Executive Summary / Key Takeaways

• AdaptHealth is executing a fundamental strategic pivot from an acquisition-driven rollup to an operationally integrated healthcare-at-home platform, with debt reduction of $225 million year-to-date and a net leverage ratio of 2.68x demonstrating disciplined capital allocation.

• The company secured a landmark five-year capitated contract covering over 10 million members, projected to generate more than $1 billion in revenue, which will elevate capitated arrangements to at least 10% of total revenue and provide a recurring, predictable earnings stream that fundamentally alters the business model.

• Segment performance shows a tale of two stories: Sleep Health and Respiratory Health deliver solid mid-20s EBITDA margins with stable growth, while Diabetes Health is showing early signs of recovery after operational missteps, and Wellness at Home is being streamlined through non-core divestitures representing approximately $100 million in annual revenue.

• Management's "One Adapt" initiative—standardizing operations, deploying AI/automation, and consolidating call centers—is driving measurable improvements, including setup times improving by one-third and a 5% reduction in offshore labor reliance in revenue cycle management.

• The investment thesis hinges on execution of the massive capitated contract ramp requiring 1,200 new employees and 30 locations, competitive bidding program outcomes that could consolidate market share, and whether Diabetes Health can sustain its nascent recovery and remove the drag on organic growth.

Setting the Scene: From Rollup to Integrated Platform

AdaptHealth Corp., founded in 2012 in Plymouth Meeting, Pennsylvania, built its national presence through a classic rollup strategy, acquiring hundreds of home medical equipment (HME) providers to create a geographically diverse network serving approximately 4.3 million patients annually across 640 locations in 47 states. This acquisition spree, funded by over $1.4 billion in debt issuances between 2020 and 2021, established scale but left the company with operational inefficiencies and a bloated balance sheet. By 2023, management recognized that growth through acquisition had run its course, initiating a strategic pivot toward operational excellence and organic growth.

The home healthcare industry sits at the intersection of powerful demographic and structural tailwinds. The aging U.S. population, increasing prevalence of chronic conditions like sleep apnea and COPD, and the broader shift from acute care facilities to home-based treatment create a market growing roughly 200 basis points faster than overall healthcare spending. Yet the industry remains highly fragmented, with service levels varying widely and no single player commanding more than 10-15% market share. This fragmentation creates opportunity for scaled operators to consolidate share through superior service and payer relationships.

AdaptHealth's response is the "One Adapt" initiative, a comprehensive operational overhaul that realigned the company into four reportable segments—Sleep Health, Respiratory Health, Diabetes Health, and Wellness at Home—each led by a general manager accountable for performance. This structural change, effective in Q4 2024, represents more than a reporting shift; it embeds accountability into the organization's DNA and enables segment-specific strategies. The company is simultaneously investing in technology, deploying AI and automation to streamline patient intake, scheduling, and revenue cycle management, while building deeper clinical relevance through adherence programs that reduce rehospitalization rates.

Technology and Strategic Differentiation: Building Moats in a Commodity Business

AdaptHealth's technology investments address the most friction-heavy points of the HME patient journey. The myAPP mobile application, launched with self-pay functionality in October 2024 and CPAP self-scheduling in December 2024, transfers administrative burden from call center agents to patients, reducing labor costs while improving satisfaction. More significantly, the company is automating intake processes and standardizing scheduling practices, which improved setup times by one-third from Q1 to Q2 2025. These improvements matter because speed-to-setup directly impacts patient retention and revenue recognition in a business where reimbursement begins only after equipment delivery.

The AI and automation initiatives extend beyond patient-facing tools. In Q3 2025, automation reduced reliance on offshore labor by approximately 5% in revenue cycle management, a meaningful cost saving that scales as the technology matures. The company is also integrating diabetes resupply operations into sleep resupply to leverage best practices from its most mature segment. This cross-pollination of operational expertise is a subtle but important advantage, as it allows proven processes to lift underperforming areas without additional acquisition costs.

Strategically, AdaptHealth is shifting from transactional fee-for-service relationships to capitated arrangements that align incentives with payers. The multi-year Humana (HUM) contract extension in 2024 validated this approach, but the Q2 2025 agreement to become the exclusive HME provider for a national healthcare system covering over 10 million members represents a quantum leap. This five-year arrangement, projected to generate over $1 billion in revenue, requires AdaptHealth to manage the entire HME population for a fixed per-member-per-month fee. The economic implications are profound: revenue becomes predictable, the company gains control of patient acquisition rather than competing for referrals, and success depends on operational efficiency rather than reimbursement rate optimization. Once fully ramped, this contract alone will produce at least $200 million in annual revenue at margins in line with the enterprise average, while elevating capitated revenue to at least 10% of the total mix.

Financial Performance: Evidence of Operational Gains

Third-quarter 2025 results provide early validation of the transformation thesis. Revenue of $820.3 million increased 1.8% year-over-year, but organic growth excluding divestitures and acquisitions reached 5.1%, a meaningful acceleration that reflects underlying health. Adjusted EBITDA of $170.1 million grew 3.5% with margins expanding 30 basis points to 20.7%, driven by modest operating expense containment and the disposal of less profitable non-core product lines. This margin expansion, while modest, occurred during a period of heavy infrastructure investment for the new capitated contract, suggesting operational leverage will become more pronounced as revenue scales.

Segment performance reveals the company's operational core. Sleep Health, the largest segment at $354.8 million in Q3 revenue, grew 5.7% year-over-year driven by higher CPAP resupply sales from a record census of 1.72 million patients. Adjusted EBITDA margins of 23.8% remain robust despite a 240 basis point compression from increased labor and supply costs. The segment's new starts of approximately 130,000 in Q3 represent a 6.8% increase, while attrition rates from the resupply team are the best in company history. Management expects the non-cash headwind from purchase-to-rental revenue mix shifts to become de minimis by Q4 2025, setting up easier comparisons for 2026.

Respiratory Health delivered the strongest performance, with Q3 revenue of $177.0 million growing 7.8% and adjusted EBITDA surging 16% to $55.1 million, expanding margins by 220 basis points to 31.1%. Oxygen census reached a new third-quarter record of 330,000 patients, demonstrating the segment's resilience despite lower-than-anticipated new starts. This performance underscores the sticky nature of oxygen therapy patients and the segment's ability to generate high-margin recurring revenue.

Diabetes Health, long a drag on overall performance, showed signs of life with Q3 revenue growing 6.4% to $150.1 million—the first year-over-year increase since Q1 2024. Adjusted EBITDA jumped 37% to $10.0 million, though margins remain depressed at 6.7% versus historical levels near 10%. CGM census grew for the third consecutive quarter, and pump sales remained strong. Management's integration of diabetes resupply into sleep operations and remodeling of patient outreach using sleep best practices appears to be gaining traction. If momentum continues, the segment could return to consistent growth in the second half of 2025, removing a key obstacle to overall organic expansion.

Wellness at Home is undergoing strategic pruning, with Q3 revenue declining 16% to $138.4 million due to the disposition of incontinence and infusion assets in Q2 2025 and custom rehab assets in Q3 2024. These divestitures, representing approximately $100 million in annual revenue, are accretive to margins and generate proceeds for debt reduction. Adjusted EBITDA margins actually improved 90 basis points to 14.8% as the segment sheds lower-margin product lines. This portfolio rationalization demonstrates management's willingness to sacrifice scale for profitability and focus.

The balance sheet transformation is equally compelling. Year-to-date debt reduction of $225 million lowered the net leverage ratio to 2.68x at quarter-end, rapidly approaching the 2.5x target. Interest expense decreased $6 million in Q3 and over $15 million year-to-date due to lower rates and reduced borrowings. Unrestricted cash of $80.4 million provides liquidity while the company prioritizes debt paydown over acquisitions. The One Big Beautiful Bill Act, signed in July 2025, reduced estimated cash taxes by $32.7 million, providing additional capital for reinvestment.

Outlook and Execution Risk: The Capitated Contract Challenge

Management maintained full-year 2025 guidance, expecting revenue "very modestly above the midpoint" of the range and adjusted EBITDA "at the bottom end" as they accelerate infrastructure investments for the new capitated arrangement. Free cash flow guidance of $170-190 million remains achievable despite increased capital expenditures of $94.2 million in Q3 (11.5% of revenue) to support new patient growth. The company allocated $19 million to tuck-in acquisitions year-to-date, but the pipeline is modest as capital allocation prioritizes debt reduction and organic growth.

The 2026 outlook is more ambitious, with management preliminary expecting 6-8% revenue growth and adjusted EBITDA margins approximately 50 basis points better than 2025. This acceleration assumes the capitated contract ramps throughout the year, contributing at least $200 million in annual revenue at maturity. However, the ramp will be back-half weighted due to the time required to stand up infrastructure, including hiring 1,200 employees, securing 30 locations, and deploying 300 vehicles. This creates execution risk: expenses will run ahead of revenue in early 2026, pressuring margins before the contract reaches scale.

The competitive bidding program represents another critical variable. CMS's proposed rule aims to reduce the number of contract awards, which would by definition consolidate traditional Medicare market share. AdaptHealth's cost structure and national scale position it to win these contracts, potentially gaining share from smaller regional providers. However, rate compression remains a risk, and the program's inclusion of CGMs and medical supplies as new categories could pressure Diabetes Health and Wellness at Home margins. Management views this as an opportunity for consolidation, but the timing and magnitude remain uncertain.

Diabetes Health recovery is the third key swing factor. While Q3 showed promising growth, the segment's adjusted EBITDA margin of 6.7% remains well below historical levels near 10%. Management expects stable retention and modest improvement in 2026, but the segment must prove it can sustain growth and margin recovery. The integration with sleep resupply operations and new leadership should help, but rebuilding trust with referral sources takes time.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is execution failure on the massive capitated contract. While the agreement provides revenue visibility, the operational complexity of onboarding 10 million members across multiple states is unprecedented for AdaptHealth. If the company cannot recruit and train 1,200 employees quickly enough, or if systems integration proves more difficult than anticipated, service levels could suffer, damaging the payer relationship and future capitated opportunities. The infrastructure investment of $150 million in the first half of 2025 alone creates a significant cash drag if revenue ramps slower than expected.

Medicare competitive bidding poses a structural threat. While CMS's proposal to limit contract awards could benefit scaled players like AdaptHealth, rate compression is not a foregone conclusion. The company's 70% revenue exposure to government payers creates vulnerability to reimbursement cuts. If the bidding program results in margin compression exceeding 2-3 percentage points, the EBITDA impact would be material given the company's current 20.7% margin. Competitors like Lincare and Apria have similar scale and will compete aggressively for limited contracts.

The Diabetes Health segment, despite recent improvement, remains a risk. Management acknowledged they "simply weren't keeping pace with the competition" in prior periods. While operational changes show promise, the segment's margin profile remains depressed and could deteriorate if payor mix continues shifting from commercial to government insurance. If CGM census growth stalls or pump sales weaken, the segment could return to being a drag on overall performance.

Legal and regulatory overhang persists despite recent favorable resolutions. The Southern District of New York declined to pursue False Claims Act charges related to ventilator billing, and the Allegheny County class action settlement will be primarily insurance-funded. However, ongoing investigations regarding humidifiers and respiratory devices from the District of South Carolina and Eastern District of Pennsylvania remain open. While management cooperates and believes exposure is limited, the inherent uncertainty of these proceedings creates headline risk and potential financial liability.

A material weakness in internal controls over inventory valuation remains unremediated as of September 30, 2025. The company is implementing a perpetual inventory system, but until this is resolved, there is risk of financial misstatement and potential restatements. This weakness also reflects broader operational immaturity in certain areas, which could impact the company's ability to execute complex capitated arrangements that require precise inventory management across hundreds of locations.

Valuation Context: Pricing a Transformation

At a recent price of $9.41 per share, AdaptHealth trades at an enterprise value of $3.10 billion, representing 4.90 times trailing EBITDA and 0.95 times revenue. These multiples place it at a significant discount to device-focused competitors like ResMed (RMD) (EV/EBITDA of 19.10x, EV/Revenue of 7.04x) and Linde (LIN) (EV/EBITDA of 15.90x, EV/Revenue of 6.24x), but at a premium to struggling distributor Owens & Minor (OMI) (EV/EBITDA of 4.75x, EV/Revenue of 0.36x). The discount reflects AdaptHealth's historical acquisition-driven growth and debt burden, while the premium to OMI acknowledges its direct patient care model and improving operational metrics.

Cash flow-based multiples tell a more compelling story. The stock trades at 5.97 times trailing free cash flow and 2.24 times operating cash flow, implying a free cash flow yield of approximately 16.7%. This is attractive for a business with recurring revenue characteristics and a clear path to debt reduction. The company's debt-to-equity ratio of 1.17x remains elevated but is trending downward rapidly as management prioritizes deleveraging. Interest coverage is improving, with year-to-date interest expense down over $15 million versus 2024.

Peer comparisons highlight AdaptHealth's unique position. Unlike ResMed's high-margin device business or Linde's industrial gas diversification, AdaptHealth is a pure-play HME services provider with national scale. Quipt Home Medical (QUIZF), a smaller regional competitor, trades at similar revenue multiples but lacks AdaptHealth's payer relationships and technology investments. The company's return on assets of 3.64% and return on equity of 5.52% remain modest but should improve as debt reduction accelerates and margins expand.

The valuation leaves room for execution error, but not failure. If AdaptHealth delivers on its 2026 guidance of 6-8% revenue growth and 50 basis points of margin expansion, EBITDA could approach $750 million, placing the stock at approximately 4.1 times forward EBITDA—a reasonable multiple for a business with improving organic growth and recurring revenue characteristics. However, if the capitated contract ramp disappoints or competitive bidding compresses margins, the multiple could expand, pressuring the stock.

Conclusion: Execution Determines Value Creation

AdaptHealth stands at an inflection point where operational discipline and strategic focus are replacing acquisition-driven growth as the primary value drivers. The combination of aggressive debt reduction, a landmark capitated contract, and measurable operational improvements in setup times and attrition rates provides a credible path to sustained organic growth and margin expansion. The company's national scale and payer relationships create a durable competitive advantage in a fragmented market that is ripe for consolidation.

The investment thesis, however, remains execution-dependent. The capitated contract ramp is a make-or-break initiative that will consume management attention and capital through early 2026 before delivering revenue acceleration. Diabetes Health must prove its recovery is sustainable, not just a cyclical bounce. The competitive bidding program could either consolidate market share or compress reimbursement rates, with outcomes uncertain until CMS finalizes rules in late 2025.

For investors, the critical monitoring points are progress on debt reduction toward the 2.5x target, quarterly performance of Diabetes Health census and margins, and any updates on the capitated contract onboarding timeline. If AdaptHealth executes, the stock's current valuation provides meaningful upside as the market re-rates the business from a rollup to an integrated healthcare platform. If execution falters, the leverage and operational complexity create downside risk that could pressure the stock toward peer-level multiples. The story is no longer about scale through acquisition, but value creation through operational excellence.