Executive Summary / Key Takeaways

• Transformative Capitated Partnerships: AdaptHealth is strategically shifting towards capitated arrangements, exemplified by a new exclusive 5-year, $1 billion+ contract with a major national healthcare system covering over 10 million members, and another new agreement for 170,000 lives. These partnerships are expected to significantly increase recurring revenue, enhance competitive positioning, and drive long-term growth by aligning incentives for superior patient outcomes and cost management.
• Operational Discipline Driving Efficiency: The company's "One Adapt" initiative, including a standardized field operating model, national contact center, and aggressive adoption of AI and automation, is streamlining operations, improving patient service, and enhancing profitability. These efforts are already yielding tangible benefits, such as reduced reliance on offshore labor and improved CPAP setup times.
• Financial Strength and Deleveraging: AdaptHealth is rapidly strengthening its balance sheet, having reduced debt by $225 million year-to-date in 2025, bringing its net leverage ratio to 2.68x, nearing its 2.5x target. Strategic divestitures of non-core assets are contributing to debt reduction and margin accretion, while the One Big Beautiful Bill Act (OBBBA) is expected to significantly reduce cash taxes and boost free cash flow.
• Diabetes Health Turnaround Gaining Momentum: After a period of underperformance, the Diabetes Health segment is showing strong signs of recovery, with sequential improvements in new starts and record-low attrition rates in resupply. This turnaround is critical for achieving enterprise-level organic growth and leveraging AdaptHealth's broad portfolio.
• Strategic Opportunity in Competitive Bidding: While CMS's proposed competitive bidding program introduces potential reimbursement pressures, AdaptHealth views it as a significant opportunity for market consolidation due to its scale, advantaged cost structure, and improving financial strength, positioning it to capture greater market share.

The Home Healthcare Imperative: AdaptHealth's Blueprint for Growth

AdaptHealth Corp. (NASDAQ:AHCO) stands at the forefront of the rapidly evolving home medical equipment (HME) and healthcare-at-home solutions industry. Founded in 2012, the company's initial growth was fueled by a strategy of aggressive acquisitions, building a national footprint that now serves approximately 4.3 million patients annually across all 50 states through a network of around 640 locations in 47 states. This expansive reach positions AdaptHealth as a national leader, uniquely capable of addressing the growing demand for home-based care. The broader industry is experiencing robust tailwinds, driven by an an aging U.S. population, the increasing prevalence of chronic conditions, and a fundamental shift in healthcare delivery towards the home, a segment projected to outstrip overall healthcare spending growth by approximately 200 basis points over the next decade.

AdaptHealth's overarching strategy, encapsulated in its "One Adapt" initiative, is to leverage its scale and operational discipline to become the industry's most reliable operator. This involves a relentless focus on patient service excellence, aiming to deliver superior quality with speed and at a competitive cost. The company's strategic blueprint is built on three core value drivers: accelerating non-acquired revenue growth, enhancing profitability, and strengthening its balance sheet. This integrated approach is designed to transform AdaptHealth from an acquisitive growth story into a model of consistent, sustainable organic expansion and value creation.

Technological Edge: Powering Efficiency and Patient Engagement

At the heart of AdaptHealth's operational transformation and competitive differentiation lies its commitment to technology and innovation. The company is actively deploying advanced solutions to streamline its operations and enhance the patient experience. A key technological differentiator is the myAPP mobile application, which offers self-service features such as bill pay, scheduling, order status, and live agent assist. Introduced in October 2024, the self-pay feature, followed by a CPAP self-scheduling feature launched in December 2024, directly addresses patient convenience by eliminating the need for direct interaction with customer service representatives for routine tasks. These features are designed to significantly improve patient experience by expediting access to critical therapies and reducing administrative burden.

Beyond patient-facing tools, AdaptHealth is aggressively pursuing AI and automation across its business. In the third quarter of 2025, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. This demonstrates a tangible, quantifiable benefit of its technological investments, directly impacting cost efficiency and profitability. The company is also leveraging AI to automate order intake, aiming to increase intake efficiency, improve order accuracy, and reduce order cycle time. These initiatives are expected to significantly increase agent productivity, reduce manual administrative tasks, and create capacity for upskilling the workforce, thereby slowing the rate of new hiring required to support business growth.

The strategic intent behind these technological advancements is clear: to build a best-in-class health services business that drives improved health outcomes and reduced costs. AdaptHealth envisions harnessing the "massive quantities of physiological, behavioral and environmental patient generated data from our in-home equipment" to deliver actionable insights to patients, physicians, and payers. This technological roadmap is foundational to AdaptHealth's competitive moat, contributing to better margins through lower operating costs, improved market positioning through superior service, and long-term growth by enhancing its value proposition to both patients and payers.

Competitive Landscape: Differentiating Through Service and Scale

AdaptHealth operates in a highly fragmented HME industry, where service levels often vary widely. The company's competitive strategy centers on leveraging its national scale and integrated service model to differentiate itself. While direct competitors like Owens & Minor (OMI), McKesson Corporation (MCK), Cardinal Health (CAH), and Philips (PHG) also operate in the medical supplies and HME distribution space, AdaptHealth's specialized focus on patient-centric, home-based chronic care services provides a distinct advantage.

Compared to broader distributors like Owens & Minor and McKesson, AdaptHealth's direct-to-patient delivery and comprehensive support for conditions like sleep apnea and diabetes foster stronger customer loyalty. While these larger competitors may possess greater scale in overall supply chain logistics, AdaptHealth aims to win on specialized patient engagement and service delivery speed. For instance, AdaptHealth's operational improvements are designed to cut down lag time from diagnosis to CPAP setup, directly addressing a key patient pain point and a competitive weakness identified in certain geographies.

Against product-focused companies like Cardinal Health, AdaptHealth's integrated home services offer a more holistic patient support model. While Cardinal Health might excel in cost leadership due to extensive supplier relationships, AdaptHealth's focus on value-driven healthcare segments and its regulatory expertise with government payers provide a strong competitive edge. Similarly, while Philips, a global health technology company, may lead in advanced technology integration for connected devices, AdaptHealth differentiates by prioritizing accessible and affordable solutions for U.S.-based patients, particularly those covered by government programs. AdaptHealth's improving financial strength also affords it the flexibility to take strategic action to consolidate market share, especially as external pressures mount on smaller operators in the fragmented industry.

Indirect competitors, such as telehealth platforms and health tech companies offering wearable devices, present a long-term challenge by potentially shifting preferences towards digital-first care models. However, AdaptHealth's investment in its myAPP and its vision for leveraging patient-generated data demonstrate an understanding of this trend, aiming to integrate digital tools into its core service offering.

Operational Transformation and Segment Performance

The past year has been marked by significant operational improvements under the "One Adapt" initiative. The company completed the implementation of a standard field operating model, consolidating from six to four regions and realaligning nearly 8,000 employees. Furthermore, fragmented call centers have been consolidated into a new national contact center, utilizing a single technology platform to improve call routing and standardize patient interactions.

The impact of these initiatives is beginning to flow through to financial results across AdaptHealth's four reportable segments:

• Sleep Health: This segment, a core strength, saw net revenue increase by 5.7% year-over-year to $354.8 million in Q3 2025. Sleep new starts were up nearly 7%, marking the highest quarter in two years, and the patient census reached a new record of 1.72 million. For the nine months ended September 30, 2025, net revenue grew 1.3% to $1.01 billion, with an Adjusted EBITDA margin of 22.8%. While Q1 2025 experienced a 2.8% decline in net revenue due to a non-cash headwind from a shift in purchase versus rental revenue accounting, management expects this impact to be "de minimis" by Q4 2025, setting up an "easier comp" for 2026.
• Respiratory Health: This segment delivered robust performance, with net revenue increasing by 7.8% year-over-year to $177.0 million in Q3 2025, driven by higher fixed monthly equipment reimbursements and a record patient census for oxygen equipment products. For the nine months ended September 30, 2025, net revenue grew 5.6% to $512.9 million, achieving an Adjusted EBITDA margin of 29.1%. This strong performance was partly fueled by increased oxygen new setups during a severe flu season in Q1 2025.
• Diabetes Health: After a period of underperformance, this segment is showing promising signs of a turnaround. In Q3 2025, net revenue increased by 6.4% year-over-year to $150.1 million, marking its first quarter of revenue growth since Q1 2024. This was primarily due to growth in patient census for CGM products and insulin pumps and supplies, and improved retention rates. For the nine months ended September 30, 2025, net revenue declined 2.1% to $433.9 million, with an Adjusted EBITDA margin of 5.1%. Management attributes the recovery to new leadership, streamlined resupply operations leveraging best practices from Sleep Health, and a focused commercial team. The company expects to resume growth in diabetes health revenues possibly as early as the second half of 2025.
• Wellness at Home: Net revenue for this segment decreased by 16.0% year-over-year to $138.4 million in Q3 2025, and by 7.6% to $445.9 million for the nine months ended September 30, 2025, with an Adjusted EBITDA margin of 11.9%. This decline was primarily due to the disposition of two businesses in Q2 2025 and certain custom rehab technology assets in Q3 2024. However, the segment experienced robust year-over-year growth driven by orthotics and hospice in Q3 2025, partially offsetting the impact of divestitures.

Financial Health and Capital Allocation

AdaptHealth is making significant strides in strengthening its financial position. For the nine months ended September 30, 2025, net revenue was $2.40 billion, with a net income attributable to AdaptHealth Corp. of $32.0 million. Adjusted EBITDA for the same period was $453.5 million, representing an Adjusted EBITDA margin of 18.9%. The company's gross profit margin for the trailing twelve months (TTM) stands at 13.84%, with an EBITDA margin of 18.39%.

A key priority is debt reduction. AdaptHealth reduced its debt by $50 million in Q3 2025, contributing to a year-to-date debt reduction of $225 million. This has brought the net debt down to $1.73 billion, and the net leverage ratio to 2.68x, rapidly approaching the company's target of 2.5x. This deleveraging has also resulted in a reduction of year-to-date interest expense by over $15 million compared to 2024. The company's capital allocation strategy prioritizes investing in organic growth and further debt reduction, followed by strategic tuck-in acquisitions. In 2025, $19 million has been allocated to tuck-in deals.

Cash flow generation remains strong. Cash flow from operations for the nine months ended September 30, 2025, was $418.6 million, leading to a free cash flow of $140.1 million. The recently enacted One Big Beautiful Bill Act (OBBBA) is expected to significantly reduce cash taxes over the next few years, benefiting free cash flow by reinstating 100% bonus depreciation and favorable interest deduction limitations. This resulted in a $32.70 million current income tax receivable as of September 30, 2025. While free cash flow for 2025 is projected to be slightly lower than 2024 due to non-recurring payment term extensions, the company expects considerably less interest expense to offset this.

Capitated Agreements: A Transformative Growth Vector

A pivotal development for AdaptHealth's future growth is its success in securing large-scale capitated agreements. In Q2 2025, the company signed a definitive agreement to become the exclusive provider of HME and supplies for a major national healthcare system. This 5-year contract, valued at over $1 billion in revenue over its term, covers more than 10 million members across multiple states. It is expected to generate at least $200 million in new annual revenue once fully ramped by the end of 2026, with Adjusted EBITDA and free cash flow margins in line with the rest of the business. This was followed by another new capitated agreement announced in Q3 2025, serving an additional 170,000 lives.

These partnerships represent a clear endorsement of AdaptHealth's ability to deliver patient service excellence at scale and fundamentally strengthen its competitive position. They increase the mix of recurring revenue, provide a clear growth runway, and align incentives between AdaptHealth and payers/providers to drive better patient outcomes and manage healthcare costs more effectively. The company is making substantial upfront investments, including recruiting approximately 1,200 employees, procuring 300 vehicles, and establishing around 30 new locations, to support the ramp-up of these contracts, with expenses running into early to mid-2026 before revenue fully materializes.

Outlook, Guidance, and Risk Assessment

For the full year 2025, AdaptHealth maintains its revenue guidance, expecting to come in "very modestly above the midpoint" of its range. Adjusted EBITDA guidance is maintained but is expected to be at the "bottom end of that range" due to accelerated investments in infrastructure, technology, and labor for the new capitated arrangements. Free cash flow guidance remains at $170 million to $190 million, despite potential government shutdown impacts on cash collections.

Looking ahead to 2026, AdaptHealth anticipates top-line growth of 6% to 8% over full-year 2025, driven by accelerated growth in core products, revenue from the new capitated contracts, and the impact of disposed assets. Revenue growth is expected to be slower in the first half of 2026, accelerating in the back half as the capitated contracts ramp up. The company also projects a 50 basis point improvement in full-year 2026 Adjusted EBITDA margin, even with continued early investments in capitated infrastructure. Organic growth (excluding acquisitions and dispositions) is projected to increase from under 2% in 2025 to under 3% in 2026, with the capitated arrangements contributing significantly to overall growth.

Key risks include the evolving CMS Competitive Bidding Program. While the final rule is pending, CMS's intent to limit contract awards could consolidate Medicare market share, which AdaptHealth views as an opportunity given its advantaged cost structure and financial strength. The potential inclusion of CGMs and medical supplies in bidding could introduce reimbursement pressures, but AdaptHealth is confident its operational efficiencies and manufacturer partnerships will help "weather the storm." Other risks include ongoing legal proceedings, a material weakness in internal control over inventory valuation (currently being remediated), and potential impacts from international trade tariffs, though the latter is currently deemed manageable due to product classifications and manufacturer assurances.

Conclusion

AdaptHealth is undergoing a profound transformation, strategically pivoting towards a future defined by large-scale capitated partnerships and operational excellence. The company's "One Adapt" initiative, coupled with significant investments in technology and automation, is enhancing efficiency and patient service, laying a robust foundation for sustainable organic growth. The recent multi-year, multi-state capitated agreements are game-changers, promising substantial recurring revenue and solidifying AdaptHealth's position as a preferred partner for payers and health systems seeking integrated home healthcare solutions.

While the company prudently manages near-term investments and addresses operational challenges, particularly in its Diabetes Health segment, the improving financial health, aggressive debt reduction, and a clear strategic roadmap underscore a compelling investment thesis. AdaptHealth's ability to leverage its scale, technological advancements, and patient-centric approach in a consolidating industry, especially in the context of evolving reimbursement models like competitive bidding, positions it for accelerated growth and enhanced shareholder value in the years to come.