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HMS Holdings (NASDAQ:HMSY)

Q4 2012 Earnings Call

February 22, 2013 9:00 am ET

Executives

Jzaneen Lalani

William C. Lucia - Chief Executive Officer, President and Director

Walter D. Hosp - Chief Financial Officer, Chief Administrative Officer and Executive Vice President

Maria Perrin - Chief Marketing Officer and Executive Vice President

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Scott J. Green - BofA Merrill Lynch, Research Division

Deepak Chaulagai - Dougherty & Company LLC, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Frank Sparacino - First Analysis Securities Corporation, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Operator

Good morning. My name is Ben and I will be your conference operator today. At this time, I would like to come everyone to HMS Holding Corp. Fourth Quarter and Full Year 2012 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I will now turn the call over to Jzaneen Lalani, from HMS Holdings. Ms. Lalani, you may begin.

Jzaneen Lalani

Thank you, Ben. Good morning and thank you for joining us today. As you know, we distribute our earnings release through our website hms.com, under the Investor Relations tab. Under that tab, you will also find the supplementary slides that accompany our call today. This call is also being webcast. Please press on Events & Presentations under the Investor Relations tab to access the webcast. We will make a replay of the call available on our website later today.

Before I turn the call over to Bill, let me remind you that some of the information presented today regarding the company's future expectations, plans and prospects are considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations and actual events may differ materially from those expectations. We refer you to the company's filings with the Securities and Exchange Commission including our annual report on form 10-K and our quarterly report on form 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. All information on this call is as of today, February 22, 2013. And the company disclaims any intent or obligation to update any forward-looking statements as a result of developments occurring after today's call.

During this call, we will also be referring to several non-GAAP measures. The press release issued this morning includes a reconciliation of these measures to GAAP measures, and is available under the Investor Relations tab on our website, hms.com.

With that, I'll turn the call over to Bill Lucia, President and CEO of HMS Holdings.

William C. Lucia

Thank you, Jzaneen. Good morning, everyone, and thank you for joining us today. I'll be hosting the call this morning along with Walter Hosp, our CFO; and Maria Perrin, our Chief Marketing Officer.

From my perspective, 2012 was a transitional year, not just for HMS, but for many companies in healthcare. Now, as we settle into 2013, we do so with much greater clarity around Healthcare Reform, with external claims processing challenges essentially behind us, and with some large and significant contract wins that will allow us to continue to deliver sustainable growth. I am pleased that despite the ambiguity and challenges we faced in 2012, we continued to achieve solid revenue growth that is reflective of the strategic progress we made during the year in all of our markets: Medicaid, Medicare and commercial.

Before I talk to you more about the quarter and the year, I'm going to turn the call over to Walter for a review of our financials. Then I will discuss our sales for the fourth quarter, review 2012, and focus the remainder of my discussion on 2013 and beyond. Walter?

Walter D. Hosp

Thank you, Bill, and good morning, everyone. I will first walk you through our fourth quarter results -- 2012 results and then turn over to the full-year results.

Revenues for the quarter increased 33.5% year-over-year to $133.1 million. This compares with a consensus revenue estimate of $134.6 million or off 1%. Adjusting for the acquisition of HDI and the negative growth in our Federal business, revenue growth for the quarter was 7.1%. The fourth quarter was affected by the same variables we have been discussing throughout much of 2012, namely, the slower growth in Medicaid expenditures, the large transition of lives from Medicaid fee-for-service to Medicaid managed care, and disruptions from the transition to HIPAA 5010 and D.0 standards. We have made progress on the 5010 backlog during the quarter, so our backlog is now under $5 million of revenue and we expect to resolve the remaining 5010 claims in the first half of 2013.

Program integrity revenues grew 158% year-over-year. Adjusting for HDI and our Federal business, program integrity revenues grew 25% year-over-year. This reflects the growth in our eligibility services and Medicaid RAC and RAC-like services we provide to managed care.

HDI revenues for the quarter were $31.3 million, we estimate that HDI's year-over-year organic growth for the quarter to be approximately 60%. Our Federal business was down 26.9% year-over-year. As stated on prior calls, this was due solely to the termination of certain CMS contracts in early 2012 due to conflicts when we acquired HDI.

Looking at expenses for the quarter, total cost of services were $84.6 million, an increase of $22.3 million or 35.9%, compared to the $62.2 million in the prior year. Excluding HDI, total cost of services for the quarter increased by $3.1 million or 5.2%, compared to the prior year. Compensation expense related to the cost of services was $42.1 million for the quarter. If we exclude HDI, total compensation related cost of services for the quarter was $32.5 million, an increase of $1.4 million or 4.4% compared to the $31.1 million last year. As a percentage of revenue this expense was 31.6% versus 32.1% in the prior year.

I would also point out that there was a nonrecurring reduction to compensation expense for the quarter of $3 million after taxes, which resulted from the termination of certain prior stock option awards. These awards were terminated in the fourth quarter because we did not meet certain required earnings performance criteria for them today.

In the fourth quarter, we had an average non-SG&A headcount of 2,371 employees, a 32.5% increase compared to the 1,790 employees in the prior-year period, which is primarily result of the HDI acquisition. The average total headcount, including SG&A employees was 2,587 employees, an increase of 665 or 34.6% over the fourth quarter of 2011. Of this increase, 485 employees were attributable to HDI.

Amortization of intangibles, associated with acquisitions was $8.1 million for the quarter, an increase of $4.7 million year-over-year. This increase was primarily due to the HDI acquisition. SG&A expenses were $11.4 million for the quarter versus $17.2 million for the same period in the prior year, a decrease of $5.8 million or 33.9% less. Most of this decrease is attributable to the $5.2 million charge in 2011 for the transaction costs related to the HDI acquisition. As a percentage of revenue, SG&A for the quarter was 8.5% versus 17.3% in the prior year.

Income taxes were $13.1 million for the current quarter compared to $8.5 million for the same quarter last year. The effective tax rate for the quarter was 39.7% versus 43.3% last year. The decrease is primarily due to state apportionments. Net income for the quarter was $20 million versus $11.1 million for the same period in 2011, an increase of 79.6% year-over-year. Fully diluted weighted average common shares outstanding for the fourth quarter was 88.6 million shares. Fully diluted GAAP net income per share was $0.23 versus $0.13 for the same period last year. The $0.23 compared to a consensus forecast of $0.18. However, after adjusting for the $3 million after tax benefit from the terminated stock options, GAAP EPS for the quarter would've been $0.19 or $0.01 better than the consensus forecast.

Adjusted EPS was $0.27 for the quarter versus $0.17 in the prior year, up 58.9%. This compares to a consensus forecast of $0.26 or $0.01 above consensus. Revenue for the fiscal year 2012 increased 30.2% year-over-year to $473.7 million. Excluding HDI and our Federal business, revenue for fiscal year '12 increased 3.6% compared to the prior year. Revenue in the Medicaid market, which includes our state government and Medicaid managed care clients increased 4.3% year-over-year. Revenue on our Federal business was down approximately 20% year-over-year, reflecting the reduction from the certain CMS contracts we terminated, which I mentioned before. HDI revenues were $106.5 million for 2012, against $2.2 million recorded in December 2011 when we made the acquisition.

Looking at expenses for the year, total cost of services for fiscal year '12 was $318.9 million, an increase of $85.1 million or 36.4%. Excluding HDI, total cost of services for fiscal year '12 increased by $8.7 million or 3.7%. Compensation expense related to the cost of services for the year increased to 27.6% year-over-year to $161.5 million, this included $33.5 million of expense associated with the acquisition of HDI. Excluding HDI, compensation expense related to the cost of services for the year was $128 million, or 1.9% higher when compared to the prior year.

In the year we had an average non-SG&A headcount of 2,229 employees, a 34.4% increase of 570 employees compared to last year, which is primarily a result of the HDI acquisition. The average total company headcount, including SG&A employees was 2,438 employees, an increase of 657 or 36.9%, and of this increase, 584 employees were attributable to HDI. For the year amortization of intangibles associated with acquisitions increased 300% year-over-year to $32.6 million, this increase was again, primarily due to the HDI acquisition. SG&A expenses were $55.3 million, up $6.1 million or 12.5% year-over-year. SG&A expenses as a percentage of revenue were 11.7% in 2012 versus 13.5% in 2011.

Total operating expenses for the year were $374.2 million, an increase of 32.2%. Excluding the effects of HDI, total operating expenses would have been $283.1 million, an increase of approximately 1% over last year. Income taxes for the year were $32.8 million, compared to $33.2 million last year. And our full year effective of tax rate for 2012 was 39.4% compared to 41% at December 31, 2011, the decrease is primarily again, due to state apportionments.

Net income for fiscal year '12 was $50.5 million versus $47.8 million for the same period of 2011, an increase of 5.7%. And fully diluted weighted average common shares outstanding for 2012 was 88.4 million. In a fully diluted GAAP net income per share was $0.57 versus $0.55 for the same period last year. Adjusted EPS was $0.86 for the year versus 66% last year, up 30.3%.

We now turn to the balance sheet and look at our general financial condition at December 31, 2012. Our cash and cash equivalents were $135.2 million at the end of December, compared to $97 million at the end of last year. Cash on hand as of yesterday was approximately $143 million. The number of days sales outstanding or DSOs at the end of December 2012 was 90 days compared to 102 days at the end of 2011. All other balance sheet changes for year end 2011 are related to the regular working capital requirements of a growing business, depreciation of PP&E, debt repayments on our term loans, and various adjustments from tax and acquisition-related assets and liabilities.

Looking at the statement of cash flows, net cash provided by operating activities for the year ended December 31, 2012 was $83 million, a $26.3 million increase over the 57 -- $56.7 million for the year ended 2011. The increase was primarily due to incremental cash flows generated from the HDI acquisition. Net cash used in investing activities for the year was $38.1 million versus $375.7 million for the year ended 2011. Last year, we recorded the acquisition of the HDI, which accounts for the most of the difference. And net cash used in financing activities for the year was $6.7 million, a $327.9 million decrease over net cash provided by financing activities versus last year. This decrease was primarily attributable to proceeds associated with the $350 million term loan we entered into December 2011 in connection with the HDI acquisition. We anticipate that our existing cash balances and funds generated by operations will be sufficient to support our current cash needs. We also continue to have a $145 million available under our revolving credit facility.

There is one final note I would like to mention regarding seasonality in 2013. As is well known, we have seasonality in our business, where we regularly have higher revenue in the second half than the first half. For 2013, we expect the Medicaid RAC contracts and the Medicare COB contracts to come onstream, such that our 2013 revenue growth is even more heavily weighted to the second half of the year.

I'd now like to turn the call over to Bill.

William C. Lucia

Thanks, Walter. Let me begin with a review of our key sales in a fourth quarter. Starting with our State Government market, we were the successful bidder on the Illinois Medicaid RAC procurement, bringing us to 30 RAC contracts. I'll give a little more color around the Medicaid RAC environment in a few minutes.

In Rhode Island, we re-won our third-party liability contractor contract under a subcontractor arrangement and we significantly increased the scope of the work. The state of Georgia also recently announced their intent to re-award their TPL procurement to us. We recently shared the exciting news that we were selected by the California Public Employees Retirement System, or CALPERS, to conduct dependent eligibility audits on behalf of the more than 3,000 public employers who participate in CALPERS. HMS will verify the eligibility of dependents enrolled in the health plans, which covers 365,000 employees and retirees. This win highlight the market's increasing attention on HMS's unique employee friendly audit solution. And we expanded our Coordination of Benefits contract in Oklahoma and added complex clinical reviews to the scope of our Medicaid RAC contract in North Carolina. In Arkansas, we expanded our third-party liability contract to include retroactive claims repricing services.

Now, let me summarize where we are in the Medicaid RAC market. We began 2012 with only 15 contracts and ended the year with 30. Eleven are fully implemented, 16 are in the implementation phase and 3 are in contract negotiations. Our priority for this program is to move all of these contracts through full implementation, but recognizing that it does take about 12 months, on average, from contract award to the start of revenue. I should note that since 2010, when we first rolled out our RAC and RAC-like services to state Medicaid programs, our recoveries have exceeded $440 million, with more than $175 million generated just last year.

Now moving to the managed care market, we signed a new agreement with UPMC -- UPMC health plan in Pennsylvania to provide complex medical reviews and data mining services and with health plan of San Mateo in California for coordinations -- coordination of benefit services. Notably, we secured contracts with both WellPoint and Blue Cross Blue Shield of Massachusetts for credit balance audit services. These new clients, along with a strong commercial sales pipeline signal that our products are gaining traction in the commercial market. I'll talk more about this market a little later on the call.

In MCO expansion sales, both Community Health Choice in Texas and Meridian Health Plan of New Hampshire added services to our Coordination of Benefits contract. And now that CareSource is providing Medicaid managed care services in Kentucky, those lives will be included in our CareSource contract. More Medicaid agencies are delegating their pharmacy programs to managed care plans. And as a result, we are seeing increased demand for our pharmacy Coordination of Benefits services. This quarter, 3 health plans added pharmacy to the scope of our contracts. Fidelis in New York, Scott & White Health Plan in Texas, and Presbyterian Health in New Mexico. On the program integrity side, we expanded our contract with United Healthcare's Evercare Texas plan to include medical reviews as well as special investigation services.

Now I'd like to talk a little bit about the short-term challenges we experienced last year and why they won't negatively impact our long-term opportunities. First, the 5010 issue. As we discussed throughout the year, health insurance carriers and claim processors including some of the nation's largest PBM's struggle to process the new HIPAA mandated 5010 and D.0 transactions for our unique Medicaid subrogation claims. Now to bring you up to date, we worked closely with carriers to reduce their processing backlogs and now have less than $5 million in delayed revenue associated with this. We do expect to resolve these claims in the first half of this year.

There was also lower Medicaid expenditure growth rate last year, estimated currently at 2%, versus the 5% to 7% we had planned. We're expecting a Medicaid expenditure growth rate of 3% for 2013. And the increased migration of lives from Medicaid fee-for-service to Medicaid managed care, also caused temporary headwinds. But will be balanced over time by opportunity to sell new services to these plans often at higher fee rates. The migration of the dual eligible population to managed care also provides us with the opportunity to assist our MCO clients in managing the increased expense associated with this high-cost population.

And as we've mentioned, the award of the Medicare Coordination of Benefits contract to HMS was protested by the incumbent and is now under CMS review. While we remain confident in a successful outcome, because we were selected based on best value to the government, there are various scenarios in terms of the decision timelines. We currently expect resolution during the second quarter, at the earliest, and by the end of the third quarter, at the latest. Once this procurement is resolved, we will be able to assist the impact on revenue we expect from the contract in 2013. And lastly, while 2012 saw delays in Medicaid RAC awards and implementation, states are now ready to move forward. In fact, we expect the pace of implementation to speed up considerably now that CMS has announced that they'll be gathering and publishing Medicaid RAC results by state. We believe that this increase transparency within the Medicaid RAC program will keep states focused on the success of these contracts.

Before I go onto our outlook for 2013, I'd like to comment on some of the industry dynamics that we believe will impact the company both in the short and long-term. First is the re-procurement of HDI's Medicare RAC contract, which expires in February of 2013. We are anticipating the release of the RFP, but we have no further information about when it will be issued or whether CMS will restructure or otherwise modify the program. Regardless of when the RFP is issued and how it's structured, we are going into the procurement process with confidence given that HDI has proved itself as the most effective of the 4 Medicare RAC vendors. There is no question that the Medicare RAC program has proven to be a valuable tool in eliminating waste and reducing improper payments in the Medicare program. CMS recently reported that after taking into consideration all fees, cost, and appeals, the Medicare recovery audit program returned more than $488 million to the Medicare Trust Fund in Federal fiscal year 2011. HDI led the pack in recovering overpayments. It's impressive that with only 22% of the Medicare claims to audit HDI has been responsible for 37% of the total corrections under the entire Medicare RAC program. Clearly, a huge contribution to the success of the program.

Now moving to the topic of Medicaid expansion. Today, about half of the states have said they will expand their Medicaid programs under Healthcare Reform. Including states like Florida and Arizona that had been vocal opponents of the ACA. In terms of Medicaid enrollment, the Congressional Budget Office projects that the number of new people gaining coverage through Medicaid in 2014 will be about 8 million. This is healthy growth by any measure and will be a growth driver for our business. We are, however, being cautious about the actual number of new Medicaid members since states will need time to update their eligibility systems and establish outreach efforts. So the number of additional people entering the program in 2014 could be smaller than currently projected.

And finally, on the subject of health insurance exchanges. Many states are still in the process of determining their exchange approach. Whether they'll run their own exchange, let the Federal government run the exchange or partner with the Federal government. Medicaid programs will be impacted by exchanges as they may be the entry point for newly eligible Medicaid receipts. HMS has data matching and decision support solutions that can help Medicaid programs with eligibility verification to help ensure that only those truly qualified are enrolled.

In 2012, we want to subcontract with the State of Illinois for very similar services and anticipate that additional states will be seeking out these decision support tools.

Before we open up the call to questions, let me take you through our strategic progress in 2012 and map for you how our achievements last year translate into 2013 growth opportunities and our plans for capitalizing on those opportunities. First, the Medicaid Coordination of Benefits market. In 2012, we've re-won every contract that came out for re-procurement, affirming our leadership position in the market. To maintain this position, our focus this year is on continuous refinement and innovation to maximize savings for our clients. Coordination of Benefits continues to be a critical component of healthcare costs containment initiatives in Medicaid. A recent report from the HHS office of the Inspector General indicated that third-party liability savings to state Medicaid agencies grew 114% from 2001 through 2011, outpacing Medicaid expenditure growth. We know that HMS has played a significant role in delivering these savings are the program. And as Medicaid grows over the next 10 years, our impact on the program will be even more significant.

In the Medicaid RAC market, we have succeeded in capturing the leading market share. Now, with procurement activity behind us, we are focused on implementing these contracts and identifying opportunities to add new services under them. In the Medicare market, HDI continues to outperform on their Medicare RAC contracts. We are continuing the focus on delivering superior results to ensure that we remain well positioned to rewin the contract. We have also achieved significant synergies with HDI, most notably, in our ability to adapt their industry-leading recovery audit platform for our Medicaid RAC and managed care contracts. In 2013, we'll focus on identifying opportunities to leverage HDI's expertise and technology across the company to enhance the value we deliver to our clients.

Also in the Medicare space, we're looking forward to moving past the procurement review and on a

[Audio Gap]

coordination of benefits award and implementing this significant contract. This is a high profile contract for HMS and it strengthens our relationship with CMS in their pivotal role to ensure payment integrity in the Medicare program.

And now the commercial market. While we're still in the early stages of capitalizing on this opportunity, we're pleased that our services gained traction with commercial plans in 2012. In particular, our Fraud, Waste & Abuse, subrogation and credit balance audit services. And we have a robust sales pipeline going into 2013. With such large opportunities available to us, we will be focusing sales and product development efforts on growing our footprint in this space. And finally, with Congress, the administration and large commercial buyers all focused on controlling Fraud, Waste and Abuse, we have been investing in a the development of our technology based solutions including analytic engines and special investigation services. We're starting to see a broader adoption of these services across all of our markets.

In summary, 2012 saw HMS evolve into a broadly diversified company, both in terms of products and markets. Behind this evolution has been an underlying focus on innovating our products, strengthening our technology and building our executive bench. 2013 is about solidifying our platform to capitalize on the opportunities created by the ACA. We start the year from a position of strength, with a solid infrastructure, a healthy sales pipeline and concentrated efforts on innovation and development.

I'll now open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Let me start with the Medicare COB and just a few questions around that. Number one, really a threefold question. Can you talk about any cost you might be incurring while that is being protested? I'm curious if they could pressure you at all to kind of keep some operations ready for that to ramp. Number two, the overall size of the contract looks a bit larger than you initially alluded, so any color there? And then number three, I guess the big question on people's minds, you didn't change your '13 outlook despite the fact that a pretty big contract is being pushed out. So can you provide a little bit more color on maybe some of the puts and takes as we think about '13 and that getting delayed?

Maria Perrin

Ryan, this is Maria Perrin. Regarding the cost, we are on a stop-work order currently as CMS is in a discussion phase with the procurement. So our costs are very minimal at the moment until we -- the stop-work order is released. Regarding the amount of the contract award, that may fluctuate a little bit as CMS finalizes the award as they are reviewing the final cost from our submission and the incumbent, the other bidder's submission. And then regarding the 2013 outlook, until the process is completed by CMS, that is the discussion phase and they review the final submissions from HMS and the incumbent, and they make their final decision on the award, we are not going to change our outlook on this contract. It will depend on the timeline that they assess as they make their final decision.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, but I guess, regarding the final comment, it's clearly going to be a lower revenue run rate than you thought for the year, given that we haven't heard already. But maybe the 5010 pushout of $5 million buffers a little bit against that. Just any thoughts you have there I think would be helpful.

Walter D. Hosp

So Ryan, so we are not changing our guidance at this point right? Today, it's a wide range of guidance. When we initially gave the guidance, we were using a $50 million estimate for 2013. Yes, clearly that number will be coming down, but because we're in these conversations and there's a range here of outcomes, we won't give you a specific estimate on that right now. But obviously, it will be lower than $50 million. And again, that we have a wide range in our guidance for this year, it doesn't prompt us for a need to change our guidance right now at this point. And as you know, there's other factors that go into that. Normally, we like to change our -- revise our guidance after the end of the second quarter, and we've been our full recast, unless there is something material enough to change that, and we wouldn't say that at this point.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, perfect, that's helpful color. And then maybe 2 more quick ones and I'll hop off. Just in regards to the Medicare RAC re-procurement, I'm curious if you're seeing any early changes in behavior out of CMS that they could slow growth this year, maybe approving less new issues, anything of that nature that surfaced that could derail the growth or are they kind of continuing business as usual to this point?

William C. Lucia

This is Bill. No, CMS is really continuing business as usual. And as everyone knows, there's a lot of provider pushback. But the approval of new scenarios, continuing to run the processes, work collaboratively with the max [ph] and the -- through the entire process and then of course, focus on the appeal process, all of that continues. So we've not seen any change.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay. And then last one, I guess back to you, Walter, you made some comments about this year being more back-end loaded than normal, I think the back half is usually maybe 52%, 53% of sales. Is this a year where we might see it go above the 55%, 56% level? I don't know if you want to give that granularity, but it may help us as we think about expectations for the first half of the year.

Walter D. Hosp

Thank you for that question. So we don't want to get in the habit -- we don't give quarterly guidance and don't want to get into that. But having said that, you designated first half, second half. And you gave a range that I think is realistic to think about. Yes, higher than in prior years, our percentage of revenue will come in the second half in 2013 because of again, the Medicare COB contract and all these Medicaid RAC contracts that we're standing up. So you're not -- I wouldn't say your range is far off.

Operator

Our next question comes from the line of Scott Green from Bank of America Merrill Lynch.

Scott J. Green - BofA Merrill Lynch, Research Division

I'm just looking for a little more color on COB. I was estimating around $72 million of revenues in the quarter backing out the HIPAA recoveries. So that looked down on a year-over-year basis. Can you just review what their drivers of that are? And then how to get comfortable with the reacceleration to 10% growth next -- this year?

Walter D. Hosp

Yes. So just to go back and reiterate what I have specifically said on that. So bear with me 1 second here. So in this marketplace, it's the 3 items that we've hit this year. As I've said, if we take out HDI and Federal, we have a 7.1% growth for the business overall. And in COB, you're correct in saying, it's essentially flat year-over-year for the quarter. And here again, it's the 3 items that continued to impact us this year. Of the slower expenditure growth, the changeover to Medicaid managed care and the 5010 issues. Now all of them are beginning to impact us less and less. In 2013 numbers, we are assuming only a 3% Medicaid growth there, so we feel that, that is a nice appropriate number to use even given where we are today, but putting in context the historical growth of the program and where it's heading clearly in 2014. These other items, as Bill mentioned in his speak, that the 5010 issues are essentially behind us, and we don't expect to see impact from that. And Bill also mentioned that in the Medicaid managed care, there are disruptions that occur to our business as lives transitioned over that impact our revenues negatively. There are over 70% of the lives now are in Medicaid managed care. And as we go into 2013, there simply aren't as many lives even available to shift over to managed care, so that item is also going to be much less of an impact, although still there in 2013. So adding those all together, that's how we came up to the 10% growth in 2013. And again, historically, this has been about a mid-teens growing business. Now that's all positioning also for 2014 when we'll see the growth in this business from the expansion of the Medicaid program.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay, that's helpful. So are you -- so you're actually starting to see in areas where there was managed care expansion in the last year, like Texas, moving more to STAR+PLUS from fee-for-service that within 12 months or however long it is you're seeing that disruption dissipate, so you return to normal growth rates. You're actually seeing that in some of the markets that went to managed care this year, which gives you confidence that the disruptions are dissipating for '13?

William C. Lucia

Yes, as we've tracked this historically, the year in which there's a large migration, there's a disruption. And it's based on states getting their arms around -- the policy around Coordination of Benefits, whether it's delegated to the plans or not, there's a lot of kind of arcane rules that follow. The year in which the migration happens, we see -- we see that as a headwind. A full 12 months after the migrations happen though, we're able to see the pickup on our revenues because the full volume is coming through the managed care plan, and as you know, at a relatively higher fee rate. So that's typically what happens. We expect we'll be on the positive rebound of the -- of the challenges we saw in 2012 as all of the plans have their lives, the claims processing and all of those feeds are coming to HMS. And there are very few -- the only plans left that are not HMS clients are very small plans.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay, that's helpful. Do you recall approximately what the headwind would have been in '12 regarding the transitions? Just trying to put that in perspective when thinking about what the tailwind could be this year.

Walter D. Hosp

Yes, it's very hard to have a data set because all these impacts are overlapping in our numbers. So it's very hard to get a data set that just isolates these variables and we could hang a hard number on them. We know they're all effects in there. We can look at underlying data and very comfortably generalize about the direction of these things and the impact. But it's hard to hang a number on that, we have to really talk about it in the overall growth rate.

Scott J. Green - BofA Merrill Lynch, Research Division

Okay. Then switching topics to one other question. HDI had another really strong quarter. Maybe could you talk about the drivers of HDI's growth? Because the CMS website seems to show that the RAC recoveries have generally been stable over the last couple of quarters, so maybe just try to reconcile the driving the strong growth for your HDI business.

Walter D. Hosp

Bill is going to add more color to that, but let me just restate what I've said in the past about the Medicare RAC revenue curves. And they are developed by getting scenarios approved by CMS and then working on those scenarios. And the revenue curve is essentially built up on scenario upon scenario. When a new scenario is introduced, there's an opportunity to look back 3 years, and there could be a large collection associated with that, and then it drops down to a more normalized level and then grows from there. And so when you look quarter-to-quarter, and this is just a provide on us, when you look quarter-to-quarter, and you see that this year in the second quarter, you'll see that not every quarter has a predictable sequential growth because these scenarios are how the revenue curve gets built up. So you should -- you've seen it in the past, and I'll just warn you that you'll see it in the future, that not every quarter looks like a sequential growth on this, and you could have surges in quarters and lower growth or even flat growth in other quarters. You really have to look at it on, say, at least a rolling 4-quarter basis to smooth that out.

William C. Lucia

Yes, and the other comment is really on the commercial side of the business. So the commercial RAC-like work that HDI does is very similar in the Medicare RAC-like work, which basically is about 12 months after the contract's executed, you are able to deliver a result. Now sometimes it could be shorter, so you're dealing with very complex clinical rules, negotiating with a client on the scope. It's very similar to the work that happens in the RAC. And it takes almost a full year. So what they saw in the fourth quarter was the benefit of commercial accounts that were signed earlier in the year at the end of 2011 that went live. So that's what will -- we'll hope to continue to see as we expand our commercial footprint.

Operator

[Operator Instructions] Our next question comes from the line of Deepak Chaulagai from Dougherty & Company.

Deepak Chaulagai - Dougherty & Company LLC, Research Division

I just wanted to follow-up on Scott's questioning on the HDI. So just to start off, what percentage of revenue are the $31.3 million? What percentage was Medicare RAC and what percentage was commercial? And then I have a follow-up for 2013.

Walter D. Hosp

Approximately, and it's not just the quarter. Approximately it's about a 70/30 split right now between RAC and commercial. With that, we're expecting that to change over the time period there because we have a higher growth rate associated with the commercial section there than we do with the RAC for 2013.

Deepak Chaulagai - Dougherty & Company LLC, Research Division

Right. That's what we had in our model too. And if we look at the commercial side, and Bill, you made the comment that, that's growing significantly, what are some of the drivers there on the commercial side with the HDI business?

William C. Lucia

Well, it's really across all of HMS' business, and that's, that -- commercial plans have the same challenges to rout out fraud, waste and abuse. They've got a -- the MLR limit, they've got to keep focused on their administrative costs, so there's been a flurry of activity of continuing to outsource services to specialized vendors like HMS. So across the board, we're going to continue to see -- we're going to continue to see a broader adoption rate in the commercial market to a certain degree following what happened in the Medicare RAC. I mean, providers are used to this -- they might not like it, but they're used to the process. It's happening in Medicaid, and it gives commercial more of an opportunity to follow suit. The other is really that, we have invested in some development of some of our existing products to be more suitable to the commercial market. And 3 of those in particular are our subrogation services, where we've won some work this year with large commercial payers and look forward to continuing that. We've been rolling out our new advanced analytics and predictive prepay and post-pay claims adjudication engine. And that's been accepted throughout the market, but we have a strong sales queue from that perspective. And then of course, our credit balance audit services, which we initially delivered just in the Medicaid market and now have sold to large commercial plans and are looking forward to continuing expansion in that area.

Deepak Chaulagai - Dougherty & Company LLC, Research Division

So it's more of expanding from what the base was for HDI when you initially acquired that on the commercial side?

William C. Lucia

It is. It's really looking at across the commercial market, how can the HMS family of companies deliver a broader range of services.

Deepak Chaulagai - Dougherty & Company LLC, Research Division

And given these seemingly strong growth, you should expect a 20-plus percent year-over-year growth from the HDI business, taking into account there could be potential changes to the Medicare RAC program and perhaps a reassignment to different regions?

Walter D. Hosp

Well, that's correct. We have in our 2013 numbers approximately a 20% growth rate for HDI assumed. And as I said in this last quarter, it's been about 60%. So the reason it's lower is because that 60% is an unsustainable growth rate for one. And secondly, that, yes, this is a reprocurement year. And there can be disruptions this year, so we're being judicious about that.

Deepak Chaulagai - Dougherty & Company LLC, Research Division

Right, and one last follow-up, I guess, on the core business. Your comments on movement of lives from fee-for-service to managed care, obviously is understandable because I think 2012 was one of the highest conversion year. What percentage of your growth do you -- or your 10% outlook are you, I guess, basing on that? And then on the other side is, you said 3% growth, have you seen any change in growth rate in the first quarter, I guess, in the overall Medicaid expense?

Walter D. Hosp

For the Medicaid expenditure growth there, we're like everybody else. We see the data that gets reported, heavily lagged data. So it's very hard to say, we have a firm opinion on what we're seeing in Q3 so far. We do get to see some data a little bit more realtime, but we're very cautious about using that as a confirmation. But the 3%, again, is historically a low number, and we feel it's the right number to have an assumption in there. The migration to managed care, as Bill said, there's a years delay impact. First there's a negative impact and then there's a year delay before we can sort things out with the managed care firms, begin expanding scope with them and then we resume growth. For next year, for 2013 I should say, our managed care growth is significant. It's offsetting though the larger base in our government business. Now longer term, that's where we want to be because the profitability, the pricing there is better. So it's a favorable mix over the long term, but we have to suffer the effects of it in the short term.

Operator

And our next question comes from the line of Dave Windley of Jefferies.

David H. Windley - Jefferies & Company, Inc., Research Division

So I want to shift gears a little bit. Walter, I heard your comments about the $3 million kind of option-related benefit to compensation. So that is -- that appears to be a big chunk of contribution to op income margin. It also looks like SG&A was a little low. If you made comments about that, I missed those. Was there a special item in SG&A? I guess I'll stop there and let you answer that first.

Walter D. Hosp

Well, just to again go back and be clear. So in the quarter here, we did have this onetime benefit of a $3 million reduction in compensation expense. Some of that's spread in our overall cost of services and some of that in SG&A. All right? So it's spread around there, but we called that out separately because it's nonrecurring. And again, when you adjust for that, we're pretty much in line or have a little bit of a $0.01 better than consensus on that. When you look at the adjusted EPS numbers, it's already taken out because it's stock-based compensation there. The SG&A, yes, the SG&A line -- again, net of HDI, there have been tight controls on that, but you have to -- the biggest adjustment I would look for is the -- in 2011, we had a $5.2 million charge for the acquisition of HDI, expenses related to that. So when you take that out, you adjust for that also, you'd see a more normalized growth of SG&A.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay, and then if I broaden out, if I zoom out on that basic concept, I believe next year's guidance assumed essentially flat op margin in '13 year-over-year versus '12...

Walter D. Hosp

Sorry, go ahead.

David H. Windley - Jefferies & Company, Inc., Research Division

I'm sorry, I was just going to say, and we're probably going to get less of an impact of the low-margin business on Medicare COB, the RAC business, the Medicare RAC HDI business that carries pretty good margin is outperforming and may very well be a bigger contributor next year than kind of anticipated in the original guidance based on the way this year ended up, I'm just wondering kind of broadbrush strokes on the puts and takes on what our margin expectations should be for 2013 and what some of the, again, what some of the puts and takes might be there?

Walter D. Hosp

Right, sure. So you're right in saying that well, the 2013 operating margins, which we projected at 20% are similar, almost identical to 2012 here. And yes, we're going to experience good growth there. But it's growth -- a lot of the growth is from lower margin business in 2013. The Medicare COB contract, we're estimating that revenues associated with that in 2013 will have only a 10% operating margin, it's a cost-plus contract, plus we are not eligible for performance awards. When we get to 2014, we'll have a full year run rate and be eligible for those awards, so the margins from that contract will go up to closer to mid-teens. When we talk about Medicaid RACs, there -- those are ramping up and as you know, we have to incur the cost there upfront because it's all contingency fee. So as we ramp those up, that's putting pressure on our operating margins. Once they are up and fully operational, the revenues start to come in, and obviously, the margin profile changes from those contracts. So -- and the first half is clearly a margin drag that it begins to improve in the second half, but it's not until 2014 that we see -- we get to realize the full margin potential from the Medicaid RAC contract.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay, if I could sneak in one more, would it be possible on Medicaid RAC to call out what the revenue was in the quarter and/or for the full year of 2012?

Walter D. Hosp

Yes, we've been reluctant to do that, only because these are individual contracts and we're worried about extrapolating from that number. What we've set for 2013 is that there's a bucket of revenue that we've estimated at about $25 million in 2012 and it should grow about 25% in 2013, that is Medicaid RAC and RAC-like services. So for us, it's not just the RAC contracts with the state governments, but we're selling nearly identical services to Medicaid managed care and even to some commercial plans. So that's why we've bucketed it that way, and that's -- the 25% growth is both from the state RAC programs formally and again, this selling of RAC-like services into managed care and commercial.

David H. Windley - Jefferies & Company, Inc., Research Division

And those RAC-like services would come from -- would be part of the old HDI, as well as some of the core, say, PI line from HMSY? Is that right? Or...

Walter D. Hosp

Yes, well, the unit supporting -- the unit supporting that work can be essentially the same whether it's a government space or commercial related to it.

Operator

Our next question comes from the line of Frank Sparacino from First Analyst (sic) [Analysis].

Frank Sparacino - First Analysis Securities Corporation, Research Division

Walter, Bill, I'm just curious of your comment with respect to Medicare RACs in '13 going forward, what your expectation are as it relates to the expansion of the claims. Was it more out of the inpatient to the physician as well as the change in terms of the look-back period from 3 or 5 years. I don't know if how, yes, material that is to the business.

William C. Lucia

I'm sorry Frank, you cut off. Are you saying Medicaid or Medicare?

Frank Sparacino - First Analysis Securities Corporation, Research Division

Medicare.

William C. Lucia

Yes. At this point, while it was enacted, CMS has not made any -- has not adopted the 5-year look back. So they're -- they're still sticking to the existing 3 year. We don't know if they'll adopt that in the new procurement, or if they'll make changes in the future. But at this time, they're not changing it. And then -- and what the kind of pushback from the provider community is probably one of the things that they can hold out there and not do immediately. It would have an impact, obviously on a positive way for us, if we had the ability to go back -- that ability to go back 5 years. And then I'm sorry, was that the extent of the question?

Frank Sparacino - First Analysis Securities Corporation, Research Division

No, I'm just curious, Bill, on the extension right? I mean, most of the Medicare RAC activity has been on the inpatient side, as that expands here.

William C. Lucia

Yes, we've actually gone beyond inpatient. I mean, we've done both outpatient and DME and have now, I think, have been the first RAC to perform nursing home audits. So we are expanding our outlook. And actually, the state RAC is sort of following a very similar model. States are also concerned about putting too much pressure on the hospitals so we're looking at everything from physician services through pharmacy to DME and home health, so especially providers. So I think you'll see, on the Medicare RAC, that continue to evolve.

Walter D. Hosp

But you shouldn't expect the attention on the Medicare A and the hospitals to abate. It's just a matter of this is not the only area to go. There's still lots of recovery opportunities there, still where the majority of dollars are for it. So the RACs have a very broad playing field to go after. But they're not going to reduce the attention on the Part A there. But the additional growth can come from all these other areas that Bill has listed.

Operator

Our next question is from the line of Bret Jones from Oppenheimer and Co.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

I wanted to start with the backlog of the 5010 and D.0 claims. You said that the client's just a little under $5 million and I just want to make sure I'm comparing that to the $10 million backlog you discussed last time?

Walter D. Hosp

That's correct, Brett. So we've been trying to describe that the claims backlog was a lot larger number. But -- and in that is revenue that is sort of trapped for us. So as we resolve this with the carriers and reprocess the claims and what have you, we see revenue coming from that. I mean, essentially, we're declaring the issue as nearly over. We're being cautious, though, in saying that the last dollar related to that could spill over to the second quarter, but for all intents and purposes, this is an issue that we think is primarily behind us.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay. And I just want to make sure I understand, the gross margin profile of that revenue coming in, is there work to be done as you reprocess those claims? Or is that coming in, in a 100% margin?

Walter D. Hosp

No. It's not coming in at a 100% margin. There is cost to rework these claims.

Walter D. Hosp

Yes. We're the only -- let me give you just a little color so -- the -- to accommodate the 5010 or the D.0 transaction, there's work on both HMS's side and of course, the carrier side and particularly, because we're a unique transaction type, we don't fit neatly into their system. In the last quarter of 2012, we went live with 58 new electronic transaction platforms, meaning 58 carriers. It takes, from the time we go live, through the time we settle down with that carrier on both their normal processing flow, because they can't process everything the first week, their ability to modify the denials that come through, to fit the Medicaid segregation world, and I don't want to get too arcane on you, but it takes 6 months. So that's why we're estimating -- we've got 58 new carrier platforms that we're working through in the first 6 months. It takes about 6 months. There's a lot of back and forth with the carrier to get them back to the adjudication level and payment levels they were at before the conversion.

And that's why we're -- we say on the -- the revenue coming from those post-5010 conversion, they take about 6 months to get back to a normal processing stream and we'll come in as a slightly lower margin because we'll be putting extra people on working that. I don't want you to think that and say a very different margin, but it -- we're still going to have to put -- we still have to put more resources on working that through with the carriers, and that's, obviously, in our best interest.

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Okay. So I just want to make sure I'm 100% clear. In terms of the revenue, that the $5 million backlog that you're clearing this last quarter, you actually had to put more resources to it so that it carried a lower gross margin than the average COB work you worked on?

William C. Lucia

Yes, but it's not that big of a delta. I mean, it's not that big of a delta and again, we do that because the carrier's an important stakeholder in our process and we want to make sure that for both us and them, we're processing efficiently in getting back to normal stream of payments.

Operator

Our next question comes from the line of Richard Close of Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Yes. Just had to get a quick couple of questions here. Bill, you were talking about the expansion of Medicaid in 2014. Think the CBO said $8 million new lives expected. And then you seem to walk back a little bit in terms of what that actually might be when all is said and done. Can you give a little bit more in-depth on that commentary there?

William C. Lucia

Yes, and, Richard, I'll tell you there's no source for definitive data, but here's why I think just working with state agencies about what we see happening. So there's the exchanges that have picked up and running, there will be states that are up and running close to January 1, and there will be states who are not ready. The exchange is one platform that newly eligible Medicaid members will come in. Of course, Medicaid will still be the arbiter of determining the true Medicaid eligibility. There's outreach efforts in states. I mean, you could -- in New York state alone has said there's people qualified for Medicaid that aren't on the rolls. So one of the challenges states have is how do we get more outreach to get people enrolled into the program as the expansion happens. So my personal opinion or our opinion is, that it will just take time for all of that to happen and so the 8 million may not ramp up as quickly as the CBO reports. Now, we'd be fine if it does. But in reality there's just too many moving pieces. And that's why we just want to put caution on that number.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and with respect to the Medicare COB contract, you're obviously have been doing work until you talked about the stop-work order that you guys implemented, I guess, in the middle of the fourth quarter. Could you talk a little bit about the revenue you might be able to recognize as soon as the protest is, I guess, completed? And if it ends up staying with you guys? Is there -- yes, any type of quantification in terms of the bolus of revenue that you'd be able to recognize immediately?

William C. Lucia

Well, one of the things we don't want to talk in too much detail about because we're in this confidential procurement process, it's a one of the avenues in which CMS has to resolve a protest. And of course, it would involve costs. So we don't really want to talk about that. But as you know, the day it goes live, or the day after that it goes live, we're able to start earning our fees because it's a cost-plus contract. And we do have some resources on. But we have a plan to quickly bring the rest of the resources on, the capital equipment, everything, that we're holding in abeyance but ready to pull the trigger on. So the revenue will ramp rather quickly because it's cost-plus.

Walter D. Hosp

But there is no bolus concept like there is in the rest of our business where there's a retroactive look back or things like that. It's just, it's the gun goes of and we start and we start ramping up.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and then final question, this is more bigger picture, I guess, longer-term. Can you talk a little bit about the impact of real-time eligibility on your overall business going forward? And then maybe a shift in focus on fraud waste and abuse towards prepayments, cleaning things up prior to becoming problems of -- rather than, I guess, pay and chase currently?

William C. Lucia

Yes, I'd be happy to talk about that. So there is a, as you know, there are electronics standards in the healthcare industry that allow payers, providers, parties like HMS or clearing houses to be able to quickly get answers through what are called 270/271 transactions about eligibility on an individual. The difference with that than our process, though we use those transactions, by the way among other things, to verify eligibility, they're point in time transaction. So you may not -- you have to may not get something it's -- if you're looking for something that's 3 months old, you may not get that information and the data is not as robust.

So we have real-time processes in our existing product suite. They're obviously more expensive and more -- a little more cumbersome for any of our clients to implement because all their transactions are not real-time but it's something we can support with the EDI assets we have today. I don't think there's a big negative impact to our business because there's still a need to understand that member's -- where that member's other third-party eligibility is. And today, we're the only true source of that across the nation. I mean, there are companies that have access to some eligibility, may have pockets of eligibility, but with the over 1,000 plans that feed into our database, we have a very current eligibility, some as daily, weekly or monthly, and then the ability to quickly verify it. So we haven't seen the -- an erosion on our business because of that.

And then on the second part, which is the prepayment, there has been a push primarily in the commercial market, but now we're seeing it pretty extensively starting to pop up in the state government market, is to make sure that there are more claims cleansing, editing and some -- almost a forensic review, this, what we call, fraud, waste and abuse analytics. Done on claims prior to them leave -- actually leaving and being paid to the provider. And we do have a government product line that serves that niche. We currently have 2 states under contract, though we have states in our sales queue and we have about, I'd say, maybe 8 health plans that use that service today and a healthy sales queue pursuing that.

So there is a trend in that space. I can tell you that everything cannot be stopped. You do need a longer retrospective view. You need time to build up claims, do the pattern analysis. There's a lot of reasons why you cannot block everything on the front end. But a few years ago, we started investing in those tools. So we have a solution for that. And for most of our clients, that's packaged with a respective recovery on the back end.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, are you doing that in the Medicare RACs? Because I think they are trying to do that as well, if I'm not mistaken.

William C. Lucia

That's a pilot. That's done. It's slightly different. It's really moving the work the RAC does and in a faster turnaround. It's really not the same as the solution I've talked about, which is it really is a software as a service solution that we manage and we intercept the claim after a claim's adjudication system has said it's ready to pay and then it goes through our analytics. And that we do for Medicaid, Medicare Advantage, commercial. We have very specific edits for that. So...

Richard C. Close - Avondale Partners, LLC, Research Division

Now would that be headwind? Should I think of that as a potential headwind on revenue similar to the shift from Medicaid COB to managed Medicaid? Or, I guess, does that have any impact on the amount of revenue potential?

William C. Lucia

No, I mean, here's why I say no to that, is that it's actually an area for us that's growing. And again, you can't find every -- if you could find every error on a prepayment analytics basis, there would be no recovery audit work today. And you just can't do that. So for us, it's a new revenue stream, it gives us the ability to add more value to our customers, a lot of the inappropriate payments. But then still, with this we package special investigation services, complex clinical review and case management services, all the things that a health plan may not want to staff up for, and that's packaged in our retrospective review.

I mean, there are a lot of -- there's a lot of technology in the health care space that cues up either problem providers or problem claim trends. But you need people to work that. So our system does both an automated process and then also provides the analytics. But we also offer the case management services and the staff to do the investigations that the health plans need.

Operator

Our final question today comes from the line of Jamie Stockton of Wells Fargo.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Maybe the first one just, and I know that a lot of people have asked about this, but the Medicare COB contract, could you give us some sense for exactly where the process stands right now? It sounds like earlier in the call, you said that you're in the discussion period which, to me, implies that you've been re-awarded the contract, but it hasn't moved to the point where it's open for protest by the incumbent vendor. Is that accurate?

Maria Perrin

No, let me clarify. The incumbent had filed a protest with the GAO. CMS said no need to continue with the protest because we are going to take what's called procurement corrective action, that's the official term. But what it means is that they take a look at some of the elements of the decision factors and the contract and the submissions. And they rereview their decision elements.

So the GAO dismissed the protest, but while CMS takes these corrective actions, which includes discussions with HMS, as well as certain discussions with the incumbent who originally protested. At the end of the discussion phase, so it will include a submission regarding clarification of certain items in the proposal. And out of that, CMS will make a decision. And their decision factor could be to release the stop-work order. It could be to make another decision regarding the procurement. That's unknown at this time. But it's officially not under protest, but the decision regarding CMS is still open and up to them based on the submissions by HMS.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

And the reasonable original expectation is that -- let's say hypothetically, that you're re-awarded the contract, and then the incumbent vendor probably will protest it. I assume that the stop-work order will probably remain in place. I know these are a lot of hypotheticals [indiscernible] go through the [indiscernible]

Maria Perrin

You're right. And that accounted for the range that Bill gave earlier in the call. So CMS has fairly short turnaround for their initial position. And if it -- the incumbent will have another opportunity based on that decision to protest again with the GAO. At which time, the GAO has up to 100 days to make a decision. That is the long end of our range that we mentioned earlier. GAO does not have to take 100 days, they can make a quick decision on that. Again, it's going -- I think it's all going to hinge on what CMS's decision is and what their explanation in their report is regarding the decision.

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Okay, and then just one more quick one. The HDI business, Walter or whoever wants to take this, you guys basically said you identified these issues and then with the Medicare RAC business, you go after those issues within the states where you have jurisdiction. Do you have any feel for how penetrated the issues are that you've currently identified that you've posted on the HDI website?

Walter D. Hosp

Well, mentioning the HDI website, I mean, that's a requirement that the RACS have to post the approved scenarios that they have and if you look back historically, you see that continually gets added to, unless there's a regulation change, that scenario remains open and it's in our coding engines to continually look for those issues. So penetration is a tough question to answer because, well, starting at the very macro level, if you talk about CMS's estimate of 8.5% of errors in Medicaid, you're only scratching the surface of what's been done so far.

The $2.4 billion, that the Medicare RAC program has recovered in fiscal year -- federal fiscal 2012, yes, a lot -- a clear majority, about 80% has come from Part A and hospitals, so that is fully more penetrated than other segments. But again, it's such a large one and there are other opportunities there. We just caution to say don't -- it is not fully penetrated by any means.

And then Bill went through a litany of other areas that we're expanding into because Medicare covers a lot more than just hospital. So the short answer to this is that there's a long and large opportunity to continue expanding these scenarios into existing areas and to new areas to continue a very attractive growth profile for this program and for HDI.

Operator

This does conclude our Q&A session. And I would like to turn the conference back over to Mr. Bill Lucia for any closing remarks.

William C. Lucia

Well, thank everybody for joining our call today. And we look forward to reporting on our progress over the course of the year.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect.

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