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HMS Holdings Corp  (NASDAQ:HMSY)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the HMS Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Borchert, SVP of Investor Relations. Sir, you may begin.

Robert Borchert -- Senior Vice President, Investor Relations

Thank you, Lauren, 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 as well as an investor slide presentation containing supplemental information are 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 you please limit your inquiries to one question and one follow-up, so we can get through the full list of callers in a timely fashion.

I'd like to remind you that 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 full-year 2019 guidance and projections, 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, they should be considered in conjunction with the cautionary statements in today's press release and risk factors described in the Company's most recent SEC filings, including our Form 10-K.

The financial results in today's press release reflect preliminary results and are not final until our 2018 Form 10-K is filed. Finally, we may refer to certain non-GAAP financial measures this morning. Reconciliations of these measures to comparable GAAP measures are included in our press release and the accompanying investor presentation posted on our website.

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

William C. Lucia -- Chairman, President, and Chief Executive Officer

Thank you, Robert, and thanks to everyone joining our call this morning. 2018 was a year of record revenue growth, expanding margins, balance sheet strengthening, and solid execution across the board at HMS. Commercial revenue grew double-digits, while Payment Integrity and Total Population Management revenue were both up in excess of 20%. The leverage in our business model was increasingly evident and cash flow from operations remained strong. As a result, we saw significant bottom line improvement, including adjusted EBITDA, which was 30% higher than the previous year.

Additionally, during 2018, we continued to improve our implementation process and reached our targeted level of contract inventory. We ramped up the cross-selling activity of our Eliza consumer engagement platform in our first full year of ownership. We launched Elli, our internally developed risk analytics and stratification solution and now have our first commercial customer. Our investments in and growing use of advanced technologies started paying real dividends, and we maintained a sharp focus throughout the year on customer satisfaction and employee engagement.

Now turning to the year ahead, the macro backdrop for our services remains favorable, and we believe our key assets, robust and market-leading data, advanced analytics, and expansive customer base, and our engaged workforce position us well to continue growing our business for many years to come.

We have pointed out on numerous occasions that the upward trajectory of healthcare spending is just unsustainable. And as consumers have taken on increased financial responsibility in recent years, due largely to growth in high-deductible health plans as well as rising co-pays and deductibles, they have become more receptive to outreach designed to improve their health and reduce costs. Now all of these financial pressures, combined with the digital self-service experience that consumers have grown to expect in other industries may finally begin to push healthcare in a similar direction.

New care delivery models focused on treating the whole person, including addressing behavioral and social determinants of health, and the acceleration by CMS to move Medicaid and Medicare toward value-based reimbursement are additional trends of significance. We believe estimates of roughly $30 billion total addressable market for the payment accuracy and Total Population Management services we currently offer are accurate. The ongoing evolution of care delivery settings, performance-based reimbursement models, and more consumer-centric program designs will each contribute to projections that our TAM could nearly double over the next decade.

We believe we are well positioned to take advantage of these industry trends with solutions built to address both the current and future needs of payers, employers, providers, and consumers. Healthcare data has always been an essential asset for HMS and in this digital health era it is more important than ever. In our view, however, data is of limited value unless it is curated and easily accessible and actionable.

For example, understanding the health profile of a newly enrolled member can be extremely valuable for a state Medicaid agency, managed care plan, or employer. It can enable effective care management and member engagement to begin as early as point of enrollment for high-risk and the high-cost individuals, and predictive analytics to identify future high-risk members is also critical. Such actionable insights are part of our Total Population Management solutions, which also includes comprehensive member engagement and the care management modules that address the key goals of reducing costs, improving health outcomes and quality, and enhancing the individual member experience.

Central to this platform is our successful member engagement solution Eliza, which deploys sophisticated data science to address medical, behavioral, and social determinants of health in a culturally sensitive and multimodal engagement process. Our ability to provide personalized engagement and care plans at enterprise scale can drive behavioral change, which in turn can lead to healthier outcomes and more satisfied consumers who are then less likely to change health plans. Many of our health plan clients are seeking new ways to retain valued members.

We do expect 2019 will be another strong year for top line and bottom line growth at HMS with a continued focus on leveraging our expansive customer base to increase our market penetration, employing technology to develop innovative solutions and boost product yield, and once again, expanding our margins through cost management and process improvements.

We have good visibility into the projections and forecasted numbers needed to achieve our 2019 financial outlook. The investments we have made over the last several years in people, technology, process improvements, and innovation, provide a solid foundation for the progress we expect in the year ahead, as does our continued focus on execution.

Jeff will now provide additional detail about our fourth quarter performance and our outlook for 2019. Jeff?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Thank you, Bill, and good morning. We delivered a record fourth quarter and full year in terms of total company revenue and finished 2018 on a high note with a nice move up in adjusted EBITDA and cash flow. Payment Integrity revenue, excluding Medicare RAC, increased 32.5% from the fourth quarter of 2017 and was up 21.5% for the full year, as we benefited from greater throughput and the implementations process, expedited customer approvals for new PI edits and apply technology to streamline processes, increase coder productivity, and accelerate revenue generation.

We continue to have a strong inventory of sold but not yet implemented PI contracts and a rollout schedule for 2019 that provides good visibility for our revenue run rate as we move through the year. Our Total Population Management revenue grew 15.1% in Q4 compared to the prior year quarter and was up 22.3% for the full year. Remember that the Eliza acquisition was completed in April of 2017, so we have added back the pre-acquisition revenue of approximately $12.6 million to get to a normalized full-year growth rate for last year.

Moving to a review of our increasing profitability. Most evident was the inherent leverage in our business model, which generated substantial adjusted EBITDA growth over the course of 2018. It increased 15% in Q4 and was up $31 million, or 25% for the year even excluding the $6.3 million benefit we received from the RAC reserve release in the first quarter. The adjusted EBITDA margin expansion of 250 basis points compared to the prior year was driven by a combination of higher-than-average contribution margin on incremental COB and PI revenue, improving leverage, and double-digit growth from our TPM solutions, and the early stage benefits of our technology investments that offer both revenue and cost driven value.

We had significant tax benefits in the fourth quarter, which actually generated a negative tax rate in the period and for the full year. Those benefits related to certain discrete tax items and had an aggregate impact of $0.17 per diluted share in the fourth quarter and $0.19 per diluted share for the full year. We had a non-cash tax benefit in the fourth quarter of last year of $0.25 per diluted share. Excluding the tax benefits in both periods, quarterly adjusted EPS in the fourth quarter of 2018 increased 29% over year -- year-over-year to $0.31 per diluted share. On a full-year basis, excluding the tax benefits from both 2017 and 2018 and the RAC reserve release in 2018, adjusted EPS increased more than 46% to $1.04 per diluted share compared to $0.71 per diluted share a year ago.

Our cash flow for the year remained strong with operating cash flow up 11.6% compared to the prior year at $96.5 million and free cash flow up 23.6% to $66.1 million. With cash and cash equivalents of almost $180 million at year-end and total net debt of just under 0.4 times trailing 12-month adjusted EBITDA, we are very comfortable with our balance sheet strength and liquidity profile as we begin 2019. Our primary focus for capital allocation in the year ahead is continued technology investments to enhance our product capabilities and IT infrastructure as well as acquisitions to complement our Payment Integrity and Total Population Management solution suites. Our principal focus for 2019 is to continue executing to the fullest on our existing business, so our disciplined and rigorous standards for any potential acquisition or partnership are unchanged.

Turning now to our financial guidance for the year ahead. We expect 2019 total company revenue of $640 million to $650 million, which is roughly 8% to 10% growth compared to last year. This is based on projected double-digit growth in analytical services, which includes Payment Integrity, Medicare RAC, and Total Population Management and low-to-mid single-digit growth in Coordination of Benefits. The percentage growth is based on 2018 revenue of $589.9 million, which excludes the Medicare RAC reserve release of $8.4 million. It will be a fairly typical year in terms of the total number of TPL reprocurements for our state Medicaid business, but none of our top 10 states are expected to conduct an RFP process.

We expect the usual sequential decline in total revenue from the fourth quarter, which is generally the highest revenue quarter each year as it was last year. First quarter revenue is expected to be approximately $10 million to $14 million lower than the fourth quarter total of $155.8 million. We are expecting adjusted EBITDA to continue to grow at a rate faster than revenue. For 2019 we are projecting full-year adjusted EBITDA of $170 million to $175 million, which represents growth of 9% to 12% over the year just concluded.

As with revenue, we are normalizing the 2018 adjusted EBITDA for comparison purposes to exclude the $6.3 million impact of the Medicare RAC reserve release. We are only in the early innings of deploying machine learning, robotics, and other technology solutions that further our process automation efforts and continue to increase efficiencies. The benefits of technology are playing a key role in our cost management initiatives and are also key drivers of yield improvements across our business. One important note is that we expect our full-year acquisition-related amortization expense to decline by approximately $16 million as the amortization related to our 2011 acquisition of HealthDataInsights diminishes substantially in 2019.

Moving on to net income, we are projecting $64 million to $70 million for the year and the year-over-year increase in net income will be due primarily to projected revenue growth and margin expansion through operating leverage. Capital expenditure this year will move somewhat higher to a range of $35 million to $40 million as we continue to invest in our IT infrastructure, build out our Big Data environment, and support the ever-present focus on data security.

Additionally, we anticipate incremental capitalized software expenses as we continue to develop innovative solutions for our customers. We've provided some additional details on our outlook for the year ahead in our press release in the investor presentation posted this morning on our IR website, which will help address more detailed modeling questions. We anticipate strong performance again in 2019 and believe the progress we made throughout 2018 positions us well to achieve our full year objectives.

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

William C. Lucia -- Chairman, President, and Chief Executive Officer

Thanks, Jeff. Achieving our financial performance goals in 2019 rests on a strategic framework, which includes four pillars: first is continuing to expand margins and profitability. We do this by maintaining a focus on product yield enhancements and process improvements, diligently managing our operating expenses and broadening our use of technology tools such as robotic process automation and machine learning.

Next is increasing sales, through both expansion of our extensive customer relationships and capturing new logos. Cross selling our Payment Integrity and Total Population Management solutions is another key component of the strategy. We will always seek to be the first call our customers make when looking for solutions to the challenges they face.

Third is taking our growth strategy to the next level by continuing the development and introduction of new products into the markets we serve. We'll also push further in the markets where we are relatively less penetrated such as self-insured employers, PBMs, and other risk-bearing entities. We also continue to identify and conduct diligence on acquisitions to supplement our organic growth.

And finally, we recognize that everything we have achieved is dependent upon our colleagues and the culture we have built at HMS. This includes our people on the frontlines who interact with customers and other stakeholders, together with the HMS leadership team, and those in our offices across the nation who keep operations functioning at peak levels. As a result, we will continue to focus on engaging our entire workforce, rewarding and retaining best performers, and recruiting top talent as we grow.

In closing, I want to thank everyone at HMS for their hard work during 2018. I also want to thank our customers for giving us the opportunity to serve them. We are proud of our achievements last year, which were significant by any measure. And we have now turned our attention to achieving our 2019 goals. With continued focus on the strategic framework I just outlined and the full support from our Board of Directors, I am confident we are up to the task.

Operator, we are now ready for the first question.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Sean Dodge with Jefferies. Your line is open.

Sean Dodge -- Jefferies LLC -- Analyst

Good morning. Maybe starting with Total Population Management, we saw some progression in revenue in the quarter. And, Bill, you mentioned having your first commercial client now in place. I guess can you maybe talk a little bit more about the pipeline of demand you're seeing there and then how we should think about revenue from Total Population Management ramping over the coming year or maybe coming couple years?

William C. Lucia -- Chairman, President, and Chief Executive Officer

So, thanks, Sean. When I mentioned the first commercial client, that was for Elli. The rest of the TPM solutions, Essette and Eliza, have a large and growing commercial customer base. So the TPM solution, the first -- the first area of growth we focused on over the last year and a half was really selling the Eliza solutions in the HMS's existing customer base. So we're seeing real traction there, and we're expecting the TPM product line to be our fastest growing product line over the next several years. It's starting from a smaller base, but adoption in the market is happening at a rapid pace, and we're one of the, if the only, entity we believe that has put the three types of products together to identify high and emerging risk, engage that high and emerging risk, and then manage it through the Essette platform. So those three products integrated together we think is one of a kind. So we're expecting that to be our fastest growth area.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

And I would just add, Sean. This is Jeff. I mean we've said analytical services is going to grow double-digits for the year. We're not giving individual product line growth projections, but certainly TPM is going to be a driver of analytical double-digit revenue growth we're expecting in 2019.

Sean Dodge -- Jefferies LLC -- Analyst

Okay. Thank you. And then, Jeff, you mentioned being in the early stages of realizing the benefits of using technology to drive margins. When I look at the midpoint of the EBITDA guidance versus what you earned in '18, excluding the reserve release, the guide implies something like 25 basis points of margin expansion. Is that the pace we should expect the model to generate over the longer term? Are there some investments or some ramping that's happening this year that's not necessarily indicative of what you're -- you're kind of expecting longer-term trend to be?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

No, I think we've seen margins expand in recent quarters and year primarily as a result of the cost control initiatives we've put in place over the last few years, including the benefits of technology, and we are experiencing those benefits across all of our businesses. And also just the inherent leverage in our business model with incremental revenue coming in at meaningfully higher than average contribution margins.

We had some big one-time items both last year and in the year ahead, as I just mentioned, on amortization expense. So we thought it'd just be cleaner to guide to an increase in adjusted EBITDA versus giving specific adjusted EBITDA margin guidance. But we do certainly expect some margin expansion for the year.

And I think finally, it is important to note, as I mentioned in my prepared remarks, we saw 260 basis point increase in adjusted EBITDA margins in 2018. So any growth would be on top of that. I think the bottom line is over time, we think our investments that we've made in technology and the inherent leverage in our business model will see margins expand, but wanted to guide more to the adjusted EBITDA number in 2019 just given some of the puts and takes.

Sean Dodge -- Jefferies LLC -- Analyst

Okay, very good. Thank you.

Operator

Our next question comes from Ana Gupte with SVB Leerink. Your line is open.

Ana Gupte -- SVB Leerink LLC -- Analyst

Hey, thanks. Good morning. Appreciate you taking the question. A strong quarter. So I'll move to the guidance. The first question is on the margins there. You have seen really strong margin expansion. You're doing all the AI and machine learning that's driving throughput. The guidance reflects a more conservative view. Do you see any drivers of upside to that?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah, I think, Ana, as I just -- as I just said, I think the investments that we have made and the work we continue to do with our technology investments to improve efficiencies could have a favorable impact on margins. Again, coming off a strong 2018, we certainly think we have room to expand margins. Our guidance really reflects what we think our best expectation is knowing what we know today on our performance for 2019. We have completed a very detailed bottom-up budgeting process and I think -- we think it is a realistic view today, but certainly there is opportunity to improve that over the year if things go our way.

Ana Gupte -- SVB Leerink LLC -- Analyst

Then going to the revenue guide as well. You had a very solid performance in Payment Integrity and PM. Going into '19 and then any kind of directional color as well into '20 from a PI perspective, I think it looks like it's a lot of new logo opportunity for you with potential disruption and competitors from the PM standpoint as well as there's a lot of talk you've had about sales cycle and going to market across the three pillars of that strategy. Do you see that growth accelerating into '19 and then into '20? And is this guide where you have it right now? What might change that or drive upside as the year progresses?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah, I think in general, we believe our current business model with our existing solution suite is capable of growing double-digits organic revenue over time and the top end of our guidance for 2019 would get us there. But as we indicated, we guided to growth numbers for which we believe we had good visibility and that puts us in the 8% to 10% range based upon what we know today after adjusting for the Medicare reserve release.

If you normalize two things, we had revenue growth of almost $77 million in 2019. If you normalize for two things, the Medicare RAC reserve release and full year Eliza revenue for 2017, our normalized EBITDA -- our normalized revenue growth for 2019 was over 10%. It was about 10.6%. So certainly we delivered double-digit organic revenue growth in 2018 and the top-end of our guidance in 2019 will get us to that double-digit range as well.

I think if we can achieve that revenue growth, which we believe we have good visibility in and get the leverage that we've been seeing in 2018 in terms of throughput to the bottom line, that positions us well to continue to grow the earnings of the Company.

Ana Gupte -- SVB Leerink LLC -- Analyst

Thanks so much. Appreciate it.

Operator

Our next question comes from Mohan Naidu with Oppenheimer. Your line is open.

Mohan Naidu -- Oppenheimer & Co. -- Analyst

Thanks for taking my questions. Congratulations on the strong finish to the year here. Bill, I wanted to ask you on the Elli risk analytics model there. On the first commercial customer, what was the driver or the pain point for that customer to seek out Elli and what are they using it for?

William C. Lucia -- Chairman, President, and Chief Executive Officer

So they really are using it to identify -- yeah, I would almost call hidden risk and the client was -- we were able to show the client through this advanced analytics platform members that they did not have in care management but desperately needed it in care management. And I'll just take a second to do a comparison against what's in the market.

Typically, what's in the market is products that show people who are high risk because they're already incurring high cost, but the absence of costs -- so our visits can be just as impactful. But someone who has a chronic disease that's not manageable, does not have a primary care physician, and uses of the ER twice a year, and sometimes ends up in a hospital admit. And those are not always the people that float at the top of the queue to be managed by the nurse case managers.

So that's what we're able to show them. The nice fact of closing this account is that while they are a managed care plan in Louisiana, they are part of a large national payer who, of course, is a Medicaid, Medicare and commercial. So we see upward potential with that customer.

And as I said in the past, Elli has gone from a per-member per-month -- is sold on a per-member per-year basis and we have multiple plug-in solutions that a client can buy from that, including our opioid analytics solution and our predictive analytics solution. This plan was a part of the initial pilot in the state of Louisiana. So they got to use the system early on at no cost and were able to kick the tires.

Mohan Naidu -- Oppenheimer & Co. -- Analyst

That is very encouraging. Thanks for the details, Bill. Jeff, if I can ask one question on the implementations on the PI contracts in the pipeline. Anything unusually complex or larger than usual this year that you have in the guidance?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

No, I think as I mentioned, as we were exiting 2017, we said we had roughly four quarters worth of implementations and we said we'll get to a more normalized level as we work through 2018, and we believe we're at that normalized level for both COB and PI implementations. It is important to note on the TPM side, particularly with Eliza, which is the largest revenue segment, we have a much smaller -- much faster sale-to-revenue conversion there, implementations -- a sale and implementation could actually take place in 30 days or 60 days on the Eliza component of our business. And so most of our implementation pipeline or the vast majority is going to be for our COB and PI customers.

Mohan Naidu -- Oppenheimer & Co. -- Analyst

Okay. Thank you so much for taking my questions.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Thanks.

Operator

Our next question comes from Jamie Stockton with Wells Fargo. Your line is open.

James John Stockton -- Wells Fargo Securities LLC -- Analyst

Good morning. I guess maybe first Jeff, I think you said down $10 million to $14 million sequentially in Q1. Is that basically just seasonality for the COB business and maybe the TPM business as well?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yes. I think our general trend, Jamie, is to see Q4 be the strongest quarter in the year, Q1 be the lowest revenue quarter, and then the revenue builds throughout the year. We have many of our commercial customers that are pushing for year-end results, which tends to help Q4 as well. On the TPM side, particularly with Eliza, more of the closing gaps in care component of the business tends to happen in the back half of the year, so that their revenue pattern actually flowed with the HMS pre-Eliza revenue model as well. So, yeah, generally just -- just the seasonality where we see big Q4, it drops off some in Q1 and then builds through the rest of the year.

James John Stockton -- Wells Fargo Securities LLC -- Analyst

Okay. And then maybe the non-GAAP SG&A number, it's bounced around a decent amount. It came in pretty tight it felt like this quarter, which obviously really helped profitability in addition to the strong top line. Anything unusual in Q4 that we should think about that caused that to be a lower number on a relative basis I guess or is that a reasonable kind of jumping-off point for 2019?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

I think it's in a reasonable range. We see some variability from quarter to quarter. In comparison to Q4 of last year, recall we had a weak Q3 in 2017, adjusted our bonus accrual down. We had a stronger Q4. So we saw some increase in bonus accrual. So on a year-over-year basis, a big component of the variance is just a higher bonus accrual on Q4 of '17 because there was some catch-up versus Q4 of '18. And then obviously we've had some large one-time items impact SG&A throughout the year. But on balance, I think Q3 and Q4 are reasonable starting point as you look at 2019.

James John Stockton -- Wells Fargo Securities LLC -- Analyst

Okay. Thank you.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

And one other thing I would note is just for modeling purposes, keep in mind as with 2018, Q1 we're expecting our stock comp expense to be about (ph) $22 million. Roughly half of that we expect is going to hit in Q1 when we give grants just based upon our plan and retirement-eligible executives where most of that will get -- will hit in Q1. So we have to expense it in Q1. So just from a modeling perspective, about half of our stock comp we expect will hit in Q1 of '19.

James John Stockton -- Wells Fargo Securities LLC -- Analyst

Okay. Thank you.

Operator

Our next question comes from Erin Wright with Credit Suisse. Your line is open.

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

Great, thanks. You just talked to potential acquisitions as part of your capital deployment strategy. Can you speak to what potential acquisitions or partnerships could look like and how the pipeline is shaping up? Thanks.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah, I think we continue to look for acquisitions. As I said in my prepared remarks, we're really focused on Payment Integrity and Total Population Management or companies that can help drive our analytical performance across all of our businesses. We've had a fairly active pipeline. It's hard to predict the timing of acquisitions, and I think we have taken a very rigorous and disciplined approach.

So we do expect that we'll be doing acquisitions over time. We're coming up now on almost two years since our last acquisition of Eliza. And I think together Eliza and Essette positions the Company well to move into the TPM space more aggressively. So we think there's good opportunities out there. It's hard to predict timing, but we are focused on deploying our free cash flow for acquisitions as we go into 2019. But again, as we said in 2018 also, we're going to maintain our focus on core execution in our business to make sure we're delivering operating results that ultimately help fund that M&A strategy.

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

Okay, great. And then just thinking about population health, there seems to be a lot of assets or capabilities that could fit under that sort of umbrella and are there capabilities that you're interested in, what are some of the biggest gaps your customers face from a population management member engagement perspective?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Well, I think the challenge that our customers face is they don't have integrated solutions, which is why we acquired and built -- acquired both Eliza and Essette and built Elli because the -- the three solutions together are much more integrated and an elegant solution to the challenge then a nurse case manager looking at four different screens and that was really the driver for us building the solution suite we have.

Now we've plugged in predictive analytics. We've built an opioid analytics panel. We will continue to build out additional analytics suites to roll under the umbrella of our Total Population Management services. I think our engagement solution is probably the leader in terms of both the number of engagements that we perform as well as the multimodal engagement -- engagement design as well as the behavioral science that's built into it. But we'll be looking at -- we'll be looking at other products that can help boost that entire suite, and then we'll be working a lot on brand this year to make sure that the entire market knows us as an analytics company, which of course previously they knew us more as a cost containment company. So that will be a big push in 2019.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Yeah, and I think I would add, we're looking for companies that have capabilities that could help patients access care more effectively, which ultimately helps bend the cost curve. So there's a fair amount of technology-type companies helping to do that in the ecosystem.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah, we'll be focused a little more on what we call care enablement than just care management.

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

That's great. Thank you.

Operator

Our next question comes from Richard Close with Canaccord Genuity. Your line is open.

Richard Collamer Close -- Canaccord Genuity Inc. -- Analyst

Great, thanks. First, Bill, Jeff, congratulations on a great year.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Thank you.

Richard Collamer Close -- Canaccord Genuity Inc. -- Analyst

And then I'll offer a welcome to Robert. So Bill, maybe on the comments on grow to the next level new products you just talked a little bit about and then you mentioned newer markets, employers, PBMs, other risk-bearing entities. Can you dig in on this a little bit? Curious any more details with respect to maybe timing? Is there an active pipeline currently? And is anything baked into your revenue guidance in terms of these new potential customers or new markets, I should say?

William C. Lucia -- Chairman, President, and Chief Executive Officer

I'll let Jeff ask the -- answer the question, but we are -- we have an active pipeline of large self-insured employers. We have closed some Payment Integrity work there. We're now launching both commercial COB and our Total Population Management, particularly a smaller set of the Eliza engagement campaigns that resonate with employers.

So last year we did market research. We've worked with the large benefit advisory firms who are the primary distribution system for our products to large employers but not solely. We also do some direct sales. So we already have a pipeline for the employer market, which we've been in doing dependent audits for many, many years now.

And then while we searched some PBMs through Eliza, we believe that the opportunity is greater and so we're focusing on expanding those sales to the entire PBM marketplace. And then really any entity that is risk bearing, and this includes providers, larger IPAs, who are already users of the Essette platform, ACOs could be, and other I would say tangential healthcare payers like workers' comp payers, any of those are potential users of the Eliza engagement services because we have to think a little broadly about those services are really to get a member to change -- do the next best thing. So for them to -- and to get them to do something that's going to change their behavior and either get a service, get a preventative service done, but something along that care path continuum.

So anybody who is concerned about that or wants to incent a member to do something, we have the platforms to do that. That's why we think it's a much broader marketplace than what we would have traditionally considered government and commercial payers.

And then lastly, while there isn't -- there isn't a strong pipe today, we expect that state governments will be buyers of these -- of the same TPM solutions and are gearing up for that this year.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

And then just from a 2019 revenue perspective, Richard, from a new product perspective, you should expect we have revenue in the millions but not tens of millions. With regards to new products and certainly as we move into the employer side where we have visibility into close or pending sales, we incorporated those into our revenue guidance for 2019.

Richard Collamer Close -- Canaccord Genuity Inc. -- Analyst

Okay. And a follow-up I guess on Sean's question earlier on population health management. Just looking at I think it was 15% growth you said in the quarter. Just curious whether -- your thoughts, did this come in above or below your expectation and was there anything maybe in the quarter that did not hit that you were anticipating. Just any thoughts in and around that.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah. I'd say on average TPM was in line with our expectations for the quarter. There wasn't anything unusual other than what we would say our expected ramp in Q4 that I talked about a little bit earlier in the call. And I think again, I would remind everyone, we are with both our said (ph) products, we analyze and we are moving more to a recurring revenue model over time, so PMPM or PMPY model, but that's going to take time. We're not going to be selling, we don't believe, on the Eliza side a PMPM subscription model to a new customer. We're going to start transactional and evolve into a PMPM over time. But we are -- we did see traction and saw growth in that in 2018, and we're certainly focused on driving more of that. (inaudible) we have much more a move to a PMPM model where historically it was a perpetual license model. So I do think that will give us more visibility, more predictability, and we believe more stickiness with our TPM revenue over time.

Richard Collamer Close -- Canaccord Genuity Inc. -- Analyst

Okay, thank you. Congratulations again.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matthew Gillmor with Robert Baird. Your line is open.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Hey, thanks for the question. I wanted to follow up on the technology investment discussion. It seems like you're getting really great returns on these investments and you've mentioned you're still in the early innings. Can you talk about the priorities for the next round of investments? And I was hoping you could maybe provide an example just to help us conceptualize it. And you've -- I think in the past you've talked about improving claim selection with PI but curious if there's other examples you can provide to sort of help us understand what's going on beneath the surface.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Well, I'll start and then Jeff can add some additional color. I guess I'll take the TPM solution. So some of the technology that we have embedded in the solution on machine learning -- and we will continue to tune is that because we've done outreach to -- we've probably done over 50 million outreaches. In fact, many more than that. But let's say 50 million consumers across the nation, many more outreaches. We learn from every outreach about a specific consumer, their demographics and attributes, the social determinants of health that we've gathered about people, and then the machine learning is used to continue to determine the best way, time, and mode in which to engage a consumer to have them change their behavior, which we call propensity to engage.

And so like we've talked for many years in our cost containment products where there is a yield management or a yield component to improve yield, in TPM, particularly Eliza, the propensity to engage is the area that we continue to tune up through machine learning. So you'll see us continue to do that with our behavioral sciences and the technology learning more about the consumers and the best ways to engage them to raise that propensity to engage which provides better outcomes for our clients. Jeff, do you want anything to add on that?

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah, I think we're also investing in our Big Data environment in order to achieve a variety of benefits, streamlining our data enterprise wide data platforms, which will allow us to conduct more sophisticated analytics. We had challenges in the past just given the sheer size and complexity of the data that we had to do our robust analytics.

So the speed with which we can now analyze large amounts of data is allowing us to increase productivity and improve yield, and we're also working with the group of customers to aggregate data across payers for a variety of purposes. So the Big Data investments we think help streamline from a cost perspective, also drive revenue, and in some of the other technology investments we've made have continued to help improve on the productivity side, including robotic process automation.

And so I think we are just really becoming more sophisticated in our approach there and believe we have more runway to go as we go out 2019 and 2020 and beyond of really capitalizing on both the top line and bottom line opportunities that those investments are yielding us.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Great. And then as a follow-up, I wanted to ask about the Medicare RAC revenue. It was up a little bit sequentially this quarter. And I was curious if there was any sort of improvement or anything in that report in terms of the dialog with CMS on that front?

William C. Lucia -- Chairman, President, and Chief Executive Officer

We expect the RAC revenue to grow double-digits in 2019 when we exclude the reserve release. I think we're continuing to expect that over time we'll get more edits approved and our ability to do work will continue to increase, but we're also still pushing to have the ADR limits increased. We think moving from 0.5% to 1% or to 1.5% or even 2% where they were historically would provide meaningful savings to the Medicare Trust Fund. So that is not something that we have stepped away from, from a government relation standpoint. We still think there's significant savings there. That number is going to go up and down as well, but I think as we're getting more and it's approved, we expect to see good growth in 2019 under the Medicare RAC program.

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Got it. Thanks very much.

Operator

Thank you. Our next question comes from Charlie Strauzer with CJS Securities. Your line is open.

Peter Kirk Lukas -- CJS Securities, Inc. -- Analyst

Yeah, hi. It's Pete Lukas for Charlie. I apologize. You guys have covered most of the questions. So I'll let you move along.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Thanks.

Operator

Our next question comes from Stephanie Demko with Citi. Your line is open.

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

Hey, guys. Thank you for taking my questions. I just had a quick one on PI. It's been two very strong quarters in a row now while one of your peers has seen a reversal. Is it safe to assume some sort of share shift has happened or is there another driver that I'm missing?

William C. Lucia -- Chairman, President, and Chief Executive Officer

I think it's too early to say that. I think the -- what we've been able to do and we said going into ' 18 and of course this continues to be a focus in '19 is (inaudible) focus on execution. So we're doing a better job of executing in the PI product line. As Jeff mentioned, we're adding automation to reduce our false positives, so that there is less provider abrasion. And we continue to build new edits and algorithms and have an entire team focused on that. So I think that's really where you've seen the strong performance was execution, improvement, and of course some sales and expansion sales that have added to that.

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Yeah. And we still look at this as a $5 billion to $6 billion total addressable market, Stephanie, and we think there's considerable white space to be had in the Payment Integrity side. We think probably $1.5 billion of it roughly is being captured today based on what we know about public and private companies. And so I think there is just a -- there is just a total addressable market opportunity that we're doing a better job of capitalizing and capturing with our existing customer base.

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

Understood. So as you -- as you add in some of these new capabilities or kind of expand on your book of analytics, are you seeing your product for PI move up in the ranks as you talk to these payers that you're in?

William C. Lucia -- Chairman, President, and Chief Executive Officer

I think there's always movement down and up across. Edits turned on and off, providers that are turned on and off, which is another thing we closely monitor. So it's really hard to say that we're definitely going to move upstream. In fact, sometimes it's better to be second or even third pass because of the fees that we'll get for doing that and still finding significant dollars. So I think the movement is a little less -- I think it's been kind of much more stable, but for us, we still have a significant growth opportunity to sell PI into our COB customers. So that's our -- one of our biggest focuses for 2019.

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

Got it. And the last one out of me. I'd feel left out if I didn't ask something on the EBITDA margin also. I know this has been asked a bunch of times, but how much of it is just planned investments versus conservatism, not assuming as much expansion (inaudible) this year? (technical difficulty)

Operator

Ladies and gentlemen, please stand by. Your conference call will resume momentarily. Once again, please stand by. Ladies and gentlemen, please stand by. Once again, your conference call will resume momentarily. Once again, please stand by. And, pardon me, Ms. Demko, if you wanted to repeat your question.

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

Hi, sorry about that. Thank you. That good of a question. Just one last one on the margin. Hey, guys. Hope everything is good on the connectivity side. But I just want to ask a little bit more on the margin. You guys do have some planned investments you've mentioned them a few times. But you have seen some pretty significant expansion year-to-date. Is this just a chunkier planned investment that's preventing you from seeing greater margin expansion in '19, or is there just conservatism built into the guidance?

William C. Lucia -- Chairman, President, and Chief Executive Officer

Well, I think, Stephanie, as I said, we saw big margin improvement in 2018. We gave a range of revenue and EBITDA. You don't necessarily have to take the low EBITDA range with the low revenue range. So there is a range of outcomes with the revenue and EBITDA range that we gave. We do expect to see margin expansion in 2019. But given the strong performance in 2018, we've -- and the moving parts, we felt more comfortable just guiding to revenue and adjusted EBITDA as we looked at our guidance for 2019.

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

All right, got it. Thank you, guys.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Thanks.

Operator

Thank you. And I'm not showing any further questions in the queue.

William C. Lucia -- Chairman, President, and Chief Executive Officer

Can you wait one second? We wanted to see if anyone pops back into the queue (multiple speaker).

Operator

Sure, no problems. (Operator Instructions). And I'm showing no further questions still.

William C. Lucia -- Chairman, President, and Chief Executive Officer

All right. Well, I want to thank everybody for your continued interest in HMS, and we look forward to speaking to you on our first quarter 2019 conference call. Have a wonderful day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.

Duration: 55 minutes

Call participants:

Robert Borchert -- Senior Vice President, Investor Relations

William C. Lucia -- Chairman, President, and Chief Executive Officer

Jeffrey S. Sherman -- Executive Vice President, Chief Financial Officer, and Treasurer

Sean Dodge -- Jefferies LLC -- Analyst

Ana Gupte -- SVB Leerink LLC -- Analyst

Mohan Naidu -- Oppenheimer & Co. -- Analyst

James John Stockton -- Wells Fargo Securities LLC -- Analyst

Erin Wilson Wright -- Credit Suisse Securities LLC -- Analyst

Richard Collamer Close -- Canaccord Genuity Inc. -- Analyst

Matthew Gillmor -- Robert W. Baird & Co. -- Analyst

Peter Kirk Lukas -- CJS Securities, Inc. -- Analyst

Stephanie J. Demko -- Citigroup Global Markets, Inc. -- Analyst

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