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HMS Holdings: Opportunity in Obamacare

Thursday, 13 Oct 2011 05:14 PM

The Patient Protection and Affordable Care Act of 2010 (commonly referred to as “Obamacare”), the aging of the U.S. population, and the massive amount of fraud associated with Medicare and Medicaid are creating a big opportunity for HMS Holdings Corp. (HMSY).

HMS Holdings provides cost-containment services for government and private healthcare programs. The company’s services help its clients ensure regulatory compliance with healthcare regulations and recover payments due from liable third-parties.

Its clients include Medicaid and Medicare managed-care plans, state Medicaid agencies, government and private employers, pharmacy benefit managers (PBMs), child support agencies, the Veterans Health Administration (VHA), the Centers for Medicare & Medicaid Services (CMS), commercial healthcare plans, and large business outsourcing firms.

As of Dec. 31, 2010, the company served 41 state Medicaid agencies and 125 Medicaid health plans. It also provides coordination of benefits and third-party insurance identification services to medical centers across all 21 Veterans Integrated Service Networks of the VHA and to child support agencies in 14 states. Two large customers during 2010 were the New York State Office of the Medicaid Inspector General and the New Jersey Department of Human Services, which accounted for 6.7 percent and 5.3 percent of HMS Holdings’s revenues, respectively, during the year.

HMS Holdings helps those entities contain their healthcare costs by ensuring that healthcare claims are paid correctly and by the responsible party. In most cases, the company’s clients pay HMS Holdings contingency fees calculated as a percentage of funds recovered by the company or as fixed fees for cost-avoidance data. Most of its contracts have terms of three to four years.

Recent operating results and outlook

The demand for the company’s services arises, in part, from the small but significant percentage of government funds that are spent every year in error, whereby a party other than a government-sponsored entity was responsible for a service, or a mistake was made by a government agency in applying complex claims-processing rules.

According to the 2010 Agency Financial Report from the U.S. Department of Health and Human services, improper payments in the Medicaid and Medicare programs totaled $70.4 billion in 2010. During that year, HMS Holdings’s services recovered more than $1.7 billion for its clients and provided data to those clients that assisted them in preventing billions of dollars more in erroneous payments. As a result of those cost recoveries and preventions of erroneous payments, the company generated $302.9 million in revenues during the year ended Dec. 31, 2010. That’s up from $229.3 million in 2009 and $14.5 million during 2008.

In light of the fact that Medicare and Medicaid programs combined pay approximately a third of all healthcare expenditures in the United States, and that those expenditures are expected to rise at a rapid rate over the next several years due to the aging of the U.S. population, I expect HMS Holdings to continue to grow its revenues at a fast, healthy pace over the next few years.

The Deficit Reduction Act (DRA) of 2005 and the Patient Protection and Affordable Care Act of 2010 also bode well for HMS Holdings.

The DRA established a Medicaid Integrity Program to increase the government’s capacity to prevent, detect, and address fraud and abuse in the Medicaid program. In addition to pre-existing measures contained in the Social Security Act — whereby U.S. states are required by law to take all reasonable measures to ascertain the legal liability of third-party entities for healthcare services provided to Medicaid recipients — the DRA added self-insured plans, PBMs, and other legally responsible parties to the list of entities that are subject to the provisions of the Social Security Act.

Forty-seven U.S. states and the District of Columbia have enacted legislation to comply with requirements of the DRA. Those measures have strengthened HMS Holdings’s ability to identify and recover erroneous payments made by its clients.

Separately, the Patient Protection and Affordable Care Act provides the company with additional sources of revenues (via its cost-containment services) by making approximately 22 million more persons eligible for Medicaid and the Children’s Health Insurance Program over the next eight years and by doubling the amount of expenditures made by those government-sponsored programs during that period, according to the Centers for Medicare & Medicaid Services.

Financial condition and profits

HMS Holdings is very strong, financially, with the company’s cash alone equal to three times its total financial obligations as of June 30, 2011 and its long-term debt representing a mere 3.9 percent of the company’s total tangible assets.

I expect the company to continue to use its excess cash to acquire other companies that offer synergistic products and services.

Meanwhile, the company has, historically, grown its revenues earnings at a fast pace. For example, during each of the past three years, HMS Holdings grew its net earnings per diluted share at a rate in excess of 29 percent, on a 24.3 percent minimum increase in its revenues. During that same period, the company increased its net profits per each dollar of sales to 13.2 percent for the year ended Dec. 31, 2010, from 10.2 percent for the year ended 2007.

In light of the company’s strong financial condition and the favorable geopolitical and demographic developments mentioned above, I expect HMS Holdings to continue to increase its earnings at a fast pace over the next few years.

With its stock holding up well over the past few months in spite of the substantial pullback in the prices of most stocks since the beginning of May, my experience suggests that now would be a good time to establish a position in HMS Holdings.


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DavidFrazier
The Patient Protection and Affordable Care Act of 2010 (commonly referred to as Obamacare ), the aging of the U.S. population, and the massive amount of fraud associated with Medicare and Medicaid are creating a big opportunity for HMS Holdings Corp. (HMSY). HMS Holdings...
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Thursday, 13 Oct 2011 05:14 PM
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