HMS (HMSY) 10-K2020 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2020

Or

For the transition period from               to

Commission File Number 000-50194

HMS HOLDINGS CORP.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2020 the last business day of the registrant’s most recently completed second quarter was approximately $1.8 billion based on the last reported sale price of the registrant’s common stock on the Nasdaq Global Select Market on that date. Solely for purposes of this disclosure, shares of common stock held by executive officers, directors and persons who hold 10% or more of the outstanding shares of common stock of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily a conclusive determination for any other purposes.

Unless provided in an amendment to this Annual Report on Form 10-K, the information required by Part III is incorporated by reference to the registrant’s 2021 definitive proxy statement, to the extent stated herein. Such proxy statement or amendment will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2020.

For purposes of this 2020 Form 10-K, the terms “HMS,” “Company,” “we, “us, and “our” refer to HMS Holdings Corp. and its consolidated subsidiaries unless the context clearly indicates otherwise. Included in this 2020 Form 10-K are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. Such statements relate to our current expectations, projections and assumptions about our business, the economy and future events or conditions. They do not relate strictly to historical or current facts.

We have tried to identify forward-looking statements by using words such as “aim,” “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “future,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “project,” “seek,” “strategy,” “target,” “trend,” “will,” “would,” “could,” “should,” variations of such terms, and similar expressions and references to guidance, although some forward-looking statements may be expressed differently. These statements include, among other things, the potential impacts of the novel coronavirus (COVID-19) and related developments, information concerning our future growth, business plans and strategic or operational initiatives, our future operating or financial performance, our ability to invest in and utilize our data and analytics capabilities, the benefits and synergies to be obtained from completed and future acquisitions, investments or strategic partnerships, including Lorica Health Pty Limited (“Lorica”) and MedAdvisor Limited (“MedAdvisor”), the expected timing, completion and effects of the proposed acquisition of HMS by Gainwell Acquisition Corp., a Delaware corporation (“Gainwell”), through the merger of Mustang MergerCo Inc., a Delaware corporation and wholly owned subsidiary of Gainwell (“Merger Sub”), with and into HMS, with HMS continuing as the surviving corporation and a wholly owned subsidiary of Gainwell (the “Merger”) pursuant to that certain Agreement and Plan of Merger, dated December 20, 2020, by and among HMS, Gainwell, Merger Sub, and Gainwell Intermediate Holding Corp., a Delaware corporation (the “Merger Agreement”), our future expenses, interest rates and tax rates, the sufficiency of our sources of liquidity, the impact of potential or future changes to U.S. healthcare legislation or healthcare spending, and other statements regarding our possible future actions, objectives and prospects. The forward-looking statements in this 2020 Form 10-K, other than the statements regarding the proposed transaction with Gainwell, do not assume the consummation of the Merger unless specifically stated otherwise.

Forward-looking statements are not guarantees and involve risks, uncertainties and assumptions that are difficult to predict. Actual results may differ materially from past results and from those indicated by such forward-looking statements if known or unknown risks or uncertainties materialize, or if underlying assumptions prove inaccurate. These risks and uncertainties include, among other things:

These and other risks are discussed under the headings “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors,” “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this 2020 Form 10-K and in other documents we file with the SEC.

Any forward-looking statements made by us in this 2020 Form 10-K speak only as of the date on which they are made. Our forward-looking statements do not reflect the potential impact of the Merger, or assume its consummation, unless specifically stated otherwise. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. We caution readers not to place undue reliance upon any of these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and Form 8- K reports and our other filings with the SEC.

Founded in 1974, HMS is an industry-leading provider of cost containment and analytical solutions in the healthcare marketplace. Our mission is to make healthcare work better for everyone. We use data, technology, analytics and in-house expertise to deliver coordination of benefits, payment integrity and population health management solutions that help healthcare organizations reduce costs, improve health outcomes and drive the value of healthcare. We provide a broad range of payment accuracy solutions to government and commercial healthcare payers, including coordination of benefits services, to ensure that the right payer pays the claim, and payment integrity services that identify and correct improper healthcare billings and payments. Our population health management solutions include a multi-layered integrated portfolio of risk analytics, engagement and care management solutions that provide healthcare organizations the tools to address the needs of the whole person and improve the quality, cost, experience and outcomes of their entire population. Through our solutions, we help move healthcare forward by saving billions of healthcare dollars while helping consumers lead healthier lives.

We currently operate as one business segment with a single management team that reports to the Chief Executive Officer. HMS began its operations as Health Management Systems, Inc., which became our wholly owned subsidiary in March 2003 when we assumed its business in connection with the adoption of a holding company structure. We incorporated in the State of New York in October 2002 and reincorporated in the State of Delaware in July 2013. Our principal executive offices are located at 5615 High Point Drive, Irving, Texas 75038, and our telephone number is (214) 453-3000. Our website is www.hms.com.

During fiscal year 2020, our business continued to evolve through a combination of targeted acquisitions and strategic investments. In November 2020, we made an additional investment in MedAdvisor, an Australian-based digital medication adherence company, reinforcing our strategic relationship and efforts to expand internationally and into new markets. In December 2020, we entered into an agreement to acquire Lorica, a leading healthcare payment accuracy and data analytics company based in Australia. The transaction closed in January 2021. The addition of Lorica further strengthens our ability to apply advanced data and payment analytics to deliver significant cost savings and value to our clients and bolsters our reach into the Australian market.

On December 20, 2020, we entered into the Merger Agreement wherein Gainwell will acquire HMS. The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into HMS, with HMS continuing as the surviving corporation and a wholly owned subsidiary of Gainwell. Under the terms of the Merger Agreement, which has been unanimously approved by the HMS Board of Directors, HMS shareholders will receive $37.00 in cash per share.

The Merger Agreement includes customary representations, warranties and covenants. The consummation of the Merger is subject to customary closing conditions, including, among others, the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the shares of HMS's common stock outstanding and entitled to vote as well as the satisfaction of other customary closing conditions, including compliance with or performance, in all material respects, or in certain instances, in all respects, by each party of its covenants and obligations under the Merger Agreement. The Merger is anticipated to close in the first half of 2021.

The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which is filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 28, 2020 and incorporated by reference herein. Copies of the Current Report on Form 8-K and our other filings with the SEC, including our recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements and the amendments to these reports or statements,

are available free of charge on our website through the Investor Relations page, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. These materials, as well as similar materials for SEC registrants, may be obtained directly from the SEC through their website at www.sec.gov.

References to URL websites are intended to be inactive textual references only. The content of any website referred to in this 2020 Form 10-K is not incorporated by reference into this filing unless expressly noted.

We provide solutions that apply broadly across the Medicaid, Medicare, commercial at-risk and employer self-insured markets. Our services span the payment and care continuum, from an individual’s enrollment in a healthcare program to pre-payment review of their claims, through post-payment identification and recovery of improper payments, and back to the individual where our consumer-driven solutions allow healthcare organizations to manage individuals' healthcare on a personal level, and at scale, using actionable analytics that drive individuals to take actions that improve health outcomes. Our coordination of benefits and payment integrity services ensure payment accuracy by addressing a wide spectrum of payment errors, including eligibility and coordination of benefits errors, the identification and investigation of potential fraud, and the review of claims on a prepayment and post-payment basis for improper payments and utilization effectiveness. Our population health management services assist customers in managing quality, risk, cost and compliance across all lines of business by engaging consumers, providing the tools to manage their care, and identifying existing or emerging health risk among consumer populations. Through our industry-leading technology, analytics and engagement solutions, we save billions of dollars annually while helping consumers lead healthier lives.

Our comprehensive solutions offer value throughout the healthcare continuum and include the following:

Payment accuracy revenue consists of revenue for our COB and PI solutions.

Our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others is important to our business and competitive position. We establish and protect our proprietary technology and intellectual property through a combination of patents, patent applications, trademarks, copyrights, domain names and trade secrets, as well as through contractual rights, including confidentiality, non-disclosure and invention assignment agreements, and other security measures.

We provide our solutions to customers across a broad range of entities within the healthcare industry, including state and federal government agencies, health plans and PBMs, healthcare exchanges, employers, at-risk providers and ACOs, and other healthcare organizations. For the years ended December 31, 2020, 2019 and 2018, our total revenue was $673.3 million, $626.4 million and $598.3 million, respectively. No single customer accounted for 10% or more of our total revenue during any period presented.

The composition of our 10 largest customers changes periodically. For the years ended December 31, 2020, 2019 and 2018, our 10 largest customers represented 42.0%, 42.7% and 41.4% of our total revenue, respectively. We provide services under contracts (or subcontracts) that contain various revenue structures, including contingent revenue and to a lesser extent fixed-fee arrangements as well as cost-plus and time-and-materials pricing. The current terms of many of our federal and state government contracts range from one to five years, including renewal terms at the option of the customer. In many instances, we provide our services pursuant to agreements that are subject to periodic reprocurements. Several of our contracts, including those with some of our largest customers, may be terminated for convenience, in whole or in part, by the customer. Because we provide our services pursuant to agreements that are

open to competition from various businesses in the U.S. healthcare arena, we cannot provide assurance that our contracts, including those with our largest customers, will not be terminated for convenience or awarded to other parties. Additionally, we cannot provide assurance that any contracts that are renewed will have the same fee structures as the expiring contracts or otherwise be on satisfactory terms. The early termination of key contracts with significant customers, or the inability to renew such contracts on favorable terms or at all, may have an adverse effect on our financial condition, results of operations and cash flows.

In providing solutions and services to our customers, we rely heavily upon our technology systems and networks, as well as on those of third-party providers, to process, transmit, maintain, store and host the confidential, proprietary and sensitive information and data we receive from our customers and other data suppliers, including private insurance plans and financial institutions. The secure processing and maintenance of this information is critical to our operations and business strategy. Although we have spent significant resources to implement security and privacy programs and controls, train our workforce and enhance our security measures with the implementation of new technologies and processes, our information technology and infrastructure, and those of third parties on which we rely , could continue to be potentially subject to various forms of cyber-attacks, as further discussed under the heading “Part I, Item 1A. Risk Factors.”

The market for cost containment solutions is large and growing, driven by increasing healthcare costs, rising program enrollment and payment complexities. Established in 1965 under the Social Security Act, Medicaid provides health insurance and long-term care services and support to low-income families and individuals with disabilities in the United States. Medicaid is funded jointly by the federal and state governments and administered by the states. The Balanced Budget Act of 1997 created CHIP to help states expand coverage primarily to children whose families earned too much to qualify for Medicaid, yet not enough to afford private health insurance. Medicare is a federal program that is administered by CMS, and provides eligible persons age 65 and over and some disabled persons with a variety of hospital, medical insurance and prescription drug benefits. All three of these programs have opted to contract with managed care organizations, or MCOs, in whole or in part as a means of delivering quality healthcare to program beneficiaries and controlling costs.

By law, Medicaid programs serve as the payer of last resort and all other sources of coverage must pay for medical costs incurred by a Medicaid-eligible individual. The TPL rules of the Medicaid statute require, among other things, that states take reasonable measures to identify potentially liable third parties and process claims accordingly. Since 1985, we have provided state Medicaid agencies with services to identify third parties with primary liability for paying claims for Medicaid members, and since 2005, we have provided similar services to Medicaid managed care plans.

For 2021, Medicare and Medicaid are projected to pay approximately 38.6% of the nation’s healthcare expenditures and serve over 147.5 million beneficiaries. Many of these beneficiaries are enrolled in managed care plans, which have the responsibility for both patient care and claims adjudication. The dual aims of cost containment and quality healthcare outcomes are the same across all at-risk entities, including commercial health plans and government healthcare programs, such as Medicaid and Medicare.

Within the commercial market, health plans sell policies directly to individuals (on the open market or via health insurance exchanges), contract with employers to underwrite their employees’ care, or contract with self-insured employers to oversee benefit administration for their employees. This market also includes a growing number of risk bearing provider-sponsored plans that operate and market health plan benefits. According to CMS NHE projections, private health insurance covered approximately 200.4 million individuals at a cost of approximately $1.36 trillion in 2020.

Several commercial health plans also offer government-sponsored lines of business, including partnering with Medicare, Medicaid and CHIP to oversee care delivery for beneficiaries enrolled in those programs. States continue to focus on improving value, quality and outcomes through arrangements with MCOs. As of September, 2020, 40 Medicaid programs operated with some form of managed care and comprehensive risk-based managed care continues to be the predominant delivery system for Medicaid services in the U.S. More than two-thirds of beneficiaries nationally receive most or all of their care through risk-based MCOs and more than half of states that contract with MCOs enroll 75% or more of their Medicaid beneficiaries in MCOs. Managed care health plans continue to assume risk for Medicare lives, with approximately one in three (39%) of all Medicare beneficiaries – 24.1 million people out of 61.7 million Medicare beneficiaries overall, enrolled in Medicare Advantage plans in 2020.

As a healthcare analytics and technology company, our business is heavily regulated and subject to complex and evolving laws, regulations and standards. In the U.S., we must adhere to local, state and federal laws and regulations relating to: privacy and data security, including but not limited to, HIPAA and substance abuse confidentiality regulations, HITECH and the Final Omnibus Privacy, Security, Breach Notification and Enforcement Rule, and the Massachusetts Standards for the Protection of Personal Information of Residents of the Commonwealth; labor and employment relations, including equal opportunity and affirmative action; prompt pay statutes; healthcare fraud, waste and abuse, including the federal anti-kickback statute and the federal False Claims Act; and similar state statutes and legislation.

As we expand into different areas of the healthcare industry, we may deliver new and enhanced solutions or enter into new markets that may further expose us to requirements under additional statutes and legislative schemes that have previously not been relevant to our business, such as the Fair Debt Collection Practices Act and other banking and credit reporting statutes, and certain consumer laws and regulations, including TCPA and similar state and federal laws on audio and telephone recording practices. We are also obligated by our contractual requirements with customers,

which may require that we comply with additional privacy regulations imposed upon certain types of customers, such as the federal Gramm-Leach-Bliley Act. In instances where we contract with federal and state governmental agencies directly, or the payment we receive for our services is paid by such government parties, we must also comply with the Federal Acquisition Regulations and similar federal and state procurement laws, which regulate the solicitation, award, administration and performance of government contracts.

Outside of the U.S., we must comply with the local and foreign laws and regulations in the jurisdiction in which we operate, as well as U.S. laws that apply to doing business internationally. These regulations involve matters concerning, among others: local and cross-border taxation; anticorruption, anti-competition, anti-bribery laws and other laws prohibiting payments to governmental officials, such as FCPA; immigration; government compliance and licensing; securities regulation; internal and disclosure control obligations; import/export controls; trade restrictions; conflict of interest; working conditions, health and safety, wage-and-hour standards and other employment regulations; environmental standards; intellectual property rights; and data privacy and protection, such as the European Union General Data Protection Regulation and Australia’s Privacy Act 1988 and Australian Privacy Principles, and cross-border data transfers.

The U.S. healthcare marketplace is a dynamic industry with a range of businesses currently offering cost containment services, both directly or indirectly (through subcontracting), to some or all of the various healthcare payers, providers, employers and consumers. In addition, with improvements in technology and the growth in healthcare spending, new businesses are incentivized to enter this marketplace. Many customers also have the ability to perform some or all of the needed cost containment services themselves and choose to exercise that option to varying degrees. Therefore, competition is robust as customers have many alternatives available to them in their effort to contain healthcare costs.

We compete based on a variety of factors, including our ability to provide a broad range of solutions that span the entire healthcare claims payment and care services continuum. These include payment accuracy solutions focused on COB and PI related functions, as well as PHM solutions that support the ability of payers to better understand and engage consumers, perform effective outreach, and impact both costs and health outcomes.

The evolution of targeted strategic acquisitions and investments, coupled with innovative internal product development and enhancement, has led to HMS being a diversified, full services solution provider. During the course of 2020, we focused on innovating and rolling out new and enhanced offerings in each line of business. In coordination of benefits, we introduced our Coverage on Demand solution and continued to scale Medicare-to-commercial and commercial-to-commercial COB solutions. We saw success in PI with our emerging solutions offering, and progress is ongoing with new client implementations underway for our Pre-payment Clinical Claim Review and Episode of Care solutions. In PHM, we introduced crisis management solutions in response to the COVID-19 pandemic. We continue to invest resources and capital towards accelerating the development and market penetration of our fully integrated PHM platform, pharmacy solutions and whole person-consumer, centric offerings.

We have a proven record of delivering results that optimize savings and recoveries, enabled by:

Our competitors range in size from large, diversified national companies, to small, specialized firms. Some of these competitors have significantly greater financial and technical resources, and others have longer operating histories and greater name recognition than we do in certain markets. Within our payment accuracy portfolio of products and services, we compete primarily with large business outsourcing and technology firms, claims processors, healthcare consulting firms, and other vendors who provide some or all of these solutions to payers. In addition, we frequently work with customers who may elect to perform some or all of their cost avoidance and recovery functions in-house. Within the population health management sector, we compete primarily with vendors who provide care management, consumer engagement, and related technology services. Examples of companies with whom we currently compete across our offerings include:

We believe that the steadily increasing enrollment and rising expenditures for Medicare and Medicaid, with most new enrollees entering managed care plans; an aging U.S. population with an increasing concentration of individuals with high-cost chronic conditions and often co-morbidities; and the overall complexity of the healthcare claims payment system in the U.S. all combine to create substantial growth opportunities for the suite of cost containment solutions we offer.

We also believe these factors present growth opportunities for our PHM services. We are focused on growing our business over the course of 2021 and beyond, both organically and inorganically, by leveraging existing key assets (e.g., our data, analytics, in-house expertise, and distribution channel) and pursuing a number of strategic objectives and initiatives, including:

Our employees and culture are critical components to our success. As of December 31, 2020, we had approximately 3,170 employees worldwide, of which the majority were based within the U.S.

At HMS, we live our values every day. We believe these values—customer focus, results-driven collaboration, meaningful innovation, uncompromising integrity, widespread inclusion and absolute accountability—define the character and culture of our organization. We strive to attract, develop and retain the best talent by providing competitive pay and benefits, continuous growth and development, and a diverse and inclusive workplace that positively impacts our people, communities and environment.

We recognize the importance of giving back to the communities where we live and work, and believe that this commitment helps in our efforts to attract and retain an innovative and diverse workforce. Through our HMS Cares program, our people use their talent and expertise to serve those who are most vulnerable in our communities. We also encourage employees to engage and support our communities by providing them with paid time off to volunteer with charitable organizations that address key social determinants of health like hunger, poverty and housing, which align with our mission to make healthcare work for everyone. HMS makes charitable financial contributions to many of these organizations and we encourage employees to do the same by offering company matching opportunities.

Since the start of the COVID-19 pandemic, our top priority has been and continues to be the safety and well-being of our employees. Over the course of the pandemic, we implemented a number of precautionary and preemptive measures to protect their safety while ensuring continuity of service to our customers. Our efforts include transitioning essentially all of our employees to working remotely, suspending non-essential employee travel, canceling participation in in-person industry events and group meetings, promoting social distancing and enhanced cleaning and sanitization

efforts across office locations, implementing protocols to quarantine employees who may have been exposed to COVID-19, or show relevant symptoms, and extending additional paid time off to employees to obtain a COVID-19 vaccine. We also commenced preparedness plans at our facilities to maintain continuity of operations, which provide for flexible work arrangements, and maintain regular communications with our workforce as well as our customers and vendors. Although we have moved to a remote working environment without any significant disruptions to our business or control processes, and believe we are well-prepared to continue operating this way, we have a multi-phase plan to return to working on-site that gradually allows our workforce to return while practicing social distancing and other safety measures. Our management team continues to monitor the situation and manages our response in collaboration with customers, government officials and stakeholders. As COVID-19 continues to evolve, we may undertake additional actions to promote the safety and security of our employees, ensure the availability and functioning of our critical infrastructure, and support the communities in which we operate. Some of these measures may include imposing remote working arrangements for personnel when possible, investing in personal protective equipment, providing paid sick leave to affected employees, and other policies and initiatives that reduce the transmission of COVID-19.

The principal risks and uncertainties affecting our business include, among others, those relating to the following factors:

The proposed Merger is subject to various closing conditions such as the approval of our shareholders, among other customary closing conditions. It is possible that our shareholders will not approve the Merger or that a governmental authority may enjoin or otherwise prohibit the consummation of the Merger. If any condition to the closing of the Merger is not satisfied or, if permissible, waived, the Merger will not be completed. In addition, satisfying the conditions to the closing of the Merger may take longer than we expect. There can be no assurance that any of the conditions to closing will be satisfied or waived or that other events will not intervene to delay or result in the failure to consummate the Merger.

If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to a number of risks, including the following:

in each case, without realizing any of the benefits of having completed the Merger, which may adversely affect our business and financial results. The market price of our common stock might decline materially as a result of any such failures to the extent that the current market prices reflect a market assumption that the Merger will be completed. If that were to occur, it is uncertain when, if ever, the price of our common stock would return to the price levels at which shares of our common stock currently trade.

We may also be negatively impacted if the Merger Agreement is terminated and our Board of Directors seeks but is unable to find another business combination or strategic transaction offering equivalent or more attractive benefits than the benefits expected to be provided in the Merger, or by our officers or members of our Board of Directors being subject to litigation related to entering into or failing to consummate the Merger.

Uncertainty about the completion or effect of the Merger may affect the relationship between us and our employees, clients and suppliers, which may have an adverse effect on our business, financial condition and results of operations. These uncertainties may cause clients, suppliers and others that deal with us to seek to change existing business relationships and to delay or defer decisions concerning us. Changes to existing business relationships, including termination or modification, could negatively affect our revenues, earnings and cash flow, as well as the market price of our common stock. Gainwell may terminate the Merger Agreement under certain circumstances, including if there is a material adverse change in our business. If that were to happen, we may not be entitled to a termination fee under the Merger Agreement, or the applicable termination fee may be insufficient to compensate us.

In addition, we are dependent on the experience and industry knowledge of our officers, key management personnel and other key employees to operate our business and execute our business plans. Our current and prospective employees may experience uncertainty about their roles following the Merger, which may have an adverse effect on our ability to attract or retain key management personnel and other key employees. Our business could be negatively impacted if key employees depart because of issues related to the uncertainty and difficulty of integration or a desire not to remain with the business if the Merger is not consummated. Adverse effects arising from the pendency of the Merger could be exacerbated by any delays in consummation of the Merger or termination of the Merger Agreement.

The Merger Agreement contains provisions that may discourage a third party from submitting an alternative proposal to us during the pendency of the proposed Merger as well as afterward, should the Merger not be consummated, that might result in greater value to our shareholders than the Merger. These Merger Agreement provisions include a prohibition on soliciting or entering into discussions with any third party regarding any alternative proposals, subject to limited exceptions. However, our Board of Directors is permitted to take actions that it believes, after consultation with its advisors, are necessary to not act in a manner inconsistent with its fiduciary duties, including withdrawing or modifying its recommendation in favor of the proposed Merger, so long as Gainwell has the opportunity, if it desires, to negotiate the terms of the Merger to address the basis for the Board of Director’s recommendation change.

In addition, we may be required to pay to Gainwell a termination fee in cash equal to $67,392,807 in certain circumstances involving acquisition proposals for competing transactions.

If the Merger Agreement is terminated and we determine to seek another strategic transaction, we may not be able to negotiate a transaction on terms comparable to, or better than, the terms of the proposed Merger.

Transactions such as the Merger often give rise to lawsuits by shareholders or other third parties. One of the conditions to the closing of the Merger is that the consummation of the Merger is not then enjoined, prevented, restrained, made illegal or otherwise prohibited by any governmental order (whether preliminary or final) or applicable law. In connection

with the Merger, plaintiffs may file lawsuits against us and/or our directors and officers in connection with the Merger. Such legal proceedings could also prevent or delay the completion of the Merger and result in additional costs. In addition, if any lawsuit is successful in obtaining an injunction prohibiting us or Gainwell from consummating the Merger on the agreed upon terms, the injunction may prevent the Merger from being completed within the expected timeframe, or at all. If the Merger is prevented or delayed, the lawsuits could result in substantial costs, including any costs associated with the indemnification of directors. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect our business, financial condition or results of operations.

The widespread outbreak of COVID-19 has created significant volatility, uncertainty, and disruption in economic activity and financial markets globally. Although the outbreak of COVID-19 has not had a material adverse effect on our operations to date, it did impact our financial results for the year ended December 31, 2020. There can be no assurance that COVID-19 will not have a material adverse effect on our future operational and financial performance. The extent to which COVID-19 could impact our operational and financial performance in future periods is currently uncertain and will depend on numerous evolving factors and future developments that we may not be able to accurately predict and to which we may not be able to respond. Such factors and developments include, but are not limited to: the duration, severity and spread of the outbreak; the measures undertaken by government authorities to contain, mitigate and treat COVID-19 and the effectiveness of such actions; the effect on the U.S. and global economies and actions taken in response; the overall impact on the businesses of our customers, partners, vendors and suppliers; changes in the healthcare industry as a result of COVID-19 and actions taken by regulatory authorities and industry participants in response to COVID-19, such as the suspension in medical record requests and audits to reduce administrative burden on hospitals; the health of and effect on our workforce; the future effects to our operational and financial results of the changes we have made to protect the safety and well-being of our employees and future operational disruptions or challenges we may face; increased cybersecurity and information security risk as a result of the transition of our employees to a remote work environment; and how quickly and to what extent normal economic and operating conditions may resume. For example, a portion of our business is tied to overall volumes of activity in the healthcare system, and due to a significant temporary reduction in volume resulting from the suspension or reduction of certain client contract work during part of 2020, we experienced lower revenues during the second quarter and continued to see an impact to our financial results in certain parts of our business in the third quarter. Further, our management has been intensely focused on mitigating COVID-19, which has required and will continue to require, a large investment of time, attention and resources. A prolonged outbreak could, among other things, strain our business continuity plans, create delays in our growth and strategic initiatives, reduce our sales and marketing activities, limit our access to financing on favorable terms, increase the Company’s exposure to potential impairment charges related to goodwill and intangible assets, hinder our ability to support our customers and operate our business effectively, heighten the risk of disruption to our information and reporting systems and internal controls, including those over financial reporting and other risk management systems, or require us to incur substantial costs. Additionally, our efforts to re-open our offices safely may not be successful, could subject our employees and partners to heightened risks for COVID-19 exposure and we may incur increased workforce costs associated with implementing further precautionary measures and workplace safety protocols to mitigate the spread and ensure the health of our workforce.

We cannot predict the degree to which COVID-19 will ultimately impact our operations and financial results, however, the effects of the COVID-19 pandemic, alone or taken together, could adversely affect our future business, financial condition, results of operations and cash flows. To the extent COVID-19 harms our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section and other sections of this 2020 Form 10-K.

The size and scope of our business operations have continued to expand over the past several years. We currently intend to drive our growth and expansion into new and adjacent healthcare areas and markets, however, our growth and expansion strategy carries costs and risks that, if not properly managed, could adversely affect our business. Our future growth will depend on, among other things, our ability to successfully execute our business plans, which includes penetrating new markets, capturing opportunities in emerging markets for HMS, cross-selling our solutions to new and existing customers, broadening and deepening our customer and industry relationships, leveraging our brand identity and talent pool, securing strategic acquisitions, investments and partnerships, and increasing the speed, quality, capacity and scale at which we deliver our services across emerging and more established markets, all while remaining competitive. We must also be flexible and responsive to customers’ needs and changes in the political, economic and regulatory environment in which we operate. The greater size and complexity of our expanding business may put additional strain on our administrative, operational and financial resources and can make optimal resource allocation more difficult to determine. It is possible that we may not be able to maintain or accelerate our growth. A failure to anticipate or properly address the demands and challenges that our continued growth and diversification may have on our resources and existing infrastructure may result in unanticipated costs and inefficiencies that could negatively impact our ability to execute on our business plans and growth goals, which may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Part of our growth strategy depends on our ability to respond to the evolving healthcare landscape with new, additive and innovative solutions and services that our existing and potential customers are willing to adopt. The development, marketing, implementation and delivery of these solutions and services may require that we make substantial financial and resource investments. We face risks that our new or enhanced offerings may not be responsive to customer preferences or industry changes, appropriately timed with market opportunity or effectively brought to market, and that the solution and service development initiatives that we prioritize may not yield the gains that we anticipate, if any. If we are unable to predict market preferences or healthcare industry changes, or if we are unable to develop or adapt solutions and services that are responsive to existing and potential customers’ needs, we may fail to expand our business, which could constrain our future revenue growth and materially adversely affect our business, financial condition, results of operations and cash flows.

To achieve our strategic goals, we have made a number of acquisitions and investments in businesses that have expanded our service offerings, including our PHM solutions, and broadened our customer base and our market and geographic presence. We may continue to pursue strategic acquisitions, investments and partnerships that advance our capabilities and build out our business lines in the future. We are subject to risks and uncertainties relating to our ability to consummate additional transactions that will be advantageous to us, including the Merger with Gainwell, and successfully integrate acquired or merged businesses, offerings technologies and employees. Future strategic acquisitions, investments and partnerships involve a number of factors that could affect our operations, including, but not limited to:

The markets for payment accuracy and population health management solutions are intensely competitive, driven by rapidly changing technologies, evolving industry standards, customer demands to become more cost-effective and efficient, and increased consolidation in both the IT and healthcare industries. Our competitors range in size from large, diversified national companies (some of which have emerged as a result of industry consolidation), to small, specialized

firms. Some of our competitors may include current or former subcontractors or teaming partners seeking to establish direct relationships with our customers and provide similar services as the prime contractor, as well as current and prospective customers that elect to perform recovery and cost avoidance functions in-house or to develop in-house capacities for solutions and services that we provide or seek to provide. For example, certain state customers have combined or “bundled” TPL services under large-scale IT procurements, as they shift to implementing modular Medicaid Enterprise Systems. As part of this modular approach, they may select a new or less experienced vendor to provide the TPL module based on preferred relationships or favorable pricing. Consolidation among vendors and healthcare providers, as well as the merging of some of our competitors or formation of business alliances with other competitors, have contributed to the increasingly competitive environment. In addition, companies that have invested in proprietary technology different from our own service offerings, such as front-end analytics or consumer-centric capabilities, have emerged as new competitors due to the rapidly evolving healthcare IT landscape. There is also increasing sophistication in the solutions and services that our competitors are developing that may become more efficient or appealing to our customers and their member populations, or may offer greater interoperability. In order to remain competitive, we may need to quickly develop and market new and enhanced solutions and services responsive to emerging technologies and changes in the healthcare industry, which may require that we make substantial financial and resource investments.

We may not be able to compete successfully against our existing or future competitors. Some of these competitors have significantly greater financial and technical resources, and others have longer operating histories and greater name recognition than we do in certain markets. They may be able to (i) offer lower prices or negotiate fee reductions on our current solutions and services, (ii) respond more quickly than we can to new and emerging technologies and changing customer requirements, (iii) devote greater resources to the sale and promotion of their products and the development and implementation of new and improved systems, solutions and services for customers that we serve, and (iv) pursue various acquisitions that allow them to rapidly amass a wide array of capabilities. We may be forced to lower our pricing, unexpectedly scale or update our technological or data capabilities, or modify our offerings. Additionally, competitors may affect our business by entering into exclusive arrangements with our existing or potential customers or vendors. Notwithstanding any changes we make in response to increased competition, the demand for our solutions and services may still decrease as a result of increased competition. A failure to be responsive to customers’ needs or the changing industry landscape could frustrate our ability to maintain or expand our customer base, hire and retain new employees, pursue new business opportunities and contracts, complete future strategic acquisitions, investments and partnerships and operate our business effectively. Any inability to compete meaningfully could materially adversely affect our business, financial condition, results of operations and cash flows.

The healthcare industry in which we operate is subject to changing political, economic and regulatory influences that directly affect the practices and operations of federal, state and commercial healthcare organizations in the United States. When the ACA was passed, its emphasis on program integrity, cost containment and expansion of Medicaid created new opportunities to grow our business and our service offerings. The regulatory framework of the ACA and other healthcare reforms continues to evolve as a result of political changes and executive, legislative, regulatory and administrative developments as well as judicial proceedings. Since its adoption into law in 2010, there have been continued efforts by Congress to amend, enhance repeal or replace all or part of the ACA.

ensuring that the ACA remains operational in all respects, we cannot predict when the Supreme Court will issue a decision or what that decision will be, or the outcome of any litigation that has been filed relating to the ACA. As such, there remains considerable uncertainty surrounding the continued implementation of the ACA and what similar healthcare reform measures or other changes might be enacted at the federal and/or state level. We will continue to evaluate the effect that the ACA and its possible invalidation may have on our business, however, it is difficult to predict the full impact and influence that the ACA and the varying healthcare reform measures may have on the U.S. healthcare industry or policy, and any resulting changes may take time to unfold.

There have also been legislative initiatives and healthcare reform proposals from the federal and state governments in response to budgetary or deficit considerations, such as block grants. While this may lead to a demand for our services, it could also result in fee concessions, contract and project holds, early contract termination, and reduced scopes or non-renewal of our contracts with certain state government customers. Another variable that impacts our business will be how state programs, commercial health plans, private employers and other healthcare payers will respond to the possible enactment of federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care industry, including any such laws or governmental regulations which are adopted in response to the COVID-19 pandemic. These organizations may react to such changed circumstances and financial pressures by taking actions to ramp up, curtail or defer their retention of cost containment providers like us, which could impact the demand for our solutions and services and our ability to increase or maintain sales of our existing solutions and services. Due to uncertainties regarding the outcome of future healthcare reform initiatives, and their enactment and implementation, we cannot predict which, if any, future reform proposals will be adopted or the effect such adoption may have on us. Future healthcare legislation and regulation could have a significant impact on our business. While certain changes may present us with new opportunities, our business, financial condition, results of operations and cash flows could be materially adversely affected if we are unable to adapt our solutions and services to meet changing requirements or expand service delivery into new areas, or if the demand for our solutions and services is reduced as a result of future legislative changes affecting Medicare, Medicaid or other publicly funded or subsidized health programs.

Our projections and expectations are premised, in part, upon consistent growth rates in the Medicare and Medicaid programs and government spending on these programs, and the impact on the current healthcare financing system overall and need for our solutions and services within that existing framework. Our continued success is based in large part on offering solutions and services that improve the ability of our customers to identify and recover revenue that would otherwise be lost often as a result of procedural inefficiencies and complexities in the healthcare delivery and payment system. However, the need for our solutions and services, the price customers are willing to pay for them and the scope and profitability of our contracts could be negatively affected by a number of factors, including, but not limited to:

The occurrence of any of these events, or other changes to the funding of the Medicare and Medicaid programs or limitations in the scope of program eligibility, benefits, initiatives and healthcare spending that materially reduce our revenue or profitability with such programs may have an adverse effect on our future business, financial condition, results of operations and cash flows.

In the ordinary course of our business, we rely heavily upon our technology systems and networks, as well as on those of third-party providers, to process, transmit, maintain, store and host the confidential, proprietary and sensitive information and data we receive from our customers and other data suppliers, including private insurance plans and financial institutions. Some of the data we process, access, store and transmit may be outside of the United States due to our international business operations. In addition, subcontractors, teaming partners or other third-party vendors may receive or utilize this information on our behalf in support of the services we perform for our customers. The secure processing and maintenance of this information is critical to our operations and business strategy. We have devoted and continue to devote significant resources to implement security and privacy programs and controls, train our workforce and augment our security measures with new and enhanced technologies and processes, among other investments. Despite our security management efforts, our information technology and infrastructure, and those of third parties on which we rely, may continue to be vulnerable to computer hacking or phishing efforts, acts of vandalism or theft, introduction of malware, computer viruses, other malicious codes or other cyber-attacks, employee or insider malfeasance and misfeasance issues, fraud, human error, catastrophes, or unforeseen events. We may be unable to implement adequate preventive measures to protect against such compromises in the future or to effectively adapt our security measures to evolving security risks. As a result, our technology systems, including our data and our customers’ data, could be accessed improperly, made unavailable, improperly modified, corrupted or otherwise breached or compromised, or we could suffer system disruptions, shutdowns and denials of service. Similarly, we could be materially adversely affected by the loss of proprietary, trade secret or confidential technical and financial data if our internal networks are compromised. The occurrence of any of these events could harm the market perception of the effectiveness of our security measures, lead to reputational damage or the loss of our customers’ confidence in our solutions, negatively affect our ability to attract new customers, cause existing customers to terminate or not renew their existing contracts with us, or deter them from using our solutions or services in the future, all of which could reduce our revenue, increase our expenses and expose us to potential liability under privacy, security or other applicable laws and regulations, including losses and costs associated with any resulting fraud. We also may be subject to investigations, regulatory fines and penalties conducted or imposed by government regulatory agencies, and damages and other substantial costs associated with litigation, indemnification and contractual obligations, increased cybersecurity insurance premiums, and additional remediation efforts, such as credit monitoring, notice expenses, call center services or other corrective plans. We may be forced to spend significant time and resources investigating the cause of the breach, repairing system damage, remediating vulnerabilities in our security procedures, disseminating breach notifications, enhancing cyber security protection controls and measures, and deploying additional security personnel

and protection technologies, all of which could increase our expenses, divert the attention of our management and key personnel away from our business operations and materially adversely affect our business, financial condition, results of operations and cash flows

Our data and operation centers are essential to our business and our operations depend on our ability to maintain and protect our information systems. We attempt to mitigate the potential adverse effects of a disruption, relocation or change in operating environment; however, the situations we plan for and the amount of insurance coverage that we maintain may not be adequate in every case. Despite systems redundancy and security measures, our systems and operations are vulnerable to damage or interruption from, among other sources:

In addition, while there are backup systems in many of our facilities, an extended outage of utility or network services supplied by third party IT vendors may delay or disrupt the delivery or performance of the services we provide for our customers. We also utilize third-party cloud service providers to help us efficiently scale certain cloud-based solutions. If we or our cloud service providers and other suppliers encounter a lengthy business interruption or a denial of service, or in the event our disaster recovery and business continuity plans are not effective, or our applicable insurance coverage is denied or not adequate or available on a timely basis for all the liabilities that might be incurred, we could suffer operational, communication and service disruptions, disputes with customers and third parties, civil or criminal penalties, regulatory problems, increases in administrative expenses, financial penalties under our service level agreements with customers, loss of our ability to produce timely and accurate financial and other reports, damage to our reputation or customer relationships or other adverse consequences, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our ability to conduct our operations and accurately report our financial results depends on the integrity of the data in our information systems and the processes performed by those systems. As a result of the services we provide, we process a number of complex transactions that require us to access, store, retrieve, process, manage and transmit the information and data of our customers’ and external third parties, as well as our own data. Although we have invested a great deal of time and resources in developing systems, processes and controls that protect the integrity of the data, such measures cannot provide absolute security. It is possible that failures or errors in hardware and software, including those in third-party technology, or technical deficiencies in our systems could result in data loss or corruption, or cause the data that we collect, utilize or disseminate or the resulting services we deliver that rely on this data to be incomplete or contain inaccuracies that our customers regard as significant. In addition, these information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs, satisfy customer requests and handle our expansion and growth. Despite our testing and quality control measures, we cannot be certain that errors or system deficiencies will be found and that remediation can be done in a timeframe that is acceptable to our customers, or that customer relationships will not be impaired by the occurrence of errors or the need for remediation. In

addition, implementation of upgrades and enhancements may cost more, take longer or require more testing than originally expected. As we continue to expand our business, we face additional challenges in implementing adequate internal control over financial reporting. Situations may also arise in which the accuracy of our data analysis or the content and quality of our work product is central to the disposition of claims, controversies or litigation between our customers and third parties that would require us to allocate significant resources to fulfilling our contractual obligations to provide our customers with full and complete access to records, analysis and back-up documentation of our work. Assuring our capacity to fulfill these obligations as well as actually fulfilling them could impose significant burdens on our infrastructure for data storage, maintenance and processing, and require us to incur increased costs to supplement our personnel, data storage and computing resources, which could materially and negatively impact other business operations.

We historically have derived and expect to continue to generate a significant portion of our revenue from a limited number of large customers at the federal and state level. Our contracts with these customers are subject to periodic renewal and some permit them to terminate their contracts on short notice, with or without cause. If a customer is dissatisfied with the quality or pricing of our work or if we fail to meet performance standards under our contracts, or if our solutions, technical infrastructure or services do not comply with the provisions of our contractual agreements or applicable regulatory requirements, the customer might seek to reduce the scope of the services we perform or prematurely terminate its agreements with us, or we could incur additional costs that may impair the profitability of a contract and damage our ability to obtain additional work from that customer, or other current or prospective customers. For example, some of our contracts contain liquidated damages provisions and financial penalties related to performance failures, which if triggered, could materially adversely affect our reputation, business, financial condition, results of operations and cash flows. We also may be required to disclose such liquidated damages or other financial penalties assessed against us in connection with future bids for services with other customers.

In addition, our government and commercial healthcare customers are subject to financial pressures or pressure from stakeholders that may cause them to terminate contracts for our services that they regard as non-essential or have the ability to develop or perform in-house. They could also redefine or reduce the scope of our contracts by, for example, significantly reducing the volume of data that we are permitted to audit, or decide to renew our contracts at lower performance fee levels. We may agree to reduce our fees mid-term or extend payment terms in response to financial or operational difficulties affecting our customers due to macroeconomic factors, such as COVID-19. Despite our right to prompt and full payment under the terms of our contracts, we could face challenges in obtaining timely or full payments for our properly provided services from our customers. If there is a substantial reduction in the scope of our services under, or a termination of, any of our key contracts with our major customers, or if we are exposed to significant costs, liabilities or negative publicity, our ability to compete for new contracts with current or prospective customer could be damaged and our business, financial condition, reputation, results of operations and cash flows could be materially adversely affected.

We obtain the data used in our solutions and services from many sources, including commercial health insurance plans, financial institutions, managed care organizations, government entities and non-government entities. From time to time, challenges arise in managing and maintaining our relationships with data sources that are not our customers and that furnish information to us pursuant to a combination of voluntary cooperation and legal obligations under laws and regulations that are often subject to differing interpretations. If a number of our information sources become unable or

unwilling to provide us with certain data under terms and conditions of receipt, processing or use that are acceptable to us and our customers, or if laws and regulations for use and protection of this data changes in a way that could disincentivize our suppliers, or impose unacceptable or unreasonable conditions, costs, or risks on us, we may not be able to obtain new or favorable agreements with alternative data suppliers. In addition, our ability to normalize and fully utilize the information we receive from various data sources to enhance and improve current services for our customers is an important component of our growth strategy. Although we believe that we have the legal and contractual rights necessary to normalize and use the data we have obtained from these sources for potential or contemplated solution and service offerings, we cannot provide assurance that these entities will permit the use of their data for these purposes. If we lose a number of our data sources or our access to their data, and fail to identify and reach the requisite agreements with suitable alternative suppliers or to successfully integrate their data into our solutions and services, or if there is a lack of accuracy or integrity in the data that current or future suppliers provide, we could experience service disruptions, increased costs, reduced quality of our solutions and services, or performance penalties under our customer contracts, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In some areas of our business, we may engage subcontractors, teaming partners, vendors or other third party providers to provide our customers with a single-source solution for a broader range of service needs. These third parties include software vendors, utility and network providers, cloud service providers, contingent workers and other information technology service providers and solution partners. Our ability to deliver and implement solutions and serve our customers effectively depends on these third parties meeting our service standards in both timeliness and quality, and in certain instances, on our ability to obtain customer approval for the use of third party subcontractors. While we believe that we perform appropriate due diligence on third party providers and take adequate measures to ensure that they comply with the appropriate laws and regulations, we cannot guarantee that they will adhere to the terms set forth in their agreements with us. Performance deficiencies or misconduct by our third party providers may be perceived as inadequacies in our solutions or capabilities or cause us to fall short of our contractual obligations to our customers, which could materially adversely affect our customer relationships and reputation, result in termination of customer contracts, and subject us to disputes with our customers. In addition, if our third party service providers terminate or refuse to renew their relationships with us or offer their products to us in the future on less advantageous terms, we may not be able to perform or deliver solutions or services for existing customers as expected.

Similarly, we are and may in the future be engaged as a subcontractor to a third party prime contractor which contracts directly with the customer. Subcontracting arrangements where we are not the prime contractor pose unique risks to us because we do not have control over the customer relationship, and our ability to generate revenue under such subcontracts is dependent on the prime contractor, its performance and relationship with the customer, and its relationship with us. We cannot be certain that the prime contractor will provide adequate and timely services to the customer, comply with the terms of its prime contract with the customer or its subcontract agreement with us, or that it will construe its contractual rights and obligations in a reasonable way, act appropriately in dealing with us or customers, and remain in compliance with the relevant laws, rules or regulations. Any failure of the prime contractor to adequately perform its obligations under the prime contract or to comply with applicable laws, rules and regulations could materially adversely affect our reputation and subject us to a dispute with the prime contractor or the customer. In the event a prime contract is terminated, whether for non-performance by the prime contractor or otherwise, our subcontract will similarly terminate, and the resulting contract loss could materially adversely affect our business, financial condition, results of operations and cash flows.

In order to market our solutions and compete for contracts with existing and potential state and federal customers, we are often required to respond to government-issued RFPs. These responses typically require us to assemble and submit a large volume of information within a rigid timetable, and to accurately estimate our cost structure for servicing the proposed contract, the time required to establish operations and the likely terms of proposals submitted by our competitors. We may also be required to disclose sensitive information, such as business developments and trade secrets, or the occurrence of certain negative events suffered by our business, including customer disputes, contract terminations, assessments of liquidated damages, corrective action plans, government inquiries or audits, pending claims and litigation, or adverse judgments and settlements in legal proceedings, which could impair our ability to win the contract at issue or have a material adverse effect on our reputation in the industry.

Even if we win these contracts, we may fail to secure favorable contract terms and conditions, or a government’s determination to award us the contract may be challenged by an interested party. Under the state and federal laws and regulations governing procurements of goods and services, challenges and award protests may be filed even if there are no valid legal grounds on which to base the protest. The filing of such challenges could potentially delay the start or implementation of the contract if the government agency determines to withhold a contract award or suspend contract performance while the protest is being considered, or to take corrective action on its own, such as soliciting new bids, reinitiating the RFP process or terminating the contract award or current procurement. In the event of irregularities that we perceive or learn of in the award or bidding process, we also may be forced to file protests in response to RFP awards to other bidders. Resolution of a protest, even in our favor, could divert our management's focus and force us to expend considerable funds in disputing the potential award or incur additional expenses to maintain our ability to timely start implementation, which may cause our actual results to differ materially and adversely from those anticipated. In addition, if we are unable to win reprocurements or protests of particular contracts, we may be precluded from entering certain customer markets for the term of the contract awarded to another party. Any failure to continue to obtain contracts in response to government RFPs, to design proposals that result in profitable contracts, to win new contracts or re-procure current contracts after they expire or to prevail in protests or challenges of contract awards could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our successful delivery of solutions and services and ability to maintain our productivity and profitability is highly dependent on our ability to identify, recruit, employ, train, engage and retain skilled personnel. The success of recruitment and retention strategies depend on a number of factors, including the competitive demands for individuals with the skill sets we need, the level of compensation required to hire and retain such employees and immigration requirements that may affect our ability to sponsor employees for employment-based visas. Customers or competitors may seek to hire away qualified and seasoned employees, which could impact our ability to innovate and operate effectively, and require us to take legal action and incur additional costs. We may not be able to recruit or maintain the personnel necessary to efficiently operate and support our business in the future, Even if our recruitment and retention strategies are successful, we may experience higher labor costs that may not be offset by improved productivity or increased sales. Our inability to attract and retain top talent on a timely basis without significantly increasing our labor costs could materially adversely affect our business, financial condition, results of operations and cash flows.

Our ability to execute on our business plans and future success requires that we attract, develop, motivate and retain experienced and innovative executive and senior leadership who have successfully managed, designed, implemented and led government services programs or information technology initiatives, or have relevant experience in other healthcare sectors, including data management and analytics. These individuals are in great demand and continue to remain a limited resource in our industry. The loss of one or more members of our management team could cause disruptions in, and harm to, our business. To the extent we lose an executive officer or senior leader, we may incur increased expenses in connection with the hiring, promotion or replacement of these individuals and the effective transfer of critical knowledge. Any failure to successfully transition key leadership roles could adversely affect our business, financial condition, results of operations and cash flows.

We have expanded our business to include operations, investments, strategic relationships and personnel outside of the United States. Our international operations expose us to a number of business and financial risks, including, but not limited to:

If any of these risks materialize, our business, financial condition, results of operations and cash flows could be materially adversely affected.

Our financial results may fail to match our past or projected performance and could vary significantly from period-to- period as a result of a number of factors, some of which are outside of our control. We have experienced fluctuations in our revenue and operating results in the past and they may vary in the future for reasons that include, but are not limited to:

In addition, occasionally our state and federal customers are requested by third party payers or providers to refund payments that we previously recovered for our customers. If our customer chooses to refund money in response to these requests, regardless of whether an error actually occurred, we may be required to return the contingent revenue associated with such refunded payment for which we were previously paid. Consequently, our operating results are subject to significant fluctuation for any particular quarter, fiscal year, or other period, and may not be indicative of future periods. Our business is also subject to seasonal patterns resulting from increased efforts at year-end by certain customers to generate additional savings, complete compliance obligations and close gaps in care. However, taken as a whole, we do not consider our operations to be seasonal to any material degree. Due to these and other factors, it is difficult to predict the extent to which future variations could occur and there may be significant fluctuations in our revenue and operating results, which may cause the market price of our common stock to decrease significantly.

We may not be able to accurately estimate the factors upon which we base our contract pricing, or the costs and timing for implementing and completing our contracts. For a majority of our customer contracts, the payment of our fee is contingent upon the recoveries received by our customers. We also have cost-plus or time-and-materials based contracts with the federal government where our revenue is recognized based on costs incurred plus an estimate of the negotiated fee earned. Our ability to earn a profit on these contracts requires that we accurately estimate the costs involved with these contracts and assess the probability of achieving certain outcomes or milestones within the contracted time period. In addition, we cannot predict with certainty the costs or the period in which implementation or contracts may be completed when we introduce new or enhanced solutions into the marketplace. For our payment

accuracy services, we may face a long implementation period with a new customer or a new contract with an existing customer, making it difficult to reliably forecast revenue under those contracts. If we do not accurately estimate the costs and timing for completing projects, or if we encounter increased or unexpected costs, delays, failures, liabilities or risks, including those outside of our control, our contracts could prove unprofitable for us or yield lower profit margins than anticipated. Although we believe that we have recorded adequate provisions in our financial statements for losses on our fixed price and cost-plus contracts where applicable, as required under U.S. GAAP, our contract loss provisions may not be adequate to cover all actual future losses.

As of December 31, 2020, the outstanding principal balance under our Credit Agreement was $240 million. Our Credit Agreement provides for a senior secured revolving credit facility in an aggregate principal amount equal to $500 million and is secured, subject to certain customary carve-outs and exceptions, by a first priority lien and security interest in substantially all of our tangible and intangible assets. Our outstanding indebtedness and any additional indebtedness we incur may have important consequences for us, including, without limitation, that:

Under the Credit Agreement, we are also required to comply with specified financial and operating covenants, which may limit our ability to operate our business as we otherwise might operate it. The Credit Agreement also contains (i) certain affirmative covenants that impose certain reporting and/or performance obligations on us and our restricted subsidiaries, (ii) certain negative covenants that generally limit, subject to various exceptions, us and our restricted subsidiaries from taking certain actions, including, without limitation, incurring indebtedness, creating liens, engaging in mergers and consolidations, disposing of certain assets or property, making certain investments and acquisitions, entering into certain transactions with affiliates, swap agreements or sale-leasebacks, making certain restricted payments, including dividends and share repurchases, changing our fiscal year or the lines of business that we or our restricted subsidiaries conduct to a material extent, and prepaying certain junior indebtedness, (iii) financial covenants consisting of a maximum consolidated leverage ratio and a minimum interest coverage ratio, and (iv) customary events of default for financings of this type.

Our obligations under the Credit Agreement may be declared due and payable upon the occurrence and during the continuance of an event of default, which includes, without limitation: non-payment of principal or reimbursement obligations when due; non-payment of interest, fees and other amounts for a period of five business days after the due date; material inaccuracies of representations and warranties; failure to perform or observe covenants, conditions or agreements (subject to any applicable grace periods); cross-defaults of certain indebtedness; inability to pay debts; certain acts of bankruptcy or insolvency; certain ERISA events; failure to pay certain material judgments; and a change of control as defined in the Credit Agreement. If not cured, an event of default could result in any amounts outstanding, including any accrued interest and unpaid fees, becoming immediately due and payable, and would give our lenders the

right to proceed against the collateral granted to them to secure the debt, which would require us to, among other things, seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, and/or reduce or delay planned capital or operating expenditures. Such measures might not be sufficient to enable us to service our debt, and any such financing or refinancing might not be available on economically favorable terms or at all. Our ability to make payments of principal and interest on our outstanding credit facility depends upon our future performance and our ability to generate cash flows. If we are unable to generate sufficient cash flows to meet our debt service obligations or are forced to take additional measures to be able to service our indebtedness, our business, financial condition and results of operations could be materially and adversely affected.

We are a U.S.-based company subject to taxation in multiple U.S. and foreign jurisdictions. As we continue to expand our business outside of the United States, we may become subject to additional tax laws and regulations, including those that could increase our exposure to additional tax liabilities and compliance, such as foreign tax laws, cross-border transfer pricing and laws relating to U.S. taxes on foreign operations. Our future effective tax rates could be materially affected by various factors, including changes in the tax rates of jurisdictions in which we do business, changes in relevant tax and accounting rules, regulations and interpretations, increases in expenses not deductible for tax purposes, including impairments of goodwill, changes in the valuation of our deferred tax assets and liabilities, and changes in geographic sales mix. Any unanticipated changes in our tax rates could affect our future results of operations.

In addition, we are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result; however, the authorities in these jurisdictions could review our returns and decide to impose additional tax, including fines and penalties, and record-keeping obligations. The final determination of any of these examinations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We currently self-insure a significant portion of expected losses associated with workers’ compensation claims, general business liabilities, property damage and employee health care benefits. We have purchased a fully-insured stop loss policy for our health plans to help offset our liability for both individual and aggregate claim costs and maintain insurance coverage with varying limits and retention amounts to help limit exposure to certain other risks. Insurance reserves are established for our estimated cost of claims incurred and unpaid as of the balance sheet date on an undiscounted basis, which is based on a number of assumptions and factors, including historical trends, actuarial assumptions, economic conditions and management judgments about the present and expected level of cost per claim. This determination is

closely monitored and adjusted when warranted by changing circumstances. Our prior growth could affect the accuracy of estimates based on historical experience. Should a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was expected, our accrued liabilities might not be sufficient and we may be required to record additional expense. Unanticipated changes in the assumptions and estimates underlying our reserves could result in materially different amounts of expense reported under these programs, which could materially adversely affect our business, financial condition, results of operations and cash flows.

Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that accounting standards we are required to adopt may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. Changes in accounting standards could result in a material adverse impact on our business, financial condition and results of operations.

Our success as a company depends in part upon our ability to protect our core technology and intellectual property. Our expanding operations and efforts to develop new solutions and services also make protection of our intellectual property more critical. We seek to protect our intellectual property and other proprietary information through a combination of patent, trademark, copyright, trade secret and unfair competition laws, confidentiality agreements and invention assignment agreements with employees, consultants and other third parties, as well as through the terms of our agreements with customers and vendors, and other security measures. However, the steps we have taken to deter misappropriation of intellectual property may be insufficient to protect our proprietary information. For example, we may not always be successful at obtaining government registrations for our patents, trademarks, or copyrights that we seek to register. Even if we are successful, existing U.S. federal and state or foreign and international intellectual property laws offer only limited protection, and our property rights in foreign jurisdictions in which we operate or seek to do business may not receive the same degree of protection or enforceability as those in the United States.

Third parties may attempt to misuse our company name or trademarks to engage in improper or illegal conduct such as cyber-squatting or other cybercrimes using our marks, and we may not always be successful at quickly obtaining relief from agencies tasked with enforcing parties’ rights, or stopping such conduct before harm to third parties occurs. Similarly, misappropriation of our other intellectual property by third parties, or any disclosure or dissemination of our confidential and proprietary trade secrets, business intelligence, queries, algorithms and other similar information by any means, could undermine any competitive advantage we currently derive or may derive from that intellectual property. For example, our current and former employees, consultants or other third parties may unintentionally or willfully disclose our trade secrets, know-how or other confidential and proprietary information to competitors. Competitors have attempted to use the federal Freedom of Information Act and other federal and state open records laws to obtain our proposal responses and other documents we provide to government customers. We cannot be certain that our efforts to protect the confidential and proprietary trade secret information or intellectual property in these proposals or other documents will always be successful, even in spite of our objections and efforts to exempt such information from disclosure, due to the many factors underlying the various state and federal decisions to release information in response to open records requests. Parts of proposals may be incorporated into client contracts, which may be made publicly available. Additionally, certain of our solution offerings from recent acquisitions may incorporate open source software

licensed under various public domain licenses or without warranties, indemnification or other contractual protections. Although we carefully monitor and manage our use of open source software to avoid uses that would require us to disclose proprietary source code or violate applicable open source licenses, if we engage in such uses inadvertently, we may be required to discontinue certain features or capabilities of our software, release certain of our proprietary source code or take other remedial action. Moreover, there remains the possibility that others will independently develop competing technologies that may be equivalent or superior to ours. If our efforts to protect our intellectual property and other proprietary rights are inadequate to prevent unauthorized use or appropriation by third parties or our employees, the value of our brand and other intangible assets may be diminished and make us less competitive, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Third parties may also claim that we are infringing upon or misappropriating their intellectual property, using their intellectual property inconsistent with or without the appropriate license terms, or assert other legal challenges to our intellectual property. Our exposure to these risks may further increase after we acquire a business or technology because third parties may wait to make infringement and similar or related claims until after we have acquired the technology.

Any of these situations could cause us to expend significant time and resources and to incur substantial costs associated with settlements, litigation or other legal proceedings that may be necessary to defend ourselves or to enforce our intellectual property rights, in which we may not ultimately prevail, and could result in our being prevented from furnishing certain solutions and services. We may also be required to indemnify our customers if they become subject to third party claims relating to intellectual property that we license or otherwise provide to them, which could be costly.

Our ability to access, process, transmit and store sensitive data, including PHI and personally identifiable information of individuals, as well as other financial, confidential and proprietary information is essential to our business. The use and disclosure of information we obtain from our customers, subcontractors, government agencies, data suppliers and other third parties is regulated at the state, federal, international and industry levels. In particular, we are subject to HIPAA and other federal regulations and various U.S. state laws related to the privacy and security of health information. As such, we often function as a business associate under HIPAA, which also imposes standards and requirements on our downstream subcontractors or business associates. Additional legislation governing the acquisition, storage and transmission or other dissemination of health record information and other personal or sensitive information, including information outside the scope of HIPAA, continues to be proposed and come into force at the state level, such as the California Consumer Privacy Act and the California Privacy Rights Act. There are also numerous international privacy and security laws that govern the collection, dissemination, use, access, retention, storage, protection and confidentiality of personal information. The processes involved with accessing or transferring of personal information across international borders continue to grow increasingly complex.

In addition, laws, rules and regulations concerning the protection of personal information may be inconsistent across jurisdictions and are subject to evolving interpretations and frequent change by legislation, regulatory issuances or industry standards. As regulatory focus on privacy issues continues to increase and these laws and regulations continue to expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data or other personally identifiable information, along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our solutions and services, and may subject us to additional liabilities.

Even though we take measures to comply with all applicable regulations and to ensure our business associates and subcontractors comply with these laws, regulations and rules, we have less than complete control over our business associates’ and subcontractors’ actions and practices. We may be exposed to data breach risk if there is unauthorized access to one of our or our subcontractors’ secure facilities, or to third-party enterprise cloud storage and cloud

computing application services that we use, or from lost or stolen laptops or other portable media from current or former employee theft of data containing PHI or customer confidential information, from computer hacking, malware, computer viruses or other malicious codes, phishing or other cyber-attacks, from misdirected mailings containing PHI, or other forms of administrative or operational error. If we or our subcontractors fail to comply with applicable laws; if unauthorized parties gain physical access to one of our facilities and steal or misuse confidential information; if we erroneously use or disclose data in a way that is inconsistent with our granted rights; or if such information is misdirected, lost or stolen during transmission or transport, we may suffer damage to our reputation, potential loss of existing customers and difficulty attracting new customers. We could also be exposed to, among other things, unfavorable publicity, governmental inquiry and oversight, allegations by our customers that we have not performed our contractual obligations, costs to provide notifications, credit monitoring or other remediation to affected individuals, fines or other penalties imposed by government regulatory agencies, or litigation by affected parties and possible financial obligations for damages or indemnification obligations related to the theft or misuse of such information, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In addition, the growth and continued expansion of our operations in the U.S. and abroad subject us to additional and sometimes conflicting legal and regulatory requirements. For example, in connection with our acquisition of Eliza Corporation, we became subject to the TCPA as a result of the member engagement services that we perform. We also face heightened consumer communication protections as a result of the changing regulatory environment. Our increased delivery of PHM solutions and penetration into new markets, such as ACOs, PBMs and commercial self-insured employers, could increase the likelihood and incidence of our being subjected to regulatory scrutiny or legal actions by third parties other than our customers, which may impose significant costs and strain on our resources.

The expansion of our international operations further subjects us to a variety of new foreign laws and regulations as well as U.S. laws that regulate the conduct and activities of U.S.-based businesses operating internationally. Our limited experience in operating our business in foreign jurisdictions increases the risk of non-compliance with international laws and regulations. Any changes in the laws of the countries in which we operate or utilize third-party resources may intensify our future legal and regulatory compliance burden and involve significant costs and resources. The inadequate enforcement of such laws or regulations could affect our business and results of operations. Despite our efforts, we may not be in compliance with all regulations in the countries in which we operate at all times, and may be subject to sanctions, penalties or fines as a result.

These laws and regulations, along with the terms of our government contracts, regulate how we do business, what services we offer and how we interact with customers, providers, other healthcare payers and the public. Although we have implemented policies and procedures designed to ensure compliance, there can be no assurance that our employees, subcontractors, vendors, agents, strategic partners or third parties with whom we do business, will not violate our policies. If the government discovers improper or illegal activities in the course of audits or investigations, we may be subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, significant monetary damages and fines, loss of required certifications or licenses, and suspension, disqualification or debarment from doing business with the government. Similarly, if our customers assert that we have failed to properly perform or comply with our contractual obligations, or if the carriers to which we send billings assert that we have failed to properly comply with applicable federal or state billing rules and regulations, we may be required to provide refunds or make payments to resolve such issues. If we are found to be in violation of any applicable law or regulation, or if we receive an adverse review, audit or investigation from a government agency or customer related to our compliance with such laws or regulations or the terms of our government contracts, any resulting negative publicity, penalties or sanctions could have an adverse effect on our reputation in the industry, impair our ability to compete for new contracts or bid in response to RFPs in one or more jurisdictions, and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject and may be a party to legal proceedings and claims that arise from time to time in the ordinary course of our business. These matters may include, but are not limited to, claims relating to billing and contractual disputes, subcontracts and teaming agreements, protection of confidential information, trade secrets or intellectual property rights, pending, terminated or completed acquisitions, dispositions, investments or other strategic transactions, individual or class action claims in relation to the services we, or the companies we acquire, may provide, adversary proceedings arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of statutes, rules and regulations that pertain to different aspects of our business, both domestically and internationally. It may be necessary to initiate costly litigation or other proceedings to protect our business interests. There is a risk that we will not be successful or otherwise able to satisfactorily resolve any pending or future litigation. In addition, litigation and other legal claims are subject to inherent uncertainties and management’s view of currently pending legal matters may change in the future. Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury decisions, and differing laws and judicial proclivities regarding damage awards in the jurisdictions in which we operate. Resolution may also require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results. Unexpected outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings (possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition, results of operations and cash flows.

U.S. federal or state governments could limit or prohibit private contractors like us from operating or performing elements of certain government functions or programs. As a condition of receiving federal funding, state and local government agencies may be required to operate such programs with government employees. Under current U.S. law, in order to privatize certain functions of government programs, the federal government must grant a consent and/or waiver to the petitioning state or local agency. If the federal government does not grant a necessary consent or waiver, the state or local government will be unable to outsource that function to a commercial entity. Such a situation could eliminate a contracting opportunity or reduce the value of an existing contract.

Similarly, the U.S. government may impose limitations or requirements on the outsourcing of work to offshore resources, which could make it more difficult for us to fulfill our contracts in a cost-effective manner. Certain areas of our operations use or involve vendor or subcontractor personnel located outside of the United States to supplement our workforce, who may (under carefully controlled circumstances) access certain PHI in the course of assisting us with various elements of the services we provide to our customers. The federal government and a number of states have proposed or passed laws or issued rules, regulations, and orders that would limit, restrict or wholly prohibit the use of offshore labor in performance of government contracts, or impose sanctions for the use of such resources. Some of our customers have already chosen to contractually limit or restrict our ability to use offshore personnel and systems. Intensified restrictions of this type or associated penalties could raise our costs of doing business, expose us to unexpected fines or penalties, increase the prices we must charge to customers to realize a profit and eliminate or significantly reduce the value of existing contracts or potential contract opportunities, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Various laws, regulations and administrative policies prohibit companies from performing work for government agencies in capacities that might be viewed to create an actual or perceived conflict of interest. In particular, CMS has stringent organizational conflict of interest, or OCI, rules, which can limit our bidding for specific work for CMS, or for other contracts that might conflict, or be perceived by CMS to conflict, with contractual work for CMS. State governments and managed care organizations also have conflict of interest restrictions that could limit our ability to bid for certain work and impact our overall sales strategy. As we continue to grow and diversify our business operations, the likelihood that customers or potential customers will perceive conflicts of interest between our various activities, lines of business and customer relationships may increase. Such conflicts, whether real or perceived, could result in a loss of contracts or additional internal structural barriers that delay operational efficiency. We may also need to divest certain existing businesses or reorganize our current organizational and management structure in order to qualify for new contract awards or to appropriately mitigate conflicts and neutralize or avoid potential OCI issues. Our failure to devote sufficient care, attention and resources to managing these adjustments may result in technical or administrative errors that could expose us to potential liability or adverse regulatory action. In addition, OCI rules and standards change frequently, and are subject to varying interpretations and varying degrees and consistency of enforcement. We may not be successful in navigating these restrictions. If we are prevented from undertaking business opportunities due to real or perceived conflicts of interest, our business, financial condition, results of operations and cash flows could be adversely affected.

The market price of our common stock has, at times, fluctuated significantly and may fluctuate in the future based on a variety of factors, many of which are beyond our control. During the 52-week period ended December 31, 2020, our common stock traded on the Nasdaq Global Select Market as high as $36.95 per share and as low as $18.20 per share. In addition to the risk and uncertainties described in this “Risk Factors” section, factors affecting our stock price include, among others, those relating to:

In addition, stock markets often experience significant price and volume fluctuations. These broad market fluctuations may materially adversely affect the market price of our common stock regardless of our operating performance. In the past, shareholders have instituted securities class action litigation following periods of market volatility. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business.

Our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of “blank check” preferred stock with such designations, rights and preferences as may be determined by our Board of Directors. Accordingly, our Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, that could adversely affect the voting power or other rights of holders of our common stock. In the event of issuance, preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying, or preventing a change in control. Although we have no present intention to issue any shares of preferred stock, it is possible that we will do so in the future. In addition, our bylaws currently require advance notice of shareholder proposals for business to be conducted at meetings of our shareholders and for nominations of candidates for election to our Board of Directors and provide for Delaware as an exclusive forum for certain disputes with our shareholders, all of which could also have the effect of discouraging a change of control.

None.

Our corporate headquarters and other material leased properties as of December 31, 2020 are shown in the following table:

Our common stock is listed on the Nasdaq Global Select Market under the symbol “HMSY”.

As of the close of business on February 23, 2021, there were 244 holders of record of our common stock.

We have not paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. Our Board of Directors will evaluate various factors, including, without limitation, our future earnings, operating cash flows, financial condition, results of operations and capital requirements in determining whether to pay any cash dividends in the future. Our Credit Agreement generally limits, subject to certain exceptions, our ability to make certain payments or distributions with respect to our capital stock, including cash dividends to our shareholders. For additional detail, see the information under the heading “Liquidity and Capital Resources” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Note 9 to the Consolidated Financial Statements in Part II, Item 8.

For equity compensation plan information, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

On November 1, 2019, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $50.0 million of shares of its common stock from time to time on the open market or in privately negotiated or other transactions. We publicly announced the program in November 2019. The share repurchase program is authorized for a period of up to two years, and may be suspended or discontinued at any time. In order to facilitate repurchases, the Company may enter into a Rule 10b5-1 plan from time to time, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws or because of a self-imposed trading blackout period. See “Equity” in Note 10 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding share repurchases. There were no repurchases of shares of common stock under the share repurchase program during the fourth quarter of 2020. The maximum approximate dollar value of shares that may yet be purchased under the program as of December 31, 2020 is $50.0 million.

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act or the Exchange Act that might incorporate by reference this 2020 Form 10-K or future filings made by us under those statutes, the Comparative Stock Performance Graph is not deemed filed with the SEC, is not deemed soliciting material and shall not be deemed incorporated by reference into any of those prior filings or into any future filings we make under those statutes, except to the extent that we specifically incorporate such information by reference into a previous or future filing, or specifically request that such information be treated as soliciting material, in each case under those statutes.

The following table sets forth selected consolidated financial amounts at and for each of the last five fiscal years in the period ended December 31, 2020. It should be read in conjunction with Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and Notes thereto, in Part II, Item 8 of this 2020 Form 10-K.

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of HMS. You should read this discussion and analysis in conjunction with the other sections of this 2020 Form 10- K, including the Cautionary Note Regarding Forward-Looking Statements appearing prior to Part I, the information in Part I, Item 1A, and the Consolidated Financial Statements and Notes thereto in Part II, Item 8. The historical results set forth in Part II, Item 6, Item 7 and Item 8 of this 2020 Form 10-K should not be taken as necessarily indicative of our future operations or financial results.

HMS is mission-driven to increase the value of healthcare so that it can benefit more people and improve the health of the population. Through our industry-leading technology, analytics and engagement solutions, we save billions of healthcare dollars annually while helping people lead healthier lives. We provide a broad range of coordination of benefits, payment integrity and population health management solutions through our operating subsidiaries that move healthcare forward. We are managed and operate as one business segment with a single management team that reports to the Chief Executive Officer.

We have grown our business both organically, through internal innovation and the development of new solutions and services, as well as by acquisition of businesses whose core services strengthened our overall mission to make

healthcare work better for everyone. Health plans were the largest growth contributor during 2020. In addition to cross-sales of our population health management solutions and other internal initiatives in 2020, various factors related to the macro healthcare environment are expected to provide opportunities for future growth, including:

To fuel our future growth, we plan to enter into new and adjacent markets, and add new customers and broaden the scope of our relationships with existing customers by capturing cross-selling opportunities and introducing innovative solutions and services that span the payment and care continuum. To advance these initiatives, we intend to increase internal product development and enhancement efforts to accelerate the launch of new offerings and capabilities that drive innovation and value for our customers. We have also renewed our focus on investing and deploying technology tools that leverage a big data environment to promote automation and greater operating efficiencies that will improve the quality, effectiveness and profitability of our offerings, increase customer satisfaction and identify revenue opportunities.

We are subject to a number of significant risks in the operation of our business, including operational, strategic, financial and regulatory risks. These include risks related to legal compliance, financial performance and condition, protection of our information technology networks and systems and intellectual property, and other risks. With respect to cybersecurity, the effective operation of our information technology networks and systems, and the secure processing and maintenance of the confidential, proprietary and sensitive information and data we receive from our customers and other data suppliers are critical to our operations and business strategy. Although we have processes and procedures to attempt to mitigate many of the risks that we face, there can be no assurance that such processes or procedures will be successful. For a discussion of certain risks relating to the Company, see the information under the heading “Part I, Item 1A. Risk Factors.”

We have agreed to customary representations, warranties and covenants in the Merger Agreement, including covenants with respect to the operation of our business prior to the closing of the transaction or termination of the Merger Agreement, such as restrictions on making certain acquisitions and dispositions, entering into certain contracts, incurring certain indebtedness or expenditures, declaring dividends, repurchasing stock and taking other specified actions. The consummation of the Merger is subject to customary closing conditions, including, among others, the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the shares of HMS's common stock outstanding and entitled to vote as well as the satisfaction of other customary closing conditions. The Merger is not conditioned upon receipt of financing by Gainwell. The Merger is anticipated to close in the first half of 2021; however, we cannot predict with certainty as to when all of the required closing conditions will be satisfied or if the Merger will close at all. Under certain specified circumstances, we may be required to pay Gainwell a termination fee of

approximately 2.0% of the transaction value in the event the Merger Agreement is terminated. See Note 1 to the Consolidated Financial Statements in Part II, Item 8 for additional details.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. Since the beginning of the outbreak, COVID-19 has significantly reduced global economic activity and increased the level of uncertainty and volatility in financial markets throughout the world. It has also impacted our day-to-day operations and the operations of the vast majority of our customers, suppliers and partners. Although the Company’s revenues increased for the year ended December 31, 2020, as compared to the prior year periods, and the COVID-19 pandemic has not had a material adverse effect on our business to date, our future operational and financial performance may be negatively impacted by the effects of COVID-19, including those that may not be in our control. The extent of the impact will depend on future developments and their effects on our customers and contracts, which are highly uncertain and cannot be accurately predicted at this time. For example, due to the circumstances related to COVID-19, some of our customers temporarily suspended or reduced certain contract work over several months in 2020. As a result of the reduction in volume and services, we experienced lower revenues during the second quarter and continued to see an impact to our financial results in certain parts of our business in the third quarter. As COVID-19 continues to evolve, we will continue to closely monitor the impact of COVID-19 and its effects on all aspects of our business, including those on our customers and partners, and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the effect of COVID-19 on the Company, please see the “Risk Factors” section set forth in Part I, Item 1A. of this 2020 Form 10-K, which is incorporated herein by reference.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. The future effects of the COVID-19 pandemic on economic and market conditions continue to remain uncertain and increase the subjectivity that will be involved in evaluating our estimates and assumptions underlying our critical accounting policies. The accounting policies that we believe to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgments are as follows:

For further information on these critical accounting policies and all other significant accounting policies, refer to the discussion under “Business and Summary of Significant Accounting Policies” in our Note 1 to the Consolidated Financial Statements in Part II, Item 8.

Results of Operations

Comparison of 2020 to 2019 and 2019 to 2018

2020 vs 2019

During the year ended December 31, 2020, Other income was $1.4 million, a decrease of $6.8 million or 82.9% compared to the prior year period. The Other income recognized in 2020 was due to a change in the fair value of ordinary shares of MedAdvisor Limited acquired during the fourth quarter of 2019. In addition, during the year ended December 31, 2019, a third party acquired one hundred percent of the outstanding stock of InstaMed Holdings, Inc. ("InstaMed") including the Company's cost based investment in InstaMed of $2.1 million. As a result, the Company received proceeds of $9.8 million from the sale of the investment and recognized a $7.7 million gain in Other income for the year ended December 31, 2019.

We do not have any off-balance sheet arrangements.

The following tables should be read in conjunction with the Consolidated Financial Statements and Notes thereto, in Part II, Item 8 of this 2020 Form 10-K.

Our cash and cash equivalents and our working capital increased as of December 31, 2020 as compared to December 31, 2019, primarily as a result of the cash used in investing activities in 2019 and an increase in accounts receivable as of December 31, 2020.

Our principal source of cash has been our cash flow from operations and our $500 million five-year revolving credit facility. Other sources of cash include proceeds from exercise of stock options and tax benefits associated with stock option exercises. The primary uses of cash include, but are not limited to, acquisitions, strategic investments, capital investments, compensation expenses, data processing, direct project and other operating costs, SG&A expenses and other expenses.

We believe that expected cash flows from operations, available cash and cash equivalents, and funds available under our revolving credit facility will be sufficient to meet our liquidity requirements for the following year, which include:

Any projections of future earnings and cash flows are subject to substantial uncertainty, particularly in light of the rapidly changing market and economic conditions created by the COVID-19 pandemic. We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to meet working capital requirements, fund acquisitions or investments or repay our indebtedness under the Credit Agreement. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. Although we believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our operations for the foreseeable future, the challenges posed by COVID-19 on our business are expected to continue to shift rapidly. Consequently, we will continue to assess our liquidity needs and anticipated capital requirements in light of future developments, particularly those relating to COVID-19.

Under the Merger Agreement with Gainwell, we have agreed to various customary covenants and agreements, including, among others, covenants to conduct our business, in all material respects, in the ordinary course of business during the interim period between the execution of the Merger Agreement and the consummation of the Merger. Outside of certain limited exceptions, we may not engage in or take specified actions during this period unless agreed to in writing by Gainwell, which include, among others:

Net cash provided by operating activities for the year ended December 31, 2020 was $99.0 million, a $34.2 million decrease from net cash provided by operating activities of $133.2 million for the year ended December 31, 2019. The decrease was primarily due to a $17.1 million decrease in net income in 2020, a $7.7 million gain on the sale of a cost-basis investment in 2019, the release of an estimated liability for appeals, net of $10.5 million in 2019, a decrease in deferred income taxes of $14.0 million in 2020, and a net increase in operating assets and liabilities of approximately $26.2 million in 2020.

The majority of our customer relationships have been in place for several years. Our future operating cash flows could be adversely affected by a decrease in a demand for our services, delayed payments from customers or if one or more contracts with our largest customers is terminated or not renewed.

Net cash used in investing activities for the year ended December 31, 2020 was $29.7 million, a $175.4 million decrease compared to net cash used in investing activities of $205.1 million for the year ended December 31, 2019. This decrease was primarily attributable to a reduction in net cash used in the acquisition of a business of $187.3 million in 2020 and a reduction in the investment in common stock of $4.0 million in 2020. These decreases were partially offset by a decrease in proceeds from the sale of our cost basis investment in InstaMed of $9.8 million in 2019 and an increase in purchases of property and equipment and investment in capitalized software of $6.3 million year over year.

We currently expect to incur capital expenditures of approximately $35 million during the year ended December 31, 2021.

Net cash used in financing activities for the year ended December 31, 2020 was $(1.4) million, a $33.5 million decrease from net cash provided by financing activities of $32.1 million for the year ended December 31, 2019. The decrease was primarily related to a $33.1 million decrease in proceeds from the exercise of stock options, net of payments of tax withholdings in 2020.

During the year ended December 31, 2020, we did not repurchase any shares of our common stock. See the discussion under “Repurchases of Shares of Common Stock” under Part II, Item 5 and “Equity” in Note 10 to the Consolidated Financial Statements under Part II, Item 8 for additional information regarding share repurchases.

In May 2013, we entered into the Credit Agreement with certain lenders and Citibank, N.A. as administrative agent. The Credit Agreement originally provided for an initial $500 million five-year revolving credit facility maturing on May 3, 2018.

On December 19, 2017, we entered into an amendment to the Credit Agreement that, among other things, provided for an extension of the maturity date of our then-existing senior secured revolving credit facility to December 19, 2022, which includes a $50 million sublimit for the issuance of letters of credit and a $25 million sublimit for swingline loans. In addition, the Credit Agreement includes an accordion feature that permits us to increase the revolving credit facility up to the sum of (a) the greater of $120 million and 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (b) additional amounts so long as our first lien leverage ratio (as defined in the Credit Agreement) on a pro forma basis is not greater than 3.00:1.00, in each case subject to obtaining commitments from lenders therefor and meeting certain other conditions.

The obligations and amounts due under the Credit Agreement are secured by a first security priority interest in all or substantially all of our tangible and intangible assets and our material 100% owned subsidiaries’ assets. The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, including financial covenants, and events of default.

As of December 31, 2020, the outstanding principal balance under our revolving credit facility was $240.0 million.

As part of a contractual agreement with a customer, the Company has an outstanding irrevocable letter of credit for $6.5 million, which is issued against our revolving credit facility and expires June 30, 2021.

As of December 31, 2020, we were in compliance with all terms of the Credit Agreement.

See Note 9 to the Consolidated Financial Statements in Part II, Item 8 for additional information regarding our Credit Agreement.

The following table represents the scheduled maturities of our contractual cash obligations and other commitments:

The information set forth under the caption “Summary of Significant Accounting Policies” in Note 1 to the Consolidated Financial Statements in Part II, Item 8 is incorporated herein by reference.

At December 31, 2020, we were not a party to any derivative financial instruments. We conduct most of our business in U.S. currency and have limited operations outside of the United States. As such, we do not have material foreign currency risk exposure. As we continue to grow our foreign operations, our exposure to foreign currency exchange rate risk could become more significant. We are exposed to changes in interest rates, primarily with respect to our revolving credit facility under our Credit Agreement. If the effective interest rate for all of our variable rate debt were to increase by 100 basis points (1%), our annual interest expense would increase by a maximum of $2.4 million based on our debt balances outstanding at December 31, 2020. Further, we currently invest substantially all of our excess cash in short-term investments, primarily money market accounts, where returns effectively reflect current interest rates. As a result, market interest rate changes may impact our interest income or expense. The impact will depend on variables such as the magnitude of rate changes and the level of borrowings or excess cash balances. We do not consider this risk to be material. We manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.

The information required by Item 8 is found under Item 15 of this 2020 Form 10-K.

None.

We are responsible for maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures

As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the 2020 Form 10-K.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of our Chief Executive Officer and our Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. GAAP.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Our independent registered public accounting firm, Grant Thornton LLP, audited our consolidated financial statements and has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2020, a copy of which is included with this 2020 Form 10-K.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There have been no changes to the Company’s internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

None.

Our Board of Directors has adopted a Code of Conduct applicable to all of our directors, officers and employees, including all employees, officers, directors, contractors, contingent workers and business affiliates of HMS subsidiaries. The Code of Conduct is publicly available on our website under the “Investors—Corporate Governance” tab at http://investor.hms.com/corporate-governance and can also be obtained free of charge by sending a written request to our Corporate Secretary. To the extent permissible under the Nasdaq Marketplace Rules, we intend to disclose amendments to our Code of Conduct, as well as waivers of the provisions thereof, that relate to our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions on the Company’s website under the “Investors—Corporate Governance” tab at http://investor.hms.com/corporate-governance.

_____________________

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on February 26, 2021.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 26, 2021.

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Opinion on the financial statements

/s/ GRANT THORNTON LLP

Board of Directors and Shareholders