
§
|
assumption of unanticipated
legal or financial liabilities and/or negative publicity related to prior acts by the acquired business;
|
|
§
|
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;
|
|
§
|
we may become significantly
leveraged as a result of incurring debt to finance an acquisition;
|
|
§
|
the acquired business
may not perform as projected which could negatively impact earnings or contingent consideration;
|
|
§
|
we may suffer impairment
of goodwill and other acquired intangible assets; and
|
|
§
|
we may suffer dilution
to our earnings per share.
|
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.
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:
|
§
|
fluctuations in
sales activity given our sales cycle;
|
|
§
|
the length of contract
and implementation periods;
|
|
§
|
the commencement,
completion or termination of contracts during any particular quarter;
|
|
§
|
contract costs
and expenses, which may be incurred in periods prior to revenue being recognized;
|
|
§
|
the timing of period
revenue recovery projects and third party payers’ claim adjudication;
|
|
§
|
the billing and
budgeting cycles of our customers;
|
|
§
|
the timing of government
procurement activities, including when contract awards are announced and the time required to resolve bid protests;
|
|
§
|
contract renewal
discussions, which may result in delayed payments for services already performed;
|
|
§
|
changes in the
pricing structure or other significant terms in our contract, or the scope of services we perform;
|
|
§
|
technological and operational issues affecting our customers, including delays in payment receipt for
previously recognized revenue due to delays in certain customers processing 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;
|
|
§
|
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 internal managerial decisions not to pursue identified claim revenue from customers;
|
|
§
|
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;
|
|
§
|
changes in applicable
laws;
|
|
§
|
changes in accounting
policies or guidelines concerning the timing of recognition of revenue; and
|
|
§
|
regulatory changes
or general economic conditions as they affect healthcare providers and payers.
|
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 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-material 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 or services into the marketplace. We may also 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:
|
§
|
power loss, transmission
cable cuts and telecommunications failures;
|
|
§
|
fire, flood, earthquake
and other natural disasters;
|
|
§
|
hardware failures
or software defects;
|
|
§
|
cyber security
breaches; and
|
|
§
|
physical break-ins,
sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.
|
In addition, while there are backup
systems in many of our operating facilities, an extended outage of utility or network services supplied by third party IT vendors
or providers may delay or disrupt the delivery or performance of the solutions and services we provide for our customers. If we
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 the products and services of third-party providers, to
input, transmit, maintain and communicate the confidential and proprietary data we receive from our customers and other data suppliers
(e.g. private insurance plans, financial institutions, etc.). 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, have been, and will likely continue to be subject to computer hacking, acts of vandalism or theft, malware, computer
viruses or other malicious codes, phishing, employee error or malfeasance, catastrophes, unforeseen events or other cyber-attacks.
To date, we have seen no material impact on our business or operations from these attacks, however, 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 and services, negatively affect our ability to attract new customers, cause existing customers to terminate
or not renew our solutions and services, or to 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 litigation costs, and
resolving legal claims and regulatory actions, 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.
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. Misappropriation
of our intellectual property by third parties, or any disclosure or dissemination of our confidential and proprietary 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 open records and/or federal Freedom of Information Act 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.
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 to small, specialized firms, and
could include current or former subcontractors or teaming partners seeking to establish direct relationships with our customers
in order to perform 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
hope 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, allowing MMIS vendors to
partner with less experienced TPL identification vendors based on preferred relationships or favorable pricing. In addition, companies
that have invested in proprietary technology different from our own solution and 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.
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.
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 our customers’ information and data,
external data, 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 not 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.
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 interpretation. For example, data suppliers
could seek to limit or end our access to and use of their data if they determine that certain uses of data for our customers are
not permitted by our agreements, or such suppliers may make errors in compiling, transmitting or accurately characterizing data
or have technological limitations that interfere with our receipt or use of the data we rely on them to provide. If a number of
our information sources become unable or unwilling to provide us with certain data under terms of 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 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 have received from various
data sources in order to enhance and improve current solutions 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 products 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 access to certain data and are unable
to identify and reach the requisite agreements with suitable alternative suppliers or fail to successfully integrate them 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 or service for a broader range of service needs. These third parties include software vendors, utility and network providers
and other information technology service providers. 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
contract or 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 RFP 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 any proposals submitted by our competitors. We may also be required to disclose the occurrence of any 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 those related
to, for example, 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.
As previously reported, in November
2017, the Company was the subject of an adverse verdict in a breach of contract claim against the Company arising out of an acquisition
in 2010. The adverse verdict resulted in a jury award of $60 million in damages to the plaintiffs. The Company intends to appeal
the verdict and believes that strong grounds exist to overturn or greatly reduce the damages awarded by the jury. See the information
under “Litigation” in Note 13 to the Consolidated Financial Statements in Part II, Item 8 for further discussion about
this proceeding.
We may not be able to deliver our
solutions and 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. As our business expands and undergoes change, we may also find it difficult to preserve our corporate culture, which
could reduce our ability to innovate and operate effectively or result in a loss of experienced personnel. In addition, customers
or competitors may hire away our qualified employees. 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 managers who have successfully managed, designed or implemented government services programs or information technology projects,
or have relevant experience in other sectors of data management or the healthcare industry. 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 manager, 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.
On December 19, 2017, HMS and certain
subsidiaries entered into Amendment No. 2 to Amended and Restated Credit Agreement (the “Amendment”), which amends
our existing Credit Agreement. Among other things, the Amendment provides for a senior secured revolving facility in an aggregate
principal amount equal to $500 million and extends the maturity date of the revolving facility to December 19, 2022 (the “Amended
Revolving Facility”). The Amended Revolving Facility 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.
As of December 31, 2017, the
outstanding principal balance due under our Credit Agreement was $240.0 million. Our outstanding indebtedness and any additional
indebtedness we incur may have important consequences for us, including, without limitation, that:
|
§
|
we may be required
to use a substantial portion of our cash flow to pay the principal of and interest on our indebtedness;
|
|
§
|
our indebtedness
and leverage may increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive
pressures;
|
|
§
|
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;
|
|
§
|
our ability to
obtain additional financing for working capital, capital expenditures, acquisitions and for general corporate and other purposes
may be limited;
|
|
§
|
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
|
|
§
|
our flexibility
in planning for, or reacting to, changes in our business and our industry may be limited.
|
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 Amended Revolving Facility 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 Amended
Revolving Facility 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, and 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 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 also be materially affected by changes in the tax rates in jurisdictions where our income
is earned and taxed, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business,
by increases in expenses not deductible for tax purposes including impairments of goodwill, by changes in U.S. GAAP or by changes
in the valuation of our deferred tax assets and liabilities. The 2017 Tax Act was enacted on December 22, 2017 and is generally
effective for tax years beginning after December 31, 2017. The 2017 Tax Act, among other things, includes a reduction to the U.S.
corporate tax rate, modifications to the limitations on certain deductions for executive compensation, new limitations on interest
deductions, repeal of the section 199 Deduction, and capital investment deductions in certain circumstances, and a shift of the
U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system. We are currently in the process
of analyzing the effects of this new legislation on our business, and although we believe that the impact of the new legislation
might be beneficial to us at this time, the ultimate outcome of the new legislation on our business and financial condition is
uncertain. 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 domestic 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.
Although we
believe that we have remediated previously identified material weaknesses in our internal control over financial reporting, our
financial statements could be materially misstated if we fail to remedy other material weaknesses that we may identify in the future,
or if we are unable to develop, implement and maintain effective internal control over financial reporting in future periods.
In connection with management’s
assessment of our internal control over financial reporting for the December 31, 2016 reporting period, we identified material
weaknesses related to the calculation of the estimated liability for appeals balance in connection with our CMS reserve and the
valuation of our accounts receivable allowance. As further described under the heading “Changes in Internal Control Over
Financial Reporting” in Part II, Item 9A of this 2017 Form 10-K, we have implemented measures to address these material weaknesses
and have successfully completed the testing necessary to conclude that the material weaknesses have been remediated.
In future periods, these remedial
measures may not operate effectively, or we may fail to design or implement effective controls or to otherwise maintain effective
internal control over financial reporting, and additional material weaknesses or significant deficiencies in our internal control
over financial reporting may occur or be discovered. As a result, we may fail to meet our future reporting obligations on a timely
basis, our financial statements may contain material misstatements or our operating results or financial condition may otherwise
be negatively impacted, and we may be subject to litigation and regulatory actions, any of which may cause us to incur substantial
costs, adversely affect investor perceptions and potentially result in a decline in the market price of our common stock. In addition,
these failures may also cause us to incur substantial additional costs in future periods relating to the implementation of remedial
measures or limit our ability to obtain financing under our Credit Agreement, which could adversely impact 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. In March 2010, the ACA was passed, and its emphasis
on program integrity and cost containment, along with its expansion of Medicaid, created new opportunities to grow our business
and our service offerings. However, some of the 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. Since January 2017, the President has 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. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. In
December 2017, the Tax Act was enacted and signed into law, one part of which repeals the “individual mandate” introduced
by the ACA effective January 1, 2019. There have also been a number of proposed and adopted legislative initiatives and healthcare
reform proposals from state and federal governments, including, (i) initiatives and proposals that would fundamentally change the
financial structure of the Medicaid program (currently funded jointly by the states and the U.S. Federal Government) that could
result in early termination or non-renewal of our contracts with certain state government customers, and (ii) initiatives and proposals
at the federal level that may reduce reimbursement rates to states, establish new payment models, increase or decrease government
involvement in healthcare, decrease the Medicare RAC Program, or otherwise change the operating environment for our customers.
Healthcare 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 efforts to waive, modify or otherwise change the ACA, in whole or in part,
and as a result of other future legislative changes affecting Medicare, Medicaid or other publicly funded or subsidized health
programs. Although we will continue to evaluate the effect that the ACA and its possible 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 in government spending on these programs,
and in the current healthcare financing system and the need for our solutions and services within that existing framework. Our
success as a company is based 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:
|
§
|
a lower than projected
growth in Medicare and Medicaid programs and expenditures;
|
|
§
|
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; limiting or reducing the amount of reviewable claims and/or the look-back
period for review in areas where we conduct audits);
|
|
§
|
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;
|
|
§
|
the transition
of healthcare beneficiaries from fee-for-service plans to value-based plans;
|
|
§
|
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);
|
|
§
|
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;
|
|
§
|
customer improvements
and enhancements to their internal healthcare claims and billing processes;
|
|
§
|
the adoption of
healthcare plans with significantly higher deductibles;
|
|
§
|
limits placed on
ongoing program integrity initiatives, including the Medicare RAC program; and
|
|
§
|
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.
|
For example, during 2014 and
2015, our recovery audit services under HDI’s Medicare RAC contract were limited because of significant delays in procurement
activities for the new Medicare RAC contract awards, resulting from, in part, the cancellation of the original and second procurements
following the denial of pre-award protests and ongoing litigation regarding certain payment terms proposed by CMS as part of the
new Medicare RAC proposals. In response to the delays, CMS allowed the Medicare RAC contractors, including HDI, to perform active
recovery auditing through July 2016 and certain limited administrative activities, including collections, related to findings
through January 31, 2018.
In October 2016, CMS announced the new Medicare RAC contract awards,
including the award of RAC Region 4 to our wholly owned subsidiary. Under the new Medicare RAC contracts, CMS implemented modified
ADR limits that reduces the ADR requirement to 0.5%. The modified ADR limits, which CMS first announced in January 2016, is a 75%
reduction from the 2.0% ADR limit established for the HDI Medicare RAC contract. In addition, in April 2016, CMS instituted a sliding
scale policy adjusting ADR limits based on provider denial rate after three 45-day ADR cycles. In January 2018, CMS further modified
this methodology, indicating that underpayments identified by the RAC would be precluded from the sliding scale policy. These changes
have significant impact on the volumes of claims that Medicare RACs are permitted to review for inpatient providers and reduces
their ability to identify overpayments and underpayments under the new Medicare RAC contracts. HMS is currently waiting for CMS
to operationalize the sliding scale under the new Medicare RAC contract, which is expected to increase the current ADR limit to
a requirement less than the 2.0% limit that was previously set under the prior contracts.
Further, in connection with our first Medicare RAC contract, CMS
announced in 2014 that it would settle with hospitals willing to withdraw inpatient status claims currently pending in the RAC
appeals process by offering to pay hospitals 68% for all eligible claims they had billed to Medicare. In June 2015, CMS notified
HDI that based on the initial lists of finalized settlements, HDI owed CMS approximately $28.6 million due to adjustments in contingency
fees under our existing Medicare RAC contract. HDI previously advised CMS that it disagrees with CMS’ interpretation of the
contract and that CMS does not have the contractual right, among other things, to require refunding fees already paid. In addition,
in September 2016, CMS announced that it would extend an opportunity for another round of settlements for hospitals that were eligible
for but did not choose to participate in the 2014 settlement, with CMS offering to pay 66% for all eligible claims they had billed
to Medicare. The implication of these settlements related to the claims for which HDI already has been paid remains uncertain.
Although we do not anticipate that our new Medicare RAC contract
will represent a significant portion of our business going forward, our Medicare RAC contract still represents a future business opportunity for us. However, there could be a material
negative impact on our future revenue to the extent that (i) any final determination of amounts owed by us to CMS under HDI’s
Medicare RAC contract materially exceeds our accrued reserves for such appeals, (ii) we are required to increase or decrease our
contractually required reserves with respect to pending appeals due to changes in appeal performance, changes in data provided
to us from other entities in the RAC process, or other related factors, (iii) we are required to repay a portion of prior fees
associated with the hospital settlements, (iv) we are unable to obtain full payments for properly provided services, or (v) future
fees payable to us by CMS are reduced. The occurrence of any of these events or other changes to the Medicare RAC program that
materially reduce our revenue or profitability with such program 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 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, subsidiaries, data supplies and other third parties
from which we obtain information. The use and disclosure of that information is regulated at the federal, state, international
and industry levels and we are also obligated by our contractual requirements with customers. 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).
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 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 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.
Much 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, other health plan members and providers,
and 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,
and federal and state prompt pay statutes. 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 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 related state and federal laws and regulations as a result of the member
engagement services that we perform. Increased involvement in analytic or audit work that can have an impact on the eligibility
of individuals for medical coverage or specific benefits, or payments made by our customers to providers, could increase the likelihood
and incidence of our being subjected to scrutiny or legal actions by parties other than our customers, based on alleged mistakes
or deficiencies in our work, with significant resulting costs and strain on our resources.
These laws and regulations, along
with the terms of our government contracts, regulate how we do business, what solutions and 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 needs as a company
that is expanding in complexity. 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, 2017, our common stock intra-day
traded on the Nasdaq Global Select Market as high as $20.90 per share and as low as $11.01 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:
|
§
|
quarterly or annual
earnings results or those of other companies in our industry;
|
|
§
|
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;
|
|
§
|
news reports relating
to trends, concerns and other issues in the healthcare industry, including perceptions in the marketplace regarding us and our
competitors;
|
|
§
|
the financial projections
we publicly provide and any changes in or failure to meet those projections;
|
|
§
|
future sales of
shares of common stock in the public market by our executive officers or directors;
|
|
§
|
any other changes
in the amount of our outstanding shares, including as a result of share repurchases;
|
|
§
|
actual or proposed
changes in federal or state laws affecting the healthcare industry;
|
|
§
|
changes in accounting
principles;
|
|
§
|
the public’s
response to our press releases, or other public announcements, including our filings with the SEC;
|
|
§
|
securities class
actions, shareholder lawsuits or other litigation; and
|
|
§
|
market conditions
in the industry and the economy as a whole.
|
In 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 provide
for a classified Board of Directors, 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.