| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Delaware (State or other jurisdiction of incorporation or organization) | ||||||||
| 11-3656261 (I.R.S. Employer Identification No.) 75038 (Zip Code) | |||||||
(214) 453-3000 (Registrant’s telephone number, including area code) | ||||||||
(214) 453-3000
(Registrant’s telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock $0.01 par value | HMSY |
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | |||||||||||||||||
| Emerging growth company ☐ | ||||||||||||||||||||
Emerging growth company ☐
17, 2020.
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Additionally, our internal data and estimates are based upon information obtained from our customers, our partners, trade and business organizations, publicly available information and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Estimates are difficult to develop and inherently uncertain, and we cannot assure you that they are accurate. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those detailed above and under “Part I, Item 1A. Risk Factors” of this 2019 Form 10-K. while helping consumers lead healthier lives. Payment Integrity (PI) The composition of our 10 largest customers changes periodically. For the years ended December 31, 2019, 2018 ACA. 2019. 2019. 2019. 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. 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. If we are unable to protect our proprietary technology, information, processes, know-how, and other intellectual property, We may also be required to indemnify our customers if they become subject to third party claims relating to intellectual property that we license or otherwise provide to them, which could be costly. In addition, our government and commercial healthcare customers are subject to financial pressures or pressure from stakeholders that may cause them to terminate contracts for our services that 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. We may not be able to deliver our solutions and perform services efficiently if we are unable to attract and retain qualified employees. Another variable that impacts our business will be how state programs, commercial health plans, private employers and other healthcare payers will respond to changes during this continued period of uncertainty surrounding the ACA. These 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 future legislative changes affecting Medicare, Medicaid or other publicly funded or subsidized health programs, or efforts to Additional legislation governing the acquisition, storage and transmission or other dissemination of health record information and other personal or sensitive information, including information outside the scope of HIPAA, continues to be proposed and come into force at the state level, such as the recently enacted California Consumer Privacy Act of 2018. There are also numerous international privacy and security laws that govern the collection, dissemination, use, access, retention, storage, protection and confidentiality of personal information. For example, the European Union General Data Protection Regulation, which became effective in May 2018, introduced new data protection requirements, which relate to, among other things, the security, confidentiality and processing of personal data in the European Union. The transferring of personal information across international borders is also becoming increasingly complex. Additionally, several countries, including Australia, have established specific legal requirements for cross-border transfers, and other countries, such as India, are considering requirements for data localization. We are subject to extensive 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. Matters. 2019. 2018. prior periods. income for the year ended December 31, 2019. other expenses. Cash Flows from Operating Activities 2020. 2020. 2019. 59. /s/ William C. Lucia /s/ Jeffrey S. Sherman /s/ Greg D. Aunan /s/ Katherine Baicker /s/ William F. Miller III /s/ Bart M. Schwartz /s/ Richard H. Stowe /s/ Cora M. Tellez December 31, 2018 December 31, 2017 2017. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When indicators exist, recoverability of assets is measured by a comparison of the carrying value of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized and charged to earnings is measured by the amount by which the carrying value of the asset group exceeds the fair value of the assets. The Company did 2017. 2017. 2018. Stock-Based Compensation Expense liability on a lease-by-lease basis. As of December 31, 2019, all operating and finance leases that create significant rights and obligations for the Company have commenced. On August 17, 2018, the SEC issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification (“Final Rule”). The Final Rule amends certain disclosure requirements to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The Final Rule was effective for public entities that are SEC filers on November 5, 2018. The adoption of this guidance in 2018 did not have a material effect on the Company’s consolidated financial statements. The Company’s internal control framework did not materially change, but existing internal controls were modified due to certain changes to business processes and systems to support the new leasing standard as necessary. As the Company previously disclosed, the standard had a material impact on its consolidated balance sheets, the most significant impact being the recognition of approximately $21.3 million of ROU assets and $26.3 million of lease liabilities on the effective date, but there was no impact on its consolidated income statements. The Company continues to expect that any impact from its adoption of the new standard will be immaterial to its net income and its internal control framework for future periods. The Company’s revenue disaggregated by market (c)Eliza Holding Corp. The financial results of Eliza’s operations since April 17, 2017 have been included in the Company’s consolidated financial statements. Eliza contributed $52.5 million, $51.9 million and $30.4 million in revenue to HMS results of operations in the years ended December 31, 2019, 2018 and 2017, respectively. 4. Property and Equipment Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities. The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and deferred tax liabilities are as follows (in 8. Liability for Appeals No principal payments were made against the Amended Revolving Facility during the year ended December 31, 2019. As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against the Amended Revolving Facility and expires June 30, 2020. 10. Equity The Company’s certificate of incorporation, as amended, 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 the Company’s Board of Directors. As of December 31, (c)Stock Options 13. Earnings per Share Contingencies In July 2012, Dennis Demetre and Lori Lewis (the “Plaintiffs”), filed an action in the Supreme Court of the State of New York against HMS Holdings Corp., claiming an undetermined amount of damages alleging that various actions by HMS unlawfully deprived the Plaintiffs of the acquisition earn-out portion of the purchase price for Allied Management Group Special Investigation Unit, Inc. (“AMG”) under the applicable Stock Purchase Agreement (the “SPA”) and that HMS had breached certain contractual provisions under the SPA. The Plaintiffs filed a second amended complaint with two causes of action for breach of contract and one cause of action for breach of implied covenant of good faith and fair dealing. HMS asserted a counterclaim against Plaintiffs for breach of contract based on contractual indemnification costs, including attorneys’ fees arising out of the Company’s defense of AMG in Kern Health Systems v. AMG, Dennis Demetre and Lori Lewis (the “California Action”), which are recoverable under the SPA. In June 2016, Kern Health Systems and AMG entered into a settlement agreement that resolved all claims in the California Action. In July 2017, the Court issued a decision on the Company’s motion for partial summary judgment and granted the motion in part, dismissing one of Plaintiffs’ breach of contract causes of action against HMS. On November 3, 2017, following a jury trial, a verdict was returned in favor of the Plaintiffs on a breach of contract claim, and the jury awarded In February 2018, the Company received a Civil Investigative Demand (“CID”) from the Texas Attorney General, purporting to investigate possible unspecified violations of the Texas Medicaid Fraud Prevention Act. States with some international revenue that is not considered material. 2017PageGlossary of Terms and Abbreviations1Page PART I3Abbreviationsterms which are described below:ACAACA Patient Protections and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 ACO Accountable Care Organizationcare organizationADR Additional Documentation Requestdocumentation requestASOAIAdministrative Service OnlyArtificial intelligenceASUASCAccounting Standards Codification ASO Administrative service only ASU Accounting Standards Update CHIP Children's Health Insurance Program CMS Centers for Medicare & Medicaid Services CMS NHE CMS National Health Expenditures COB Coordination of Benefits COSO Committee of Sponsoring Organizations of the Treadway Commission Credit Agreement The Amended and Restated Credit Agreement dated as of May 3, 2013, as amended by Amendment No. 1 to Amended and Restated Credit Agreement dated as of March 8, 2017, and as further amended by Amendment No. 2 to Amended and Restated Credit Agreement, dated as of December 19, 2017, by and among HMS Holdings Corp., the Guarantors party thereto, the Lenders party thereto and Citibank, N.A. as Administrative Agent DSO Days Sales Outstandingsales outstandingERISA Employment Retirement Income Security Act of 1974 Exchange Act Securities Exchange Act of 1934, as amended FASB Financial Accounting Standards Board HIPAAFCPAU.S. Foreign Corrupt Practices Act of 1977, as amended HIPAA Health Insurance Portability and Accountability Act of 1996 HITECH Health Information Technology for Economic and Clinical Health IRCIRSInternal Revenue CodeIRSU.S. Internal Revenue Service LIBOR or LIBO Rate Intercontinental Exchange London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) MCO Managed care organization PBMMLPharmacy Benefit ManagerMachine learningPHINLPNatural language processing PBM Pharmacy benefit manager PHI Protected health information PIPHMPayment IntegrityPopulation Health ManagementR&D CreditPIU.S. Research and Experimentation Tax Credit pursuant to IRC Section 41Payment IntegrityRACPMPMPer member per month PMPY Per member per year RAC Recovery Audit Contractor RFP Request for proposal SECROURight-of-use RPA Robotic process automation SEC U.S. Securities and Exchange Commission Securities Act Securities Act of 1933, as amended Section 199 Deduction U.S. Production Activities Deduction pursuant to IRC Section 199 SG&A Selling, general and administrative TPL Third-party liability TPMTotal Population ManagementU.S. GAAP United States Generally Accepted Accounting Principles 401(k) PlanHMS Holdings Corp. 401(k) Plan2006 Stock Plan HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan, as amended by Amendment No. 1 to the HMS Holdings Corp. Fourth Amended and Restated 2006 Stock Plan dated as of February 16, 2012 2011 HDI Plan HDI Holdings, Inc. Amended 2011 Stock option and Stock Issuance Plan 2016 Omnibus Plan HMS Holdings Corp. 2016 Omnibus Incentive Plan 2017 Tax Act Tax Cuts and Jobs Act of 2017 20182019 Form 10-KHMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 201820192019 Omnibus Plan HMS Holdings Corp. 2019 Omnibus Incentive Plan 401(k) Plan HMS Holdings Corp. 401(k) Plan 1 20182019 Form 10-K, the terms “HMS,” “Company,” “we, “us, and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. Included in this 20182019 Form 10-K are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts.§our ability to execute our business plans or growth strategy;§our ability to innovate, develop or implement new or enhanced solutions or services;§the nature of investment and acquisition opportunities we are pursuing, and the successful execution of such investments and acquisitions;§our ability to successfully integrate acquired businesses and realize synergies;§significant competition for our solutions and services;§variations in our results of operations;§our ability to accurately forecast the revenue under our contracts and solutions;§our ability to protect our systems from damage, interruption or breach, and to maintain effective information and technology systems and networks;§our ability to protect our intellectual property rights, proprietary technology, information processes and know-how;§our failure to maintain a high level of customer retention or the unexpected reduction in scope or termination of key contracts with major customers;§customer dissatisfaction or our non-compliance with contractual provisions or regulatory requirements;§our failure to meet performance standards triggering significant costs or liabilities under our contracts;§our inability to manage our relationships with data sources and suppliers;§our reliance on subcontractors and other third party providers and parties to perform services;§our ability to continue to secure contracts and favorable contract terms through the competitive bidding process;§pending or threatened litigation;§unfavorable outcomes in legal proceedings;§our success in attracting and retaining qualified employees and members of our management team;§our ability to generate sufficient cash to cover our interest and principal payments under our credit facility;§unexpected changes in tax laws, regulations or guidance and unexpected changes in our effective tax rate;§unanticipated increases in the number or amount of claims for which we are self-insured;§changes in the U.S. healthcare environment or healthcare financing system, including regulatory, budgetary or political actions that affect healthcare spending or the practices and operations of healthcare organizations;§our failure to comply with applicable laws and regulations governing individual privacy and information security or to protect such information from theft and misuse;§our ability to comply with current and future legal and regulatory requirements;2 §negative results of government or customer reviews, audits or investigations;§state or federal limitations related to outsourcing of certain government programs or functions;§restrictions on bidding or performing certain work due to perceived conflicts of interests;§the market price of our common stock and lack of dividend payments; and§anti-takeover provisions in our corporate governance documents.20182019 Form 10-K and in other documents we file with the SEC.20182019 Form 10-K speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. We caution readers not to place undue reliance upon any of these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and Form 8-K8- K reports and our other filings with the SEC.20182019 Form 10-K contains market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications, and other published industry sources.sources and our internal data and estimates. We have not independently verified the information from third party sources and cannot make any representation as to the accuracy or completeness of such information. None of the reports and other materials of third party sources referred to in this 20182019 Form 10-K were prepared for use in, or in connection with, this 20182019 Form 10-K.HMS IntegritySourceElli®, Eliza®, Essette® and Elli®, Essette®, VitreosHealth® and Accent®. These and other trademarks of ours appearing in this 20182019 Form 10-K are our property. Solely for convenience, trademarks and trade names of ours referred to in this 20182019 Form 10-K may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. This 20182019 Form 10-K contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.3 healthcare data, technology analytics and related servicesanalytics to deliver coordination of benefits, payment integrity and population risk intelligence, carehealth management and consumer engagement solutions tothat help payershealthcare organizations reduce costs, improve healthcarehealth outcomes and enhance memberconsumer experiences. We provide coordinationa broad range of benefits servicespayment accuracy solutions to government and commercial healthcare payers, including coordination of benefits services, to ensure that the correct partyright payer pays athe claim, and payment integrity services to ensure the correct amount is paid.address improper payments and fraud, waste and abuse. Our total population health management solutions include a portfolio of integrated risk analytics, consumer engagement and care management solutions that provide risk-bearinghealthcare organizations with reliable intelligence acrossinsight into their population and member populationsrisks to predict, identify risks and improve patient engagement and outcomes. Together these servicesavoid preventable high cost events over the healthcare continuum. Through our solutions, we help move the healthcare system forward by saving billions of dollars for our customers and contribute to bending the healthcare cost curve for the nation.In recent years HMSSince then, our business has grown both organicallyevolved through a combination of organic growth and through targeted acquisitions of businesses that helped expand our solution suite, including IntegriGuard, LLC (doing business as HMS Federal) in 2009; HealthDataInsights, Inc. (“HDI”) in 2011; Essette, Inc. (“Essette”) in 2016; and Eliza Holding Corp. (“Eliza”) in 2017.acquisitions. We currently operate as one business segment with a single management team that reports to the Chief Executive Officer.2018,2019, we had approximately 2,5003,100 employees. Additional information about HMS is available on our website at www.hms.com.20182019 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.4 before medical service is rendered, to pre-payment review of a claim,their claims, through post-payment identification and recovery where identification of improper payments, is made via audit, and back to the individual where our consumer-driven solutions allow health planshealthcare organizations to manage their membersindividuals' healthcare on a personal level, and at scale, by using actionable analytics that drive patientsindividuals to take action toactions that improve health outcomes. Our coordination of benefits and payment integrity services ensure payment accuracy by addressing a wide spectrum of payment errors, including eligibility and coordination of benefits errors, the identification and investigation of potential fraud, and the review of claims on a pre-paymentprepayment and post-payment basis.basis for improper payments and utilization effectiveness. Our total population health management services assist customers in managing quality, risk, cost and compliance across all lines of business by engaging members,consumers, providing the tools to manage their care, and identifying existing or emerging health risk among members.consumer populations. As a result of these services, our customers saved billions of dollars in 20182019 through the prevention of erroneous payments, improved clinical outcomes for their members, and reduced insurance plan enrollment turnover; and they received billions more in cash recoveries for improperly paid claims.
Ourservices are provided primarily for state governmentssolutions to healthcare organizations, including Medicaid, Medicare, CHIP, healthcare exchanges, commercial payers and Medicaid managedother at-risk entities. We deliver high value to our customers by delivering timely and accurate information about members' other insurance coverage, which enables our customers to better coordinate care, plans, pursuant to Federal law which mandates that Medicaid is the payer of last resort,maximize cost savings, ensure accurate reimbursement and draw principally upon proprietary information management and data mining techniques designed to ensure the correct party pays a healthcare claim.reduce administrative rework. We offer cost avoidance services, which include providing validatedprovide verified insurance coverage information that is used by payersas early as the point of enrollment, as well as at the point of prior authorization, or prior to coordinate benefits properly for future claims. With validated insurance information, Medicaid payers can avoid unnecessary costs by ensuring they pay only after all other insurance coverage available has been exhausted. Nevertheless, due to a varietythe payment of factors, many Medicaid claims are paid even when there is a known responsible third party. Our customers rely on us to identify Medicaid eligibility, before a claim, is submitted,to maximize cost avoidance. We pursue recovery for any healthcare claim for which another party was liable to pay first. Experience and retrospectively, foranalytics inform our ability to accuratelywereensure we recover the maximum amount of inappropriately paid in error, and then recover these payments from the liable third party. expenditures for our customers. 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, forFor 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, 2019, 2018 2017 and 2016,2017, our COB services represented 66.4%64.5%, 73.4%66.4% and 72.2%73.4% of our total revenue, respectively.5 Analytical servicesAnalytical services consists of our payment integrity and total population management solutions.ensure healthcare payments are accurateemploy advanced data analytics, leading technologies and appropriate. These services are applicableclinical expertise to all customers HMS serves, includingmaximize savings and deliver proven, measureable results for federal and state governments, commercial health plans, and other at-risk or self-insured entities. Our solutions verify that healthcare services are utilized, billed and paid appropriately. We combine data analytics, clinical expertise and proprietary algorithms and technology tohelp our customers identify and preventavoid improper payments, on submitted claims to optimize savings before a claim is even paid, and on a post-payment basis, to identify and recover those overpayments and correct underpayments;when they occur, detect and prevent fraud, wasteensure compliance with regulations, and abuse;increase cost savings with innovative technology and identify process improvements.processes. Our PI solutions, delivered on a pre- and post-pay basis across all claims and provider types, are data-driven and stakeholder-sensitive, resulting in better payment accuracy, lower administrative costs, and decreased incidents of fraud and abuse. We leverage predictive and prescriptive analytics, AI, NLP, and ML, and incorporate RPA into our operations for increased efficiency and operational effectiveness. For the years ended December 31, 2019, 2018 2017 and 2016,2017, our PI services represented 24.1%25.9%, 20.0%24.1% and 27.6%20.0% of our total revenue, respectively.Total (TPM)Our TPM services consist of population risk analytics, consumer(PHM)care management solutions, which areimprove outcomes throughout the result of internal product development and our acquisitions of Essette in 2016 and Eliza in 2017. These solutions help customers better manage quality, cost, compliance and patient outcomes and improve their members’ experience. The services span across the care continuum.member lifecycle. Our flexible, scalable architecture and modular platform integrates early risk identification, advanced analytics, multi-channelmulti- channel outreach social engagement and care management components to addresshelp our customers’ increased focuscustomers target the right members at the right time for interventions, with outreach that drives action and change. Our prescriptive approach leverages AI, ML, NLP and efficacy studies to proactively manage care for all members, drive better outcomes and quality scores, and enhance member satisfaction and retention, while reducing administrative and medical spend. Our PHM solutions enable our customers to understand the health of their unique populations in real-time, and identify future risks, then develop personalized care plans and actionable engagement programs for maximum return on consumer engagement, performance management and program design—all key components of an effective population health management program. Our Elli, Eliza and Essette solutions leverage HMS data and advanced analytics to support population risk management, member engagement and care management, respectively, and provide customers with a tailored, integrated platform that addresses core healthcare industry challenges on an enterprise scale.investment. For the years ended December 31, 2019, 2018 and 2017, and 2016, our TPMPHM services represented 9.5%9.6%, 6.6%9.5% and 0.2%6.6%, of our total revenue, respectively.2018,2019, our patent portfolio is comprised of approximately 6080 domestic and international patents, and we are currently pursuing several patent applications in the United States and around the world. Our principal trademarks are our company name and corresponding design marks, including but not limited to HMS®, Eliza®, Essette®, VitreosHealth® and Accent®, and the corresponding HMS + logo design mark, HMS IntegritySourceour key product marks, such as Elli®, ElizaCOBManager®, Essette®, and Elli®.other marks for our products. We also hold copyrights relating to certain aspects of our solutions and services. While we consider all of our intellectual and proprietary rights important to HMS, we believe our business as a whole is not materially dependent on any particular patent, trademark, license or other intellectual property right.state agencies, federal programs, privateand PBMs, healthcare exchanges, employers, at-risk providers and ACOs, and other risk-bearing healthcare organizations. For the years ended December 31, 2019, 2018 2017 and 2016,2017, our total revenue was $626.4 million, $598.3 million $521.2 million and $489.7$521.2 million, respectively. No single customer accounted for 10% or more of our total revenue during any period presented.6 2017 and 2016,2017, our 10 largest customers represented 41.4%42.7%, 39.5%41.4% and 40.6%39.5% of our total revenue, respectively. We provide services under contracts (or subcontracts) that contain various revenue structures, including contingent revenue and to a lesser extent fixed-fee arrangements.arrangements as well as cost-plus and time-and-materials pricing. The current terms of many of our federal and state government contracts range from one 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. Several of our contracts, including those with some of our largest customers, may be terminated for convenience, in whole or in part, by the customer. Because we provide our services pursuant to agreements that are open to competition from various businesses in the U.S. healthcare arena, we cannot provide assurance that our contracts, including those with our largest customers, will not be terminated for convenience or awarded to other parties. Additionally, we cannot provide assurance that any contracts that are renewed will have the same fee structures as the expiring contracts or otherwise be on satisfactory terms. The early termination of key contracts with significant customers, or the inability to renew such contracts on favorable terms or at all, may have an adverse effect on our financial condition, results of operations and cash flows.augmentenhance 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 , could continue to be potentially subject to various forms of cyber-attacks, as further discussed under the heading “Part I, Item 1A. Risk Factors.”ACA and became the Medicare RAC for Region D with our acquisition of HDI. We again were awarded a region under the new Medicare RAC contracts in October 2016. Following the implementation of the new Medicare RAC contracts and completion of contract closeout activities for RAC Region D, our original Medicare RAC contract expired on January 31, 2018.Obamacare,"Obamacare," was signed into law on March 23, 2010. The law aimed to decrease the uninsured population in 2010 and has made broad-based changes to the U.S. by expanding Medicaid, enabling access to healthcare system, including many provisions impactingcoverage through health insurance exchanges, and mandating coverage for pre-existing conditions and other healthcare delivery and payment programs, suchsituations. It is estimated that 20 million people have gained healthcare coverage as employer-sponsored health coverage, Medicaid, Health Insurance Exchanges with premium subsidies and payment integrity efforts. The ACA also further expanded the recovery audit contractor program to states. CMS and various states have proposed Medicaid program design alternatives and changes to enrollment criteria which could impact future Medicaid enrollment. As ACA-related changes develop or are enacted, we will assess their potential impact, including opportunities they may present for our customers and for us.7 Industry Trends and OpportunitiesU.S. healthcare expenditures continue to escalate and consume an increasingly larger proportiona result of the U.S. GDP, presenting challenges for payers who wish to contain costs and promote quality healthcare outcomes. ACA.2019,2020, Medicare and Medicaid are projected to pay approximately 37.9%38% of the nation’s healthcare expenditures and serve over 136.3146.3 million beneficiaries. Many of these beneficiaries are enrolled in managed care plans, which have the responsibility for both patient care and claims adjudication. The dual aims of cost containment and quality healthcare outcomes are the same across all at-risk entities, including commercial health plans and government healthcare programs, such as Medicaid and Medicare.197.5196.3 million individuals at a cost of approximately $1.24$1.28 trillion in 2018.state fiscal year 2018,2019, 47 states and the District of ColumbiaMedicaid programs operated with some form of managed care, and AlaskaNorth Carolina reported plans to implement a managed care program in 2019.2020. Comprehensive risk-based managed care continues to be the predominant delivery system for Medicaid services in the US.U.S. Among the 39 Medicaid40 programs with comprehensive risk-based MCOs, 33 reported that 75% or more of their Medicaid beneficiaries were enrolled in MCOs as of July 1, 2018. Of2019. Two states (Maine and Virginia) implemented the 32 states that had implementedACA Medicaid expansion pursuantin 2019, bringing the total number of states to the ACA, 2734. As of July 1, 2019, 29 of these states were using MCOs to cover newly eligible adults as of July 1, 2018.adults. Managed care health plans also continue to assume risk for a growing number of Medicare lives. Approximately 34%lives, with approximately one-third (34%) of all Medicare beneficiaries, or 2022 million lives, werepeople, enrolled in Medicare Advantage plans in 2018.20182019 covered approximately 5960.4 million people at a cost of approximately $748$800.1 billion and Medicaid/CHIP covered approximately 81.282.4 million people, costing approximately $641$643.9 billion. Altogether, it is projected that the government programs we serve covered approximately 140.2142.8 million people at a total cost of nearly $1.39$1.44 trillion in 2018.3.03%2.81% in 2019,2020, with expenditures to increase by 7.95%7.19% in 20192020 compared to 2018;2019; and Medicaid/CHIP enrollment growth will increase by 1.97%2.18% in 2019,2020, with expenditures to increase by 5.5%4.96% in 20192020 compared to 2018.2019. As commercial and government health plans focus on strategies to contain costs across their different lines of business, HMS will continue offering solutions to meet their evolving needs.TPMPHM solutions whichthat support the ability of payers to better understand and engage consumers, perform effective outreach, and impact both costs and health outcomes.§in-depth government and commercial healthcare program experience;§clinical staff expertise;§expansive data resources;8 §innovative technology;§enterprise analytics;§an extensive insurance eligibility database;§extensive relationships with customers and other industry stakeholders; and§an ability to provide customers with actionable intelligence to improve clinical outcomes, optimize patient engagement, and better manage costs.and PBMs, clearinghouses, healthcare consulting firms, and other vendors who provide some or all of these solutions to payers. In addition, we frequently work with customers who may elect to perform some or all of their cost avoidance and recovery functions in-house. Within the population health management sector, we compete primarily with vendors who provide care management, consumer engagement, and related technology services. CompaniesExamples of companies with whom we currently compete across our offerings include:§ Accenture plc§ CaseNet LLC§ Change Healthcare§ ▪Accenture plc ▪ Casenet LLC ▪ Change Healthcare ▪ Cotiviti, CorporationInc.§ ▪DXC Technology Company § Equian, LLC▪ExlService Holdings, Inc. § EXL Service Holdings, Inc.▪§ Experian Health§ IBM Watson Health▪ Inovalon Holdings, Inc. ▪ MEDecision, Inc. § LexisNexis▪§ MedHok, Inc.MHK§ Optum (subsidiary of UnitedHealthGroup)▪§ Performant Financial Corporation§ Welltok,▪Optum, Inc. (subsidiary of UnitedHealth Group; Equian is part of Optum) ▪ § WellTok, Inc.▪ ZeOmega, LLCInc.high costhigh-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.
9 TPMPHM services. We are focused on growing our business over the course of 20192020 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 solutions 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 ASOs; government healthcare payers, including Medicaid agencies, state employee health benefit plans and CHIPs; at-risk provider organizations and ACOs; and commercial self-insured employers.§Introducing new innovative solutions and services– through internal development initiatives designed to enhance or expand our existing suite of cost containment solutions.§Utilizing technology tools to leverage a big data environment – to create a more nimble operating environment, create operating efficiencies, improve the yield on our existing solution 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.§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 our internally developed Elli risk intelligence product; 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, enhance our technological capabilities 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, which has a remaining unused authority of approximately $29.9 million.20182019 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.partnerships,relationships, and increasing the speed, quality, capacity and scale at which we deliver our services across emerging and more established markets, all while remaining competitive. We must also be flexible and responsive to customers’ needs and changes in the political, economic and regulatory environment in which we operate. The greater size and complexity of our expanding business may put additional strain on our administrative, operational and financial resources and can make optimal resource allocation more difficult to determine. It is possible that we may not be able to maintain or accelerate our growth. A failure to anticipate or properly address the demands and challenges that our continued growth strategy and potential diversification may have on our resources and existing infrastructure may result in unanticipated costs and inefficiencies that could negatively impact our ability to execute on our business plans and growth goals, which may have a material adverse effect on our business, financial condition, results of operations and cash flows.10 solutions and servicesofferings may not be responsive to customer preferences or industry changes, appropriately timed with market opportunity or effectively brought to market, 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.��Historically, totheour service offerings, including our population health management solutions, and services we offer, provided a presence in complementary business lines, or expandedbroadened our customer base and our market and geographic presence and/or customer base.presence. We intend to pursue future acquisitions, investments and strategic relationships that will continue to expandcomplement and complementgrow our business lines and to engage periodically engage in discussions regarding such possible acquisitions.transactions. We are subject to risks and uncertainties relating to our ability to identifyacquisition candidates,acquisitions, investments and strategic relationships, and to consummate additional acquisitionstransactions that will be advantageous to us and to successfully integrate future acquisitions.acquired businesses, solutions, services, technologies or employees. Future and potential business acquisitions, investments and strategic relationships 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;§our ability to expand and further develop the acquired business;§our ability to cross-sell our solutions and the solutions 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 or manage new business lines;§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.11 marketmarkets for healthcare cost containmentpayment accuracy and population health management solutions isare intensely competitive, driven by rapidly changing technologies, evolving industry standards, and customer demands to become more efficient.cost-effective and efficient, and increased consolidation in both the IT and healthcare industries. Our competitors range in size from large, diversified national companies (some of which have emerged as a result of industry consolidation), to small, specialized firms. Some of our competitors may include current or former subcontractors or teaming partners seeking to establish direct relationships with our customers and provide 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 seek 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, as they shift to implementing modular Medicaid Enterprise Systems. As part of this modular approach, they may select a new or less experienced vendor to provide the TPL module based on preferred relationships or favorable pricing. 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. In addition, companies that have invested in proprietary technology different from our own service offerings, such as front-end analytics or consumer-centric capabilities, have emerged as new competitors due to the rapidly evolving healthcare IT 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.customers and their member populations, or may offer greater interoperability. 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.period-to-periodperiod-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 certain customers delayed processing of 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 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;12 §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.§power loss, transmission cable cuts and telecommunications failures;§fire, flood, earthquake and other natural disasters;§hardware failures or software defects;§operator error;§cyber security breaches; and§physical break-ins, sabotage, intentional acts of vandalism, terrorist attacks and other events beyond our control.and business interruptionare not effective, or our applicable insurance coverage areis denied or not adequate or failsufficient to compensate usfor all the liability on a timely basis, we could suffer operational, communication and service disruptions, disputes with customers and third parties, 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.13 Although weWe have spentdevoted and continue to devote significant resources to implement security and privacy programs and controls, train our workforce and augment our security measures with the implementation of new and enhanced technologies and processes, among other investments. Despite our security management efforts, our information technology and infrastructure, and those of third parties on which we rely, couldmay continue to be subjectvulnerable to computer hacking or phishing efforts, acts of vandalism or theft, introduction of malware, computer viruses, or other malicious codes employee error or malfeasance issues, catastrophes, unforeseen events or other cyber-attacks.cyber-attacks, employee or insider malfeasance and misfeasance issues, fraud, human error, catastrophes, or unforeseen events. We may be unable toregulations.regulations, including losses and costs associated with any resulting fraud. We could also may be forcedsubject 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 penalties imposed by government regulatory agencies, and damages and other substantial costs associated with litigation, indemnification and contractual obligations, as well as increased cybersecurity insurance premiums, and undertaking additional remediation efforts, such as credit monitoring, call center services or other corrective plans. We may be forced to spend significant time and resources investigating the cause of the breach, repairing system damage, remediating vulnerabilities in our security procedures, disseminating breach notifications, enhancing cyber security protection controls and measures, and deploying additional security personnel and protection technologies, 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.14 and intellectual property rights, or become subject to third party claims of infringing or misappropriating the intellectual property of third parties,infringement or misappropriation, the value of our solutions and services may be diminished and our business may be materially adversely affected.WeFor example, we may not always be successful at obtaining government registrations for our patents, trademarks, or copyrights that we seek to register. Even if we are successful, the existing U.S. federal and state intellectual property laws offer only limited protection, and our property rights in foreign jurisdictions in which we operate or seek to do business may not receive the same degree of protection or enforceability as those in the United States. Third parties may also attempt to misuse our company name or trademarks to engage in improper or illegal conduct such as cyber-squatting or other cybercrimes using our marks, and we may not always be successful at quickly obtaining relief from agencies tasked with enforcing parties’ rights, or stopping such conduct before harm to third parties occurs. Similarly, misappropriation of our other intellectual property by third parties, or any disclosure or dissemination of our confidential and proprietary trade secrets, 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 and/or federal open records laws (such as the federal Freedom of Information Act and analogous state 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,Additionally, certain of our service or solutions offerings from our recent acquisitions may incorporate open source software that are licensed under various public domain licenses or without warranties, indemnification or other contractual protections. Although we carefully monitor and manage our use of open source software to avoid uses that would require us to disclose proprietary source code or violate applicable open source licenses, if we engage in such uses inadvertently, we may be required to take remedial action or release certain of our proprietary source code. Moreover, 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,make us less competitive, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.related to the use of intellectual property may alsofurther increase asafter we acquire a result of acquisitionsbusiness or technology 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 settlements, litigation or other 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.customersthe customer might seek to reduce the scope of the services we perform or prematurely terminate theirits 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.15 may be regardedthey regard as non-essential or have the ability to develop or perform in-house. They could also 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 contractdecide to renew our contracts 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.anany inability to successfully manage our relationships with a number of these suppliers may harm the quality and availability of our solutions and services.disincentivizescould disincentivize our suppliers, or imposesimpose unacceptable or unreasonable conditions, costs, 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 receive from various data sources to enhance and improve current services 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 solution 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 our access to their data, and fail to identify and reach the requisite agreements with suitable alternative suppliers or to successfully integrate their data 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.a customer contract,contracts, and subject us to a disputedisputes with our customer.customers. 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.contractor.contractor which contracts directly with the customer. 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 contractorcontract 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.16 state and federal statutes, rules and regulations that pertain to different aspects of our business.business, both domestically and internationally. 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 amongin the statesjurisdictions 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.17 and the level of compensation required to hire and retain such employees.employees and immigration requirements that may affect our ability to sponsor employees for employment-based visas. Customers or competitors may seek to hire away qualified and seasoned employees, which could reduce our ability to innovate and operate effectively. 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.2018,2019, the outstanding principal balance under our Credit Agreement was $240.0$240 million. Our Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount equal to $500 million and 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. 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.obligationobligations 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 toof certain indebtedness; inability to pay debts;18 or interpretations of, tax rules and regulations, or in interpretations thereof, may materially adversely affect our effective tax rates.United States-basedU.S.-based company subject to various federal, state, U.S. Territory and local tax laws and regulationstaxation in multiple U.S. jurisdictions that govern numerous aspects of our business.and foreign jurisdictions. As we continue to expand our business we may perform services for new customers located outside of the United States, or in a U.S. Territory, whichwe may become subject us to foreignadditional tax laws and regulations, including those that could increase our exposure to additional tax liabilities.liabilities, such as foreign tax laws, and laws relating to U.S. taxes on foreign operations. Our future effective tax rates could be materially affected by various factors, including changes in the tax rates of jurisdictions in which we do business, changes in relevant tax and accounting rules, regulations and interpretations, increases in expenses not deductible for tax purposes, including impairments of goodwill, and changes in the valuation of our deferred tax assets and liabilities.liabilities, and changes in geographic sales mix. For example, in December 2017, Congress enacted the 2017 Tax Act which, among other things, reduced the U.S. corporate tax rate, modified limitations on certain deductions for executive compensation, placed new limitations on interest deductions, repealed the Section 199 Deduction and certain capital investment deductions, and shifted U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system. Any unanticipated changes in our tax rates could affect our future results of operations. 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.maintain various insurance policies for companycurrently self-insure a significant portion of expected losses associated with workers’ compensation claims, general business liabilities, property damage and employee health workers’ compensation, general liability and property damage.care benefits. We are self-insured for our health plans, and have purchased a fully-insured stop loss policy for our health plans to help offset our liability for both individual and aggregate claim costs. Wecosts and maintain insurance coverage with varying limits and retention amounts to help limit exposure to certain other risks. Insurance reserves are also responsibleestablished 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 anddate on an undiscounted basis,and economic conditions and management judgments about the present and expected level of cost per claim. This determination 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 producein the assumptions and estimates underlying our reserves could result in 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.there have been a number of judicial and legal challenges to certain aspectsthe regulatory framework of the ACA. In February 2018, 20 states filed suit in the U.S. District Court for the Northern DistrictACA and other healthcare reforms continues to evolve as a result of Texas alleging that the ACA is unconstitutional in light of the repeal of the penalties associated with the individual mandate. On December 14, 2018, the Court issued a ruling that the mandate was no longer permissible under Congress’s taxing powerexecutive, legislative, regulatory and was thus unconstitutional. As such, the Court further found that the entire ACA is deemed to be invalid because the individual mandate is “essential”administrative developments and inseverable from the ACA. Although, a stay and partial final judgment has been issued, ensuring that the ACA remains in full effect for the foreseeable future, we cannot predict the outcome of the litigation that has been filed relating to the constitutionality of the ACA. Additionally, sincejudicial proceedings. Since its adoption into law in 2010, there have been continued efforts by Congress to amend, repeal or replace all or part of the ACA. For example, under the 2017 Tax Act, the “individual mandate” introduced by the ACA was repealed effective January 1, 2019. Congress has introduced several other bills to delay, defund or repeal implementation or amend significant provisions of the ACA, though none of these other bills have passed the House and Senate.governments.governments in response to budgetary or deficit considerations. These include (i) measuresblock grants and other proposals that would fundamentally change the financial structure of the Medicaid program (currently funded jointly by the states and the U.S. Federal Government), which could result in early termination, reduced scopes or non-renewal of our contracts with certain state government customers, and (ii) changes at the federal level that would reduce reimbursement rates to states, establish new payment models, further limit the Medicare RAC program, or otherwise change the operating environment for our customers and transform the government’s involvement in healthcare. In additionFuture healthcare legislation could also have a significant impact on our business. Due to these legislative proposals,uncertainties regarding the President has taken several steps to limit the functionalityoutcome of future healthcare reform initiatives, and their enactment and implementation, we cannot predict which, if any, of the ACA and advocate for its repeal and replacement since taking office. During 2017,future reform proposals will be adopted or the President 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.19 §a lower than projected growth in Medicare and Medicaid program enrollment and expenditures;§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;§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);§the transition of healthcare beneficiaries from fee-for-service plans to value-based 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;§the adoption of healthcare plans with significantly higher deductibles;20 §customer improvements and enhancements to their internal healthcare claims and billing processes;§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, including limits on the look-back period for review in areas where we conduct audits);§limits placed on ongoing program integrity initiatives, including the Medicare RAC program and state Medicaid RAC programs (for example, limitations or reductions in the amount of reviewable claims we audit, such as the modified ADR limits and sliding scale policy implemented by CMS for the current Medicare RAC contracts, which have a significant impact on the volumes of claims that Medicare RACs are permitted to review for inpatient providers and reduce their ability to identify overpayments and underpayments); 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,In particular, 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 U.S. state laws. HIPAA also imposes standards and requirements on our business associates (as defined under HIPAA). We are also obligated by our contractual requirements with customers, which may require that we comply with additional privacy regulations imposed upon certain types of customers, such as the federal Gramm-Leach-Bliley Act and other laws.In addition, laws, rules and regulations concerning the protectiongovernment regulation,domestic and foreign laws and regulations, including government and customer audits and investigations relating to our compliance with thesuch 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.TheThese laws and regulations governing our operations are generally intended to benefit and protect individual citizens, including government program beneficiaries, health plan members and their dependents. TheAs such, the federal and state governmental agencies administering these laws and regulations have broad latitude to enforce them. As such, weOur contracts with U.S. government agencies are also subject to unique contractual provisions and performance requirements, and, on an ongoing basis, to various governmentalgovernment and customer reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations, as well as specialized 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, federal and state prompt pay statutes, healthcare fraud, waste and abuse laws, including anti-kickback laws, and similar legislation. 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.suspensions andsuspension, disqualification or 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.to permit private entitiesfor them to perform such work, or impose other limitations on outsourcing or certain vendors that may obstruct cost-effective performance of our contracts.Federalgovernmentsgovernment agencies may be required to operate such programs with government employees. Under current U.S. 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 agencygovernment 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.other statethe U.S. government may impose limitations or federal limitationsrequirements on the outsourcing certain types of work to vendors that supplement our workforceoffshore resources, which 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 to supplement our workforce, 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 consideredproposed or passed 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.personnel and systems. 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.22 RelatedRelating to Our Common Stock widely and may continue to do so.fluctuate. During the 52-week period ended December 31, 2018,2019, our common stock traded on the Nasdaq Global Select Market as high as $37.38$39.93 per share and as low as $15.06$26.53 per share. Our stock price is subject to fluctuation as a result offluctuates based on a variety of factors, including factorsmany of which are beyond our control, such aswhich include 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 changes in the number 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.23 the stock marketmarkets often experiencesexperience 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. WhenIn the market price of a company’s stock drops significantly,past, shareholders may institutehave instituted securities class action litigation against that company.following periods of market volatility. 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.20182019 are shown in the following table:LocationLocation Approximate Square Footage Owned/Leased Irving, TX (corporate headquarters) 242,260 242,260Owned Las Vegas, NV (office space) 63,593 63,593Leased Danvers, MA (office space) 38,868 38,868Leased New York , NY (office space) 34,759 34,759Leased Jackson, MN (office space) 27,932 Owned Westerville, OH (office space) 25,212 25,212Leased All other locations (23)(26)120,556 80,759Leased also includetwo data centers, which are allprimarily located in the United States. Outside the U.S., we also lease office space in India. The aboveleased locations have expiration dates through 2026. A portion of the above Las Vegas, NV and New York, NY office spaces are sub-leased. In general, we believe our existing facilities, including both owned and leased, are suitable to meet our current and reasonably anticipated future needs. See “Lease Commitments”“Leases” in Note 1516 to the Consolidated Financial Statements in Part II, Item 8 for additional information.1514 to the Consolidated Financial Statements in Part II, Item 8 is incorporated herein by reference.24 15, 2019,17, 2020, there were 252249 holders of record of our common stock.These restrictions are described in moreFor additional detail, see the information under the heading “Liquidity and Capital Resources” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 109 to the Consolidated Financial Statements in Part II, Item 8.SeeMatters for information relating to securities authorized for issuance under our equity compensation plans.theour Board of Directors ofapproved a share repurchase program authorizing the Company to repurchase up to $50.0 million of shares of its common stock, which we publicly announced on November 3, 2017. This program expired on November 1, 2019 and had approximately $29.9 million remaining at the time of expiration. On November 1, 2019, our Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $50.0 million of shares of its common stock from time to time on the open market or in privately negotiated or other transactions. We publicly announced the new program inon November 2017.1, 2019. The new share repurchase program is authorized for a period of up to two years, and may be suspended or discontinued at any time. In order to facilitate repurchases, the Company may enter into a Rule 10b5-1 plan from time to time, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws or because of a self-imposed trading blackout period. All repurchases were made under the program and using cash resources. See “Equity” in Note 1110 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding share repurchases. There were no repurchases of shares of common stock inunder either share repurchase program during the fourth quarter of 2018.Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program October 1, 2018 to October 31, 2018 - $ - - $ - November 1, 2018 to November 30, 2018 - - - - December 1, 2018 to December 31, 2018 - - - - Total - $ - - $ 29,933,055 25 
belowabove compares the cumulative total shareholder return on our common stock with the cumulative total shareholder returns of the Nasdaq Composite Index, the Nasdaq Computer & Data Processing Index and the Nasdaq Health Services Index assuming an investment of $100 on December 31, 20132014 and the reinvestment of dividends through the year ended December 31, 2018. 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 HMS Holdings Corp. $ 100.00 $ 93.13 $ 54.36 $ 80.00 $ 74.67 $ 123.92 NASDAQ Composite 100.00 114.62 122.81 133.19 172.11 165.84 NASDAQ Computer & Data Processing 100.00 113.68 140.03 150.12 209.72 212.97 NASDAQ Health Services 100.00 123.14 134.70 110.22 131.32 155.16 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 HMS Holdings Corp. $ 100.00 $ 58.37 $ 85.90 $ 80.18 $ 133.07 $ 140.02 Nasdaq Composite 100.00 106.96 116.45 150.96 146.67 200.49 Nasdaq Computer & Data Processing 100.00 123.21 132.37 185.07 187.89 262.83 Nasdaq Health Services 100.00 107.35 86.83 109.24 123.53 160.42 20182019 Form 10-K or future filings made by us under those statutes, the Comparative Stock Performance Graph is not deemed filed with the SEC, is not deemed soliciting material and shall not be deemed incorporated by reference into any of those prior filings or into any future filings we make under those statutes, except to the extent that we specifically incorporate such information by reference into a previous or future filing, or specifically request that such information be treated as soliciting material, in each case under those statutes.26 2018.2019. It should be read in conjunction with Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and Notes thereto, in Part II, Item 8 of this 20182019 Form 10-K. Years ended December 31, (in thousands, except per share amounts) 2018 2017 2016 2015 2014 Revenue $ 598,290 $ 521,212 $ 489,720 $ 474,216 $ 443,225 Total operating expenses 535,052 470,781 432,051 426,644 409,021 Operating income 63,238 50,431 57,669 47,572 34,204 Interest expense (11,310 ) (10,871 ) (8,519 ) (7,812 ) (7,931 ) Interest income 1,089 295 321 49 57 Income before income taxes 53,017 39,855 49,471 39,809 26,330 Income taxes (1,972 ) (199 ) 11,835 15,282 12,383 Net income $ 54,989 $ 40,054 $ 37,636 $ 24,527 $ 13,947 Net Income Per Common Share Basic income per common share: Net income per common share - basic $ 0.66 $ 0.48 $ 0.45 $ 0.28 $ 0.16 Diluted income per common share: Net income per common share - diluted $ 0.64 $ 0.47 $ 0.43 $ 0.28 $ 0.16 Weighted average shares: Basic 83,625 83,821 84,221 87,881 87,673 Diluted 86,144 85,088 86,987 88,361 88,164 Years ended December 31, (in thousands, except per share amounts) 2019 2018 2017 2016 2015 Revenue $ 626,395 $ 598,290 $ 521,212 $ 489,720 $ 474,216 Total operating expenses 523,379 535,052 470,781 432,051 426,644 Operating income 103,016 63,238 50,431 57,669 47,572 Interest expense (11,013) (11,310) (10,871) (8,519) (7,812) Interest income 4,148 1,089 295 321 49 Other income 8,211 — — — — Income before income taxes 104,362 53,017 39,855 49,471 39,809 Income taxes 17,138 (1,972) (199) 11,835 15,282 Net income $ 87,224 $ 54,989 $ 40,054 $ 37,636 $ 24,527 Net Income Per Common Share Basic income per common share: Net income per common share — basic $ 1.00 $ 0.66 $ 0.48 $ 0.45 $ 0.28 Diluted income per common share: Net income per common share — diluted $ 0.98 $ 0.64 $ 0.47 $ 0.43 $ 0.28 Weighted average shares: Basic 87,222 83,625 83,821 84,221 87,881 Diluted 89,317 86,144 85,088 86,987 88,361 Years ended December 31, (in thousands) 2018 2017 2016 2015 2014 Cash and cash equivalents $ 178,946 $ 83,313 $ 175,999 $ 145,610 $ 133,116 Working capital $ 328,684 $ 199,967 $ 277,478 $ 240,456 $ 226,271 Total assets $ 1,078,518 $ 975,160 $ 882,755 $ 850,597 $ 880,988 Revolving credit facility $ 240,000 $ 240,000 $ 197,796 $ 197,796 $ 197,796 Total shareholders' equity $ 713,396 $ 606,229 $ 556,610 $ 524,702 $ 533,090 27 Years ended December 31, (in thousands) 2019 2018 2017 2016 2015 Cash and cash equivalents $ 139,268 $ 178,946 $ 83,313 $ 175,999 $ 145,610 Working capital $ 296,093 $ 328,684 $ 199,967 $ 277,478 $ 240,456 Total assets $ 1,244,276 $ 1,078,518 $ 975,160 $ 882,755 $ 850,597 Revolving credit facility $ 240,000 $ 240,000 $ 240,000 $ 197,796 $ 197,796 Total shareholders' equity $ 854,865 $ 713,396 $ 606,229 $ 556,610 $ 524,702 20182019 Form 10-K,10- K, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I, the information in Part I, Item 1A, and the Consolidated Financial Statements and Notes thereto in Part II, Item 8. The historical results set forth in Part II, Item 6, Item 7 and Item 8 of this 20182019 Form 10-K should not be taken as necessarily indicative of our future operations or financial results.provides a broad range of cost containmentdelivers healthcare technology, analytics and engagement solutions to help healthcare payers and at-risk providers reduce costs, improve health outcomes and enhance memberconsumer experiences. Using industry-leading technology, analytics and engagement solutions, we deliverWe provide a broad range of coordination of benefits, payment integrity and total population health management solutions through our operating subsidiaries to move the healthcare system forward for our customers.customers and contribute to improving health outcomes. We are managed and operate as one business segment with a single management team that reports to the Chief Executive Officer.
serveprovide solutions that apply broadly across state Medicaid programs, commercialand Federal government agencies, health plans federal government health agencies, government and privatePBMs. employers, CHIPs and other healthcare payers.at-risk providers. We also serve as a subcontractor for certain business outsourcing and technology firms. As of December 31, 2018,2019, our customer base included the following:§over 40 state Medicaid programs;§more than 325 health plans, including 23 of the top 25 health plans nationally (based on membership) in support of their multiple lines of business, including Medicaid managed care, Medicare Advantage and group and individual health;§over 150 private employers;§CMS, the Centers for Disease Control and Prevention, and the Department of Veterans Affairs; and§PBMs, third-party administrators and other risk-bearing entities, including independent practice associations, hospital systems, ACOs and specialty care organizations.costs.costs and improve health outcomes. Our largest growth during 20182019 was with commercial health plan customersgovernmentwe currently expect this market to present the greatest opportunity for continued growth in the year ahead.federal customers. In addition to cross-sales of our total population health management solutions and other internal growth initiatives in 2019, various factors related to the macro healthcare environment are expected to contributeprovide opportunities for future growth, including:our expected growth, including:§an aging U.S. population with high-cost, chronic conditions and often co-morbidities;§projected growth in Medicare enrollment from 2018 to 2026 is estimated by CMS to be at 24%, with a projected increase in spending of 83% during this same time period;§Medicaid expenditures are projected to grow 60% from 2018 to 2026 based on CMS NHE projections;§government program payment error rates remain high at approximately 9%;§more than half of the U.S. population is projected by CMS to remain covered by employer-sponsored plans;§continued support for moving the focus of U.S. reimbursement models away from volume of service to quality outcomes; and§increased healthcare industry focus on improved population health, enhanced consumer outcomes and experience, and reduced costs.28 We plan toby leveragingwe plan to enter into new markets and expand the scope of our expertiserelationships with existing customers, with a focus on selling additional solutions and services that span the payment and care continuum, from an individual's enrollment in a healthcare program to expand solution offerings, attractingpre-payment review of their claims through post-payment identification and recovery of improper payments, and back to the individual where our consumer-driven solutions will allow healthcare organizations to manage individuals' healthcare on a personal level, at scale.andwhile broadening our relationships with current customers, through the introduction of newinnovative solutions and services, audit strategies and claim types. Our goal isdesigned to develop and build onenhance or expand our existing partnerships with our state, federal and commercial health plan customers to provide servicessuite of cost containment solutions, By utilizing technology tools that better address their business needs and promote consumer engagement and satisfaction in the constantly evolving healthcare marketplace. We also expectleverage a big data environment, we intend to continue increasing recovery yields fromto promote automation and innovation to improve the effectiveness of our current services by enhancing ourexisting solution suite, and identify new revenue opportunities. We plan to continue to implement new technology and process improvements to increase customer satisfaction and achieve greater operating and organizational efficiency and by implementing new technologiesefficiencies that will improve the quality, effectiveness and profitability of our service offerings.below:Revenue RecognitionDescriptionRevenue Recognition Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions The Company recognizes revenue when performance obligations under the terms of the contracts with our customers realize economic benefits from our services when our services are completed.satisfied.Due to the range of solutions and services that HMS provides and the differing fee structures associated with each type of contract, revenue may be recognized in irregular increments. A portion of our revenue is recorded net of an estimate of future revenue adjustments, with an offsetting entry to accounts receivable, allowance, based on historical patterns of billing adjustments, length of operating and collection cycle and customer negotiations, behaviors and payment patterns. Changes in these estimates are recorded to revenue in the period of change.If we were to enter any new contracts with differing fee structures or performance obligations or if we were to change any of the judgments or estimates related to estimated future revenue adjustments, it could cause a material increase or decrease in the amount of revenue we report in a particular period. 29 Estimated Liability for AppealsDescriptionBusiness Combinations Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions Under our contracts with certain commercial health plan customers and our Medicare RAC contracts with CMS, we recognize revenue when HMS claim findings are sent to the Company’s customers for offset against future claim payments to providers. These contracts permit providers the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer. The total estimated liability for appeals balance was $21.7 million and $30.8 million as of December 31, 2018 and December 31, 2017, respectively. The Company’s original Medicare RAC contract with CMS expired on January 31, 2018.The appeal process established under the Medicare RAC contract with CMS includes five levels of appeals and resolution of appeals can take substantial time to resolve. HMS records (i) a liability for findings which have been adjudicated in favor of providers and (ii) an estimated liability based on the amount of revenue that is subject to appeals and which is probable of being adjudicated in favor of providers following their successful appeal. Our estimated liability is based on the Company’s historical experience.As a result of the original Medicare RAC contract expiration, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date have ceased and therefore the Company released its estimated return obligation liability and increased revenue by $8.4 million during the first quarter of 2018.To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount. Any future changes to any of our customer contracts, including modifications to Medicare RAC contracts, may require us to apply different assumptions that could materially affect both the Company’s revenue and estimated liability for appeals in future periods.Business CombinationsDescriptionJudgments and UncertaintiesEffect if Actual Results Differ from AssumptionsWe record assets acquired and liabilities assumed in a business combination based upon their acquisition date fair values. Goodwill is the excess of acquisition costs over the fair values of assets and liabilities of acquired businesses. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. In most instances there is not a readily defined or listed market price for individual assets and liabilities acquired in connection with a business, including intangible assets. We determine fair value through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary. Significant assumptions used in those techniques include, but are not limited to, growth rates, discount rates, customer attrition rates, expected levels of revenues, earnings, cash flows and tax rates. The use of different valuation techniques and assumptions are highly subjective and inherently uncertain and, as a result, actual results may differ materially from estimates. 30 Impairment of GoodwillDescriptionImpairment of Goodwill Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions The Company’s carrying amount of goodwill was $487.6 million as of December 31, 2018.TheIf we can support the conclusion that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount using the qualitative assessment, then the Company completed the annual impairment test as of June 30, 2018 electingwould not need to perform the quantitativeimpairment test. If the Company cannot support such a conclusion, or the Company does not elect to perform the qualitative assessment, of whichthen the first stepgoodwill impairment test is used to compareidentify potential impairment by comparing the fair value of the reporting unit with its carrying value,amount, including goodwill.In calculatinggoodwill and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.reporting unit,quantitative annual impairment test as of June 30, 2018 and in June 30, 2019 elected to perform the qualitative assessment.The income approach to determining fair value computes projections of the cash flows that the reporting unit is expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach include income projections, a discount rate and a terminal growth value which are all level 3 inputs. The income projections include assumptions for revenue and expense growth which are based on internally developed business plans and largely reflect recent historical revenue and expense trends. The discount rate was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The terminal growth value is Company specific and was determined analyzing inputs such as historical inflation and the GDP growth rate.value. The guideline public company approach and merger and acquisition approach are based on pricing multiples observed for similar publicly traded companies or similar market companies that were sold.The results of the annual impairment assessment provide that the fair value of the reporting unit was significantly in excess of the Company’s carrying value, including goodwill; therefore, no impairment was indicated. If actual results are not consistent with our estimates or assumptions, the Company may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations. There were no impairment charges related to goodwill during the years ended December 31, 2019, 2018, 2017, or 2016.2017.31 ImpairmentDescriptionImpairment of Long-Lived and Intangible Assets Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When indicators exist, recoverability of assets is measured by a comparison of the carrying value of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized and charged to earnings is measured by the amount by which the carrying value of the asset group exceeds the fair value of the assets. We use significant judgment in assessing events or changes in circumstances which indicate that the carrying amount of the asset may not be recoverable. The Company’s carrying amount of long-lived assets, including property and equipment and intangible assets was $161.6$218.8 million as of December 31, 2018.2019. The Company did not recognize any impairment charges related to long-lived and intangible assets during the years ended December 31, 2019, 2018 2017 or 2016.2017. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our consolidated financial position and results of operations.Valuation of Stock-Based CompensationDescriptionValuation of Stock-Based Compensation Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions The determination of the fair value of the options on the grant date using the Black-Scholes pricing model and/or the Monte Carlo Simulation is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. Certain key variables include: the Company’s expected stock price volatility over the expected term of the awards; a risk-free interest rate; and any expected dividends. The fair value of all awards also includes an estimate of expected forfeitures.We estimate stock price volatility based on the historical volatility of the Company’s common stock and estimate the expected term of the awards based on the Company’s historical option exercises for similar types of stock option awards. The assumed risk-free interest rate is based on the yield on the measurement date of a zero-coupon U.S. Treasury bond with a maturity period equal to the option’s expected term. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore, uses an expected dividend yield of zero in the option valuation models. Forfeitures are estimated based on historical experience. If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of stock compensation expense we report in a particular period. For example, if actual forfeitures vary from estimates, a difference in compensation expense will be recognized in the period the actual forfeitures occur. 32 Income TaxesDescriptionIncome Taxes Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits for net operating loss carry-forwards.carry-forwardsDeferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. A valuation allowance is provided against deferred tax assets to the extent their realization is not more likely than not.
Uncertain income tax positions are accounted for by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate.To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results.
Although the Company believes that it has adequately reserved for uncertain tax positions (including interest and penalties), it can provide no assurance that the final tax outcome of these matters will not be materially different.ContingenciesDescriptionContingencies Description Judgments and Uncertainties Effect if Actual Results Differ from Assumptions From time to time, we are involved in legal proceedings in the ordinary course of business. We assess the likelihood of any adverse judgments or outcomes to these contingencies as well as potential ranges or probable losses and establish reserves accordingly. We record accruals for outstanding legal matters when we believe it is probable that a loss will be incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust the provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. The amount of reserves required may change in future periods due to new developments in each matter or changes in approach to a matter such as a change in settlement strategy which could have a material impact on our financial condition and operating results. 33 2018§Revenue growth of 14.8%§Operating income growth of 25.4%§Cash flow from operations of $96.5 million§Repurchased approximately 384,000 shares of common stock for $6.0 million§Net income growth of 37.2% and 2017 to 2016dollars in millions Year Ended December 31, $ Change % Change $ Change % Change 2018 2017 2016 2018 vs 2017 2017 vs 2016 Revenue $ 598.3 $ 521.2 $ 489.7 $ 77.1 14.8 % $ 31.5 6.4 % Cost of Services : Compensation 224.9 202.0 189.3 22.9 11.3 12.7 6.7 Information technology 53.4 45.7 37.3 7.7 16.8 8.4 22.5 Occupancy 16.0 17.2 14.0 (1.2 ) (7.0 ) 3.2 22.9 Direct project costs 42.9 41.4 46.3 1.5 3.6 (4.9 ) (10.6 ) Other operating costs 31.4 28.4 27.8 3.0 10.6 0.6 2.2 Amortization of acquisition related software and intangible assets 33.0 30.4 28.0 2.6 8.6 2.4 8.6 Total Cost of Services 401.6 365.1 342.7 36.5 10.0 22.4 6.5 Selling, general and administrative expenses 113.5 105.7 89.4 7.8 7.4 16.3 18.2 Settlement expense 20.0 - - 20.0 100.0 - - Total Operating Expenses 535.1 470.8 432.1 64.3 13.7 38.7 9.0 Operating Income 63.2 50.4 57.6 12.8 25.4 (7.2 ) (12.5 ) Interest expense (11.3 ) (10.8 ) (8.5 ) (0.5 ) 4.6 (2.3 ) 27.2 Interest income 1.1 0.3 0.3 0.8 266.7 0.0 0.3 Income before income taxes 53.0 39.9 49.4 13.1 32.8 (9.5 ) (19.2 ) Income taxes (2.0 ) (0.2 ) 11.8 (1.8 ) 900.0 (12.0 ) (101.7 ) Net Income $ 55.0 $ 40.1 $ 37.6 $ 14.9 37.2 % $ 2.5 6.6 % Revenue
(dollars in millions) Year Ended December 31, $ Change % Change $ Change % Change 2019 2018 2017 2019 vs 2018 2018 vs 2017 Revenue $ 626.4 $ 598.3 $ 521.2 $ 28.1 4.7% $ 77.1 14.8% Cost of services: Compensation 231.3 224.9 202.0 6.4 2.8 22.9 11.3 Direct project and other operating expenses 90.1 74.3 69.8 15.8 21.3 4.5 6.4 Information technology 53.9 53.4 45.7 0.5 0.9 7.7 16.8 Occupancy 16.4 16.0 17.2 0.4 2.5 (1.2) (7.0) Amortization of acquisition related software and intangible assets 17.0 33.0 30.4 (16.0) (48.5) 2.6 8.6 Total cost of services 408.7 401.6 365.1 7.1 1.8 36.5 10.0 Selling, general and administrative expenses 114.7 113.5 105.7 1.2 1.1 7.8 7.4 Settlement expense — 20.0 — (20.0) (100.0) 20.0 100.0 Total operating expenses 523.4 535.1 470.8 (11.7) (2.2) 64.3 13.7 Operating income 103.0 63.2 50.4 39.8 63.0 12.8 25.4 Interest expense (11.0) (11.3) (10.8) 0.3 (2.7) (0.5) 4.6 Interest income 4.1 1.1 0.3 3.0 272.7 0.8 266.7 Other income 8.2 — — 8.2 100.0 — — Income before income taxes 104.3 53.0 39.9 51.3 96.8 13.1 32.8 Income taxes 17.1 (2.0) (0.2) 19.1 (955.0) (1.8) 900.0 Net income $ 87.2 $ 55.0 $ 40.1 $ 32.2 58.5% $ 14.9 37.2% in Millions34 
vs. 20172018,2019, revenue was $598.3$626.4 million, an increase of $77.1$28.1 million or 14.8%4.7% compared to $521.2$598.3 million for the year ended December 31, 2017.§By solution, which consists of coordination of benefits and analytical services, and included in analytical services are our payment integrity and total population management solutions:oCoordination of benefits product revenue increased $14.4 million or 3.8% which was attributable to yield improvements and the addition of Medicaid enrollees which entered our customer eligibility files in 2018.oPayment integrity revenue increased $39.7 million or 38.0% which was attributable to expanded commercial health plan scopes, including the addition of health plans to current contracts and yield improvements. Within payment integrity, Medicare RAC revenue increased $17.8 million which includes an $8.4 million reserve release during the first quarter of 2018 as compared to prior year.oTotal population management revenue increased $23.0 million or 67.4% of which $21.4 million is due to Eliza (acquired in April 2017). Additionally, Essette revenue increased $1.6 million as compared to prior year.§By market:oCommercial health plan market revenue increased $54.0 million or 20.1% which includes increases of $21.4 million from Eliza (acquired in April 2017) as compared to the prior year and $1.6 million from Essette as compared to prior year. The increases are due to expanded commercial health plan scopes, including the addition of health plans to current contracts and yield improvements.oState government market revenue increased $6.9 million or 3.0%, which was attributable to expanded scopes and yield improvements.oFederal government market and other revenue increased $16.2 million or 64.8% which includes an $8.4 million Medicare RAC reserve release.2017 vs. 2016
2017, revenue2019, total cost of services was $521.2$408.7 million, an increase of $31.5$7.1 million or 6.4%1.8% compared to $489.7$401.6 million for the year ended December 31, 2016.§By solution, which consists of coordination of benefits and analytical services, and included in analytical services are our payment integrity and total population management solutions:oCoordination of benefits service revenue increased $29.0 million or 8.2% which was attributable to yield improvements and the addition of Medicaid enrollees which entered our customer eligibility files in 2017.oPayment integrity revenue decreased $30.7 million or 22.8% which was attributable to a $14.7 million decrease in Medicare RAC revenue because the Medicare RAC Region D program ceased generating revenue in late 2016, as expected, and a $16.1 million decrease due to various contract completions and expirations.oTotal population management revenue increased $33.3 million or 3746.8% almost all of which is due to the Eliza acquisition in April 2017.§By market:oCommercial health plan market revenue increased $39.0 million or 17.0% which was attributable to Eliza contributing revenue of $30.4 million since its acquisition in April 2017, Essette increasing revenue $2.9 million as compared to prior year and expanded commercial health plan scopes, including the addition of health plans to current contracts and yield improvements.oState government market revenue increased by $7.9 million or 3.6%, which was attributable to expanded scopes and yield improvements.oFederal government market and other revenue decreased $15.4 million, which was primarily attributable to a reduction of Medicare RAC revenue because the Medicare RAC D Region D program ceased generating new claims for active auditing in 2016, as expected.35 CostServices
Cost of Servicesacquisition related software and intangibles assets decreased by $16.0 million due to certain intangible assets becoming fully amortized in millions
vs. 20172018, total cost of services2019, SG&A expense was $401.6$114.7 million, an increase of $36.5$1.2 million or 10.0%1.1% compared to $365.1$113.5 million for the year ended December 31, 2017. This change resulted primarily2018.increases in compensation expensethe sale of $22.9 million, information technology expense ofthe investment and recognized a $7.7 million gain in other operating costs of $3.0 million and amortization of intangibles expense of $2.6 million.§The increase in total cost of services relating to Eliza (acquired in April 2017) represented $14.4 million of the increase.§Excluding Eliza, total cost of services increased by $22.1 million which was primarily related to increases in compensation expenses of $17.0 million related to the overall performance of the Company and information technology expenses of $4.2 million.2017 vs. 20162017, total cost of services was $365.1 million, an increase of $22.4 million or 6.5% compared to $342.7 million for the year ended December 31, 2016. This change resulted primarily from increases in compensation expense of $12.7 million, information technology expense of $8.4 million, and amortization of intangibles expense of $2.4 million.§The Eliza acquisition and the related compensation, data processing, occupancy and amortization of intangibles expenses incurred since its acquisition in April 2017 represented $23.4 million of the increase.§Excluding Eliza, total cost of services decreased by $1.0 million which was primarily related to a reduction in direct project costs partially offset by increases in data processing and compensation expenses.36 Selling, General and Administrative Expenses
SG&A in millions2018 vs. 2017During the year ended December 31, 2018, SG&A expense was $113.5 million, an increase of $7.8 million or 7.4% compared to $105.7 million for the year ended December 31, 2017.§Eliza (acquired in April 2017) represented $1.9 million of the increase.§Excluding Eliza, expenses increased by $5.9 million primarily related to increased variable compensation expense due to the overall performance of the Company.2017 vs. 2016During the year ended December 31, 2017, SG&A expense was $105.7 million, an increase of $16.3 million or 18.2% compared to $89.4 million for the year ended December 31, 2016.§The Eliza acquisition and related transaction fees and other SG&A expenses incurred since its acquisition in April 2017 represented $8.7 million of the increase.§Excluding Eliza, stock compensation expense also increased by $7.3 million primarily due to stock compensation expense for retirement eligible employees.Income Taxes2018 vs. 2017During the year ended December 31, 2018,2019, we recorded an income tax benefitexpense of ($2.0)$17.1 million, anthe expense increased benefit of $1.8by $19.1 million compared to an income tax benefit of ($0.2)$(2.0) million for the year ended December 31, 2017.§On December 22, 2017, the 2017 Tax Act was signed into law and includes provisions reducing the federal2018. years beginning in 2018 from 35% to 21%.§Our effective tax rate was (3.7%) for the year ended December 31, 2018 compared to an effective tax rate of (0.5%) for the year ended December 31, 2017. The low 2018 effective tax rate is primarily due to favorable tax benefits related to current year credits, equity compensation, subsidiary basis write off, prior year state tax apportionment changes, uncertain tax position releases, and acquisition adjustments.§Our normalized effective tax rate of 25.8% for 2018 decreased from our normalized effective tax rate of 36.1% for 2017 primarily due to a lower federal tax rate. The normalized effective tax rate excludes prior years’ expense and benefit adjustments recognized in the respective fiscal year.2017 vs. 2016During the year ended December 31, 2017, we recorded2019 compared to an incomeeffective tax benefitrate of ($0.2) million, a decrease of $12.0 million compared to(3.7)% for the year ended December 31, 2016.37 §Our effective tax rate was (0.5%) for the year ended December 31, 2017 compared to an effective tax rate of (23.9%) for the year ended December 31, 2016. The decrease is primarily due to the revaluation of our deferred tax liabilities based on the reduced federal tax rate described above.§Our normalized effective tax rate of 36.1% for 2017 is comparable to our normalized effective tax rate of 36.2% for 2016. The normalized effective tax rate excludes prior years expense and benefit adjustments recognized in the respective fiscal year.20182019 Form 10-K. Years ended December 31, 2018 2017 Cash and cash equivalents $ 178,946 $ 83,313 Working capital $ 328,684 $ 199,967 Available borrowings under credit facility $ 253,500 $ 254,600 Years ended December 31, 2019 2018 Cash and cash equivalents $ 139,268 $ 178,946 Working capital $ 296,093 $ 328,684 Available borrowings under credit facility $ 253,500 $ 253,500 Years ended December 31, 2018 2017 2016 Net cash provided by operating activities $ 96,457 $ 86,464 $ 88,639 Net cash used in investing activities (30,413 ) (204,364 ) (39,201 ) Net cash provided by/(used in) financing activities 29,589 25,214 (19,049 ) Net increase / (decrease) in cash and cash equivalents $ 95,633 $ (92,686 ) $ 30,389 Years ended December 31, 2019 2018 2017 Net cash provided by operating activities $ 133,232 $ 96,457 $ 86,464 Net cash used in investing activities (205,059) (30,413) (204,364) Net cash provided by financing activities 32,149 29,589 25,214 Net increase / (decrease) in cash and cash equivalents $ (39,678) $ 95,633 $ (92,686) increaseddecreased as of December 31, 20182019 as compared to December 31, 2017,2018, primarily as a result of the cash generated by our operatingused in investing activities as discussed below.acquisitions. We may also use available cash to repurchase shares of our common stock.§the working capital requirements of our operations;§investments in our business;§business development activities;§repurchases of common stock; and§repayment of our revolving credit facility.38 20182019 was $96.5$133.2 million, a $10.0$36.7 million increase from net cash provided by operating activities of $86.5$96.5 million for the year ended December 31, 2017.2018. The increase was primarily due to a $14.9$32.2 million increase in net income, a $14.7 million decrease in the amortization of intangibles and increases in reconciling itemsa $7.7 million gain on the sale of $14.3 million as compared to prior year.a cost-basis investment. These increases were partially offset by decreasesa $10.8 million change in deferred income taxes, a $4.1 million increase in noncash lease expense and a net decrease in operating assets and liabilities of approximately $19.2$13.5 million.Net cash provided by operating activities for the year ended December 31, 2017 was $86.5 million, a $2.1 million decrease from net cash provided by operating activities of $88.6 million for the year ended December 31, 2016. The decrease was primarily due to a decrease in deferred income taxes of $13.0 million related to our revaluation of the Company’s deferred tax balances from the federal tax rate of 35% to 21% under the 2017 Tax Act, offset by an increase in stock based compensation expense of $10.9 million primarily related to retirement eligible employees. The decrease was also impacted by changes in operating assets and liabilities and offset by increases in net income, and depreciation and amortization expenses.2018,2019, revenue was $598.3$626.4 million, an increase of $77.1$28.1 million compared to revenue of $521.2$598.3 million for the year ended December 31, 2017.2018. DSO increased by 4 days to 123 days as of December 31, 2019, as compared to 119 days as of December 31, 2018, as compared to 115 days as of December 31, 2017.2018. The change was primarily due to timing delaysthe acquisition of Accent resulting in certain clients processing our findings through their systems.a 3 day increase. We do not currently anticipate collection issues with our accounts receivable, however, nor do we currently expect that any extended collections will materially impact our liquidity.20182019 was $30.4$205.1 million, a $174.0 million decrease compared to net cash used in investing activities of $204.4 million for the year ended December 31, 2017. This decrease was primarily due to the use of approximately $171.3 million for the Eliza acquisition in April 2017. Purchases of property and equipment and investment in capitalized software also decreased by $2.7 million year over year.Net cash used in investing activities for the year ended December 31, 2017 was $204.4 million, a $165.2$174.7 million increase compared to net cash used in investing activities of $39.2$30.4 million for the year ended December 31, 2016.2018. This increase was primarily due to the use of approximately $171.3$185.8 million, net of cash acquired, for the Eliza acquisitionacquisitions of Accent and VitreosHealth, proceeds from the sale of our cost basis investment in April 2017 as compared toInstaMed of $9.8 million and purchaseuse of approximately $20.7 million for the Essette acquisition in September 2016.year ended December 31, 2019. Purchases of property and equipment and investment in capitalized software also increaseddecreased by $12.0$8.8 million million year over year.$35-approximately $4034 million during the year ended December 31, 2019.20182019 was $29.6$32.1 million, a $4.4$2.5 million increase from net cash provided by financing activities of $25.2$29.6 million for the year ended December 31, 2017.2018. This increase was primarily attributable to an increasea result of $36.0 million of proceeds from exercise of stock options over prior year and an $8.2 million decrease inthe Company not making any repurchases of common stock asduring fiscal year 2019, compared to prior year. Additionally, there was a $39.8approximately $6.0 million decrease in proceeds from our credit facility net2018, partially offset by an increase in tax withholding payments for employees' net-share settlement of deferred financing cost payments.Net cash provided by financing activities for the year ended December 31, 2017 was $25.2 million, a $44.2 million increase from net cash used in financing activities of $19.0 million for the year ended December 31, 2016. This increase was primarily attributable to $42.2 million of proceeds from additional borrowings under our amended credit facility.39 2018,2019, we repurchased 0.4 milliondid not repurchase any shares of our common stock for approximately $6.0 million using cash resources.stock. See the discussion under “Repurchases of Shares of Common Stock” under Part II, Item 5 and “Equity” in Note 1110 to the Consolidated Financial Statements under Part II, Item 8 for additional information regarding share repurchases.2018,2019, the outstanding principal balance under our revolving credit facility was $240.0 million.2019.2018,2019, we were in compliance with all terms of the Credit Agreement.109 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding our Credit Agreement.40 Payments Due by Period (in thousands) Contractual Obligations (1) Total Less than 1 year 1 - 3 years 3 -5 years More than 5 years Operating leases (2) $ 22,654 $ 5,778 $ 9,162 $ 4,767 $ 2,947 Revolving credit facility (3) 240,000 - - 240,000 - Interest expense (4) 41,687 10,494 21,016 10,177 - Commitment fee (5) 2,610 651 1,320 639 - Capital leases (6) 8 8 - - - Letter of Credit fee (7) 49 49 - - - Purchase obligations and commitments (8) 26,966 10,180 13,970 2,816 - Total $ 333,974 $ 27,160 $ 45,468 $ 258,399 $ 2,947 (1)The Company has excluded long-term unrecognized tax benefits, net of interest and penalties, of $4.8 million from the amounts presented as the timing of these obligations is uncertain.(2)Represents the future minimum lease payments under non-cancelable operating leases.(3)Represents scheduled repayments of principal on the revolving credit facility under the terms of our Credit Agreement. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Credit Agreement.(4)Represents estimates of amounts due on the revolving credit facility based on the interest rate as of December 31, 2018 and on scheduled repayments of principal. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Credit Agreement.(5)Represents the commitment fee due on the revolving credit facility. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Credit Agreement.(6)Represents the future minimum lease payments under capital leases.(7)Represents the fees for the letter of credit issued against the revolving credit facility. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Credit Agreement.(8)Represents future purchases related to outstanding purchase orders and supplier requisitions.Total Less than 1 year 1 - 3 years 3 -5 years More than 5 years $ 18,726 $ 5,808 $ 7,092 $ 4,835 $ 991 240,000 — 240,000 — — 24,027 8,171 15,856 — — 1,949 653 1,296 — — 1,154 454 454 246 — 53 53 — — — 28,334 15,211 13,123 — — Total $ 314,243 $ 30,350 $ 277,821 $ 5,081 $ 991 41 2018,2019, we were not a party to any derivative financial instruments. We conduct allmost of our business in U.S. currency and hencehave limited operations outside of the United States. As such, do not have directmaterial foreign currency risk.risk exposure. As we continue to grow our foreign operations, our exposure to foreign currency exchange rate risk could become more significant. We are exposed to changes in interest rates, primarily with respect to our revolving credit facility under our Credit Agreement. If the effective interest rate for all of our variable rate debt were to increase by 100 basis points (1%), our annual interest expense would increase by a maximum of $2.4 million based on our debt balances outstanding at December 31, 2018.2019. Further, we currently invest substantially all of our excess cash in short-term investments, primarily money market accounts, where returns effectively reflect current interest rates. As a result, market interest rate changes may impact our interest income or expense. The impact will depend on variables such as the magnitude of rate changes and the level of borrowings or excess cash balances. We do not consider this risk to be material. We manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.20182019 Form 10-K.2018.2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the 20182019 Form 10-K.42 2018,2019, based on criteria established in the Internal Control-Integrated Framework issued by COSO. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on that assessment, we believe that the Company’s internal control over financial reporting was effective based on those criteria as of December 31, 2018.2018,2019, a copy of which is included with this 20182019 Form 10-K.20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.None.43 20192020 Annual Meeting of Shareholders under the captions “Proposal One: Election of Class II Directors,” “Executive Officers,” “DelinquentSection 16(a) Beneficial Ownership Reporting Compliance,Reports,” “Director Nomination Process,,” “Additional Information—Shareholder Proposals and Director Nominations for 20202021 Annual Meeting,” and “Board Committees and Related Matters.Matters.”corporate-governance.cfmcorporate- governance.cfm and can also be obtained free of charge by sending a written request to our Corporate Secretary. To the extent permissible under the Nasdaq Marketplace Rules, we intend to disclose amendments to our Code of Conduct, as well as waivers of the provisions thereof, that relate to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions on the Company’s website under the “Investors—Corporate Governance” tab at http://investor.hms.com/corporate-governance.cfm.20192020 Annual Meeting of Shareholders under the captions “Executive Compensation,” “Director Compensation,” and “Compensation“Compensation Committee Interlocks and Insider Participation.”20192020 Annual Meeting of Shareholders under the caption “Ownership of HMS Common Stock.”2018.2019. For additional information about our equity compensation plans see the discussion set forth under the caption “Stock-Based Compensation” in Note 1312 to the Consolidated Financial Statements in Part II, Item 8. Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by shareholders 5,825,734 (1) $ 17.07 4,758,398 Equity compensation plans not approved by shareholders 19,004 (2) $ 12.00 — Total 5,844,738 (1)This includes stock options and restricted stock units granted under our 2006 Stock Plan and 2016 Omnibus Plan.(2)This includes stock options granted under the 2011 HDI Plan, which was assumed in connection with our acquisition of HDI and approved by the Compensation Committee of our Board.44 Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by shareholders 3,577,870 (1) $ 23.43 9,289,094 Equity compensation plans not approved by shareholders 17,184 (2) $ 12.95 — Total 3,595,054 20192020 Annual Meeting of Shareholders under the captions “Certain Relationships and Related Transactions” and “Director Independence.Independence.”20192020 Annual Meeting of Shareholders.45 1.Financial Statements.52.2.Financial Statement Schedules.82.97. All other financial statement schedules have been omitted as they are either not required, not applicable or the information is otherwise included.3.Exhibits.46 ExhibitNumberDescription3.2 47 Exhibit Number Description 10.3.4 10.3.5 10.4.1 10.3.210.4.248 10.13.2Exhibit NumberDescription 10.14.2 10.1410.1549 ExhibitNumberDescription21.1 23.1 23.231.1Consent of KPMG LLP31.131.2 32.1 32.2 101.INS101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document ______________________†Indicates a management contract or compensatory plan, contract or arrangement104 *The certifications attached hereto asCover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 32.1 and Exhibit 32.2 are furnished with this 2018 Form 10-K and shall not be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act101)None.50 25, 2019.24, 2020.HMS Holdings Corp./s/ William C. Lucia William C. Lucia Chairman of the Board, President and
Chief Executive Officer25, 2019.24, 2020.Signature Title William C. Lucia Director, Chairman of the Board, President and
Chief Executive Officer (Principal Executive Officer)Jeffrey S. Sherman Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Greg D. Aunan Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Katherine Baicker Director /s/ Robert Becker Robert BeckerDirectorRobert Becker Director /s/ Craig R. Callen Craig R. Callen Director William F. Miller III Director /s/ Jeffrey A. Rideout Jeffrey A. Rideout Director /s/ Ellen A. Rudnick Ellen A. Rudnick Director Bart M. Schwartz Director Richard H. Stowe Director Cora M. Tellez Director 51 PageNumberConsolidated Financial Statements: Page Number and 2016 and 2016Financial Statement Schedule: 52 20182019 and 2017,2018, the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 2018,2019, and the related notes and financial statement schedule included under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2018,2019, in conformity with accounting principles generally accepted in the United States of America.2018,2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 201924, 2020 expressed an unqualified opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2017.Dallas, TexasFebruary 25, 201953 The :We have audited the accompanying consolidated balance sheet of HMS Holdings Corp. and subsidiaries as of December 31, 2016, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year ended December 31, 2016. In connection with our audit of the consolidated financial statements, we also have audited financial statement schedule II as it relates to the year ended December 31, 2016. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HMS Holdings Corp. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule as it relates to the year ended December 31, 2016, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein./s/ KPMG, LLPDallas, TexasJune 6, 201754 Report of Independent Registered Public Accounting FirmBoard of Directors and ShareholdersHMS Holdings Corp.Opinion on internal control over financial reporting2018,2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.2018,2019, and our report dated February 25, 201924, 2020 expressed an unqualified opinion on those financial statements.overOver Financial Reporting.Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB./s/ GRANT THORNTON LLPDallas, TexasFebruary 25, 201955 December 31,
2019December 31,
2018Assets Assets Current assets: Current assets: Cash and cash equivalents $ 178,946 $ 83,313 Cash and cash equivalents $ 139,268 $ 178,946 Accounts receivable, net of allowance of $13,683 and $14,799, at December 31, 2018 and December 31, 2017, respectively 206,772 189,460 Prepaid expenses 19,970 16,589 Accounts receivable, net Accounts receivable, net 223,443 206,772 Prepaid expenses and other current assets Prepaid expenses and other current assets 30,925 20,210 Income tax receivable 18,817 1,892 Income tax receivable 3,210 18,817 Deferred financing costs, net 564 564 Deferred financing costs, net 564 564 Other current assets 240 836 Total current assets 425,309 292,654 Total current assets 397,410 425,309 Property and equipment, net 94,435 98,581 Property and equipment, net 86,947 94,435 Goodwill 487,617 487,617 Goodwill 599,351 487,617 Intangible assets, net 67,140 91,482 Intangible assets, net 131,849 67,140 Operating lease right-of-use assets Operating lease right-of-use assets 17,493 — Deferred financing costs, net 1,673 2,237 Deferred financing costs, net 1,109 1,673 Other assets 2,344 2,589 Other assets 10,117 2,344 Total assets $ 1,078,518 $ 975,160 Total assets $ 1,244,276 $ 1,078,518 Liabilities and Shareholders' Equity Liabilities and Shareholders' Equity Current liabilities: Current liabilities: Accounts payable, accrued expenses and other liabilities $ 74,902 $ 61,900 Accounts payable, accrued expenses and other liabilities $ 97,747 $ 74,902 Estimated liability for appeals 21,723 30,787 Liability for appeals Liability for appeals 3,570 21,723 Total current liabilities 96,625 92,687 Total current liabilities 101,317 96,625 Long-term liabilities: Long-term liabilities: Revolving credit facility 240,000 240,000 Revolving credit facility 240,000 240,000 Operating lease liabilities Operating lease liabilities 14,881 — Net deferred tax liabilities 18,485 21,989 Net deferred tax liabilities 25,587 18,485 Deferred rent 4,118 4,852 Other liabilities 5,894 9,403 Other liabilities 7,626 10,012 Total long-term liabilities 268,497 276,244 Total long-term liabilities 288,094 268,497 Total liabilities 365,122 368,931 Total liabilities 389,411 365,122 Commitments and contingencies Commitments and contingencies Shareholders' equity: Shareholders' equity: Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued — — Common stock -- $0.01 par value; 175,000,000 shares authorized; 98,924,501 shares issued and 85,261,664 shares outstanding at December 31, 2018; 96,536,251 shares issued and 83,256,858 shares outstanding at December 31, 2017 989 965 Preferred stock -- $0.01 par value; 5,000,000 shares authorized; NaN issued Preferred stock -- $0.01 par value; 5,000,000 shares authorized; NaN issued — — Common stock -- $0.01 par value; 175,000,000 shares authorized; 101,766,468 shares issued and 88,103,566 shares outstanding at December 31,2019; 98,924,501 shares issued and 85,261,664 shares outstanding at December 31, 2018 Common stock -- $0.01 par value; 175,000,000 shares authorized; 101,766,468 shares issued and 88,103,566 shares outstanding at December 31,2019; 98,924,501 shares issued and 85,261,664 shares outstanding at December 31, 2018 1,018 989 Capital in excess of par value 425,748 368,721 Capital in excess of par value 479,964 425,748 Retained earnings 422,235 366,164 Retained earnings 509,459 422,235 Treasury stock, at cost: 13,663,194 shares at December 31, 2018 and 13,279,393 shares at December 31, 2017 (135,576 ) (129,621 ) Treasury stock, at cost: 13,663,194 shares at December 31, 2019 and 13,663,194 shares at December 31, 2018 Treasury stock, at cost: 13,663,194 shares at December 31, 2019 and 13,663,194 shares at December 31, 2018 (135,576) (135,576) Total shareholders' equity 713,396 606,229 Total shareholders' equity 854,865 713,396 Total liabilities and shareholders' equity $ 1,078,518 $ 975,160 Total liabilities and shareholders' equity $ 1,244,276 $ 1,078,518 56 Year Ended December 31, Year Ended December 31, 2018 2017 2016 2019 2018 2017 Revenue $ 598,290 $ 521,212 $ 489,720 Revenue $ 626,395 $ 598,290 $ 521,212 Cost of services: Cost of services: Compensation 224,893 202,049 189,271 Compensation 231,321 224,893 202,049 Direct project and other operating expenses Direct project and other operating expenses 90,069 74,346 69,772 Information technology 53,428 45,723 37,337 Information technology 53,950 53,428 45,723 Occupancy 15,968 17,190 14,000 Occupancy 16,375 15,968 17,190 Direct project expenses 42,908 41,347 46,254 Other operating expenses 31,438 28,425 27,778 Amortization of acquisition related software and intangible assets 32,975 30,393 28,030 Amortization of acquisition related software and intangible assets 16,999 32,975 30,393 Total cost of services 401,610 365,127 342,670 Total cost of services 408,714 401,610 365,127 Selling, general and administrative expenses 113,442 105,654 89,381 Selling, general and administrative expenses 114,665 113,442 105,654 Settlement expense 20,000 - - Settlement expense — 20,000 — Total operating expenses 535,052 470,781 432,051 Total operating expenses 523,379 535,052 470,781 Operating income 63,238 50,431 57,669 Operating income 103,016 63,238 50,431 Interest expense (11,310 ) (10,871 ) (8,519 ) Interest expense (11,013) (11,310) (10,871) Interest income 1,089 295 321 Interest income 4,148 1,089 295 Other income Other income 8,211 — — Income before income taxes 53,017 39,855 49,471 Income before income taxes 104,362 53,017 39,855 Income taxes (1,972 ) (199 ) 11,835 Income taxes 17,138 (1,972) (199) Net Income $ 54,989 $ 40,054 $ 37,636 Net income Net income $ 87,224 $ 54,989 $ 40,054 Basic income per common share: Basic income per common share: Net income per common share -- basic $ 0.66 $ 0.48 $ 0.45 Net income per common share — basic Net income per common share — basic $ 1.00 $ 0.66 $ 0.48 Diluted income per common share: Diluted income per common share: Net income per common share -- diluted $ 0.64 $ 0.47 $ 0.43 Net income per common share — diluted Net income per common share — diluted $ 0.98 $ 0.64 $ 0.47 Weighted average shares: Weighted average shares: Basic 83,625 83,821 84,221 Basic 87,222 83,625 83,821 Diluted 86,144 85,088 86,987 Diluted 89,317 86,144 85,088 57 Common Stock Treasury Stock # of Shares Issued Par Value Capital in Excess of Par Value Retained Earnings # of Shares Amount Total Shareholders' Equity Year Ended December 31, Balance at January 1, 2016 95,263,461 $ 952 $ 330,290 $ 288,474 11,273,746 $ (95,014 ) $ 524,702 2019 2018 2017 Common Stock and paid-in capital Common Stock and paid-in capital Balance, beginning of period Balance, beginning of period $ 426,737 $ 369,686 $ 345,984 Exercise of stock options Exercise of stock options 39,332 38,362 2,720 Stock-based compensation expense Stock-based compensation expense 21,901 21,507 24,143 Vesting of restricted stock units, net of shares withheld for employee tax Vesting of restricted stock units, net of shares withheld for employee tax (6,988) (2,818) (3,161) Balance, end of period Balance, end of period 480,982 426,737 369,686 Retained earnings Retained earnings Balance, beginning of period Balance, beginning of period 422,235 366,164 326,110 Net income - - - 37,636 - - 37,636 Net income 87,224 54,989 40,054 Stock-based compensation expense - - 13,277 - - - 13,277 Cumulative effect of accounting changes Cumulative effect of accounting changes — 1,082 — Balance, end of period Balance, end of period 509,459 422,235 366,164 Treasury stock Treasury stock Balance, beginning of period Balance, beginning of period (135,576) (129,621) (115,484) Purchase of treasury stock - - - - 1,140,332 (20,470 ) (20,470 ) Purchase of treasury stock — (5,955) (14,137) Exercise of stock options 510,512 5 2,935 - - - 2,940 Vesting of restricted stock awards and units, net of shares withheld for employee tax 192,879 2 (1,477 ) - - - (1,475 ) Balance, end of period Balance, end of period (135,576) (135,576) (129,621) Total shareholders' equity Total shareholders' equity $ 854,865 $ 713,396 $ 606,229 Balance at December 31, 2016 95,966,852 $ 959 345,025 $ 326,110 12,414,078 $ (115,484 ) $ 556,610 Net income - - - 40,054 - - 40,054 Stock-based compensation expense - - 24,143 - - - 24,143 Purchase of treasury stock - - - - 865,315 (14,137 ) (14,137 ) Exercise of stock options 172,326 2 2,718 - - - 2,720 Vesting of restricted stock awards and units, net of shares withheld for employee tax 397,073 4 (3,165 ) - - - (3,161 ) Balance at December 31, 2017 96,536,251 $ 965 $ 368,721 $ 366,164 13,279,393 $ (129,621 ) $ 606,229 Adoption of accounting standard (Note 1 and 2) - - - 1,082 - - 1,082 Net income - - - 54,989 - - 54,989 Stock-based compensation expense - - 21,507 - - 21,507 Purchase of treasury stock - - - - 383,801 (5,955 ) (5,955 ) Shares issued Shares issued Balance, beginning of period Balance, beginning of period 98,924,501 96,536,251 95,966,852 Exercise of stock options 2,017,442 20 38,342 - - - 38,362 Exercise of stock options 2,435,648 2,017,442 172,326 Vesting of restricted stock units, net of shares withheld for employee tax 370,808 4 (2,822 ) - - - (2,818 ) Vesting of restricted stock units, net of shares withheld for employee tax 406,319 370,808 397,073 Balance, end of period Balance, end of period 101,766,468 98,924,501 96,536,251 Balance at December 31, 2018 98,924,501 $ 989 $ 425,748 $ 422,235 13,663,194 $ (135,576 ) $ 713,396 Treasury Stock Treasury Stock Balance, beginning of period Balance, beginning of period 13,663,194 13,279,393 12,414,078 Purchase of treasury stock Purchase of treasury stock — 383,801 865,315 Balance, end of period Balance, end of period 13,663,194 13,663,194 13,279,393 58 Years Ended December 31, Year Ended December 31, 2018 2017 2016 2019 2018 2017 Operating activities: Operating activities: Net income $ 54,989 $ 40,054 $ 37,636 Net income $ 87,224 $ 54,989 $ 40,054 Adjustments to reconcile net income to net cash provided by operating activities: Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment and software 33,254 27,515 24,882 Depreciation and amortization of property, equipment and software 33,293 33,254 27,724 Amortization of intangible assets 24,342 22,555 20,164 Amortization of intangible assets 9,691 24,342 22,555 Amortization of deferred financing costs 564 2,258 2,083 Amortization of deferred financing costs 564 564 2,258 Gain on sale of cost basis investment Gain on sale of cost basis investment (7,697) — — Stock-based compensation expense 21,507 24,143 13,277 Stock-based compensation expense 21,901 21,507 24,143 Deferred income taxes (3,504 ) (20,409 ) (7,368 ) Deferred income taxes 7,290 (3,504) (20,409) (Gain) / Loss on disposal of assets - 209 (948 ) Noncash lease expense Noncash lease expense 4,133 — — Change in fair value of contingent consideration (35 ) (2,865 ) - Change in fair value of contingent consideration — (35) (2,865) Release of estimated liability for appeals (8,436 ) - - Release of estimated liability for appeals, net Release of estimated liability for appeals, net (10,478) (8,436) — Changes in operating assets and liabilities: Changes in operating assets and liabilities: Accounts receivable (17,312 ) (6,976 ) (3,554 ) Accounts receivable (16,292) (17,312) (6,976) Prepaid expenses (3,381 ) (1,463 ) (2,399 ) Other current assets 596 165 2,066 Prepaid expenses and other current assets Prepaid expenses and other current assets (10,487) (2,785) (1,298) Other assets 245 124 234 Other assets (2,173) 245 124 Income taxes receivable / (payable) (16,925 ) 1,462 (7,227 ) Income taxes receivable / (payable) 15,607 (16,925) 1,462 Accounts payable, accrued expenses and other liabilities 11,181 (340 ) 12,116 Accounts payable, accrued expenses and other liabilities 4,744 11,181 (340) Estimated liability for appeals (628 ) 32 (2,323 ) Operating lease liabilities Operating lease liabilities (5,315) — — Liability for appeals Liability for appeals 1,227 (628) 32 Net cash provided by operating activities 96,457 86,464 88,639 Net cash provided by operating activities 133,232 96,457 86,464 Investing activities: Investing activities: Acquisition of a business, net of cash acquired - (171,321 ) (20,678 ) Acquisition of businesses, net of cash acquired Acquisition of businesses, net of cash acquired (185,790) — (171,321) Proceeds from sale of cost basis investment - - 2,496 Proceeds from sale of cost basis investment 9,776 — — Investment in common stock Investment in common stock (7,421) — — Purchases of property and equipment (11,264 ) (17,318 ) (13,703 ) Purchases of property and equipment (8,276) (11,264) (17,318) Investment in capitalized software (19,149 ) (15,725 ) (7,316 ) Investment in capitalized software (13,348) (19,149) (15,725) Net cash used in investing activities (30,413 ) (204,364 ) (39,201 ) Net cash used in investing activities (205,059) (30,413) (204,364) Financing activities: Financing activities: Proceeds from credit facility - 42,204 - Proceeds from credit facility — — 42,204 Payments for deferred financing costs - (2,269 ) - Payments for deferred financing costs — — (2,269) Proceeds from exercise of stock options 38,362 2,720 2,940 Proceeds from exercise of stock options 39,332 38,362 2,720 Payments of tax withholdings on behalf of employees for net-share settlements (2,818 ) (3,161 ) (1,475 ) Payments of tax withholdings on behalf of employees for net-share settlements (6,988) (2,818) (3,161) Payments on capital lease obligations - (143 ) (44 ) Payments on capital lease obligations (195) — (143) Purchases of treasury stock (5,955 ) (14,137 ) (20,470 ) Purchases of treasury stock — (5,955) (14,137) Net cash provided by/(used in) financing activities 29,589 25,214 (19,049 ) Net increase/(decrease) in cash and cash equivalents 95,633 (92,686 ) 30,389 Net cash provided by financing activities Net cash provided by financing activities 32,149 29,589 25,214 Net (decrease)/increase in cash and cash equivalents Net (decrease)/increase in cash and cash equivalents (39,678) 95,633 (92,686) Cash and Cash Equivalents Cash and Cash Equivalents Cash and cash equivalents at beginning of year 83,313 175,999 145,610 Cash and cash equivalents at beginning of year 178,946 83,313 175,999 Cash and cash equivalents at end of period $ 178,946 $ 83,313 $ 175,999 Cash and cash equivalents at end of period $ 139,268 $ 178,946 $ 83,313 Supplemental disclosure of cash flow information: Supplemental disclosure of cash flow information: Cash paid for income taxes, net of refunds $ 22,225 $ 17,995 $ 20,326 Cash (refunds received)/paid for income taxes, net of refunds Cash (refunds received)/paid for income taxes, net of refunds $ (5,298) $ 22,225 $ 17,995 Cash paid for interest $ 10,326 $ 9,944 $ 6,196 Cash paid for interest $ 10,457 $ 10,326 $ 9,944 Supplemental disclosure of non-cash activities: Supplemental disclosure of non-cash activities: Change in balance of accrued property and equipment purchases $ 1,305 $ 51 $ 684 Change in balance of accrued property and equipment purchases $ (1,303) $ 1,305 $ 51 59 1.Business and Summary of Significant Accounting Policieshealthcaredata, technology analytics and engagement solutions,analytics to deliver coordination of benefits, payment integrity and population risk analytics, and carehealth management and consumer engagement solutions tothat help payershealthcare organizations reduce costs, improve healthcarehealth outcomes and enhance memberconsumer experiences. We provide coordinationa broad range of benefits servicespayment accuracy solutions to government and commercial healthcare payers, including coordination of benefit services to ensure that the correct partyright payer pays the claim. Ourclaim, and payment integrity services promote accuracy by fightingto address improper payments and fraud, waste and abuse, and our totalabuse. Our population health management solutions include a portfolio of integrated risk analytics, consumer engagement and care management solutions that provide risk-bearinghealthcare organizations with reliable intelligence acrossinsight into their population and member populationsrisks to predict, identify risks and improve patient engagement and outcomes. Together these various servicesavoid preventable high cost events over the healthcare continuum. Through our solutions, we help move the healthcare system forward by saving billions of dollars for our customers.customers while helping consumers lead healthier lives. We currently operate as one1 business segment with a single management team that reports to the Chief Executive Officer.(i)Principles of Consolidation(ii)Use of Estimates(iii)Cash and Cash Equivalents(iv)Concentration of Credit Risk60 (v)Property and EquipmentProperty and Equipment Useful Life
(in years)Equipment 2 to 5 Leasehold improvements 5 to 10 Furniture and fixtures 5 Capitalized software 3 to 10 Building and building improvements up to 39 2017 or 2016.(vi)Intangible assetsIntangible Assets Useful Life
(in years)Customer relationships 7 to 15 Restrictive covenants 1 to 3 Trade names 1.5 to 7 Intellectual property 4 to 6 61 not0t recognize any impairment charges related to intangible assets during the years ended December 31, 2019, 2018 2017 or 2016.(vii)GoodwillGoodwill is subject to a periodic assessment for impairment. We haveThe Company has the option to perform a qualitative or quantitative assessment to determine if impairment is more likely than not to have occurred. When the qualitative assessment of goodwill impairment is performed, significant judgment is required in the assessment of qualitative factors including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting units and future opportunities in the markets in which they operate. If the Company can support the conclusion that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount using the qualitative assessment, then the Company would not need to perform the two-step impairment test. If the Company cannot support such a conclusion, or the Company does not elect to perform the qualitative assessment, then the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit with its carrying amount, including goodwill. The Company completed the annual impairment test as of June 30, 2018 electing to perform2019 using the quantitativequalitative assessment of which the first step is to compare the fair value of the reporting unit with its carrying value, including goodwill. In calculating the fair value of the reporting unit, the Company utilized a weighting across three commonly accepted valuation approaches: an income approach, a guideline public company approach, and a merger and acquisition approach. The income approach to determining fair value computes projections of the cash flows that the reporting unit is expected to generate converted into a present value equivalent through discounting. Significant assumptions in the income approach include income projections, a discount rate and a terminal growth value which are all level 3 inputs. The income projections include assumptions for revenue and expense growth which are based on internally developed business plans and largely reflect recent historical revenue and expense trends. The discount rate was based on a risk free rate plus a beta adjusted equity risk premium and specific company risk premium. The terminal growth value is Company specific and was determined analyzing inputs such as historical inflation and the GDP growth rate. The guideline public company approach and merger and acquisition approach are based on pricing multiples observed for similar publicly traded companies or similar market companies that were sold. The results of the annual impairment assessment provide that the fair value of the reporting unit was significantly in excess of the Company’s carrying value, including goodwill; therefore, no impairment was indicated.existed. There were no0 impairment charges related to goodwill during the years ended December 31, 2019, 2018 2017 or 2016. There were no changes in the carrying amount of goodwill for the year ended December 31, 2018.(viii) Income Taxes62 (ix)Expense Classifications&A&A") functions, which are presented separately as a component of total operating costs. A description of the primary expenses included in each category is as follows:§Compensation: Salary, fringe benefits, bonus and stock-based compensation.§Information technology: Hardware, software and data communication costs.§Occupancy: Rent, utilities, depreciation, office equipment and repair and maintenance costs.§Direct project expense:Variable costs incurred from third party providers that are directly associated with specific revenue generating projects and employee travel expenses.§Other operating expenses:Professional fees, temporary staffing, travel and entertainment, insurance and local and property tax costs.§Amortization of acquisition related software and intangible assets:Amortization of the cost of acquisition related software and intangible assets.§Expenses related to general management, marketing and administrative activities.(x)Estimating Valuation Allowances and Accrued Liabilities20182019 and 2017,2018, the accounts receivable balance was $206.8$223.4 million and $189.5$206.8 million, net of adjustments. Adjustments to the accounts receivable balance include revenue recognition related adjustments, such as customer discounts, and allowance for credit related losses. The allowance for credit related losses was not material to the financial statements as of $13.7 millionDecember 31, 2019 and $14.8 million, respectively.(xi)Stock-Based Compensation(“equity awards”) to HMS employees and non-employee directors of the Company under the 2016HMS Holdings Corp. 2019 Omnibus Incentive Plan (the “2019 Omnibus Plan”), as approved byJune 23, 2016.May 22, 2019. The 20162019 Omnibus Plan replaced and superseded the Company’s 2006 Stock Plan and 2011 HDIHMS Holdings Corp. 2016 Omnibus Incentive Plan. As of December 31, 2018,2019, the number of securities remaining available for future issuance under equity compensation plans, excluding securities to be issued upon exercise of outstanding options and vesting of restricted stock units, is 4,758,398was 9,289,094 shares. All of the Company’s employees as well as HMS non-employee directors are eligible to participate in the 20162019 Omnibus Plan. Awards granted under the 20162019 Omnibus Plan generally vest over one to four years. TheSubject to certain exceptions, the exercise price of stock options granted under the 20162019 Omnibus Plan may not be less than the fair market value of a share of stock on the grant date, as measured bywhich is determined based on the closing price of the Company’s common stock on the Nasdaq Global Select Market and the term of a stock option may not exceed ten years. Prior to 2018, the Company granted two types of equity awards: 1) equity awards with service conditions and 2) equity awards with market and service conditions. The market condition is based on the Company’s common stock price during the applicable measurement period. In 2019 and 2018, the Company only issued equity awards with service conditions.63 zero0 in the option valuation models. The fair value of all awards also includes an estimate of expected forfeitures. Forfeitures are estimated based on historical experience. If actual forfeitures vary from estimates, a difference in compensation expense will be recognized in the period the actual forfeitures occur. Upon the exercise of stock options or the vesting of restricted stock units, the resulting excess tax benefits or deficiencies, if any, are recognized as income tax expense or benefit.(xii)Fair Value of Financial Instruments§Level 1: Observable inputs such as quoted prices in active markets;§Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and§Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.(xiii)LeasesHMSagreements as either operating or capital leases, depending on certain defined criteria. Lease costs are amortizedpayments is recognized on a straight-line basis without regard to deferred payment terms, such as rent holidays, that deferover the commencement date of required payments. Additionally, incentives such as tenant improvement allowances,lease term. For certain real estate and equipment leases, the Company has lease agreements with lease and non-lease components, which are capitalized and are treatedgenerally accounted for as a reductionsingle component.rental expense overwhich include options to extend the termlease for up to 10 years. We evaluate whether to include the option period in the calculation of the ROU asset and lease agreement.(xiv)Recent Accounting GuidanceFASBFinancial Accounting Standards Board ("FASB") issued ASU 2014-09, Accounting Standards Update ("ASU") No. 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”2014-9”), which is the new comprehensive revenue recognition standard that supersedes all existing revenue recognition guidance under U.S. GAAP. The Company adopted ASU 2014-092014-9 on January 1, 2018 using the modified retrospective method and the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The financial information for comparative prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The effect of adopting ASU 2014-092014-9 in the current annual reporting period2018 as compared with the guidance that was in effect before the change is immaterial. The Company’s internal control framework did not materially change, but existing internal controls were modified due to certain changes to business processes and systems to support the new revenue recognition standard as necessary. The Company continues to expect the impact of the adoption of the new standard to be immaterial to its net income and its internal control framework on an ongoing basis.64 In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”) that changes the accounting for certain aspects of share-based payments to employees. The newthis guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified asdid not have a financing activity apart from other income tax cash flows. The standard also allows companies to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activitymaterial effect on the cash flows statement and provides an accounting policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within such annual reporting periods with early adoption permitted. The Company elected to early adopt the new guidance in the fourth quarterCompany’s consolidated financial statements.2017-01, 2017-1, Business Combinations (Topic(Topic 805) – Clarifying the Definition of a Business(“ (“ASU 2017-01”2017-1”). ASU 2017-012017-1 finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly. The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance on January 1, 2018. The adoption of this guidance in 2018 did not have a material effect on the Company’s consolidated financial statements.2017-09, 2017-9, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,, (“ASU 2017-09”2017-9”). ASU 2017-092017-9 requires entities to apply modification accounting to changes made to a share-based payment award. The new guidance specifies that entities will apply modification accounting to changes to a share-based payment award only if any of the following are not the same immediately before and after the change: 1) The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used), 2) the award’s vesting conditions, and 3) the award’s classification as an equity or liability instrument. ASU 2017-092017-9 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within such annual periods, with early adoption permitted. The Company adopted this guidance on January 1, 2018. The adoption of this guidance in 2018 did not have a material effect on the Company’s consolidated financial statements.2017-04, 2017-4, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(“ (“ASU 2017-04”2017-4”). This amendment simplifies the manner in which an entity is required to test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendment simplifies this approach by having the entity (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company elected to early adopt the new guidance in the fourth quarter of fiscal year 2018. The adoption of this guidance in 2018 did not have a material effect on the Company’s consolidated financial statements.65 Recent Accounting Guidance Not Yet Adoptedwill requirerequires most lessees to recognize a majority of the company’s leases on the balance sheet, which will increaseincreases reported assets and liabilities. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases;Leases; and ASU No. 2018-11, Targeted Improvements.Improvements. The new standard establishes a right-of-useROU model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will beare classified as finance or operating, with classification affecting the pattern and classification of expensehas not early adopted this guidance, and therefore is adopting this guidance on January 1, 2019, and will useutilizing the optional transition method approach with an effective date of January 1, 2019. Consequently, financial information prior to the effective date as our date of initial application. Consequently, financial information willwas not be updated and the disclosures required under the new standard willare not be provided for dates and periods prior to the dateeffective date. There were 0 cumulative effect adjustments to retained earnings as part of adoption. The Company developed a preliminary implementation plan and reviewed historical lease agreements in order to quantifyelected the impact of adoption. Based upon the preliminary implementation plan, the Company expects the adoption of ASU 2016-02 will have a material impact on the consolidated balance sheet due to the recognition of the ROU assets and lease liabilities. The adoption of ASU 2016-02 is not expected to have a material impact on the consolidated statement of income or consolidated statement of cash flow. However, the Company continues to perform the necessary reviews and other implementation considerations, including an evaluation of the incremental borrowing rate, in order to appropriately quantify the changes. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate operating leases and (2) financial statement disclosures. We do not expect a significant change in our leasing activities between now and adoption. A range of undiscounted ROU assets and lease liabilities at January 1, 2019 is $28 million to $31 million. We expect to recognize operating lease ROU assets and lease liabilities that reflect the present value of these future payments. The Company plans adopt this guidance using the optional transition method. The new standard also providesavailable practical expedients, for an entity’s existing and ongoing accounting and we expect to adopt the package of practical expedients as well asincluding the practical expedient to not separate lease and non-lease components of ourits leases and the short-term lease practical expedient.(“ (“ASU 2016-13”). ASU 2016-13 introduces the current expected credit losses methodology (“CECL”) for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for which the fair value option has been elected, or loans and receivables between entities under common control. ASU 2016-13 is effective for public entities for fiscal yearyears beginning after December 15, 2019, including interim periods within thatthose fiscal year.years. Early adoption is permitted. The Company is currently evaluating the impact on the Company’s financial statements of adopting this guidance but thisThis guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.JuneAugust 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements2018-15, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to Nonemployee Share Based Payment Accounting, (“develop or obtain internal use software. ASU 2018-07”). ASU 2018-07 requires entities to apply similar accounting for share-based payment transactions with non-employees as with share-based payment transactions with employees. ASU 2018-072018-15 is effective for public business entities for fiscal yearyears beginning after December 15, 2018, including2019, and interim periods within thatthose fiscal year.years. Early adoption is permitted. The Company is currently evaluating the impact on the Company’spermitted, including adoption in any interim period for which financial statements of adoptinghave not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance but thisis first applied or retrospectively. This guidance is not expected to have a material impact on the Company’s financial position, results of operations or internal control framework.66 2.Revenuefor the year ended December 31, 2018 iswas as follows (in thousands):Years ended December 31, 2019 2018 Coordination of Benefits $ 397,095 Coordination of Benefits $ 404,123 $ 397,095 Payment Integrity 144,063 Payment Integrity 162,194 144,063 Total Population Management 57,132 Population Health Management Population Health Management 60,078 57,132 Total $ 598,290 Total $ 626,395 $ 598,290 1 to 5multiple years with the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery of verified commercial insurance coverage information; (c) the identification of paid claims where another third party is liable; and (d) the identification and enrollment of Medicaid members who have access to employer insurance. Most of these types of service contracts contain multiple promises, all of which are not distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration includes identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Generally, coordination of benefit contract payment terms are not standardized within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.Analytical services consists of payment integrity services and total population management.severalmultiple years with the option to renew. Types of service contracts could include: (a) services designed to ensure that healthcare payments are accurate and appropriate; and (b) theTotal populationtotal population health management contracts have distinct performance obligations related to software license and implementation fees which have historically been recognized as revenue ratably over the life of the contract. Lastly, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within one to three years. Upon adoption of ASC 606 in 2018, revenue for software licenses is recognized at the beginning of the license period when control is transferred as the license is installed and revenue for implementation fees is recognized when control is transferred over time as the implementation is being performed. As the performance obligation is deemed to have been satisfied and control transferred to our customers for software licenses and implementation fees on or before December 31, 2017, the Company recorded a decrease to deferred revenue and an increase to opening retained earnings of $1.1 million, net of tax, as of January 1, 2018 for the cumulative impact of adopting ASC 606. Generally, total population health management contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g., 30, 45, 60 days) from the date of invoice. A portion of the payment received may relate to future performance obligations and will result in an increase to deferred revenue until the obligation has been met.67 for the year ended December 31, 2018 is as follows (in thousands):Years ended December 31, 2019 2018 Commercial $ 323,150 Commercial $ 302,489 $ 323,150 State 233,921 State 257,685 233,921 Federal 41,219 Federal 66,221 41,219 Total $ 598,290 Total $ 626,395 $ 598,290 $6.4$5.6 million as of December 31, 2017;2018; $1.1 million, net of tax, was recorded as a decrease to deferred revenue as of January 1, 2018 as discussed above; and $5.3 million of this amount was recognized as revenue during the year ended December 31, 2018. Approximately $5.6 million of the December 31, 2018 deferred revenue balance was recognized as revenue during the year ended December 31, 2019. Deferred revenue was approximately and $5.6$4.2 million as of December 31, 2018.2019. Deferred revenue is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets.3.Fair Value Financial InstrumentsFinancial instruments (principally cash in the amount of $158.6 million, which was funded through cash on hand. The purchase price is subject to certain post-closing purchase price adjustments and cash equivalents, accounts receivable, accounts payablethe initial purchase price allocation as of the date of acquisition was based on a preliminary valuation. Estimates and accrued expenses)assumptions for which the Company is still obtaining or evaluating information are carried at cost,subject to change up to one year from the acquisition date as additional information becomes available and adjustments may require a change in the amounts allocated to goodwill during the periods in which approximates fair value due to the short-term maturity of these instruments. adjustments are determined.Company’s long-term credit facility is carried at cost, which due to the variable interest rate associated with the revolving credit facility, cost approximates its fair value. The Company has no Level 1 or Level 2 financial instruments and there were no transfers between Level 1 or Level 2 financial instruments. Included in Other liabilities on the Consolidated Balance Sheet is a contingent consideration liability of $0 and $35 thousand at December 31, 2018 and 2017, respectively, isintangible assets are valued using a Monte Carlo simulationvarious methods which require several judgments, including growth rates, discount rates, customer attrition rates, and includes unobservable inputs such as expected levels of revenues, earnings, cash flows and discounttax rates. The liabilityintangible assets are amortized over their estimated useful lives on a straight-line basis. Goodwill was classified as level 3 withindetermined based on the difference between the purchase price and the fair values of the tangible and intangible assets acquired. Goodwill recognized from the acquisition was the result of synergies to be realized from future revenue growth. Goodwill is deductible for tax purposes, has an indefinite useful life and will be included in the Company’s annual impairment testing or between annual tests if an indicator of impairment exists.hierarchy. Changesof the assets acquired and the liabilities assumed as of December 23, 2019, the effective date of the acquisition, was as follows (in thousands):Cash and cash equivalents $ 9,400 Accounts receivable 9,188 Prepaid expenses 129 Property and equipment 2,878 Intangible assets 68,400 Goodwill 81,545 Other assets 489 Accounts payable and accrued liabilities (13,395) Total purchase price $ 158,634 Useful Life
(in years)Customer relationships 12 $ 67,000 Trade name 3 1,400 Fair value of intangibles acquired $ 68,400 unobservable inputsCompany’s consolidated financial statements and are not considered material for the year ended December 31, 2019.Years ended December 31, 2019 2018 (pro forma, in thousands) (unaudited) Revenue $ 675,259 $ 650,203 Net income $ 92,845 $ 60,011 value measurementvalues as of this instrument could result in aSeptember 16, 2019. The Company allocated the purchase price, net of cash acquired, to the following significant change inassets: intellectual property subject to amortization of $6.0 million, and goodwill of $30.2 million which represents the fair value measurement.excess purchase price over the net identifiable tangible and intangible assets. There were no sales, settlements, purchases, issuances and/or transfersadditional material allocations to assets and liabilities. The intangible assets are valued using various methods which require several judgments, including growth rates, discount rates, expected levels of revenues, earnings, cash flows and tax rates. The intangible assets are amortized over their estimated useful lives on a straight-line basis and are not expected to be deductible for tax purposes. The goodwill recognized from thelevel 3 instrument inbusiness acquisition for the year ended December 31, 2018, or 2017. There were no other level 3 instruments.interim periods thereafter, and for the year ended December 31, 2019, have not been presented and are not considered material. The results of VitreosHealth's operations since September 16, 2019 have been included in the Company's consolidated financial statements and are not considered material.4.Acquisitions(a)Eliza Holding Corp.68 The allocationWe incurred acquisition related costs of the purchase price$4.5 million related to the fair value ofEliza acquisition for the assets acquiredyear ended December 31, 2017. The costs include consulting, legal and the liabilities assumed as of April 17, 2017, the effective date of the acquisition, is as follows (in thousands):Cash and cash equivalents $ 435 Accounts receivable 8,902 Prepaid expenses 1,427 Property and equipment 1,146 Intangible assets 76,240 Goodwill 107,754 Other assets 63 Accounts payable (2,620 ) Deferred tax liability (19,681 ) Other liabilities (2,057 ) Total purchase price $ 171,609 The purchase price allocated to the intangibles acquired was as follows (in thousands): Useful Life
(in years) Customer relationships 15 $ 56,200 Intellectual property 6 19,600 Trade name 1.5 310 Restrictive covenants 1 130 Fair value of intangibles acquired $ 76,240 Acquisitiontransaction costs, and have been recorded toin selling, general and administrative expenses were as follows (in thousands):Other operating expenses - consulting fees $ 3,515 Other operating expenses - legal fees 832 Other operating expenses - transaction costs 185 Acquisition-related costs $ 4,532 (b)EssetteOn September 2, 2016, the Company acquired the outstanding capital stock of Essette for a purchase price of $24.2 million funded by cash on hand. The immaterial results of Essette’s operations since September 2, 2016 have been included in the Company’s consolidated financial statements.69 5.Property and Equipment December 31, 2018 2017 Equipment $ 95,350 $ 106,768 Leasehold improvements 7,547 8,357 Building 8,624 8,624 Building improvements 14,825 14,546 Land 2,769 2,769 Furniture and fixtures 9,404 10,352 Capitalized software 131,819 125,655 270,338 277,071 Less: accumulated depreciation and amortization (175,903 ) (178,490 ) Property and equipment, net $ 94,435 $ 98,581 December 31, 2018 2017 2016 Depreciation and amortization expenses related to property and equipment $ 33,254 $ 27,515 $ 24,882 70 December 31, 2019 2018 Equipment $ 90,347 $ 95,350 Leasehold improvements 8,042 7,547 Building 9,674 8,624 Building improvements 16,305 14,825 Land 2,949 2,769 Furniture and fixtures 8,685 9,404 Capitalized software 134,864 131,819 270,866 270,338 Less: accumulated depreciation and amortization (183,919) (175,903) Property and equipment, net $ 86,947 $ 94,435 6.Intangible AssetsYears ended December 31, 2019 2018 2017 Depreciation and amortization expense related to property and equipment $ 33,293 $ 33,254 $ 27,515 Gross Carrying Amount Accumulated
Amortization Net Carrying Amount Weighted Average Amortization Period in Years December 31, 2018 Gross Carrying Amount Accumulated
AmortizationNet Carrying Amount Weighted Average
Amortization Period in YearsDecember 31, 2019 December 31, 2019 Customer relationships $ 156,790 $ (104,740 ) $ 52,050 12.8 Customer relationships $ 135,290 $ (21,637) $ 113,653 12.1 Trade names 16,246 (16,215 ) 31 0.7 Trade names 1,536 (147) 1,389 3.0 Intellectual property 21,700 (6,670 ) 15,030 4.1 Intellectual property 27,700 (10,893) 16,807 3.7 Restrictive covenants 263 (234 ) 29 0.7 Total $ 194,999 $ (127,859 ) $ 67,140 Total $ 164,526 $ (32,677) $ 131,849 Gross Carrying Amount Accumulated
Amortization Net Carrying Amount Weighted Average Amortization Period in Years December 31, 2017 Customer relationships $ 159,290 $ (89,106 ) $ 70,184 11.3 Trade names 16,246 (13,916 ) 2,330 1.0 Intellectual property 21,700 (2,874 ) 18,826 5.2 Restrictive covenants 263 (121 ) 142 1.3 Total $ 197,499 $ (106,017 ) $ 91,482 Gross Carrying Amount Accumulated
AmortizationNet Carrying Amount Weighted Average
Amortization Period in YearsDecember 31, 2018 Customer relationships $ 156,790 $ (104,740) $ 52,050 12.8 Trade names 16,246 (16,215) 31 0.7 Intellectual property 21,700 (6,670) 15,030 4.1 Restrictive covenants 263 (234) 29 0.7 Total $ 194,999 $ (127,859) $ 67,140 Year ending December 31, Year ending December 31, Amortization Year ending December 31, Amortization 2019 $ 9,195 2020 7,664 2020 $ 14,914 2021 7,197 2021 14,447 2022 7,197 2022 14,439 2023 4,822 2023 11,605 2024 2024 10,180 Thereafter 31,065 Thereafter 66,264 Total $ 67,140 Total $ 131,849 2017 and 2016,2017, amortization expense related to intangible assets was $9.7 million, $24.3 million, $22.6 million, and $20.2$22.6 million, respectively. In addition, during the year ended December 31, 2018,2019, some of the intangible assets became fully amortized.7.Balance at December 31, 2018 Accounts Payable, Accrued Expenses and Other Liabilities$487,617 Vitreos acquisition 30,189 Accent acquisition 81,545 Balance at December 31, 2019 $ 599,351 thousands)thousands): December 31,
2018 December 31,
2017Accounts payable, trade $ 12,394 $ 19,330 Accrued compensation and other 42,833 24,072 Accrued operating expenses 19,675 18,498 Total accounts payable, accrued expenses and other liabilities $ 74,902 $ 61,900 71 December 31,
2019December 31,
2018Accounts payable, trade $ 12,246 $ 12,394 Accrued compensation and other 36,827 42,833 Accrued operating expenses 42,045 19,675 Current portion of lease liabilities 6,629 — Total accounts payable, accrued expenses and other liabilities $ 97,747 $ 74,902 8.Income Taxesthousands)thousands): December 31, 2018 2017 2016 December 31, Current tax expense: 2019 2018 2017 Current tax expense (benefit): Current tax expense (benefit): Federal $ 2,965 $ 17,008 $ 16,274 Federal $ 6,167 $ 2,965 $ 17,008 State (1,433 ) 3,201 2,929 State 3,678 (1,433) 3,201 Total current tax expense: 1,532 20,209 19,203 Total current tax expense: 9,845 1,532 20,209 Deferred tax expense (benefit): Deferred tax expense (benefit): Federal (2,650 ) (19,425 ) (7,115 ) Federal 6,219 (2,650) (19,425) State (854 ) (983 ) (253 ) State 1,074 (854) (983) Total deferred tax benefit: (3,504 ) (20,408 ) (7,368 ) Total deferred tax expense (benefit): Total deferred tax expense (benefit): 7,293 (3,504) (20,408) Total income tax expense (benefit) $ (1,972 ) $ (199 ) $ 11,835 Total income tax expense (benefit) $ 17,138 $ (1,972) $ (199) thousands)thousands): December 31, December 31, 2018 % 2017 % 2016 % 2019 % 2018 % 2017 % Computed at federal statutory rate $ 11,134 21.0 $ 13,949 35.0 $ 17,315 35.0 Computed at federal statutory rate $ 21,916 21.0 $ 11,134 21.0 $ 13,949 35.0 State and local tax expense, net of federal benefit 2,367 4.5 2,226 5.6 2,448 5.0 State and local tax expense, net of federal benefit 3,625 3.4 2,367 4.5 2,226 5.6 Net permanent deduction and credit tax benefits from current year (1,143 ) (2.2 ) (1,513 ) (3.8 ) (1,509 ) (3.1 ) Net permanent deduction and credit tax benefits from current year (1,166) (1.1) (1,143) (2.2) (1,513) (3.8) Net permanent deduction and credit tax benefits from prior years - - - - (6,213 ) (12.6 ) Net uncertain tax positions excluding current permanent deduction and credit benefits (3,756 ) (7.0 ) (373 ) (0.9 ) - - Net uncertain tax positions excluding current
permanent deduction and credit benefits(937) (0.8) (3,756) (7.0) (373) (0.9) Subsidiary basis write off (3,423 ) (6.5 ) - - - - Subsidiary basis write off — — (3,423) (6.5) — — Equity compensation net tax windfall (2,890 ) (5.5 ) - - - - Equity compensation net tax windfall (8,634) (8.3) (2,890) (5.5) — — State tax apportionment changes (3,737 ) (7.0 ) - - - - State tax apportionment changes — — (3,737) (7.0) — — Disallowed executive compensation 682 1.3 - - - - Disallowed executive compensation 1,750 1.6 682 1.3 — — Tax Reform - revaluation of deferrals - - (15,130 ) (38.0 ) - - Tax Reform - revaluation of deferrals — — — — (15,130) (38.0) Acquisition adjustments (1,226 ) (2.3 ) (1,003 ) (2.5 ) - - Acquisition adjustments — — (1,226) (2.3) (1,003) (2.5) Acquisition costs - - 697 1.7 203 0.4 Acquisition costs 245 0.3 — — 697 1.7 Other, net 20 - 948 2.4 (409 ) (0.8 ) Other, net 339 0.3 20 — 948 2.4 Total income tax expense $ (1,972 ) (3.7 ) $ (199 ) (0.5 ) $ 11,835 23.9 Total income tax expense $ 17,138 16.4 $ (1,972) (3.7) $ (199) (0.5) The Company’s effective tax rate decreased to (3.7%) for the year ended December 31, 2018 from (0.5%) for the year ended December 31, 2017, primarily from favorable tax benefits relating to current year credits, equity compensation, subsidiary basis write-off, prior year state apportionment changes, uncertain tax position releases and acquisition adjustments. no adjustments, to any previously recorded provisional amounts, relatingcurrent period foreign income tax expense and includes global intangible low-taxed income as current period income tax expense, both of which are not material to the Tax Cuts and Jobs Act which was enacted on December 22, 2017. During the year ended December 31, 2018 and in conjunction with the Settlement Agreement in Note 15 to the Consolidated Financial Statements, the Company determined that the common stockoverall financial statements.thousands)thousands): December 31, December 31, 2018 2017 2019 2018 Deferred tax assets: Deferred tax assets: Stock-based compensation $ 9,545 $ 9,980 Stock-based compensation $ 8,056 $ 9,545 Goodwill and intangible assets 5,874 6,524 Goodwill and intangible assets 5,516 5,874 Allowance for doubtful accounts 3,537 3,822 Accounts receivable, net Accounts receivable, net 4,442 3,537 Deferred rent 696 909 Deferred rent — 696 Tenant improvements 569 669 Tenant improvements — 569 Estimated liability for appeals 5,632 7,775 Liability for appeals Liability for appeals 931 5,632 Net operating loss carry-forwards 1,527 3,358 Net operating loss carry-forwards 2,644 1,527 Tax credit carry-forwards 4,076 3,667 Tax credit carry-forwards 1,815 4,076 Property and equipment 49 256 Property and equipment 139 49 Accrued expenses and other 7,839 3,615 Accrued expenses and other 5,054 7,839 ROU Liability ROU Liability 5,799 — Total deferred tax assets 39,344 40,575 Total deferred tax assets 34,396 39,344 Deferred tax liabilities: Deferred tax liabilities: Goodwill and intangible assets 43,400 48,186 Goodwill and intangible assets 42,894 43,400 Section 481(a) adjustment 5,073 7,413 Section 481(a) adjustment 2,551 5,073 Prepaid expenses 668 624 Prepaid expenses 734 668 Capitalized software cost 8,688 6,341 Capitalized software cost 9,068 8,688 ROU Asset ROU Asset 4,736 — Total deferred tax liabilities 57,829 62,564 Total deferred tax liabilities 59,983 57,829 Total net deferred tax liabilities $ 18,485 $ 21,989 Total net deferred tax liabilities $ 25,587 $ 18,485 inin Other liabilitiesLiabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately $4.8$4.2 million and $8.2$4.8 million as of December 31, 20182019 and 2017,2018, respectively, net of the federal benefit for state issues that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other Liabilities on the Consolidated Balance Sheets are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of $0.7 million and $0.6$0.7 million as of December 31, 20182019 and 2017,2018, respectively. HMS includes interest expense and penalties in the provision for income taxes in the Consolidated Statements of Income. The amount of interest expense, net of federal and state income tax benefits, and penalties in the Consolidated Statements of Income for the years ended December 31, 2019, 2018, and 2017 and 2016 was $0.04 million, $0.1 million $0.02 million and $0.2$0.02 million, respectively. The Company believes it is reasonably possible the amount of unrecognized tax benefits may decrease by $1.7 million during 2019,2020, due to the expiration of the statute of limitations in various jurisdictions.thousands)thousands): 2018 2017 2019 2018 Unrecognized tax benefits at January 1 $ 8,234 $ 7,433 Unrecognized tax benefits at January 1 $ 4,839 $ 8,234 Additions for tax positions taken during prior periods 399 599 Additions for tax positions taken during prior periods 543 399 Additions for tax positions taken during current period including amended prior years 360 1,174 Additions for tax positions taken during current period including amended prior years 409 360 Reductions relating to settlements with taxing authorities (2,227 ) - Reductions relating to settlements with taxing authorities — (2,227) Reductions related to the expiration of statutes of limitations (1,927 ) (972 ) Reductions related to the expiration of statutes of limitations (1,542) (1,927) Unrecognized tax benefits at December 31 $ 4,839 $ 8,234 Unrecognized tax benefits at December 31 $ 4,249 $ 4,839 2018,2019, related to tax benefits recognized for current period R&D Credits.U.S. Research and Experimentation Tax Credits pursuant to IRC Section 41. At December 31, 2018,2019, HMS had federal and state pre-tax net operating loss and tax credit carryforwards of approximately $24.3$30.3 million and $4.1$1.8 million, respectively, which will be available to offset future taxable income. If not used, these net operating loss and tax credit carryforwards will begin to expire in 2020 and 2019,2028, respectively. The Company files income tax returns with the U.S. Federal government and various state territory, and local jurisdictions.jurisdictions and will file income tax returns in certain foreign jurisdictions as a result of its acquisition of VitreosHealth. HMS is generally no longer subject to U.S. Federal income tax examinations for years before 2013. The Company settled an audit by the Internal Revenue Service for years 2013 and 2014 which resulted in immaterial assessments and recognition of prior unrecognized tax benefits. HMS operates in a number of state, territoryforeign and local jurisdictions. Accordingly, HMS is subject to state, territorylocal, and localforeign income tax examinations based uponon the various statutes of limitations in each jurisdiction. Previously recognized Texas refund claims were examined by the state and resulted in a favorable apportionment method change for all open tax years.73 9.Estimated Liability for AppealsRAC contractsRecovery Audit Contractor (“RAC”) contract with CMSthe Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s PIpayment integrity services revenue), providers have the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer.estimated liability for appeals is as follows (in thousands): Original
RAC contract RAC 4
contract Commercial contracts Total Balance at December 31, 2016 $ 28,427 $ - $ 2,328 $ 30,755 Provision 2,054 - 2,729 4,783 Appeals found in providers favor (2,665 ) - (2,086 ) (4,751 ) Balance at December 31, 2017 $ 27,816 $ - $ 2,971 $ 30,787 Provision 108 20 2,038 2,166 Appeals found in providers favor (108 ) - (2,686 ) (2,794 ) Release of estimated liability (8,436 ) - - (8,436 ) Balance at December 31, 2018 $ 19,380 $ 20 $ 2,323 $ 21,723 Original
RAC contractRAC 4
contractCommercial
contractsTotal Balance at December 31, 2017 $ 27,816 $ — $ 2,971 $ 30,787 Provision 108 20 2,038 2,166 Appeals found in providers favor (108) — (2,686) (2,794) Release of estimated liability (8,436) — — (8,436) Balance at December 31, 2018 $ 19,380 $ 20 $ 2,323 $ 21,723 Provision — 2,026 7,347 9,373 Appeals found in providers favor — (440) (7,706) (8,146) Release of estimated liability (19,380) — — (19,380) Balance at December 31, 2019 $ — $ 1,606 $ 1,964 $ 3,570 Thecontinuesdetermined, based on communications, that there was no further contractual obligation to assess the remaining CMS liability forwith respect to the original Medicare RAC contract to determine management’s best estimateas of June 30, 2019. Accordingly, the Company released its remaining estimated liability for any findings which have been previously adjudicated priorof $19.4 million and net receivables during the second quarter of 2019. As a result of the release, there was a $10.5 million increase to the expiration ofCompany's revenue for the contract. Any future changes or modifications to the Medicare RAC contracts or to the Company’s commercial customer contracts may require the Company to apply different assumptions that could materially affect both the Company’s revenue and estimated liability for appeals in future periods.three months ended June 30, 2019.10.Credit AgreementCredit Agreement "Credit Agreement")with certain lenders and Citibank, N.A. as administrative agent. The Credit Agreement originally provided for an initial $500 million five-yearfive-year revolving credit facility maturing on May 3, 2018.2022.2022 (the "Amended Revolving Facility"). The availability of funds under the amended revolving credit facilityAmended Revolving Facility includes sublimits for (a) up to $50 million for the issuance of letters of credit and (b) up to $25 million for swingline loans. In addition, the Company may increase the commitments under its revolving credit facilitythe Amended Revolving Facility and/or add one or more incremental term loan facilities, provided that such incremental facilities do not exceed in the aggregate the sum of (i) the greater of $120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (ii) an additional amount so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, subject to obtaining commitments from the lenders therefor and meeting certain other conditions.74 During the year endedAs of December 31, 2018, no principal payments were made against the Company’s then existing revolving credit facility. As of2019 and December 31, 2018, the outstanding principal balance underdue on the amended revolving credit facilityAmended Revolving Facility was $240.0$240 million.§a base rate determined by reference to the greatest of (a) the prime or base commercial lending rate of the administrative agent as in effect on the relevant date, (b) the federal funds effective rate plus 0.50% and (c) the one-month LIBO Rate plus 1.00%, plus an interest margin ranging from 0.50% to 1.00% based on the Company’s consolidated leverage ratio for the applicable period; or§an adjusted LIBO Rate, equal to the LIBO Rate for the applicable interest period multiplied by the statutory reserve rate (equal to (x) one divided by (y) one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) established by the Board of Governors of the Federal Reserve System of the United States), plus an interest margin ranging from 1.50% to 2.00% based on the Company’s consolidated leverage ratio for the applicable period.revolving credit facilityAmended Revolving Facility during the term of the Credit Agreement ranging from 0.375% to 0.250% per annum based on the Company’s consolidated leverage ratio and letter of credit fees equal to 0.125% per annum on the aggregate face amount of each letter of credit, as well as customary agency fees.Company’s obligations under the Credit Agreement areAmended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible assets of the Company and certain subsidiaries of the Company. The Credit AgreementAmended Revolving Facility contains certain restrictive covenants, which affect, among other things, the ability of the Company and its subsidiaries to incur indebtedness, create liens, make investments, sell or otherwise dispose of assets, engage in mergers or consolidations with other entities, and pay dividends or repurchase stock. The Company is also required to comply, on a quarterly basis, with two financial covenants: (i) a minimum interest coverage ratio of 3:00:1:00,3.00:1.00, and (ii) a maximum consolidated leverage ratio of 4.75:1.00 through December 2019 and 4.25:1.00 from and after January 2020. The consolidated leverage ratio is subject to a step-up to 5.25:1.00 for four full consecutive fiscal quarters following a permitted acquisition or similar investment. As of December 31, 2018,2019, the Company was in compliance with all terms of the Credit Agreement.arewere as follows (in thousands): Years ended December 31, Years ended December 31, 2018 2017 2016 2019 2018 2017 Interest expense $ 9,294 $ 7,170 $ 4,837 Interest expense $ 9,460 $ 9,294 $ 7,170 Commitment fees 1,189 1,359 1,518 Commitment fees 638 1,189 1,359 The Company deferred $2.3 million of financing fees associated with the amendment. 20182019 and 2017,2018, the unamortized balance of deferred financingorigination fees and debt issuance costs was $2.2$1.7 million and $2.8$2.2 million, respectively. The Company amortized deferred financing costs of $0.6 million, $2.3$0.6 million and $2.1$2.3 million in the years ended December 31, 2019, 2018 and 2017, and 2016.As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against its revolving credit facility and expires June 30, 2019.75 11.EquityFollowing are ActivityCompany’s quarterly repurchasesprevious share repurchase program, which expired in November 2019 and had $29.9 million remaining at the time of expiration. We did not repurchase shares of common stock forduring fiscal year 2018, all2019.Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program January 1, 2018 to March 31, 2018 383,801 $ 15.50 383,801 $ 29,933,055 April 1, 2018 to June 30, 2018 - - - - July 1, 2018 to September 30, 2018 - - - - October 1, 2018 to December 31, 2018 - - - - Total 383,801 $ 15.50 383,801 $ 29,933,055 (b) Preferred Stock2018, no2019, 0 preferred stock had been issued.12.Employee Benefit Plan and 2016, HMS matched 100% of the first 3% of pay contributed by each eligible employee and 50% on the next 2% of pay contributed. These matching contributions vest immediately and are not in the form of the Company’s common stock.2017 and 2016,2017, HMS contributed $7.7 million, $7.3 million $5.9 million and $4.8$5.9 million, respectively, to the 401(k) Plan in the form of matching contributions.13.Stock-Based Compensationlong-termlong- term incentive award plans was as follows (in thousands)(in thousands): Years ended December 31, Years ended December 31, 2018 2017 2016 2019 2018 2017 Cost of services-compensation $ 7,421 $ 7,354 $ 3,805 Cost of services-compensation $ 8,887 $ 7,421 $ 7,354 Selling, general and administrative 14,086 16,789 9,472 Selling, general and administrative 13,014 14,086 16,789 Total $ 21,507 $ 24,143 $ 13,277 Total $ 21,901 $ 21,507 $ 24,143 and 2016 was $16.7 million, $9.1 million and $4.0 million, and $4.1 million, respectively.76 $10.3 million and $6.9$10.3 million for the years ended December 31, 2019, 2018 and 2017, and 2016, respectively.2018 2019 (in thousands, except for weighted average exercise price and weighted average remaining contractual terms): Number of Options Weighted
Average
Exercise
Price Weighted
Average-
Remaining
Contractual
Terms Aggregate-
Intrinsic
Value Outstanding balance at December 31, 2017 5,554 $ 17.35 Number of Options Weighted
Average
Exercise
PriceWeighted
Average- Remaining
Contractual
TermsAggregate-
Intrinsic
ValueOutstanding balance at December 31, 2018 Outstanding balance at December 31, 2018 4,402 $ 17.07 Granted 1,010 19.58 Granted 640 38.61 Exercised (2,017 ) 19.14 Exercised (2,436) 16.20 Forfeitures (114 ) 17.74 Forfeitures (187) 21.21 Expired (31 ) 22.34 Expired (8) 23.59 Outstanding balance at December 31, 2018 4,402 17.07 5.80 $ 48,339 Outstanding balance at December 31, 2019 Outstanding balance at December 31, 2019 2,411 23.43 7.28 $ 20,242 Expected to vest at December 31, 2018 1,481 $ 18.60 8.22 $ 14,119 Exercisable at December 31, 2018 2,370 $ 15.87 3.83 $ 29,068 Expected to vest at December 31, 2019 Expected to vest at December 31, 2019 1,070 $ 28.20 8.5 $ 5,979 Exercisable at December 31, 2019 Exercisable at December 31, 2019 968 $ 17.08 5.6 $ 12,121 20182019 and 2017,2018, the Company had 1,999,0691,400,233 and 2,372,682,1,999,069, respectively, in unvested options with a weighted-average-grant-date fair value per share of $7.27$10.13 and $6.39,$7.27, respectively. The weighted-average-grant-date fair value per share of the stock options granted during the years ended December 31, 2019, 2018 and 2017 was $13.86, $7.52 and 2016 was $7.52, $7.66, and $5.55, respectively. The weighted-average-grant-date fair value per share of stock options vested during the year ended December 31, 20182019 was $6.18.$7.36. The weighted-average-grant-date fair value per share of the stock options forfeited during the years ended December 31, 2019, 2018 and 2017 was $7.94, $6.86 and 2016 was $6.86, $5.24, and $6.26, respectively. Year ended December 31, 2018 2017 2016 Expected dividend yield - - - Risk-free interest rate 2.7 % 1.8 % 1.2 % Expected volatility 42.4 % 44.2 % 44.0 % Expected life (years) 6.0 5.0 4.9 77 Year ended December 31, 2019 2019 2018 2017 Expected dividend yield — % — % — % Risk-free interest rate 2.5 % 2.7 % 1.8 % Expected volatility 41.1 % 42.4 % 44.2 % Expected life (years) 6.4 6.0 5.0 and 2016 market condition option grants on the date of grant using a Monte-Carlo simulation model. There were no market condition awards granted in 2019 or 2018. Assumptions are set forth in the following table: Year ended December 31, Year ended December 31, 2018 2017 2016 2019 2018 2017 Expected dividend yield - - - Expected dividend yield — % — % — % Risk-free interest rate - 2.2 % 1.6 % Risk-free interest rate — % — % 2.2 % Expected volatility - 52.5 % 40.5 % Expected volatility — % — % 52.5 % Expected life (years) - 6.5 4.9 Expected life (years) 0 6.5 2017 and 2016,2017, the Company issued 2,435,648, 2,017,442 172,326 and 510,512172,326 shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $38.3$39.3 million, $2.7$38.4 million and $2.9$2.7 million, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 and 2016 was $45.6 million, $27.6 million and $0.5 million, and $6.3 million, respectively.2018,2019, there was approximately $5.5$4.3 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 0.90.8 years.$13.8 million and $6.4$13.8 million for the years ended December 31, 2019, 2018 and 2017, and 2016, respectively.20182019 (in thousands, except for weighted average grant date fair value per unit): Number of
Units Weighted Average
Grant Date Fair
Value per UnitOutstanding balance at December 31, 2017 1,346 $ 17.65
Number of UnitsWeighted Average
Grant Date Fair
Value per UnitOutstanding balance at December 31, 2018 Outstanding balance at December 31, 2018 1,488 $ 17.60 Granted 766 16.80 Granted 487 34.02 Vesting of restricted stock units, net of units withheld for taxes (371 ) 17.06 Vesting of restricted stock units, net of units withheld for taxes (406) 16.65 Units withheld for taxes (163 ) 17.06 Units withheld for taxes (201) 16.65 Forfeitures (90 ) 17.31 Forfeitures (129) 21.32 Outstanding balance at December 31, 2018 1,488 $ 17.60 Outstanding balance at December 31, 2019 Outstanding balance at December 31, 2019 1,239 $ 21.37 2018, 1,259,0032019, 974,050 restricted stock units remained unvested and there was approximately $9.2$9.9 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 0.870.84 years. During the years ended December 31, 2019, 2018 2017 and 2016,2017, the Company’s vested restricted stock units had a fair value of $10.7 million, $9.9 million, $9.5 million, and $6.8$9.5 million, respectively. The weighted average grant date fair value per share of the restricted stock units vested during the years ended December 31, 2019, 2018 and 2017 was $16.65, $17.06 and 2016 was $17.06, $15.39, and $18.64, respectively. The weighted average grant date fair value per share of the restricted stock units forfeited during the years ended December 31, 2019, 2018 and 2017 was $21.32, $17.31 and 2016 was $17.31, $15.37, and $16.95, respectively.78 14.Earnings per Sharefollowingfollowing table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Years ended December 31, 2018 2017 2016 Net income $ 54,989 $ 40,054 $ 37,636 Weighted average common shares outstanding-basic 83,625 83,821 84,221 Plus: net effect of dilutive stock options and restricted stock units 2,519 1,808 2,766 Weighted average common shares outstanding-diluted 86,144 85,629 86,987 Net income per common share-basic $ 0.66 $ 0.48 $ 0.45 Net income per common share-diluted $ 0.64 $ 0.47 $ 0.43 Years ended December 31 2019 2018 2017 Net income $ 87,224 $ 54,989 $ 40,054 Weighted average common shares outstanding-basic 87,222 83,625 83,821 Plus: net effect of dilutive stock options and restricted stock units 2,095 2,519 1,267 Weighted average common shares outstanding-diluted 89,317 86,144 85,088 Net income per common share — basic $ 1.00 $ 0.66 $ 0.48 Net income per common share — diluted $ 0.98 $ 0.64 $ 0.47 2017 and 2016:2017: (i) 509,617, 804,959 2,646,100 and 2,070,7712,646,100 stock options, respectively, and (ii) restricted stock units representing 2,564, 0 31,155 and 46,65131,155 shares of common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.15. and Contingencies(a) Lease CommitmentsThe Company primarily leases office space but also leases information technology equipment and software licenses under operating leases that expire on various dates through 2026. Additionally, the Company has nominal capital leases. Total lease expense, net of office space sublease income for the years ended December 31, 2018, 2017 and 2016 was $3.6 million, $5.1 million and $5.0 million, respectively.Minimum annual lease payments to be made under operating leases, net of $8.3 million office space sublease payments to be received, for each of the next five years ending December 31 and thereafter are as follows (in thousands): Operating Lease Payments 2019 $ 5,778 2020 5,420 2021 3,742 2022 2,531 2023 2,236 Thereafter 2,947 Total $ 22,654 (b) Litigation$60$60.0 million in damages to the Plaintiffs. On March 14, 2018, the Court held a hearing on the Company’s post-trial motion for an order granting it judgment notwithstanding the verdict or, alternatively, setting aside the jury’s award of damages. On June 27, 2018, prior to the Court issuing a decision on the motion, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with the Plaintiffs, John Alfred Lewis and Christopher Brandon Lewis. Pursuant to the terms of the Settlement Agreement, the Company paid $20$20.0 million to resolve all matters in controversy pertaining to the lawsuit. On July 5, 2018, the Court entered an order to discontinue the lawsuit pursuant to the Stipulation of Discontinuance with Prejudice filed by the parties.79 TheIn March 2018, the Company provided certain documents and information in March 2018 in response to the CID. HMS has not received any further requests for informationfrom the government in connection with this CID.The Company has movedIn May 2019, the Court heard oral arguments on the Company's motion to dismiss the complaint and thecomplaint. The motion is currently under consideration byremains pending before the Court. The Company continues to believe that this claim is without merit and intends to vigorously defend this matter.16.Customer ConcentrationStates.2017 and 20162017 no one individual Company customer accounted for more than 10% of the Company’s total revenue.2017 and 2016,2017, the Company’s ten largest customers represented 41.4%42.7%, 39.5%41.4% and 40.6%39.5% of HMS’ total revenue, respectively. Excluding those contracts that contain automatic renewal provisions or evergreen terms, the Company’s agreements with the ten current largest customers generally expire between 20192020 and 2026. In many instances, HMS provides services pursuant to agreements that may be renewed or subject to a competitive reprocurement process. Several of the Company’s contracts, including those with some of its largest customers, may be terminated for convenience.80 Year ended December 31, 2019 Operating lease cost $ 6,625 Finance lease cost: Amortization of right-of-use assets $ 202 Interest on lease liabilities 25 Total finance lease cost $ 227 17.Subsequent EventsYear ended December 31, 2019 Cash paid for amounts included in measurement of lease liabilities: Operating cash flows from operating leases $ 7,402 Operating cash flows from finance leases $ 24 Financing cash flows from finance leases $ 195 Right-of-use assets obtained in exchange for new lease liabilities: Operating leases $ 1,181 Finance leases $ 1,820 Year ended December 31, 2019 Operating Leases Operating lease right-of-use assets $ 17,493 Other current liabilities $ 6,269 Operating lease liabilities 14,881 Total operating lease liabilities $ 21,150 Finance Leases Other Assets $ 1,081 Other current liabilities $ 360 Other long-term liabilities 677 Total finance leases liabilities $ 1,037 Year ended December 31, Operating Leases Finance Leases 2020 $ 7,266 $ 399 2021 5,791 454 2022 3,546 246 2023 3,319 — 2024 2,833 — Thereafter 991 — Total lease payments 23,746 1,099 Less: Imputed interest 2,596 62 Total lease obligation $ 21,150 $ 1,037 Year ended December 31, Operating Leases 2019 $ 5,778 2020 5,420 2021 3,742 2022 2,531 2023 2,236 Thereafter 2,947 Total lease payments $ 22,654 14, 2019,13, 2020, the Compensation Committee of the Board of Directors approved approximately $21.3$24.5 million in stock option and restricted stock unit awards to employees. The awards generally will vest over three years and will be issued three business days subsequent to the filing of this 20182019 Form 10-K.18.Quarterly Financial Data (Unaudited)2018 First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Year Ended 2019 2019 First
QuarterSecond Quarter Third
QuarterFourth
QuarterYear Ended Revenue $ 141,425 $ 146,791 $ 154,246 $ 155,828 $ 598,290 Revenue $ 147,953 $ 168,182 $ 146,815 $ 163,445 $ 626,395 Gross profit Gross profit $ 48,952 $ 68,584 $ 45,296 $ 54,849 $ 217,681 Operating income $ 11,922 $ (763 ) $ 24,231 $ 27,848 $ 63,238 Operating income $ 19,706 $ 40,548 $ 17,064 $ 25,698 $ 103,016 Net income $ 6,391 $ (3,367 ) $ 18,574 $ 33,391 $ 54,989 Net income $ 19,642 $ 29,100 $ 21,136 $ 17,346 $ 87,224 Net income per common share - basic $ 0.08 $ (0.04 ) $ 0.22 $ 0.40 $ 0.66 Net income per common share - basic $ 0.23 $ 0.34 $ 0.24 $ 0.20 $ 1.00 Net income per common share - diluted $ 0.07 $ (0.04 ) $ 0.22 $ 0.38 $ 0.64 Net income per common share - diluted $ 0.22 $ 0.33 $ 0.24 $ 0.20 $ 0.98 2017 First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Year Ended Revenue $ 113,733 $ 133,313 $ 125,673 $ 148,493 $ 521,212 Operating income $ 3,943 $ 14,361 $ 12,861 $ 19,266 $ 50,431 Net income $ 1,442 $ 6,517 $ 6,372 $ 25,723 $ 40,054 Net income per common share - basic $ 0.02 $ 0.08 $ 0.08 $ 0.30 $ 0.48 Net income per common share - diluted $ 0.02 $ 0.08 $ 0.07 $ 0.30 $ 0.47 2018 First
Quarter Second Quarter Third
Quarter Fourth
Quarter Year Ended Revenue $ 141,425 $ 146,791 $ 154,246 $ 155,828 $ 598,290 Gross profit $ 43,920 $ 45,769 $ 52,409 $ 54,582 $ 196,680 Operating income/(loss) $ 11,922 $ (763) $ 24,231 $ 27,848 $ 63,238 Net income/(loss) $ 6,391 $ (3,367) $ 18,574 $ 33,391 $ 54,989 Net income/(loss) per common share - basic $ 0.08 $ (0.04) $ 0.22 $ 0.40 $ 0.66 Net income/(loss) per common share - diluted $ 0.07 $ (0.04) $ 0.22 $ 0.38 $ 0.64 15.(2) Fourth quarter 2017 results include a non-cash tax benefit14.81 2017 and 20162017 and 20162017 are as follows:receivable allowance Receivable Allowance (in thousands): Balance at Beginning of Year Provision Recoveries Charge-offs Balance at End of Year Year ended December 31, 2016 $ 11,464 $ 21,583 $ 108 $ (22,383 ) $ 10,772 Balance at Beginning of
YearProvision Recoveries Charge-offs Balance at End of Year Year ended December 31, 2017 10,772 20,233 - (16,206 ) 14,799 Year ended December 31, 2017 $ 10,772 $ 20,233 $ — $ (16,206) $ 14,799 Year ended December 31, 2018 14,799 20,453 - (21,569 ) 13,683 Year ended December 31, 2018 14,799 20,453 — (21,569) 13,683 Year ended December 31, 2019 Year ended December 31, 2019 13,683 22,289 — (18,890) 17,082 Balance at Beginning of Year Provision Appeals found in providers favor Release of estimated liability Balance at End of Year Year ended December 31, 2016 $ 12,801 $ 721 $ (2,396 ) $ - $ 11,126 Balance at Beginning of
YearProvision Appeals found in
providers favorRelease of estimated
liabilityBalance at End of Year Year ended December 31, 2017 11,126 83 (2,665 ) - 8,544 Year ended December 31, 2017 $ 11,126 $ 83 $ (2,665) $ — $ 8,544 Year ended December 31, 2018 8,544 - (108 ) (8,436 ) - Year ended December 31, 2018 8,544 — (108) (8,436) — Year ended December 31, 2019 Year ended December 31, 2019 — — — — — 82