Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-50194

HMS HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware

11-3656261

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

5615 High Point Drive

75038

Irving,

(Address of principal executive offices)

(Zip Code)

(214) 453-3000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock $0.01 par value

HMSY

The Nasdaq Stock Market LLC

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an 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	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 31, 2019, there were approximately 88,097,605 shares of the registrant’s common stock outstanding.

HMS HOLDINGS CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

INDEX


		Page

Glossary			1

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	6

	Consolidated Balance Sheets September 30, 2019 (unaudited) and December 31, 2018	6

	Consolidated Statements of Income Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	8

	Consolidated Statement of Shareholders’ Equity Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	9

	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2019 and 2018 (unaudited)	10

	Notes to the Consolidated Financial Statements Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 6.	Exhibits	43

Signatures			45

Glossary

Throughout this Quarterly Report on Form 10-Q, the Company may use certain abbreviations, acronyms and terms which are described below:


ACA			Patient Protections and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
ACO			Accountable Care Organization
ADR			Additional Documentation Request
ASC			Accounting 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 outstanding
ERISA			Employment Retirement Income Security Act of 1974
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
Form 10-Q			HMS Holdings Corp. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019
HIPAA			Health Insurance Portability and Accountability Act of 1996
HITECH			Health Information Technology for Economic and Clinical Health Act
IRC			Internal Revenue Code
IRS			U.S. Internal Revenue Service
LIBO Rate			London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement)
MCO			Managed Care Organization
PBM			Pharmacy Benefit Manager
PHI			Protected health information
PHM			Population Health Management
PI			Payment Integrity
PMPM			Per Member Per Month
PMPY			Per Member Per Year
R&D Credit			U.S. Research and Experimentation Tax Credit pursuant to IRC Section 41


RAC			Recovery Audit Contractor
RFP			Request for proposal
ROU			Right-of-use
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
U.S. GAAP			United States Generally Accepted Accounting Principles
2006 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, 2017
2016 Omnibus Plan			HMS Holdings Corp. 2016 Omnibus Incentive Plan
2017 Tax Act			Tax Cuts and Jobs Act of 2017
2018 Form 10-K			HMS Holdings Corp. Annual Report on Form 10-K for the year ended December 31, 2018
2019 Omnibus Plan			HMS Holdings Corp. 2019 Omnibus Incentive Plan
401(k) Plan			HMS Holdings Corp. 401(k) Plan

For purposes of this Form 10-Q, the terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise.

Cautionary Note Regarding Forward-Looking Statements

Included in this Form 10-Q 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.

We have tried to identify forward-looking statements by using words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “strategy,” “target,” “trend,” “will,” “would,” “could,” “should,” and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. These statements include, among other things, information concerning our future growth, business strategy, strategic or operational initiatives, our future operating or financial performance, our ability to invest in and utilize our data and analytics capabilities to expand our solutions and services, the benefits and synergies to be obtained from completed and future acquisitions, investments and strategic relationships, including VitreosHealth, Inc. and MedAdvisor Limited, the future performance of companies we have acquired, our future expenses, interest rates and tax rates, our ability to meet our future liquidity requirements, the impact of changes to healthcare legislation or healthcare spending affecting Medicare, Medicaid or other publicly funded or subsidized health programs, and other statements regarding our possible future actions, business plans, objectives and prospects.

Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from past results and from those indicated by such forward-looking statements if known or unknown risks or uncertainties materialize, or if underlying assumptions prove inaccurate. These risks and uncertainties include, among other things:

▪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, acquisition and strategic relationship opportunities we are pursuing, and the successful execution of such investments, acquisitions and strategic relationships;

▪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;

▪accounting changes or revisions;

▪risks relating to our international operations, including political, regulatory, economic, foreign exchange, tax compliance and other risks;

▪changes in the 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;

▪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.

These and other risks are discussed in this Form 10-Q and under the headings “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” of our 2018 Form 10-K, and in other documents we file with the SEC.

Any forward-looking statements made by us in this Form 10-Q 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 reports and other filings with the SEC.

Market and Industry Data

This Form 10-Q may include market, industry and government data and forecasts that have been obtained from publicly available information, various industry publications, other published industry sources and our own internal data and estimates. We have not independently verified

third-party information 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 Form 10-Q were prepared for use in, or in connection with, this Form 10-Q.

Trademarks and Trade Names

We have a number of registered trademarks, including HMS®, as well as the corresponding HMS + logo design mark, HMS IntegritySource®, Eliza®, Essette®, and Elli®. These and other trademarks of ours appearing in this Form 10-Q are our property. Solely for convenience, trademarks and trade names of ours referred to in this Form 10-Q 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. Other trademarks and trade names appearing in this Form 10-Q are the property of their respective owners. We do not intend our use or display of other companies' trademarks or trade names to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2019		December 31, 2018
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	280,596	$	178,946
Accounts receivable, net of allowance of $16,316 and $13,683, at September 30, 2019 and December 31, 2018, respectively	197,455		206,772
Prepaid expenses	20,035		19,970
Income tax receivable	8,891		18,817
Deferred financing costs, net	564		564
Other current assets	202		240
Total current assets	507,743		425,309
Property and equipment, net	84,028		94,435
Goodwill	517,460		487,617
Intangible assets, net	66,131		67,140
Operating lease right-of-use assets	18,351		—
Deferred financing costs, net	1,250		1,673
Other assets	2,100		2,344
Total assets	$	1,197,063	$	1,078,518

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities	$	73,434	$	74,902
Liability for appeals	2,554		21,723
Total current liabilities	75,988		96,625
Long-term liabilities:
Revolving credit facility	240,000		240,000
Operating lease liabilities	16,269		—
Net deferred tax liabilities	24,280		18,485
Other liabilities	6,332		10,012
Total long-term liabilities	286,881		268,497
Total liabilities	362,869		365,122
Commitments and contingencies
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;101,756,679 shares issued and 88,092,640 shares outstanding at September 30, 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	476,639		425,748
Retained earnings	492,113		422,235
Treasury stock, at cost: 13,663,194 shares at September 30, 2019 and December 31, 2018	(135,576)		(135,576)
Total shareholders' equity	834,194		713,396
Total liabilities and shareholders' equity	$	1,197,063	$	1,078,518

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	146,815	$	154,246	$	462,950	$	442,462
Cost of services:
Compensation	56,258		58,188		172,033		169,455
Direct project and other operating expenses	22,751		19,228		63,693		53,835
Information technology	14,207		12,979		39,627		39,482
Occupancy	4,144		3,500		12,275		11,897
Amortization of acquisition related software and intangible assets	4,158		7,942		12,490		25,695
Total cost of services	101,518		101,837		300,118		300,364
Selling, general and administrative expenses	28,232		28,178		85,514		86,708
Settlement expense	—		—		—		20,000
Total operating expenses	129,750		130,015		385,632		407,072
Operating income	17,065		24,231		77,318		35,390
Interest expense	(2,677)		(2,880)		(8,379)		(8,562)
Interest income	1,210		292		3,291		600
Other income	7,697		—		7,697		—
Income before income taxes	23,295		21,643		79,927		27,428
Income taxes	2,159		3,069		10,049		5,830
Net income	$	21,136	$	18,574	$	69,878	$	21,598

Basic income per common share:
Net income per common share -- basic	$	0.24	$	0.22	$	0.79	$	0.26
Diluted income per common share:
Net income per common share -- diluted	$	0.24	$	0.22	$	0.77	$	0.25
Weighted average shares:
Basic	86,324		83,509		88,190		83,373
Diluted	88,324		85,144		90,441		85,241

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Common Stock and paid-in capital
Balance, beginning of period	$	462,569	$	383,600	$	426,737	$	369,686
Exercise of stock options	12,177		11,243		39,175		13,633
Stock-based compensation expense	2,934		3,437		18,715		17,645
Vesting of restricted stock units, net of shares withheld for employee tax	(23)		(113)		(6,970)		(2,797)
Balance, end of period	477,657		398,167		477,657		398,167
Retained earnings
Balance, beginning of period	470,977		370,615		422,235		366,164
Net income	21,136		18,574		69,878		21,598
Cumulative effect of accounting changes	—		—		—		1,427
Balance, end of period	492,113		389,189		492,113		389,189
Treasury stock
Balance, beginning of period	(135,576)		(135,576)		(135,576)		(129,621)
Purchase of treasury stock	—		—		—		(5,955)
Balance, end of period	(135,576)		(135,576)		(135,576)		(135,576)
Total shareholders' equity	$	834,194	$	651,780	$	834,194	$	651,780

Shares issued
Balance, beginning of period	101,014,406		97,051,108		98,924,501		96,536,251
Exercise of stock options	740,748		534,778		2,427,156		685,812
Vesting of restricted stock units, net of shares withheld for employee tax	1,525		2,770		405,022		366,593
Balance, end of period	101,756,679		97,588,656		101,756,679		97,588,656

Treasury Stock
Balance, beginning of period	13,663,194		13,663,194		13,663,194		13,279,393
Purchase of treasury stock	—		—		—		383,801
Balance, end of period	13,663,194		13,663,194		13,663,194		13,663,194

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2019		2018
Operating activities:
Net income	$	69,878	$	21,598
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and software	24,719		24,331
Amortization of intangible assets	7,009		18,889
Amortization of deferred financing costs	423		423
Gain on sale of cost basis investment	(7,697)		—
Stock-based compensation expense	18,715		17,645
Deferred income taxes	6,327		(7,582)
Noncash lease expense	2,955		—
Change in fair value of contingent consideration	—		(35)
Release of estimated liability for appeals, net	(10,478)		(8,436)
Changes in operating assets and liabilities:
Accounts receivable	508		(13,038)
Prepaid expenses and other current assets	72		285
Other assets	(1,746)		(66)
Income taxes receivable	9,926		(2,705)
Accounts payable, accrued expenses and other liabilities	(3,976)		4,394
Operating lease liabilities	(3,927)		—
Liability for appeals	211		(167)
Net cash provided by operating activities	112,919		55,536
Investing activities:
Acquisition of a business, net of cash acquired	(36,554)		—
Proceeds from sale of cost basis investment	9,776		—
Purchases of property and equipment	(5,840)		(4,333)
Investment in capitalized software	(10,763)		(15,100)
Net cash used in investing activities	(43,381)		(19,433)
Financing activities:
Proceeds from exercise of stock options	39,175		13,633
Payments of tax withholdings on behalf of employees for net-share settlements	(6,970)		(2,797)
Payments on capital lease obligations	(93)		—
Purchases of treasury stock	—		(5,955)


Net cash provided by financing activities	32,112		4,881
Net increase in cash and cash equivalents	101,650		40,984
Cash and Cash Equivalents
Cash and cash equivalents at beginning of year	178,946		83,313
Cash and cash equivalents at end of period	$	280,596	$	124,297

Supplemental disclosure of cash flow information:
Cash (refunds received)/paid for income taxes, net of refunds	$	(5,303)	$	15,501
Cash paid for interest	$	8,118	$	7,769

Supplemental disclosure of non-cash activities:
Change in balance of accrued property and equipment purchases	$	2,291	$	538

See accompanying Notes to the unaudited Consolidated Financial Statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018

(unaudited)

1. Business and Summary of Significant Accounting Policies

(a) Business

The terms “HMS,” “Company,” “we,” “us,” and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. HMS is an industry-leading provider of cost containment solutions in the healthcare marketplace. We use healthcare data technology, analytics and engagement solutions, to deliver coordination of benefits, payment integrity and population health management solutions to help payers reduce costs, improve healthcare outcomes and enhance member experiences. We provide coordination of benefits services to government and commercial healthcare payers to ensure that the correct party pays the claim, and our payment integrity services promote accuracy by fighting fraud, waste and abuse. Our population health management solutions consist of population risk analytics and care management and consumer engagement services that provide risk-bearing organizations with reliable intelligence across their member populations to identify risks and improve patient engagement and outcomes. Together these various services help move the healthcare system forward for our customers. We currently operate as one business segment with a single management team that reports to the Chief Executive Officer.

The Consolidated Financial Statements and accompanying Notes in this Form 10-Q are unaudited. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These statements include all adjustments (which include only normal recurring adjustments, except as disclosed) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these unaudited Consolidated Financial Statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these unaudited Consolidated Financial Statements be read in conjunction with the Company’s consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, which were filed with the SEC as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). The consolidated balance sheet as of December 31, 2018 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The preparation of the Company’s unaudited Consolidated Financial Statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, fixed assets, accrued expenses, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.

These unaudited Consolidated Financial Statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies that are referenced in the 2018 Form 10-K other than as described below with respect to leases.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires most lessees to recognize a majority of the company’s leases on the balance sheet, which increases 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; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (“ROU”) model 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 are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 including interim periods within such annual reporting periods with early adoption permitted. The Company adopted this guidance on January 1, 2019, utilizing the optional transition method approach with an effective date of January 1, 2019. Consequently, financial information prior to the effective date was not updated and the disclosures required under the new standard are not provided for dates and periods prior to the effective date. There were no cumulative effect adjustments to retained earnings as part of adoption. The Company elected the available practical expedients, including the practical expedient to not separate lease and non-lease components of its leases and the short-term lease practical expedient. 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.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting, (“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 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2019. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”). ASU 2016-13 introduces the current expected credit losses methodology 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 years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company continues to evaluate whether the adoption of this guidance will have any impact on the Company’s financial statements but does not expect that this guidance will have a material impact on the Company’s financial position, results of operations or internal control framework.

In August 2018, the FASB issued ASU 2018-15, 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 develop or obtain internal use software. ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is 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.

2. Revenue Recognition

The Company’s revenue disaggregated by solution for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Coordination of Benefits	$	94,619	$	105,694	$	305,564	$	298,201
Payment Integrity	37,016		33,289		113,863		103,122
Population Health Management	15,180		15,263		43,523		41,139
Total	$	146,815	$	154,246	$	462,950	$	442,462

Coordination of benefits revenue is derived from contracts with state governments and Medicaid managed care plans that can span 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 include 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 revenue consists of revenue for our payment integrity services and population health management solutions.

Payment integrity services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk entities that can span 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) the identification of over/under payments or inaccurate charges based on a review of medical records. 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 amount of recovery findings the Company identifies, 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 include 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, payment integrity contract payment terms are not standardized within the respective contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.

Population health management revenue is derived from contracts with health plans and other risk-bearing entities that can span years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement; and (b) outreach services designed to improve clinical outcomes. 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 services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (1) our performance toward complete satisfaction of the performance obligation under the contract and (2) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognition of revenue related to its performance obligations when the amount we have the right to invoice the customer corresponds directly with the value to the

customer. Additionally, certain 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, 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 adoption of ASC 606. Generally, 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.

In connection with coordination of benefits and certain payment integrity services, lockboxes and their associated bank accounts are set up to support recoveries and remittances. Generally, these bank accounts are for the benefit of the Company’s customers. Customer cash held in Company bank accounts for the benefit of the customer was approximately $4.0 million as of September 30, 2019. This amount is included in cash and cash equivalents and other current liabilities on the accompanying consolidated balance sheet.

The Company’s revenue disaggregated by market for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Commercial	$	69,711	$	86,609	$	225,014	$	238,987
State	62,830		59,374		189,752		172,709
Federal	14,274		8,263		48,184		30,766
Total	$	146,815	$	154,246	$	462,950	$	442,462

A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately $4.6 million and $5.6 million as of September 30, 2019 and December 31, 2018, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately $4.2 million of the December 31, 2018 balance was recognized in revenue during the year ended September 30, 2019.

Contract modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most instances, contract modifications are for services that are not distinct, and, therefore, modifications are accounted for as part of the existing contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is one year or less.

3. Accounts Receivable and Accounts Receivable Allowance

The Company’s accounts receivable, net, consisted of the following (in thousands):


	September 30, 2019		December 31, 2018
Accounts receivable	$	213,771	$	220,455
Allowance	(16,316)		(13,683)
Accounts receivable, net	$	197,455	$	206,772

We record an 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. The following is a summary of the activity in the accounts receivable allowance (in thousands)


	September 30, 2019		December 31, 2018
Balance--beginning of period	$	13,683	$	14,799
Provision	15,908		20,453
Charge-offs	(13,275)		(21,569)
Balance--end of period	$	16,316	$	13,683

4. Intangible Assets, Goodwill and Other Assets

(a) Intangible Assets

Intangible assets consisted of the following (in thousands, except for weighted average amortization period):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period in Years
September 30, 2019
Customer relationships	$	68,290	$	(20,284)	$	48,006	12.3
Intellectual property	27,700		(9,575)		18,125		3.9
Trade names	136		(136)		—		0.0
Restrictive covenants	133		(133)		—		0.0
Total	$	96,259	$	(30,128)	$	66,131


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period in Years
December 31, 2018
Customer relationships	$	156,790	$	(104,740)	$	52,050	12.8
Intellectual property	21,700		(6,670)		15,030		4.1
Trade names	16,246		(16,215)		31		0.7
Restrictive covenants	263		(234)		29		0.7
Total	$	194,999	$	(127,859)	$	67,140

Amortization expense of intangible assets is expected to approximate the following (in thousands):


Year ending December 31,	Amortization
2019 (excluding the nine months ended September 30, 2019)	$	2,487
2020	8,866
2021	8,399
2022	8,399
2023	6,024
Thereafter	31,956
Total	$	66,131

For the three months ended September 30, 2019 and 2018, amortization expense related to intangible assets was $2.3 million and $6.1 million, respectively. For the nine months ended September 30, 2019 and 2018, amortization expense related to intangible assets was $7.0 million and $18.9 million, respectively.

(b) Goodwill

On September 16, 2019, HMS acquired VitreosHealth, Inc. ("VitreosHealth"), a company that offers predictive and prescriptive health insights utilized by population risk models, for aggregate consideration of $36.6 million, which was funded with cash on hand. The purchase price is subject to certain post-closing adjustments based upon the final amounts of the adjusted working capital of VitreosHealth and other final amounts at closing.

The Company's preliminary allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the acquisition is based on estimated fair values as of September 16, 2019. The Company allocated the purchase price, net of cash acquired, to the following significant assets: intellectual property subject to amortization of $6.0 million, and goodwill of $29.8 million which represents the excess purchase price over the net identifiable tangible and intangible assets. There were no additional material allocations to assets and liabilities. The intangible assets are valued using various methods which requires 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 the acquisition was a result of expected synergies to be realized from

future revenue growth, is not expected to be deductible for tax purposes, has an indefinite useful life and will be included in the Company’s annual impairment testing. The amounts shown above are subject to change in the near term as management continues to assess the fair value of the acquired assets and liabilities.

Pro forma historical results of operations related to this business acquisition for the year ended December 31, 2018, or interim periods thereafter, 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.

During the three months ended September 30, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed") including the Company's cost based investment in Instamed of $2.1 million. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in other income for the three and nine months ended September 30, 2019.

5. Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):


	September 30, 2019		December 31, 2018
Accounts payable, trade	$	15,225	$	12,394
Accrued compensation and other	27,188		42,833
Accrued operating expenses	24,142		19,675
Current portion of lease liabilities	6,879		—
Total accounts payable, accrued expenses and other liabilities	$	73,434	$	74,902

6. Income Taxes

The Company’s effective tax rate decreased to 12.6% for the nine months ended September 30, 2019 from 21.3% for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 includes discrete tax benefits primarily related to net equity compensation deductions and releases of uncertain tax benefits. For the nine months ended September 30, 2019, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.

Included in Other liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits (net of the federal benefit for state issues) of approximately $3.9 million and $4.8 million, as of September 30, 2019 and December 31, 2018, respectively, 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 $0.7 million as of September 30, 2019 and December 31, 2018, respectively. HMS includes interest expense and penalties in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018 was $0.03 million and $0.4 million, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease by $0.1 million over the next twelve months, due to the expiration of the statute of limitations in federal and various state jurisdictions.

HMS files income tax returns with the U.S. Federal government and various state and local jurisdictions and will file income tax returns in certain foreign jurisdictions in future periods as a result of its acquisition of VitreosHealth. HMS is generally no longer subject to U.S. Federal income tax examinations for years before 2016. HMS operates in a number of state, local and foreign jurisdictions. Accordingly, HMS is subject to state, local and foreign income tax examinations based on the various statutes of limitations in each jurisdiction.

7. Liability For Appeals

Under the Company’s contracts with certain commercial health plan customers and its Medicare Recovery Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”) (included within the Company’s payment 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.

The Company’s original Medicare RAC contract with CMS expired on January 31, 2018. As a result of the original contract expiration, which historically had net settlement terms, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date ceased, and the Company released its estimated liability and increased revenue by $8.4 million during the first quarter of 2018. The Company's liability for appeals related to CMS and commercial contracts was approximately $21.7 million as of December 31, 2018, and $2.6 million as of September 30, 2019. The Company determined, based on communications, that there was no further contractual obligation to CMS with respect to the original Medicare RAC contract as of June 30, 2019. Accordingly, the Company released its remaining estimated liability of $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 Company's revenue for the three months ended June 30, 2019. For the nine months ended September 30, 2019, the net change in the liability resulted in a $10.5 million increase to the Company's revenue.

8. Credit Agreement

In December 2017, the Company entered into an amendment to its Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) which, among other things, extended the maturity of its then existing $500 million revolving credit facility by five years to December 2022 (the “Amended Revolving Facility”). The availability of funds under the Amended 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 the 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 lenders therefore and meeting certain other conditions.

As of September 30, 2019 and December 31, 2018, the outstanding principal balance due on the Amended Revolving Facility was $240 million. No principal payments were made against the Amended Revolving Facility during the nine months ended September 30, 2019.

Borrowings under the Amended Revolving Facility bear interest at a rate equal to, at the Company’s election (except with respect to swingline borrowings, which will accrue interest based only at the base rate), either:

▪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 London Interbank Offered Rate (or any successor rate determined in accordance with the Credit Agreement) (“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.

In addition to paying interest on the outstanding principal, the Company is required to pay unused commitment fees on the Amended 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. 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.

The Amended Revolving Facility is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all tangible and intangible assets of the Company and certain subsidiaries of the Company. The Amended 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, 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 September 30, 2019, the Company was in compliance with all terms of the Credit Agreement.

Interest expense and the commitment fees on the unused portion of the Company’s Amended Revolving Facility were as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Interest expense	$	2,342	$	2,527	$	7,392	$	7,224
Commitment fees	157		211		473		688

As of September 30, 2019 and December 31, 2018, the unamortized balance of deferred origination fees and debt issuance costs was $1.8 million and $2.2 million, respectively. For the nine month periods ended September 30, 2019 and 2018, HMS amortized $0.4 million and $0.4 million, respectively, of interest expense related to the Company’s deferred origination fees and debt issue costs.

9. Earnings Per Share

The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Net income	$	21,136	$	18,574	$	69,878	$	21,598

Weighted average common shares outstanding-basic	86,324		83,509		88,190		83,373
Plus: net effect of dilutive stock options and restricted stock units	2,000		1,635		2,251		1,868
Weighted average common shares outstanding-diluted	88,324		85,144		90,441		85,241
Net income per common share -- basic	$	0.24	$	0.22	$	0.79	$	0.26
Net income per common share -- diluted	$	0.24	$	0.22	$	0.77	$	0.25

For the three months ended September 30, 2019 and 2018, (i) 625,573 and 21,105 stock options, respectively, and (ii) restricted stock units representing 1,693 and 202 shares of the Company's common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

For the nine months ended September 30, 2019 and 2018, (i) 472,627 and 531,378 stock options, respectively, and (ii) restricted stock units representing 2,791 and 595 shares of common stock, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

10. Stock-Based Compensation

(a) Long-Term Incentive Award Plans

The Company grants stock options and restricted stock units to HMS employees and non-employee directors of the Company under the HMS Holdings Corp. 2019 Omnibus Incentive Plan (the “2019 Omnibus Plan”), as approved by the Company’s shareholders on May 22, 2019. The 2019 Omnibus Plan replaces and supersedes the HMS Holdings Corp. 2016 Omnibus Incentive Plan.

(b) Stock-Based Compensation Expense

Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of services-compensation	$	982	$	1,537	$	7,825	$	5,802
Selling, general and administrative	1,952		1,900		10,890		11,843
Total	$	2,934	$	3,437	$	18,715	$	17,645

For the three months ended September 30, 2019 and 2018, stock-based compensation expense related to stock options was approximately $0.9 million and $1.6 million, respectively. For the nine months ended September 30, 2019 and 2018, stock-based compensation expense related to stock options was approximately $7.8 million and $7.6 million, respectively.

Presented below is a summary of stock option activity for the nine months ended September 30, 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, 2018	4,402	$	17.07
Granted	634	38.71
Exercised	(2,427)	16.18
Forfeitures	(146)	19.68
Expired	(2)	15.78
Outstanding balance at September 30, 2019	2,461
Expected to vest at September 30, 2019	1,051	$	28.22	8.75	$	8,746
Exercisable at September 30, 2019	979	$	17.18	5.78	$	16,918

During the three months ended September 30, 2019 and 2018, the Company received proceeds of $12.2 million and $11.2 million, respectively, for the issuance of 740,748 and 535,077 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the three months ended September 30, 2019 and 2018 was $16.0 million and $4.0 million, respectively. During the nine months ended September 30, 2019 and 2018, the Company received proceeds of $39.2 million and $13.6 million, respectively, for the issuance of 2,427,156 and 686,111 shares of common stock upon the exercise of outstanding stock options, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2019 and 2018 was $45.5 million and $4.7 million, respectively.

As of September 30, 2019, there was approximately $5.6 million of total unrecognized compensation cost related to stock options outstanding, which is expected to be recognized over a weighted average period of 1.1 years.

The weighted-average grant date fair value per share of the stock options granted during the nine months ended September 30, 2019 and 2018 was $13.87 and $7.52, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model and weighted–average assumptions set forth in the following table:


	Nine Months Ended September 30,
	2019		2018
Expected dividend yield	0	%	0	%
Risk-free interest rate	2.5	%	2.7	%
Expected volatility	40.9	%	42.4	%
Expected life (years)	6.35		6.00

The total tax benefits recognized on stock-based compensation related to stock options for the nine months ended September 30, 2019 and 2018 was $16.1 million and $1.0 million, respectively.

(d) Restricted Stock Units

For the three months ended September 30, 2019 and 2018, stock-based compensation expense related to restricted stock units was approximately $1.9 million and $1.9 million, respectively. For the nine months ended September 30, 2019 and 2018, stock-based compensation expense related to restricted stock units was approximately $10.9 million and $10.0 million, respectively.

Presented below is a summary of restricted stock units activity for the nine months ended September 30, 2019 (in thousands, except for weighted average grant date fair value per unit):


	Number of Units	Weighted Average Grant Date Fair Value per Unit
Outstanding balance at December 31, 2018	1,488	$	17.60
Granted	473	34.19
Vesting of restricted stock units, net of units withheld for taxes	(405)	16.60
Units withheld for taxes	(200)	16.60
Forfeitures	(99)	19.97
Outstanding balance at September 30, 2019	1,257	$	25.82

For the three months ended September 30, 2019 and 2018, HMS granted 12,687 and 1,794 restricted stock units, respectively, with an aggregate fair market value of $0.5 million and $0.1 million, respectively. For the nine months ended September 30, 2019 and 2018, HMS granted 474,520 and 762,877 restricted stock units, respectively, with an aggregate fair market value of $16.2 million and $12.8 million, respectively.

As of September 30, 2019, 995,860 restricted stock units remained unvested and there was approximately $12.4 million of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average vesting period of 1.1 years.

11. Leases

The Company determines if an arrangement is a lease at inception. Operating leases are reported on the Company’s consolidated balance sheet within Operating lease right-of-use assets, Operating lease liabilities and Accounts payable, accrued expenses and other liabilities. Finance leases are reported on the Company’s consolidated balance sheets within Other assets, Other liabilities and Accounts payable, accrued expenses and other liabilities.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at the lease’s commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. For certain real estate and equipment leases, the Company has lease agreements with lease and non-lease components, which are generally accounted for as a single component.

The Company primarily leases real estate, information technology equipment and data centers on terms that expire on various dates through 2026, some of which include options to extend the lease for up to 10 years. We evaluate whether to include the option period in the calculation of the ROU asset and lease liability on a lease-by-lease basis.

As of September 30, 2019, all operating and finance leases that create significant rights and obligations for the Company have commenced.

The components of lease expense for the three and nine months ended September 30, 2019 were as follows (in thousands):


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019

Operating lease cost	$	1,653	$	4,967

Finance lease cost:
Amortization of right-of-use assets	$	59	$	97
Interest on lease liabilities	$	8	$	13
Total finance lease cost	$	67	$	110

Supplemental cash flow and other information related to leases for the nine months ended September 30, 2019 were as follows (in thousands):


	Nine Months Ended September 30, 2019

Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	5,559
Operating cash flows from finance leases	$	11
Financing cash flows from finance leases	$	93
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	1,253
Finance leases	$	1,160

Supplemental balance sheet information related to leases as of September 30, 2019 consisted of the following (in thousands):


	Nine Months Ended September 30, 2019
Operating Leases
Operating lease right-of-use assets	$	18,351

Other current liabilities	$	6,475
Operating lease liabilities	$	16,269
Total operating lease liabilities	$	22,744

Finance Leases
Other Assets	$	1,167

Other current liabilities	$	404
Other long-term liabilities	$	769
Total finance leases liabilities	$	1,173

As of September 30, 2019, the weighted-average remaining lease term for operating and finance leases was 4.2 years and 2.8 years, respectively. As of September 30, 2019, the weighted-average discount rates were 5.7% and 4.6% for operating and finance leases, respectively.

Sublease income for the nine months ended September 30, 2019 and 2018 was $1.6 million and $1.3 million, respectively.

Maturities of lease liabilities were as follows (in thousands):


Year ended December 31,	Operating Leases		Finance Leases
2019 (excluding the nine months ended September 30, 2019)	$	1,874	$	112
2020	7,468		447
2021	5,768		447
2022	3,487		240
2023	3,259		—
Thereafter	3,741		—
Total lease payments	25,597		1,246
Less: Imputed interest	2,853		73
Total lease obligation	$	22,744	$	1,173

12. Commitments and 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 $60 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 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.

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. In March 2018, the Company provided certain documents and information in response to the CID. HMS has not received any further requests for information in connection with this CID.

In September 2018, a former employee filed an action in the New York County Supreme Court entitled Christopher Frey v. Health Management Systems, Inc. alleging retaliation under New York law. The complaint seeks recovery of an unspecified amount of monetary damages, including back pay and other compensatory and equitable relief. The Company moved to dismiss the complaint and the Court heard oral arguments on May 2, 2019. A decision on the motion has not yet been issued by the Court. The Company continues to believe that this claim is without merit and intends to vigorously defend this matter.

From time to time, HMS may be subject to investigations, legal proceedings and other disputes arising in the ordinary course of the Company’s business, including but not limited to regulatory audits, billing and contractual disputes, employment-related matters and post-closing disputes related to acquisitions. Due to the Company’s contractual relationships, including those with federal and state government entities, HMS’s operations, billing and business practices are subject to scrutiny and audit by those entities and other multiple agencies and levels of government, as well as to frequent transitions and changes in the personnel responsible for oversight of the Company’s contractual performance. HMS may have contractual disputes with its customers arising from differing interpretations of contractual provisions that define the Company’s rights, obligations, scope of work or terms of payment, and with associated claims of liability for inaccurate or improper billing for reimbursement of contract fees, or for sanctions or damages for alleged performance deficiencies. Resolution of such disputes may involve litigation

or may require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results that could affect the Company’s business, financial condition, results of operations and cash flows.

HMS records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, HMS does not establish an accrued liability.

13. Subsequent Events

Investment in MedAdvisor

On October 6, 2019, the Company announced its planned investment of $7.5 million in ordinary shares of MedAdvisor Limited ("MedAdvisor")(ASX: MDR), a leading digital medication management company based in Australia. On October 11, 2019, the Company completed the investment with cash on hand for a 12.8% ownership stake in MedAdvisor and the Company's Chief Financial Officer was appointed to MedAdvisor's board of directors in connection with the transaction.

Share Repurchase

On November 1, 2019, the Board of Directors of the Company approved a share repurchase program authorizing the Company to repurchase up to $50.0 million in shares of its common stock from time to time on the open market or in privately negotiated or other transactions. The repurchase program is authorized for a period of up to two years, and may be suspended or discontinued at any time. Repurchased shares will be available for use in connection with reissuance under the Company’s stock plans and for other corporate purposes. The timing and amount of any shares repurchased under the program will be determined by the Company’s management based on its evaluation of market conditions, share price and other factors. 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of HMS. You should read this discussion and analysis in conjunction with the other sections of this Form 10-Q, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I and the unaudited Consolidated Financial Statements and accompanying Notes included in Part I, Item 1. The historical results set forth in Items 1 and 2 of Part I of this Form 10-Q should not be taken as necessarily indicative of our future operations or financial results.

Business Overview

HMS provides a broad range of cost containment solutions to help healthcare payers and at-risk providers reduce costs, improve health outcomes and enhance member experiences. Using industry-leading technology, analytics and engagement solutions, we deliver coordination of benefits, payment integrity and population health management solutions through our operating subsidiaries to move the healthcare system forward for our customers. We are managed and operate as one business segment with a single management team that reports to the Chief Executive Officer.

We serve state Medicaid programs, commercial health plans, federal government health agencies, government and private employers, CHIPs and other healthcare payers. We also serve as a subcontractor for certain business outsourcing and technology firms. As of September 30, 2019, our customer base included the following:

▪over 40 state Medicaid programs;

▪approximately 350 health plans, including 22 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 160 private employers;

▪CMS and the Centers for Disease Control and Prevention; and

▪PBMs, third-party administrators and other risk-bearing entities, including independent practice associations, hospital systems, ACOs and specialty care organizations.

Critical Accounting Policies and Estimates

Since the date of our 2018 Form 10-K, there have been no material changes to our critical accounting policies other than with respect to leases as described in Notes 1 and 11 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. With respect to our accounting policies other than those for leases, refer to the discussion in our 2018 Form 10-

K under “Critical Accounting Policies and Estimates” in Part II, Item 7 and “Business and Summary of Significant Accounting Policies” in Note 1 to the Consolidated Financial Statements under Part II, Item 8.

RESULTS

As of and for the three months ended September 30, 2019 and September 30, 2018

▪ Revenue of $146.8 million decreased $7.4 million, or 4.8% over the same quarter in 2018; and

▪ Operating income of $17.1 million decreased by $7.1 million as compared to operating income of $24.2 million in the same quarter of the prior year.

Comparison of Three Months Ended September 30, 2019 to September 30, 2018


	Three Months Ended
dollars in millions	September 30,						$ Change		% Change
	2019		2018		2019 vs 2018
Revenue	$	146.8	$	154.2	$	(7.4)	(4.8)	%
Cost of services:
Compensation	56.3		58.2		(1.9)		(3.3)
Direct project and other operating expenses	22.7		19.2		3.5		18.2
Information technology	14.2		13.0		1.2		9.2
Occupancy	4.1		3.5		0.6		17.1
Amortization of acquisition related software and intangible assets	4.2		8.0		(3.8)		(47.5)
Total cost of services	101.5		101.9		(0.4)		(0.4)
Selling, general and administrative expenses	28.2		28.1		0.1		0.4

Total operating expenses	129.7		130.0		(0.3)		(0.2)
Operating income	17.1		24.2		(7.1)		(29.3)
Interest expense	(2.7)		(2.9)		0.2		(6.9)
Interest income	1.2		0.3		0.9		300.0
Other income	7.7		—		7.7		100.0
Income before income taxes	23.3		21.6		1.7		(7.9)
Income taxes	2.2		3.1		(0.9)		(29.0)
Net income	$	21.1	$	18.5	$	2.6	14.1	%

Revenue (in millions)

Three Months Ended September 30 – 2019 vs. 2018

During the three months ended September 30, 2019, revenue was $146.8 million, a decrease of $7.4 million or 4.8% compared to revenue of $154.2 million for the prior year quarter.

▪By solution, which consists of coordination of benefits and analytical services, and included in analytical services are our payment integrity and population health management solutions:

◦Coordination of benefits revenue decreased $11.1 million or 10.5% which was primarily attributable to a reduction in the timing of recoveries related to certain customers.

◦Payment integrity revenue increased $3.8 million or 11.4% primarily due to an increased volume of claims activity.

◦Population health management revenue decreased $0.1 million or 0.7%.

▪By market:

◦Commercial health plan market revenue decreased $16.9 million or 19.5%, which was primarily attributable to the decrease in the timing of recoveries related to existing customers.

◦Federal government market revenue increased $6.0 million or 72.3% compared to the prior year quarter primarily due to increased federal related claims processed.

◦State government market revenue increased by $3.5 million or 5.9%, which was attributable to expanded scopes and yield improvements.

Total Cost of Services (in millions)

Three Months Ended September 30 – 2019 vs. 2018

During the three months ended September 30, 2019, total cost of services was $101.5 million, a decrease of $0.4 million or 0.4% compared to $101.9 million for the prior year quarter.

▪Compensation expense decreased by $1.9 million primarily due to a reduction in capitalized software related projects and variable compensation costs, partially offset by an increase in compensation costs.

▪Direct project and other operating costs increased by $3.5 million due to increased labor and services utilized to support revenue generating activities.

▪Information technology expense increased by $1.2 million due to an increase of amortization of internally developed software assets.

▪Amortization of acquisition related software and intangible assets decreased by $3.8 million due to certain intangible assets becoming fully amortized in prior periods.

Selling, General and Administrative expenses (in millions)

Three Months Ended September 30 – 2019 vs. 2018

During the three months ended September 30, 2019, SG&A expense was $28.2 million, an increase of $0.1 million or 0.4% compared to $28.1 million for the prior year quarter.

▪Professional and consulting fees increased $2.0 million compared to the prior year as the Company leveraged additional external resources and expertise for certain activities during the third quarter of 2019. The increase was partially offset by a decrease in bad debt expense of $1.7 million.

Other Income

During the three months ended September 30, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed"), including the Company's minority interest in Instamed. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in the third quarter.

Income Taxes

Three Months Ended September 30 – 2019 vs. 2018

The Company’s effective tax rate decreased to 9.4% for the three months ended September 30, 2019 compared to 14.2% for the three months ended September 30, 2018. The effective tax rate for the three months ended September 30, 2019 includes discrete tax benefits primarily related to net equity compensation deductions and reversals of uncertain tax benefits. Excluding the above mentioned discrete tax items, our effective tax rate would approximate 28.0% for the three months ended September 30, 2019. For the three months ended September 30, 2019, the differences between the federal statutory rate and our effective tax rate are tax items related to state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.

As of and for the nine months ended September 30, 2019 and September 30, 2018

▪Revenue of $463.0 million increased $20.5 million, or 4.6% over the same period in 2018; and

▪Operating income of $77.4 million increased by $42.0 million as compared to operating income of $35.4 million (which includes a non-recurring $20 million settlement expense) in the same period in 2018.

Comparison of Nine Months Ended September 30, 2019 to September 30, 2018


	Nine Months Ended
dollars in millions	September 30,						$ Change		% Change
	2019		2018		2019 vs 2018
Revenue	$	463.0	$	442.5	$	20.5	4.6	%
Cost of services:
Compensation	172.0		169.5		2.5		1.5
Direct project and other operating expenses	63.7		53.8		9.9		18.4
Information technology	39.6		39.5		0.1		0.3
Occupancy	12.3		11.9		0.4		3.4
Amortization of acquisition related software and intangible assets	12.5		25.7		(13.2)		(51.4)
Total cost of services	300.1		300.4		(0.3)		(0.1)
Selling, general and administrative expenses	85.5		86.7		(1.2)		(1.4)
Settlement expense	—		20.0		(20.0)		(100.0)
Total operating expenses	385.6		407.1		(21.5)		(5.3)
Operating income	77.4		35.4		42.0		118.6
Interest expense	(8.4)		(8.6)		0.2		(2.3)
Interest income	3.2		0.6		2.6		433.3
Other income	7.7		—		7.7		100.0
Income before income taxes	79.9		27.4		52.5		191.6
Income taxes	10.0		5.8		4.2		72.4
Net income	$	69.9	$	21.6	$	48.3	223.6	%

Revenue (in millions)

Nine Months Ended September 30 – 2019 vs. 2018

During the nine months ended September 30, 2019, revenue was $463.0 million, an increase of $20.5 million or 4.6% compared to revenue of $442.5 million for the prior year period.

▪By solution, which consists of coordination of benefits and analytical services, and included in analytical services are our payment integrity and population health management solutions:

◦Coordination of benefits revenue increased $7.4 million or 2.5% which was attributable to incremental services and yield increases provided to existing customers in our cost avoidance and post payment recovery business, partially offset by the timing of recoveries related to certain customers.

◦Payment integrity revenue increased $10.7 million or 10.4% primarily due to a $14.5 million increase in federal related claims, which included a $2.1 million increase in revenue from the release of the Company's remaining estimated liability and net receivables relating to the original Medicare RAC contract as described above. The Company determined that there was no further contractual obligation to CMS with respect to the original Medicare RAC contract as of June 30, 2019.

◦Population health management revenue increased $2.4 million or 5.8%.

▪By market:

◦Commercial health plan market revenue decreased $14.0 million or 5.9%, which was primarily due to a decrease in the timing of recoveries related to existing customers.

◦Federal government market revenue increased $17.4 million or 56.5% compared to the prior year due to a $14.5 million increase in federal related claims processed, which included an incremental increase in revenue of $2.1 million related to the original Medicare RAC contract as described above.

◦State government market revenue increased by $17.1 million or 9.9%, which was attributable to expanded scopes and yield improvements.

Total Cost of Services (in millions)

Nine Months Ended September 30 – 2019 vs. 2018

During the nine months ended September 30, 2019, total cost of services was $300.1 million, a decrease of $0.3 million or 0.1% compared to $300.4 million for the prior year period.

▪Compensation expense increased by $2.5 million primarily due to an increase in compensation costs, a reduction in capitalized software related projects, and an increase in stock compensation expense due to stock option vestings for COS related retirement eligible employees, partially offset by a decrease in variable compensation costs.

▪Direct project and other operating costs increased by $9.9 million due to increased labor and services utilized to support revenue generating activities.

▪Amortization of acquisition related software and intangible assets decreased by $13.2 million primarily related to certain intangible assets becoming fully amortized in prior periods, including certain customer relationships, trade names and software related intangibles.

Selling, General and Administrative expenses (in millions)

Nine Months Ended September 30 – 2019 vs. 2018

During the nine months ended September 30, 2019, SG&A expense was $85.5 million, a decrease of $1.2 million or 1.4% compared to $86.7 million for the prior year period.

▪Compensation expense in 2019 decreased by $2.7 million primarily as a result of a decrease in salaries, benefits, and other variable compensation.

▪Professional and consulting fees increased $3.7 million compared to the prior year as the Company leveraged additional external resources and expertise for certain activities during 2019.

Other Income

During the third quarter of 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed, including the Company's minority interest in InstaMed. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in the third quarter.

Income Taxes

Nine Months Ended September 30 – 2019 vs. 2018

The Company’s effective tax rate decreased to 12.6% for the nine months ended September 30, 2019 compared to 21.3% for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 includes discrete tax benefits primarily related to net equity compensation deductions and reversals of uncertain tax benefits. Excluding the above mentioned discrete tax items, our effective tax rate would approximate 27.4% for the nine months ended September 30, 2019. For the nine months ended September 30, 2019, the differences between the federal statutory rate and our effective tax rate are tax expense items related to state taxes, equity compensation impacts, unrecognized tax benefits, including

interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Liquidity and Capital Resources

The following tables should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Form 10-Q.

Our cash and cash equivalents, working capital and available borrowings under our revolving credit facility (based upon the borrowing base and financial covenants in our Credit Agreement) were as follows (in thousands):


	September 30, 2019		December 31, 2018
Cash and cash equivalents	$	280,596	$	178,946
Working capital	$	431,755	$	328,684
Available borrowings under credit facility	$	253,500	$	253,500

The following is a summary of our cash flows (in thousands):


	Nine Months Ended September 30,
			2019			2018
Net cash provided by operating activities	$	112,919		$	55,536
Net cash used in investing activities	(43,381)			(19,433)
Net cash provided by financing activities	32,112			4,881
Net increase in cash and cash equivalents	$	101,650		$	40,984

Our principal source of cash has been our cash flow from operations and our $500 million five-year revolving credit facility. Other sources of cash include proceeds from the exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses.

We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include:

▪ the working capital requirements of our operations;

▪ investments in our business;

▪ business development activities; and

▪ repurchases of common stock.

Any projections of future earnings and cash flows are subject to substantial uncertainty. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing.

Cash Flows from Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 2019 was $112.9 million, a $57.4 million increase compared to net cash provided by operating activities of $55.5 million for the nine months ended September 30, 2018. The increase was primarily related to a $48.3 million increase in net income and a $12.4 million increase resulting from changes in operating assets and liabilities reconciling items. These increases were partially offset by a $2.0 million change in the Estimated liability for appeals balance due to a reserve release.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2019 was $43.4 million, a $24.0 million increase compared to net cash used in investing activities of $19.4 million for the nine months ended September 30, 2018. The increase was primarily attributable to the use of approximately $36.6 million for the VitreosHealth acquisition in September 2019. Cash used was partially offset by cash provided by the sale of InstaMed common stock in July 2019 of $9.8 million. Purchases of property and equipment and investment in capitalized software decreased by $2.8 million.

Cash Flows from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2019 was $32.1 million, a $27.2 million increase compared to net cash provided by financing activities of $4.9 million for the nine months ended September 30, 2018. The increase was primarily related to a $21.4 million increase in proceeds from the exercise of stock options, net of payments of tax withholdings, and a $6.0 million decrease in repurchases of common stock.

Contractual Obligations

There have been no material changes outside the ordinary course of business in our contractual obligations as presented in our 2018 Form 10-K.

Recently Issued Accounting Pronouncements

The information set forth under the caption “Recently Issued Accounting Pronouncements Not Yet Adopted” in Note 1 to the unaudited Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the market risks discussed in Item 7A to Part II of our 2018 Form 10-K.

Item 4. Controls and Procedures

We are responsible for maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as September 30, 2019. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that their objectives were met as of the end of the period covered by this Form 10-Q.

There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation of our controls performed during the three months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under the caption “Commitments and Contingencies” in Note12 to the unaudited Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

In addition to the information set forth in this Form 10-Q, the risks that are discussed in our 2018 Form 10-K, under the headings “Business” of Part I, Item 1, “Risk Factors” of Part I, Item 1A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” of Part II, Item 7A, should be carefully considered as such risks could materially affect the Company’s business, financial condition or future results. There has been no material change in the Company’s risk factors from those described in our 2018 Form 10-K.

These risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may have a material adverse effect on the Company’s business, financial condition or future results.

Item 6. Exhibits

The exhibits may include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other actual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties, and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties, and covenants in the agreements may have been used for the purpose of allocating risk between parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof.

Where an exhibit is filed by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified after the description of the exhibit.


Exhibit Number						Description

3.1						Conformed copy of Certificate of Incorporation of the Company, as amended through May 23, 2018 (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (File No. 000-50194) as filed with the SEC on August 6, 2018)

3.2						Second Amended and Restated Bylaws of HMS Holdings Corp. dated May 23, 2018 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 000-50194) as filed with the SEC on May 25, 2018)


31.1						Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2						Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1						Section 1350 Certification of the Principal Executive Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2						Section 1350 Certification of the Principal Financial Officer of HMS Holdings Corp., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


101.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
104						Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

__________________________________

* The certifications attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished with this Form 10-Q and shall not be deemed “filed” by the Company for purposes of Section 18 of the Exchange Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:

November 4, 2019

HMS HOLDINGS CORP.

By:

/s/ William C. Lucia

William C. Lucia
President and Chief Executive Officer
(Principal Executive Officer)

By:

/s/ Jeffrey S. Sherman

Jeffrey S. Sherman
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)