Revenue Recognition

The Company’s revenue disaggregated by solution for the

three

months ended

March 31, 2019

and

2018

was as follows

(in thousands)

	Three Months Ended
		March 31, 2019		March 31, 2018
Coordination of Benefits	$	105,851	$	91,752
Payment Integrity		27,726		38,641
Total Population Management		14,376		11,032
Total	$	147,953	$	141,425

Coordination of benefits revenue is derived from contracts with state governments and Medicaid managed care plans that can span years with the option to renew. Types of service contracts could include: (a) the identification of erroneously paid claims; (b) the delivery of verified commercial insurance coverage information; (c) the identification of paid claims where another

third

party is liable; and (d) the identification and enrollment of Medicaid members who have access to employer insurance. Most of these types of service contracts contain multiple promises, all of which are

not

distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the number of claims or amount of findings the Company identified, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within

one

three

years. Generally, coordination of benefit contract payment terms are

not

standardized within the respective contract; however, payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.

Analytical services revenue consists of revenue for our payment integrity services and total population management solutions.

Payment integrity services revenue is derived from contracts with federal and state governments, commercial health plans and other at-risk entities that can span years with the option to renew. Types of service contracts could include: (a) services designed to ensure that healthcare payments are accurate and appropriate; and (b) the identification of over/under payments or inaccurate charges based on a review of medical records. Most of these types of service contracts contain multiple promises, all of which are

not

distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these performance obligations is largely based on variable consideration where, based on the amount of recovery findings the Company identifies, a contingent or fixed transaction price/recovery percentage is allocated to each distinct performance obligation. The Company utilizes the expected value method to estimate the variable consideration related to the transaction price for its service contracts. Key inputs and assumptions in determining variable consideration include identified pricing and expected recoveries and/or savings. The expected recoveries and/or savings are based on historical experience of information received from our customers. Revenue is primarily recognized at a point in time when our customers realize economic benefits from our services when our services are completed. However, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within

one

three

years. Generally, payment integrity contract payment terms are

not

standardized within the respective contract; however, invoice payment is typically due on demand and there is a clear and distinct history of customers making consistent payments.

Total population management revenue is derived from contracts with health plans and other risk-bearing entities that can span years with the option to renew. Types of service contracts could include: (a) programs designed to improve member engagement; and (b) outreach services designed to improve clinical outcomes. Most of these types of service contracts contain multiple promises, all of which are

not

distinct within the context of the contract. Therefore, the promises represent a single, distinct performance obligation for the types of services we offer. Revenue derived from these services is largely based on consideration associated with prices per order/transfer and PMPM/PMPY fees. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (

) our performance toward complete satisfaction of the performance obligation under the contract and (

) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognition of revenue related to its performance obligations when the amount we have the right to invoice the customer corresponds directly with the value to the customer. Additionally, certain total population management contracts have distinct performance obligations related to software license and implementation fees which have historically been recognized as revenue ratably over the life of the contract. Lastly, we have a limited number of fixed fee arrangements where revenue is recognized over time as performance obligations are satisfied within

one

three

years. Upon adoption of ASC

606,

revenue for software licenses is recognized at the beginning of the license period when control is transferred as the license is installed and revenue for implementation fees is recognized when control is transferred over time as the implementation is being performed. As the performance obligation is deemed to have been satisfied and control transferred to our customers for software licenses and implementation fees on or before

December 31, 2017,

the Company recorded a decrease to deferred revenue and an increase to opening retained earnings of

$1.1

million, net of tax, as of

January 1, 2018

for the cumulative impact of adopting ASC

606.

Generally, total population management contract payment terms are stated within the contract and are due within an explicitly stated time period (e.g.,

30,

45,

days) from the date of invoice. A portion of the payment received

may

relate to future performance obligations and will result in an increase to deferred revenue until the obligation has been met.

In connection with Coordination of Benefits and certain Payment Integrity services, lockboxes and their associated bank accounts are setup to support recoveries and remittances. Generally, these bank accounts are for the benefit of the Company’s customers. Customer cash held in Company bank accounts for the benefit of the customer was approximately

$5.4

million as of

March 31, 2019.

This amount is included in cash and cash equivalents and other current liabilities on the accompanying consolidated balance sheet.

The Company’s revenue disaggregated by market for the

three

months ended

March 31, 2019

and

2018

was as follows (

in thousands

	Three Months Ended
		March 31, 2019		March 31, 2018
Commercial	$	76,259	$	71,785
State		61,742		54,620
Federal		9,952		15,020
Total	$	147,953	$	141,425

A portion of the Company’s services are deferred and revenue is recognized at a later time. Deferred revenue was approximately

$6.5

million and

$5.6

million as of

March 31, 2019

and

December 31, 2018,

respectively, and is included in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets. Approximately

$1.4

million of the

December 31, 2018

balance was recognized in revenue during the quarter ended

March 31, 2019.

Contract modifications are routine in nature and often done to account for changes in the contract specifications or requirements. In most instances, contract modifications are for services that are

not

distinct, and, therefore, modifications are accounted for as part of the existing contract. The Company has elected to use the practical expedient to expense the incremental costs of obtaining a contract if the amortization period of the asset that the Company would have otherwise recognized is

one

year or less.