AdaptHealth. They are one of the largest or maybe the largest provider of medical equipment, I guess, in the U.S. Jason is here with us. We're going to go right in Q&A. Before we start, I guess Luke is in the audience, too. He's hiding. In case anybody wants to say hi to Luke, he's right there. Maybe, yeah, maybe we'll go just right into Q&A and start with the Q1 . You know, you guys came in, you know, a little bit below on EBITDA line, where you call a couple of items. Maybe, you know, remind us the elements, I guess, that created the shortfall, right?
Also, you know, as we think about Q2, right, maybe, you know, the timeline of kind of recovery some of these cost items that kind of were weighing on Q1 EBITDA.
Sure. Sure, be happy to. It's good to see you again, Joanna. Thanks for having us back at BofA. Q1 for AdaptHealth was frankly extraordinary in a lot of different ways. All four business segments grew organically. That's the first time that's happened, I think, since we broke into four different business segments. The underlying core business of sleep and respiratory, as Joanna mentioned, we're the largest durable medical equipment provider in the country. Both sleep and respiratory grew organically year- over year between 3%-4%, so we were happy to see that in the core business.
Our diabetes business grew organically for the first time in some time, a little over 2% as we put out more CGMs, a lot more pumps. Pumps are having a pretty good run for the last couple of quarters. That was good news. Wellness at home, which encompasses the true bent metal, as we affectionately refer to it, beds, wheelchairs, walkers, that type of DME that's in service of patients with sleep and respiratory conditions, primarily.
That business line grew as well, organically year-over-year. We did have several dispositions in the prior year. Reported that segment was down, ex those dispositions, that business was up as well.
The core in total was up a little over 4% organically year-over-year. The big news was that we've started a very, very large capitated agreement with a large West Coast-based hospital system and IDN. We're now covering over 12 million members in a capitated arrangement. For those not familiar with capitated arrangements, they are at-risk contracts. We get paid a per member per month fee for managing an entire membership of a particular plan.
And then we manage the utilization, which in DME happens to be extraordinarily steady and stable. As you can imagine, folks that need DME, that curve doesn't bend so quickly. You either need home oxygen or you don't, and those trends don't change too rapidly. We take that risk.
Total organic growth was over 9% for the Q1 . That was kind of the headline of what happened with revenue.
With that did come additional carrying cost for that capitated arrangement above and beyond what we thought we would do for the Q1 . We thought we'd come in around $128 million of adjusted EBITDA. We came in at $121 million. We beat revenue by about $20 million, so that added certainly to the top and the bottom line. At the end of the day, we were about $12 million over in labor for the Q1 .
Most of that was variable in nature, about $8 million, those were dollars spent for sign-on bonuses, incentive pay, overtime and contract labor as we were bringing on hundreds and hundreds of thousands of patients, all within about a five to six week timeframe.
The amount of work and effort that went into that was challenging to predict, I guess, is how I would frame that. We were very pleased that with all that additional variable pay, we were able to secure the revenue earlier than what we had originally anticipated. The rest of that $12 million was higher salary expense, more W-2 employees than we had predicted. That is essentially more staff. Over time, we will work to right size that staffing model with the new contract. Again, the headline, I think, for the year and for Q1 is that we are now fully transitioned for this capitated arrangement.
What was partial revenue in the Q1 will now start flowing for the Q2 and throughout the rest of the year, which is why we show such a significant step up in profitability as we work through the rest of 2026.
Right. You gave the Q2 guidance, where you talk about 19% EBITDA margin.
Yep
That also implies a step up. It sounds like some of it is normalization or just having the more of the revenue flow through on top of the labor cost that you already have in place.
That's, that's right. I mean, our revenue, ex patient equipment depreciation, flows through about 60% gross margin. The effect in Q2 is that we step up revenue from $820 million to $850 million, and so that $30 million of incremental revenue is essentially all capitated business. It's expected to flow through right around 60%. That sequentially adds a little under $20 million. As usual, throughout our history, collections are tougher in the Q1 .
They step up pretty significantly into the Q2 and throughout the course of the year. That's the impact of patient deductible resets, as well as those deductibles start capping out, the patient pay portion becomes lower and the patient dollar is a little harder to collect than the insurance dollar, so that means collection performance improves.
That should add about $10 million in the Q2 . Finally, a lot of that variable labor has already run out that won't repeat in supporting the onboarding of the capitated arrangement. You're seeing about a $40 million step-up in profitability, and those are the three bridge points to get there.
Right. This is very helpful. On this capitated program, contract, sorry, very exciting, right? I mean, it sounds like you guys were talking about previously that those should be kind of running at a above average margin versus like the corporate level.
That's correct.
We expect.
Eventually.
Yeah, we expect at least a 20%, so essentially the enterprise margin for this contract.
Kind of walk us through the ramp up. Sounds like, you know, kind of a lot of investments have been done, and now you're kind of just capturing that, sort of any timeline or any kind of ramp up to get to that margin?
Sure. For perspective, the ramp up in the infrastructure really started in earnest around September of last year. For perspective, we de novo 35 brand new locations from September up until call it mid-February. We hired well over 1,200 employees all within that timeframe. Some of them came from the incumbent DME provider. As employees were displaced through the loss of that contract, we were able to convert many of those employees, as well as new employees that we recruited on the open marketplace. Over 300 vehicles were procured, vehicles and sites were outfitted.
Hundreds of thousands of active patients were converted onto our systems and our platforms, and we were able to acquire a little over $80 million worth of active patient equipment from the incumbent provider. All of these things happened on the course of end of September through, call it, mid-February, and then a little bit more into early March as the final phase of the contract started. All that carrying cost was there pre-revenue or without the revenue to support it.
Although we carried significantly more cost than we originally anticipated up front, now that the revenue's started, those margins start locking in quite rapidly, and so that's why we expect to see that step up over the course of 2026.
Would you say as you exit 2026, you're going to be at that margin, target margin for that particular contract?
Yes.
Okay.
Yes, we do expect that.
Okay, perfect. I guess you do now have two large contracts, right? The obvious question is like, you know.
For now. We're working on more
Exactly. maybe walk us through that.
Sure
We expect another large one, or there's more like the smaller ones.
Sure
how we should think about.
I,
The step up from here.
Yeah, I would characterize the capitated pipeline or the opportunity as basically small, medium, large. You know, the Humana capitated agreement that covers 33 different states and the District of Columbia, that we started over three years ago now, you know, that at the time was the largest transition of capitated business in the history of the industry.
You know, it was a very large contract. It was over a million covered lives, and certainly with Humana membership growing in 2026, we benefit from that as well as those plans have more membership and we take care of more of those patients. But that was a very large agreement.
Prior to securing the Humana contract, you know, I couldn't tell you that anyone inside of AdaptHealth thought that it would be possible to win the Kaiser agreement. You know, once we did, it, you know, and we were able to now convert all of these patients successfully, the amount of inbound interest for this type of payment structure is elevated. We've now proven for the second time that we can transition huge populations of patients from incumbent providers onto the AdaptHealth platform. In doing that, we become the single service provider for that plan.
We provide the daily, weekly, monthly metrics around patient satisfaction, contact center measures of referral provider satisfaction, and operational metrics such as emergency orders arriving in that patient's driveway within four hours of discharge of that hospital. You know, being a single operator as opposed to traditionally hundreds of DME operators in each state across the country, that's a huge benefit for insurance plans.
Certainly, we're happy to offer some reimbursement compression in exchange for a tremendous amount of volume, you know, that economically makes a lot of sense for us. That's an added benefit to the program. We are actively pricing small and arguably medium-sized contracts. We do have a dedicated team that's focused on this. They price them, they pitch them.
Ultimately, they integrate them and then pass them off to operations for continuing that book of business. You know, Suzanne did allude to getting pretty close on a new opportunity in the last earnings call. With a little luck, we might have something to talk about by the next call.
I guess a couple follow-ups here. First, you know, this Kaiser versus Humana experience, right? With Humana, I guess it was much bigger contract, right? 'Cause initially, there was some disruption there.
Actually, it was much smaller.
Smaller initially.
This is a tale of two different contracts. I think maybe what you're getting at is in the startup of Humana, we incurred significant penalty payments from Humana. We did open some de novo locations to support that Humana contract, but it was five or six, not 35 like we've done now with Kaiser. The other difference was that we were taking business literally from hundreds of DME operators, some of them just mom-and-pop, single or two-site location entities.
The communication of AdaptHealth to those members, from Humana to those members, educating the referring providers that, if you're a Humana Medicare Advantage plan on HMO, AdaptHealth is the only place that you can refer membership to for DME products.
That was a considerable amount of disruption to handle all at the same time. Effectively day one we got paid the per member per month. However, if a patient was serviced on home oxygen by a different provider at roughly $120 a month, that single patient would deduct from our payment. That took essentially Q3 to work through the system until the point that we were fully integrated, which was two years ago in early 2024.
The difference with Kaiser is that it was all coming from an incumbent, a single incumbent provider. You know, there was a very respectful and professional relationship built between us and that competitor that was established to essentially lift and shift those patients and transition them smoothly to AdaptHealth.
There were no penalties incurred. That concept didn't even exist in the second opportunity. The difference was that we de novo 35 sites, you know, essentially all in geographies that, prior to Kaiser we didn't have footprint in. The opportunity that's in front of us now is, as that contract is now fully transitioned and we're starting to right-size the staffing model to handle the volumes and to handle that relationship, the next thing we're doing is bringing in new sales force into these parts of Northern and Southern California, Oregon, Washington, essentially everywhere Kaiser has a hospital footprint.
Now those sales folks are selling into referring providers outside of the Kaiser network, because we've got all that fixed cost essentially paid for, and now we can go find additional opportunity to bring in at a much higher flow through of every new dollar of revenue.
I guess on Humana follow-up, 'cause you alluded to this idea of Humana's gonna grow their membership much faster this year. Does that require more investments on your end?
It does not
During this?
It does not. It, well, I said that quickly. No fixed costs or additional infrastructure investments.
Certainly it will require a little more CapEx investment because the bigger membership means that the flow through will be additional patients that are utilizing, so there'll be some CapEx that'll come with that.
Again, that contract also operates at or better the enterprise margins.
Oh, it's already there, right?
Correct.
So,
Yes
Okay. On this capitated revenue exposure, I think you said, I guess 9% in Q1, obviously this was partial Kaiser in there, how should we think about the exit rate, like magnitude?
Sure
of things?
Yeah. As you said, about 9% of enterprise revenue is capitated in the Q1 . We expect to be exiting the year closer to 15%.
Now much of that will come through the ramp as we fully transition and that revenue will start flowing Q2 and beyond. That's a big part of it, as well as we are working our pipeline.
I guess, coming back to, you know, I guess the core business or outside of capitation, but the sleep business.
Yeah
Is probably doing pretty well.
It's doing great.
Yeah.
I guess walk us through the drivers there, in terms of like what's driving that and kind of you guys also alluded to this idea of like there's still a lot of, you know, undiagnosed patients out there and stuff.
Right.
Like that's improving. Kinda walk us through, does that change your view of this business and kinda growth algorithm for that particular service line because of this?
Well, I'd say that it doesn't change our view of the growth algorithm. I mean, both sleep and respiratory, you know, which represents almost 70% of the business, we expect that to grow in the 3%-4% range over time. Respiratory a little lighter than that, sleep a little heavier than that. That's our general growth outlook for the businesses. Now, you know, GLP-1s certainly there were a lot of concerns, boy, I guess that was maybe two years ago we were sitting here talking about this or even three.
It, you know, certainly the top of the funnel, we don't have data to show this, but we expect certainly there are patients that they're on a GLP-1 either for diabetes or for weight loss, that's helped them with their OSA condition. Maybe their AHI has come down to a level that they're comfortable not sleeping with a CPAP. Certainly there must be some compression at the top of the funnel. However, the cross-current is essentially coming from devices, wearables, watches, rings, other indicators that suggest a patient might have sleep apnea. They're more detectors than they're not actually diagnosing.
That is creating a tremendous amount of volume in not just in sleep centers, but also at home sleep testing, which is exploding. Those cross-currents are resulting in double-digit referral growth year-over-year. I've been in this business now six years. I've not ever seen that kind of referral growth. That doesn't mean you convert all of them ultimately as patients. You know, for a whole host of different reasons, but the top of the funnel, the demand for sleep, and we think just the environment and the awareness of sleep health is gonna be here for many years to come.
For perspective, there's slightly fewer than 7 million Americans that are on a CPAP. They sleep with a CPAP today. 25% of them are on our census, so we're by far the largest operator in this space. You know, moderate to severe sleep apnea, there's approximately 33 million Americans with moderate to severe sleep apnea. Mild sleep apnea, I mean, there's 80 million Americans. And many of those patients would also benefit from CPAPs or mouth guards or other products to treat OSA. In terms of that top of the funnel, we're very confident. There's good growth ahead for sleep.
Respiratory is also under-diagnosed, not nearly to the extent of sleep, but, you know, there's millions of Americans, the American Lung Association believes, that have under-diagnosed or undiagnosed COPD. Our sales force is also selling into those call points to help diagnose patients faster. When that happens, you're able to treat them with nebulizers and nebulizer medications. Ultimately, COPD only progresses.
There is no cure, so that patient at some point will need oxygen, either portable, stationary, or both, and at some point, the lungs will no longer ventilate, so the patient will need ventilation. We provide that entire product catalog to patients, and so many of our respiratory patients are on service more than a decade. That business is continuing to slowly compound.
We refer to that as a little bit of our bread and butter in the business. It's a great business and we expect it's gonna continue to compound over time.
Before we talk about the respiratory, but the sleep, so you said faster than three to four. Would you say much faster, like close to high single digits, or is it,
It depends on the quarter or the year.
Say like a longer term.
Four-five.
would you, would you,
Four-five
Okay. All right.
Yeah. In that area.
Also when you said, your, I guess, referral growth was double digits, but also in the oxygen starts, that number was up a lot in this quarter, right? I mean, I don't know if you-
Remember that was capitated.
Okay
Yes. Yes. I mean, if you, if you take out the capitated and if you look at our segment revenue year-over-year ex cap, both sleep and respiratory were up between 3% and 4%. We do expect that to continue for the foreseeable future.
I guess for that business, you know, there's some reimbursement changes that sounds like may be favorable for respiratory. Is there something that also could explain why maybe you're seeing?
Well.
More of a tailwind there?
Potentially, reimbursement change that would be, that would be a tailwind. The SOAR Act, S-O-A-R, is still moving through Congress. There is a fair amount of support for that business, essentially reestablishing the rates that were in place during the COVID pandemic. You know, those rates were installed temporarily to incentivize particularly rural providers, which we provide a lot of rural respiratory service, with increased reimbursement to make sure that the supply chain was healthy and patient access was not disrupted.
There is opportunity there. You know, we'll see. We don't count any of that until or unless it's announced. I'd say, there was also a National Coverage Determination, an NCD.
announced several months ago around ventilation. This one's interesting because Medicare is essentially requiring same or similar levels of monitoring of that equipment and the patient utilization as what's already required within our sleep health. We monitor the machines to understand, you know, is the patient utilizing or not. That's required for Medicare billing for Medicare billing claims.
I'd say on the respiratory side many years ago, we established an advanced respiratory team that are licensed respiratory therapists. They have been actively monitoring patients on our vents for years, the introduction of this NCD within the industry has created a tremendous amount of uproar because most DMEs don't have that infrastructure or that capability to conduct what's required by Medicare.
For us, it's a shoulder shrug. We've been doing it for a long time. We are seeing elevated referral volume for ventilation. We do believe that this is some of the reason for that. You know, overall, the respiratory regulatory and reimbursement environment is very steady to arguably trending positive.
I guess the last piece, right? diabetes. there was a lot of disruption. Sounds like, you know, growth is still there, right? But, like, the margins are quite low. Kinda how are you guys thinking about this strategically, this business? Like, do you expect margins to get better, or should we think about sort of low single digits for that business?
Well, I'd say, you know, strategically as we think through diabetes, if we were making a decision today to invest a new dollar into that business, I don't, I don't know that we'd do that today because over time, particularly since Suzanne Foster arrived from Danaher two years ago, we've thought through and reassessed how much volume does that product category drive to sleep and respiratory? I mean, the answer is de minimis.
Through the underwriting years ago, it was believed that, look, many patients with diabetes also have sleep apnea and vice versa, there was a belief of a cross sell opportunity. That never panned out. There's operational reasons why attempting a cross sell is complicated and arguably more risky than what it's actually worth.
Which is why we say that if we were making the decision today, I don't know that we'd be moving into the product category. That said, it's the business we're in. You know, it is only about a 3% EBITDA margin in the Q1 . It's becoming such a small piece of the pie. We have a de minimis amount of diabetes capitated revenue, not with Humana, not with Kaiser, with some smaller California plans. It's not critical in terms of selling new capitated opportunity.
Again, it does not drive ancillary patient volume into the core, which is sleep and respiratory, over 70% of our revenue. For that reason, we, you know, we intend to run it as best we can.
It still cash flows, but that's where we stand with diabetes.
Since you mentioned capital deployment, maybe we should talk about that.
Sure
right. You have target 2.5 net leverage ratio. I guess you did some refinancing earlier of last year, so maybe this year. Was it some things you were changing up? Maybe talk about, yeah, your priorities in terms of leverage, M&A.
Or,
adding investments.
Joanna, I mean, arguably the best bank out there led us through that refinancing. We're grateful. A couple folks here in the room today. Thank you for that. You know, that was an opportunistic deal. I mean, our next tranche of notes come due in August of 2028. They're our lowest cost bonds. They're at 6.125%. You know, we're raising money right now at 5%, basically 5% even. Once we hit our leverage target of 2.5 and potentially lower, there's some potential improvement there as well.
You know, that alone, we intend to take out those 28s in August once the prepayment penalty goes away. That move alone should save us about $3.5 million a year of interest. That was a no regrets move. You know, with that, we did modestly upside the revolver. The reason for that was, we drew $100 million to acquire the patient equipment assets of this third party DME in support of Kaiser. We're still carrying that revolver as of the end of the Q1 . You know, for the year, we expect $200 million of free cash flow, slightly less than what we've produced the last two years.
A lot of that is the capital requirements in standing up Kaiser. In terms of allocating, you know, Suzanne and I have targeted somewhere between one to two points of M&A of revenue and, you know, arguably about the same amount of capital, $35 million-$70 million or so of M&A. We'll see if we get all that done in one year or not, but we, you know, we work a pipeline. We've been extremely disciplined.
Just as many DMEs that we look at these days, we actually walk away from more deals and diligence than we end up closing because of, you know, compliance concerns or they might be making business decisions that just aren't gonna work for AdaptHealth. But there is still opportunity.
It is still worth, you know, running that pipeline and we intend to do some deals. After M&A and certainly after supporting organic growth, I mean, we'll continue to delever and deploy more cash towards the balance sheet.
We only have two minutes. There are two topics I wanna hit. You mentioned something I wanna also touch base on, in terms of the compliance issues of the smaller DMEs,
Yeah, sure.
Cause we're hearing a lot, you know, focus in D.C. around fraud and abuse.
Well, well, there's a new moratorium in place.
Right. Exactly. What does it mean to you guys? Does it open up kinda more markets to you to grow? Even maybe you don't have to buy, but just take over-
Well.
Some of the patients.
Our view is that the regulatory environment which can include the Medicare Competitive Bidding Program as well as the current moratorium that's in place for essentially new PTANs or new Medicare billing numbers within DME. You know, for us, I mean, we've got 670 locations all over the country, our footprint is essentially everywhere already. A moratorium doesn't hurt us. It might hurt others in a different way. Bigger picture, there are several vector You know, the first is the regulatory environment is making it harder for smaller players.
When you,
Sure,
Wanna hit on that topic, AI, right? Very still hot topic.
Sure
I guess you guys been, historically focused on technology and
We are, yes.
Streamlining. Maybe give us a, you know, quick overview where you stand there.
Sure
In terms of like how much more there is to, I guess, utilize this technology.
Well, I'd say with, you know, now with 12,000 employees on staff, you know, that's a lot of manual work and labor that's happening in our business. There's another, roughly, a little over 4,000 employees or FTEs that are offshore as well. You know, by definition, they're kind of picking things up and putting things down, copying on one screen and pasting on the other.
The opportunity set in front of us is large. I don't know that I'm ready to quantify it just yet. We are making tremendous progress in certain areas of our business, one being the revenue cycle. We have deployed bots and other AI that is reducing the amount of offshore labor.
You'll see that in our filings, that those number of headcounts are continuing to come down. We expect that will continue in 2026 and beyond. The second area is a combination of the myAPP, which is our patient app. Now over 400,000 patients registered. Those numbers are growing at a very rapid clip.
Within the myAPP, it gives the patient choice and potential to resupply and order on their own without talking to an AdaptHealth employee, or they can talk with our AI chatbots or call the phone numbers that have conversational AI bots that are again, they're doing so many things like scheduling patient setups, like reordering supplies, even paying their bills, that historically humans were 100% part of that ecosystem.
We're making great progress. We'll continue to report that, and we think there's a bright future with AI and technology here at AdaptHealth.
All right. I think that's all the time we have, or is that?
I think we're going backwards.
Yeah, we're going backwards. Sorry. That needs to be done. Thank you.
Thanks for having us.
so much. Thank you so much.
Thank you.
Thanks, everyone.