AdaptHealth Corp. (AHCO) Earnings Call Transcript & Summary

All right. We're going to go ahead and get started. With us today, we have Jason Clemens, CFO of AdaptHealth.

We're just going to jump right into the questions because we do have a lot. So I guess maybe let's start with sleep apnea. We get a lot of questions in terms of how the sleep apnea process works. So can you walk us through the CPAP rental and sales process? And then just also just the trial period and how that works and flows into the system?

Sure. Sure. I'd be happy to. Good morning, everybody. Thanks for having us. So for the sleep apnea patient, I mean, I guess I'd probably start at the top. I mean there's somewhere around 33 million to 34 million Americans for the American Academy of Sleep Medicine that have obstructive sleep apnea. The problem is only 20% actually know it and are getting treatment for sleep apnea. So there's a massive underdiagnosed patient population. Now the future seems bright due to the wearables, right, the oral rings and the Apple Watches and everything else that it seems that all these wearables are promising some sort of detection for a patient that might have sleep apnea. So that's resulting in what we're seeing as record wait times to get into sleep centers. It's also resulting in several at-home sleep test companies servicing these patients and helping them identify that they have sleep apnea. So once the patients determined to have OSA, we'll get a referral from that patient's physician. And so if we take Medicare as an example, to maybe walk your detailed question. Patient will come see us. They'll get the CPAP. Typically, a respiratory therapist is going to set them up on that device. Additionally, they're going to get their first supply, which will typically include a mask, heated tubes, cushions, things like that. For the next 13 months, if the patient is adherent, we'll get paid, again, for Medicare about $60 a month. So you can kind of think of that as you're kind of paying back your device. And in the meantime, we'll work with that patient to qualify them for a resupply order. Now those resupply orders can come with another mask, typically the tubes, cushions. I mean it's kind of a razor-razor blade model, if you will. And so there's a recurring revenue that comes with that patient. And that will recur as long as that patient is on service with us. Now within the first 3 months, there are very specific guidelines for the patient to be adherent. So we stay very close on the 30- and 90-day adherence programs. We've got hundreds of sleep coaches that essentially come to work in the morning and they follow the algorithms of who they're going to call next. And they'll work with those patients to figure out why they might not be adherent. Oftentimes, it's a setting on the machine more often than you might believe the machine is not plugged in. So we'll help them with that. And then there's other reasons. Maybe the mask isn't a good fit for that patient. It might be too big. It might be too small. It might be too heavy or light. And so often, that patient will come back in and we'll get them refit and get them back on adherence. So we know that we are head and shoulders above anybody in the industry in terms of driving adherence. So we run a best-in-class operation there.

What is adherence like obviously, not the first day, but is it close to 90%, 95%...

The industry runs a touch over 70%, and we run over 80% with that adherence. So it's -- I mean, it gets detailed within the first 30 days or within a 30-day period in that first 3 months. The patient is got to be adherent essentially 4 hours a night or more for 20 days within that 30-day period.

Okay. And the $60 that you're receiving, does that cover for all the other consumables that come or attached to the sleep apnea?

No. I mean the consumables, so the average reorder is about $200. And so that will happen again when the patient gets set up on the CPAP. And then again, we'll work ideally every 3 months. Now we don't resupply every patient 4x a year, but we do, on average, resupply patients just under 3x a year. The industry is closer to 2x per year.

And that is mostly associated with the adherence aspect of it.

It is. It's the adherence and it's the monitoring. It's also the technology that is hardwired to each payer's contract. So for that patient, we know specifically what they're eligible for, when. And so our teams are all over that. And as they provide that outreach to the patient, either through physical mail or phone call or text or e-mail, ideally for us through our app, I mean, we've got hundreds of thousands of patients that are registered in our app. And so we'll conduct outreach that way as well to get in touch with that patient and advise them that they're eligible for resupply.

And you've been at this, obviously, for a long time. You've seen and figured out, okay, maybe we could do these little things, make a few tweaks to increase adherence. What has that adherence -- how has that shifted over the years? Has it materially increased? And how do you think about getting or capturing that incremental 10%, 20%?

We have folks that wake up every day trying to get just that a little bit better. Now I will say over the last couple of years, it has somewhat leveled out. I mean, we do drive improved adherence. Maybe surprisingly, patients that are coming in for a CPAP that are on a GLP-1 are adhering better than patients that are not on GLP-1s. So that's also helping a bit in terms of adherence. But again, I mean, we've got hundreds and hundreds of people. This is all they do, and they follow the algorithms and the success that we've seen with setups even. I mean that can drive a lot more adherence than you might think. And so we have a best-in-class setup. Again, we have workflows when that respiratory therapist is setting up the patient that they'll follow those guidelines, and that also results in better adherence.

So what happens after 13 months?

Well, for that Medicare patient in that example, the rental payment will stop, and it will go into basically a cap period until month 60. So if that patient is still with us at that time, they become eligible for a new CPAP. And so we know that down to every detail and every day. And so we, again, outreach to the patient, let them know that they're eligible for a new CPAP and we'll work to fulfill them there as well.

And that just rotates sets the next step....

Some patients are on service for well over a decade with AdaptHealth.

Yes. Okay. As you think about just in that 13-month period, what is the average rental revenue per patient during that period? Including the consumables.

Yes. I mean for Medicare, it's about $60. So you get $60 a month for 13 months. And then on that resupply, it's about $200 on each resupply.

And on the commercial side?

Well, it depends. I mean, I'm using that as an example. That's more or less how it works.

Okay. And then the -- you talked about GLP-1s, but can you just talk through the source of your prescriptions? Is it mostly all from direct sleep studies? Is it from docs that are prescribing or meeting patients and prescribing GLP-1s and then they come in? How does that -- how is that mix? I know it's shifting from a GLP-1 standpoint, but how has that mix changed?

Well, I mean, a patient can come to us, a sleep patient, in many ways. Certainly, sleep centers, that's a big referral point as are pulmonology groups, sleep specialist doctors and then, of course, primary care. I mean primary care is a huge source of referrals. And so that's why we've got 700 sales folks all over the country that all day long, they're visiting these offices and making sure that we're doing a good job for the referrals, so we continue to get patients.

Okay. As you -- the product, if I'm not mistaken, ResMed, you have competitors that use the same product. So can you just talk about the core differentials between Adapt and your competitors as it relates to the product that they're all selling?

Sure. So as it relates to sleep, really as it relates to all of our products, I mean, the name of the game is to be the easy button for the referring provider. You do that by taking great care of that patient, by driving patient satisfaction because if the patient is not happy, typically, they're not going to tell you, they are going to tell their doctor next time they're in to see their physician. And so over time, if you're not doing a good job and you're not preventing that physician office phone from ringing, you'll get less referrals. Speed to set up is very important. Last year at this time in the first quarter, we were struggling with time to set up. The national average is about 17 days, and we were actually starting to peak above that. Well, today, that's cut in half. As Suzanne reported in the last earnings call, I mean, we're down to 9 days on average to get a patient set up on a CPAP. So you might ask, well, what takes so long? Well, typically, it is the insurance requirements, prior authorization. It takes time when needed, getting in touch with the patient. And we've cut that time down because now as you arrive at the patient's office, they'll have a placard with the AdaptHealth QR code that they can download our app. And we've now got AI chatbots that are available when patients call in for setup that reach into our capacity and the chatbot knows the time at each location of our almost 700 locations across the country. It will provide -- for that patient, we know they're dialing in and what their home address is. So we'll provide the nearest facilities. And again, we're taking more humans out of that loop and that interface, which is also increasing the patient satisfaction, but back to that point of referral and their satisfaction.

The TAM for sleep apnea is pretty high and it's increasing.

Yes. We think it's 33 million to 34 million Americans.

And how should we think about just the natural growth with everything that you're doing, how should we think about the growth within the sleep apnea business?

Well, we believe that the sleep apnea market in the U.S. is poised to grow low single digit up to mid-single digit. We are by far the largest operator in the business. We represent about 1/4 of the United States CPAP usage is coming from AdaptHealth. No other competitor is anywhere near that. We are continuing to grow share. I mean, every 6 months, we look at the claims data, and we're continuing to validate that we're growing share. And again, on this last quarterly update, we reported record numbers in census, and we're within just a couple of hundred patients for a record setup quarter. We think that, that's going to happen in 2026.

And then in terms of the share that you have, I mean, 25% of the U.S. market, are there any particular regions where you have dense -- a higher amount of market share? And where are those regions? And what is it about those regions as to why you may have?

Yes. I'd say that -- I mean, Adapt across the board. I mean, we're large and deep. Historically, the one area of the country that we didn't have a huge presence was the West Coast. Now what's so unique about this new capitated contract that we announced that has started in earnest. There will be further start dates throughout the course of the year as we stand up these new markets are that most of these hospital systems are in areas that we operated in before. And so we're setting up de novo locations, about 30 in total, all up and down the West Coast. We just made an acquisition in Hawaii December 1. So we entered that state and with a terrific operator out there. And so as we get this capitated contract stood up and really humming, the next thing we're going to do is drop in more salespeople into those markets and go compete head-to-head with the local folks and with the nationals as well. So the West Coast is really the only spot that we're not deep, and that's changing here in 2026.

So we'll get to that, the West Coast in a second and also the capitated contracts. But let's just go back to respiratory. I know it has a similar rental and sales process. Can you just walk us through that process?

Sure. So depending on the product, I mean, oxygen concentrators is both stationary and portable are the largest products within that category. We also provide noninvasive ventilation, noninvasive ventilation for patients at home. So for oxygen, it follows a similar structure. Instead of a 13-month period, it's 36. There is still that 60-month cycle that a patient then qualifies for new equipment if they're still on the device. So it's a very similar revenue structure. Now there is resupply that comes with respiratory products, but it's not nearly as much or as important as the resupply for sleep.

And what is the rate that you're getting with on respiratory and the resupply rates?

Well, for Medicare, it can range. It's about $120 a month. And again, that will go for 36 months. And then on resupply, I mean, we're talking dollars. These are cannulas. Typically that are there to make the concentrator effective for the patient.

So we'll go through the other segments. But before we do that, let's talk about the large contract that you have in California. The stand up, just the process. And how deep is this going to go? And when do you think you'll have it fully stood up?

Sure. Well, I guess I'd start by saying that just the magnitude of the contract and what's required in terms of infrastructure. I mentioned the 30 locations, all new, all de novo. We're standing up, outfitting and filling with patient equipment. hundreds and hundreds of vehicles, again, newly acquired from the OEMs, outfitted and on the road. And then 1,200 employees onshore, these are 1,200 employees that we're hiring very, very rapidly. We're actually -- we're at our peak. We're about to hit the goal of having all the people we need in place to support the contract. So a little bit of revenue did start in December as we reported during earnings. And we then made an acquisition of patient equipment to secure the February 1 start dates. So we feel great about that. There are start dates further in the year. But as indicated in our guidance, I mean, we actually brought our revenue up for this new contract versus what we provided as an outlook in November. And the reason for that is we've secured all this infrastructure, and we're in place ready to go day 1 to take care of these patients.

And this contract, is it mostly all sleep and respiratory? Does it touch on other areas?

Also DME. So like beds, wheelchairs, walkers, things like that.

Okay. So we'll get to the DME stuff in a bit. But just -- and we'll come back to Kaiser. But on Humana, have you maxed the opportunities Humana? And what are -- if not, what are those additional opportunities?

No. I mean, Humana is a massive organization. We'd love to do more with them. We think we're doing a pretty good job as we got a contract extension there as we reported last year, early in '25. So the contract today that we've got capitated, it is for HMO Medicare Advantage patients in 33 states, plus the District of Columbia. So certainly, Humana has grown their share of MA this year. And so that will help us out in terms of membership and another growth vector for our capitated business. But the PPO business, I mean, we are a preferred provider, and we do get a halo effect of being the only provider for HMO. And so that's been great for us. Of course, there are states that we've not capped. There's products that we haven't capped. So I mean, we're going to take care of as many Humana patients as Humana has got, and we do continue to develop that relationship.

In those 33 states, what percentage of those Humana patients do you currently have in your system?

100% of the HMO population.

Okay. And then the additional states that you're referring to, walk us through that process of maybe capturing those additional states? Is it just more continued conversations with Humana? Or is Humana using another service? Are you going to have to displace a service?

Yes. So there were 8 other states awarded a cap agreement back when we secured Humana. So that went to a regional privately-held DME company. Now those states were primarily out West where back to the infrastructure comments I made earlier, we didn't have a lot of depth. And so we price that accordingly that it would have cost us a substantial investment to stand that up. So we didn't win there at that time. Again, we're loading up infrastructure out West, and we'll see what happens here in the future. But our view is that if we continue to do the job we're doing with Humana, there's more opportunity.

What have you learned from Humana that you think you could actually use as part of your Kaiser project?

Well, I mean, we learned a lot. I'd say the most impactful lesson was around the transition of patients that were with an incumbent provider. It's not easy to change out patient by patient. I mean there's a lot to that. You need to get in touch with the patient's physician. You got to get documentation on record. You've got to schedule time in the patient's home in some cases and exchange equipment. So I mean, we did a lot of that with Humana. And so we've structured the Kaiser business very differently. I mean we talked about an acquisition -- several acquisitions that we've already made to secure that equipment and prevent the friction of having to change that patient out one at a time. We also spoke in our call of drawing on our revolver subsequent to the end of the quarter in the anticipation of closing the remaining deals that we want to do to secure the patients on day 1 for Kaiser. So I'd say that's the biggest lesson. Separately, the daily, weekly and monthly measures that we signed up for with Humana, we've signed up for many of those with Kaiser. We've hardwired our technology to produce that data automatically. We've got the Adapt Business System team around those measures and continuously improving those measures. Everything from patient experience when they call into the call center to patient satisfaction when we enter the home for new equipment to various SLAs for getting equipment on patients, sometimes in just 4 hours or less from the point of discharge from the hospital.

That cost to capture those patients, was that all figured into -- with Humana specifically into the capitated amount that you're receiving? Or did you go over -- meaning were margins pretty thin? And how are margins now within those capitated patients?

Yes. So we've said that margin is at or better the enterprise average for both adjusted EBITDA margin as well as free cash flow margin. We've said the same for Kaiser that as this business gets stood up that, that is our expectation, and that's how we've priced these deals. Certainly, we're happy to stand up investment to secure these contracts. I mean, versus the M&A dollars that you deploy to attempt to acquire this amount of business. I mean, the ROIC on these investments is incredible.

Yes. You have another capitated contract in Southern California. Clearly, it's expanding your reach in terms of what you are doing. It's a small contract relative to what you probably have with Kaiser....

The one we announced in the fourth quarter.

Yes. What do you think this contract will allow you to do? Is this more of a competitive replacement over time? How do you view that contract and that opportunity?

Sure. I mean we took that contract also from an incumbent operator in that market. That payer, it is part of a very large national payer that we do believe that there's more opportunity with that payer if we prove to do a good job in Southern California. The timing was great as we're standing up new sites everywhere in California, but particularly Southern Cal as it relates to Kaiser. So we're deepening our presence and our ability to take more share and we think we will.

Shifting over to diabetes. Can you just walk us through -- I mean, obviously, there's been some challenges in the past with shift from DME to pharmacy. Some of Omnipod is even talk -- or Insulet is talking about introducing another faster version of what they have today. How do you think about that space? And I know you're also looking to develop your pharmacy channel. Where do you stand there on that front?

Yes. So pharmacy as a percent of diabetes revenue is now just a touch under 10%. I mean that's up from half that just about 5 to 6 quarters ago. So fueling some of that growth, I mean, we do distribute CGMs. But the real growth is in Omnipod, as you suggested. Tandem recently spoke of the Mobi Tubeless coming much faster than I think the market had originally anticipated. And they're making some progress securing pharmacy contracts for Mobi. Well, that's all eligible for us to distribute through our 50-state mail-order pharmacy. And so that's been a good growth engine for us. I mean pumps are actually up double digit the last couple of quarters. On the CGM side, now we do offer CGMs through pharmacy, not so much because we want to grow that aggressively because the margins for CGM on pharmacy are quite thin. But what it allows us to do is back to that easy button for the referring provider. We don't want that office to worry about whether we accept a pharmacy order, we don't accept the pharmacy order or we accept this payer and not that payer. We want to accept everything. And that's part of the strategy of growing the pharmacy is to ensure that our sales folks when they're out there fighting for each order that we're not restricting them in any way, which should help growth on the new starts.

Just on the durable equipment side, there's obviously a lot of on this, just given Dr. Oz's comments in terms of what's happening in Florida and California. Obviously, it has a little to do with you guys, but are there repercussions in terms of them looking at this, whether it's isolated to those groups or more holistically, how do you think this affects just the DME side of your business?

Well, I think for the scaled players, particularly public companies with control environments and those kind of things, look, we're pleased to be involved with the CMS as they continue to look at DME. From an operational perspective, though, for us, it's a little bit of a shoulder shrug in terms of impact. Now there is some nuance on the moratorium. This is a 6-month moratorium that the CMS has put in for new licensing. In terms of acquisition activity, we don't think much will change. I mean targets are -- as long as they haven't changed majority ownership in the last 3 years, you can still buy the DMEs and transfer those license. And we think for newer DME businesses, I mean, frankly, those aren't businesses that we'd likely be entertaining acquiring anyway. So I mean, our stance on this is it's all kind of part of the industry we're in.

And on the DME front, have you quantified what the rulings in '27, '28, how that could actually affect you on the competitive...

For competitive bidding? So we commented a fair amount on this a couple of quarters ago. We'd say that we were pleased to see that the CMS clarified the final rule that was published in late '25. They have excluded kind of our core categories of sleep, respiratory and DME from the competitive bid round that will be pushed out to 2028. The products that will be in include diabetes as well as ostomy and urology, which are very small categories for us. And in terms of the impact, look, there's almost 2,000 DMEs today that are distributing CGMs to Medicare patients. The CMS has been clear that, that will be 10 or less is what will happen. So there's a lot of market share that will be up for grabs. Adapt is the #2 player in terms of CGM distribution to Medicare. So as we learn more about the process, we're leaning in, and we see the competitive bid as an opportunity to continue to grow our revenue.

And on that 10 or less, obviously, it is a clear opportunity for you guys and maybe taking share, but is that leading to consolidation? And how does that work from just an FTC standpoint?

Yes. I mean competitive bid over the years, frankly, was part of AdaptHealth's origins as DMEs that may not win contracts, there's really 2 options. You either sell your business. And again, you don't have a Medicare contract. So that's going to be a depressed multiple or you close the doors. And so over the years, following competitive bid, I mean, it's been good for acquisition and it's been great for consolidation.

Your largest competitor or one of your competitors had noted that they have a preferred status with Optum. Can you just walk us through as to what that means? And how does that affect Adapt?

Well, to our knowledge, that competitor has not stated the value of that contract or the importance of the contract. For us, it's business as usual. We have seen 0 impact from this situation.

When you say 0 impact, meaning that you're still.....

No change in volumes, no change in referral patterns. We have not seen any impact.

And just from a competitive standpoint, obviously, given that competitor's challenged, how -- what are the opportunities that you're seeing there, the opportunity set? And what are you doing to try to maximize on those opportunities?

Well, I wouldn't say that the competitive landscape is really any different. I mean you have to remember, I mean, health care is local. The folks that are seeing referrals every day, going to see referral offices. I mean they're fighting with the same salesperson at the company down the street as they were last year or as they will next year. And so if things are changing at the top of the house in these big companies, it's really not an impact locally. And it doesn't change anything that we're doing to continue to grow market share.

Just from a regulatory front, and we talked about competitive bidding. But over the last decade, I think -- correct me if I'm wrong, one of the more major ones was public health emergency and then the reversal of that 75-25. What are you seeing today in D.C. outside of, again, of competitive bidding and the stuff with Dr. Oz, are you seeing any other movement on that could either be beneficial, just something that we all, as investors, have to be aware of and track?

Well, sure. I guess, firstly, I'd call out that, as usual, in December, the CMS published the 2026 fee schedule, and there were increases. I mean this is largely an inflation-based fee schedule. And with inflation up, the fee schedule was up just over 2% across the product catalog. So that was good news for the industry. On the regulatory front, and the lobbying front, there's the SOAR Act, S-O-A-R, that is working through. I mean it's really working to increase reimbursement levels for respiratory, which is a large and important category for Adapt. Also working to simplify, reduce restrictions in terms of setting patients up and so kind of increasing that patient access. So we're, of course, part of that, the industry consortium that's lobbying for that act, and we're hopeful, but certainly haven't accounted for any of this in our guidance.

With the capitated contracts you have today, obviously, it's very clear as to what that covers sleep, respiratory and some of the DME stuff. But as you look at the spectrum of opportunities, even with some of these contracts, are there any tuck-ins or areas of opportunities that you might consider looking at just to kind of enhance your product offering today?

Meaning like outside of our core products? No, I can't say that for now, we're spending much time thinking about that. I mean -- and the reason is that the underdiagnosed nature of sleep apnea, COPD and diabetes, frankly, I mean, it's just so significant that the TAM within the segments that we operate in is just so large and continues to grow. And so we're very focused on continuing to win market share within those categories.

And similar to -- I mean, obviously, Kaiser is a big one. Humana is a big one. You have the relationship in Southern California. How many or more of those types of capitated relationships are there? Can you just quantify that opportunity?

So I'll answer that in 2 ways. Firstly, we do have a pipeline of capitated contracts. We have a dedicated payer team that is working to structure price contracts, get competitive. There's been a little more RFP activity from the payers recently, which makes sense based on, I think, the headlines that the payer community is dealing with and finding ways to be more efficient and lower cost....

Sorry, just on that, what are they looking for? Just reducing the prices that they pay? Or is it something?

Well, every one of these RFPs, I mean, some can be different. Some can be pure DME, them can kind of be all-encompassing for home health. I mean they're looking for the same thing, I think that Humana and Kaiser was looking for is a single operator in most states, I mean, there's hundreds of DMEs. So administratively for a payer to handle that versus one scaled player, I mean that's a big deal. The pricing, I mean, we're always happy to offer modest discounts to reimbursement rates in exchange for a whole lot of volume. So Adapt is happy to do that. And then the consistency of the per member per month. I mean the payer knows their membership and those rates per member are locked in. And so it's just a very predictable cost stream for the payer and a revenue stream for Adapt.

We have about 2 minutes left. Does anyone in the audience have any questions that they want to ask?

[indiscernible].

Well, yes, I'd say for adjusted EBITDA margins, which, of course, exclude the CapEx, it excludes the patient equipment. That runs in the high 20% for sleep and respiratory. When you get down to the kind of the gross margins on those sales, we do report segment financials for sleep, that's around a 60% of cost for that resupply. But at the end of the day, it's a high 20-digit 20% adjusted EBITDA margin and both businesses free cash flow and about the 6% to 7% of revenue.

Any other questions? Just on the ability to take market share, is that also -- I mean, it's the service offerings and everything else. But how much of that is also some of these folks just coming to you just being upset or annoyed with what they're currently using today?

From a competitor....

Yes. Competitor standpoint.

Well, sure. I mean we'll take share any way we can get it. Certainly, we're happy to take on patients that are maybe frustrated with their current provider. For us, in terms of retention, I mean, we continue to set records. And so we think we're doing a pretty good job taking care of the patients that we have. And certainly, we're looking to grow that.

Great. Well, we've come to the end of our panel. Thank you so much, Jason.

Thanks for having us. Thank very much.

Thank you. Appreciate it.