AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Okay, great. Good morning, everybody. Thanks for sticking with us at our conference. Glad to see everybody here this morning. It's my pleasure to introduce a company that's relatively new to me. AdaptHealth, third largest provider of home medical equipment in the country, full suite of medical products, rental and sell, focus on respiratory and mobility, serves over 1 million patients, 7,000 deliveries a day. They operate in 49 states, will generate about $0.5 billion of revenue this year. And Luke McGee, who's the Chief Executive Officer, is going to lead us through the story today. Thanks.

Thanks, Gary. Welcome, everyone. Thank you for joining us here on Thursday of the conference. We're thrilled to be here. AdaptHealth is new to Gary and JPMorgan but also new to the public markets. We came public via our merger with a SPAC that was sponsored by Deerfield Management in November. We're traded on the Nasdaq, ticker AHCO. So skipping ahead, as Gary mentioned, we are now the third largest provider of home medical equipment in the country. We do business, physical locations in 37 states. We ship into 49 states. For those of you who aren't familiar, HME is a critical component to getting patients care in the home and keeping them in the home. It is a $12 billion to $15 billion addressable market in our core respiratory and HME lines. More recently, we've expanded in some supply business categories that we'll get into, and that should expand or almost double our addressable market. As Gary mentioned, we serve more than 1 million patients a year with our latest acquisition, the PCS business at McKesson. In 2019, we serviced 1.25 million unique patients, many of whom have a chronic condition and get multiple products or deliveries from us. We're doing 10,000 deliveries a day now, up from 7,000, both organic growth and acquisition in 2019. In some respects, for those of you who are familiar with the HME space, we've had last-mover advantage. It is an issue that's been around for a long time. We have 4 large competitors, the largest being Lincare, second largest being Apria and then 2 companies, AeroCare and Rotech. All of those companies have been around for 20 or 30 years, have legacy systems. We came into the market in 2012, knowing competitive bidding was going to happen across our products. And so we have purpose-built our platform with knowing reimbursement was going to compress. Rates are down 50% for Medicare across our categories. And yet, we've grown revenue, gross profit and operating profit every year through that. And we are going to continue to invest in technology to take labor out. We fundamentally believe care in the home is patient-preferred and cost-effective and that we are a critical component to delivering that care. As Gary mentioned, it's about $0.5 billion in revenue in 2019. With recent acquisitions, we'll do more than $800 million in revenue in calendar 2020. $75 million of EBITDA less CapEx, which is a pretty good proxy for unlevered free cash flow. In 2019, $123.3 million of EBITDA. For this coming year, ex the more recent acquisitions, $583 million of targeted revenue, $142 million of EBITDA and $88 million of EBITDA less CapEx. We'll get into some of the financials as we get to the end of the presentation. But just a foot forward, as we mentioned, we are doing business in 49 states, although we may ship an order or 2 to Hawaii as well to check off the 50th physical locations in 37 states. If you look at the dots on the map, it's pretty apparent, we are concentrated in the Northeast. From 2012 to 2015, those are the only states we did business in: New York, New Jersey, Pennsylvania, Delaware, Maryland. So we have significant share and concentration in those markets. Since 2015, we've expanded out more business on the coasts. As the dots would show you, less business in the middle of the country. We'd like to solve that through acquisition this year. We are under-penetrated from a patient service population in the southeast, in the southwest and in the Midwest. We will strategically look to expand in those markets. We do intend to be a full national supplier, be able to fulfill and service patients across the country. I'm the CEO of AdaptHealth. I've been with the company since we founded in 2012. With us in the room somewhere is our President and COO, Josh Parnes. We are the sort of 2 senior-most members of the management team, but we've looked to build out the team, both prior to coming public and then with coming public; Gregg Holst, Chief Financial Officer. And then I'm just not going to read the rest of the names, but I will call out Richard Barasch joined us as the Chairman of AdaptHealth. He's also in the room. He was formerly the President and CEO of Universal American prior to the purchase from WellCare in 2017. He brings needed experience and expertise for us on the payer side, and we're thrilled to work with Richard. Just to step back, there's -- just want to make sure everyone understands what HME is. We prefer the HME parlance. Other people will refer to it as DME. We are well aware it's been a little bit of a dirty word in health care fraud, waste abuse and competitive bidding, keeping investors away and also sort of giving what is needed products a bad name. And we think we are on the other side of rate compression. And given, again, patient preference and cost-effectiveness in the home, it is absolutely critical the care we deliver. It allows people to stay in the home. It allows the more independence. I'd say 90% of our patients have some chronic condition whether it be sleep apnea, diabetes, hypertension, COPD, CHF. And so we are caring for needy, expensive patient populations. As I said, we've had last-mover advantage. So we took the view that care in the home is not going away in 2012 and that if you could build a business model that was less reliant on the fax machine, more labor efficient, you could succeed even in the face of compressing reimbursements. And so we are the market leader for HME and e-prescribing. We do 30,000 orders a month, e-prescribed. We do believe over the next 3 to 5 years that the entire market will go e-prescribed. The fax machine is just an inefficient way to communicate. It's rife with error. It's labor expensive. And frankly, for the patient, the prescriber and ourselves, it is just not an efficient way to do business. We do have a broad payer contract network. So we'll get to the next slide that breaks down our payer concentration, but we are diversified across payers. We believe that we want to be a network with every payer. We want to service a broad array of product categories across a broad array of payers to a variety of referral sources. Let's talk a little bit about our business today. In the next slide we'll talk about what it looks like pro forma for 2 acquisitions that we've announced since we've come public. About 60% of our business is a sale transaction, 40% rental. If you break the left side of the page, the sale transactions, the big categories would be PAP supply, orthotic bracing, mobility products like walkers, commodes and then things like wheelchair cushions. On the right side, the rental items, oxygen, wheelchairs, beds, some ventilation, CPAP. The product mix today, about 57% sleep split between the rental of the CPAP unit and the replenishment of the supplies, the supplies being the bigger piece of that. 17% respiratory. Almost all of that respiratory is home oxygen. We are not a big supplier of noninvasive ventilation, about 2% of our business is noninvasive ventilation, but we would lump that in the respiratory category. You have HME. For us, HME is walkers, beds, wheelchairs, commodes, aids to daily living. 17% of our business, that's significantly more diversified and concentrated in those categories than any of our large peers. That is very intentional. We want to be a one-stop shop to our referral sources. We want to go into a major metropolitan hospital and be able to take their full array of business. And we think by doing their walkers and doing their wheelchairs, we can influence prescribing behaviors and drive adoption of e-prescribing because we're doing those product categories where other people are not willing to do. Other for us: enteral nutrition, some orthotic bracing and supplies. We'll talk about supplies in a second. It's a very interesting growth category for us. On a stand-alone, not huge but growing and bigger with recent acquisitions. Bottom right of the page, our payer mix, no single commercial payer is more than 10% of our revenue. So we're diversified and in network with all of the large major commercial payers across the U.S. Fee-for-service Medicare on a stand-alone basis, about 30% of our business. MA, specifically managed care, about 5% of our business. That looks like a small percentage. That's really due to our geographic sort of concentrations. We do not intend and we do not try to discriminate by payer. We sort of welcome all payer sources. We want to be a network. I think as we expand to other territories, you'll see MA as a percentage of our overall business grow. Going on to Slide 9. With 2 recent acquisitions, one of which is closed and one of which is due to close at the end of February, we continue to shift towards product sales. So it's more than 2/3 of our business or roughly 2/3 of our business will be product sale, post the McKesson PCS and Advanced Home Care acquisitions. You see the biggest change if you flip between 8 and 9 would be in the top right sort of quadrant of the page, sleep on a stand-alone basis today being 57% of our business. We'll talk a little bit more about sleep as I go forward. But pro forma for those 2 acquisitions, it goes down to about 40%. In general, we would like sleep to be less than half of our business, and so we've been intentional about diversifying the business, growing into categories that have similarities to sleep in the recurring nature of the supplies, the way we interface with chronic condition patients but do it in different product categories. To summarize before we get in some more detail, this is a growth story. We are fortunate to benefit from fantastic demographic trends. On the sleep side of the business, the market is growing. We believe the market is growing high single digits. We believe that wheelchairs, walkers, beds, commodes grow at geriatric demographic trends. On top of what can be 6% organic growth without taking share, we think with additional product expansion and some share capture we can be between 6% and 8%. And importantly, we've done 65 acquisitions. There are lots and lots of consolidation opportunities available. And when we say 12% to 15% top line growth, that's all internally funded. We do not need to raise capital to grow at 20% per year. So 6% to 8% organic on top of 12% to 15% M&A growth internally funded by cash flow. And then we'll talk about, with the McKesson acquisition, we think there's opportunities to further diversify our platform. As I said, if you just start with -- you can't fight demographics. And so we are on the right side of the demographic curve, the aging population, 65-plus supposed to grow at 3% per year. That is just a nice base tailwind for us. The big thing there is 65-plus and the really 80-plus age population, which is actually growing slightly faster than the 65-plus, they're all avid consumers not by choice but by necessity on a lot of the products we sell. If you go on and sort of if we have that baseline demographic trend sort of driving demand for our products, very excitingly, sleep is growing even faster. 26% of the adults in the U.S. are estimated to have sleep apnea. Only 20% of those are diagnosed today. There's 54 million people in the U.S. with an AHI score high enough to qualify for sleep apnea and 24 million who have sort of severe sleep apnea. So this is a market that is growing. We are one of the largest providers of sleep and CPAP therapy in the United States. We think that there's -- the market is growing. We are continuing to capture share, and we're really excited that if you believe there's 3% just baseline growth, the sleep growth, we think, is high single digits. Outside of sleep and outside of just demographic trends, if you look at our product mix in the northeast, the states that we've operated in since 2012, 40% of our business comes from nonrespiratory nonsleep lines. We believe there's an opportunity and it's one of my bigger regrets that we haven't captured this opportunity today is to expand our product portfolio as we've acquired in different geographies. And we've bought businesses out west and in the Pacific Northwest, and we let them run as respiratory-only companies. Starting in mid-2019, we've made a concerted effort to diversify our product portfolio outside those states, offer the ability for our referral sources to do beds, wheelchairs, walkers, commodes, orthotic bracing supplies, and that is a big focus in 2020. It will drive organic growth as we just open up new referral sources in other parts of the country. If we were just -- and it will take several years, but if we were to, on a flat revenue base, just grow the nonrespiratory business and match the mix we have in the northeast, that's $100 million of top line growth that can come from us just matching what we're doing in the northeast. As I said, this is an M&A story. We think we're very good at it. We've done 65 transactions since we started. We are very cognizant of the risks that come in growing through acquisition. Every single acquisition we've done is on our platform, on our RCM systems. We get these things on our platform in 30 to 90 days. We closed 19 transactions last year, representing more than $225 million of top line revenue. I can't stress enough, these businesses are integrated on our platforms. We have been hiring talent. We are excited about the M&A opportunity going forward. We are very confident that we will add $100 million per year for the next 3 to 5 years by buying small to mid-sized mom-and-pop providers, that we believe we've established a track record of doing very well. Now part of the M&A story for us it's -- obviously, it's a growth driver. It's -- we've accelerated sort of the pace of our acquisitions so far from 2017, 2018, 2019. The reason that's accelerated is we have gotten increasing confidence in our ability to execute on that. We've taken the lessons we've learned and, frankly, the mistakes we made in 2013, 2014, learned from them, built the systems, invested in the people, got to know the industry. And so I would expect the pace of acquisitions to continue to accelerate. One nice thing about an acquisition in addition to adding geographic scale, potentially diversifying our product portfolio is if we buy a company that is in our core product lines, if they're a respiratory, sleep and HME provider, we are the third largest in the country. There is significant cost of good savings that can be effectively garnered day 1. And so we get 2 samples on the right side of Page 15. The first one, company 1, this is a real live example. It was relatively our largest acquisition to date, actually. We still were able to get 8% cost of goods savings the first day. Company 2, very representative of the midsize or smaller acquisition. We closed that transaction in January -- sorry, July of 2018. And day 1, we were able to capture 25% cost of goods savings. It makes transactions very accretive, and we are going to continue to attack that opportunity. If you look at the HME landscape, on the left side of the page, we have 4 large competitors, who have more than $400 million in revenue. AeroCare, Apria Healthcare, Lincare and Rotech. We have respect for them as competitors, but we do not believe they have the technology systems we have. We also believe that there should be consolidation on that left-hand column. This is -- there has been lots of consolidation and movement over the last 7 years from the mom-and-pops to the scaled regionals and the nationals. We think over the next 2 to 3 years, there should. And we will be an active participant in driving consolidation, on the left side of the page. If you move to the right side of the -- moving to the right. Now there is a collection of scaled regionals. For us, the scaled regional defined as $30 million to $150 million in revenue, has geographic concentration or good reputation in a given market. We are pleased to note the first one on the page. This is a slide we've used for the last 7 months. In December of 2019, we announced the acquisition of the HME business of Advanced Home Care. It's an $85 million business headquartered in High Point, North Carolina. And we will continue dialogue with what can be very well run, very good companies, the scaled regionals, who just need scale and need to join up with someone on the left side of the page. Moving to the product specific. Most of these companies, they may be owned by a large manufacturer but have a competency in one particular business line, sort of unlike AdaptHealth, which is diversified across business categories. We do think, particularly some of the supplies categories that we've now gotten in through the PCS acquisition, scale does matter, and we will look to be acquisitive in some of the supply-only businesses just to grow scale there. And then lastly, the mom-and-pops, that's the pond we fished in for the 65 acquisitions. We'll continue to do that. Understanding that small transaction sometimes take the same effort as a large transaction, so we'll have a bias for larger ones, but in markets we operate in, we absolutely will continue to be acquisitive on the mom-and-pop side. Again, Slide 17, it's a slide we've used for the last several months. And so you see that big green check box. That represents our expansion in those categories. There wasn't a green check box last time I gave this presentation. It's there today because on January 1 -- or actually, I think, January 2, we acquired the PCS supplies business for McKesson. That's a $130 million net revenue business that does diabetes, ostomy, urology, wound care, breast pumps and incontinence. Of those categories, diabetes and, frankly, the distribution of CGM is particularly interesting to us, and we'll continue to spend time in that space. PCS was a distributor, albeit a small one, of CGM, and we're excited about the potential there. Moving to the right side and along the time continuum likely. We think the platform we've built is naturally set up to distribute other products and do other things in the home, whether that be respiratory medications. More interestingly to us, remote patient monitoring, we have 600,000 CPAP patients that we resupply. Nearly all of those patients have a connected device in their home, those CPAP devices have modems that we monitor on a routine basis, whether that be for up-front compliance or ongoing use and need. We think that our interaction with that patient that has a chronic disease sets us up to put other connected devices in the home and monitor them. Early, early innings of us for that, but we'll start that in 2020. And then over time, again, distribution into the home, we have about 160 locations. We've got vans on the streets. We are a trusted partner to these patients in their home. We think there's other things we can do like home infusion and home dialysis over time. I'm just going to -- that concludes most of the presentation. I'm going to quickly talk about some slides of recent acquisitions we've announced and go through the financials. So as I've talked about several times in this presentation, in January of this year, we acquired the PCS, our Patient Care Solutions divisions of McKesson Home Care, $130 million net revenue business doing your supply categories. For us, those supply categories, there is an incredible analog to the way we handle CPAP resupply. These are chronic patients that need resupply, whether it be on a monthly, quarterly or semiannual basis. We have built the technology, systems, call centers and expertise to resupply patients who have chronic conditions. We feel like it's a very natural expansion. We are -- have been a customer of McKesson's on the distribution side for quite some time. We will continue to be a customer on a pick, pack, ship distribution. We think that we do a really good job of acquiring the customer, caring for the customer and building the claim, all things that McKesson, frankly, in this business didn't do very well. It also offers us additional payer contracts as well as expansion of the number of lives we service. The second acquisition that we've announced since becoming public was the acquisition of Advanced Home Care, an $85 million HME operating in High Point, North Carolina. It is the largest provider of home medical equipment in North and South Carolina. We like going into markets and having density, having lots of relationships with both acute and subacute facilities. Advanced was owned by 13-member hospital systems. It was a nonprofit and an asset purchase, we are carving out the HME assets. We are thrilled. This is the stuff we do. We've done it 65 times. We know this business. We'll have it on our systems go live day 1. We announced the transaction early December, closing February 28. That's 75-day period between effectively sign and close, allows us to make sure we go day 1 live on our platforms. Quickly talking about some of the numbers we talked about in the beginning. For 2019, we've given guidance, we think revenue will be $518 million. We'll report final results at the end of February, expected EBITDA to be $124 million. EBITDA less CapEx at 20 -- or $75 million. It's an important distinction for us. EBITDA less CapEx is our guiding light. It is the way we run the company. It is the best proxy for unlevered free cash flow. We care about it. On a stand-alone basis, we expect that to grow from $75 million to $88 million. There's a bridge that I'll walk through why we're confident we'll get there. And then you add acquisitions on top of that. We are very confident we'll acquire that $100 million of revenue that can drop 10% cash flow to us. And so with those acquisitions, $98 million. Important to note, those projections do not include Advanced or McKesson. Walking through the bridge and why we're so confident that we'll get there, from $75 million -- from $123 million to $142 million on the EBITDA but from $75 million to $88 million on the EBITDA less CapEx. And I'll focus on the right-hand side of the page, EBITDA less CapEx. The $75 million coming into the close of the year, $6 million or $5.9 million just from the full year impact of acquisitions that we already own. These are businesses that we own coming into the new year, and we just get the full year impact from things we bought in April, June, July, August, October. And then 7.2% -- $7.22 million of organic growth, that 6% to 8% top line driven by some margin improvements and tech efficiencies. Quickly to run through the capital structure. We are very cognizant of leverage. We want to run this company less than 3x notional EBITDA leverage. We would flex up to pull off a big acquisition, but I think you should expect us to stay sub-3x on a sort of ongoing basis. On the equity side, we did come public through an Up-C structure, so we have Class A and Class B shares, effectively the same economic rights. Management are big shareholders. Management owns about 13 million (sic) [ 16.2 million ] of the 72.4 million shares. So with that, I'm going to conclude my prepared remarks and look forward to catching up in the Q&A.

Great. Thanks. This is Gary Taylor, JPMorgan, welcoming you to the AdaptHealth breakout. Got the CEO, Luke McGee and the President, Josh Parnes joining me. So maybe I'll kick it off. I'm going to go just a little bigger picture. You touched on this a little bit, some of the changes that have happened in the industry, but I want to get into it a little bit more. It's been a while since I covered the industry and the really large -- or the larger players that are publicly traded. And at that time, we kind of live through sort of a decade of reimbursement, cuts and competitive bidding and that sort of thing. And so you've come in, as you've described, and been able to build a platform after the rate compression that's been successful. But I guess, tell us where do we see in the competitive bidding, is there still other rounds that come with that? Why do you have confidence you've kind of stabilized here? And the story of sort of consolidating this somewhat -- broken isn't the perfect word, but the sector that's been down, this consolidation story looks like a pretty attractive opportunity. But what risks are there still on the reimbursement side, government side, et cetera?

Yes. So we have been through 2 full rounds or really 2.5 rounds of competitive biddings since 2013. This is Luke McGee, CEO of AdaptHealth. We are -- we have submitted bids for what is called round 2021. So rates will go effective 1/1/21. We are cautiously optimistic that we are largely through the big rate compression. That's not saying that rates won't come down across product categories, that there aren't categories that are more exposed, for example, categories that have never been bid before like noninvasive ventilation or off-the-shelf knee and back bracing. Frankly, we think that those categories that have never been bid likely follow a similar trend that the first time other categories were bid. This round of competitive bidding, there's been structural bidding reform, mostly positive, although not exclusively, big changes, binding bids, so people couldn't bid and then withdraw because they didn't like the rates. And the biggest thing is the competitive bidding for us is a Dutch Auction, you bid pricing capacity. CMS, in the previous rounds, would actually take the clearing, all of the clearing bids to satisfy capacity and pick the median number as the rate price that everybody would get. The big substantial positive change here is we are now going to be using the clearing price. And so you have to take every bid at the clearing price, and that is the price that everybody gets. Mathematically, that will drive rates higher if all the bids were the same. That's not to say that people won't change their bidding behavior because they know that was going to happen. The negative and competitive bidding this time was instead of bidding every SKU in an attempt to simplify the bidding process, we only bid the lead items, 16 different SKUs across categories. And they use an imputed price across the rest of the SKUS. What that will mean for categories like CPAP resupply that weren't bid down as far as the CPAP unit in prior rounds, there will be price compression. But we think that if round 1 was the big whack in 2013, the 40% cut and round -- that's actually round 2 and then round 2 recompete in 2016 was about rolling out rates to the rest of the country and taking bid rates and push them everywhere else, we think round 2021 is really just about product category SKU. So noninvasive ventilation, off-the-shelf knee and back bracing, you'll see significant price pressure, not big categories for us, less than 2% of our revenue in those categories. You'll see something like CPAP resupply, which is unfortunately a big business for us. We do think that there is a potential for high single digit, low double-digit rate compression there. Fortunately, we also think our manufacturers can be partners in sharing that pain. And then we think there are categories like walkers, beds and wheelchairs that are just not competitive anymore. There are markets where we are one of 1 or 2 suppliers willing to do those products for Medicare. And so we're optimistic rates may actually come up there.

And so how do you think about 2021, you were laying out some 2020 targets, I mean does that -- when you think about your acquisition growth strategy, the offsets you may have in terms of procurement, pricing, do you anticipate you still have a really robust growth rate going into '21? Or it's a year where it slows down and then you get back to an accelerated path?

So on our core business, I think we are sanguine that there is a potential of high single digit, potentially very low double-digit net cash flow impact to us. We think that both through organic growth in 2020 and also the turnaround of the McKesson Supplies business that we can more than offset that and still grow maybe not at 20% with acquisitions, but certainly, high single digit, low double digits. I mean the McKesson acquisition, in 2020, it will be an investment for us. The purchase price was $40 million in cash. We expect to double that with restructuring and turning that business around in 2020. But frankly, we think we can more than offset the rate compression in 2021 just by turning that business around in 2020.

And speaking of that acquisition, I mean, it sounds like a bargain purchase price. You mentioned there's some additional investment there, and it wasn't profitable. But how -- why such a low multiple of sales, just no other bidders for it, and that's sort of this last-mover advantage playing out and a larger acquisition or...

No, I mean, obviously, we are very comfortable that we paid for the asset, I think from a McKesson perspective, there is likely a lack of interest to selling it to a direct competitor. An Edgepark or a Byram would have been very natural acquirers of that business, but they obviously compete more directly with McKesson in other business lines. So I think there's a reticence there that limited some natural buyers. We also have a pre-existing distribution relationship with McKesson. And so I think there's desires of continuing that and growing that relationship. But it was a broken asset that didn't get attention. And we are not shy about willingness to restructure, cut costs. We did a big risk the first day we bought the asset to rightsize the labor profile. We're optimistic. As you said that it will be an attractive purchase, but it's not because of lack of work or effort.

Got you. And just backtrack for a second. On the round 3 rates, when do you actually see those? So they'll be bid yet, and when do they get compiled and released?

Yes. We submitted bids in fall of 2019. CMS has said summer publication of rates. In talking to some industry participants, apparently, summer might mean as late as August or September.

Got you. Something else just in the presentation, you talked about sort of this tech-enabled infrastructure, the e-prescribing. Like what else goes -- I mean when I think of HME, I guess, tech-enabled infrastructure doesn't leap to mind as sort of the first thing. So where are other areas where technology has allowed you to have some sort of cost advantage? And I particularly want to understand how the -- what the distribution model looks like and if technology is playing a role there.

Yes. So there is less, I'll say, less sexy technology that just helps us run a more efficient business, starting with paperless delivery. And when we go to a patient's home or we drop something off, we'll have them sign tablets. We are not here to pretend that we've sort of reinvented the wheel using paperless delivery. Obviously, other industries have used that for a long time, but we do believe we were one of the first in the HME sector. We believe some of our large competitors still refuse and use paper delivery tickets, which can be lost, which are expensive to fax or scan and rife with error. So things as simple as paperless delivery to communicating with patients via apps and texts and e-mails, and we think that, that is -- we are in the very early innings of patient engagement technology for things like CPAP, where there's an ongoing resupply need. And then there's just workflow technology. I mean our large competitors have 20- or 30 year-old technology systems that they've kept building on top of. Everything we do is in the cloud. And again, whether it be moving a claim more efficiently through processing, checking payer websites on eligibility, understanding of a claim denies, how do we use software and algorithms to prioritize when we check with the payer, that's blocking and tackling and not the most exciting technology but allows us to take labor out. For us, technology is about doing 2 things. One is it's increasing revenue through patient engagement and also reducing bad debt, which is a contra revenue item. And then second piece is taking labor out. We pride ourselves on our labor efficiency versus our peers.

Any questions from the audience? I got another one. Can we talk about -- I want to understand the distribution model a little bit and back a decade ago when I was kind of covering the industry, I think the distribution model was regional warehouses full of a bunch of bent metal and auction tanks and maybe some old concentrators. And every time I saw one of those, those struck me that having all this inventory in a regional warehouse wasn't generating any revenue and wasn't particularly efficient use of capital, but that's a decade-old view. So what does distribution look like for you? Is it different for different product categories? And what are the efficiencies you found in that?

Yes. No, I mean, this industry has changed and modernized and is continuing to, not just for us. Our competitors, the large ones and small ones, albeit slowly, are getting better. On the distribution side, we do have 160 locations, not all of them have a warehouse attached to it. So we have a number of locations that will service walk-in CPAP set-up patients. They come into our office. We see higher compliance rates from patients coming in to one of our stores or locations and getting set up on CPAP therapy versus going out to their home. And so we encourage people to come in and do that. On the capital intensivity and efficiency, where we can, we rely on distribution partner. So on CPAP resupply, we use a fulfillment house -- industry fulfillment partner called VGM. So we don't take possession of inventory. We don't pick, pack and ship it. We send them in order. We pay for that product. The manufacturers can sign inventory to VGM. We don't pay for the product until it's pulled and shipped. And we don't have to have the labor, pick, pack. We pay just an [ occupancy ] fee for that. Similarly with McKesson, where we can, walkers, to some extent, wheelchair, certainly commodes, canes aids to daily living, if we're not having a truck go out to the house, we're going to use the common carriers. We're going to rely on McKesson, pay them a distribution fee, so we don't have to warehouse the product and hold the capital. But we also don't have to have the distraction of one of our trucks dropping off a walker at Mrs. Smith's house.

Okay. Another question was -- sure.

Sure. Luke, maybe, can you talk a little bit about the competition in the [indiscernible]. I know you're saying [indiscernible].

I'd characterize it as a buyer's market. Of our large competitors, one of them -- one of the larger, there's only 2 who hasn't acquired effectively anything over the last 10 years. The other has been acquisitive, but have gone through periods of hot and cold. So we think it's a buyer's market. Of the transaction we've done, 2/3 of the 65 have been nonbrokered, so had been relationship based, us getting to a seller, building relationship and being able to bring them into the sort of AdaptHealth group of companies. We think we're an attractive acquirer, even compared to some of our peers. We have a track record of keeping on the talent at these local acquisitions. Our job is to make the business more simple for the local operator. So we want to take the most complex functions, RCM, health care compliance and then just the back-office stuff, the finance, HR, things they don't want to do, give them technology systems and let them locally operate. Let them interface with the referral sources. We are not so dogmatic about -- we understand Chicago is a different market than New York. It's a different market than Springfield, Missouri, where we just bought a business. And you have to have some willingness and tolerance in the way you interface with your referrals to understand sort of local or regional variations. Where we can't tolerate valuation is the way we build claims and compliance. On the smaller side, it comes, frankly, pretty hard for a small or a new entrant to compete with us just because of that slide that we showed with our vendor savings: on a bigger deal, 8%; on a small deal, 25%. A new -- even private equity or sponsor-backed, until they aggregate scale, aren't going to be able to access those same savings. So what cost them 5 may only cost me 3 because of those savings.

Just a quick question on your payer mix. So you had mentioned the 5% MA and that really be in a geographic function. That still seems low given almost 1/3 of seniors are in MA. So I'm wondering, is there still any differential in the fee-for-service rates versus MA rates? After competitive bidding, I wouldn't think that would be the case any longer.

Yes. No, the -- I mean, we generally see there's been rate harmonization. And so there's -- that's not to say there aren't outliers, both negative and positive. But by and large, Medicare fee-for-service rates are a pretty good benchmark for plus 5%, minus 5% across the board. As I said, we don't discriminate, like, our salespeople aren't commissioned differently. We don't tell them to go out and take -- go get the Aetna or United versus the Medicare fee-for-service or vice versa. We want to be the basket taker from our referrals.

Got you. How many people on the business development team?

We've built it out more recently. It's been a focus preparing for our moment in the sun here and wanting to be able to be -- take advantage. So it's about 10 people in total today. It will continue to be a growth area and focus. The limiting factor for us is not financial capital, it's intellectual capital and being able to -- diligence and integrate more quickly. But I will say, we saw this coming and been building it out over the last 1.5 years.

Great. Any other questions from the audience? Well, if not, then we'll yield back a little time to the hallways, even though they're less crowded today, but thank you very much.

Thank you, Gary. Thank you.