Founded in 1976, Performant Financial Corporation (PFMT) has evolved into a leading provider of technology-enabled payment integrity, eligibility, and analytics services for the healthcare industry. The company's mission is to support payers in identifying, preventing, and recovering waste and improper payments by leveraging advanced technology, analytics, and proprietary data assets.

Company Background and Evolution

Performant Financial Corporation, headquartered in Plantation, Florida, began its journey as a provider of recovery audit services, focusing on helping clients identify and recover improper payments. Over the years, the company expanded its service offerings and client base, venturing into the commercial healthcare sector while maintaining its government clientele. A significant milestone in Performant's history came in 2006 with the passage of the Tax Relief and Health Care Act, which mandated the Centers for Medicare & Medicaid Services (CMS) to contract with private firms for Medicare claims audits. This legislation opened up new opportunities for Performant, leading to the company securing Medicare Recovery Audit Contractor (RAC) contracts for Regions 1 and 5 in 2016.

The company faced a temporary setback in 2020 when CMS paused medical review activities under its RAC contracts due to the COVID-19 pandemic. However, Performant demonstrated resilience by resuming these activities in August 2020 as restrictions were lifted. In 2021, the company's expertise and performance were recognized when it was re-awarded the CMS Region 1 RAC contract with an extended term. Further cementing its position in the government healthcare sector, Performant was awarded an indefinite delivery, indefinite quantity contract with the U.S. Department of Health and Human Services, Office of the Inspector General in 2022 to provide medical review and consultative services.

Strategic Expansion and Market Position

In 2016, Performant made a strategic move by securing two new Medicare Recovery Audit Contractor (RAC) contracts with the Centers for Medicare & Medicaid Services (CMS) for Regions 1 and 5. These contracts, which involve the audit of improper payments for claims made under Medicare Parts A and B, have been instrumental in establishing Performant's reputation as a leading provider of payment integrity services in the government healthcare sector.

Building on this success, the company further expanded its footprint in the commercial healthcare market, leveraging its expertise and technology platform to provide eligibility-based, also known as coordination-of-benefits (COB) services, as well as claims-based services, which include the audit and identification of improperly paid claims. Performant's client base now includes a diverse mix of national and regional healthcare payers, solidifying its position as a trusted partner in the industry.

Financials

Performant's financial performance has been marked by a focus on growth and operational efficiency. In the first nine months of 2024, the company reported healthcare revenues of $84.0 million, a 12% increase compared to the same period in the prior year. This growth was driven by a combination of successful commercial client implementations and the continued ramp-up of the CMS RAC Region 2 contract.

The company's adjusted EBITDA for the nine-month period stood at $1.3 million, an improvement of $2.5 million compared to the same period in 2023. This progress can be attributed to Performant's strategic investments in technology and operational initiatives, aimed at enhancing efficiency and productivity across its service offerings.

For the most recent fiscal year ending December 31, 2023, Performant reported total revenue of $113.74 million, with a net loss of $7.52 million. The company generated operating cash flow of $3.86 million and free cash flow of -$283,000 for the same period.

In the most recent quarter ending September 30, 2024, Performant reported revenue of $31.52 million, representing a 5% year-over-year growth. The net loss for the quarter was $2.38 million. The company reported negative operating cash flow of $1.31 million and negative free cash flow of $2.55 million for the quarter.

Liquidity

As of December 31, 2023, Performant had a debt-to-equity ratio of 0.11, indicating a relatively low level of debt compared to equity. The company's cash position stood at $7.25 million, providing a solid foundation for operations and future investments.

Performant maintains a $25 million revolving credit facility with Wells Fargo Bank, of which $14 million was available as of September 30, 2024. This credit facility provides additional financial flexibility for the company to pursue growth opportunities and manage working capital needs.

The company's current ratio and quick ratio both stood at 2.67 as of December 31, 2023, indicating a strong ability to meet short-term obligations with its liquid assets.

Product Segments

Performant operates through two main product segments: Healthcare and Customer Care Outsourced Services.

The Healthcare segment is the primary revenue driver, accounting for $84.01 million or 95% of total revenues in the first nine months of 2024. This segment offers two key services:

1. Eligibility-based Services (Coordination-of-Benefits or COB): These services generated $43.72 million in revenues in the first nine months of 2024, a slight decrease of 2% compared to the prior year period. Performant identifies and recovers payments in situations where the client should not be the primary payer of healthcare claims due to other insurance coverage.

2. Claims-based Services: This service line generated $40.29 million in revenues in the first nine months of 2024, a significant increase of 32% compared to the prior year period. Performant audits, identifies, and sometimes recovers improperly paid claims through both automated and manual review processes.

The Customer Care Outsourced Services segment generated $4.20 million in revenues in the first nine months of 2024, a decrease of 28% compared to the prior year period. This segment provides call center and other outsourced services to clients.

Recent Developments and Innovations

One noteworthy development in 2024 was Performant's successful bid for the New York State Medicaid Recovery Audit Contractor (RAC) contract. This multi-year award, which includes an initial three-year term and the potential for two additional one-year extensions, represents the company's first foray into the lucrative state Medicaid market, which it estimates to be a $300 to $500 million annual revenue opportunity.

Performant's commitment to innovation has been a key driver of its growth strategy. In 2024, the company integrated natural language processing (NLP) technologies into its technology stack, further enhancing the accuracy and efficiency of its medical auditing capabilities. This investment aligns with Performant's "Scale to Innovate" pillar, which focuses on developing scalable infrastructure and workflows to support its long-term growth objectives.

Challenges and Resilience

Despite facing some industry-wide challenges, such as the impact of the Change Healthcare data breach and election-related conservatism in the government healthcare sector, Performant has demonstrated its resilience and adaptability. The company has continued to diversify its client base, expand its service offerings, and invest in technology to drive operational improvements.

Future Outlook

Looking ahead, Performant remains optimistic about its growth prospects. The company has maintained its guidance for 2024 healthcare revenues in the range of $117 million to $122 million and adjusted EBITDA between $4 million and $5 million, despite facing temporary industry challenges and delays.

In the first nine months of 2024, Performant implemented 32 programs that are expected to deliver between $13 and $14 million of annualized revenue at steady state. The recently won New York RAC contract is anticipated to generate double-digit millions in annual revenues at steady state, although the company has not provided a more definitive range until they can work more closely with the New York-only team to understand the specifics of the program scope and implementation.

Conclusion

Performant's transformation from a student loan recovery firm to a leading provider of healthcare payment integrity solutions underscores the company's adaptability and vision. By leveraging its expertise, technology, and client relationships, Performant is well-positioned to continue its growth trajectory and solidify its position as a trusted partner in the evolving healthcare landscape. The company's focus on innovation, strategic expansions, and operational efficiency, combined with its strong market position in both government and commercial healthcare sectors, provides a solid foundation for future growth and value creation for its stakeholders.