HMSY

HMS Holdings Corp

We provide a variety of cost containment, coordination of benefits and program integrity services for government-sponsored health and human services programs. These services are designed to help our clients recover amounts due from liable third parties, reduce costs, ensure regulatory compliance, and increase operational efficiencies.

Our clients are state Medicaid agencies, government-sponsored managed care plans, Pharmacy Benefit Managers (PBMs), child support agencies, the Veterans Health Administration (VHA), the Centers for Medicare & Medicaid Services (CMS), commercial plans, self-funded employer plans and other healthcare payors. We help these payors contain healthcare costs by identifying third party insurance coverage and recovering expenditures that were the responsibility of the third party, or that were paid in error.

In September 2009, we acquired IntegriGuard LLC, or IntegriGuard, an International Organization for Standardization (ISO) certified and Utilization Review Accreditation Commission (URAC) accredited organization, which provides services related to the prevention and detection of fraud, waste, and abuse in the healthcare system. IntegriGuard is based in Omaha, Nebraska and operates as our wholly owned subsidiary. With this acquisition, we further expanded our portfolio of program integrity service offerings for government healthcare programs, and in particular for the Medicare program. IntegriGuard’s services include audit, compliance and education, data and analysis, eligibility verification, medical review, and investigation services. In addition to being designated by CMS as one of twelve Program Safeguard Contractors, IntegriGuard is also one of eight Qualified Independent Contractors for CMS.

In December 2009, we acquired the assets of Verify Solutions, LLC, or Verify Solutions, a company based in Alpharetta, Georgia, specializing in dependent eligibility audit services for large and mid-market employer-sponsored healthcare plans. With this acquisition, we moved into the employer-based market with valuable new services that ensure that dependents covered by employees are eligible to receive healthcare benefits. Verify Solutions’ services provide savings throughout the benefit cost structure, including medical, prescription drug, dental, and vision plans.

Our 2009 revenue increased to $229 million, $45 million or 24% over 2008 revenue, primarily as a result of the expansion of existing product offerings and acquisitions. In addition, we have leveraged our expertise to acquire new clients at the state, federal and employer levels and to expand our current contracts to provide new services to current clients.

The Healthcare Environment

In 2009, the cost of healthcare in the United States continued to rise, placing ever more pressure on patients, insurers, providers and government healthcare programs. The largest government healthcare programs are Medicare, the healthcare program for aged and disabled citizens that is administered by CMS, and Medicaid, the program that provides medical assistance to eligible low income persons, which is also regulated by CMS but administered by state Medicaid agencies. Medicare and Medicaid combined pay about one-third of the nation’s healthcare expenditures and serve over 100 million beneficiaries. Many of these beneficiaries are enrolled in managed care plans, which have the responsibility for both patient care and claim adjudication.

In February 2009, Congress approved an increase in states’ federal Medicaid matching funds and allocated $86.6 billion for this effort. This measure helped states mitigate the increase in Medicaid expenses during the economic downturn and helped relieve state funding shortfalls. The funding is set to expire at the end of 2010, although an effort is underway to extend this funding for an additional six months. We believe that demand for our services will remain strong as states seek to balance their budgets and contain healthcare costs during this period of high Medicaid enrollment growth and reduced state revenues.

Dialogue around healthcare reform continues at both the federal and state level. Policymakers at both levels seek to offer solutions that will lower the rising number of uninsured Americans and reduce the escalating costs of our healthcare system. To date, the Senate, the House of Representatives and the White House have been unable to reach an agreement on a final healthcare reform bill, and the debate is complex and political. Future growth in healthcare spending and enrollment, however, is more certain. In 2009, CMS reported that healthcare spending grew 5.7%, and reached $2.5 trillion. According to CMS, healthcare spending is expected to grow at an average annual rate of 6.1%, to $4.5 trillion, by 2019.

Medicaid spending in particular will grow significantly. Federal and state Medicaid spending combined is projected to have grown 9.9% in 2009, the fastest rate of Medicaid growth since 2002. This means that our primary client base, Medicaid agencies and Medicaid managed care plans, can expect their beneficiary rolls to continue to grow regardless of the outcome of healthcare reform. CMS projects Medicaid spending to double in size by 2019, as a result, we expect a continued increase in the need for our cost containment and management services.

Under the Title XIX of the Social Security Act, or the Social Security Act, states are required to take all reasonable measures to ascertain the legal liability of “third parties” for healthcare services provided to Medicaid recipients. The Deficit Reduction Act (DRA), signed into law in February 2006, established a Medicaid Integrity Program to increase the government’s capacity to prevent, detect, and address fraud and abuse in the Medicaid program. The DRA is the largest dedicated investment the federal government has made in ensuring the integrity of the Medicaid program. Additionally, the DRA added new entities, such as self-insured plans, PBMs and other “legally responsible” parties to the list of entities subject to the provisions of the Social Security Act. To date, at least 46 states have enacted legislation in order to comply with requirements of the DRA. Together, these measures at both the federal and state level have strengthened our ability to identify and recover erroneous payments made by our clients.

Principal Products and Services

The demand for our services arises, in part, from the small but significant percentage of government funds spent in error, where another payor was actually responsible for the service, or a mistake was made in applying complex claim processing rules. In its 2009 Agency Financial Report, the U.S. Department of Health and Human Services estimated that improper payments made by Medicare and Medicaid will total approximately $50 billion for the 2009 fiscal year. Our services focus on containing costs by reducing this error rate.

Medicaid is the United States health program for eligible individuals and families with low incomes and resources. It is a means tested program that is jointly funded by the states and federal government, and is managed by the states. By law, the Medicaid program is intended to be the payor of last resort; that is, all other available third party resources must meet their legal obligation to pay claims before the Medicaid program pays for the care of an individual eligible for Medicaid. States are required to take all reasonable measures to ascertain the legal liability of third parties to pay for care and services being provided under that state’s plan. Since 1985, we have provided state Medicaid agencies with services to identify the other parties with liability for Medicaid claims, and since 2005, we have provided these services to Medicaid managed care plans.

Our services draw upon proprietary information management and data mining techniques, and include coordination of benefits, cost avoidance, and program integrity. In 2009, we recovered more than $1.0 billion for our clients and provided data to our clients that assisted them in preventing billions of dollars more in erroneous payments.

We provide the following services: Coordination of benefits services, which route claims already paid by a government program to the liable third party, which then reimburses the government payor. The Medicaid and Medicare programs, including Medicaid and Medicare managed care organizations, and VHA must all coordinate benefits with other payors to ensure that claims are paid by the entitlement program, group health plan or other party that actually bears responsibility for a particular incident of medical service. By properly coordinating benefits, these programs are able to recover dollars spent in error and avoid unnecessary future costs.

Cost avoidance services, which provide validated insurance coverage information that is used by government payors to reject claims that are the responsibility of a third party, typically a group health plan sponsored by a beneficiary’s employer. Child support agencies use this information to identify children who have coverage from either the custodial or non-custodial parent, as well as to identify children without coverage. With validated insurance information, healthcare payors can avoid unnecessary future costs.

Program integrity services, which are designed to ensure that medical services are utilized, billed, and paid appropriately. We identify payment errors, and then recover the erroneous payments, if appropriate. Our program integrity services include: data mining; credit balance reviews; clinical reviews; fraud, waste, and abuse detection; and recoupment services.

To perform our services, we aggregate medical claims, health insurance and other beneficiary data from a variety of sources. The data is mined to identify instances of health insurance coverage, or claims that were paid in error for administrative or clinical reasons. We provide our clients with ways to recover funds or avoid future errors, including validating primary insurance coverage, generating electronic claims to liable third parties, documenting liens that attach to personal injury litigation and estates, and enrolling children under the insurance of non-custodial and custodial parents, as appropriate.