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HMS Holdings Corp (NASDAQ:HMSY)
Q3 2020 Earnings Call
Nov 6, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HMS Q3 2020 Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Robert Borchert, SVP of Investor Relations. Thank you. Please go ahead.

Robert Borchert -- Senior Vice President, Investor Relations

Thank you, Brandy, and good morning everyone. Joining me our 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's website at hms.com. Today's press release highlighting our financial result is also 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 third quarter and nine month period ended September 30, 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 the timing and effect of circumstances surrounding COVID-19, our full-year 2020 guidance and future financial and operating performance and our future business plans and objectives are subject to risks and uncertainties that may cause actual results to differ materially. As a result, they may 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 subsequent Form 10-Q reports.

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 on our website.

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

Bill Lucia -- Chairman, President, and Chief Executive Officer

Thank you, Robert, and good morning everyone. HMS experienced a solid rebound in the third quarter with revenue rising 15.8% sequentially from the second quarter and increasing 12.5% when compared with the third quarter last year. This is a testament to the resiliency of our strategy and the ability to deliver strong value for our clients. Our significant financial strength positions us to continue to invest in the go-to-market strategies and product innovations that will fuel our growth through the remainder of 2020 and well into the future. Our performance was in the midst of the many external challenges continuing to face our nation and the entire healthcare system.

We had another quarter of strong sales growth and an expanding sales pipeline. We released product enhancements and new product introductions and we focused on driving further client benefit through enhanced product yields. As we mentioned last quarter, nearly all of our lower Q2 revenue was related to the effects of COVID-19. At that time we were confident in our positive business outlook given the improving trends we were seeing. This perspective became a reality. During our third quarter as clients began to lift the audit work pauses enacted during the COVID-19 emergency period and other business lines regained a more normalized run rate. Additionally, we began to realize the impact of rising Medicaid enrollment.

Organic COB revenue growth of 9% over last year's third quarter was driven by increases in prospective COB, improvement in claim volumes related to retrospective recovery work, incremental revenue from yield initiatives and implementation of new client contracts signed over the past nine months. We believe the underlying market dynamics will continue to be a positive driver for our COB business with Medicaid enrollment trends increasing again in the third quarter in both traditional fee-for-service and managed Medicaid. In addition, states responding to a recent industry survey, currently expect Medicaid enrollment to jump 8.2% in fiscal year 2021, with Medicaid spending growth anticipated to accelerate to 8.4%. These trends position us for favorable growth in the fourth quarter and well into 2021.

Payment Integrity revenue was -- also experienced strong growth of over 55% on a sequential basis from Q2 to Q3, as CMS and a number of state and commercial clients began to lift pauses that were in place, to temporarily ease hospital administrative burdens during the pandemic. From a sales perspective, we've seen a significant increase in new and expansion sales in payment accuracy in the first nine months of 2020 compared to the same period last year. As a reminder payment accuracy includes both COB and PI.

Our go-to-market initiatives continue to highlight our significant capability in delivering meaningful and measurable savings for our clients. During Q3, we signed new payment accuracy contracts with 14 clients, including six new logos. Based on current implementation timeframes, we would expect revenue generation from these contracts to begin to be recognized in 2021. Our capabilities are seeing especially important to states facing significant budget pressures due to lower tax revenues and higher Medicaid and unemployment costs. In addition, we continue to scale our Medicare to commercial and commercial to commercial COB solutions, which are helping to drive incremental revenue opportunities through our concerted cross-selling efforts.

Year-to-date, we have been able to cross-sell Accent services into six of our commercial clients including commercial COB and subrogation solutions. In addition, our Annual Momentum Client Conference this past September generated strong interest in our product capabilities and thought leadership initiatives. Even though this year's event was virtual, it was a resounding success as we doubled our client attendance and stimulated both lead generation and engagement on industrywide initiatives. We also continue to innovate and are regularly adding new and enhanced solutions to our comprehensive business lines.

A key component of our strategic growth plan is the gain a greater foothold in the Medicare Advantage market, which will continue to be the fastest growing segment of the healthcare market. Our ability to configure our existing products for Medicare Advantage plans as lead to further penetration into the Medicare market. This year we have signed new contracts or executed scope expansions with eight Medicare Advantage plans. Our solution set for this market includes Medicare Secondary Payor premium protection, Part D cost avoidance and recoveries, clinical claims review, payment analytics and fraud detection and investigative support. Our full suite of population health management services including analytics, care management and member engagement also actively address the Medicare Advantage marketplace.

PHM revenue increased from the second quarter, but did decline on a year-over-year basis as we continue to build a stronger sales pipeline and recover from some of our clients shifting focus during the pandemic. There have clearly been some COVID-19 related timing challenges in our sales initiatives during the second and early third quarter for our PHM business, as our clients clinical leaders were focused on the medical response to the pandemic. As the third quarter progressed, we saw sales momentum in PHM with closed sales in the quarter greater than the first two quarters combined. During the quarter, we also had three clients go live on our new integrated platform, which combines Elli risk analytics with our Essette Care Management solution. This provides real-time data and information sharing to help improve members clinical outcomes. We believe the integration of these solutions and the ability to now inform member care plans from a continuous feedback loop will enable our clients to better manage medical costs and improve outcomes.

In summary, we delivered a solid quarter of revenue growth and strong profitability in Q3, and we believe there is more to come. Importantly we maintained healthy cash flows and a solid capital structure that we expect to fuel our growth. Strong cost containment and clinical outcome capabilities should continue to grow in importance, both during and after this health crisis. This will likely help states in their efforts to close budget gaps as they deal with fiscal pressures due to lower revenue and higher Medicaid costs.

In addition, we believe increasing Medicaid enrollment and healthcare utilization trends should be beneficial for our business over the coming months and quarters. This combination of macro trends, sales performance and product innovation, coupled with our financial strength and business resilience creates a strong platform to capitalize on the many opportunities for our business.

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

Jeff Sherman -- Chief Financial Officer

Thank you, Bill, and good morning. We continue to execute on our growth strategy in the third quarter while effectively managing our operations and costs in the midst of the pandemic. Our growth has been powered by an expanding product and value proposition, new client wins and contract expansions, a strong financial position and breadth of capabilities that enable us to help our clients meet their most pressing needs. We experienced a significant rebound with sequential revenue growth from Q2 to Q3 across our business lines. As Bill mentioned, this was due to temporary client work pauses being lifted and positive impact of increasing Medicaid enrollment and healthcare utilization rates reaching closer to pre-COVID-19 levels.

COB revenue in Q3 rose 6.6% -- 6.7% sequentially from Q2 and increased 20.3% from the third quarter last year or a 9% increase organically if you exclude Accent revenue. As Bill also noted, this performance was led by strong results in perspective COB, improvement in claims volumes and recoveries related to post payment work, continuous yield initiatives and recently implemented new client contracts. We expect continued growth in the fourth quarter and anticipate our COB business momentum will continue into 2021. We may experience some quarterly revenue variability as we have referenced in prior quarters, but we expect the momentum in our COB business to continue in the coming quarters.

Payment Integrity having significant rebound in Q3 as expected with PI revenue increasing 55.6% sequentially from Q2, and up 2.6% from the third quarter last year. During the third quarter, many of our PI clients started lifting the work pauses enacted during the COVID-19 emergency period. However, year-over-year growth continued to be restrained by the lingering effects of COVID-19 circumstances. For example, NPI the Medicare RAC contract did not restart until the end of August, causing a negative impact of approximately $3.5 million. I know the $2.5 million impact was related to state RAC contracts that restarted during the quarter or early in Q4 and the COVID-19 impact to our commercial PI business line was approximately $3 million due to client work pauses. We do expect some of this delayed revenue will be recovered in the fourth quarter and in 2021.

PHM revenue also recovered in Q3 and was up 6.2% sequentially. On a year-over-year basis, while PHM revenue declined 11.9%, we expect stronger sales in Q3 will help to drive incremental revenue growth in Q4. Adjusted EBITDA in the third quarter increased 33.5% from a year ago and was up more than 57% sequentially from Q2. Our results demonstrated strong operating leverage in the third quarter. Total revenue was up $23 million from the second quarter with only a $1 million increase in operating costs. Adjusted EBITDA margin of 26.5% was up 420 basis points from a year ago when you exclude the $7.7 million gain on investment in Q3 last year and was up by 700 basis points from the second quarter. We recognized other expense of $1.1 million in the quarter related to the mark-to-market fair value of our MedAdvisor investment. So this was $1 million drag on our adjusted EBITDA and $0.01 in adjusted EPS in Q3 versus a benefit in Q2. Third quarter adjusted EPS of $0.30 per diluted share was up 20% from the $0.25 per diluted share reported in Q3 a year ago, excluding the gain and investment in the third quarter of 2019.

Our business is maintaining healthy cash flows and a strong balance sheet with more than $211 million in cash and total net debt of less than $30 million or 0.2 times trailing 12 month adjusted EBITDA. This enables us to continue to invest in our product and sales capabilities, support and enhance our IT infrastructure and advance our internal and external growth initiatives.

Turning now to our financial guidance. Given our updated analysis of the business, we are maintaining our full-year 2020 revenue and adjusted EBITDA guidance. Total revenue is now trending toward the low end of our guidance range of $680 million to $690 million. This represents growth of 10.5% to 12.1% compared to last year when you exclude the Medicare RAC reserve release from 2019. The market environment is still evolving in the midst of the continuing COVID-19 circumstances and the extent timing and duration of COVID-19s impact on our operating and financial performance will continue to be driven by many factors. This includes the length and severity of the continuing pandemic and the related impact on medical utilization, any new client work pauses, Medicaid enrollment and state budget pressures.

That being said we currently expect our performance to improve again in the fourth quarter, with momentum continuing into 2021. We recognize our full year guidance implies a sizable sequential increase in revenue from Q3 to Q4 and are confident in our outlook for the remainder of 2020 for the following reasons. First, the encouraging underlying market trends Bill noted earlier, including significant increases in Medicaid enrollment during 2020 and rising utilization in claims volumes. Second, new client contract signed in Q1 and Q2 that have been implemented and are now beginning to generate revenue. Third, our Medicare and state RAC product lines are now running at a full revenue run rate in the fourth quarter with Accent continuing to ramp-up. Fourth, we continue to have success with yield initiatives in our Payment Accuracy solutions. And finally, our fourth quarter is typically our strongest quarter of the year for all three business lines and we currently expect this trend to continue.

I'd also note that revenue increased sequentially each month during the third quarter and we view the month of September as a good run rate to grow off of as we move through Q4. We believe these business drivers position HMS for healthy top line growth in 2021, especially given the current level of demand for our solutions, the positive trajectory of our sales pipeline and recently closed sales enactive implementations. Given the expected revenue increase in Q4 and our continued success in managing cost effectively, our adjusted EBITDA guidance range remains unchanged at $177 million to $187 million for 2020. This would be year-over-year growth of 7.9% to 14% given the improved operating expense trends now forecasted for the remainder of the year. As with revenue, we are normalizing the 2019 adjusted EBITDA for comparison purposes to exclude $8.2 million from Medicare RAC reserve release as well as the $7.7 million investment gain.

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

Bill Lucia -- Chairman, President, and Chief Executive Officer

Thank you, Jeff. We believe strong cost containment and clinical outcome capabilities are going to grow in importance, both during and after this health crisis. This trend, along with the trajectory of our sales pipeline, close sales and active implementations are all positive indicators of the potential for our future success. All of these trends, make us confident in our business outlook, and we remain focused on supporting our clients and protecting our employees health and safety. We will continue to invest in our people, processes and technology to sustain future growth and deliver strong client value to meet the industries evolving needs. I continue to be thankful for the support and commitment of all HMS employees and very appreciative of the active collaboration with our clients to drive enhanced value through our partnerships. We'd also be remiss if we didn't continue to thank our nation's front line health-care workers for what they do every single day. Thank you.

Operator, we are now ready for the first question.

Questions and Answers:

Operator

Your first question comes from the line of Jailendra Singh with Credit Suisse.

Jailendra Singh -- Credit Suisse -- Analyst

Hi, good morning everyone. Thank you. Actually, I want to talk about your shares were volatile yesterday after one of your competitors in the healthcare technology made comments that they replaced a major competitor at a Blues' plan and signed two significant Medicaid COB deals. I don't know how much you can comment on individual contracts, been some losses, but I was wondering if you can talk about just the competitive landscape in Medicaid COB given the strong foothold and market share you have?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes. So we're not aware of any HMS contract transition related to this competitor. And we do not know the size, scope or specific product the company was referring to. Well, we don't know any details. We do believe the Blues contract for their Coding Advisor product would not be related to COB at all, but the prepayment claim editing regarding the Medicaid COB contracts mentioned, the company did not describe the COB contracts as being with either Medicaid MCOs or states. We've not competed with Change Healthcare for a state TPL contract since 2016. At that time we were awarded one of their state TPL contracts when it was up for reprocurement and we have maintained that contract since 2016 without disruption. And we are unaware of Change Healthcare participating in any state TPL competitive procurements as a head to head competitor with HMS.

Jailendra Singh -- Credit Suisse -- Analyst

Okay, that's helpful. One follow-up. I understand again, you cannot comment on all the market speculation and Fed's report. But I was wondering if you can discuss your financial flexibility with more than $200 million cash on balance sheet and with shares trading at these levels, why not get more aggressive on share buyback? And can you remind us, roughly how much cash you need to have on balance sheet to run day-to-day operations?

Jeff Sherman -- Chief Financial Officer

Sure, this is Jeff. I mean, obviously we have -- still have a significant amount of liquidity available, both with the cash on our balance sheet and our undrawn revolver. So in terms of cash on the balance sheet, I mean, we could clearly operate with cash anywhere between $30 million to $50 million on our balance sheet and operate very effectively, still acknowledging that we have the credit line that we can go -- that we can utilize if we need it.

We do have a share buyback authorization in place. It is one of the tools that we use. We've been opportunistic buyers of our shares over time and we continue to have that flexibility. We're not going to comment on any specific share repurchase strategies, but as we think about capital deployment, our first priority has been investing in our business. We continue to do that, roughly $30 million, $35 million a year in capex. Second priority has been strategic M&A. Obviously, we did a big acquisition in the fourth quarter of last year. We have been rebuilding cash since then. So we will continue to evaluate our priorities for capital deployment. Share buyback remains one of those and we have been opportunistic buyers in the past and that remains an opportunity for us going forward.

Jailendra Singh -- Credit Suisse -- Analyst

All right, thanks a lot.

Operator

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

Matthew Gillmor -- Robert W. Baird -- Analyst

Thanks for the question. I guess, I wanted to ask about the guidance ramp into the fourth quarter. I think if I did the math right on the low end you need about $35 million of higher revenues sequentially. So can you help us think through sort of what are the more important drivers on a sequential basis? And I know you mentioned, September being a better month. So you ended the quarter well. And then you also get normal seasonality. But to the extent you can quantify any of that or just provide some additional details, I think that would be helpful?

Jeff Sherman -- Chief Financial Officer

Sure, Matt. So, first, just kind of reiterating a few of my comments in terms of the drivers, Medicaid enrollment is certainly a driver for a sequential improvement. You can see most of the publicly traded Medicaid MCO companies have reported Medicaid enrollment growth of over 10% from Q1 to Q3, so that will be an important driver for our COB business as we exit Q3 and into Q4. We have signed new contracts that I noted in Q1 and Q2, that are being implemented. The Medicare and state RAC product lines now returning to a more normalized full run rate. We had state contracts both from on the URR side as well as RAC contracts that paused work during the second quarter. Those were lifted during the third quarter. And in terms of the seasonality Q4 has always been our strongest quarter. So just on the specific business lines, I'd also mention, we did have roughly about $2.5 million that pushed from Q3 to Q4 in both COB and PI. So $2.5 million total, that's just a normal revenue quarterly variability that we experienced.

But in terms of bucketing this, the largest driver of the sequential growth is COB recovery revenue. And our COB build claims that we send out for recovery were up over 40% in Q3 versus Q2. So as the claim utilization volume trends materialize and again, we are on a lag basis anywhere between 60 to 90 days or longer, we saw April being the low point in terms of build claims and with the significant increase we saw in Q3 and we have a detailed statistical model that really is a liquidation curve, when we expect to collect those bills. So the single biggest driver of the sequential growth is just collecting on the claims that we sent out in the third quarter. That was up significantly from Q2.

The Medicaid lives growth continues to drive perspective COB revenue as we expected, as I said with Medicaid lives up over 10% sequentially from the first quarter that will continue to drive revenue and that piece of the business. On the PI side, with both the Medicare RAC and state contracts ramping back up, that is a big driver and I noted about $9.5 million, $10 million of continued negative impact in Q3, most, if not all of that on a comparative basis is listed in Q4.

And finally, I would say we continue to see progress in Accent. Accent had challenges in collecting dollars from providers. So we're seeing some return in collections as well as some higher claim volumes there. And then finally on the PHM side, we see increasing sales growth in Q3, will help drive revenue in Q4. So a lot of moving parts. The single biggest driver will be COB followed by Payment Integrity return basically ramping up on the contracts restarting and a sequential increase in PHM.

Matthew Gillmor -- Robert W. Baird -- Analyst

Got it. And then one follow-up just on Medicaid enrollment, obviously that's an important driver hopefully into 2021 I would assume for you all as well. But for these new people that are hitting the system, do they -- are there any different in terms of their make up relative to the existing Medicaid population. I guess specifically, I was curious, do they have a higher or lower propensity to have other forms of coverage. Just so you can think about if enrollment goes up 8%. Just if you could -- it might help us think through what that means in terms of revenue at higher or lower propensity to have other companies?

Bill Lucia -- Chairman, President, and Chief Executive Officer

So, Matt. So far during our review of that data and we've -- we look at this monthly, their percentage of employer-sponsored coverage remains about the same. So, there has not been any large swings in new enrollees who have third-party coverage. In fact, this year, we've been a little above the baseline of people having dual coverage. Now, there's been a lot of talk about the impact to employer-sponsored insurance. But it has been -- the impacts been lower than anticipated, because it's primarily impacted. It's concentrated on lower income populations and this could be a positive for us on the recent study from the Robert Wood Johnson Foundation found that 48 million Americans or maybe about 14.5% of the US population are in a family in which at least one worker lost his job. But there are other members covered in that family and they can get coverage from the family members employer-sponsored insurance plan. So I think that's diminishing the decrease and what you might think as a rate of other coverage.

Now about 28% of those in that study, about 28% of those who lose their coverage will enroll in Medicaid, but think about them enrolling in Medicaid, but from a third-party perspective, they are on their spouses coverage as well, and that's a win-win for HMS. I would also say that as people reenter the workforce, it's anticipated that many may be under employed, and still qualify for Medicaid as well as regaining employer-sponsored insurance coverage. So we believe all of this leads to what might be an incremental tailwind for COB revenue over time as of course healthcare utilization continues to rise and our work is accomplished based on eligibility and utilization.

Jeff Sherman -- Chief Financial Officer

And the only thing I would add to that is obviously given the state fiscal pressures, we're still expecting that to be a tailwind as well as they look to us to draw for health and saving more dollars and helping to cover either tax revenue shortfalls or their share of Medicaid enrollment costs.

Matthew Gillmor -- Robert W. Baird -- Analyst

Okay, thanks a lot.

Operator

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

Ryan Daniels -- William Blair -- Analyst

Hi guys, thanks for taking the question. Bill, in your prepared comments, it seems like you were more focused this quarter on product innovation and some new products. Can you talk a little bit more about kind of what product expansions, you're doing and new products both in regards to specifically what those are focused on? And number two what market, it sounds like those might be more MA oriented, but I want to make sure that's correct? Thanks.

Bill Lucia -- Chairman, President, and Chief Executive Officer

Sure. Thanks, Ryan. So we've been innovating in each product line. So in COB, last year we introduced our coverage on-demand product, which can be used -- which is being used by healthcare.gov. It can be used by any state exchange and we have two states that have agreed to start using that. So that's identifying third-party coverage at the point of enrollment. It could be done at the point of service. That really -- any point in the food chain and we believe that will get wider adoption after clients can figure out how to integrate with us and adjust in time process. It's just an API to our services. We have some other COB innovations coming along, as well as making sure that we sell as many to our existing clients, the Accent product lines. Looks like we've said we've sold six within the first nine months of the acquisition.

In Payment Integrity, we continue to move more of our services upstream and more clients are buying our prepayment clinical claims review, with additional implementations happening this quarter as well as continuing to ideate in that area. So we have very strong movement in terms of getting new innovative audit scenarios in front of our customers. And then in PHM, not only have we integrated Elli and Eliza, but we are now on the path of integrating -- I mean Elli and Essette, we are now on the path of integrating Eliza into that. So we believe we will be the only organization that with one set of tools, you can identify your highest-risk members, you can engage them electronically or in a digital fashion and you can manage them through our care management platform. There is also additional versions of Eliza that are planned for launch in 2021. So a lot of work on that. We did -- I won't say shift our focus, but we put a lot of focus on Medicare Advantage, because our products are configurable for that market and as we said in the prepared remarks, we had quite a bit of success in selling into the MA marketplace this year, and we'll continue to see that in our sales queue. So the innovation is going to be coming across all of our product lines and our product management function has been very active in both the COB side, the Payment Integrity side and on the PHM side.

Ryan Daniels -- William Blair -- Analyst

Okay, very helpful. And then one quick follow-up on the pauses in work. Have all of those effectively been removed at the state in Medicare level or is there still some outstanding work pauses both for RAC and then broader program integrity? Thanks guys.

Jeff Sherman -- Chief Financial Officer

Yes.

Bill Lucia -- Chairman, President, and Chief Executive Officer

Go ahead Jeff.

Jeff Sherman -- Chief Financial Officer

Yes. I think at the state level and at the same as for our contract all the pauses had been lifted. I think we still have one commercial client that we are hopefully expecting that pause to be lifted. But other than that I think all of them have been lifted.

Bill Lucia -- Chairman, President, and Chief Executive Officer

So that impact, that work will see the impact starting in Q4 and into Q1, because of the lifts.

Operator

And your next question comes from the line of Stephanie Davis with SVB Leerink.

Stephanie Davis -- SVB Leerink -- Analyst

Hi guys. Thank you for taking my question. Bill in your prepared comments indicate some demand space from states looking to close budget gaps. Can you give us some color on those inbound or from the state conversations? Is there any way to quantify the impact for 4Q or 2021?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes, so let me -- I'll give you a couple of examples. We -- I'm not going to name state clients, but we had one of our long-term clients reach out to us and ask us to submit as many proposals as possible to help them with their upcoming budget crisis. I'd say since that happened, which was very early in the pandemic, we've had significant inbounds, and of course, we're actively talking to very senior level people across state Medicaid programs about what can be done to further protect their budgets. What it is as an expansion in both our RAC, our state RAC, PI work and also regulatory processes that we're helping them with the further protect their rights to recover Medicaid third-party liability. Also on the Medicaid reform commission, I'm not quite sure if I have that correct in New York State and a number of the initiatives that we proposed were adopted by the state. Obviously, that's a very large Medicaid program. So inbound activity has been strong. Interestingly enough, outbound activity has been a little easier because it's easier to get very senior level people at state government to take a meeting virtually then with all the half of travel and trying to coordinate schedules. So it's been a very active period for sales.

Stephanie Davis -- SVB Leerink -- Analyst

All right. That's super helpful. And then kind of related to that, could you walk us through some of the PHM wins that you mentioned in the remarks. What gained traction and what pushed folks over the finish line given budgets are a little bit tighter right now?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Well, so the PHM wins and the ones we mentioned about that are in implementation this quarter are the three integrated Essette and Elli solutions. Now what happens every year and it has happened last year, it's happening this year, after our Momentum Client Conference and people get a chance to see the ability of Essette and Elli integrated, we typically get sales and lead generation from that. So those wins have been around that -- those product lines. And of course, this is the time of the year where, even though there is still some concern about the pandemic, a lot of our clients are still very interested in making sure that their client, their members get in for childhood immunizations, well baby visits, mammograms, anything or post-hospital discharge programs that we run, all of the things that help them not only improve quality but continually help them make sure that people with chronic conditions are stable. So this is the time of year where we're typically doing more Eliza campaigns, and they usually -- it's usually the fourth quarter where we have the highest number of, and I wouldn't say there are new logos, it's our typical clients who are doing more campaigns as we close the year. We've had the new logos in the Essette and Elli side of the business, and Elli sales are growing rapidly.

Stephanie Davis -- SVB Leerink -- Analyst

All right. Thank you, Bill and team.

Operator

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

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Yes, great. Good morning. Thank you for the question. So I guess that -- I guess the last question was sort of highlighted I think some of the positive demand from sort of state Medicaid programs. But is there any kind of risk or on the other side to the extent that there is -- there are so many moving parts here with the FMAP bump and with public health emergency period potentially winding down at some point, as you look forward, I mean are there potential in your sort of macro view of the world. Is there -- are there any concerns or thoughts around maybe kind of any reductions in Medicaid spending over time or sort of more tight eligibility. Is there any -- are there any risk that that could backfire against you with things going really well right now?

Bill Lucia -- Chairman, President, and Chief Executive Officer

I guess, I mean, I don't see a tightening of Medicaid eligibility. Of course, it does depend on the outcome of the election, what directions we may -- Medicaid may take. But in reality, we don't really see any reductions in eligibility or stricter eligibility requirements. As you know, the work requirements have not been a wildly accepted both by states or in court. And I guess the other side of the question is many years ago, we used to be counter cyclical. So when the economy was bad and more people were on Medicaid we grew. When states have rainy-day funds, maybe they didn't ask as much from us. That is not the case anymore. All of our clients are pretty voracious about saving money and typically once they start an initiative with us and the money starts flowing in they do not turn it off. Now that's a little different than in the commercial world, where PI can be an arms race, right. The client may fix a payment analytics issue and then we're on to presenting three more to them. But we don't see that happening in the state market. States are going to be impacted by the pandemic and the budget pressures for some time to come, and don't have a lot -- from a Medicaid perspective, don't have a lot of other levers to pull, and we don't think they want to make eligibility even harder during a horrific pandemic.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Okay. Thanks for your perspective and maybe another question, in terms of -- it sounds like you're getting some synergies there, which is wonderful to hear. And I know you provided some detail on kind of growth expectations on profitability a few quarters ago. Now with this thing under your belt for a year. Are we still on track in terms of kind of that growth outlook for that set of businesses going forward. What's -- can you update us on your updated thoughts on growth and profitability for Accent as a stand-alone business?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Well, let me -- I'll answer first from a, what the opportunity is and then Jeff can talk about it from a financial perspective. So Accent was obviously also impacted, because a lot of their work is recovery from providers in the commercial COB space and collecting from providers during the pandemic was a little more difficult. However, we are seeing that start to rebound. The most important thing about it is that we have completed the integration. We have a path for the technology integrated. The technology is all on HMS data centers now, but we have completed the roadmap for how the different technologies will be integrated. And I think the real success about the growth of this business underneath us is that we've already cross sold their six existing HMS clients with Accent products and then we are in the process of selling Accent clients with HMS products. So we believe that it's been to date a successful integration. The employee engagement scores at Accent are higher than they've ever been, and we did all of this storing a pandemic where we were all working from home. Jeff, do you want to talk about the financial outlook on Accent?

Jeff Sherman -- Chief Financial Officer

Sure. Thanks, Bill. So, as Bill noted, so we're down where we originally expected to be, we think most of that is timing related for the year as Bill noted. So I think with the six cross-sales that we have so far with Accent that will be ramping up in adding revenue as well as our Accent team to merging with our HMS teams and really IDA and using our analytic capabilities on both sides. We're confident that our original expectations for Accent are going to materialize. We do have all the integration costs this year, that as Bill noted really finished in the third quarter. So those would be gone as we exit -- as we move into Q4 and will help be driving our earnings next year. So I think nothing has changed from our original optimism about what action is going to do, the cross-sales activity, as well as the opportunity to use technology to help things -- help do things more effectively, more efficiently, and Accent also present margin opportunity. So I think we're pleased at where we're at nine, 10 months or 10-11 months into this and see a lot of good growth potential from here.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Great. Thank you and congrats.

Bill Lucia -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

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

Sean Dodge -- RBC Capital Markets -- Analyst

Thanks, good morning. Maybe going back to the guidance, can you talk about the margin profile or mix of the incremental revenue you expect to come on in the fourth quarter or maybe are there some investments here where you're spending you expect to ramp-up. I'm looking at the contribution margins implied in the guidance, and there's not as much improvement implied in EBITDA sequentially, typically been able to generate in the past given kind of this amount of progression in revenue. So anything on spending into the fourth quarter margin profile, etc.

Jeff Sherman -- Chief Financial Officer

Hey, Sean. So as I said, we didn't give out specific drivers. COB and PI are the two biggest drivers. So on the COB side, we tend to have more automation there. So from a margin profile perspective. On the PI side, they are more cost associated with driving PI revenue. So we do have some additional investments planned as we're adding some costs in the fourth quarter. I don't expect them to be very material to the overall cost structure. We do also just, one other point to make is, we record our bonus accrual based upon relative earnings in each quarter. So with more earnings expected in Q4 that will drive just higher bonus accrual on a sequential basis from the second or third quarter. Other than that I think it's more just resources that we need to drive the incremental revenue, and are expecting obviously if you look at our guidance range a significant lift in adjusted EBITDA in the fourth quarter and higher margins in the fourth quarter to get to our overall guidance number.

Sean Dodge -- RBC Capital Markets -- Analyst

Okay, that's helpful. Then on the Medicare RAC restart. When we think about the impact that can have on revenue. There have been Medicare claims continuing to be generated over the time it was halted. Can that help get revenue off to a quicker start or maybe help it reach a little bit of a higher plane for a period of time, because you've got the big backlog or bullets, you can work through initially? Or does it not work like that?

Jeff Sherman -- Chief Financial Officer

So we don't have clarity yet on whether we will be able to audit claims during -- from the pandemic period. So the work we are doing, that we did in the third quarter and are doing now are still for pre-pandemic claims. But we obviously had claims that were Medicare requests that were outstanding when the pause happened in the first quarter, we are redoing work on those and in the second quarter and into the third quarter, and when the opportunity was restarted, when CMS allowed us to start recapturing those dollars that's what hit in Q3. We are sending out more medical record request, but that didn't start until April -- until August when the pause was lifted. So right now, our guidance is not incorporate any additional claims from the pandemic period, that's potential upside, although at this point, I don't think we would expect any definitive answers on that probably before we exit the year. So we are hopeful that we'll be able to audit claims during the pandemic period as we move forward.

Sean Dodge -- RBC Capital Markets -- Analyst

Okay, very good. Thank you.

Operator

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

David Windley -- Jefferies -- Analyst

Hi, thanks for taking my question. I wondered -- it's come up several times, but I wondered if you could quantify the revenue opportunity, the revenue contribution from these six Accent cross-sales and you also mentioned the integrated -- a couple of integrated PHM platform sales. Could you give us revenue size on those or if not just kind of what you think that broader opportunity could be?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes, I don't think we typically -- I think we've said in the past that when we sign a contract for really any of our work, it takes quite a while for it -- not the implementation period, but also for it to ramp up. So I don't think we've -- we actually give our detailed contract size, but we consider the addition of the Accent product line into HMS to be able to allow us to offer a comprehensive COB solution for all lines of business, Medicaid, Medicare, and Commercial that no one else has under their umbrella. So we think that's a very competitive advantage. Jeff anything else on the revenue contribution?

Jeff Sherman -- Chief Financial Officer

Yes, I mean, I would say it's in the millions in terms of annual contract value that we're expecting for those sales getting more granular. But to Bill's point, I think having the platform to continue that cross-sell and seeing those implemented over time will certainly help us drive revenue. I mean, as we think about our forecasting, we are always looking at multiple drivers. One on the COB side, we're looking at lives, we're looking at claims coming in. Now sometimes when those claims get paid, it causes variability. So that's why we tend to talk about our revenue in terms of annual versus quarter. And we do a detailed forecast really by client by product on a monthly basis and update that real time. Obviously there's processing delays and things happening in that forecast that can move revenue, but over time when you look at on a rolling four quarter basis, we usually been fairly accurate in terms of how we capture those revenues in our forecast. And then we also have closed sales that move into implementation and we track that by client, by product as well. So it would be pretty good handle on when closed sales are going to be generating revenues.

David Windley -- Jefferies -- Analyst

Got it. Thank you. I think there is over fairly extended period of time there has been a talk about kind of developing and driving prospective products, prospective audits and analyzes. Where does the mix of prospective versus retrospective stand and is that still a portion something that your clients have strong appetite for as a way to kind of minimize provider abrasion?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes, so in payment accuracy, obviously and COB half of our revenue is prospective and we're trying to work with our clients to make that even more real time. We can do it, it's whether they can inject -- export and ingest the appropriate APIs. On the Payment Integrity side, there continues to be a strong desire, particularly in the MCO space for prepayment, because it does, it is less provider abrasion. And so, in that space we've also launched an audit, a clinical claims review audit that based on the AI capabilities in our review and looking at an entire episode of care, we do not need medical records that can be done pre or post even if it's done post payments, clinical review and the medical records only require if the provider appeals it. So there is a strong market demand for moving as much upstream as possible. So that, A, they are not chasing the dollars afterwards, and B, providers are getting appropriate claims paid and adjusted at the time of the adjudication.

David Windley -- Jefferies -- Analyst

Got it. Last question from me. There was a headline not too long ago about strategic alternative review. Can you lend any credence to that or give any comment at all about whether that's ongoing?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes, so we don't -- we have a pretty strong policy about not commenting on rumors. In reality, we as a business have always -- are always looking for the best alternatives for our organization. But we're not going to comment publicly on rumors that come out of the press.

David Windley -- Jefferies -- Analyst

Got it. I figured as much. Thank you very much.

Operator

Your next question comes from the line of Steve Halper with Cantor Fitzgerald.

Steven Halper -- Cantor Fitzgerald -- Analyst

Yes, hi. Good morning. Could you just talk to the impacts on the operating cash flow in the quarter. It looks like it declined from two levels specifically on the receivables side. Anything to read in there?

Jeff Sherman -- Chief Financial Officer

No, the only thing I would say is, we obviously, we had a big lift -- big jump in revenue Steve in Q3, and so we will be -- we will look to be collecting that as we progress and then we had strong -- very strong cash collections in the second quarter from a strong first quarter. So I would expect a similar pattern to occur as we move into Q4.

Steven Halper -- Cantor Fitzgerald -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Daniel Grosslight with Citi.

Daniel Grosslight -- Citi -- Analyst

Hi guys, thanks for taking the question here. Maybe a bigger picture question for you. Once all this noise passes with COVID, it seems like there are some pretty big tailwinds behind you. So, I think previously you have said that the analytics segment, Payment Integrity and PHM could grow kind of double-digit and COB could grow low to mid single-digits. Are you still thinking about longer term segment growth in that way? And what are some of the drivers of upside and downside to some of those longer-term projections?

Jeff Sherman -- Chief Financial Officer

You want me to start, Bill.

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes, why don't you start.

Jeff Sherman -- Chief Financial Officer

Yes. So well, first, I'd say, yes, we will give guidance for 2021 as we report our fourth quarter remarks. What I would say, as we think about a couple of drivers, obviously adding Accent into our COB capabilities gives us more optimism about the growth potential in our COB business. On the Payment Integrity side, we grew at double-digit in 2019. We had a very strong Q1 in 2020 in Payment Integrity and obviously we have had to adjust for the pandemic. But we clearly think that that's a double-digit grower over time.

And then finally on PHM, we also have had impact related to COVID on PHM, and we've also spent a lot of time reconstructing and rebuilding a sales force really to deal with the inherent complexities of our Payment Integrity product suite and have seen success with that. It's taking time as those new people have come on. Over the last three, four quarters and our building their sales pipeline, we did see some evidence of that in Q3 as well.

And I would say on PHM, in terms of, we really did see almost a hall of sales activity in the second quarter as the clinical leaders that we typically interact with really were entirely focused on the pandemic, which made sense. I think as we exited the second quarter into the third quarter and it was clear that COVID was going to be around for a longer period of time. I think we started to see reengagement on the sales side. And actually saw that driving sales. So I don't think anything has changed from our perspective. We still think we can see COB growing over time in that mid-single-digit perspective and then double-digit growth for PI and PHM. And obviously given our leverage, our ability to gain leverage on that we think that bodes well for earnings and cash flow growth with that type of revenue growth.

Daniel Grosslight -- Citi -- Analyst

Got it, OK. Okay. And then on the Accent business if I'm looking at it correctly, it looks like a little bit of a sequential decline this quarter, although pretty much flat. As we think about the fourth quarter and heading into 2021, how should we think about the ramp-up sequentially over 3Q and I get that it was difficult to collect payment from providers in 2Q. But I would have expected at least some sequential increase in 3Q? What do you think is limit -- had limited that in the third quarter?

Jeff Sherman -- Chief Financial Officer

I mean, some of it is as Bill noted, it was providers that were furloughing staff or were really focusing on managing their cash flow, and so I think we acknowledged that. We are dealing with our clients to try and get those recoveries. It's not a question of if the dollars are owed. It's a question of timing of collection. And so I think we will -- and Q4 tends to be seasonally a stronger quarter for Accent and has been historically as well. So we would expect to see sequential growth in Accent again where we have findings and really it's a matter of timing of collections not if, now we did see some lower claims volume also impact Accent. So as the pre-COVID or as the utilization levels start to have increase, we would expect that to drive more dollars -- more claims volume to drive revenue there as well. And then 2020 we should -- 2021, we should expect those cross-sales begin to generate more revenue as well, and expect to see good growth in Accent when we provide our guidance for 2021.

Daniel Grosslight -- Citi -- Analyst

Got it. Thanks guys.

Operator

Your next question comes from the line of Charlie Strauzer with CJS.

Charlie Strauzer -- CJS Securities -- Analyst

Hi, good morning. So Bill just a quick one for you, just in terms of your the questions that you were talking about the helping states with their budgetary pressures. Historically some states have kept the COB process in how have you heard or had conversations with any of these states that maybe could loosen that up and maybe and look at kind of outsourcing point forward?

Bill Lucia -- Chairman, President, and Chief Executive Officer

Yes. So we did this year we did win a state that has never outsourced COB in the past. That was one. I think maybe in Q1 or Q2. We continue to have our balance into states that don't outsource COB work. Some may plan to put out competitive procurements, others may not. We also do some COB work for states that have not put out a COB or TPL procurement through a state RAC contracts. Of course, it's in our best interest at this point, particularly during a point where states have severe budget shortfalls to both up-sell to our existing clients which there has been significant activity in the state market and then look to these open states to do procurements. So we're active in that arena. But I did -- as I said, we did add one new state client this year.

And I will say what's pretty interesting about our state government market is, it continues to grow even though 80% of the lives are in managed care. So we have a lot of stickiness and up-sells with the state -- with our state Medicaid clients.

Charlie Strauzer -- CJS Securities -- Analyst

Great, thank you very much.

Operator

And I will -- that does conclude the question-and-answer portion. And I will now hand the call back over to Bill Lucia.

Bill Lucia -- Chairman, President, and Chief Executive Officer

Well, thank you so much everyone for attending our call. We appreciate your continued interest in HMS and we look forward to talking to you at our fourth quarter full-year 2020 earnings call in February. Thanks and have a wonderful weekend.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Robert Borchert -- Senior Vice President, Investor Relations

Bill Lucia -- Chairman, President, and Chief Executive Officer

Jeff Sherman -- Chief Financial Officer

Jailendra Singh -- Credit Suisse -- Analyst

Matthew Gillmor -- Robert W. Baird -- Analyst

Ryan Daniels -- William Blair -- Analyst

Stephanie Davis -- SVB Leerink -- Analyst

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Sean Dodge -- RBC Capital Markets -- Analyst

David Windley -- Jefferies -- Analyst

Steven Halper -- Cantor Fitzgerald -- Analyst

Daniel Grosslight -- Citi -- Analyst

Charlie Strauzer -- CJS Securities -- Analyst

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