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Edited Transcript of HMSY earnings conference call or presentation 8-May-20 12:30pm GMT

Q1 2020 HMS Holdings Corp Earnings Call

NEW YORK May 29, 2020 (Thomson StreetEvents) -- Edited Transcript of HMS Holdings Corp earnings conference call or presentation Friday, May 8, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey S. Sherman

HMS Holdings Corp. - Executive VP, CFO & Treasurer

* Robert P. Borchert

HMS Holdings Corp. - SVP of IR

* William C. Lucia

HMS Holdings Corp. - Chairman, President & CEO

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Conference Call Participants

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* David Howard Windley

Jefferies LLC, Research Division - MD & Equity Analyst

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Jailendra P. Singh

Crédit Suisse AG, Research Division - Research Analyst

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

* Jared Phillip Haase

William Blair & Company L.L.C., Research Division - Research Analyst

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Richard Collamer Close

Canaccord Genuity Corp., Research Division - MD & Senior Analyst

* Sean Wilfred Dodge

RBC Capital Markets, Research Division - Analyst

* Stephanie July Davis Demko

SVB Leerink LLC, Research Division - MD & Senior Research Analyst

* Vikram Kesavabhotla

Guggenheim Securities, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the HMS Q1 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Mr. Robert Borchert, Head of Investor Relations. Thank you. Please go ahead.

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Robert P. Borchert, HMS Holdings Corp. - SVP of IR [2]

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Thank you, Chelsea, and good morning, everyone. Joining me are Bill Lucia, our Chairman and Chief Executive Officer; and Jeff Sherman, our Chief Financial Officer. This call is being webcast and can be accessed via the Investor Relations section of our company website at hms.com. Today's press release highlighting our financial results is posted on our IR website.

Bill and Jeff will first provide their perspective on our recent financial and operating results and business outlook, and then we will open the line for questions. We ask that you please limit yourself to one question and one follow-up, so we can get through the full queue in a timely fashion.

I'd like to remind you that the financial results reported today and in this morning's press release are preliminary and are not final until our Form 10-Q for the first quarter ended March 31, 2020, is filed. Some of the statements we will make today are forward-looking in nature based on our current expectations and a view of our business as we see it today. Such statements, including those related to our updated full year 2020 guidance, the timing and effect of circumstances surrounded COVID-19, future financial and operating performance and future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, this should be considered in conjunction with the cautionary statements in today's press release and the risk factors described in the company's most recent SEC filings, including our Form 10-K and first quarter 10-Q.

And finally, we may refer to certain non-GAAP measures this morning. Reconciliations of these measures to comparable GAAP measures are included in our press release posted to our website.

With that, I'll now hand the call over to Bill.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [3]

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Thank you, Robert, and good morning, everyone. Over the past 8 weeks, HMS has taken decisive actions to protect and support our employees, clients, partners and the community and to continue to sustain a high level of operational execution.

Our core business remains strong. Our organization seamlessly transitioned to work-from-home and the integration of Accent is on track. We continue to have an abundance of opportunities for sustainable, long-term growth. We also have a very solid capital structure with low debt and a high cash balance that will support and enable our company to emerge from this pandemic even stronger. We believe this health crisis will ultimately increase the need for greater cost containment and clinical outcome capabilities, and we are well positioned to deliver enhanced value for our clients as the pandemic subsides.

Given the current circumstances surrounding COVID-19 and its broad impact on our nation, I'll first spend a few minutes discussing our company's actions to maintain business continuity. Then I'll summarize our financial results and operational performance before handing it off to Jeff to offer his perspective on our outlook for the remainder of 2020.

The entire HMS organization moved swiftly to enact our business continuity plan. This was to ensure continued service to our clients as we all began dealing with the global health emergency and shelter-in-place guidelines due to COVID-19. Prior to this, about 1/3 of our workforce was already operating remotely. By the end of March, essentially 100% of our more than 3,100 employees were working from home with the necessary technology, security software and system access to accomplish their day-to-day jobs in support of our clients. Full credit and an immense amount of gratitude goes to our IT, security and operations teams for making this a very smooth transition.

Importantly, our emergency response team, led by our Chief Medical Officer, implemented several measures to help employees avoid exposure to COVID-19, care for their families and have the necessary resources for treatment if they become ill. This is all part of the disaster recovery planning we already had in place, which specifically addresses public health emergencies and includes business continuity, organizational agility and employee health and safety as well as support of our clients.

Regarding our Q1 performance, we experienced minimal impact in the first quarter as HMS delivered strong revenue and profit results, with total revenue for the quarter increasing 15.9%, and 8.5% organically; and adjusted EBITDA up 15% from last year's first quarter. Cash flow remains strong, and we continue to be well positioned with ample liquidity and financial strength to invest in our people, processes and technology supporting future growth.

First quarter Coordination of Benefits revenue was a record $118.1 million. As we noted on our last 2 earnings calls, our COB revenue can experience quarterly variability, but remains a stable and resilient business.

Since HMS acquired Accent more than 4 months ago, we've been working as one team to integrate key business operations while remaining focused on achieving our 2020 business goals. While HMS and Accent both identify and recover overpayments for our clients, we have previously relied on different approaches and technologies. Our teams are now concentrating on integrating processes that are expected to yield the largest benefits for our clients and our business. This includes scaling and automating Accent's Medicare-to-Commercial and Commercial-to-Commercial COB products to increase capacity, reduce cost and improve results.

Payment Integrity maintained its strong performance, with first quarter revenue up 41.8% from the same period in 2019. As anticipated, COVID-19 circumstances have impacted PI activities, particularly work that involves medical record requests from hospitals. And this was done in order to temporarily ease administrative burdens. In fact, CMS paused all RAC-related medical reviews and documentation requests during the COVID-19 emergency period and a few states, including New York followed suit.

We have been moving very quickly to reallocate resources toward areas of our PI business that can drive near-term revenue, but our ability to operate at full capacity will depend on the pandemic circumstances and how our clients respond to the changing landscape.

As a trusted partner to our clients, we continue to offer support and consultation on how to sustain their Payment Integrity efforts while balancing the current demands on providers.

Revenue from our Population Health business declined slightly from the first quarter a year ago as we complete the rebuild of our PHM sales force with the addition of several highly experienced sales executives.

COVID-19 has also interrupted some of our traditional consumer engagement programs, as our clients shifted their focus during the pandemic. Despite this temporary pause in certain engagement activities, we have been agile in supporting our clients. One example of this is our COVID-19 rapid response solution. To date, we've delivered communications to about 7 million people, ensuring our clients' members receive critical information about the virus. From helping them learn how to stay healthy at home to providing instructions on how to order vital medications by mail, our team has been working nonstop in the fight against the coronavirus.

A number of our clients have also moved forward with contract extensions, including some of our state COB clients that were scheduled for reprocurements. Our ability to successfully operate in the current environment firmly positions HMS as a highly credible and financially strong partner that can deliver both results and innovation despite industry challenges.

We will continue to invest in our sales and marketing efforts to support our growth strategy, as we have continued to expand our services to new and existing clients.

In summary, Q1 was a challenge for our industry, and HMS rose to the occasion. Our strong performance and our capacity to quickly mobilize and adapt during the crisis enabled us to continue to deliver solid results for our clients.

Jeff will now provide additional detail on our first quarter performance and outlook for the remainder of the year. Jeff?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [4]

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Thank you, Bill, and good morning. As Bill mentioned, we delivered strong financial performance in Q1, with total revenue up 15.9% and organic growth of 8.5%, excluding the contribution from our recently acquired Accent business.

COB posted a record quarter with revenue growth of 11.5% over Q1 last year to $118.1 million, including Accent. The first quarter of 2019 was our previous record high for COB revenue, and we still delivered organic growth of 1.2% over the prior year period.

We've consistently said that our business model has the potential for some quarter-to-quarter revenue variability, especially in Coordination of Benefits, and this quarter clearly demonstrated that. Payment Integrity revenue increased 41.8% in the first quarter, continuing its solid solution adoption trends with our client base. The first quarter of 2019 was our lowest revenue quarter for PI last year.

PHM revenue decreased 2.3% in Q1 as we have seen some delays in our traditional consumer engagement programs.

Adjusted EBITDA in the first quarter was $47.1 million, an increase of $6.1 million or 15% from the prior year quarter. As expected, we did see an increase in compensation as well as direct project and other operating costs as a result of the VitreosHealth and Accent acquisitions in the third and fourth quarters of 2019. We incurred approximately $2.8 million of Accent integration costs in the quarter, which are reflected as an add-back in the adjusted EBITDA reconciliation schedule.

First quarter adjusted EPS increased 14.3% to $0.32 per diluted share, which includes $0.02 of integration-related costs. This compares to $0.28 per diluted share in Q1 a year ago, excluding $0.07 in discrete tax benefits.

Cash flow from operations was $17 million in the quarter, which is down from Q1 last year, due primarily to a $6 million variance in income taxes.

With cash of $148 million at quarter end and total net debt of 0.5x trailing 12-month adjusted EBITDA, we continue to have a very strong balance sheet and liquidity profile. We also have another $253 million of capacity available under our credit facility, and currently anticipate our expected cash flows and cash generation will be more than sufficient to fund our business operations and growth expectations without needing to access to credit line.

Turning now to our updated financial guidance. Given our analysis of the business and financial impact due to the COVID-19 crisis, we now expect full year 2020 total revenue to be in a range of $690 million to $705 million, with the midpoint of guidance, $12.5 million below the midpoint of our previous guidance. This now reflects growth of 12.1% to 14.5% compared to last year when you exclude the Medicare RAC reserve release from 2019. This guidance revision is to compensate for the delays in Payment Integrity work as well as a more muted impact to our COB and PHM business lines. We are forecasting the vast majority of the COVID-19 revenue impact for the year to occur during this second quarter. Payment Integrity is expected to comprise a significant part of the sequential decline from Q1 to Q2. Approximately $7 million of COB recognized in Q1 had previously been anticipated in Q4 of 2019. So that would account for the remainder of the sequential revenue decline from Q1 to Q2.

This pandemic has reduced the volume of health care services delivered in the short term. As these services come back online and more individuals likely enter government health care programs, we believe demand for our payment accuracy and cost containment capabilities will ultimately increase.

We have also lowered our full year adjusted EBITDA guidance to a range of $177 million to $187 million for 2020, a midpoint reduction of $6.5 million from the previous midpoint, commensurate with our new revenue range. This now represents adjusted EBITDA growth of 7.9% to 14%. As with revenue, we are normalizing the 2019 adjusted EBITDA for comparison purposes to exclude $8.2 million from the Medicare RAC reserve release as well as a $7.7 million investment gain.

While we did see an increase in costs related to our acquisitions and IT investments beginning in the second half of 2019, we believe this spending will drive financial returns in the second half of 2020 and beyond. We remain diligent in managing expenses in order to maintain an appropriate cost structure relative to revenue growth we expect in the third and fourth quarters this year.

We provided some additional financial updates on our full year 2020 outlook in our press release this morning. We believe the progress we've made in 2019, and in Q1 of this year, positions us well to achieve year-over-year revenue growth and solid adjusted EBITDA and cash flows with a strong competitive standing in the market.

Bill will now offer some concluding remarks, and then we'll be ready for questions. Bill?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [5]

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Thank you, Jeff. We are well positioned to deliver high value to our clients and the health care industry. Given the dramatic rise in unemployment and the potential for Medicaid and other government-sponsored programs to increase enrollment and demand for services, our capabilities and expertise can have a strong impact on both cost management and improved outcomes.

Today, 85% of our revenue is generated from government-related sources, including federal, state and health plan clients serving Medicaid, Medicare and other government-funded populations. We have already received inbound requests from clients interested in expanding use of our services to help sustain their programs during and post the pandemic.

Our employees have been resilient during this challenging period, and they have taken the time under these circumstances to develop and leverage meaningful collaboration tools and work in the community to support our neighbors and those in need during this crisis. They have been steadfast in supporting our clients and each other.

I want to thank our clients for their valued partnership. We appreciate your continued trust and collaboration. I also want to send my sincerest thank you and appreciation to our employees and Board of Directors. Your support and commitment are vital to our business. Lastly, I'd like to thank all the health care workers across our nation who are on the front line serving all of us during this pandemic.

Chelsea, we are now ready for the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Richard Close with Canaccord.

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [2]

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Richard, are you on?

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Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [3]

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Yes. Sorry about that. I was -- on COB, first of all, I was wondering if -- obviously, you had the record quarter. I was wondering if you could quantify in terms of maybe the strength there. How much of that was catch-up from -- I think it was the third quarter of last year. Maybe some thoughts on that.

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [4]

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Sure, Richard. This is Jeff. In my prepared remarks, I did note $7 million in COB revenue in Q1 really was a revenue we expected in the back half of 2019 that ultimately came in. So we've talked about the visibility of that revenue. It does have variability from quarter-to-quarter. So we were expecting that to come in Q4, but it did hit in Q1 of this year.

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Richard Collamer Close, Canaccord Genuity Corp., Research Division - MD & Senior Analyst [5]

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Okay. I'm sorry, I guess I misunderstood. I thought the $7 million you were referring to is Payment Integrity. I apologize on that. With respect to Payment Integrity, I understand the comments with -- on the second quarter. How quickly do you think that is going to rebound in terms of being able to do audits and whatnot?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [6]

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Let me -- this is Bill. I'll answer that. So we're already in discussions with a number of clients who have said they kind of like to be first in the queue to execute on audits. Now not all auditing has stopped. It was really the Medicare RAC program that had put a pause. And again, it's a temporary pause, and we're already talking to them about when would we restart audit. So from a PI perspective, we are still performing audits. We expect that we'll start to, of course, dependent upon the wave of the pandemic. We expect we'll regain auditing again in Q3 and Q4. The one thing I just would remind everybody about most of our business is that we rarely lose the opportunity. It just gets shifted to the next quarter or 2.

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [7]

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Yes. And I would just add to that, we are continuing to receive medical records from hospitals. But as Bill's noted, CMS and a few other clients basically just said, we could not do -- could not process any claims activity for the -- from a guidance perspective, we're really showing that our expectation is that, that's going to be the biggest impact in Q2 and we'll respect -- expect a rebound of that coming into Q3 and Q4.

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Operator [8]

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Your next question comes from the line of Matthew Gillmor with Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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A question. I guess I just wanted to get some bigger perspective on sort of how the business tends to perform during recessionary environments. And I guess I was curious with job losses mounting and, presumably, some of those folks will end up on Medicaid. When do you expect that would sort of flow through from HMS lives' perspective and impact your revenue?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [10]

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Thanks, Matt. This is Bill. So clearly, a significant portion of people will -- and depending on which agency or article you read, we're expecting significant increase in Medicaid. Now it does take a little time to go through the Medicaid qualification. So we're expecting more of the increase starting to hit really the end of this quarter and Q3 and Q4 in terms of the Medicaid roles starting to rise. We will probably not see that in our data until sometime in Q3. But we expect Q3 and Q4, primarily Q4 will have a significant increase in Medicaid lives and, therefore, expenditures.

The other part that will be somewhat of a boost is that, as you know, we are just starting to open up in different markets. The demand for outpatient services, surgeries, dentist offices are reopening. As that happens, the claim volume will increase and we should start to see that. We'll start to see the increase in volume, but due to the lag, we'll see more of the impact on us in Q3 and Q4.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Okay. And then, I guess I was curious probably from Jeff's perspective. But have you kind of factored in anything explicit from a guidance perspective in terms of what higher Medicaid enrollment would mean for this year?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [12]

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Yes. For 2020, Matt, we haven't put anything explicit into the guidance. As Bill said, getting discrete granular data on a state-by-state basis with the lags involved has really not occurred yet. So we're not -- we don't, in our current forecast, have any material upside to Medicaid expansion. But do think it could be a net positive to us, obviously, as it was when we saw the ACA expansion that occurred.

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Operator [13]

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Your next question comes from the line of Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [14]

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So just maybe -- just to clear up some of the earlier questions in my mind at least. When I think about you guys in the PI area, you all can go back in time, right, for a period of time. So anything you would have missed as a result of sort of concerns around abrasion with providers during the COVID-19 outbreak? You can go back and get that information and capture revenue there, presumably when everything normalizes, right?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [15]

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Well, yes. So we can do that often. My guess is and what we typically will recommend is that we meter out those audits. Because as you could tell, if, let's say, the Medicare program, Medicare Advantage, Medicaid, Medicaid MCOs and Commercial all say, "Okay. You can start auditing again," there'd be a flood of audit requests to hospitals. So we will meter that out with our customers, and we'll be working closely with them. But clearly, we don't lose -- we really don't lose anything except for maybe a couple of months off the back end. But even then, most of our plans have rights to go back pretty far in audit. The same actually exist probably even greater on the COB side and that we really have 3 years to identify and recover dollars in Coordination of Benefits. So that even has a longer tail. And we see any of that being recaptured -- any and all that being recaptured as we go live again.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [16]

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Okay. And then I know in the past, you guys have sort of focused on investing in technologies, that sort of lessened the abrasion with providers in PI and I guess in COB as well, but mainly PI. I think I assume that's an ongoing area of product development for you guys. Can you maybe update some advances there in terms of how you're reducing abrasion currently and then over time?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [17]

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Yes. So we have always really communicated with providers through a portal where they're able to -- we're able to communicate their audit and they're able to submit medical records. We have recently revised that audit to be an enterprise -- a portal to be an enterprise, portal for the entire company. We've been working with providers and our clients to move more of our audits to prepayments, so post adjudication prepayment. And then we've enabled new tools for providers to submit records electronically. And for those that we're in a couple of pilots across the nation that just have electronic access to the EMR.

Now I would tell you that the EMR doesn't always have all the information we need and we may need supplemental documentation, but we've also done that. So our goal is to ease the burden on providers. The other way to ease the burden is to make sure as you select claims or records for audit that you have very few false positives. So we've worked judiciously on that as well.

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Operator [18]

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Your next question comes from the line of Sean Dodge with RBC Capital Markets.

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Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [19]

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Jeff, you mentioned there've been some cost actions you all have taken over the last 1.5 months in response to the pandemic. Can you give us just a couple of examples of what you've done there and maybe some bookends around how much you've been able to reduce your cost structure by as a result?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [20]

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Yes. My comments were, Sean, that really, we just continue to manage costs as we have. We haven't done anything else discretely to this point in response. Obviously, given our performance, and that we expect that the pause in audit activity, particularly, in Q2 is only going to be temporary. We haven't made any major changes to our cost structure, but we are continuing our disciplined approach to cost management and how we add costs to the company's infrastructure. Bill, a moment ago, just talked about continuing to invest in technology. And that continues to be a source of opportunity for us as we can use technology to help automate more routine tasks and then really redeploy those staff on higher-value activities, such as yield and client services. So nothing major in the cost structure. And we really didn't see a lot of incremental costs, very immaterial moving to a entirely work-from-home process over the last 30 to 45 days. And as Bill noted in his prepared remarks, it was a fairly seamless transition. So a lot of hard work from our teams to move our people home. But clearly now, we're continuing to evaluate as we've actually seen that go very smoothly and actually seen productivity at or above where we were previously. It will cause us to take a step back and look at how we manage our real estate on a future basis.

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Sean Wilfred Dodge, RBC Capital Markets, Research Division - Analyst [21]

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Okay. That's great. And then maybe going back to the increasing Medicaid enrollment, is there a difference in timing of the lift between that COB and Payment Integrity? Does the lift from the increase in enrollment show up in one quicker than the other?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [22]

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Well, that's an interesting question. We typically see the lift and/or the lives coming through in our feeds that are then moved downstream into our COB product because that's where we first see eligibility. There won't be an impact on Payment Integrity, of course, until we actually see claims volume. So really, COB is the first indicator, and then it would be Payment Integrity.

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Operator [23]

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Your next question comes from the line of Vikram Kesavabhotla with Guggenheim Securities.

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Vikram Kesavabhotla, Guggenheim Securities, LLC, Research Division - Analyst [24]

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I wanted to start on the Accent business. And in particular, I'm curious how the current environment is just affecting the integration process there and the time line to achieving growth and synergies from that acquisition.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [25]

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So this is Bill. We are kind of nonstop on the integration. Accent, we had to quickly move the Accent employees to work-from-home, and we did that along with all the HMS employees. The integration, as you know, we've all become accustomed to working virtually. So in fact, we just had an Integration Update Meeting this week with probably 100 attendees on WebEx. So things are moving smoothly. We expect that we'll have the IT integration done this summer. We're starting to launch the Accent products into the HMS customer base. And then we are working with our technology teams to see how we can further apply automation to both Accent and, of course, additional HMS processes. But we've really not seen any slowdown in the integration process. We do have a team that's focused solely on the integration, and then we have people who are business owners that are involved in it as well.

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [26]

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And I would say, clearly, we are excited about what we see as the long-term growth opportunities and synergies by bringing Accent on. We were moving into the Commercial-to-Commercial space prior to the Accent acquisition, but it has really accelerated our movement into that space. And as our teams are really working together very closely, we're identifying opportunities for the legacy Accent clients as well as HMS' customers. And so I think we're pretty enthused so far and are pleased with the progress to date.

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Vikram Kesavabhotla, Guggenheim Securities, LLC, Research Division - Analyst [27]

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Okay. Great. And then maybe just a follow-up. I'm curious if you can talk about how the current environment is affecting the sales pipeline across each of your business lines? And how that's affecting your visibility going forward? Any color there would be great.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [28]

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Yes. I'll take that. So both Q4 and Q1, we had very large sales quarters. Now -- and that means closed sales. And as you know, the turn from sales to revenue is longest in Payment Integrity, shorter in COB and, of course, very short in our Population Health business. But both Q4 and Q1 were very strong sales. And in fact, I believe by -- while we got the award after -- we finally got the contract with the -- a recovery audit contract for the Veterans Administration. So that's a nice new win for us, that's an implementation with an expected go-live date of November. So there has been brisk sales across our product lines through both of those quarters, and it really hasn't slowed down in Q1. As you can imagine, sales via WebEx calls and GoToMeetings, et cetera, can be challenging at times. But we are already, as I mentioned, in the prepared remarks, receiving inbound inquiries, particularly from states who are going to bear a significant brunt of the costs and their Medicaid programs and are looking for savings opportunities.

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Operator [29]

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Your next question comes from the line of Jailendra Singh with Crédit Suisse.

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Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [30]

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[Recent] you guys said like below $11 million. You see in record, you guys have talked about annual run rate of like $50 million. Wondering if this [guide] in that business and there's some guidance, still assume $50 million of contribution from that business?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [31]

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Jailendra, you were breaking up a little bit there. I think you were talking about the Accent business. So I think it's fair to say, we're very close to that range of revenue for Accent in our forecast for this year. There has been some impact on our Accent business related to COVID, because we do recover some of those -- some of the recoveries that they are doing are from providers. And so we have seen some slowdown in some provider recoveries there. Again, back to our earlier commentary in this instance, this is really just a timing delay. And so if providers are not -- if we're not being able to recover claims from providers in the short term, we ultimately will be able to recover those dollars, but we're still seeing some timing delays. But we are right in that range for our 2020 expected performance for the Accent business.

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Jailendra P. Singh, Crédit Suisse AG, Research Division - Research Analyst [32]

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And then a quick follow-up. I was looking at your guidance. Now you include $5 million to $10 million of [product integration] cost, which was not in the previous guidance. Can you elaborate more on that? What exactly you can say based on that in terms of your capital deployment, I mean given the COVID-19 -- seeing increased opportunities with respect to some attractive assets available at a discounted price, which you might [get rid of]?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [33]

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Yes. You were breaking up a little bit again there, but I think I got the gist of your questions. So we did say when we gave our guidance in February that Accent specific integration costs, we would be adding back. So we have a transition services agreement with Intrado that we acquired Accent from. And so we're paying them basically for IT services. We're also using some outside resources to help with the lift and shift of the IT technologies and hardware and software that we're moving to the HMS systems. And so we said we would call those out and add them back. They will be nonrecurring, so we view them as onetime expenses, not impacting the long-term revenue and earnings trajectory of the business. And so we have added those back with a range. And the range really is reflecting on the sooner we can get off of the legacy Intrado systems, the quicker, we don't have to be paying basically IT resources for both companies.

In terms of M&A, clearly, I think it's safe to assume now that overall valuations will probably be coming down. There's not, frankly, a lot in the marketplace right now. And I would say, probably the companies that are in the marketplace for sailing right now have to be in the marketplace, probably from a liquidity profile. But I think it's fair to say that valuations most likely will come down. I think it's also fair to say that financing sources, particularly with some of the competitors that we might be competing against, maybe are less available now as well. So we're continuing to look for strategic acquisitions. Obviously, our focus right now is continuing to integrate Accent and make sure that we do that well and that we capture the synergies that we think are available. But we're going to continue to look for strategic opportunities to add into our product portfolio over these next few quarters.

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Operator [34]

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Your next question comes from the line of Ryan Daniels with William Blair.

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Jared Phillip Haase, William Blair & Company L.L.C., Research Division - Research Analyst [35]

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This is Jared in for Ryan. Maybe we can just stick on PHM segment a little bit as I think if I heard correctly in the prepared remarks, it sounded like there was a little bit of impact on consumer engagement programs. That were headwinds from COVID-19. So I'm curious if you could just talk a little bit about maybe quantifying how big that impact actually was on the quarterly performance? And maybe just help us think about maybe what the trend lines were prior to those headwinds coming into place?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [36]

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Yes. I'll start and then Bill can add. I mean there's always puts and takes in the sales queue. As we had worked with our customers, I think there was certainly a definitive shift and wanting to engage with members related to COVID-19. And as Bill said in his remarks, we stood up and did significant outreach to almost 7 million members very quickly. But as you can imagine, as a result of those outreaches, plans -- some plans decided to hold some of their other more typical outreach, most likely viewing it now isn't having much effectiveness during COVID, which I think makes sense. And so we were below where we initially thought we'd be in the quarter, but not by much for Q1. And I think the focus now is as plans start to look to the future, how do they start reengaging with patients that we're focusing our sales queue on that and continuing to do outreach in COVID-19, because it's not over yet. But I think once we get through that in the back half of the year, we would expect a more normal return to some of the typical programs we've earned from our customers.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [37]

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And the only thing I would add to that is while CMS has lessened the requirement for reporting data for HEDIS and Star's, all of our health plan clients are still interested in continuing with medication adherence programs and other factors and engagement programs that will help them make sure their clients are healthy, their members are healthy through this pandemic. So we expect that now that we're going to get a little bit back to business as normal, that the typical time line for revenue will follow that. And of course, we've had a very -- even though it's the smaller part of our Population Health revenue, we've had an uptick in interest in sales in both Essette and Elli.

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Jared Phillip Haase, William Blair & Company L.L.C., Research Division - Research Analyst [38]

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Okay. Great. Yes. That's really a helpful color. And I think on the last call, Jeff, maybe you mentioned thinking of this segment as being a double-digit grower this year. Is that still a reasonable benchmark when we think about modeling for 2020, even given some of the headwinds?

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [39]

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Yes. We haven't broke down the individual product lines. So we haven't updated the individual product line view. I think as we think about the business, we certainly think it's a double-digit grower over time. And our overall revenue guidance reflects the puts and takes by product line, but we haven't updated a specific PHM product line revenue for this year. But do certainly think over time, it's going to be a double-digit grower.

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Operator [40]

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Your next question comes from the line of Jamie Stockton with Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [41]

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I guess maybe on Program Integrity, or Payment Integrity, can you talk about how you think health plans are approaching how much they actually want to audit, not necessarily are medical records available to be able to do the auditing work, but when they see provider organizations that are in pretty rough shape right now, how interested are they in pressing audit activity this year?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [42]

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Yes. So Jamie, they are actually -- so we have some health plans who have not turned audits off. Meaning we're still collecting medical records. Of course, with medical records, we always have a backlog of records to review. So we're busy doing that. But some who have turned off audits that require medical records or documentation requests, we are shifting our resources to make sure that we get as many automated services out the door. So what that means is our edits and analytics overpayment analysis, we're still running those. And the only total pause that we have, has been in the Medicare RAC, but we expect that they will turn that back on within -- hopefully within the next couple of months because, as you can tell, Medicare is both from HHS sending out advanced Medicare payments to hospitals, the Medicare Trust Fund is going to be bleeding quite a bit. And so they'll want to return to a normal audit process.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [43]

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Okay. And so they're not looking at provider fundamentals and saying, "Hey, this is going to be a terrible year for hospitals and doctor's offices, we're going to take a break."

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [44]

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I think, Jamie, I would add that they are looking at areas that are hit harder as well from a geographic standpoint. So it's not just a blanket view for the country. Certainly, there's areas like New York, New Jersey that have been hit pretty hard, but there's also many areas that have been hit significantly less in terms of the immediate impact. So I think it's really client dependent on those issues. But I would say, I don't think we've seen any significant diminishing of demand for the services. And as Bill said, sales activity continues even in the Payment Integrity space as well. So I think it's more on a case-by-case basis. But as we looked at the impact, Q2 is where we are expecting the biggest impact, as we've already talked about, and then expect it'll ramp back up in the third and fourth quarters.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [45]

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Yes, that was I believe...

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Jeffrey S. Sherman, HMS Holdings Corp. - Executive VP, CFO & Treasurer [46]

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Go ahead.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [47]

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I'm sorry, I just wanted to add a little color because I just had calls with one of our New York-based health plans. And obviously, they're in the thick of things pretty large plan, but their indications were that they would like us to pick up. In fact, this is a new implementation that's ready, but has been on pause, but they'd like us to start back in June. So that's a pretty short time frame. But as they see -- as they're looking at the curve, their plans are to start the auditing back in June, start metering it out. And of course, their goal is, "Can you get us in line first?" So a lot of these plans are -- and particularly in the Medicaid space are in the areas that have been hit the hardest experiencing some real challenges, and we're helping them through that. So we expect that the audits will begin by the end of this quarter. And as Jeff said, we'll start to see the impact in Q3 and Q4.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [48]

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And then my other question would just be on utilization. And how you think it impacts your business this year? Obviously, it's been weak in margin in the second quarter. How are you baking that into the way that you're modeling the rest of the year?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [49]

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Yes. So we're -- as you can guess, we are lagged, right? So there's a lag between data service and the date the claim's paid by our client, no matter if it's government or a health plan. And then there's a lag sometimes for us to get the data. Though usually, it's -- as we've always said, daily, weekly or monthly depending on the client, we have seen a dip in overall expenditures and volume. But what's going -- what we expect to see probably starting in files we received in June is that reopening up of what is the somewhat of pent-up demand. So dentist offices are opening. We had the sharpest decline in dental claims. Of course, they're small dollars, but large volume. We will see those start to rise again. We've seen an increase in behavioral health claims and that's obviously just everybody dealing with the grief and stress of this pandemic, but we expect to see with outpatient surgery centers and hospitals opening up for what are more elective surgeries, we expect to see a climb in that with claim files we start to see in June. So that's what we can tell right now, and that's what's being modeled into our forecast. Of course, we're taking a measured approach as we go through the year.

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Operator [50]

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Your next question comes from the line of Dave Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - MD & Equity Analyst [51]

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Kind of a follow-up to Jamie's question on utilization. But a part that hasn't been asked is around telemedicine and how that changes the claim value or the error rate, things that would drive opportunity for you. I know, as you mentioned, with dental, I know the dollar value is probably pretty small and not really majority of what you would collect. But I'm just wondering as we evolve towards -- seemingly evolve toward more telemedicine, how does that impact your business?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [52]

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Thanks, Dave. That's a good question. In fact, it's very timely because in the last 2 weeks, we've gotten inbounds from some of our clients saying that they believe there could be an uptick in potential fraud or erroneous coding for telehealth, and they'd like us to start to look at that. So obviously, if you have a COVID diagnosis code, you're going to be paid more, and so they're really starting to worry about the large increase in telehealth utilization. And if we're going to be able to detect any fraud or aberrant patterns.

So we believe that's going to happen. I don't think it dramatically other than plan to have waived the co-pay cost, it's still a paid claim, right? So it's going to come through our systems. And we expect that -- and I'll just mention on dental, while a dental claim is rather small and, of course, the Medicaid even smaller, we recover multimillions of dollars in Medicaid Coordination of Benefits throughout the nation. So when that comes back and comes back strong and, as you know, also with hospitals are looking to put additional shifts in the surgery wings, we expect to see a pretty steep climb once pent-up demand is starting to be fulfilled.

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David Howard Windley, Jefferies LLC, Research Division - MD & Equity Analyst [53]

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Okay. Great. Appreciate that. I suppose maybe another question is a follow-up on the PHM business and just want to try to understand a little bit better the balance between the consumer engagement activity that is, I suppose, more standard traditional type things that you're mentioning that maybe some clients put on the shelf versus kind of crisis engagement that I think in the past, prior to COVID, you would have talked about that as being a functional capability or a value-add of the consumer engagement platform. I guess I'm just trying to understand the balance a little bit because I'm a little surprised that plans would not have wanted to really pound the communication on the crisis engagement that would have actually made that revenue go up instead of down.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [54]

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Well, I mean, so you have to kind of get into the mindset of the plan as they're trying to serve their members. And yes, we had hoped for more than 7 million members during outreach. Some of the clients are doing ongoing outreach with us, right? So as the messaging, obviously, has to change. And it has to be geographic based, which is what we do. But when you're going through a crisis like this, it's the same thing as if we were going through a large natural disaster. Our plans typically say, in fact, we even -- we have weather maps that show us that there's going to be a hurricane hitting Florida that they want us to let members know that they are preapproved for early refill, what to do for safety during evacuation, make sure you bring your meds, but they don't want to pepper them with a lot of other things like you need to go in for your mammogram, your child needs a flu shot. Those are things that they want to put aside during a crisis. And we've seen the same thing happen here with the pandemic. So they want us to communicate regarding the pandemic and anything might be related to that or anything related to flu, in general. But for some of the other things that are not as important, at least for this quarter, they wanted to not put noise into the system, which makes absolute sense because people are bombarded with a lot of news about COVID, and they wanted to get accurate information out.

Now not all plans signed up for it because they already had communication campaigns that they were operating. The difference is, of course, we meet the member where they want to be communicated to. And so some very large plans took us up on that and are doing recurring messaging as we speak.

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Operator [55]

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Your last question comes the line of Stephanie Davis Demko with SVB Leerink.

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Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [56]

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So the pandemic has highlighted a need for analytics across our health care infrastructure. With that in mind, are you seeing any early traction or conversations in your pop health segment that could get that rolling in a bit of a more significant way going forward?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [57]

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Yes. So we've been talking to our clients about that. We have started to run just against our data -- our clients' data trends. And we are in the process right now in our partnership with both the Digital Health Research Center in Australia, but also with the Stanford School of Medicine and their Center for Biomedical Informatics Research.

There -- we're starting an initiative with them to evaluate COVID-19 in Medicaid claims and look at across the states to identify which risk mitigation factors worked, how it affects the Medicaid population, given their high rates of comorbidities. And of course, depending on the demographics of the member or patient, their potential lack of ability to socially distance compared to other population. Once that analysis is complete, it's fed into a model. That model is then incorporated into our LA product. So that's what we've been doing. What we're also doing is asking more clients to allow us to load their data into this de-identified research database that will help us further identify solutions to better predict which actions have to be taken either during this pandemic or a future one.

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Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [58]

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So are you seeing traction for that? Or is it still, to say, early day conversations as obviously, clients have a lot of other things to focus on?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [59]

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Yes. It's early conversations, but we have some clients have asked us, "As you slice the data and you perform your analysis, can you give us any further insights into this?" One of the things we did early on before there was an ICD code for COVID-19, we started to see a trend of individuals with flu, with complications, or flu with pneumonia, which gave us an early indicator that these were pre-COVID diagnosed claims. So we're able to look at that trend across our entire population and then for building this into our analytics, we're using this de-identified data on 18 million people. So it's a very rich database to build predictive models around. There are, as you can tell, that everybody is trying to build something whether it's an app, a tracing app, you name it. We're trying to build predictive tools that help them zero in on the patients that are going to need the most outreach, the most attention and who's most likely to have a real problem with COVID-19 or some other pandemic, so they can do early intervention and education.

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Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [60]

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Got to add some of those social determinants to health, Bill.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [61]

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We have actually -- we gather them -- or we either gather them from the patient or we derive them from demographic data that we use. And that's factored into our risk scoring to determine if a person that has a higher risk in really any disease state for particularly COVID-19.

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Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [62]

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Okay. You also -- you've always done a great job of wearing your Washington Hat. So one follow-up on that front. Are there any pockets of coverage expansion? Or do you have any views on the sustainability of some of these lucent restrictions?

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [63]

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Well, so there -- unfortunately, sometimes we get some mixed messages out of DC, but in reality, administration...

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Stephanie July Davis Demko, SVB Leerink LLC, Research Division - MD & Senior Research Analyst [64]

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Never.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [65]

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Yes. Well, the administration and Congress, though, are looking for ways to make sure that health care coverage exists for people rather than the unemployment rank swelling. So of course, Medicaid is that safety net. We do have and have submitted many different proposals to both Congress and the administration of ways in which we can keep the employer-sponsored network in place. So there's many tools that they can use if they choose to, reimbursing employers to pay for COBRA or pay for employee benefits while someone is unemployed for a certain period of time. There are other measures that can be taken, and they're being done differently on a state-by-state basis.

And then, of course, there are some states that are a little more aggressive about getting people enrolled into Medicaid so that they're at least covered by the safety net.

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Operator [66]

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There are no further questions at this time. I would now like to turn the conference back to Mr. Lucia.

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William C. Lucia, HMS Holdings Corp. - Chairman, President & CEO [67]

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Thank you, Chelsea, and thank you, everyone, for attending our call today. Please stay safe and healthy, and we look forward to speaking to you again on our second quarter call. Have a good weekend.

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Operator [68]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.