AdaptHealth cites supplier, contract challenges in second-half outlook

CONSHOHOCKEN, Pa. – AdaptHealth's disclosure that an unexpected manufacturer price increase will have a $30 million impact in the second half became a focal point for analysts during the company's second-quarter earnings call.

CEO Suzanne Foster said a manufacturer notified AdaptHealth on June 30 that it was terminating its contract with the company and implementing an immediate price increase effective July 1.

“We are actively working with the manufacturer to secure improved pricing and terms,” she said during the call. “But at this point, we’ve reflected the full impact in our outlook.”

Foster declined to identify the manufacturer, citing ongoing negotiations. She also declined to disclose the size of the increase or the business segment affected.

Because the increase came midway through the year, AdaptHealth does not currently have an opportunity to pass through those costs, Foster said. Instead, the company is evaluating its supplier mix and product portfolio to identify potential offsets.

“This is kind of a TBD right now with this situation, until we really get through the negotiation, which we’ll be able to update you at the end of (the third quarter),” she said.

One analyst asked Foster to confirm that it was unusual for AdaptHealth to absorb a significant price increase with little notice, noting that such increases are typically announced in advance and clearly defined.

“I would agree with you – it’s unusual, but it’s factual and it’s unfortunate,” she said. “We like to say that we have strong partnerships with our manufacturers. I mean we're always in constant discussion with our suppliers on different situations, volumes, supply, recalls, you name it, right? So, this one did surprise us a bit.”

West Coast contract challenges weigh on outlook

AdaptHealth has now completed its first full quarter operating under a capitated agreement on the West Coast and says it has gained greater visibility into operational challenges, including the need to work through pent-up patient demand and streamline inherited inefficient workflows. The result: A $40 million negative impact on profitability projections for the second half of the year.

AdaptHealth also had planned to leverage the infrastructure it built for the contract to serve business beyond the capitated population. Those plans have been delayed by a temporary moratorium on new DME supplier enrollments.

“Once that happens, we see substantial opportunity to serve patients who use our customers' health system but are insured through other payers and to sell proactively to other customers located near or within our new footprint,” Foster said.

In response to cost pressures, AdaptHealth reduced its workforce during the second quarter, generating approximately $19 million in savings.

OneHome agreement expands footprint

AdaptHealth has signed a new agreement with Humana OneHome in South Florida and Texas to serve about 478,000 members, expanding its geographic reach and adding a new market. The company now has approximately 10 capitated agreements.

“Florida was not a state we service,” Foster said. “That does not mean we took it from the provider that has Florida. This piece of business was being handled by Humana, and they decided to get out of that business. They RFP'ed it (and) we took it over, purchased the assets, and we have now the new operator in that space, which is a new geography for us.”

Portfolio restructuring now complete

With the pending sale of its diabetes business to Cardinal Health, AdaptHealth has completed its transition to a more focused portfolio centered on sleep and respiratory products. Previously, the company divested its complex rehab (to National Seating & Mobility), infusion and other businesses.

“With the looming threats out there of competitive bid (and) having to invest to grow, we thought it would be better to shrink down to our core and build from there,” Foster said. “So, this very disciplined portfolio pruning has been a journey that we're on that really came to this point in time. This is the quarter where we can say we have finished that divestiture path that we've been on.”

• Related: AdaptHealth’s fast start on contract boosts confidence.