Executive Summary / Key Takeaways

• ModivCare, a technology-enabled supportive care provider across NEMT, Personal Care, and Monitoring segments, is pursuing a strategic transformation focused on digitization, operational optimization, and deleveraging in response to significant market headwinds and liquidity challenges.
• The company faces substantial doubt about its ability to continue as a going concern due to increased costs, contract losses, membership declines, and lengthened collection periods straining liquidity and potentially impacting debt covenant compliance.
• Management has secured temporary debt covenant relief and additional financing while actively pursuing cost optimization, contract renegotiations for faster cash collection, and evaluating potential strategic asset divestitures (Monitoring, PCS) to strengthen the balance sheet.
• Despite financial pressures, ModivCare highlights operational improvements driven by technology, including reduced NEMT unit costs, improved call-to-trip ratios, enhanced on-time performance, and initial traction in new clinical monitoring programs.
• While formal 2025 guidance is withheld pending strategic review outcomes, management anticipates meaningful improvement in cash flow generation exiting the year, driven by operational efficiencies and working capital normalization efforts, though large debt payments in Q2 and Q4 will impact quarterly cash flow.

A Supportive Care Platform Under Pressure, Forging a New Path

ModivCare Inc. (NASDAQ: MODV) operates at the intersection of healthcare and human services, providing essential supportive care solutions designed to address the social determinants of health (SDoH). Through its three core segments – Non-Emergency Medical Transportation (NEMT), Personal Care Services (PCS), and In-Home Monitoring – the company connects vulnerable populations to critical care, aiming to improve health outcomes and manage costs for public and private payors. ModivCare has grown to be a significant player in these markets, leveraging a technology-enabled platform to coordinate complex service delivery. However, the company has recently faced a confluence of severe market disruptions that have tested its financial resilience and necessitated a strategic pivot focused on operational efficiency, balance sheet repair, and potential portfolio optimization.

The company's history reflects a trajectory of growth and expansion, particularly in securing large state and managed care contracts. Yet, the past year, described by management as a "perfect storm," brought unprecedented challenges. Medicaid redetermination led to significant membership declines, increased healthcare utilization drove up service costs, and Medicare Advantage (MA) reimbursement cuts pressured payors, resulting in contract losses and churn across ModivCare's segments. These external forces exposed vulnerabilities in the company's working capital cycle, particularly within certain NEMT contract structures, leading to lengthened collection periods and strained liquidity.

In response, ModivCare has embarked on a multi-faceted transformation guided by five enterprise objectives: strengthening customer relationships, digitizing operations, optimizing the operating model, increasing capital efficiency/deleveraging, and enhancing service delivery. This strategic framework underpins the company's efforts to stabilize performance, improve cash flow, and navigate a challenging financial landscape.

Technology as a Differentiator and Efficiency Driver

At the heart of ModivCare's strategy is its technology-enabled platform, which serves as a foundational strength and a key competitive differentiator across its segments. The company is actively investing in and leveraging technology to drive operational efficiency, improve service quality, and enhance its competitive standing.

In the NEMT segment, technology is crucial for managing a complex network and high-volume transactions. The platform incorporates automation and AI algorithms for trip management, aiming to optimize routing and mode assignment. This focus on efficiency is reflected in operational metrics: the self-service call-to-trip ratio reached 36.1% in Q1 2025, up from 31% a year ago, indicating increased digital adoption by members. Automated processes contributed to a 1.2% year-over-year reduction in NEMT unit costs. Digital trip volume exceeded 1 million transactions in Q1 2025. Furthermore, technology supports quality control, with complaints declining 31.2% year-over-year, on-time performance rising to 95.2%, and missed trips decreasing 20% quarter-over-quarter. The company is also deploying AI-powered tools for QA automation and expanding the use of intelligent virtual agents. This technological infrastructure, including API integrations with clients and transportation providers, positions ModivCare as a highly connected NEMT provider, enabling real-time eligibility verification and seamless trip management.

For Personal Care Services, digital tools are being expanded to support shift scheduling, caregiver engagement, and e-learning, with a reported 72% completion rate for e-learning among new caregivers. These tools aim to improve recruiting and retention, strengthen compliance, and support revenue cycle management. The shift to a centralized hub-and-spoke model, supported by standardized dashboards, drove a $1 million year-over-year reduction in PCS General and Administrative expenses.

In the Monitoring segment, recent technological advancements include the completion of phase one of a cloud-based continuity platform and the launch of new revenue cycle management automation. The company is also expanding its capabilities beyond traditional Personal Emergency Response Systems (PERS) with new condition-based monitoring contracts and virtual care management services, leveraging technology for in-home clinical monitoring and data-driven patient engagement.

From an investor perspective, ModivCare's technology investments are intended to create a competitive moat by driving cost leadership and operational leverage. While direct quantitative comparisons of specific technology performance metrics against all competitors are not publicly detailed, management asserts that its platform enables efficiencies that contribute to lower unit costs in NEMT (e.g., purchased services per trip decreased to $40.69 in Q4 2024). Against larger, more diversified competitors like UnitedHealth Group (UNH) or CVS Health (CVS), ModivCare's focused technology development in supportive care aims to provide specialized capabilities and cost advantages in its niche markets, even if it may lag in the sheer scale of R&D investment or integration with broader health plan ecosystems. The ability to effectively manage complex logistics at scale through technology is a critical factor in maintaining market share and profitability, particularly in the competitive NEMT and Personal Care markets.

Segment Performance and Strategic Adjustments

ModivCare's financial performance in Q1 2025 reflects the ongoing impact of the market challenges and the initial effects of its strategic responses. Consolidated service revenue decreased by 4.9% year-over-year to $650.7 million, primarily driven by declines across all three segments.

The NEMT segment, the largest contributor, saw revenue decrease by 6.3% to $449.0 million. This was largely attributed to the loss of certain contracts and the impact of Medicaid redetermination, resulting in a 19% decrease in average monthly members and a 4% decrease in total paid trips compared to Q1 2024. However, the segment demonstrated operational improvements and pricing power, with revenue per member per month increasing by 15.5% and Adjusted EBITDA margin improving to 6.2% (up from 5.7% in Q1 2024). Management highlighted securing two new Medicaid MCO contracts ($52 million combined annual value) and submitting four state contract renewals ($246 million annual value) as evidence of continued business development traction, aiming to offset prior losses. Cost optimization efforts, particularly in payroll and purchased services, also contributed to margin stability despite revenue pressure.

The Personal Care Services segment experienced a 1.0% revenue decrease to $181.8 million, primarily due to a 2.1% reduction in hours worked, influenced by expected seasonality and localized labor shortages. Despite this, the segment's Adjusted EBITDA margin improved to 6.7% (up from 6.1% in Q1 2024), driven by structural cost savings and G&A reductions from the operational streamlining initiatives. Management noted signing four new strategic agreements expected to generate significant monthly service hours, signaling potential for future growth.

The Monitoring segment's revenue decreased by 9.8% to $18.1 million, impacted by a decrease in both average monthly members and revenue per member per month, partly due to the planned exit of a Medicare Advantage customer. However, the segment maintained a strong Adjusted EBITDA margin of 29% and is focusing on growing its Medicaid LTSS footprint and expanding its clinical monitoring programs, including operating under three active condition-based monitoring contracts.

The Corporate and Other segment, which includes corporate overhead and the Matrix Medical investment, saw its operating loss widen to $23.3 million in Q1 2025 from $16.4 million in Q1 2024, primarily due to increased professional service and legal costs related to the company's debt transactions. The equity in net loss of the Matrix investment also increased significantly.

Competitively, ModivCare's NEMT segment maintains a leading position, leveraging its scale and technology against rivals like Elevance Health (ELV) in managing large state and MCO contracts. In PCS, its scale in the Northeast provides an advantage in a fragmented market, though it competes with larger entities like CVS Health that integrate personal care with broader retail health strategies. The Monitoring segment's focus on Medicaid LTSS and new clinical programs positions it against competitors like Humana (HUM) in the senior care space, aiming to differentiate beyond traditional PERS.

Liquidity Strain and the Path to Deleveraging

A critical aspect of the ModivCare investment thesis currently revolves around its financial health and liquidity position. The market headwinds of 2024 significantly impacted the company's cash flow generation, leading to a substantial use of cash in operating activities ($82.1 million) in Q1 2025, a sharp contrast to the cash provided in Q1 2024. This deterioration was largely driven by unfavorable changes in operating assets and liabilities, including a significant build-up in accounts receivable and contract receivables and increased payments for accounts payable and accrued transportation costs.

These factors, coupled with increased debt obligations, have led management to conclude that substantial doubt exists about the company's ability to continue as a going concern within one year from the Q1 2025 filing date. The company is likely to require additional liquidity and is not expected to meet certain financial covenants under its existing credit agreements, which could trigger acceleration of its debt.

In response, ModivCare has taken decisive steps to address its capital structure. It secured amendments to its Credit Agreement, including a temporary financial covenant holiday through Q2 2025, and obtained additional financing through a $75 million Incremental Term Loan and $30 million in Second Lien Notes in early 2025. The Incremental Term Loan, however, is a short-term facility maturing in January 2026, highlighting the ongoing need for a long-term solution.

A key strategic priority is to improve cash flow conversion and deleverage the balance sheet. The company is actively renegotiating NEMT contract terms to accelerate cash settlements, aiming for some contracts to settle within 90 days or less compared to prior 6-18 month cycles. This effort is already showing initial results, with $30 million in receivables collected in April 2025 ahead of schedule. Management expects meaningful improvement in cash flow generation as the year progresses, driven by these working capital initiatives and ongoing cost optimization efforts, including a company-wide G&A reduction targeting $25 million in annualized savings.

Furthermore, the company has established a Strategic Alternatives Committee to explore potential strategic asset divestitures, with the Monitoring platform and PCS segment identified as potential candidates for monetization. This signals a willingness to potentially reshape the business portfolio to strengthen the balance sheet and provide long-term covenant relief.

As of March 31, 2025, ModivCare had significant debt outstanding, including $270.7 million on its Revolving Credit Facility, $518.3 million on its Term Loan Facility, $78.75 million on its Incremental Term Loan, $228.8 million on its 2029 Senior Notes, and $301.2 million on its Second Lien Notes (which increased to $316.2 million in April 2025 due to a PIK interest payment). Total cash requirements due within one year were $880.5 million. The increased interest expense, nearly doubling year-over-year in Q1 2025, adds further pressure on cash flow.

Compared to larger, better-capitalized competitors like UNH or CVS, ModivCare's financial position is significantly more constrained. Its ability to generate free cash flow has been challenged, and its debt levels relative to its earnings power are high, contributing to the going concern doubt. The success of its working capital initiatives, cost cuts, and potential divestitures are paramount to improving its financial stability and reducing this vulnerability.

Outlook, Risks, and Investment Considerations

ModivCare is not providing formal financial guidance for 2025, citing the ongoing strategic review and potential portfolio changes. However, management has offered qualitative expectations: NEMT contract wins are expected to partially offset losses, weighted towards the latter half of the year, accompanied by positive pricing trends and continued efficiency gains. PCS and Monitoring are expected to see modest volume growth, with Monitoring's LTSS and clinical programs offsetting MA churn.

The core of the forward outlook rests on the successful execution of the company's strategic initiatives. Management anticipates meaningful improvement in cash flow generation as the year exits, driven by working capital normalization and cost reductions. However, the path is not without significant risks.

Key risks include the potential for increased transportation and caregiver costs to outpace reimbursement rate increases, further contract losses or membership declines, continued delays in collecting receivables, and the inability to meet financial covenants or secure necessary long-term financing/debt restructuring. The conclusion of substantial doubt about the company's ability to continue as a going concern highlights the severity of the current financial challenges. Macroeconomic factors, including inflation and labor shortages, continue to pose headwinds, particularly for the cost structures in NEMT and PCS. Legal proceedings, such as the class action lawsuits related to NEMT collections and PCS caregiver pay, also represent potential liabilities and distractions.

For investors, the ModivCare story is one of a company with established positions in growing supportive care markets and a clear strategy to leverage technology for efficiency and differentiation, but facing acute financial and liquidity pressures. The investment thesis hinges on management's ability to successfully execute its deleveraging plan, whether through operational cash flow improvement, asset divestitures, or debt restructuring. The outcome of the strategic review and the company's ability to navigate its near-term debt obligations and covenant requirements are critical factors to monitor. While the long-term demand trends for supportive care remain favorable, the immediate focus is on the company's ability to stabilize its financial foundation and demonstrate a clear path to sustainable, profitable growth and reduced leverage.

Conclusion

ModivCare stands at a critical juncture, grappling with the financial aftermath of significant industry disruptions while simultaneously pursuing a strategic transformation. The company's technology-enabled platform provides a foundation for operational efficiency and competitive differentiation in its core NEMT, Personal Care, and Monitoring segments. However, severe liquidity constraints, driven by market headwinds and working capital challenges, have raised substantial doubt about its near-term financial viability. Management is actively implementing cost reductions, renegotiating contracts for faster cash collection, and exploring strategic asset sales to address these pressures and deleverage the balance sheet. The success of these initiatives will be paramount in stabilizing the company's financial position and positioning it to capitalize on the long-term growth trends in supportive care, ultimately determining the trajectory of the investment thesis.