Adapthealth at RBC Conference: Strategic Moves and Challenges

On Wednesday, 21 May 2025, AdaptHealth Corp (NASDAQ:AHCO) presented at the RBC Capital Markets Global Healthcare Conference 2025. The company outlined strategic initiatives and challenges across its core business segments, including diabetes, sleep, and respiratory. While some areas showed promise, others faced hurdles, reflecting a mix of growth opportunities and operational challenges.

Key Takeaways

• Diabetes revenue declined by 8%, but improvements in retention and new patient starts were noted.
• The sleep segment faced slower-than-expected startup rates, prompting AI and automation initiatives.
• Respiratory performance was bolstered by a record flu season and new quotas.
• Capitated revenue is projected to increase from 4% to 10% in the coming years.
• Strategic divestitures and acquisitions are refocusing efforts on core segments.

Financial Results

• Diabetes revenue saw an 8% year-over-year decline due to a planned segment overhaul.
• Free cash flow is expected to increase, with two-thirds projected in the year’s second half.
• Gross debt decreased from $1.9975 billion to $1.905 billion following the sale of ActiveStyle.
• The company absorbed a $25 million impact from a reimbursement cut last year.
• AdaptHealth has allocated $30 million to $35 million for mergers and acquisitions this year.

Operational Updates

Diabetes Segment:

• A new management team was introduced, shifting the resupply unit to Nashville.
• Achieved the best retention rates in over two years and consecutive quarters of new start growth.
• Implemented process improvements like postcard reminders and the myAdapt app.

Sleep Segment:

• Startup rates were slower than expected, leading to financial losses.
• AI and automation are being implemented to streamline operations and reduce data entry time.

Respiratory Segment:

• Benefited from a significant flu season, increasing respiratory condition diagnoses.
• New quotas enhanced performance in respiratory and ventilation segments.

Capitated Business:

• The Humana agreement was extended, showing growth in capitated revenue.
• Capitated revenue is expected to grow from 4% to 10% in the next few years.

Future Outlook

• Focus remains on growing core segments: sleep, respiratory, and diabetes.
• Capitated revenue is targeted to increase significantly.
• Strategic M&A opportunities will continue, particularly in the hospital-based DME space.
• Free cash flow is anticipated to ramp up, with the majority generated in the latter half of the year.

Q&A Highlights

• The company is at a pivot point in the HME industry, with consolidation expected.
• The convenience model is driving rapid consolidation, benefiting larger operators.

For a more detailed understanding, readers are encouraged to refer to the full transcript below.

Full transcript - RBC Capital Markets Global Healthcare Conference 2025:

Unidentified speaker: Relations in the room. Thank you guys very much for joining us. Thanks for having us, Ben. Yeah. I just wanted to kinda recap some of the dynamics that are going on in the quarter.

Diabetes revenue declined 8%, but it’s largely as expected. We’re doing a overhaul of that segment, but you noticed some better than expected sequential developments and setups. Maybe you can kinda walk us through what you’re seeing and and kinda how we you’re framing the diabetes backdrop as we get through the quarter here. Sure. Sure.

So, yeah, we we were planning for down about ten percent. So we did we did

Unidentified speaker: a little better than we thought. You know, the the two metrics we’re really watching, I think investors should be watching, is our our retention, which, you know, our resupply represents about 85% of the diabetes revenue in any given quarter is coming from patients that were set up in previous quarters. So that’s that that number is a big deal that and I’ll talk about that in a moment. Second is is certainly the new starts, new patient starts. And so those are you know, that’s our field force that’s out every day knocking on doors with referral partners working to earn business.

And then all that comes into the the resupply funnel, and, you know, the idea is to compound that over time and then continue to resupply those patients as long as they need CGMs or or pumps and related supplies. And so mid q three last year, we had a significant changeover in in management of the division or of of the segment. You know, we’ve brought in several new leaders, a new president for the segment, a new SVP of sales, various operators at a kind of a vice president level. And the second thing we did was we lifted the resupply unit in diabetes, and we shifted it to our sleep resupply center in Nashville. So our center of excellence, frankly, it’s the crown jewel of Adapt Health.

I mean, we do over a billion a year of of business on resupply for for sleep products. Well, the the mechanics and the process for a diabetes resupply is is largely the same. And so we’ve brought that team together. And, you know, just a quarter later in the fourth quarter, they had achieved the best retention we’ve seen in over two years. That happened again in q one.

And so q one retention typically drops off a touch from q four as, you know, deductibles reset and, you know, insurance plans change. But, again, they achieved the best q one retention that we’ve seen in over two years. So we string together a couple of those. We’re gonna be in very good shape. While on the new start side, we’ve now had two consecutive quarters of sequential new start growth.

So new patients coming into the funnel. So I I think it’s easy to see if you’re able to retain what you have at a steady state and you’re bringing in more patients each month, pretty soon that that segment’s gonna be back to growth mode. And so it it’s absolutely the top priority in in the company right now, and so far, so good.

Unidentified speaker: Great. Can you tell us what’s involved with you know, you mentioned the overhaul and bringing the diabetes into your sleep platform. What what was involved there? Are there any headwinds that you had to manage through? And and and kind of how much room do we have to run on the further integration there?

Unidentified speaker: Well, I’ll start with the second part, you know, in terms of how much more we have to run. In terms of process, we’re We’re fully we’re fully integrated. We’re running the same process in diabetes now that we run-in sleep. We do have some room to run on the technology front, and so that that has to be developed. And so we’re we’re hard at work developing that.

That’ll likely take a little time for us to build out, but it’s not holding us back. It it is something that should drive further efficiency going forward. In terms of the processes and getting them lined up, so I I I qualify this as simple but not easy. And so I’ll give you some examples. They’ll they’ll they’ll probably sound certainly simple and and maybe silly.

You would be shocked at the number of dials that we get, inbound calls from patients seeking resupply when we send them a postcard reminding them that they’re eligible. I mean, it’s really amazing this day and age with all the technology and everything else, like like how much business that really drives. Similarly, you know, processes like if we call a patient and they don’t answer, they’re on a do not call list for forty eight hours. Because the last thing we wanna do is, you know, just, you know, excessively contact patients seeking resupply. You know, it’s it’s a, you know, it’s it’s a balance.

You know, you wanna take good care of those patients, not excessively call them, but also make sure they’re getting what they need. And so we’ve turned on various processes as it relates to text messaging, the my app, which has had great success within the diabetes business unit, as well as just email and other modes, kind of other channels of communication. So again, think a lot of this sounds simple, but it I mean, these changes have made big impacts quickly. Mhmm.

Unidentified speaker: And then how about on the personnel side for diabetes? You’ve made some changes there as well. And and do you have the the people you need in in the seats or are we still hiring? Or

Unidentified speaker: No. We we’ve got a we’ve got a build out team. We’re really happy with Gary Sheehan. So if you follow DME or you know DME, he’s he’s he’s very well known. He he and his his brothers and the family, they’re they’re well known in New England DME.

We we bought a big business from that family back in 2021. And so Gary came back with us to run the diabetes unit. So he he doesn’t have a diabetes background, but he he’s been a DME guy for forty years. He knows how to resupply. He knows what it takes to win business from referral partners.

And so he’s now leading the charge in that business segment. You know, he said he’s having the most fun he’s had in his career. So that’s that’s, I think, a a good sign. Graham Ward, I mean, he he he’s our head of sales for diabetes. He was with Suzanne back at Medtronic.

And then later, when Suzanne was running Edge Park for Cardinal, Graham was her leader of sales and ops for the diabetes business. So he knows the business well. He’s got a military background. He’s a very hard charger, but he’s an inspirational sales leader as well. And so just the energy that he’s brought and the best practices from training and, you know, monitoring and and coaching, he’s he’s doing an excellent job, and it’s showing in those sales numbers.

Great.

Unidentified speaker: And, if we could turn over to the sleep side a little bit. I know we had a little bit of a headwind in the first quarter. We, looks like we’re a little slow off the line on some start ups. Maybe you can kind of talk about, what drove that and kind of your strategy to to turn that around?

Unidentified speaker: Sure. Mhmm. So to put it in perspective, we’re there were a handful of states that were too slow at the moment. I mean, we’re getting beat out on on speed to set up. You know, to put in perspective, we’re talking about a couple million dollars.

Now the reason we called it out was that it’s obviously our largest business. It’s our largest segment. And if you continuously miss on setups, like, it just compounds. And so we didn’t wanna be in a position that if we don’t get our arms around this, that it it could catch up to us later in the year. So that’s the reason we called it out.

There’s two things that we’re really focused on getting after there. The first is operationally and and speed to set up, time to set up. And so we’ve spoken about AI and automation. I mean, this this is our first big bet is on the front end of the documentation and the the prescriptions coming in from referral partners. Mean, we’ve said we said that it it’s amazing.

We we actually ingest over 5,000,000 pages of facts every month. And so you can think about how many humans that takes to pull up that eight, nine page script. They they they on a dual screen, they’re looking for the key fields, the patient name, address, the ICD 10 code for the diagnoses that that that the physician determined, you know, what’s been prescribed specifically. And, you know, there’s about, call it 40 or 50 fields that need to be used to generate the sales order. Well, these are humans with eyeballs.

I mean, that that’s that takes five minutes to do that even if you’re efficient. We’re three different AI organizations right now. One’s starting to edge out, it seems. So we’re not yet scaling this, but we do intend to. But we’re getting 90% of the fields prepopulated now in the sales order.

And so they’re still human in that loop with the AI. However, we’re reducing the the the time to lift that that data out to under a minute. And so, you know, that that can be fantastic from a cost perspective. You know, we’ll we’ll comment further on that later in the year. I mean, I would think of that as 2026 opportunity.

However, the speed to cycle through, it just it just increases dramatically. So that’s what we’re working on operationally. It’s gonna take a little time. In the meantime, to close the gap, a separate procedure we have is related to what we call repap. So it’s pretty typical for a patient, depending on their managed care provider, to be eligible for a new CPAP machine every five years.

So historically, we would determine that the patient’s eligible, and then that would be handled at the branch level. The branch would be responsible for scheduling the patient, having them come in and get set up on the new CPAP, and then we earn that revenue. Well, we’ve we’ve changed that. We’ve centralized that just in the last couple of weeks since since the earnings call, actually. And what we’re doing out of our resupply center of excellence in Nashville is there we’re identifying the patients eligible for repap because it is a sale.

I mean, you need the patient to confirm that they actually want the new machine and that they’re gonna pay for it, their insurance company, and through their copay that they’re gonna pay for it. And so rather than sending that to the branch, these are patients that know how to use a CPAP. They’ve been on it for five years. They don’t need fitted for the mask because they don’t need to go through training. They don’t need to go through the standard setup process, so they don’t need to be in our location.

We can drop ship that. I mean, the settings have to be, you know, updated properly, and we’ve got respiratory therapists that do that. But we’re now centralizing that function and that that machine starting to turn and we’re we’re showing a little bit of progress. It’s early, but we’re showing some progress. So we hope to close-up that gap and and we’ll update we’ll update everybody, I think, the next call.

Unidentified speaker: Great. And then lastly, just the respiratory oxygen record census. Yeah. It sounds like in first quarter, maybe you can kinda talk about, you know, where that’s going and what’s kinda driving that strength.

Unidentified speaker: Well, two two things are driving the strength. First and foremost, I mean, record flu season. I mean, started late, which is why q four for respiratory was a little lighter than we anticipated, but it it came back in full force in in q one. And so what what happens when there’s a record flu season or or or COVID is that patients will present in the emergency room with, you know, respiratory problem. Well, the the physician, the ED doc will will get that patient into a stable steady state is is what it’s called.

And they’ll they’ll test for underlying respiratory condition like COPD. And so it it when these hap when these things happen like a big flu season, it what it does is it it drives more diagnosis of the disease state because it’s about twenty five percent underdiagnosed in The US. There’s twenty million folks with COPD, only fifteen million or so are getting treated for the disease state. So it helps bring more patients into the funnel. It’s just kind of a natural tailwind for us.

So so that happened. Secondly, we did install new quotas at the beginning of the year. You know, we we’re turning those dials as we’re going into q two a bit, but, you know, certainly, we saw a little more, particularly out of ventilation. But we saw a little more out

Unidentified speaker: of respiratory and vent in the first quarter because of of how we’ve incentivized the the field force. Got you. And then maybe you could kinda talk about your capitated business. And Sure. That’s going.

I know that, you know, there was a little bit slower initially getting that off the ground, but it seems like it’s up and running now. And then how’s that how’s that faring for similar types of arrangements as we go forward?

Unidentified speaker: Yeah. Sure. So I’d say I’d say firstly that, I mean, we learned a lot in starting up the Humana agreement for those that don’t know. A couple years ago, we won an RFP for 33 states plus the District Of Columbia. If you’re a Humana Medicare Advantage patient with an HMO plan, Adapt Health is your only DME provider for sleep, respiratory, and and and DME.

So, I mean, it was it was a fantastic win for us state by state. I mean, we had to swap out respiratory products or sleep products or or hospital beds, patients that had been serviced by a competitor. And per state, you’re talking about hundreds of competitors in each state. And so there was considerable startup costs with that. There were some penalties for not transitioning fast enough that we wouldn’t structure a contract that way again.

Mhmm. So we we learned that lesson. However, now that we’re up and running, we’ve we’ve been online now with Humana for almost two years. We we we reported that we extended that agreement for for multiple years. We reported that earlier in the year.

And so, I mean, the relationship is is fantastic. We’re very pleased to to to serve Humana. We wanna do more with Humana. We we are getting the benefit on the PPO side of the business of the halo effect. Some of our public competitors have actually talked about that as a as a headwind to their business, but we’re seeing that very clearly because it it’s just a it’s just an easier transition at the administrative office.

You know, Adapt is the only game in town for HMO. Well, do you have to think HMO versus PPO? And does this plan, how does it map? Just send it to Adapt. And so that’s absolutely happening.

We’re seeing that in the numbers. And so for that reason and many reasons, we we think that the capitated business is it’s such a good solution for payers and or large hospital systems. You you know, the reason is that, I mean, we’re we’re happy to take a little bit of reimbursement cut in exchange for a lot of volume at once. I mean, we’ll do that all day. But for the payer, it’s much less about the money than it is about those hundreds of DME providers I talked about.

I mean, managing all that and the administrative, you know, headache and, you know, you got you got patients complaining about all these different things from all these different companies, you can have one throat to choke. I mean, we’re happy to be that throat here at Adapt Health. I mean, that, you know, we’ve signed up for SLAs that, I mean, that doesn’t exist in fee for service contracts, you know? So we’re happy to sign up for one time delivery of oxygen and other products. We’re happy to sign up for patient satisfaction improvement and over time continuous improvement we get better together.

So, like, that that value prop to a payer is is is meaningful. So we’ve invested meaningfully in in dedicated resources that we’ve got folks that all they do is they’ll price these contracts, they’ll pitch these type of arrangements with payers and large hospital systems. You know, they operate the utilization, manage utilization, and and and run these contracts. You know, Suzanne was very purposeful answering a question on last earnings call that our pipeline for capitated arrangements, it has grown since our last earnings call. Deals within that pipeline have advanced since the last earnings call.

We reported that we won two new capitated arrangements in the fourth quarter. It started January 1. Not huge, but great business. And so we’ve got, you know, we’ve we’ve got a lot of things we’re working on, large, small, somewhere in between. But but we think that rather than 4% of our revenue today capitated, we we think that’s gonna grow pretty significantly over time.

We could see that at 10% just in the next couple of years.

Unidentified speaker: And as you increasingly become that one stop shop in the underneath these capitated arrangements, is there are there competitive pressures that could drive more roll up in some of your markets of of common crops?

Unidentified speaker: Sure. I mean, there’s we we think we’re at another new pivot point of consolidation within the the the HME industry. So if you look back at 2016, the CMS reported there was over 10,000 operators in The United States. More recently, just a couple years ago, they showed that number was now under 5,500. You know, we believe that there’s not there won’t be more than 2,000 DME operators in the next three to five years, maybe sooner.

The reasons are several fold. First, again, back to that Humana arrangement, like, hundreds of DME operators, like, have all their fixed costs they gotta worry about. I mean, all of that margin got ripped out at once, and they can’t do anything about it. So they gotta find more business somehow. So that’s point one.

I think point two is the $75.25 reimbursement cut last year. I mean, for us, that was $25,000,000 top and bottom line, and we absorbed that and grew through it. Not so easy if you’re the little guy. I mean, inflation’s ripping. You got just I mean, you’ve got Medicare Advantage growing.

I mean, there’s there’s a lot of factors to to battle in this industry, and so scale matters. Like, size and scale really, really matters in managing through that. So those pressures are very real. M and A is still happening. I mean, we we did a nice little deal in November, about $10,000,000 of revenue.

Great hospital DME business bolts right on easy integration. And, you know, you’re you’re bringing on resources that are tied into that hospital system. Oftentimes, they work in the four walls of the hospital with the discharge coordinators and planners, and so that’s all getting, you know, brought in to our to our network. We said in the last earnings call, we got a couple of deals under LOI, and we’ll continue that. We’ve we’ve earmarked 30 to 35,000,000.

Suzanne and I have earmarked for for M and A this year, and so you will continue to see these hospital based DMEs tucking in, rolling up, fantastic multiples. And so if we make progress, we’ll we’ll report that and update guidance next quarter or or the following. Others, there’s m and a in other places that is also forcing that consolidation. And then finally, the conveners. I mean, there are various companies out there that are convening, so they’re they’re performing somewhat of a similar business model that we’re doing with Humana, except they’re they’re they’re capitating with the payer and taking the risk, and they’re outsourcing the operations.

So we’re happy to take that. We get paid there too. You know, we’re we’re so as long as we maintain the relationship with the patient and maintain the clinical data and outcomes of that patient, we’ll accept that type of model. It is it is different than our core business model. But by accepting that, that does force rapid consolidation as well because those folks managing risk, they’re gonna make more money if they’re doing it with big operators that can do it at lower rates.

And so, again, that that’s another natural consolidation point that’s that’s happening in the industry.

Unidentified speaker: And then we do have a deal announcement. Quipped take out DME provider, 250,000,000 revenue. Can you talk about your thoughts on that and kinda what it means for for your landscape? Sure. So Quipped, QIPT.

Publicly traded,

Unidentified speaker: you know, significantly smaller DME than us. Yeah. It was reported yesterday of an investor offer to take out the company. We understand multiple from an EBITDA less patient equipment CapEx perspective to be 10.6. You know, not long ago, Cardinal took out ADS, advanced diabetes supply.

You know, again, we understand that EBITDA less patient equipment CapEx multiple to be at 11 times even. You know, so I won’t get an evaluation. That’s your job. But, you know, our we look different than that. You know, so I we think that was interesting.

We also think it’s interesting that the you know, there there does seem to be more appetite for m and a in the industry. We on our end, we’re we’re seeing more activity. We are looking at more opportunities than we were, call it six months ago. I mean, the landscape’s just shifting a little bit. But again, we’re we’re not I mean, we’re we we if we stay on path doing exactly what we’re doing, we think we’re in very, very good shape.

And so there’s nothing to chase. We’ll continue to be extraordinarily disciplined. But, you know, it’s it’s it’s something certainly that we’re we’re keeping an eye on.

Unidentified speaker: And then sticking on the capital front, guidance adjusted for a couple of divestitures that Yeah. Coming down the pipe. Maybe you can kinda talk about the strategic focus you’re putting in place and kind of how you’re how you think of the go forward portfolio. Sure. So,

Unidentified speaker: you know, we we we conducted a, you know, a thorough portfolio review. Started almost two years ago, actually. We looked at several kind of subcategories underneath the segments. And where we landed was there were three businesses specifically as part of our wellness at home segment that we didn’t have scale. They were anchors to our top line growth.

They were anchors to our margins. And frankly, we just we just weren’t we weren’t the right owner. We just weren’t great operators in the space. So that first asset we sold in the third quarter last year. So that was a custom rehab business.

So think of like motorized wheelchairs, labor intensive, capital intensive, negative margins for us. You know, we sold that to the leader in custom rehab and, you know, we we think they’re going to do great with that business. So a little bit of proceeds, but frankly, that was one we were moving pretty quickly just to just to move along. So we were pleased with that. Last quarter, we reported the sale of ActiveStyle.

So this was a business that we bought five years ago. It it was it’s incontinence business, but it was focused on the direct to consumer, which that doesn’t really fit our business model. It was a lot of late night television ads finding Medicaid patients that could be eligible for incontinence products and then working that lead and turning it into a revenue stream. So we sold that business on May 1. You’ll see in our subsequent events in the first quarter, we did report the proceeds from that sale of $68,800,000, and we paid off another $70,000,000 of our term loan a since the first quarter ended.

So we were very pleased to report that, you know, with that, you know, gross debt down from 1.9975 to 1.905 based on that subsequent event. That same day, we announced a definitive agreement to sell our home infusion business. So think of like an option care type type model. That’s what it is. Mhmm.

Again, subscale, but, you know, we’re working to sell that asset with a little luck. We’ll close it at the end of the second quarter, and all of the proceeds of that are earmarked to further debt reduction on our term loan a. So, you know, with that, I think any company you’re always potentially evaluating your your portfolio. But, you know, we feel very good that these three assets that we’re we’re we’re almost done, and we’re focused on our three core segments, which are sleep, respiratory, and diabetes. And then the wellness category, which is there to support.

Oftentimes those patients need products in our wellness segment and or it drives ancillary revenue into the core. That’s really where our focus is.

Unidentified speaker: Great. And then I guess we’ll close just a quick commentary on expectations for cash flow ramp through the back of the year.

Unidentified speaker: Oh, sure. I mean, just like last year, a third of our free cash flow will deliver in the first half. The second third will come in in the second half of the year. Some of that’s just timing of when payments are sent for debt servicing and bonus payments early in the year and things like that. But, you know, we’re very, very confident in our free cash flow guidance that we put out for the year.

Unidentified speaker: Great. Thank you very much. Really appreciate your you’ve been with us today.

Unidentified speaker: Thanks for having us.

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