Estimated Liability for Appeals

Under the Company’s contracts with certain commercial health plan customers and its Medicare RAC contracts with CMS (included within the Company’s PI services revenue), providers have the right to appeal HMS claim findings and to pursue additional appeals if the initial appeal is found in favor of HMS’s customer. The appeal process established under the Medicare RAC contracts with CMS includes

five

levels of appeals, and resolution of appeals can take substantial time to resolve. HMS records a) an actual return obligation liability for findings which have been previously adjudicated in favor of providers and b) an estimated return obligation liability based on the amount of revenue that is subject to appeals and which are probable of being adjudicated in favor of providers following their successful appeal. The Company’s estimate is based on the Company’s historical experience. To the extent the amount to be returned to providers following a successful appeal exceeds or is less than the amount recorded, revenue in the applicable period would be reduced or increased by such amount.

A roll-forward of the activity in the estimated liability for appeals is as follows (

in thousands

	Original RAC contract			RAC 4 contract		Commercial contracts			Total
Balance at December 31, 2016	$	28,427		$	-	$	2,328		$	30,755
Provision		2,054			-		2,729			4,783
Appeals found in providers favor		(2,665	)		-		(2,086	)		(4,751	)
Balance at December 31, 2017	$	27,816		$	-	$	2,971		$	30,787
Provision		108			20		2,038			2,166
Appeals found in providers favor		(108	)		-		(2,686	)		(2,794	)
Release of estimated liability		(8,436	)		-		-			(8,436	)
Balance at December 31, 2018	$	19,380		$	20	$	2,323		$	21,723

The Company’s original Medicare RAC contract with CMS expired on

January 31, 2018.

As a result of the original contract expiration, the Company’s contractual obligation with respect to any appeals resolved in favor of providers subsequent to the expiration date have ceased and therefore the Company released its estimated return obligation liability and increased revenue by

$8.4

million during the

first

quarter of

2018.

The Company continues to assess the remaining CMS liability for the original Medicare RAC contract to determine management’s best estimate of liability for any findings which have been previously adjudicated prior to the expiration of the contract. Any future changes or modifications to the Medicare RAC contracts or to the Company’s commercial customer contracts

may

require the Company to apply different assumptions that could materially affect both the Company’s revenue and estimated liability for appeals in future periods.