AdaptHealth Corp.

Hey everyone, and welcome to today's ADAPT Health fourth quarter and full year 2023 earnings release. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. Today's speakers will be Richard Barish, Chairman and Interim CEO of ADAPT Health, and Jason Clemens, Chief Financial Officer of Adapt Health. Josh Parks, President of Adapt Health, will join Richard and Jason for the question and answer portion of today's call. 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 the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding financial results for 2023 and beyond. Actual results could differ materially from those projected in the forelooking statements because of a number of risk factors and uncertainties, which are discussed at length in the company's annual and quarterly SEC filings. Adept Health Corps should have 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, and free cash flow, all of which are non-GAAP financial measures. This morning's call is being recorded, and a replay of this call will be available later today. I am now pleased to introduce the Chairman and Interim CEO of Adapt Health, Richard Barish.

Good morning, everyone, and thank you for joining us this morning to review Adapt Health's fourth quarter and full year 2023 performance. Stated simply, we had a terrific fourth quarter and ended 2023 with a great deal of positive momentum throughout our business. For the year, our net revenue grew by 7.7% and adjusted EBITDA grew 13% compared to the prior year. This is the fourth year in a row that Adapt Health grew both top and bottom line, and it's especially notable that nearly 95% of the 2023 revenue growth was non-acquired. We finished the year with a very favorable quarter, driven by continued strength in our sleep and respiratory product lines and the expected improvement in our Humana contract. It's also noteworthy that adjusted EBITDA grew faster than revenue, largely as a result of the cost-out program and technology-driven operating improvements. Another highlight of 2023 was a significant increase in cash flow from operations and free cash flow, even absorbing elevated interest rates on the floating rate portion of our term loan. As a result, our net leverage decreased from 3.69 times to 3.16 times, and we expect to be below three times before the end of this year. We have a favorable debt structure with a good portion of our debt in longer terms at attractive fixed rates. But as we generate further increases in free cash flow in 2024, we will lean into reducing our overall indebtedness. Turning to our product lines, Our suite product line was the primary driver for a full year and fourth quarter performance. Jason will give you more detail, but our top line for the year was 16%, powered by a 12% increase in our resupply census, which resulted in record volumes. Based on reliable industry data, we have yet again increased our market share and are clearly the number one provider of CPAPs and related supplies in the United States. The increase in our census is a direct result of our intentional efforts to improve our adherence rates, which we believe are best in the industry. We have more than 300 sleep coaches whose job is to improve the patient experience, which we also believe is best in class. Our respiratory business also exceeded our expectations. Revenue for the year increased by nearly 8% over last year, with a 10% increase in the fourth quarter. Here again, driven by the expertise of our respiratory therapists, we believe we have increased our share and are striving to become number one in this product category, too. Diabetes continues to be a work in progress, but the progress is tangible. We have enhanced the management team, including the recent hiring of a new head of diabetes, revamped the operations of the product line, and have reinvigorated our selling efforts by doubling the size of our sales force. While we are still feeling the pressure of the compression on pumps and some continued mix shift to the pharmacy channel, government business continues to be our focus, and government-sponsored payers accounted for 79% of CGM census in the fourth quarter, up another 30 basis points from last quarter. Further, as I mentioned last quarter, we are ramping up to participate in the growing pharmacy channel. As we predicted last quarter, the Humana contract is now performing as we had originally expected. The transition is now largely behind us, but we are on track to substantially complete patient conversion this quarter. We value our relationship with Humana and are working hard to be a good partner. We've learned valuable lessons in onboarding these types of agreements and are now in a position to do more of the same. Now I'd like to continue the discussion about the possible effect of GLP-1 drugs on our business. First, there seems to be a consensus that GLP-1s will not have a negative effect on CGM growth. Excuse me. It's logical to assume that patients on GLP-1s are actively engaged in their health and will be inclined to monitor their A1C levels through CGMs. We also believe that increased insurance coverage of CGMs, especially in the government sector, is a strong tailwind. First and most important, we see no current impact on our business. Our sleep census, which is a combination of new starts and ongoing PAP resupply continues to grow at a pace that bodes well for future revenue growth. Further, we take particular note of the real-world study recently conducted by ResMed. This study shows a modest increase to adherence when CPAP users also take GLP-1s. This is consistent with what we are seeing in our population. A recent surveying suggests that 16% of our current CPAP users are already using GLP-1s. We want our patients to be healthier, so this is good news. We believe that greater awareness and diagnosis of obstructive sleep apnea will offset the potential of reduced usage of CPAPs resulting from GLP-1s. It's also reasonable to assume that increased awareness of obesity will also increase awareness of related comorbidities like OSA. These trends are beneficial for everyone. That said, we're not dismissive of the potential issues from GLP-1s, and we are proactively responding to this possible long-term pressure. We believe we can overcome any reduction in the growth of CPAP usage by continuing to increase our share of the market through enhanced traditional sales efforts and enterprise sales, decreased operating costs through automation and better processes, and increased focus on patient adherence and retention. We've improved on each of these measures over the past few years, and the GLP-1 conversation has expedited our progress in these basic areas. The recent focus on GLP-1s has also accelerated our efforts to enhance our role in the ecosystem of providing care in the home and community. Adapt Health is at the epicenter of the movement to improve the health of people with chronic conditions like obesity, diabetes, sleep apnea, and COPD. We occupy a unique position connecting providers, patients, and payers. We also generate and have access to reams of data that, when curated properly, will assist providers and payers in providing better care more efficiently. We currently have ongoing relationships with more than 1.5 million people with sleep apnea. more than 230,000 people with diabetes, and more than 300,000 people with chronic respiratory conditions. We interact with these patients on a regular basis to help them with adherence to their therapies by teaching them how to use their devices properly and supplying and resupplying needed equipment. Our initial work on adherence indicates that we can improve proper utilization of the devices and therapies. We believe we are also improving outcomes and we are beginning to use the data that we are generating to prove it. I'd also like to provide a brief update on the ongoing CEO search. We now have a couple of very promising candidates who are currently advancing through the recruiting process. We will keep you updated as we move forward, but as you can see from our results, our progress has not slowed down during this process. I'll now turn it over to Jason to take you through the numbers.

Thank you, Richard, and thanks to all for joining the call. Like Richard, I was very pleased with the fourth quarter results. We made significant investments in the business during the year, and they are beginning to bear fruit. We will look to build on that momentum across the business in 2024. Adapt Health's net revenue grew 7.7% over 2022, and non-acquired growth was 7.3%, led by our sleep and respiratory product categories. Adjusted EBITDA grew 13% over that same period as we delivered on the cost management program that we announced in early 2023. Cash flow from operations of $480.7 million grew 28.6% over the prior year. Free cash flow of $143 million improved significantly over 2022, led by DSO improvement of 1.5 days and significantly improved CapEx management. Our net leverage ratio finished the year at 3.16 times down half a turn from 2022. Turning to fourth quarter results, net revenue of $858.2 million increased 10.0% compared to the fourth quarter of 2022. Sleep revenue of $328.8 million grew 15.2% compared to a year ago. Patient demand for new PAP equipment was steady and up a touch from the third quarter. New starts for PAP equipment met our expectations, our adherence performance met our expectations, and resupply continues to be very strong. Our resupply census has reached 1.55 million patients, with electronic reordering now over 40% of total orders. Not only is electronic reordering easier for the patient, but it also drives more efficiency in our operations. Respiratory revenue of $151 million increased 10.1% year over year. Our oxygen census is the highest it has ever been, now over 315,000 patients. For oxygen, as well as for non-invasive ventilation, industry data shows that we continue to take market share in these important categories. Our diabetes revenue was down 3.8% against the fourth quarter of 2022. As expected, we continued to absorb pressure in our pump and pump supply revenue as the market shifted toward tubeless pumps. We believe the pressure will start to ease in the second half of 2024 as the transition stabilizes and as we grow our tubeless pump revenue. As expected, CGM census was up a few points. We overcame some reimbursement pressure from shift to the pharmacy benefit, resulting in 1% CGM revenue growth. Turning to profitability, fourth quarter adjusted EBITDA of $204.6 million reflects an adjusted EBITDA margin of 23.8%. We outperformed our expectations due to increased revenue, especially in high margin categories, improvement in our Humana contract to original expectations, improvement in COGS, and improvements in labor and operating expenses. Cash flow from operations of $155.3 million grew 60.2% over the fourth quarter of 2023. Cap debts of $88.6 million, representing 10.3% of revenue, beat our expectations, resulting in free cash flow of $66.6 million in the fourth quarter. For the full year, free cash flow was $143.2 million, or 4.5% of total revenue, exceeding our goal of 3% to 4%. As Richard noted, most of our debt is long-term with favorable interest rates. We are highly focused on generating free cash flow and reducing our overall debt load. During 2023, we paid down $45 million of our term loan, including a $10 million voluntary payment in the fourth quarter, as a result of our strong free cash flow. During the first quarter of this year, we expect to pay down our TLA by approximately $25 million. As mentioned earlier, our net leverage ratio at year-end decreased by more than half a turn to 3.16 times, down from 3.69 times a year ago, and our goal is to reduce our leverage to below three times in the course of 2024. As part of our fourth quarter results, we recorded a $318.9 million pre-tax write-down to Goodwill as we announced in our earnings release this morning. This non-cash pre-tax charge was triggered by the reduction in our stock price as of December 31st. We also recorded a $25 million pre-tax charge to settle a pending securities action filed in 2021 premised on allegations regarding disclosures related to our former CEO and organic growth. Turning now to guidance for 2024, we currently anticipate revenue to be in the range of $3.25 to $3.35 billion adjusted EBITDA to be between $650 and $710 million, and free cash flow to be between $150 and $180 million. Let me share with you some assumptions that support our views on guidance. The 7525 reimbursement for non-competitively bid non-rural MSAs expired on January 1st. And although it is possible the rates will still be extended, we are budgeting approximately $25 million of headwind to revenue and to adjusted EBITDA. We expect revenue for our sleep category to grow mid-single digit over 2023, a very tough comparable period that benefited from the backlog of demand pent up following the supply chain shortages faced in 2022 and early 2023. We recently doubled our dedicated Salesforce for our diabetes products. And although we expect limited growth in the first half of 2023, as that team ramps production, we expect to bridge to low single-digit growth in the second half of the year. We anticipate the rest of the product categories to deliver the remaining top-line growth. As we look to 2024, we expect a very similar quarterly slope to full-year revenue and adjusted EBITDA that we experienced in 2023. expect to improve free cash flow generation over 2023 by 15 at the midpoint as we're already securing efficiencies in procuring and managing our capex and inventory for q1 2024 we expect revenue and adjusted evita to grow about three percent over the first quarter of 2023 free cash flow to be approximately zero as we absorb the seasonal effects of patient deductible resets on our cash inflows, as well as interest, bonus payments, and cash related to the previously mentioned shareholder lawsuit settlement. We ended the year in a position of strength and have built a solid foundation to grow. We look forward to keeping you updated as the year unfolds. I'll turn it back to Richard for his closing remarks.

Thank you, Jason. And now I'd like to add some color to Jason's remarks on 2024 guidance. We know that one of the risks in healthcare is reimbursement changes, and the non-extension of the 75-25 rate relief masks growth rates that would have been more expected in 2024, considering the tough comparables in sleep and respiratory. Here's how we can improve on these numbers over the base that we've established for 2024 and into the future. We can close on the strategic relationships in our pipeline, not as large as Humana, but certainly large enough singly and in the aggregate to boost growth. We can continue to pick up share in the sleep and respiratory categories. We can bring our diabetes category back to market rates of growth. And finally, we can continue to get more efficient. If we accomplish this basic blocking and tackling, It can achieve our target of mid to upper single-digit non-acquired growth in 2025 and beyond. Before I turn it over for questions, I'd be remiss if I didn't thank our nearly 11,000 employees who are focused on improving the lives of the 4.1 million people who rely on us for needed medical devices and supplies. Operator, please open the line for questions now. Thank you.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 if you would like to ask a question. We'll take our first question from Brian Tanquillette with Jefferies. Your line is now open. Brian, please check the mute function on your phone.

Can you hear me, guys? Can you hear me? Yes. Yes, loud and clear. Oh, there you go. Awesome. Congrats on the quarter. I guess the first question I would ask is just for Richard. As we think about kind of like a normalized run rate as we get past 2024, how are you thinking about the growth rate for the business, maybe either by product category or just in totality?

You know, what I said in my prepared remarks is our target is mid to upper single-digit growth in 2025 and beyond. I don't want to get more specific than that, but I kind of alluded to some of the building blocks. And one of the key issues for us is to bring diabetes back to, you know, closer to a market rate of growth, maintain our dominance in sleep. And then, you know, respiratory, as an example, was a pleasant surprise for us this year. We think we have the tools to continue. So, you know, broad, you know, we can talk about the broad, but, you know, let's get through 2024 to get to the specifics thereafter.

I appreciate that. And then maybe, Jason, just as I think about the cadence for the year, I know you gave guidance like you want anything to call out as it relates to cash flow in terms of how, you know, any seasonality factors there that we need to be considering.

Thank you. Nothing unusual for 24, Brian. You know, we should expect approximately a third of our free cash to get generated in the first half of the year and the remainder to be generated in the second half of the year, much like we did in 2023. If you're getting down to the quarter level, certainly Q1 is pressured, as we call it out. Q2 is historically stronger, as there's no interest payments that quarter. Q3's got interest, so there's a shift there. And then Q4, as usual, is the big quarter, as we just demonstrated. Awesome. Thanks, and congrats again.

Thanks, Brian. Thanks, Brian.

Thank you. We'll take our next question from Eric Coldwell with Barrett. Your line is open.

Thanks very much.

I have a couple here. First one on pumps. In the past, you did give some revenue numbers and headwind expectations for 2023.

I was hoping we could get the final tally on pump revenue in 23 and how much that was down.

And then in 2024, what your expectation is for the full year, how much of a, I assume a net headwind still, but maybe not. Just hoping you could give us some color on that. Sure. This is Jason. So firstly, you know, as we have reported previously, pump revenue in 22 was about 160 million, and we expected about 120 in 2023. So we came right in line with that expectation. We had previously talked about a 35 to $40 million headwind, and it literally came square in the middle of that. We think, as we stand here today, that the headwind in 24 will be about half that. So called in the range of high teams to $20 million. We do think that the second half of the year will do a bit better than the first half. The reason for that is, as discussed in the prepared remarks, some of the transition is stabilizing. So in other words, if you were on a tube-based pump and you wanted to move to a tubeless pump, you've made that decision already. And then secondly, we are growing our tubeless pump revenue. um we had a we had a solid quarter in new starts related to tubeless pumps and for the first time we overcame um to the base pumps in terms of new starts and so again it'll take some time for that to work through the system if you will but those are the thoughts on the pump and pump supplies for for the for the year that's a great detail thank you and then on uh the sleep mid single digit growth not a not a surprise there at all but i am curious How does resupply or sales growth compare to rental performance in 2024? I would think the resupply would be up stronger than mid-single-digit rental, maybe flat to down, but I was hoping to get a little more detail on that, if you will. Yeah, you got that exactly right, Eric. We're expecting higher single-digit in the resupply operations. as we just continue to increase the average sales price and number of products per order, as well as improving our adherence rates. So just continuing to compound that census. So we feel great about resupply in 2024. To your point of rental, you know, our new start growth is strong. Patient demand is strong, frankly, as strong as it's ever been. Within rental revenue, the nuance of the 13-month rental cycle means that the record setups we reported in the first half of 2023 are rolling off of that rental revenue cycle. um, in 2024. And so it's creating just a tough comp, uh, rental revenues probably around flat, um, is what we're expecting for the year. But again, this is not, you know, uh, uh, uh, anything other than a tough comp period and just larger, uh, number of patients rolling off from, from a year ago. That's great. And then last one for me, um, thank you for all the, uh, uh, details here. The, um, The efficiencies you've cited in patient CapEx, could you dig into that a little bit? Was there any unusual timing or items in the fourth quarter? And then, you know, what are the major structural or thematic changes in your CapEx requirements that, you know, perhaps could be sustainable? Sure. So maybe start with a level setting of 23 by quarter. In Q1 in 23, CapEx represented 12% of revenue. And as reported, that was related to a purposeful stockpiling of CPAPs that we felt was necessary to meet the continued demand in sleep therapies. And then that dialed off to kind of high 10%, mid 10%, and then low 10%, you know, 10.3% for Q4. And so that kind of mid 10% range is a good run rate. We think we'll get half a point out in 24, which is why free cash flow conversion is up half a point. Structurally, what's changing here is technology, really related to the Oracle fixed assets and inventory digitalization project that we've been hard at work on for about a year now. That is taking hold. We just went live within the last few weeks in our first sites for HME, and we're finding benefit there of compressing our day's hand on inventory and just getting more efficient about the way we order, how we order, and just kind of what we're comfortable with in terms of mins and maxes, and we expect to bring more improvement throughout the year. Thanks very much. Nice seeing the good progress here. Congrats. Thanks, Eric.

Thank you. We'll take our next question from Matthew Blackman with FIFO. Your line is open.

Good morning, guys. This is Colin on for Matt. I thought I'd start by asking for a bit of a state of a union of sorts on the diabetes franchise, particularly on the CGM side. Are you seeing any lift from basal patients, particularly the Medicare coverage decision that went through last year? or any new sensors like the G7 launch? And is the government mix going to stabilize this year? What are your thoughts around that? I know that's still a priority.

It's a compound question. Let me start and then I'll turn. This is Richard. I'll turn it over to Jason. We're not seeing the benefits yet from the extensions in Medicare and in some of the other governmental programs, but we think we will in 2024. So that's a pillar of why we think we can ultimately get back to more growth. So that we see as upside for going forward. Jason, why don't you repeat? You asked a compound question. Jason's got it.

Yeah, I'd say, Colin, as it relates to newer products and those trends, we are distributing the newer models for both Dexcom and Abbott. They've been great partners, and we're continuing to run that transition, frankly, faster than we had planned for or expected. And we think that's a good thing, obviously, for our patients and then certainly for our economic support. I guess I'd say in terms of the government split, we think that we will grow that government census a touch more in 2024. And the reason is the doubling of the sales force is really intended to go after geographies that we've never been in before. And so as you'd expect, a lot of data and analysis went into where the business is, what we think You know, these geographies, particularly urban areas, will produce. And we're pointed directly at a primary care sale, which happens to be a very heavily government patient population. And so, again, we do expect to grow in that area in 2024, and particularly in the second half of the year, we expect to get back to growth mode.

And then I had one follow-up on the gross margin outperformance during the quarter. Was that primarily a function of the Humana dynamic or any one-time items, or was it just the underlying business and the cost efficiencies that you've put in place this year? How should we think about that kind of progressing into 2024? Thanks.

You know, I'd say all the above, Colin. I mean, we were just pleased. I mean, frankly, we beat on essentially every assumption, every measure. You know, Humana, to your point, we have done a good job transitioning patients, and we have gone faster than we committed to, which is resulting in a big improvement in Q4 over Q3. Secondly, you know, in reference to the cost management program, when you look across labor, OpEx, and G&A, I mean, Q4 is essentially flat over the prior year. And so, you know, the company was able to deliver on that cost containment program and then also deliver what I think is about $80 million of growth over the prior year. So, I mean, it's really those couple of factors that drove the performance in the quarter.

Thank you so much.

Thank you. We'll take our next question from Pito Chickering with Deutsche Bank. Your line is open.

Good morning. Thanks for taking my questions. Going back to sleep rentals for a second, I understand the flat growth guidance for 2024 just due to really tough comps in 23. If I just plug 2024 into a CAGR from 22, it's about 12%. Is that the right growth we should be thinking about for 2025 for sleep rentals?

Well, I'd say, Peter, sleep as a category, you know, mid to upper single digit, as Richard alluded to, across the enterprise. You know, we think that sleep growth will continue to be healthy. You know, once you get to a point that your comparable period is clean, then yes. I mean, both whether it's rental or resupply, it should grow at approximately the same rate.

Okay, great. And then a few follow-ups here on diabetes. What percent of your pumps today are tubeless versus tubed? What's the cost difference for patients if they get a tubeless pump and a pharmacy versus a DME? And then what do you think of the payer mix ends the year? We're 24?

Yep. Yeah, I'd say, to take that last part first, it's probably up a point or two. So the 79%, you know, that we just reported, we think it's up a couple points as we exit 24. Regarding pumps, you know, the tubeless pumps that we are putting out, which are Omnipod 5s as well as a new entry, Betabionics, I mean, we're running those through the pharmacy. I mean, we're tapping our pharmacy capability and running those through the pharmacy channel today. So there really is no differential versus, like, a DME channel because, you know, those products are really going through pharmacy.

Okay. So what percent of your revenues for diabetes are pharmacy versus DME? And I guess if you're guiding – the whole sector to be flat for the first half of the year and the growing lows in the back half of the year, any sort of color on how is it going to deem the growing versus pharmacy?

Yeah, I'd say, you know, Peter, we haven't – we're not ready to put out a split of revenue on – pumps you know tubeless versus uh pump uh i'm sorry two bliss versus two based um but i will say you know for the quarter our new starts it was outweighed in two bliss and so that that will take some time as you get a pretty long length of stack for pump patients you know that will take some time for that to start equalizing um in terms of the you know getting back to growth in the second half really you got two factors you got the the pump pressures we think will be heavier in the first half and lighter in the second half And then secondly, in CGMs, we think growth will be lighter in the first half as the sales team starts ramping, and then we'll deliver in Q3 and Q4. So we think the second half is going to be stronger than the first.

Okay, great. And then quickies here, the other revenues are a pretty big driver in the quarter. Can you remind me what other is? And then free cash flow conversion, is this the right ratio for the next couple of years, about 24% free cash flow conversion versus just EBITDA?

Yes. uh on uh free cash that's a that's an easy one and the reason is we think you know that conversion from ebitda down to cash flow from operations and then just you know better capex efficiencies um you know you're you're getting to that same place um and and i'm sorry peter the first part of the question was related to uh it's uh uh revenues and other i guess can you just yeah sure Yeah, so historically and currently, other included items such as e-commerce, hospice, orthotics, you know, so it's kind of a grouping of various lines of business. Since July, it also includes the PMPM revenue. from capitated agreement. And so that's why you're seeing a large growth in Q4 over Q3 sequential.

Makes sense. Thank you so very much. Thank you.

Thank you. We'll take our next question from Kevin Calanaro with UBS. Your line is open.

Hi, good morning, everybody. It's Andrea Alfonso in for Kevin. Thanks so much for taking the question. I actually just have a follow-up to those last set of questions. You know, I just think on free cash flow, you know, you talked about some of the moving parts there that underlie your expectations for 24. You know, if we sort of just single out certain improvements like cash collections, for example, how do you think about you know, the next tranche there of capturing some of those benefits. And maybe if there are any working capital commitments, you know, from the ramp of Humana, how do you balance those improvements against that? And then I have another follow-up question.

Sure, Andrea. Good morning. I'd say, firstly, you know, in terms of DSO and kind of the AR side of things, I mean, we brought DSOs down considerably over the last 12 months. And, you know, as previously discussed, that was really a result of big investment in technology, particularly in claims editor engine that we built as proprietary tech that we own and operate. And, you know, that was just a home run of an investment. And that's really, you know, the people and the processes within the REV cycle of WSOs. We are not anticipating much of a shift in DSOs versus the 2023. by quarter. We are, however, actively investing in particularly the denial management portion of RevCycle. We've got big tech and new process going in there. And so, we're not ready to talk about it. But, you know, again, we're investing millions. And, you know, we will expect ESO improvement from that point. But you're really looking more 2025. When you look at the other areas of working capital, you'll note inventory did a little better job in inventory management over the course of 23, particularly at the end of 23. We're expecting that, whether you call it inventory management or CapEx improvement, we're expecting half a point better on revenue over the course of 2024. Thanks.

And just again, a follow-up question on Tito's prior question about the other revenue lines. So, you know, if I look at kind of that $77 million or so that you reported on the sales line, is that – how do we think about the cadence going forward? Was there some sort of a capture of an accelerated benefit that's not expected to recur? Thanks so much for taking my question.

Sure. So, you know, that other revenue category, if you look at the third quarter, 23 sales, other we reported $64 million of revenue. And that's now up in Q4 to $77 million of revenue. So, again, the PMPM revenue from capitated agreements is inside of that category. And so as we, you know, far outpaced the patient transitions that we committed to as part of the key agreement in Q4, those cap deductions came down significantly. And that's a top line and bottom line impact. So both good guys. So that's the predominance of what you're seeing there in that sales other growth.

Thanks a lot. Operator, is there another question?

Yes, Sarah, as I apologize, we'll take our question from Ben Hendrix with RBC Capital Markets.

Hey, thanks, guys. I wanted to just get a little deeper into the Humana contract conversion. Just want to get an idea of where we are in that process.

You said you've had some good success lately and getting that ramped up. If you could quantify perhaps the PMPM contribution to that $77 million and then again, just how that does, you know, how you expect that portion of it to track through the year.

Hey, Ben. This is Jason. You know, we won't comment much on the economics of the arrangement. But to help out, I would tell you that we have committed to being substantially complete with patient transitions by the end of this quarter, at the end of this first quarter. And if we are able to execute on that, you'll see a fully loaded quarter that we've essentially removed those cap deductions. So it's, in other words, kind of a fully loaded quarter, and then you can run them out from there.

okay thank you and then just to follow up on the diabetes and pharmacy channel shift uh commentary uh if you could describe a little more detail about your efforts and how you know the penetration into the pharmacy channel what does that look like and kind of where are we in that process and timing we should have something more significant to say about this in the first quarter. In the first quarter call, we're working diligently to identify appropriate partners to work with us on this. Entering the pharmacy channel is not a small enterprise for us. We've got a 50-state pharmacy, but we do need you know, the backup tools and pipes in order to do this as efficiently as some of our competitors. So we are going to – we are, in fact, spending time and resources to get ramped up in this quarter and hope to have something to talk about in a couple of months. Thank you.

Thank you. We'll take our next question from Joanna Gadjunk with Bank of America. Your line is open.

Good morning. Thanks for taking the question. So I guess first a follow-up on the questions around the Humana contract and the other revenue. So there was the $92 million, I guess, revenue in this quarter to four. That sounds like there's still more roundups. So the question is, you know, is this $92 million a good starting point or if there's more? And I guess when it comes to thinking about this being a strong quarter overall, was there some sort of pull forward, you know, of this revenue from Humana or some adjustments, you know, from 24 into 23 to Q4?

There were no adjustments or unusual items in the quarter. The 92, you're referencing the total other revenue. I think earlier we were talking about the other sales revenue at $77 million. But as we said, Joanna, we expect to be substantially complete with patient transitions before the end of the first quarter 2024. And if we're able to execute on that, that should give you a good run rate within that sales other category of what we believe is our baseline, our new baseline.

Okay, great. Thank you. I appreciate it. And so I guess just coming back to the performance in the quarter, so you said EBITDA came in more above your higher end of your range, and you said revenue came with higher margin, and obviously the Humana contract and a couple of other things. Any way to quantify any of these things, or you would say that they equally contributed to the outperformance?

Yeah, I mean, a little bit here, a little bit there, a little everywhere. You know, adds up to some real numbers, I guess. You know, I'd say if we look back at what we said in Q3, you know, we had expected, you know, sleep and diabetes sequentially, their resupply growth to be about $20 million. I mean, it was $40 million. Right. And so you've got all the flow through on that. I mean, we have various other lines that be. And like I said, it's kind of a couple million here, a couple million there. Certainly on labor and OPEX, we put out conservative expectations and we beat them. You know, so that was about another five million dollars of sequential improvement across labor and OPEX.

Thank you. And another, I guess, follow-up, when it comes to the expiration of the 75-25 rule, which, I guess, product category would be hit the most? Would it be, I guess, respiratory and sleep?

Yeah, I mean, it would generally fall in line with, you know, the size of those businesses, right? So sleep being almost about 40% of our revenue, right, would arguably be impact most. But, you know, this is down at an MSA level and actually a product pick-pick level, and so there's a lot of detail and nuance there. But for a proxy, it's safe to assume that it spreads across the business based on the size of the products.

All right. Thank you for that. And just talking about, I guess, the government exposure as it relates to diabetes business, right? So you talk about the census being almost 80 percent and, I guess, growing from here. So when you talk about these government payer exposure, how much, I guess, in that bucket is from, you know, Medicaid Free For Service versus Medicaid Advantage, Manage Medicaid? And also, you know, when it comes to these payers, managed Medicare and managed Medicaid, you know, are those payers largely, you know, in the pharmacy benefit or medical benefit? You know, is there, I guess, still potential for some movement in some of these payers that are actually in the government bucket, but they have, you know, more flexibility versus the people service? Thank you.

You know, Jan, I'd say that, I mean, we're not going to provide a lot of detail of the components, you know, that you're asking for to make up the total. The reason that we're categorizing it as government-sponsored payers is that we believe that, you know, this part of the business is fairly well insulated from the risks that you're highlighting. And so that's the reason we're reporting it that way.

Thank you. Thanks so much for taking the question.

Thanks, Joanna.

Thank you. We do have a follow-up from Eric Coldwell with Barrett. Your line is open.

Thanks. I wanted to go back to the reimbursement and regulatory environment. In the recent past, CMS has issued a few final rules that help rein in Medicare Advantage and managed Medicaid programs for things like improper denials, unnecessary or improper prior authorizations. Also, CMS is forcing these plans to cover everything covered under fee-for-service, provide faster appeals, resolution, and also more transparency. I mean, it would seem like those would all be good guys for ADAPT and the rest of the industry, but I'm curious. It's very early here, obviously, with the last final rule. I'm curious, have you seen any benefit or change in in-payer behavior since this came out, and what are you expecting? Thank you.

We haven't seen nothing so far, but, you know, your intuition that this is all positive for us is, I think, correct.

Have you incorporated any forecasting of a, you know, potential lift or benefit in your guidance? No. Yeah, so anything that happens would be upside potential. That's right. Okay.

You got it. Thanks very much. Thanks, Eric.

Thank you. And we have no further questions in the queue at this time. I would now like to thank everyone for joining today's call. You may now disconnect your line at any time.