Estimated Liability For Appeals

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

Under the Company’s Medicare RAC contract with the CMS, held by the Company’s wholly owned subsidiary HealthDataInsights, Inc. (“HDI”) and certain contracts for commercial health plan customers, HMS recognizes revenue when claims are sent to the customer for offset against future claims payments. Providers and health plan customers have the right to appeal a claim and

may

pursue additional appeals if the initial appeal is found in favor of the customer. HMS accrues an estimated liability for appeals based on the amount of revenue that is subject to appeals, closures or other adjustments and which HMS estimates are probable of being returned to providers following a successful appeal. The Company’s estimates are based on the Company’s historical experience with appeals. The estimated liability for appeals represents the Company’s estimate of the potential amount of repayments related to appeals of claims, closures and other adjustments for which revenue was previously collected.

A summary of the activity in the Estimated liability for appeals was as follows

(in thousands)

	March 31, 2017
Balance--beginning of period	$	11,126
Provision		-
Appeals found in providers favor		(521	)
Balance--end of period	$	10,605

The above chart represents the CMS estimated reserve liability only. The liability for appeals is an offset to revenue to the Company’s unaudited Consolidated Statements of Income. The total liability for appeals balance of

$31.5

million and

$30.8

million as of

March 31, 2017

and

December 31, 2016,

respectively, includes

$17.9

million and

$17.3

million of CMS liabilities, respectively, which represents findings which have been adjudicated in favor of providers and

$10.6

million and

$11.1

million, respectively, of CMS liabilities which represents an estimate of findings that are probable of being returned to providers following a successful appeal.