The last or almost the last session, so thanks so much.
Last but not least.
Can you yeah, exactly. Thanks for sticking out. You know, we saved the best for last. Totally. You should be in this room. So now, my name is Joanna Gajuk. I work at the Bank of America Equity Research covering small and mid-cap healthcare facility names. So now my pleasure to host this session with AdaptHealth. And today with us is Richard Barasch, who's the Interim CEO. So thank you.
One more day? One more day?
Yes, I know. I know, right? I mean.
Two more. Excuse me. Two more minutes.
Then Jason Clemens, CFO. So we're going to go right into Q&A since we only have 30 minutes. So there's a lot to cover because the company, so many different business stories, but maybe we should start with, I guess, Q1 and the guidance since there's a lot of questions like the quarter was pretty good, but the guidance.
Great questions.
You could get guidance, so can you kind of just flesh it out, what happened there, essentially?
Sure. Sure. So first, some context setting. So it's been a pleasure working with Richard for the last year.
Thank you.
But I do have a new boss coming in next week. Didn't seem to make sense despite a great quarter, maybe moving the bar. So a little bit of context on that. We'd say secondly, when you look at Q2, we thought it made good sense to temper really two things. The first is on the expense side related to the ongoing repair following Change Healthcare disruption. And so we expect $several million of unplanned expense in the Q2 related to the processing of cash as it's now rolling in. So we're very confident in free cash flow and kind of where things are going to land. On the front end, the problem that creates on the back end as all the electronic connectivity is cut off of processing your EOBs, your ERNs.
You have the cash in the bank, but you have to post it and apply it properly. That's being handled literally one by one by humans now, mostly offshore, but it's added expense that we need to absorb in the quarter. It could spill to July, but we think we got it contained just to Q2. So that was the first thing that we made an update to for the Q2 . The second item is related to our largest business, which is sleep and sleep resupply, the largest revenue line that we report. We've been recently alerted. I think ResMed has made it publicly known that there are some supply chain crunches they're dealing with related to a few of the specific masks, heated tubes, and cushions that is creating a backorder situation for us just about 2-2.5 weeks before our earnings call.
What we presented for Q2 was what we think is a very bad case scenario of essentially working with ResMed, letting that play out, and as the orders come in, fulfilling it for patients. Now, at the end of the day, there is ability to advise patients that although your ResMed item is on backorder, we may be able to offer you a same and similar product from any of the other manufacturers that can work interchangeably with your CPAP. You want to be thoughtful about pulling those levers because it can create some just operational challenges downstream, but it is a lever we have at our disposal. And so what we've presented is a view of Q2 that we're confident in. We think we've got the tools to deliver on.
No, great. Thanks for that. And I guess on the last point you were making around the commentary from the supplier about certain items that are on the backorder, I just want to clarify and make sure I understand because I guess we've heard him talking about some disruption because of the Red Sea, but my understanding was that this particular supplier manufactures in Australia and Singapore, so I guess they're shipping through the Pacific instead of through the Red Sea. So I was curious if that's accurate.
Well, the entry point is Savannah, right? So what they've articulated is rerouting and then creating delays associated with some of this product. So we're working together. They're a great partner of ours, and we're confident that we'll manage to the numbers we put out for Q2.
No, thanks for that. With this, I guess, specific item you're calling out, so there's some things you can do to kind of mitigate this. What is the range of outcomes? It sounds like what you kind of included in your guidance is kind of the worst-case scenario, but obviously, it sounds like there's some alternatives or things you can do. What's the kind of range? Is it a situation where it might turn out not to be an issue? Because the similar question was posed to your competitor, essentially, like, "Oh, they're seeing these costs," and they made it sound like they didn't really call it out. It sounds like maybe it's something you can actually manage through. Just asking the likelihood of those different outcomes.
Yeah. I mean, for us, we think we've got tools in place that we can do better than what we committed to. And that includes things like offering alternative product, which we do have in stock and in inventory. Again, it's a balance, and we're continuing to monitor, and we intend to deliver on what we committed to.
No, that's great. Since we started talking about sleep, your biggest business, essentially, and you talk about for this year, right, you expected growth would be around the mid-single digits.
We do.
Right? So what is the reasonable assumption to be made going forward, 25+, how we should think about it? Because clearly, there's some reasons why you talk about maybe a little bit slower growth in 2024.
Yeah. I mean, look, this is a comparable period situation. I mean, we think the year will be 4%-6% growth over the prior year for sleep, right, mid-single digit. We think it could be 5%-7% as you think out a year and beyond that. And the reason is really related to the rental setups, right? We had record setups on CPAP equipment starting late Q4 of 2022 and going through the end of the Q2 of 2023. So there was pent-up demand as part of Respironics exiting the market and getting enough supply, not just us, but everyone in the industry, to put out that supply on patients. And so there was record starts.
And so just the nature of how we get paid for that piece of equipment, it's typically a 13-month rental stream that you'll earn on that piece of equipment. And so at the end of that 13 months, even though that patient is most likely still with you in your census, which is why our census keeps growing, and ordering resupply from you, the rental revenue gets capped. And so the implication of that is, despite having record setups a year ago, that's your hurdle rate in growing your revenue in the rental lines in the current year. So we've said we'd be thrilled if we're flat this year in rental. We achieved that in Q1. Sequentially, we think we'll be $80-$81 million in Q2, which, again, that comparable period, you've got a year-over-year compression.
I mean, that's the reason, essentially, for the point difference between this year and what we think we'll deliver next year.
That makes sense. And.
Let's just let me make a fine point here. The key number to keep looking at is the census. And that keeps growing, and that becomes a cumulative number. So that's why we have confidence in.
On the resupply. Right. Exactly. And I guess just to kind of put a bow on this because obviously, the other topic related to the sleep business is the GLPs and the discussions around. We hosted a panel today, too, around these shortages and where's the reimbursement and all these stuff. But I guess what's your latest view on that? Obviously, we also do our own survey, and we'd already see it in the past.
Your surveys have been very helpful to us because what you're showing is a very small number of people whose behavior is changing away from CPAPs, even if they're taking GLPs. And we know that that's going to happen. It's going to help a certain number of people. But what we thought was pretty interesting about the recent Lilly announcement about the drug specifically is they talk about an addressable market that's far in excess of anything that we had been talking about before that. So our broad view, our macro view, is that there's going to be more conversation, more advertising, more discussion about sleep and sleep apnea as an essential part of health. And so far, and this is so far, the results of the study for Lilly don't show that their efficacy is better than CPAP, in fact, still quite a bit less efficacious. So we're clear.
We think that the top funnel is going to keep growing. More people are going to be interested. More people are going to be going to sleep doctors as the awareness grows. And our therapy is available, less expensive, and better to this point. So we're pretty confident that we're going to be in this for a very long time.
I guess you mentioned that was true, but I guess you, at some point, mentioned that you will also try to collect your own data for your patients.
We are collecting. We're collecting our own data. Jason wants you to be specific.
Sure. So starting in the Q4 , upon setup, we're surveying every patient on their history of GLP-1. And in the Q4 , about 6%-7% of patients that came in and got set up for a CPAP had identified as being on a GLP-1 drug. That number increased in the Q1 . We're up to about 10%-11% of folks that are getting set up have identified as being on a GLP-1, yet they still came in and they still got set up. What we're now able to do is start cohorting those patients to understand if they differ in two key variables. The first is adherence to the CPAP therapy. We have detected no difference between a patient that's on a GLP-1 versus not when their adherence from point of setup through now.
The second key item is, well, what are their resupply ordering patterns? Does that somehow change? ResMed has put out a real-world study that says within 1 year of CPAP setup, a patient that's on a GLP-1 drug is going to order 3% more frequently than a patient that's not. In 2 years, it's going to be 5% more. Now, we're not seeing that yet, but we're seeing no change in a patient that's on a GLP-1 drug versus not and their resupply ordering pattern a quarter later. Now, it's just 2 quarters of data, so I can't say we have a view on the future other than we're going to continue to survey and monitor the cohorts and report what we're seeing. Patient demand has been steady, and our setups are hitting our expectations.
Our adherence rates are actually quite, quite good.
Yeah. No, actually, I had it on my list to ask you about that because obviously, you outperformed the industry. So can you maybe share the magic trick here?
Here, I was chairman of this company for a few years before I became CEO. I knew the company, but until I actually sat in the seat, I really didn't understand how effective our people are at helping our patients use their therapy properly. We have 300 sleep coaches.
350.
We're not getting paid for that. That's our cost. And it's our cost because we believe adherence is good for us economically, but it's also good for the patient. So it's one of these nice things that our effort is helping our patients deal with what's not an easy therapy for some people. And there's no issue about that. Deal with it better. And it works. Same in respiratory. What I've come to learn about Adapt is we have an incredible depth of respiratory experts, respiratory technicians, whatever you want to call them, but they're experts. They know what they're doing. They know how to set patients up properly. And sort of the next level for us in both actually in diabetes and in respiratory is to prove what we think is intuitively the case that we're helping downstream costs tremendously.
We believe we're pretty close to being able to prove that out on respiratory. We have 1,000 professionals whose work it is to help our patients use their therapy better.
No, exactly. And you mentioned diabetes, so maybe we can shift gears a little bit just to make sure we cover the main business lines here. So diabetes actually was a nice surprise, positive surprise in Q1, right? Things are at least from what we could tell, things are going well there. So I guess obviously, you didn't change your guidance specifically, but any commentary about does it change your view for the year, and does it change your view kind of going forward in 2025?
I'll give you a qualitative answer, and I'll let Jason do the quant. Qualitatively, we're in a different spot than we were a year ago. A year ago, we had operational challenges. We had management challenges. We had a distribution force that was what's the opposite of not growing? And so it was a part of the business. They really needed fixing it. And I talked about this on the first call that I did a year ago. And we're not declaring victory. We're not doing a victory lap, but we've got a fantastic present of diabetes. We've restructured the inside of the company from an operational perspective. We've intentionally opened up the pharmacy channel in places where it will work for us. So it's a very different picture. It's going to take time. Yes, the Q1 was a nice surprise. It was great.
We have to sustain that. We've got some tough comps that Jason will describe. But the picture is very, very positive from the inside.
Yeah. I think for the full year, our expectation hasn't shifted. I mean, we thought that a flat year would be a good year. Some of that is absorbing a $15-$20 million headwind on our pump business as we're lessening that headwind and continuing to put out more tubeless-based pumps than tube-based pumps than we ever have. So Q2 in a row, we put out more tube-less pumps, which is really the growth engine behind pump and pump supplies. And so as we're continuing to turn that portfolio, if you will, we're making progress a little faster than we thought. CGMs, we doubled the field force, starting to get production there. But we don't want to get ahead of ourselves. We don't want to overshoot expectations. It takes a lot of time to get a salesperson on the ground, opening doors, getting them effective.
I mean, it just takes time. So we're working on that. We still think that a year-over-year compression in the first half, followed by growth in the second half, getting to a full year flat and position for growth in 2025, we're still confident in that.
That's great to hear. And I guess you mentioned do you open new pharmacies, right, to kind of participate more in this channel? So obviously, that's been a headwind to this segment on shifting some of the payers, shifting into pharmacy. So where are we at on that? I mean, is there a potential risk because I guess the company clearly has the emphasis on the commercial and going after the government payers. But I guess inside the government bucket, it seems to me that there's also managed Medicaid, Medicare Advantage. So can you give us a sense of where these payers are? Is there a risk that they could shift to?
Strategically, we can't just be in the medical channel. It just doesn't make sense. So we have to figure out ways to benefit in the pharmacy channel, both in terms of volume. There's a second part of this that I think is important. In the same way we just alluded to this, we're very much through pilots that are proving that our adherence is because of intentional work on our part is better. I think intuitively, there's a sense that if people use their CGMs, use the data, they're going to manage their diabetes better. The next step for us is to prove that we're actually having an impact on A1C scores, which intuitively, we think is going to prove to be the case.
But if we're able to make that case, and we're able to make that case to payers, that should induce them to want to do more business with us. Speaking as a former payer, it would for sure matter to me if my CGM supplier also cared a lot about outcomes.
Yeah. I'd say on the risk side of things, I mean, we're investing in the infrastructure that Richard just referenced because we want to be in a position to go to the payer community and say, "We don't really care how you reimburse for this product. We're going to deliver the same quality service, the same adherence monitoring, and the same healthcare outcome management scenario, whether you reimburse us through a DME channel or medical benefit channel or through a pharmacy channel." To directly answer your question, I mean, three payers switched January 1st, two Medicaid offices and one commercial payer in the upper Midwest that we knew of. We detected it last year. We planned for it in our guidance, so there were no surprises, which is a very different place than we were a year ago.
I mean, there was 5X that number of payer changes on January 1st of 2023. So we think we're in a position now that we detect the change. We know where it is. One of those Medicaid offices that switched to a pharmacy benefit. We've opened that market, right? So we're on top of it. And again, it's a different place than we were a year ago because we want to chase business in both channels.
We also believe that we're going to be able to prove to the manufacturers that given our emphasis on adherence, which is good for them and for us as well, that they'll care about that. Hopefully, they'll care about that in a constructive and meaningful way.
Exactly. And talking about the payers and outcomes, Humana contract, clearly, that's a win. So clearly, there were some issues there, but it sounds like you're on track there, so.
It was a startup. Yeah. It was a startup. Look, it's the first big contract the company had done. In retrospect, we should have planned for more startup, more time. But once we got on track, it was a very, very fast transition. I believe that Humana is quite happy with us, with the work that we've done. I think they recognize the complications of this contract as well. And we've worked very closely with them, and I think they're happy with us.
What I was getting at is that is there something in this contract where you get paid for outcomes? Is there a bonus?
No. No. There's nothing like that. This is spring training.
Nor are there penalties.
Yeah. So that's the point, though, is at some point well, we don't have diabetes in the Humana contract. If they're out there listening, yet. But once we start proving the point in all of our businesses, it should make payers more willing to work with us.
All right. So is there some sort of timeframe where you're like, "Okay. So we had this contract for this period of time, and we have this data, and now we're pitching it to all these other payers"?
We're past that. Yes.
We're past that. Yes.
We are actively pursuing more similar arrangements. Again, it's not including guidance. We won't do that unless or until we win more contracts, but we're actively pursuing.
I guess to that end, because it sounds like this Humana contract and maybe some additional ones that in the future you would add, they would be viewed as organic growth, right? So I guess when you talk about your organic growth, I guess, in this quarter, in this Q1 , is there a way to think about how much of it is actually Humana? Because clearly, you gain market share. I mean, that's what disruption was caused by that because you were transferring patients from others to you.
It's about a point.
A point.
In the quarter. Yeah. I mean, it's tough to see it comparably because a year ago, we had a ton of business in these 33 states and D.C. where we won the contracts with Humana. You don't want a fee-for-service standard, so they were reported in our standard revenue categories. And then this year, that revenue is now reported in cap, plus the growth is reported in cap. So about a point is the right way to think about it.
Okay. And just thinking about the big picture, so we cover kind of the two main business lines, but can you kind of frame, I know you started talking about how you think about these business lines, growth, not just this year but going forward. So can you kind of hit again, remind us how you think about those two main lines, business lines, but also the additional lines and kind of what this should kind of build up to?
I would add respiratory as a third business line because it's very important. It's steady growth. And based on what we think can happen on the ground is the sense that we're very good at this, and we should be able to take even more share of the respiratory business than we currently do. So there's demographic growth, but we think we can do better than that. So just as a conceptual matter, think about respiratory as the third big leg in the stool. There's a bunch of other businesses that were acquired or came with acquisitions that do contribute something. We're being very mindful of trying to make sure that our portfolio is efficient. So more to come on that at some point later.
How should we think about the growth outlook for that business and for the additional ones and kind of how this all rolls up to total company?
Yeah. I'd probably start by bridging you out from this year, what we expect, right? Our revenue guidance at the mid is 3.4% growth over the prior year, all organic, 100% organic. The 75/25 Rule that was a $25 million top and bottom line impact in 2024 that we are actively absorbing, right? We're currently absorbing that, and we intend to grow through it. But that's about 60 bips of top line, right? So the first bridge from 3.4 to 4. Diabetes, we said we think will be flat this year. Well, it's 20% of our business, and if we can get to 5% next year or more, but 5%, that's another point, right? You're now up to 5%. And then 40% of our business, sleep. Again, we think we will move an additional point there. And so you're seeing now a movement up into this upper single-digit growth.
That's before any new cap deals or pursuits that we're chasing. We'd be thrilled with that, with a mid single-digit growth into next year and beyond.
We're also seeing quite a bit of interest on the part of systems to use us as preferred providers. Our scale is starting to matter a lot. I think we're better buyers of equipment. I would assume that better than most, if not all. But more importantly, we're efficient, and we know how to get the product to them when somebody comes out of a hospital, the oxygen has to be there when they get home. The wheelchair or the walker has to be there after someone has hip surgery or knee surgery. So the fact that we're quite good at this is going to matter. And we think there's quite a good opportunity to become a preferred provider in more systems throughout the country as well.
Would that include, say, hospital-home?
Yes. Yeah. Yeah. Well, I mean, we're seeing an interest in hospital beds. And it's not going to, I don't think, it's going to move the needle hugely, but we can do it. And it's part of a portfolio of things we can do on discharge or hospital at home.
Do you have anything like this in place already with any of the systems, or this is just?
Oh, yeah. Yeah. Without question. We've got many preferred provider arrangements with name-brand hospital systems throughout the country. Some of them are as simple as stocking and restocking orthopedic closets. That can move also into DME. That can move further into diabetes. We have recently successfully closed our first couple of deals on offering CGMs and diabetes products to patients upon discharge from the hospital. That's an area we're focusing on a lot. And then kind of the top of the menu is getting hospital liaisons working inside the four walls of the hospital to essentially be the easy button for all discharges. So for us, it doesn't matter if you're discharged with a CGM or a piece of oxygen equipment or full DME. At home, I mean, we want to service all of it because we offer every product in the catalog.
As you go further upstream and you've got people inside of those systems being the easy button, you're going to earn more referrals.
No, that's definitely an exciting area for sure because hospitals are looking for solutions to kind of hospital safety.
Yeah. One of the things that's happened in the last period of time is where these relationships were occurring ad hoc in various places. We did a good job. Now, I think we woke up and said, "Gee, this is interesting. Why not focus on this? Why not have a group of people who do this intentionally?" It's starting to bear fruit.
That's great. I guess we have only a couple of minutes. But Jason, you mentioned the 75/25 Rule. So I figure we should also talk about reimbursement outlook because Medicare is a meaningful payer here. And I guess in some of these areas, you're actually kind of growing into that area. So can you kind of flesh it out, things you're looking out for in terms of either the rates or any risk or any changes in reimbursement?
Yeah. I can't say we're watching too closely risk to reimbursement at the moment. What we are watching closely, and we're obviously part of, is some new activity in Congress around. There's a SOAR Act out there, S-O-A-R. It's really focused on streamlining qualifying patients for respiratory services. Historically, our industry has lobbied that it has been somewhat of a cumbersome practice, getting the qualification, getting clean orders. So there's some activity working to just make things easier, as well as reimbursement to potentially eliminate respiratory from the competitive bid program. I mean, that's one of the areas that the industry is lobbying for. As inflation is real, it just keeps happening. And we think that the rates should come up with that. I mean, we're here to service a significant portion of Medicare beneficiaries on respiratory needs.
So we're working to lobby in Washington on that.
I guess on the.
Stay tuned.
Right. No, that would be definitely favorable. But I guess on the flip side, there's also a discussion that the competitive bidding, I guess, being put on pause by CMS. But clearly, at some point, they might be like, "Oh, should we come back to this?" And so maybe there will be things being removed. But what's the risk that things that are being put in there that are not in there? I guess we saw this OIG, whatever, worksheet or plan, and they're looking at CGMs. That's like four years out.
Back in November. Yeah. Yeah. Yeah. I mean, we were surprised it took that long. The OIG producing a review of cost is really the first step in bringing forth a recommendation on whether a product comes into or out of the DMEPOS fee schedule and the competitive bid program. Frankly, CGM is a new product. It only hit the scene in 2017 and hit Medicare qualification a year later. And so it's a newer product. And so this was, frankly, delayed a bit by the pandemic, but it is now on the radar. We have said that CGM is among our lowest-margin categories. And so I think it's reasonable to ask how much cost or inefficiency could there be to take out. But I mean, we would fully expect if and when CMS brings forth a new competitive bid program that CGMs would be included in that.
It'll be part of the program. We'll submit our bids, market by market, what we're willing to take as a price to supply the business. It's kind of part of the business we're in.
But again, this would be like 2027 or something away when we actually find out.
Certainly not January 2025.
Right. Exactly. I guess we ran out of time. So thank you so much, gentlemen.
Thanks, Joanna. Appreciate it, everyone.
Thanks, Joanna. Thanks, everybody.