Revenue Model:
The current revenue model is success-based, fees are generated based on a percentage of validated recoveries for clients. Services do not require significant upfront investments by customers, not reliant on their spending budgets, while offering the opportunity to recover significant funds otherwise lost. Contracts are negotiated on case by case basis, fees may range from 10-30% of recoveries and the duration of contracts may last 3-5+ years. These are high margin, recurring revenue contracts, expected to provide multiple years of prolonged double digit growth. Recent ramp up costs and Covid have been hurdles for the trajectory of the healthcare business as CMS, followed by other customers, requested a short-term pause on existing healthcare audits. As this has largely ended, expect revenues to normalize and continue trending higher. The technology is largely developed, so massive amounts of R&D is no longer needed. The largest cost to Performant is labour cost to ramp up and service new customers as more contracts are won.
There are two main revenue verticals:
1)Claims-Based Reviews(21% CAGR)
PFMT sifts through improperly coded insurance claims and determines whether a claim was overpaid and needs to be recuperated. Acting as a profit center for insurance companies, while taking 10-30% of recovered fees. For example, there may exist two codes for knee surgery, one of which is 5 times the cost of the other. The more expensive medical code was applied to the bill which was ultimately paid for incorrectly by the insurance company.
2)Eligibility- Based Reviews (66% CAGR)
Determines who is responsible for paying for an incident, procedure, or claim. For example, if an individual slips and hurts themselves in a Walmart, should the individual insurance pay, should Walmart pay, CMS, etc? As a 3rd party Vendor, PFMT helps insurance companies and CMS ensure accurate payments.
Insurance companies DO have some form of in-house claims assessment but they ALSO hire 3rd party vendors to try and accurately assess others. Typically, insurance company’s hire every vendor (Performant, Cotiviti + HMS [both owned by Veritas], Discovery Healthcare, Optum + Change HC [owned by UnitedHealth]) and have them compete for claims in a vendor stack model. For example, Humana would hire all vendors (excluding Optum and Change HC because they are owned by a competitor, United Health) to review all of their Durable Medical Equipment (DME) claims. First Humana will assess as many inhouse claims as possible so that they don’t pay 10-30% recovery fees. Then there is a queued pass system where the 1st ranked vendor get the first look on the claims to assess and refute claims for a 15-20% recovery fee. Then, the 2nd ranked vendor in the pass system will get the second look on those claims, and so on, until the last vendor gets to review the claims at a higher % recovery fee as an incentive for being last. DME would be just one vertical within Humana, among 40+ potential verticals.
Commercial insurers typically only use vendors that have contracts with CMS. As a smaller, independent player that has established credibility with CMS contracts, PFMT has leverage to grow in the commercial space. Growth can include growing the number of verticals within an individual provider. Currently PFMT has an average of 5 verticals within four of the five largest insurance companies (10M+ lives covered). Recall DME was one vertical. Improving results in DME may reward PFMT with access to more verticals within Humana (for example) such as Home Health, Hospice, skilled nursing, brain, etc. On average PFMT has 5 out of 45 verticals, plenty of room for growth. It costs the insurance nothing to onboard PFMT, their incentives are aligned. Another advantage for insurers to hire vendors to review claims compared to strictly in-house screening is because 3rd party vendors have data from CMS, Aetna, CIgna, Elevance, Humana, Small/Large insurers across the country which allows them to catch more claims that would normally be missed. PFMT can grow by acquiring new customers, new verticals and moving up the priority stack within verticals. Large competitors do not focus on the mid-tier plans such as Blue Cross and Blue Shield, PFMT can also target the mid-tier plans as a huge source of growth.
The integration process takes 6-9 months from the moment they win a contract. Then 2-6 months to get paid. Giving good visibility into revenues 1-5 years out. The way PFMT wins new programs is by approaching an insurance provider, running tests for about a year, then once they determine whether they can compete, they propose terms for a contractual agreement. Take a look at their Deck for a case study of their “land and expand” strategy. First they ask to run tests, data mine, then review past claims. Eventually they request a chance to review claims in the 4th position of the queue/pass system for a particular vertical. They prove themselves by increasing the total # of claims by 75%, thus winning higher ranking within that vertical queue. Eventually winning access to more verticals.
Mgmt has indicated 2022 target healthcare revenues of $92-96M. 2021 saw record healthcare revenues of $77.5M. Total revenues have recently taken a dip as the company moved away from legacy recovery markets. Since 2014 Healthcare revenues have come from $3.4M annually to a 2022 revenue guidance of $94M (51% CAGR), finally accounting for a majority of revenues ( 85% of revenues in the most recent quarter). In the long term, PFMT targets $500-750M in annual revenues with 20-30% ebitda margins. With mgmt mentioning a near term goal of $160-200M in the next 1-2 years being realistic. Mgmt has indicated they could look to move some of their workforce to the Philippines to improve margins, similar to what competitor Cotiviti has done (currently has about 35% margins- according to mgmt).
Contracts:
Current government contracts contribute a significant amount of revenues to their healthcare business and also offer a crucial intangible benefit. As the largest medical payer in the country, CMS contract wins give a stamp of approval for the large commercial plans and ultimately smaller potential customers as well. The total spend in the commercial markets is much larger than any government contracts, allowing for huge potential growth. During their recent Q2 earnings call, mgmt disclosed they were in advanced stages of negotiations with two midsized payers to become their exclusive payment integrity partner which would be an expansion of their traditional vendor stack model. Also something to consider, Humana and Anthem (Elevance Health) have been criticized for their growing days payable claims outstanding, and have openly mentioned their intent to pursue more outsourcing.
-Recently Re-awarded CMS RAC Region 1 (8.5 years, as of April 2021)
-CMC Region 5 National Contract DME/HHH (Durable Medical Equipment/ Home Health, Hospice)
-CMC RAC Region 2 awarded in March 2022 (8.5 year contract) but currently in protest by incumbent Cotiviti.
-Awarded HHS OIG IDIQ contract for medical review in 2022
-Engaged with 4 of the 5 largest national health plans
PFMT has three main targets:
1)National plans with 10M+ covered lives.Highly competitive, going against other large players. PFMT’s ability to win national CMS contracts gives a stamp of approval for other large commercial plans
2)Mid-tier plans with 500k-4M covered lives. Large Competitors dont focus on the mid-tier space, allowing for large growth potential
3)Smaller plans <500k covered lives. Small plans have least competition. PFMT is able to create SAAS solutions.
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