AdaptHealth NASDAQ: AHCO told investors at a Bank of America event that first-quarter results reflected broad organic growth across its business lines, but also higher-than-expected labor costs tied to a major capitated contract transition.
Bank of America analyst Joanna Gajuk opened the discussion by asking about AdaptHealth’s first-quarter adjusted EBITDA shortfall. A company representative, introduced by Gajuk as Jason, said the quarter was “extraordinary” in several respects, including organic growth across all four business segments for the first time since the company began reporting them separately.
The representative said AdaptHealth’s sleep and respiratory businesses each grew organically year over year between 3% and 4%, while the diabetes business grew organically by a little more than 2%. The wellness-at-home segment also grew organically after excluding prior-year dispositions. Overall core organic growth was a little above 4%, while total organic growth exceeded 9% in the quarter.
Capitated Contract Drove Revenue and Costs
The company said a major driver of first-quarter activity was the start of a large capitated agreement with a West Coast-based hospital system and integrated delivery network, later referred to in the discussion as Kaiser. The arrangement covers more than 12 million members.
Under a capitated model, AdaptHealth receives a per-member-per-month fee and assumes risk for managing durable medical equipment utilization. The representative said utilization in durable medical equipment tends to be “extraordinarily steady and stable.”
AdaptHealth had expected about $128 million of adjusted EBITDA in the first quarter but reported $121 million. The representative said revenue exceeded expectations by about $20 million, but labor costs were about $12 million higher than expected. Roughly $8 million of that was variable labor, including sign-on bonuses, incentive pay, overtime and contract labor, as the company onboarded “hundreds and hundreds of thousands of patients” over roughly five to six weeks. The rest reflected higher salary expense from more employees than anticipated.
The company said it has now fully transitioned the capitated arrangement. Partial revenue in the first quarter is expected to become a fuller revenue contribution beginning in the second quarter and continuing through the year.
Second-Quarter Margin Step-Up Expected
Gajuk noted that AdaptHealth’s second-quarter guidance called for a 19% EBITDA margin. The company representative said the expected improvement reflects several factors.
- Revenue is expected to rise from $820 million to $850 million, with the incremental $30 million largely tied to capitated business.
- That revenue is expected to flow through at roughly a 60% gross margin, excluding patient equipment depreciation, adding just under $20 million sequentially.
- Collections typically improve after the first quarter as patient deductibles are met, which is expected to add about $10 million.
- Much of the variable labor tied to contract onboarding is not expected to repeat.
The company said it expects the Kaiser contract to reach at least enterprise-level margins of around 20% by the end of 2026. To support the contract, AdaptHealth opened 35 new locations beginning around September, hired more than 1,200 employees, procured more than 300 vehicles and acquired more than $80 million of active patient equipment from the incumbent provider.
More Capitated Opportunities in Pipeline
The company said it now has two large capitated contracts, including its Humana agreement and the Kaiser agreement, and is working on more. The representative described the pipeline as including small, medium and large opportunities.
The Humana agreement covers 33 states and the District of Columbia and was described as a significant earlier transition for the company. The representative said the Kaiser transition differed because it involved moving patients from a single incumbent provider, while Humana involved hundreds of durable medical equipment providers.
AdaptHealth said capitated revenue represented about 9% of enterprise revenue in the first quarter and is expected to approach 15% by year-end. The company also said Humana membership growth should benefit AdaptHealth without requiring additional fixed-cost infrastructure, though some capital expenditure would be needed to support additional patient utilization.
Sleep and Respiratory Remain Core Growth Businesses
Outside capitation, the company highlighted continued momentum in sleep and respiratory, which together represent nearly 70% of the business. The representative said AdaptHealth expects those businesses to grow in the 3% to 4% range over time, with sleep somewhat higher and respiratory somewhat lower. Asked about longer-term growth in sleep specifically, the representative said “4 to 5” percent.
The company said sleep referral growth has been in the double digits, helped by increased awareness of sleep health, at-home sleep testing and consumer devices such as watches and rings that may indicate possible sleep apnea. The representative said fewer than 7 million Americans currently use CPAP devices, while approximately 33 million have moderate to severe sleep apnea.
For respiratory, the company said chronic obstructive pulmonary disease remains underdiagnosed and that its sales force is working with providers to help identify patients earlier. The representative also pointed to potential reimbursement tailwinds from the SOAR Act and said a Medicare National Coverage Determination related to ventilation monitoring may benefit AdaptHealth because it already has respiratory therapist infrastructure in place.
Diabetes, Capital Allocation and AI
AdaptHealth described diabetes as a lower-margin business that has not produced the expected cross-selling benefits into sleep and respiratory. The representative said diabetes generated about a 3% EBITDA margin in the first quarter and is becoming “such a small piece of the pie,” though it still produces cash flow.
On capital allocation, the company reiterated a target net leverage ratio of 2.5 times and said it expects about $200 million of free cash flow for the year. The representative said AdaptHealth may pursue $35 million to $70 million of mergers and acquisitions, while remaining disciplined on compliance and diligence.
The company also said it is using bots and AI in revenue cycle operations to reduce offshore labor, and pointed to its myAPP patient app, which has more than 400,000 registered patients. The app, AI chatbots and conversational AI phone tools are being used for functions such as supply reorders, scheduling setups and bill payment.
About AdaptHealth NASDAQ: AHCO
AdaptHealth, Inc operates as a leading provider of home medical equipment (HME) and related services in the United States. The company focuses on delivering respiratory care, mobility solutions and bathroom safety products to patients with chronic and acute medical needs. Through its comprehensive service offerings, AdaptHealth aims to enhance quality of life and clinical outcomes for patients who require long-term support outside of a hospital setting.
The company's respiratory portfolio includes products such as continuous positive airway pressure (CPAP) devices, oxygen concentrators, ventilators, and associated supplies for patients with sleep apnea, COPD and other pulmonary conditions.
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