AdaptHealth Corp. Q3 FY2024 Earnings Call

Good day, everyone, and welcome to today's AdaptHealth Third Quarter 2024 Earnings Release. Today's speakers will be Suzanne Foster, Chief Executive Officer of AdaptHealth, and Jason Clemens, Chief Financial Officer of AdaptHealth. 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. These statements include comments regarding financial results for 2024 and beyond. Actual results could differ materially from those projected in forward-looking statements due to various risk factors and uncertainties discussed in the company's annual and quarterly SEC filings. AdaptHealth Corp has no obligation to update the information provided on this call to reflect subsequent events. Additionally, during this morning's call, the company will reference certain financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, and free cash flow, which are non-GAAP financial measures. More information about these non-GAAP measures is available in the presentation materials accompanying today's call on the company's website. This morning's call is being recorded, and a replay will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Thank you, and good morning, everyone. Thank you for attending our third quarter earnings call. Before we start, I want to acknowledge the extraordinary efforts our team displayed during the recent weather events in the Southeast. Prior to the storms, we contacted more than 40,000 patients from the impacted areas to confirm they had the medical equipment they needed before the severe weather moved in. In advance of the storm, we made sure to deliver oxygen where needed. As a result, there were no material service interruptions. I want to thank the team again for their exceptional performance. Now turning to Q3 results. We are pleased to report another consistent quarter. With results in line with our expectations for revenue, adjusted EBITDA, and free cash flow. Compared to the previous year, revenue was flat with our two larger products, sleep and respiratory, delivering growth that offset a decline in diabetes. Sleep increased 3.5%, respiratory was strong, increasing 8.6% while diabetes decreased 11.8%. Rounding out the numbers, which Jason will cover more in depth, we delivered an improvement in adjusted EBITDA margin and had a positive quarter for free cash flow. We completed the non-core asset sale we announced last quarter, refinanced our senior secured credit facility and paid down another $50 million of debt. As a result, we are now committing to deleveraging further with a new multi-year target set at 2.5 times net leverage. Over the past quarter, our focus has been on establishing a One Adapt approach to operating this business, which means rolling out standard work, new operating structures, and identifying growth opportunities. Let's start with sleep. According to the American Academy of Sleep Medicine, there are approximately 30 million adults in the U.S. living with obstructive sleep apnea, but only 20% have been diagnosed. This market is large and it is growing rapidly, partly because of increased awareness of OSA and the negative health implications of going untreated. As detection technology evolves, we believe more people will be prompted to seek treatment for OSA, with many of those patients seeking CPAP therapy. There are reasons AdaptHealth is the number one market leader in sleep. It's because our respiratory therapists and sleep coaches provide best-in-class adherence programs, and our resupply team delivers a highly reliable and convenient experience to more than 1.6 million patients. The opportunity for growth in sleep is to increase new patient conversion rates. Right now, approximately 75% of the referrals we receive are fulfilled. We are working on opportunities to improve this conversion rate by introducing a new self-scheduling feature in myAPP, thereby eliminating the need to reach the patient by phone, and standardizing workflow processes to eliminate the back-and-forth of getting services for new patients approved. Turning to respiratory, based on data from the American Lung Association, we know that more than 35 million people in the U.S. are living with chronic lung disease like asthma and COPD. Supporting these patients requires a commitment to excellence, which we have. Our clinical coordination team is unique in the market, in that, we have multiple levels of respiratory therapist care. As a result, we deliver strong clinical outcomes designed to help lower hospital readmission rates. It is this level of clinical support that differentiates us and results in growth. To maintain our position as the number one market leader in this area, we are focused on optimizing our workflows and exploring opportunities to expand our product portfolio to better help patients living at home with respiratory conditions. Our sleep and respiratory product lines currently make up the majority of our revenue and we expect continued solid performance in these areas. We must, however, fix our performance and execution issues that we have in diabetes, which currently represents 17% of revenue. Following last quarter's results, I turned my attention to our diabetes product line and found the outlook was much worse than I thought after my first two months. The reality is the market is growing, our competitors are growing, and we are not. We acted immediately by dismissing several members of the diabetes leadership team and through a series of diagnostic reviews, we uncovered systemic operational issues that we need to fix. We have taken swift actions to turn this around. First, we appointed a new leadership team; one, a former CEO of an AdaptHealth acquisition with a background in delivering exceptional service in sleep and home medical supplies; and we brought in a seasoned sales leader with experience in diabetes. Second, we integrated the resupply of our diabetes products into our sleep resupply center of excellence to leverage its leadership, replicate processes, and increase performance. Third, we know that acquiring new CGM patients and being able to timely service them is the single most important thing we need to do. Notwithstanding a dynamic market environment, executing here is within our control. And we are taking the necessary actions to improve across the board. Our diabetes improvement efforts are now underway, yet we expect that it will take us a few quarters to demonstrate results. Therefore, we are guiding the balance of the year down based on what we learned and to provide an appropriate amount of time for our actions to have an impact. Unlocking growth in diabetes is an imperative. The American Diabetes Association reports that more than 38 million Americans have diabetes, with almost 100 million being pre-diabetic. If we put all these numbers in perspective, there are more than 100 million potential patients for AdaptHealth to serve in the United States. Today, we proudly serve 4.2 million patients a year. In simplest terms, growth is about providing exceptional service to the increasing number of patients that need our support. Another topic I would like to update you on is the progress we are making on the technology front. Last quarter, I mentioned that we were doing a few low-cost experiments with AI and automation. I am happy to report that this is moving quickly, and we have moved from inception to production. The mission was to use AI to deal with the massive amount of incoming unstructured data we receive, which is an ongoing healthcare challenge. With the way things are done, we receive more than 5 million pages of faxes every month and we rely on a combination of people and technology to get the information in those faxes into the correct workflow. In a matter of weeks, we successfully automated parts of the workflow and our new automated process enabled by AI has proven to be 99.6% accurate compared to 89% with our legacy process. This was the first step to prove we can do so with accuracy. We are optimistic about our ability to rapidly deploy this technology across our workflows in a way that is responsible. We see AI as a viable option for us to improve our performance, reliability, and efficiency. We are prioritizing use cases that will improve our ability to deliver exceptional service. I think it's good to note that due to improved operational rigor and successful cost management initiatives this past quarter, we were able to invest in people and technology while delivering improved bottom-line results. In addition, this is the last quarter we will report results as a single segment. We are moving to a four-segment reporting structure that consists of sleep health, respiratory health, diabetes health, and wellness at home. This shift to segment reporting will allow for increased transparency and insight into our performance. Most importantly, it will enable us to focus our resources and architect our growth in each segment. I continue to be optimistic about the road ahead. We have identified growth opportunities. We are assembling a high-performing team and investing in areas that allow us to serve even more patients in their homes. Our focus is on execution, and continuously improving every day. And with that, I will turn it over to Jason.

Thanks, Suzanne, and thanks to all for joining our call today. For the third quarter of 2024, we delivered against our expectations for revenue, adjusted EBITDA, and free cash flow. We also made considerable progress in strengthening our financial position, disposing of non-core assets, refinancing our senior credit facility, and paying down debt. During the quarter, we completed the previously announced transaction to sell certain custom rehab assets to a third party. As a reminder, the annual revenue for these assets was about $30 million, so that comes out of our H&E revenue run-rate going forward. We continue to consider alternatives for a couple of similarly sized product categories that do not fit strategically into our core businesses. In aggregate, they represent less than $100 million of annual revenue and we will provide updates as we make progress with those initiatives. Third quarter net revenue of $805.9 million was up 0.2% compared to the third quarter of 2023. Sleep revenue of $326.4 million increased 3.5% over the prior year, in line with our expectations as we faced a very-high comparable in 2023 due to record starts from fulfilling the backlog following a manufacturer recall. For perspective, over the past two years, sleep revenue grew $55.8 million against $270.6 million in the third quarter of 2022, representing 9.8% of compounded annual growth. Although CPAP starts to experience the typical sequential deceleration from Q2 as July and August vacation schedules impact sleep testing and referral activity, we were pleased to once again surpass 120,000 starts. Sleep resupply census now stands at over 1.63 million patients, up another 29,000 from the previous quarter. Our CPAP survey indicated 15% of respondents were using GLP-1s to manage diabetes or weight loss, up from 12% last quarter. Now a year into our surveys, we are detecting a very slight uptick in CPAP adherence versus patients not indicating GLP-1 usage. So far, there is an immaterial difference in resupply ordering patterns. We will continue to monitor and report these trends as time goes on. Diabetes revenue of $141.1 million decreased 11.8% compared to the third quarter of 2023. Driven by lower CGM revenue. Before we get into those details, we were encouraged to see stabilization regarding insulin pumps and related supplies, representing $28.4 million of revenue for the quarter, about flat against the prior year. For CGMs, we've previously discussed reimbursement channel pressure as some payers shifted reimbursement policy to 100% pharmacy in 2024. That landscape has remained steady over the year, but as we lost access to members in a handful of markets in early 2024, we failed to overcome that headwind with new sales orders. We also shipped fewer recurring orders than expected, impacted by the operational challenges Suzanne discussed. Respiratory revenue of $164 million increased 8.6% compared to the third quarter of 2023, led by oxygen exceeding our expectations. For the first time in our history, our oxygen census surpassed 325,000 patients actively on service. Most patients on oxygen need to order tank refills periodically, and until recently, that has been a time-consuming process. During the quarter, 7.5% of our oxygen patients ordered tank refills without having to interact with an Adapt customer service representative via new technology just launched in myAPP, as well as chatbot technology recently launched in our interactive voice response telephone systems. This tech was launched in the second quarter with only 1.5% of oxygen patients ordering through these platforms 90 days ago, so we are making progress quickly. Revenue from all other product categories was $174.3 million, a decrease of 1.9% compared to the previous year, which met our expectations due to revenue loss from the sale of certain custom rehab assets. Regarding profitability, the adjusted EBITDA for the third quarter was $164.3 million, resulting in an adjusted EBITDA margin of 20.4%, a slight improvement from the same period last year. This margin expansion was attributed to a favorable revenue mix, with higher-margin products like sleep and respiratory outpacing lower-margin products such as diabetes. We were pleased to maintain labor expenses year-over-year as we implemented sufficient efficiencies to accommodate merit-based salary increases and other labor-related inflation. Operating expenses and G&A were consistent with our expectations. Cash flow from operations reached $144.4 million. The days sales outstanding for Q3 was 47.9, reduced from 48.9 in the previous quarter, as accounts receivable continued to stabilize following the Change Healthcare situation earlier this year. Capital expenditures of $59.6 million constituted 7.4% of revenue, down from 9.6% of revenue in the third quarter of 2023. Free cash flow was $84.8 million, exceeding our target of $30 million. That estimate was based on the assumption that we would pay off a $40.7 million loan provided as part of Optum's temporary funding assistance program related to the Change Healthcare outage earlier this year. However, that repayment did not take place until mid-October. After accounting for the timing of that cash outflow, we still generated strong cash flows for the quarter, prompting us to raise our full-year guidance. During the third quarter, we amended our debt agreement to lock a $950 million senior secured credit facility, consisting of a fully funded $650 million Term Loan A and a $300 million revolving line of credit. Proceeds from the new $650 million term loan were used to fully repay without penalty the company's existing term loan due to reach final maturity in January of 2026. The new $300 million revolver replaces the company's existing $450 million revolving credit facility, which had no balance drawn at the end of the third quarter. The reduced revolver size decreases undrawn commitment fees. The interest rate pricing for the new senior secured credit facility decreased from the interest rate pricing in AdaptHealth's existing bank credit facility, and the new maturity is extended up to September 13, 2029. At the end of the third quarter, we paid an additional $50 million against the term loan A balance, resulting in a net leverage ratio of 2.87 times compared to 3.51 times in the third quarter of 2023. We are very pleased to have achieved our net leverage target of 3 times ahead of schedule and we remain focused on paying down debt. So much so that we are introducing a new multi-year net leverage target for the company at 2.5 times net leverage as defined in our covenants. We expect to acquire home medical equipment providers in the future as access and scale are important to us. But for the next few quarters, we expect acquisition activity to be limited. When and where it makes sense, we will acquire but will otherwise remain focused on paying down debt and increasing our free cash flow conversion. For the balance of 2024, we are adjusting our revenue midpoint down $45 million and adjusted EBITDA midpoint down $15 million responding to recent trends in diabetes. Our updated full-year guidance is net revenue to be in the range of $3.22 billion to $3.26 billion, adjusted EBITDA to be in the range of $655 million to $675 million and even with these updates, given the continued positive trends in working capital, we expect free cash flow to be in the range of $175 million to $195 million. With that, we'll open the call up for questions.

And we will take our first question from Kevin Caliendo with UBS. Please go ahead.

Sorry, I was on mute. I apologize. Thanks for taking my question. I want to delve deeper into the diabetes issues. How much of this is linked to manufacturer problems? Does it call for more collaboration? What's going on in the market regarding the shift between pharmacy and DME? Any insights into what's really happening in the end-markets and with your clients would be appreciated.

Yes, Kevin. A couple of comments. No, we have not identified the compression in revenue to any specific issues with manufacturers. In fact, you know, the CGM manufacturers as well as all of the pump manufacturers have been very good parties to work with and good partners over the years. I mean, they have supported various integrations of data and technology coming from their devices inside of our four walls. If you've done that kind of work before, you know that that takes, frankly, a tremendous amount of collaboration working across different companies. We certainly are continuing to face pressure from the pharmacy channel reimbursement changes. So we referenced that in our prepared remarks. We have not seen this quarter really any shift in major payer activities against what we saw in the second-quarter or against what we saw in the first-quarter. And so even though we do have some pressure to overcome from the prior year, that environment has remained relatively steady. What we are saying is that the new starts that we had expected from adding sales folks, we are not pulling through, frankly anywhere near our expectations and the growth that we believe is there in the market. And then on the recur side, we do have some operational challenges that have been unpacked and we are deploying our sleep resupply operation towards improving. I mean, just a minor tick or two in recur since it represents such an overwhelming part of revenue. If you degrade performance, it can have a big impact and that's what we're absorbing here in the third quarter.

I'd just double down on that to say I think our partnerships with the manufacturers are strong and continuing to get stronger when meeting regularly and I am happy to see that that partnership is taking on a whole new life, so I think that is positive. The reimbursement shift obviously has been a headwind but with the message today is we should be able to grow through that given what we know about the end markets and we're not growing through it as a result of our own operational issues internally that I believe we can fix over the next couple of quarters.

That's helpful. If I can ask a quick follow-up, a logical question is how much impact do you expect this to have in 2025? Considering the revenue growth target for 2025 is around 5%, and not asking for guidance, does the current issue with diabetes affect 2025 and could it pose an additional challenge as we look ahead?

Well, Kevin, I would say that we plan to provide guidance for 2025 around the end of February when we report the fourth quarter results. Looking at the fourth quarter, we reduced our top line by $45 million. There are various factors contributing to this, but essentially, we achieved $140 million in revenue in the third quarter and are not committing to exceeding that in the fourth quarter. We've lowered our guidance, which results in a $45 million decline compared to the fourth quarter of last year because we don't want to overcommit. We believe we have the right people in the right positions and have made necessary organizational changes, particularly in reorganizing our resupply operations out of our Nashville center, which has shown excellent performance in our sleep business for many years. While we are focusing on that, we are not prepared to commit to any further growth, even sequentially, until we have more confidence. Regarding 2025, it’s clear that we expect some challenges ahead, but we still have 90 days to evaluate the situation, and we will provide updated guidance at that time.

Appreciate the color. Thanks.

Thank you. And we will take our next question from Mathew Blackman with Stifel. Please go ahead.

Great. Good morning, everybody. Thank you for taking my questions. I'm also going to touch on diabetes here. And maybe sort of frame it this way, it does sound like you're still bullish on the long-term prospects of this business. I think in the recent past, you've talked about diabetes maybe growing higher single-digits. Is that still in play perhaps, of course, over a longer timeframe? And then maybe a follow-up question. I was just hoping to understand how you better get after new patients in the CGM franchise. Obviously, there's been a sales force expansion, but just practically speaking, how do you execute on getting new patients into the business? I would be interested in hearing your thoughts there. Thank you.

Okay. I'll start with the second part of the question and Jason will go back to the numbers. So the third point of the plan around obviously increasing CGM new starts is the number-one thing we need to do literally across the business. And the plan there is you cannot, in my opinion, just go continue to put out more and more salespeople and expect a different result. They can only sell as good as we are on the operational side. And so what I've uncovered this quarter is that we have to beef up or improve the timeliness and ease in which you can order a CGM for us, how we bring that new patient in. And so we're pushing on two fronts. One is our operations team is looking at how do we streamline the processes, make it easier so that when our salespeople go out to a referring provider, we can promise service levels that are more in line with the market. And unfortunately, over the last couple of quarters, we have been lagging behind in the timeliness of delivering on that promise. And so we're stabilizing the sales force, making sure we're going out and having a high-touch white-glove experience with our referring providers. And at the same time, our operators are charged with streamlining the workflows and their performance so that we can deliver with speed and quality.

I think, Matt, when it comes to the question about the end market and growth, we can consider two different perspectives. First, looking at the Q3 comments from CGM manufacturers, one reported very low single-digit growth while the other reported mid-20% growth. They don’t split the market evenly, but considering that, I estimate we might be seeing growth around 10%, 12%, or 9%. The second point is that some of our public competitors have reported what we believe to be upper single-digit growth for the quarter, indicating a segment growth of 5% to 6%, with diabetes leading and growing faster than us. Based on these two points, we think the market is growing in the upper single digits, perhaps low double digits. In fact, we contracted nearly 12% this quarter. As Suzanne mentioned in her prepared remarks, the market is growing, our competitors are growing, but we are not. This is the work we are focused on to address our operational challenges.

Got it. And if I could just squeeze one follow-up, maybe, Suzanne, and organic growth, I think in particular, you've sort of identified, you said, opportunities for organic growth. I think in the past, I've heard you talk about things like national accounts and contracting. Can you maybe just give us a sense of some of the other opportunities or if you want to talk a little bit about national accounts and what kind of opportunity that could be for Adapt as we think about the organic profile of the company over the next several years, would be interested in hearing that. Thank you.

Appreciate that question. Yes. So, as I said at the end, we were able to continue to improve bottom line even though we made technology and people investments. Those people investments this last quarter did come from beefing up our national accounts or what we're calling enterprise sales team. And the reason for that is, I believe there's two additional organic growth drivers here. One is in larger health systems. We do a very, very nice job in certain geographies around partnering with large health systems to have a seamless experience when patients are discharged from the health systems, but we have not nationalized that program and we are now in the process of doing that, which I'm optimistic about. I think we have an incredible value proposition on that front. So we're investing in that area. And then the other area that we're highly focused on is increasing the total covered lives. So, our managed-care team and how do we make sure that we have our fair share of covered lives, so that when our sales force goes in, we can basically be a one-stop shop for any referral sources as we can take almost any payer and we offer the total portfolio of products. If you send it to us, we promise we can deliver well for your patient.

Thank you. And we will take our next question from Eric Coldwell with Baird. Please go ahead.

Okay, it very well could be redundant and obvious, but last year in diabetes, you did $185 million in sales in the fourth quarter. This quarter, you're only committing to $140 million. So that's the equivalent of the $45 million midpoint revenue guidance cut. I just want to confirm that the only adjustment to revenue guidance is this diabetes change. And then secondarily, you missed diabetes a little bit here this quarter, a handful of millions of dollars, margin was good, but this is a much bigger step-down. So what is the margin impact, whether it's fourth quarter or going into '25 from the significantly reduced diabetes revenue outlook? Thank you very much.

Sure, Eric. Yes, we'll confirm that the guide down is diabetes. I mean we are guiding down due to the recent CGM performance. When we think about what we were aiming at internally, Q3, we were down about $10 million top-line for diabetes. And so that's a little bit of this. We've rolled that ahead. But the rest of it is just not just not committing to any sequential growth in the quarter. Now it's pretty typical to get a bump-up as deductibles have reset and there's a big push in the fourth quarter. But again, until we resolve these operational issues, we just aren't ready to commit to higher growth, but it is all diabetes impacted. When you think of the EBITDA, the same way, I mean, we took about a third of that, top-line of the $45 million and we passed through $15 million flow-through to the bottom line. Again, we wanted to put out numbers that we feel very good about hitting for the fourth quarter, and as we think about '25, as referenced earlier, I mean, we'll come forth with that guidance at the end of February.

Jason, was all of the change in both revenue and EBITDA specific to diabetes?

Yes, correct.

Thank you. And we will take our next question from Brian Tanquilut from Jefferies. Please go ahead.

Hi, good morning. Jason, in the prepared remarks, you guys talked about the app and the quick progress that you're seeing there, so just curious how you're thinking about the savings opportunity from reducing call center operations or call center interactions with patients over the next year or next 18 months?

Yes, good question, Brian. I may answer that with some nuance. The intent of assembling the company going forward against these large patient chronic disease states, right, respiratory being one of them. The intent is really to focus our resources and our people against getting after that total addressable market, and in each of these categories, it's large and growing rapidly, particularly in sleep respiratory, I mean, we're market leaders, and so the intent here is to assemble our resources and people around taking more than our fair share of really growing that top line. As well, the intent is to improve the patient experience, drive better patient outcomes. Figure out how that converts to potentially rate increases or more volumes, right? So, we really want people and resources waking up every day and focus all day on those goals. And so yes, there's been great tech already installed here with respiratory. We think with dedicated leadership, those conversions will go faster. We'll learn more. We're capturing a tremendous amount of data from these interactions through this new tech that's been rolled out and these people are going to be focused on capitalizing on that growth going forward.

Can I just add one thing on that? I just want to say, I know it's early days for us in terms of the automation and the AI and our launch of myAPP. But I have been incredibly encouraged by our ability to move quickly. As I said, it's a matter of weeks that we put something into production. That is because our existing tech architecture and infrastructure was already prepared to take on this more advanced technology. And so our partner that we work with on this front said most companies do not have the infrastructure that's already ready to go. So we have this diamond in the rough, if you will, of a strong technology infrastructure that we're going to be able to rapidly deploy responsibly the myAPP features and increased automation in AI. So more to come, early days as I suggested, but I do think it's the strength of AdaptHealth.

I appreciate that. And then maybe, Jason, my follow-up, just as I think about Medicare rates for calendar 2025, do you have visibility into what that rate adjustment looks like?

Well, we don't have visibility. We don't want to speculate, but we will offer some data. We would fully expect the DMEPOS Fee Schedule. It's typically published December 6, 7, kind of, in that ballpark. That is our expectation based on what we're hearing out of Washington. For those that may not follow that fee schedule, how it's constructed very closely, I mean it is an inflation-based measure. It compares the CPIU through June of the prior year. They take those rolling 12 months of the prior year. And so we know that number already. That's about 3% or so. Historically, there has been a labor productivity factor applied against that inflation measure that brings the rates down. It depends on the year. It could be half a point, it could be a point. So somewhere in that ballpark is generally what we are thinking. But again, we don't want to speculate on any of this until things are formally published, but hopefully that provides some perspective.

Thank you. And we will take our next question from Whit Mayo with Leerink Partners. Please go ahead.

Thanks. Good morning. I got just one quick one. Just on the Humana contract, how that's tracking versus internal expectations, what you're excited about, not excited about? And just any other conversations with other payers? Is this something that you still want to expand? Just any additional thoughts would be helpful. Thanks.

Hi, Whit. I want to mention that Humana is performing exceptionally well. We are eager to expand this type of business. In relation to my earlier comments about increasing investment in our workforce for enterprise national accounts and managed care engagement, we are exploring more opportunities like Humana. This partnership has proven beneficial for us, and we hope to share more similar developments in the near future.

Thank you. And we will take our next question from Richard Close with Canaccord. Please go ahead.

Yes. Suzanne, could you discuss the investments in the team and the changes that have been made, particularly regarding diabetes? Also, what can you tell us about the potential divestiture of the other businesses that Jason mentioned?

Okay. I'll let Jason address the divestitures and let me discuss the team. We used to have a structure with a President of Diabetes, a COO, and a sales group leader, making diabetes somewhat standalone. In the recent changes, we've brought in Gary Sheehan, a former CEO from one of our larger acquisitions, to take on the role of General Manager, moving away from the President role. The General Manager will now report to our new Chief Operating Officer, Scott Barnhart. This shift is strategic, as we aim to leverage our strengths in sleep and respiratory to benefit the diabetes segment where relevant. Gary has significant experience leading in the Sleep HME business, and he believes diabetes operates similarly, minus the large CPAP machines. I'm optimistic about his leadership and his approach to integrating the broader AdaptHealth business to enhance our diabetes division. Additionally, we appointed a new sales leader for diabetes, Graham Ward, who has a background in medical devices. He has had a successful career at Medtronic, worked at Cardinal, and most recently was at Google in a national accounts role. Graham brings a wealth of sales experience and is assessing our salesforce to understand why recent expansion efforts underperformed. He is implementing quotas and territory management and is collaborating with our extensive team of 700 salespeople on the HME side, aiming to support our diabetes initiatives effectively. Turning around our diabetes business is critical for everyone at AdaptHealth. Furthermore, we decided to integrate our Diabetes Resupply business with the exceptional Sleep Resupply Center of Excellence in Nashville. That leadership team has established processes and a solid reputation for excellence. By shifting our Resupply business to that team, we anticipate improving the resupply experience for our patients, and I am excited about this development. Those are the significant changes.

And then switching gears, Richard, to potential disposition of assets. We're discussing some subcategories that we will refer to as wellness at home in the future. This includes various products such as beds, wheelchairs, and walkers. We value this business highly, especially for establishing hospital relationships where we become the preferred option for providers discharging patients. As we provide excellent service, we gain more referrals in our core areas, particularly respiratory and sleep. These products serve as ancillary to our three main product categories that we plan to focus on. There are other business lines under wellness at home, like home infusion, which is similar to custom rehab. Over the years, we've accumulated assets from other acquisitions that can be sizable. We are evaluating whether these product lines contribute to our core business. Our priority is to address areas that have lacked sufficient attention. We believe these assets would be better managed by someone else as they show low growth potential for us and could enhance margins if we choose to dispose of them. We will keep you updated on this process.

Now we will take our next question from Pito Chickering with Deutsche Bank. Please go ahead.

Hi guys, thanks for taking my questions. Can you talk a little back to the CGM reordering issues that you talked about on the call, you have such a good model for DME, reordering for your whole business. So can you quantify how big those CGM delays were in the reordering, why those were delayed and how you can fix it and if those delays were in both pharmacy and DME?

So, first off, regarding sleep resupply in our Nashville operations center, we have a large workforce there, and the technology they use is built on Brightree. Much of the design was developed by our employees and is integral to our workflows, allowing us to accurately identify what patients qualify for. We understand the importance of timely resupply and our team is dedicated to assisting patients with adherence issues, such as equipment that doesn't fit properly or exploring different models. Historically, we haven't integrated our diabetes resupply operation into Nashville due to the need to consolidate eight different diabetes companies we acquired. We invested a couple of years to merge all those patients onto single platforms and databases, and that work is now complete. Suzanne has directed a swift transition to leverage the capabilities and infrastructure in Nashville for diabetes. In terms of quantifying the overall contraction compared to the previous year, we can break it down into three roughly equal areas. First, there's real reimbursement changes, particularly pressure from certain payers we mentioned in earlier calls that shifted to 100% pharmacy, which we've been working to address and will continue to do so through the fourth quarter until we see improvements next year. Second, there were new starts; we were slightly short in Q2, but it was premature to adjust revenue expectations since many of our sales representatives are still acclimating. As Suzanne indicated, there's significant work ahead to optimize their workflows, and we believe that Gary, Graham, and others will excel in this area. However, the shortfall in Q2, combined with misses in Q3 regarding new starts, has implications moving into Q4, prompting us to make adjustments. Lastly, there's the recurring challenge of tracking eligibility and ensuring prompt order confirmations and product deliveries. These are the three key areas that Suzanne outlined in the plan we will implement over the next 90 days.

Okay, great. And then a follow-up question here is, just looking at the overall market growth between the two channels, pharma channel and DME, I guess, what do you think that those two channels are growing in 2024? And as you think about sort of growth in the out years, kind of where do you guys think that you guys can grow within both channels? Thanks.

Yes. I mean, it's again too early for us to comment on '25 or even beyond. We do know that right now, there are competitors in this space with same or similar capabilities that we have that are growing quite nicely. And so our job is to first stabilize and prevent compression and then get back to growth mode, and that's what we're focused on.

Okay, great. Thanks so much. Thank you. And we will take our next question from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, everyone. Thank you for fitting me in. I have a quick question, and I apologize if I missed this. Last quarter, you mentioned some shifts in the channel, possibly some reabsorption or movement back to the DME channel among certain carriers. I wanted to see if there are any indications of how that might look for next year. Are you noticing any incremental transitions back or any insights on how that balance might stabilize in the long term? Thank you.

Hi, Ben, it's Jason. You know, not since last quarter. I mean, we did call reference to two Southeast states regarding Medicaid where they laid in new policy that was somewhat advantageous. And so, we're doing our work there to start earning some business. But it's nothing material that's impacting the top line. Regarding any future shifts or changes one way or the other, I think we'll reserve those comments until open enrollment season wraps up and payers publish new policy as we're getting into January and we'll have something to talk about when we report at the end of February.

Great. Thanks, guys. Thank you. And it appears that we have no further questions at this time. I will now turn the program back to Suzanne Foster.

Well, once again, everyone, I just want to thank you for tuning in this morning. I mean, the takeaway, hopefully, you get the gist of it, is that kind of the 80-20 role is with diabetes being 17% of our revenue, we definitely have an opportunity there and we are incredibly focused on improving in that area. And the guide that we issued today is really to de-risk that and give the team time to perform. But 80% of our business continues to perform solid. There's obviously an opportunity for continuous improvement, but we are working on that as well with the addition of a lot of technology and myAPP and people and org structure will continue that work, but very optimistic about the core of our business and our future. So I hope to see you all out there on the road and thanks again.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.