Estimated Liability for Appeals and Estimated Allowance for Appeals

The Company provides services under contracts that contain various fee structures, including contingency fee and fixed fee arrangements. Revenue is recognized when a contract exists, services have been provided to the customer, the fee is fixed and determinable, and collectability is reasonably assured. In addition, the Company has contracts with the federal government which are generally cost-plus or time and material based. Revenue on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Revenue on time and materials contracts is recognized based on hours worked and expenses incurred.

Under the Company’s Medicare Recovery Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”), (held by its wholly owned subsidiary HealthDataInsights, Inc.) and certain contracts for commercial health plan customers, HMS recognizes revenue when claims are sent to the customer for offset against future claims payments. Providers and health plan customers have the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of the customer. HMS accrues an estimated liability for appeals based on the amount of revenue that is subject to appeals, closures or other adjustments and which HMS estimate are probable of being returned to providers following a successful appeal. The Company’s estimates are based on the Company’s historical experience with appeals. The estimated liability for appeals represents the Company’s estimate of the potential amount of repayments related to appeals of claims, closures and other adjustments for which revenue was previously collected.

A summary of the activity in the estimated liability for appeals and estimated allowance for appeals is as follows

(in thousands)

	Three Months Ended March 31,
	2016			2015
Balance--beginning of period (1)	$	39,692		$	41,623
Provision		998			2,321
Appeals found in providers favor		(4,729	)		(1,485	)
Balance--end of period (2)	$	35,961		$	42,459

(1)

For the three months ended December 31, 2015 and 2014 included within the estimated allowance for appeals found in favor of providers, $6,614 million and $4,824 million, respectively was activity associated with the Medicare RAC contract.

(2)

For the three months ended March 31, 2016 and 2015 included within the estimated allowance for appeals found in favor of providers, $5,348 million and $5,473 million, respectively was activity associated with the Medicare RAC contract.