AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

Thank you for joining us for our next presentation. Our next presentation, we have Jason Clemens, Chief Financial Officer with AdaptHealth Corp. Thank you, Jason and Brian for -- somewhere out there. Brian, for joining us at the conference. Really appreciate it.

Thanks for having us.

As you were walking up, Jason and I were just talking, I thought a good place to start with just maybe a brief overview of each of the 4 lines of business, and we can kind of evolve from there off the discussion there.

Sure. So for those may be new to the story, AdaptHealth is the country's largest home medical equipment supplier. We really focused our business around 3 core segments or 3 core patient populations. The first is patients with obstructive sleep apnea. So there's somewhere between 6 million and 7 million patients that today are on a CPAP or a BiPAP for the treatment of OSA, but we believe there's somewhere between 33 million and 34 million Americans that have OSA. Many of them just don't know it yet. So we are benefiting from some tailwinds in like wearables, certain watches and rings and whatnot that are helping to detect that a patient might have OSA and then that propels them to go in for a formal sleep test by physician. And if they need a CPAP, we're happy to provide it. So we're about 25% of the marketplace in the United States, by far, the largest operator in sleep health. Second part of our business is focused on patients with advanced respiratory diseases, primarily COPD stages 1 through 4 and also other advanced respiratory illnesses. So that TAM is about 20 million patients. We believe there's about 15 million that have been diagnosed formally with COPD, and they're on either nebulizer or oxygen concentrators or ventilation. We offer all those products. We believe we're about 20% of the U.S. marketplace, also the market leader in respiratory equipment supplies to the home. Thirdly is diabetes. And so we provide insulin pumps, related supplies as well as continuous glucose monitors. So things like Dexcom and Abbott type products. We distribute both. That TAM is about 7 million patients. So those are type 1s and type 2 patients that are injecting insulin. And then certainly, there's somewhere between 30 million and 80 million Americans that have diabetes or prediabetes. So that's a large and growing market as well. And then finally, we have a fourth segment called wellness at home. It's essentially bent metal, beds, wheelchairs, walkers, things like that for mobility needs in the home as well as supplies to the home for patients with chronic disease states such as urological disorders, incontinence, ostomy and other needs.

Okay. Great. Can you talk specifically dialing down on the diabetes segment? It's been a little bit of a state of flux past years. Can you just a little bit of the background in the transition of CGM and so forth and where you see that market today? It seems like you're coming around and posting stronger numbers.

Well, yes, we think we are in process of turning a corner. We had a great Q3. I mean diabetes organic growth was up over 6%. That's the first time that segment has grown in some time, not quite 2 years, but it's been some time. Now we do have some tough comps in the fourth quarter, so I don't know that that's going to continue forever. But we think that diabetes will -- look, if we're flat, down 1 point, up a point next year, that's generally how we're thinking about our -- the outlook that we provided. And so the key in that business is keeping your resupply steady, which we think we've accomplished that. We're hitting record resupply numbers and retention numbers. And then it's really a matter of filling the top of the funnel with new patients. We've got some improvement there. We are investing as we speak in more field force, more salespeople to be out calling on endocrinologists as well as primary care docs to take more share of the new CGM business.

Okay. I know you've made some changes kind of going from, I think, some structural changes internally in terms of regional management. You've talked about -- can you talk about the backdrop behind that, the thinking behind that and what you're planning to accomplish with going out of -- I think you're going down to 4 regions.

Sure. So as you said, it was much more of a strategic move than maybe a financial move. I mean we'll save a couple of bucks with this. But it was really about shrinking the number of regions. We went from 6 to 4. But then within those regional offices, really standardizing the components of that office. So there's a Vice President of intake in every one of these regions. There's a Vice President of patient services in every one of these regions. And so what that then allowed us to do is we went through a very large-scale reorganization of operations inside the company. So I mean, there were almost 10,000 people that went through job title changes and new descriptions and new measures on their performance. And so the reason all that's important is that it is unlocking our ability to then start scaling the automation and AI that we've been piloting, somewhat experimenting with over the last 1.5 years. But now that we've got that structure in place and work is getting done in same or similar ways across the country, that's going to give us the opportunity to leverage the tech that we're putting in and hopefully make progress quickly.

Okay. Where do you see AI? I mean, where could it have an impact for you?

Well, where it is having impact already is a couple of areas, really 3. One is within intake of documentation. And so it's staggering even to me every time I say it, but every month, we're ingesting over 5 million pages of fax orders. Some of those are handwritten, believe it or not. So the physician orders for the patient, the diagnosis code, what the physician is ordering for that patient. All that's got to be taken in and turned into structured data. I mean there's about 40 fields or so. I name some of them, patient name data birth, those kind of things that have to come into our sales order system to start creating the patient record in the rep cycle. And so again, there's just a tremendous amount of manual work today that you've literally got people, a lot of them overseas on 2 screens. They're reading the facts, the image of the facts on the right screen, they're entering it in. And that's a pretty lengthy workflow, up to about 6 or 7 minutes. Well, the AI that we've got running now in our sleep business, I mean, it's got that under a minute in terms of ingesting it because it's essentially screen scraping, right? And it's filling those fields automatically. And then we still have a human in the loop that's checking it. But rather than searching for it and keying it in, they're clicking through and it's just a very rapid process. So that already is starting to unlock some efficiencies and cost savings for us. We've got some good progress within the rev cycle. So think like cash posting. So the automation associated with matching receipts with EOBs and posting that cash. And then thirdly, we do have some conversational chatbots, AI within our workflow, particularly for things like where's my order? I mean we'll have thousands of patients calling every day asking where their order is. And so we're now automating that experience, and we're removing an Adapt employee from that interaction. So tremendous efficiencies there that we're going to continue to find and scale.

It's really a cost margin opportunity at the end of the day.

I'd say, though, also, I mean, some of it is also patient experience. I mean the NPS score of the chatbot is surprisingly very good. I mean -- and if the patient has got what they need, they're going to leave the call and they're happy. They don't necessarily need to talk to a human. So there's other things in this other than just cost. I mean there's other benefits.

Certainly. One of the data points that has been very topical recently, the Kaiser contract. Can you -- as much as you can share with us why that from a capitation perspective? And then you have the historical reference of Humana, the learnings, the puts and takes of Humana, your takeaways for that. I know first, that was challenging and you got through that. What are your thoughts about -- what you could share with us on that contract? And longer term, your thoughts on capitation and based on your observations, what you've seen out of Humana, you obviously gained some comfort moving forward with Kaiser. So kind of just speak to the dynamics around.

Well, I guess I'd start with some framing. I mean, today, our capitated revenue is about 4% of revenue. With this new contract that is starting in earnest essentially now and really ramping over the course of 2026, we'll be well over 10% of our revenue will be in capitated, pushing 15%. Where does that go over time? I mean, we aspire for it to grow. How fast is unclear. As we stood up Humana, I mean, that was such a significant accomplishment because we were able to prove to Kaiser that switching was possible that there was a DME out there that could take on tens of thousands of patients all at once. And I wouldn't say seamless. I mean there's bumps in the road. But overall, we were quite pleased with our execution on Humana. And so far, we're very pleased with our ability to procure what we've needed in terms of locations, new space, equipment, vehicles as well as recruiting. I mean we need to recruit 1,200 new employees between now and the last contract date. So we're well into that effort, but it is a big lift. In terms of the benefits, I mean, for a payer, whether you're a hospital system or a managed care operator, I mean, there's so many benefits. The first is essentially one throat to choke of an operator managing your home medical equipment. That's significant because in most states, I mean, if you're a managed care company, I mean, you've got hundreds of DME providers. They're all setting up their equipment in different ways on different formularies with different patient experiences. Managing the complaints that come out of DME is no small task. And so if you're a payer, you're managing escalations and complaints across hundreds of operators as opposed to one. I mean that's really the first and foremost benefit. The second benefit is then having ability to manage the membership through SLAs and commitments that we've put forth. We've got daily, weekly, monthly metrics and reports that are shared with our capitated partners, regular monthly business reviews and a commitment to continuously improving the patient experience and the metrics that come with these contracts. So that's a pretty big deal because when you're dealing with hundreds of mom-and-pop DMEs, you're not going to have that level of data or visibility to your membership. And then thirdly, I mean, look, we're happy to offer a discounted reimbursement rate in exchange for a whole lot of membership, a whole lot of volume all at once. We'll continue to price aggressively because we're very confident in managing these type of agreements, and we do intend to do more.

Is it -- was the value proposition for us, you took it away from a competitor, a direct competitor. I mean what was the value proposition other than pricing? Was it just that, that you could manage the patient base more efficiently? Well, more transparency?

Yes. I mean I won't get into maybe the details of why that business came to RFP other than -- Kaiser was looking for a change. I think what we offered in addition to everything I just mentioned, look, I mean, our technology is best-in-class in the industry with our patient apps that we've got as well as our web portals. And frankly, our team, our employees and what they bring to the table. Kaiser is very forward thinking with technology. And so that was a big part of this is how can we leverage our tech to communicate with patients. There's interesting things that you can do above and beyond just DME in terms of communicating with the patient because we've got all these patients on census already, and we're learning a lot about their health through the vitals that are coming to us from these pieces of equipment. And so there's a lot to be learned about patient behavior, keeping folks at home healthy as opposed to showing up in emergency rooms.

I mean kind of -- do you think you'll see more of this going forward? Obviously, I presume you do.

We're pursuing a pipeline. We did in the third quarter announce an additional incremental capitated agreement. Now the strategic significance of that deal is that we're taking diabetes products into that cap for the first time. So we're experimenting with it. I mean we do think diabetes utilization swings much more than like respiratory and sleep and DME, which is very steady utilization curves. So we're going to see how it goes. And if it's successful, I mean, there's more to pursue.

Okay. How long does it take to fully embed a Kaiser contract? What do you think it will -- for you to adapt the infrastructure soup to nuts before you kind of normalizing, if you will?

Well, before the end of '26.

End of '26.

Yes. Yes. I mean we've said that we expect to be run rating the full contract value before the fourth quarter.

In any of that on the call?

Yes. So in Q4 of '26, we expect fully run rating. Now contractually, that can happen sooner. I mean, we expect it to happen sooner. But in setting an outlook for '26, we wanted to put out numbers that we thought were achievable. And so the idea is to go as fast as we can.

Yes. And the capitated business is from a margin perspective, it's largely reflective of the rest of your business model?

So everything that we've -- that we're currently running and cap is running at or better the enterprise margin. We've said that the new Kaiser deal is going to run at the enterprise margin. That's both adjusted EBIT as well as free cash flow.

Okay. So confirm. Okay. I believe you had mentioned on the call, but I know it's been talked about competitive bidding. What are your thoughts on competitive bidding? And I know you also made a reference the last couple of calls, but I believe in terms of talking about competitive bidding that it may translate into further consolidation in the business more broadly. So if you can share your thoughts on that.

Well, since the call, the final rule has been published by the CMS. So we got a little day after Thanksgiving gift. So we've been through that report several times. It is 700 pages. So there's a lot there. But I'd say the headline is there's no surprises really at all to us versus what was proposed and what went final. The competitive bidding process will start next year and contracts will then be awarded in 2027 for implementation in January of 2028. So we've got 2 years here before the next contract cycle is awarded. The details of the final rule, I mean, it is crystal clear that the CMS intends to consolidate the number of contracts. There's various calculators and scenarios that they walk through in that rule that illustrates very specifically respiratory potentially coming down 26% in the number of contracts awarded, diabetes going to literally under 10 suppliers in the country. And so for scaled operators, I mean, particularly for Adapt, we see a lot of opportunity in the final rule that's been published. Much like my reference in the capitated arrangement, we're happy to offer some reimbursement -- lower reimbursement in exchange for more volumes. And so this is no different. And so again, we're still digesting, but there's no surprises. And at the end of the day, this is the business we're in, operating within the competitive bid environment. It's been around now for 15 years pretty successfully. So we're looking forward to getting moving with it.

All right. '26, you've given some feedback in kind of context, like growth rates of, I think it was 6% to 8% in terms of '26. Can you discuss or walk through kind of your thinking on the kind of the puts and takes, what goes into that thinking and especially across the 4 business lines what did you expect and you've talked about respiratory opportunistically.