Encore Opportunities: How Durable Is SEC's Arbitration and Collections Engine

The Collections Engine Is The Story, Not Just The Revenue Line

The main article argued that SEC was the real swing factor behind Encore's 2025. This follow-up isolates the narrower question inside that thesis: has the arbitration and collections process already become a durable engine, or was 2025 the year when better collections and a more favorable revenue-recognition model hit the income statement at the same time.

First finding: the improvement is real. The recognition rate rose from 8.85% at the end of 2024 to 22.51% at the end of 2025, and actual cash collections in urgent care jumped to $264.4 million from $85.2 million in 2024.

Second finding: this is still not a "clean" revenue story. Out of SEC's $255.5 million of 2025 revenue, about $75.3 million came from changes in variable consideration recognized from prior years. In other words, close to one-third of the segment's 2025 revenue came from re-estimating older claims, not only from current-period activity.

Third finding: the open-claims stock is still massive. At year-end 2025, open claims stood at $900.2 million, of which $714.6 million were already in appeal and arbitration, while only $33.4 million were recognized as revenue against that stock.

Fourth finding: the engine works, but it is expensive. At group level, collection and arbitration costs rose to $32.8 million in 2025 from $17.5 million in 2024. That does not negate the operating improvement, but it does mean durability has to be judged through cost as well as cash.

The right way to read SEC now is not to ask whether 2025 was a strong year. That part is already clear. The real question is whether 2025 created a revenue and cash base that can roll forward even as the older claims inventory shrinks, even through weaker quarters, and without collection costs consuming too much of the upside.

What Actually Sits Inside 2025 Revenue

The important number here is not only the $255.5 million revenue figure, but its internal composition. The urgent-care revenue note shows $180.3 million of current variable consideration recognized in 2025, plus another $75.3 million from changes in variable consideration recognized in prior years. Put differently, a large part of the 2025 top line reflects updated estimates on an older claims book, not only fresh 2025 services.

That does not automatically make the revenue low quality. Better collections provide real support for a better estimate. But it does mean SEC's 2025 revenue did not come only from patient activity. It also came from a model that decides how much of an old claims pool is now collectible enough to be recognized. That is exactly why the auditor treated urgent-care revenue recognition as a key audit matter: the methodology, the inputs, and the judgment all matter.

This chart shows how much of 2025 was an accounting step-up as well as an operating step-up. The recognition rate almost tripled within one year. Midroog was still saying in November 2025 that the model needed a longer track record and was using a base-case recognition level around 20%. The annual report then closed the year at 22.51%, which is another step higher, but still a number built on history rather than contractual certainty.

The construction of the model matters as much as the level. The year-end 2025 recognition rate was determined using a testing window from April 1, 2024 through September 30, 2025, with payments collected through December 31, 2025. So this is a backward-looking rolling model that uses both cumulative collection rate and cumulative collection pace. That means sharp improvement and temporary softness do not flow through instantly. They filter into the rate with a lag. That point will matter a lot in 2026.

The company also recognized about $16.37 million of revenue from arbitration claims that had been won but not yet collected as of the balance-sheet date. By February 3, 2026, roughly $13 million of that amount had already been collected. That is an important detail because it shows the arbitration layer reaching the income statement before full cash receipt. In that setup, the key question is not whether the company can win arbitration, but how quickly those wins turn into actual cash.

The Claims Stock Is Less Distorted, But Still Far From Small

The most encouraging headline at first glance is that open claims came down to $900.2 million at year-end 2025. That is much closer to the $800 million to $900 million range that Midroog framed as a more normalized medium-term corridor. But that is only half of the picture.

Out of that $900.2 million, $714.6 million were already in appeal and arbitration. In other words, almost 80% of the open-claims stock is not waiting for ordinary processing. It is already sitting in a more contested stage. That is why SEC should be read not only as a healthcare operator, but as a healthcare collections platform with a meaningful procedural and legal layer built into its economics.

This is where the company's relative conservatism becomes visible. In the youngest bucket, up to 9 months, it recognized $28.6 million against $279.3 million of open claims. In the 9-18 month bucket, it recognized only $4.8 million against $126.8 million of open claims. In the bucket older than 18 months, there are $494.1 million of open claims and zero recognized revenue.

That is the constructive part of the story. The company is not pulling the oldest claims block into revenue. In the most sensitive bucket, older than 18 months, recognition is zero. That meaningfully reduces the risk that the 2025 top line is being inflated by aggressive assumptions on very old claims.

But there is also a clear yellow flag here. If more than half of the open-claims stock is already older than 18 months, then even after the big 2025 improvement, the older inventory is still heavy. That is not primarily an accounting problem, because the company is not recognizing it. It is an economic one. As long as that block remains unresolved, it still consumes management attention, still requires deposits and process costs, and still keeps the cash-conversion cycle structurally long.

The table also sharpens another point. Revenue recognized against the full open-claims stock is only $33.4 million, or roughly 3.7% of the entire balance. So anyone looking at the 22.51% recognition rate and assuming the company has already pulled most of the claims book into revenue is reading the structure too simplistically. Most of the claims stock still sits outside the revenue line, and most of it still depends on the continued closure of a long-tail book.

Arbitration Improved Collections, But It Is Not Free

The strongest part of the 2025 story is that arbitration stopped being an emergency workaround and started functioning as a real operating lever. The company describes arbitration-related collections rising by as much as three times, and says that from January 2025 arbitration cases were transferred from HaloMD to QMACS at a cost lower by 10% of the relevant recoveries. As of the report date, QMACS had already started handling arbitration itself.

At first glance that sounds fully positive. If the same collections performance now comes through a cheaper operator, margins should become more durable. But this is where the economics need to stay grounded. The company itself says arbitration collections cost around 20% of recoveries versus about 5% in the ordinary process. So even after the shift to QMACS, arbitration is still a much more expensive channel than normal collections.

The move from $17.5 million to $32.8 million does not erase the improvement in revenue. It does change its quality. If 2025 was a transition year in which the company had to pay up to unlock a jammed claims book, investors can live with that. If this is the structural cost of every additional dollar that SEC brings in, then 2025 margins are less durable than they first appear.

Midroog was already pointing to that tradeoff in November 2025. It said the first nine months of 2025 included about $30 million of mediator-related fees and payments, and its forward operating-margin assumptions for 2026-2027 still embedded variable arbitration fees plus annual management fees of about $10 million. So even on a fairly constructive credit read, better collections were never treated as a free margin expansion story.

That is exactly where the durability test sits now. If the move to QMACS improves both speed and unit economics, 2025 can prove to be the build year of a healthier engine. If not, SEC may remain a business with much better collections, but still too much friction between gross cash coming in and the earnings that remain.

Q4 Does Not Cancel 2025, But It Does Stop The Story From Going On Autopilot

Turnaround stories always look cleanest when read through the full-year number. The fourth quarter is a useful reminder that the mechanism still needs proof. After collections of $68.8 million in Q1, $76.1 million in Q2, and $71.5 million in Q3, Q4 dropped to $47.9 million.

That is about one-third below Q3. The company mainly attributes the slowdown to two factors: the holiday season and the U.S. government shutdown that delayed payments from federal sources. The investor presentation adds that the shutdown lasted about 43 days. That explanation is plausible, but it is not yet proof. Because the recognition model is based on historical collections, one weak quarter does not immediately reset the year-end recognition rate, but it does turn the first half of 2026 into the next decisive checkpoint.

The monthly pattern does not give a clean all-clear either. October 2025 was $19.0 million, November dropped to $11.4 million, December recovered to $17.4 million, and January 2026 came in at $16.1 million. That does not look like a collapse, but it also does not yet look like an immediate return to the stronger mid-2025 pace.

The implication is that the 22.51% year-end recognition rate still needs to be re-earned in 2026. It reflects real improvement, but to become a true new base rather than a one-year step-up, SEC needs to show two things at the same time: collections returning to a stronger pace after the Q4 disruption, and lower collection cost per dollar recovered.

Conclusion

Bottom line: SEC's arbitration and collections engine is clearly more durable than it was in 2023 or 2024, but it has not yet fully moved from repair mode into steady-state mode. 2025 proved that the company can close more claims, raise the recognition rate, and convert that improvement into cash at a scale that did not exist before. That is a real change.

But 2025 also showed where the sensitivity still sits. Nearly one-third of SEC revenue came from prior-year estimate revisions. The open-claims stock remained huge, heavy, and concentrated in appeal and arbitration. Collection costs rose sharply. And Q4 was a reminder that the system is still exposed to external processing delays.

So the real 2026 test is not whether SEC can keep posting high accounting revenue. It is whether it can keep converting the claims stock into cash at a strong pace, at a lower unit cost, while continuing to shrink the over-18-month block. If all three happen together, 2025 will look like a true proof year. If not, it may end up looking more like a successful backlog-clearing year than a fully durable new earnings base.