AdaptHealth Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2024 Earnings Release. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Today's speakers will be Suzanne Foster, Chief Executive Officer of Adapt Health and Jason Clemens, Chief Financial Officer of Adapt Health. Before we begin, I'd like to remind everyone that statements included in this conference call and in the press release issued today may constitute forward looking statements within the meaning of Private Securities Litigation Reform Act.

Operator

These statements include, but are not limited to, comments regarding financial results for 2024 and beyond. Actual results could differ materially from those projected in forward looking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. Adapt Health Corp. Has no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin and free cash flow, all of which are non GAAP financial measures.

Operator

You can find more information about these non GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of Adopt Health, Suzanne Foster.

Speaker 1

Thank you, and good morning, everyone. Thank you for attending our Q3 earnings call. Before we start, I want to acknowledge the extraordinary efforts our team displayed during the recent weather events in the Southeast. Prior to the storms, we contacted more than 40,000 patients from the impacted areas to confirm they had the medical equipment they needed before the severe weather moved in. In advance of the storm, we made sure to deliver oxygen where needed.

Speaker 1

As a result, there were no material service interruptions. I want to thank the team again for their exceptional performance. Now turning to Q3 results, we are pleased to report another consistent quarter with results in line with our expectations for revenue, adjusted EBITDA and free cash flow. Compared to the previous year, revenue was flat with our 2 larger products, sleep and respiratory, delivering growth that offset a decline in diabetes. Sleep increased 3.5%, respiratory was strong, increasing 8.6%, while diabetes decreased 11.8%.

Speaker 1

Rounding out the numbers, which Jason will cover more in-depth, we delivered an improvement in adjusted EBITDA margin and had a positive quarter for free cash flow. We completed the non core asset sale we announced last quarter, refinanced our senior secured credit facility and paid down another $50,000,000 of debt. As a result, we are now committing to delevering further with a new multiyear target set at 2.5x net leverage. Over the past quarter, our focus has been on establishing a one adapt approach to operating this business, which means rolling out standard work, new operating structures and identifying growth opportunities. Let's start with sleep.

Speaker 1

According to the American Academy of Sleep Medicine, there are approximately 30,000,000 adults in the U. S. Living with obstructive sleep apnea, but only 20% have been diagnosed. This market is large and it is growing rapidly, partly because of increased awareness of OSA and the negative health implications by going untreated. As detection technology evolves, we believe more people will be prompted to seek treatment for OSA with many of those patients seeking CPAP therapy.

Speaker 1

There are reasons Adapt Health is the number one market leader in sleep. It's because our respiratory therapists and sleep coaches provide best in class adherence programs and our read supply team delivers a highly reliable and convenient experience to more than 1,600,000 patients. The opportunity for growth in sleep is to increase new patient conversion rates. Right now, approximately 75% of the referrals we receive are fulfilled. We are working on opportunities to improve this conversion rate by introducing a new self scheduling feature in MyApp, thereby eliminating the need to reach the patient by phone and standardizing workflow processes to eliminate the back and forth of getting services for new patients approved.

Speaker 1

Turning to respiratory, based on data from the American Lung Association, we know that more than 35,000,000 people in the U. S. Are living with chronic lung disease like asthma and COPD. Supporting these patients requires a commitment to excellence, which we have. Our clinical coordination team is unique in the market.

Speaker 1

In that, we have multiple levels of respiratory therapist care. As a result, we deliver strong clinical outcomes designed to help lower hospital readmission rates. It is this level of clinical support that differentiates us and results in growth. To maintain our position as the number one market leader in this area, we are focused on optimizing our workflows and exploring opportunities to expand our product portfolio to better help patients living at home with respiratory conditions. Our sleep and respiratory product lines currently make up the majority of our revenue and we expect continued solid performance in these areas.

Speaker 1

We must however fix our performance and execution issues that we have in diabetes, which currently represents 17% of revenue. Following last quarter's results, I turned my attention to our diabetes product line and found the outlook was much worse than I thought after my 1st 2 months. The reality is the market is growing, our competitors are growing and we are not. We acted immediately by dismissing several members of the diabetes leadership team and through a series of diagnostic reviews, we uncovered systemic operational issues that we need to fix. We have taken swift actions to turn this around.

Speaker 1

First, we appointed a new leadership team, 1, a former CEO of an Adapt Health acquisition with a background in delivering exceptional service in sleep and home medical supplies, and we brought in a seasoned sales leader with experience in diabetes. 2nd, we integrated the resupply of our diabetes products into our sleep resupply center of excellence to leverage its leadership, replicate processes and increase performance. 3rd, we know that acquiring new CGM patients and being able to timely service them is the single most important thing we need to do. Notwithstanding a dynamic market environment, executing here is within our control and we are taking the necessary actions to improve across the board. Our diabetes improvement efforts are now underway, yet we expect that it will take us a few quarters to demonstrate results.

Speaker 1

Therefore, we are guiding the balance of the year down based on what we learned and to provide an appropriate amount of time for our actions to have an impact. Unlocking growth in diabetes is an imperative. The American Diabetes Association reports that more than 38,000,000 Americans have diabetes with almost 100,000,000 being pre diabetic. If we put all these numbers in perspective, there are more than 100,000,000 potential patients for Adapt Health to serve in the United States. Today, we proudly serve 4,200,000 patients a year.

Speaker 1

In simplest terms, growth is about providing exceptional service to the increasing number of patients that need our support. Another topic I would like to update you on is the progress we are making on the technology front. Last quarter, I mentioned that we were doing a few low cost experiments with AI and automation. I am happy to report that this is moving quickly and we have moved from inception to production. The mission was to use AI to deal with the massive amount of incoming unstructured data we receive, which is an ongoing healthcare challenge.

Speaker 1

With the way things are done, we receive more than 5,000,000 pages of faxes every month and we rely on a combination of people and technology to get the information in those faxes into the correct workflow. In a matter of weeks, we successfully automated parts of the workflow and our new automated process enabled by AI has proven to be 99.6% accurate compared to 89% with our legacy process. This was the first step to prove we can do so with accuracy. We are optimistic about our ability to rapidly deploy this technology across our workflows in a way that is responsible. We see AI as a viable option for us to improve our performance, reliability and efficiency.

Speaker 1

We are prioritizing use cases that will improve our ability to deliver exceptional service. I think it's good to note that due to improved operational rigor and successful cost management initiatives this past quarter, we were able to invest in people and technology while delivering improved bottom line results. In addition, this is the last quarter we will report results as a single segment. We are moving to a 4th segment reporting structure that consists of sleep health, respiratory health, diabetes health and wellness at home. This shift to segment reporting will allow for increased transparency and insight into our performance.

Speaker 1

Most importantly, it will enable us to focus our resources and architect our growth in each segment. I continue to be optimistic about the road ahead. We have identified growth opportunities. We are assembling a high performing team and investing in areas that allow us to serve even more patients in their homes. Our focus is on execution and continuously improving every day.

Speaker 1

And with that, I will turn it over to Jason.

Speaker 2

Thanks, Suzanne, and thanks to all for joining our call today. For the Q3 of 2024, we delivered against our expectations for revenue, adjusted EBITDA and free cash flow. We also made considerable progress in strengthening our financial position, disposing of non core assets, refinancing our senior credit facility and paying down debt. During the quarter, we completed the previously announced transaction to sell certain custom rehab assets to a 3rd party. As a reminder, the annual revenue for these assets was about $30,000,000 so that comes out of our HME revenue run rate going forward.

Speaker 2

We continue to consider alternatives for a couple of similarly sized product categories that do not fit strategically into our core businesses. In aggregate, they represent less than $100,000,000 of annual revenue and we will provide updates as we make progress with those initiatives. 3rd quarter net revenue of $805,900,000 was up 0.2% compared to the Q3 of 2020 3. Fleet revenue of $326,400,000 increased 3.5% over the prior year, in line with our expectations as we faced a very high comparable in 2023 due to record starts from fulfilling the backlog following a manufacturer recall. For perspective, over the past 2 years, fleet revenue grew $55,800,000 against $270,600,000 in the Q3 of 2022, representing 9.8% of compounded annual growth.

Speaker 2

Although CPAP starts experienced the typical sequential deceleration from Q2, as July August vacation schedules impact sleep testing and referral activity, we were pleased to once again surpass 120,000 starts. Sleep resupply census now stands over 1,630,000 patients, up another 29,000 from the previous quarter. Our CPAP survey indicated 15% of respondents were using GLP-1s to manage diabetes or weight loss, up from 12% last quarter. Now a year into our surveys, we are detecting a very slight uptick in CPAP adherence versus patients not indicating GLP-one usage. So far, there is an immaterial difference in resupply ordering patterns.

Speaker 2

We will continue to monitor and report these trends as time goes on. Diabetes revenue of $141,100,000 decreased 11.8% compared to the Q3 of 2023, driven by lower CGM revenue. Before we get into those details, we were encouraged to see stabilization regarding insulin pumps and related supplies, representing $28,400,000 of revenue for the quarter, about flat against the prior year. For CGMs, we've previously discussed reimbursement channel pressure as some payers shifted reimbursement policy to 100% pharmacy in 2024. That landscape has remained steady over the year, but as we lost access to members in a handful of markets in early 2024, we failed to overcome that headwind with new sales orders.

Speaker 2

We also shipped fewer recur orders than expected impacted by the operational challenges Suzanne discussed. Respiratory revenue of $164,000,000 increased 8.6% compared to the Q3 of 2023, led by oxygen, exceeding our expectations. For the first time in our history, our oxygen census surpassed 325,000 patients actively on service. Most patients on oxygen need to order tank refills periodically, and until recently that has been a time consuming process. During the quarter, 7.5% of our O2 patients order tank refills without having to interact with an Adapt customer service representative via new technology just launched in MyApp as well as chatbot technology recently launched in our interactive voice response telephone systems.

Speaker 2

This tech was launched in the 2nd quarter with only 1.5% of O2 patients ordering through these platforms 90 days ago, so we are making progress quickly. Revenue from all other product categories of 174,300,000 dollars decreased 1.9% over the prior year, aligned with our expectations, driven by revenue loss from the sale of certain custom rehab assets. Turning to profitability. 3rd quarter adjusted EBITDA of $164,300,000 reflects an adjusted EBITDA margin of 20.4%, a slight improvement over the same period last year. This margin expansion was driven by revenue mix, meaning that higher margin products like sleep and respiratory outgrew lower margin products like diabetes.

Speaker 2

We were pleased to maintain labor expense year over year as we installed enough efficiencies to pay for merit based salary raises and other labor inflation. Operating expenses and G and A were in line with our expectations. Cash flow from operations was $144,400,000 Days sales outstanding for Q3 was 47.9, down from 48.9 in the previous quarter as accounts receivable continued to normalize following the change healthcare situation earlier this year. CapEx of 59,600,000 represented 7.4% of revenue, down against 9.6% of revenue in the Q3 of 2023. Free cash flow of $84,800,000 outperformed our target of $30,000,000 That $30,000,000 estimate assumed that we would pay off the $40,700,000 loan offered as part of Optum's temporary funding assistance program related to the change healthcare outage earlier this year.

Speaker 2

However, that payoff did not occur until mid November excuse me, mid October. After adjusting for the timing of that cash outflow, we still produced strong cash flows for the quarter, so we are again raising full year guidance. During the Q3, we amended our debt agreement to lock a $950,000,000 senior secured credit facility consisting of a fully funded $650,000,000 Term Loan A and a $300,000,000 revolving line of credit. Proceeds from the new $650,000,000 term loan were used to fully repay without penalty the company's existing term loan due to reach final maturity in January of 2026. The new $300,000,000 revolver replaces the company's existing $450,000,000 revolving credit facility, which had no balance drawn at the end of the Q3.

Speaker 2

The reduced revolver size decreases undrawn commitment fees. The interest rate pricing for the new senior secured credit facility decreased from the interest rate pricing in AdaptHealth's existing bank credit facility and the new maturity is extended up to September 13, 2029. At the end of the Q3, we paid an additional $50,000,000 against the Term Loan A balance, resulting in a net leverage ratio of 2.87 times compared to 3.51 times in the Q3 of 2023. We are very pleased to have achieved our net leverage target of 3 times ahead of schedule and we remain focused on paying down debt. So much so that we are introducing a new multiyear net leverage target for the company at 2.5 times net leverage as defined in our covenants.

Speaker 2

We expect to acquire home medical equipment providers in the future as access and scale are important to us. But for the next few quarters, we expect acquisition activity to be limited. When and where it makes sense, we will acquire, but will otherwise remain focused on paying down debt and increasing our free cash flow conversion. For the balance of 2024, we are adjusting our revenue midpoint down $45,000,000 and our adjusted EBITDA midpoint down $15,000,000 responding to recent trends in diabetes. Our updated full year guidance is net revenue to be in the range of 3.22 $1,000,000,000 to $3,260,000,000 adjusted EBITDA to be in the range of $655,000,000 to $675,000,000 And even with these updates, given the continued positive trends in working capital, we expect free cash flow to be in the range of $175,000,000 to $195,000,000 With that, we'll open the call up for questions.

Speaker 2

Operator?

Operator

Thank And we will take our first question from Kevin Caliendo with UBS. Please go ahead. Please go ahead, Kevin Caliendo. Your line is open.

Speaker 2

Sorry, I was on mute. I apologize. Thanks for taking my question. Just want to go through the diabetes issues a little bit more in-depth. How much of this is related to issues with manufacturers?

Speaker 2

Does it require more collaboration? Is it more of a market with the end market? What's happening there in terms of moving pharmacy versus DME? Like any help around what's really happening in the end markets and what's happening with your clients would be great. Yes, Kevin.

Speaker 2

A couple of comments. No, we have not identified the compression in revenue to any specific issues with manufacturers. In fact, the CGM manufacturers as well as all of the pump manufacturers have been very good parties to work with and good partners over the years. I mean, they've supported various integrations of data and technology coming from their devices inside of our 4 walls. If you've done that kind of work before, you know that that takes frankly a tremendous amount of collaboration working across different companies.

Speaker 2

We certainly are continuing to face pressure from the pharmacy channel reimbursement changes. So we referenced that in our prepared remarks. We have not seen this quarter really any shift in major payer activities against what we saw in the Q2 or against what we saw in the Q1. And so even though we do have some pressure to overcome from the prior year, that environment has remained relatively steady. What we are saying is that the new starts that we had expected from adding sales folks, we are not pulling through frankly anywhere near our expectations and the growth that we believe is there in the market.

Speaker 2

And then on the recur side, we do have some operational challenges that have been unpacked and we are deploying our sleep resupply operation towards improving. I mean, just a minor tick or 2 in recur since it represents such an overwhelming part of revenue. If you degrade performance, it can have a big impact and that's what we're absorbing here in the Q3.

Speaker 1

I'll just double down on to say I think that our partnerships with the manufacturers are strong and continuing to get stronger. We're meeting regularly and I'm happy to see that that partnership is taking on a whole new life. So I think that's positive. The reimbursement shift actually obviously has been a headwind. So what the message today is we should be able to grow through that given what we know about the end markets and we're not growing through it as a result of our own operational issues internally that I believe we can fix over the next couple of quarters.

Speaker 1

That's helpful. If I

Speaker 2

can ask a quick follow-up then, I think a logical one is how much do you think this will impact 'twenty five? If we think about the bar for 2025, the revenue growth is around 5%. Not asking for guidance, but does the issue with diabetes that you're having now, does that spill over into 2025? And could that be an incremental headwind as we think about that? Well, Kevin, I think I'd say that we plan to guide $25,000,000 near the end of February when we'll report the Q4.

Speaker 2

When we think about the Q4, I mean, we took down top line by $45,000,000 I mean, there are ins and outs to that. But essentially, what we're saying is we delivered $140,000,000 of revenue here in the Q3. We're not committing to more than that in the Q4. I mean, we have guided down, which creates a $45,000,000 compression against the Q4 of last year because we don't want to over commit. We do have, we believe, the right people in the right seats with the right organizational changes, most specifically reorganizing all resupply operations out of our resupply center in Nashville that has produced incredible performance in our sleep business for many, many years.

Speaker 2

And so we are focusing on that, but we're just not going to commit to any more growth even sequentially until we know that we're confident in doing so. So how that impacts 2025? I mean, I think it goes without saying, we as we stand here today, we anticipate some pressures in 'twenty five, but we've got another 90 days ahead of us and we're going to do our work and we'll come back with updated guidance at that time. Appreciate the color. Thanks.

Operator

Thank you. And we will take our next question from Matthew Blackman with Stifel. Please go ahead.

Speaker 3

Great. Good morning, everybody. Thank you for taking my questions. I'm also going to touch on diabetes here. And maybe sort of frame it this way.

Speaker 3

It does sound like you're still bullish on the long term prospects of this business. I think in the recent past, you've talked about diabetes maybe growing higher single digits. Is that still in play, perhaps, of course, over a longer timeframe? And then maybe the follow-up question. I was just hoping to understand how you better get after new patients in the CGM franchise.

Speaker 3

Obviously, there's been a sales force expansion. But just practically speaking, how do you execute on getting new patients into the business? I'd be interested in hearing your thoughts there. Thank you.

Speaker 1

Okay. I'll start with the second part of the question and then Jason go back to the numbers. So the 3rd point of the plan around obviously increasing CGM new starts is the number one thing we need to do literally across the business. And the plan there is you cannot in my opinion just go continue to put out more and more salespeople and expect a different result. They can only sell as good as we are on the operational side.

Speaker 1

And so what I've uncovered this quarter is that we have to beef up or improve the timeliness and ease in which you can order a CGM for us, how we bring that new patient in. And so we're pushing on 2 fronts. One is our operations team is looking at how do we streamline the processes, make it easier so that when our salespeople go out to a referring provider, we can promise service levels that are more in line with the market. And unfortunately, over the last couple of quarters, we have been lagging behind in the timeliness of delivering on that promise. And so we're stabilizing the sales force, making sure we're going out and having a high touch white glove experience with our referring providers and at the same time our operators are charged with streamlining the workflows and their performance so that we can deliver with speed and quality.

Speaker 2

I think Matt in regard to the question about the end market and the growth, we'd offer 2 different ways to look at that. Firstly, I think if we consider the Q3 comments from the CGM manufacturers, I think one reporting very low single digits and the other reporting mid-twenty percent growth. They're not fifty-fifty in the marketplace necessarily, but when accounting for that, I mean, you're going to be in whether it's 10%, 12%, 9%, somewhere in that ballpark. The second data point is that, look, some of our public competitors have recently reported what we believe to be upper single digit growth for the quarter. I mean, as a segment producing 5% to 6% growth and when asked, diabetes is leading the way, implying they're growing faster than that.

Speaker 2

So those two data points alone, we do believe that the the market is growing upper single digit, perhaps lower double digit. And in fact, we compressed almost 12% this quarter. So like Suzanne said in her prepared remarks, the market is growing. Our competitors are growing. We are not.

Speaker 2

And so that's the work that we're putting in to fix these operational challenges. Got it. And if I

Speaker 3

could just squeeze one follow-up, maybe. Suzanne, organic growth, I think, in particular, you've sort of identified, you said opportunities for organic growth. I think in the past, I've heard you talk about things like national accounts and contracting. Can you maybe just give us a sense of some of the other opportunities or if you wanted to talk a little about national accounts and what kind of opportunity that could be for Adapt as we think about the organic profile of the company over the next several years? Would be interested in hearing that.

Speaker 3

Thank you.

Speaker 1

Appreciate that question. Yes. So as I said at the end, we were able to continue to improve Bottomline even though we made technology and people investments. Those people investments this last quarter did come from beefing up our national accounts or what we're calling enterprise sales team. The reason for that is I believe there's 2 additional organic growth drivers here.

Speaker 1

1 is in larger health systems. We do a very, very nice job in certain geographies around partnering with large health systems to have a seamless experience when patients are discharged from the health system, but we have not nationalized that program and we are now in the process of doing that, which I'm optimistic about. I think we have an incredible value proposition on that front. So we're investing in that area. And then the other area that we're highly focused on is increasing the total covered lives.

Speaker 1

So our managed care team and how do we make sure that we have the our fair share of covered lives so that when our sales force goes in, we can basically be a one stop shop for any referral source that says we can take almost any payer and we offer the total portfolio of products. If you send it to us, we promise we can deliver well for your patients.

Speaker 3

Thank you.

Operator

Thank you. And we will take our next question from Eric Coldwell with Baird. Please go ahead.

Speaker 4

Okay. It very well could be redundant and obvious, but last year in diabetes, you did $185,000,000 in sales in the Q4. This quarter, you're only committing to $41,000,000 So that's the equivalent of the $45,000,000 midpoint revenue guidance, Scott. I just want to confirm that the only adjustment to revenue guidance is this diabetes change. And then secondarily, you missed diabetes a little bit here this quarter, handful of 1,000,000 of dollars.

Speaker 4

Margin was good, but this is a much bigger step down. So what is the margin impact, whether it's Q4 or going into 'twenty 5 from the significantly reduced diabetes revenue outlook? Thank you very much.

Speaker 2

Sure, Eric. Yes, we'll confirm that the guide down is diabetes. I mean, we are guiding down due to the recent CGM performance. When we think about what we were aiming at internally, Q3, we were down about $10,000,000 top line for diabetes. And so that's a little bit of this.

Speaker 2

We've rolled that ahead. But the rest of it is just not committing to any sequential growth in the quarter. Now it's pretty typical to get a bump up as deductibles have reset and there's a big push in the Q4. But again, until we resolve these operational issues, we just aren't ready to commit to higher growth. But it is all diabetes impacted.

Speaker 2

When you think of the EBITDA the same way, I mean, we took about a third of that top line of the $45,000,000 and we passed through $15,000,000 flow through to the bottom line. Again, we wanted to put out numbers that we feel very good about hitting for the Q4. And as we think about $25,000,000 as referenced earlier, I mean, we'll come forth with that guidance at the end of February.

Speaker 4

And so Jason, for both the revenue and the EBITDA, all of the change was diabetes specific?

Speaker 2

Yes, correct.

Speaker 4

Okay. So you fixed that problem, you're back on track. There's nothing else here?

Speaker 2

Yes, that's right. I mean, when we look at the other product lines, we expect a solid Q4 out of sleep as we've demonstrated, I think, frankly, year over year. Respiratory, we believe, will continue to compound slowly. We add a couple of million a quarter consistently, and that's what we're expecting out of that product line. And then all other categories, which is will get reported in the future as wellness at home.

Speaker 2

We're expecting generally flat performance. I mean, we're going to take out about $7,000,000 to $8,000,000 from the custom rehab asset disposition. We accounted for that in the last guidance update when we reported in Q2. So yes, I think that if we're able to do better in diabetes, that will mean we'll be better as a portfolio, but the rest of the product lines are performing as expected.

Operator

Thank you. And we will take our next question from Brian Tanquilut with Jefferies. Please go ahead.

Speaker 2

Hey, good morning. Jason, in the prepared remarks, you guys talked about the app and the quick progress that you're seeing there. So just curious how you're thinking about the savings opportunity from reducing call center operations or call center interactions with patients over the next year or next 18 months? Yes. Good question, Brian.

Speaker 2

I may answer that with some nuance. The intent of assembling the company going forward against these large patient chronic disease states, respiratory being one of them. The intent is really to focus our resources and our people against getting after that TAM. And in each of these categories, it's large TAM, it's growing rapidly, particularly in sleep, respiratory, I mean, we're market leaders. And so the intent here is to assemble our resources and people around taking more than our fair share of really growing that top line.

Speaker 2

As well, the intent is to improve the patient experience, drive better patient outcomes, figure out how that converts to potentially rate increases or more volumes, right? So we really want people and resources waking up every day and focused all day on those goals. And so, yes, there's been great tech already installed here with respiratory. We think with dedicated leadership, those conversions will go faster. We'll learn more.

Speaker 2

We're capturing a tremendous amount of data from these interactions through this new tech that's been rolled out. And these people are going to be focused on capitalizing on that growth going forward. Got it. And then just as a go ahead, you got it, Sam. Yes.

Speaker 1

Can I just add one thing on that? I just want to say, I know it's early days for us in terms of the automation and the AI and our launch of MyApp, but I have been incredibly encouraged by our ability to move quickly. As I said, it was a matter of weeks that we put something into production. That is because our existing tech architecture and infrastructure was already prepared to take on this more advanced technology. And so our partner that we work with on this front said most companies do not have the infrastructure that's already ready to go.

Speaker 1

And so we have this diamond in the rough, if you will, of a strong technology infrastructure that we're going to be able to rapidly deploy responsibly the Maya features and increased automation in AI. So more to come early days as I suggested, but I do think it's the strength of AdaptHealth.

Speaker 2

I appreciate that. And then maybe Jason, my follow-up, just as I think about Medicare rates for calendar 2025, do you have visibility into what that rate adjustment looks like? Well, we don't have visibility. We don't want to we don't have visibility. We don't want to speculate, but we will offer some data.

Speaker 2

We would fully expect the Demi post fee schedule. It's typically published December 6, 7th, kind of in that ballpark. That is our expectation based on we're hearing out of Washington. For those that may not follow that fee schedule, how it's constructed very closely, I mean, it is an inflation based measure. It compares the CPIU through June of the prior year.

Speaker 2

They take those rolling 12 months of the prior year. So we know that number already. That's about 3% or so. Historically, there has been a labor productivity factor applied against that inflation measure that brings the rates down. It depends on the year.

Speaker 2

It could be half a point, could be a point. So somewhere in that ballpark is generally what we are thinking. But again, we don't want to speculate on any of this until things are formally published. But hopefully, that provides some perspective.

Operator

And we will take our next question from Whit Mayo with Leerink Partners.

Speaker 5

Thanks. Good morning. I got just one quick one. Just on the Humana contract, how that's tracking versus internal expectations, what you're excited about, not excited about? Just any other conversations with other payers, is this something that you still want to expand, just any additional thoughts would be helpful?

Speaker 5

Thanks.

Speaker 1

Hi, Whit. I'll say that Humana is doing quite spot on, very good. We want more of this business. If you link back to my comments around putting more investment in people into the business on Enterprise National Accounts and Managed Care Engagement, they are tasked with are there more opportunities like Humana, we are exploring those and that's the type of business I think is very good for us. So Humana has worked out very good, big partnership there and hopefully we'll have more of those to share soon.

Speaker 5

Great, thanks.

Operator

Thank you. And we will take our next question from Richard Close with Canaccord. Please go ahead.

Speaker 2

Yes. Just two questions. Suzanne, can you talk a little bit about the more the investments in the team, the changes that have been made, I guess specifically on diabetes as well, and then the potential divestiture of these other businesses that Jason highlighted.

Speaker 1

Okay. I'll let Jason address the divestitures and let me talk about the team. So the way we were organized is we had a President of Diabetes, a COO, a sales leader and diabetes was somewhat standalone, if you will, and then we had the remainder of the business. So in these changes, what we did is we tapped a very experienced, as I said, former CEO of 1 of our larger acquisitions, his name is Gary Sheehan, to be General Manager. So we've abandoned the President role.

Speaker 1

The General Manager is going to report into our new Chief Operating Officer, Scott Barnhart, who I've mentioned in the past. The reason for that change in reporting is because so much of what we need to do is to leverage our strengths on the sleep and respiratory side, the remainder of the business for the diabetes business where it makes sense. And so having the GM sit underneath the Chief Operating Officer that can leverage the entire Adapt business where it makes sense was an important first step. Given that Gary has a long history in leading sleep HME business, in his words, he'll say diabetes is essentially the same business without the big CPAP machine, the timeliness of service, the catering to the patient, the experience. So I'm very optimistic about his experience in leading a business, but also the mindset in the how he's going to think about leveraging the broader Adapt Health business to improve our diabetes business.

Speaker 1

2nd to that, we appointed a new sales leader for the diabetes business, someone with med device background, his name is Graham Ward, he's been a top season sales leader at the likes of Medtronic, had spent time in at Cardinal and then most recently came over from Google where he was in a national accounts role. Graham has joined us and brings that very deep sales experience that he's getting his arms around the sales force that we have, understanding why that expansion didn't perform like it should have, putting in quotas, territory management, but more importantly doing exactly as Gary's doing where he's looking at the 700 salespeople we have out there on the HME side and saying how do we work together to not only use our 78 today's diabetes salespeople, but how do we bring our army of 700 to help support the cause because everyone across Adapt Health knows that turning around diabetes is the most important thing we need to do. In addition to that, we talked about moving the resupply business. It became obvious that we have a diabetes resupply business and then we have this crown jewel at AdaptHealth of our sleep resupply center of excellence out of Nashville.

Speaker 1

That leadership team is solid. They have clear standard work, processes, proven excellence. And so we shifted our resupply business to that team and that organization. And so through that infrastructure, we believe we'll be able to deliver a better resupply experience to the patient. And so I'm excited about that work.

Speaker 1

Those are the bigger changes. So from the top, we have the new Chief Operating Officer who's driving timely quality service. We have a new General Manager that's paying attention to the manufacturing relationship, how do we integrate and use the best of the best across Adaptel, a new sales leader and then a gentleman named Matt Cox who runs our sleep resply that will be taking on the diabetes resupply for us.

Speaker 2

And then switching gears, Richard, to potential disposition of assets. We're really talking about some of the subcategories in what we in the future we'll be calling wellness at home. And so there's different products inside of Wellness at Home. Some include the classic bed metal beds, wheelchairs, walkers. Now we like that business a lot.

Speaker 2

It's very important, particularly in securing hospital relationships where you're able to be the easy button for those referring providers that are discharging patients. And as you deliver excellent service, you earn more referrals in our other core areas, most notably respiratory and sleep. And so those products are ancillary, if you will, into the core, into those 3 core products that we intend to segment around. There's other lines of business inside of wellness to home. Home infusion is one that comes to mind.

Speaker 2

I mean, much like custom rehab, we've built up somewhat of a collection of assets over the years that were pieces and parts of other acquisitions. We could do this long enough and some of these can get pretty large. So does we're asking ourselves questions like, well, does that product line deliver ancillary business into the core? And so we're in process of answering those questions and making those determinations. I mean, there are other examples, but I won't get into those today.

Speaker 2

But that's really where our focus is, is to take areas where we just haven't paid enough attention. These assets will be better owned by someone else. They're pretty low growth for us. It should improve margin, frankly, if and when we decide to dispose of them. And we'll continue to provide updates going forward.

Speaker 2

Okay. Thank you.

Operator

Thank you. And we will take our next question from Pito Chickering with Deutsche Bank. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my questions. Back to the CGM reordering issues they talked about on the call, you have such a good model for DME reordering for your whole business. So can you quantify how big those CGM delays were in the reordering? Why those are delayed and how you can fix it?

Speaker 5

And if those delays were in both pharmacy and DME?

Speaker 2

So a couple of things, Pito. First, we'd say that starting with sleep resupply in our Nashville operation center, I mean, we've got 100 and 100 of people working out of that center. The tech that is used there that sits on top of Brightree, some of that core design was frankly developed by Adapt Health and employees of Adapt Health. And it's so ingrained into our workflow. So it operates with the precision of knowing exactly what the patient qualifies for.

Speaker 2

We know the benefits of proper resupply following proper cadence. And that team works to advise patients, work with patients on things that aren't their adherence, like things aren't fitting properly or they might have a different model that they want to explore. And so those teams are just so highly skilled at that. Historically, we had not yet integrated our diabetes resply operation into Nashville, frankly, because we had integration work to do on the 8 different diabetes companies that we bought. And so there was a couple of years of work that went into consolidating all of those patients onto single platforms, single databases and that work has been completed.

Speaker 2

And so a very quick move that Suzanne has directed and the team is carrying out is to now take advantage of all the capability and infrastructure that we've got out of Nashville and bring diabetes into that. In terms of quantifying, I mean, the overarching compression over the prior year, I mean, think of it in 3 buckets, fairly equal buckets, the first being real reimbursement change, pressure from specific payers that we've named in previous calls that shifted to 100 percent pharmacy. And that was ground that we had to make up. And so we're continuing to absorb that and we will as well in the Q4 until we lap those changes next year. The second is in new starts.

Speaker 2

I mean, we were a little short in Q2, but it was too early to call revenue down as a lot of these sales folks are still new. Suzanne said, I mean, there's a lot to be done to optimize their workflows and we think that Gary, Graham and others are going to do a great job with that. But just that miss in Q2 and then in Q3, the in quarter miss against new starts, that had an impact. And as a carry forward into Q4 that we made an adjustment for. And then finally is on the recur.

Speaker 2

Frankly, just dropping the ball in who is eligible when and making sure that we've got timely order confirmation delivery of products. So those are the 3 buckets and those are the 3 areas that Suzanne brought forth a plan that we're going to run against here over the next 90 days.

Speaker 5

Okay, great. And then a follow-up question here, just looking at the overall market growth between the two channels, pharma channel and DME, I guess, what do you think that those two channels are growing in 2024? And as you think about sort of growth in the out years, kind of where do you guys think that you guys can grow within both channels? Thanks.

Speaker 2

Yeah. I mean, it's, again, too early for us to comment on 'twenty five or even beyond. We do know that right now, there are competitors in the space with same or similar capabilities that we have that are growing quite nicely. And so our job is to, first stabilize and prevent compression and then get back to growth mode, and that's what we're focused on. And

Operator

we will take our next question from Ben Hendricks with RBC Capital Markets.

Speaker 6

Just a quick question and apologies if I missed this, but I think last quarter you talked about some of that channel shift, maybe some reabsorption or transition back among some carriers to the DME channel. Just wanted to see if there was any you've kind of outlined your expectations before Q, but is there any indication to how that could look into next year? Is there any transition back incremental that you're seeing or any indication of how that balance will kind of even out long term? Thanks.

Speaker 2

Hey, Ben, it's Jason. Not since last quarter. I mean, we did call out reference to 2 Southeast states regarding Medicaid where they've laid in new policy that was somewhat advantageous. And so we're doing our work there to start earning some business, but it's nothing material that's impacting the top line. Regarding any future shifts or changes one way or the other, I think we'll reserve those comments until open enrollment season up and payers publish new policy as we're getting into January and we'll have something to talk about when we report at the end of February.

Speaker 6

Great. Thanks, guys.

Operator

And it appears that we have no further questions at this time. I will now turn the program back to Suzanne Foster.

Speaker 1

Once again, everyone, I just want to thank you for tuning in this morning. I mean, the takeaway, the guide that we issued today is really to derisk that and give the team the guide that we issued today is really to de risk that and give the team time to perform. But 80% of our business continues to perform solid. There's obviously an opportunity for continuous improvement, but we are working on that as well with the addition of a lot of technology and my app and people in org structure will continue that work, but very optimistic about the core of our business and our future. So hope to see you all out there on the road and thanks again.

Operator

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
AdaptHealth Q3 2024
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