Good afternoon, everyone. Welcome to the Baird Conference, and thanks for joining us. I'm Eric Coldwell. We have a surprise guest with us this week, Harriss.
Thank you.
I'm going to grill you the most.
Yeah, please do.
I'm sure you know everything about the company.
No problem.
Harriss very recently joined as CFO.
Yep.
Suzanne Foster, CEO. We're going to go straight to Q&A, I believe.
Sure.
Or do you have
Yeah, let's tee it up.
Yeah
I'll base my opening comments on that.
All right. Great. Well, let's just jump right in. Welcome to the company.
Thank you.
How the heck did you get here?
A long, arduous process, but I made it, and I am excited about the opportunity here at the company. Lots of growth opportunity, lots of opportunity to implement a lot of what I am really good at, with over two decades of public company operational experience in controls, process, procedures, structure, and all the rest. I am looking forward to being able to apply a lot of that knowledge, and the scars and bruises that I developed over that long period of time, and bring it to AdaptHealth.
How did you meet? What was the process? If you can share that, yeah.
Sure. The process was, at some point, Jason Clemens, who many of you know, who I want to formally thank for almost seven years at AdaptHealth, had brought the company through very significant changes in times and maturity. But the conversation had started around just like a new pitcher. You got to put a new guy on the mound. We started having conversations about what Adapt needed in its next CFO. What I was looking for was public company experience. Someone who's been there, done that. What I put out to the network was a very strong, operationally minded, proven CFO. Where AdaptHealth is is we, 160 acquisitions over the years. We've made great progress in integrating, but the maturity of our finance team needs to go to the next level, all the way down to the bottom.
Bringing in someone who could be process driven, use predictive analytics, think about what the numbers mean, reduce surprises, have real-time visibility, was the type of profile I was looking for. Sent word out and through the network. Discovered Harriss. He has worked alongside our chief legal officer for seven years at Luminex, Richard Rew. Called Harriss up and said, "Is this something worth looking at?" As he tells the story, he said that Harriss didn't say immediate yes, which the chief legal officer didn't like that answer, but by the end of the day, had time to dig into the financials, look at our company in a little more depth, and said this is an incredible opportunity. That's why he's here. We got to know him. Proven operational leader.
That's great. I've been living out of a suitcase. I didn't have a chance to catch up with the company when the news hit. You did not, however, recommit to the existing guidance.
Yep.
I'm not asking you to do something different on stage, but maybe talk about the thought process on that. When we might hear something.
It was simple as, don't read through. Good or bad, it wasn't intended to do that. It was, given the last couple of quarters and where we are, I really wanted to set Harriss up for success. We're on the eve of the close of the quarter, so why jump it?
Yeah.
It's not a read-through in any way. It was literally, it's a new day, and out of respect for Harriss and getting his arms around the business, I didn't think it was the right thing to do.
I want to spend a lot of time on competitive bidding. I think first off, it might be a good level set, the Medicare DMEPOS supplier enrollment moratorium. It's a long phrase.
Yeah.
I believe that expired a couple of weeks ago.
It sure did.
We're good to go now?
We are good to go. What that means-
Talk about what that means. Yes.
Yeah.
Yeah.
What that means is, well, first of all, you had two things in there. On the competitive bid, let's just put that to rest. We've sidestepped that with the future disposition of our diabetes business. We're keeping a small portion of our, what we call our PCS business and our Wellness at Home, really in service to our enterprise, our hospital accounts, and capitated. So we will bid, but it's such a small piece of our business. So let's just put competitive bid, it's really not an issue for AdaptHealth. Okay?
Yeah. You've removed what could've been, if nothing else, it was a sentiment thematic overhang.
For us.
Could've been a fundamental overhang, but-
Sure
It was clearly a sentiment overhang. That's, what, now 2%, 3% of the company? I don't even know. How small would that be in 2028 at this point?
Oh, the diabetes business?
Well, with diabetes gone, what would your overall exposure to competitive bidding even be, if anything?
Oh. Oh, yeah. No, it's immaterial.
Yeah.
We have a couple remote item delivery products that we're keeping in service to our hospital accounts.
Yeah
Because we got out of that. We announced that in Q2.
Yeah.
Stopped proactively selling it. It's literally not anything for us anymore.
Yeah.
But the moratorium was a big deal. The reason for that is, when we won the Kaiser contract and we started going live, we stood up 40 brand new locations in the West Coast, predominantly in California. We were doing that in November, December, January, for a go live date of February 1st and March 1st. On February 24th, the government came out and said, no more new Medicare billing enrollments. It's called the DME moratorium. We had strategically made the decision to bring on the Kaiser business, establish our footprint in California as a result, because we wouldn't have entered California without Kaiser, because whoever owns that population, right, owns California. We saw it as a strategic move to get into California, where you're getting $280 million a year to establish your footprint.
The footprint we built prior to knowing about the moratorium was big enough to take on additional business. On February 24, the moratorium says, "No more additional business. You don't get a billing number." It is a six-month term. History would have told us that that would have been extended, because usually those things extend. Fortunately, on August, it expired, which was great news for us. It expired because they were concerned about the competitive bid and how they had slimmed down the amount of providers that they were double-dipping on narrowing, and they wouldn't have the right number of providers. We got the news on August 24. We had heard rumors, and we were ready to go with our filings on the end of August. We have submitted for those 40 locations, what is called our PTAN numbers.
The reason that is important is because right now that fixed infrastructure in California is 100% burdened to Kaiser. Only Kaiser business is running through it, and we have a lot of capacity left in there. As soon as we get these, which the government says is about a six-month processing, I am begging for something sooner, then we can capture what we had referred to as the strategic halo effect that we intended when we went into California, which means the percentage of patients that run through a Kaiser hospital that aren't capitated or Kaiser members, we would be able to now take that business. We will also be able to put salespeople around that 40-location footprint and bring in other business. That was really good news for us in August.
At this point, though, it is still a six-month-
Yeah, at this point
as far as we know.
It's a Q2 second half of next year, unless these applications get expedited.
Do we have any hope in our healthcare system right now?
Well, there's backlog of them. We're hoping-
Yeah
with AdaptHealth and the alphabetical order, I mean.
Yeah. We could have a side story on alphabetical order after this.
Okay.
West Coast capitated deal. You've said Kaiser. It was a bit of a headwind for other reasons, not just your ability to
Right
leverage that platform once you had it built out. It came in a couple of different areas. On one hand, there was a big jump, maybe an unexpected jump in CPAP resupply demand. There was some enteral demand that came in. There was also some operational surprises or nuances with urgent orders that are anything but urgent. Perhaps when you need to go to the commode, it might feel like an urgent order, but
Yeah
maybe commodes don't have to be in a driveway in four hours all of the time. Can we parse these one by one
Sure
and maybe give us updates on where you are with each of those customer-specific, contract-specific issues that caused
Yeah, let me reframe it now at the value of time
Yeah
to make it a little bit more understandable. There's kind of three buckets that is driving the cost overruns. The first one is stock wholly in our control, which we're making tremendous progress on. That's just 40 new locations, 1,800 new people, new country for us, right? That work of just getting our people in the right place at the right time and operationalized on our business, I feel really confident about. Because we know how to do this. We know how to do sleep and respiratory and HME. So that work is underway, and we're seeing the benefits of that already kind of starting to come through. So put that one aside. Last quarter, when I said that there were cost overruns that would require a conversation with our partner, Kaiser, those are in two buckets. One of them is the cost to serve.
What we learned, there wasn't data prior to the arrangement. What we learned as we got into it was ordering patterns, we'll call it, and we talked about this publicly, that the way that their prescribers were prescribing to us in an urgent way was out of the norm of what we see across the country, to surprise to both of us. In partnership, we have made progress and are continuing to work that problem together. But we've been able to quantify that and say, "Here's the cost if we continue down that path. That needs to be adjusted for." That conversation's ongoing. The biggest thing we're working on with our partner is the utilization. We've talked about it, whether it's sleep resupply or enteral, it doesn't matter.
What matters is in the categories of products, the actual utilization in a couple of categories is higher than what would've been anticipated. You may say, "Well, how did that happen?" Well, part of it is because in a capitated agreement, you rely on the data that comes in past claims utilization data. Our stepped-up service, if you will, the way we're servicing the agreement, means that we're servicing at a better rate that the claims data historically was lower. You following me?
We're hitting our SLAs. We're performing really well, which means that we're improving the utilization based on the prescriptions coming in. In partnership, what we're saying is AdaptHealth shouldn't bear that burden. Our partner's saying, "Okay, we have actual data now. Let's baseline off of that." We're in discussions to figure out what that looks like from a PMPM or an economic adjustment or whatever it may be. I hope you followed that.
No, I do, maybe too well.
Okay.
To me, this has always been the concerning part of capitated, right? If you're doing your job Kaiser or whomever the customer is, wants their patients to be getting the best medical care, high adherence, high compliance. The doctors are prescribing, they're Kaiser doctors. They want the patient to have a CPAP, let's say. Patient should have a CPAP, and they should be replacing that mask and tubing and whatever they need to replace every three months or whatever the schedule is. In an ideal world, you're doing those things to maximize adherence, compliance, startups. That also hurts you if you're in a per-member per-month contract and the prior provider had less adherence and less compliance, and people weren't happy. They weren't taking the product. They were dropping off of the product. The patient wasn't getting a good outcome. The doctor was wasting their time writing the script.
You're the one who got penalized. I always worry that the vendor is the one who pays the price in these deals, and that's my underlying concern.
The contract in future state takes care of that because you have corridors.
Okay.
Right. If you're working off an appropriate baseline, and let's for the purpose of illustration, say you have a 6-month baseline, and then in 6 months, some prescribing habit changes that drives it up, there are corridors in place that fix that or drives it down. In future state, the contracts, capitated contracts, take care of it. This is a unique situation because it was utilization data prior to, and you don't have a mechanism to adjust for that. The benefit we have is because we share this purpose of patient first. Kaiser is beautiful about member patient first, and we want that business, and we share that vision. We are not going to let a patient fall through the cracks, even at our own financial detriment in the short run, and we will fix that.
We have an aligned interest to not have us back off of the superior service that we are providing right now. Because if we drop off on service, which we have made this incredibly effective, we are performing so well, the upstream cost to them if we pull back in our service levels is they have delayed discharges, patient member dissatisfaction, provider dissatisfaction. So when we are at the table, there is an aligned interest to saying we want to enjoy this level of service and we want to right-size the economics.
Holistically, as you continue to pursue capitated business, and you have recently announced another win, what, Texas, South Florida, I think it was?
Humana expansion in Texas and South Florida.
As you are going after that business, has there been a learning experience with the Kaiser onboarding that would actually change how you write that contract or go to market up front to say, "Look, give us a 6-month, you pay us fee-for-service for 6 months. Let us get the corridor set." I am making this up.
Yeah.
You get the corridor set.
The difference is, Eric,
The baseline set. I'm sorry, yeah.
Yeah. The difference is we brought on, I think it was close to 500,000 Humana members last quarter in Texas and Florida without a hiccup, because it's just like what we do. If you look even at Kaiser, that is across the country.
Yeah.
Right. The majority of it is what we do, meaning non-Kaiser hospitals and providers. If you narrow it down into the problem that we're trying to solve together with Kaiser, it is Kaiser hospitals. When you look at other capitated agreements or capitated business that we have, that's in the normal course of things. It's because in the Humana's, there is no Humana hospital. That onboarding last quarter, it's already performing as it should. These other smaller capitated deals that we bring on from time to time, we know how to do that because of the Humana learnings. The uniqueness of Kaiser is literally focused on that California hospital discharge performance.
Okay. Any timeline where we might get an update on how this could reset or rebase for the next 12 months, the next several years?
Well, I can guarantee if it's not in our earnings script, you're going to ask the question.
Yeah.
We're going to find if it's still in progress or if it's resolved, obviously, we will come out with that. If it's not resolved, we'll find the right words to tell you where we are in that discussion.
Another topic that came up on the last update was what appeared to be an unexpected overnight manufacturer price increase. Correct me if I am wrong. My understanding is in this particular case, that contract was due for renewal on June 30th, which was the manufacturer's fiscal year end. Is that not the case?
Not the case.
Okay.
It was an annual contract. It was not due until the end of-
It was not on a 12-month fiscal year. It was an annual. It happened midstream.
Yes.
Okay. What can you tell us about negotiating? You can't negotiate in public. It's a hard question to ask.
Yeah.
What can you tell us about the-
Well, just at a higher level, I can tell you-
Yeah
the way our industry works is we have volume rebate structures. You're always in discussion with your manufacturing partners, right, and trying to achieve certain levels. With the buildup of our inventory system and where we were, and we are trying to balance cash and EBITDA, et cetera, there was a question on how much we want to take advantage of the rebate structure in that quarter. Somehow wires got crossed as we were trying to talk through that, and on June 30, an email came in announcing a next day price increase. It was unfortunate. I think both of us need to do better to make sure that doesn't happen. As we were trying to work through it, the other unfortunate thing was the timing of the earnings call.
Even though we know we had to get that resolved, we couldn't leave that risk out there that in the event we didn't. So we called out that risk with a promise that we're going to go back to the negotiation table as that manufacturer's largest customer, and obviously an incredibly important manufacturer to us, and get to the table and make this right. So inter-quarter, as we sit here today, I'm looking forward to updating you next quarter on how that's progressing.
What was the magnitude of the, on an annualized basis, and I know there could be a gross cost and then maybe you did or didn't build in some offsets into the $30 million that was highlighted on the call for the back half of this year, but what was the actual percentage increase all in, just-
We haven't. I don't think we've said any.
We can do rough math, right?
Yeah. Okay.
I can take $30 million, multiply it by two,
You say it then.
build in some growth, divide it by 90% of a segment plus or minus five points, and I can do the math pretty quickly.
Yeah
Am I missing anything here? Were the growth, maybe the gross impact was greater than what you highlighted, but you assumed some offsets in terms of cost actions or-
It was significant. Like you said-
Yeah
You can do the math. Basically, when backed into the corner, what are you guys going to do to offset that should you not be able to resolve that you're out of contract and you're just buying at these elevated costs? The only thing a company like ours can do is we can take that unbranded script and move share. We've never been a company that really intentionally has played that game because we believe that the manufacturers go out and sell their product, and the benefits and clinical value to it, and that we are a service business, and we try to stay neutral to that.
Now, we have to protect our bottom line, so should we not come to terms in any of these future situations or this one, we would have to look at the portion of unbranded scripts and put that to a lower cost supplier. That was how I described how we'd mitigate against this-
Well-
should we have to.
Beyond, let's presume this is a category where the other big supplier of the past is not currently in the marketplace. Maybe he can come back next year, maybe not. Nobody really knows.
Right.
A lot of rumors that possibly next year could be an interesting time. The other players here are kind of secondary, tertiary players. They're pretty small market share. One has had some warning letters, some not safe, not the best news, even if it wasn't as big of a deal as it might sound like. But is the market receptive to the other manufacturers in this category?
Uh-
How much capacity do they have? I mean,
Yeah
Yeah.
My understanding on capacity is that it's there, I guess until proven otherwise.
Yeah.
I think to your point, is the market receptive? The market is receptive, I would say, to the exact amount of unbranded scripts that come in.
Yeah.
Right? We know that is-
What does that person
Come on, Eric. Like, you
I was hoping to get you at the end of the day. I mean, come on.
Yeah, you would get me. It is a material amount, right? That is why this industry works off rebate
Yeah
volume tiers, because they want to protect
Yeah
from that unbranded script. Yes, it is significant.
All right. I will shift it up. I will throw a curve ball at you, Harriss.
Great.
Because he is getting a lot of no from me.
Yeah.
What is your philosophy? Let us suspend disbelief and say that you came to a material resolution, not 100%, whatever we can come up with. Something that feels like, hey, Wall Street would like to have this news. What is the philosophy on transparency, on an 8-K mid-quarter press release versus just leaving us dangling until November?
If it is a material adjustment to the financials and it will have a contribution in the current period, then I would tend to get it out there as fast as I can. If it is not going to affect the current period that we are talking about, then I would wait for the earnings call and broadcast that at that point.
You realize why that is important, right?
Right.
Because you could actually resolve this issue on the last day of the quarter.
Yep
but not be compelled to report that until sometime in November when you're reporting. I'm assuming it will be a November earnings report again. Wall Street could assume that the absence of an 8-K means nothing good has happened.
They can, but you're in, effectively, what's a quiet period after-
Yeah
you've closed your results and working towards your earnings release.
Yeah.
It's going to have to be material information to, material on which maybe you file an amendment to the document, or if it's material to the ongoing operations of the company. Certainly there's an opportunity that you might hear something, but I think the likelihood is that you would hear it in the conference call.
Yeah. The point I am trying to get across is that the last thing I need is going to be 100 phone calls from people saying, "I didn't see an 8-K, it must be bad news.
No. Sure.
We should give you grace. We should give you till reporting.
Sure, but you are also assuming that September 30th is a drop-dead date for getting this resolved. It could get resolved October the seventh.
Right
or whatever as we go. The closer you get to the earnings call, the less likely you are to say anything.
Yeah
It doesn't matter. Unless it's going to cause a material adjustment to the expectations and the analyst projections of the company for the quarter in which you are reporting. If you're going to have a material difference and you've got a pre-release, you got to say, "Okay, guys. Let me tell you where you're way off because we resolved this issue favorably, and they're going to give us a lump sum payment of $100 million." I'm just making up a number.
Right.
If that was coming, then yeah, you probably would see an 8-K wrapped around that.
Fair enough. There were three minutes left. Somebody's run off with my iPad, so I can't take investor questions. If there are any in the room.
Oh
raise your hand. You had a few other items to talk about. A lot of moving pieces this quarter.
Yeah.
Maybe we could-
Want to close with that?
speed date for three minutes here on the last three minutes of this. $100 million EBITDA reduction for diabetes divestiture, $40 million of EBITDA, $60 million of stranded. Any updated thoughts on-
Yeah, I'd love to clarify that.
Yeah.
I wish that we were a little clearer on that. The way that works with diabetes is, first of all, our corporate allocations were as percent of revenue, so you got to first start there. $60 million we said is staying in continued operations. Where I want to really clarify here is that $30 million of that $60 comes out on or shortly thereafter the close of the deal because it's stuff that either transacts over to Cardinal Health or we shut it down because we don't need it. It's in service too. So the true stranded cost is $30 million. That is what we will grow through over the next two years and resolve.
It would take an effort and an event, but you could, in theory, make a couple of-
Yeah
respiratory or sleep acquisitions and fill in that hole on EBITDA at least pretty quickly.
For sure. Yep. It will either come through organic growth or a couple smaller acquisitions. We did not spend a lot of time talking about our West Coast, but that should be a real growth driver for us that maybe we will plug in a couple little things around there.
Yep
That we will grow right through that.
We have a $60 million additional headwind, but really it is just getting to the close, and $30 is pretty quickly gone. It is really $30.
It is really $30.
post-event.
Yeah.
I feel a lot better because that's not
Language matters, and we apologize
that's not exactly how it was interpreted by everybody coming off of the call.
Yeah. Think of it as $30 million of stranded cost.
Wellness at Home, winding down a couple of businesses there. Talk about those quickly.
Just quickly, it was over the last two years, one of our focus has been prudent portfolio management. The last two moves were some low margin, competitive bid risk product lines that we stopped actively selling in diabetes. That is going to complete our portfolio management. At that point, we will become a pure play sleep and respiratory and HME provider. We will keep access to a couple of those product lines in service to where we capitate business because that does help, and our large hospital accounts, like the broadness of that portfolio. But we are not actively selling the ostomy wound care, those type of lower margin products.
What I was trying to get to, and with
Yeah
30 seconds left, we are not going to have a fulsome debate or discussion on this, but a lot of noise this year, some out of the blue. We go into next year, the year after, it feels like you are a completely rebooted company. You are only in the categories you want to be in. You have removed all of the competitive bidding risk. Tough luck, bad outcomes this year on some numbers actually go away pretty quickly at points.
Yeah
at some point in the future.
Yeah.
Has anything strategically, philosophically, structurally changed in your view, as we were talking earlier this year, about the kind of robustness of the company after some point in calendar 2027, the ability to be back on the path that you were thinking you would be on?
No, I think we still see tremendous opportunity. If you look at this industry has a lot of dynamics going on right now, but what we're operating with blinders on that says we want a clean portfolio in end markets that make a lot of sense.
Yeah.
We want to get out of these one-sy, two-sy products. We want to go after the enterprise sales, which in my language means big hospital health systems, which we've stood up an entire sales force for that. We want to get chunky business in the capitated where it makes sense. Now, we're not going to onboard another Kaiser, not that there is one or anything anytime soon, but I do have confidence that that business is going to hit its benchmark. Depending on where we do with what happens with Kaiser is just a matter of time. And then the smaller ones like Humana and the ones around that will continue, not because we're pushing it, but because the managed care and the payers want it. It's coming at us whether we want it or not.
They want to take that small amount of HME/DME spend, and they just want to run rate that. The inbound on that is really what's driving it. We're set up now to have an effective fee-for-service model, which we've proven. Our base business is performing at 5%, 6% right now growth at effective margins. We'll right-size the capitated Kaiser, really California. We'll grow on the West Coast. We've got the leadership team now in place.
All of these moves that we've made over the last two years, as volatile as it has made us, if you take each and every one of them separately, including our e-commerce spin-out, the PCS shutdown, all of that, I think you would say that each of the moves were the right moves, but they've just come at times with other little complications around them that we really believe we can minimize. As we move into 2027 and 2028 as a pure play home medical equipment and service provider, and we focus on bringing on volume, that's the game we're playing, is the more patients we can put on the AdaptHealth system, better purchasing power we have, better negotiation we have with payers. That's how our P&L improves.
Yeah.
That's what we're doing, and that's what we're focused on. The rest of it is all noise to us right now.
Thank you for the extra two minutes.
You got it.
I thought that was useful.
Yeah.
All right.
I appreciate that.
Good. Harriss, nice to meet you.
Yeah, nice to meet you.
Look forward to-
Sorry I was so talkative.
Yeah. I got more than I was expecting.
Thank you.
Everyone, please join me in thanking AdaptHealth for being with us today.