AdaptHealth - Earnings Call - Q1 2020

Transcript

Speaker 0

Greetings, and welcome to Adapt Health First Quarter twenty twenty Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Chris Joyce, General Counsel. Thank you. You may begin.

Speaker 1

Thank you, Devin. I'd like to

Speaker 2

welcome everyone to Adapt Health Corp's earnings conference call for the quarter ended 03/31/2020. Everyone should have received a copy of our earnings release earlier this morning. If not, I'd like to highlight that the earnings release as well as supplemental slide presentation regarding Q1 twenty twenty results is posted on our Investor Relations page. In a moment, we'll have some prepared comments from Luke McGee, Chief Executive Officer Josh Parnas, President and Greg Hulse, Chief Financial Officer. Then we'll open the call for questions.

Before we start, I'd like to remind everyone that statements included in this conference call and in our earnings release may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2020 and beyond. Actual results could differ materially from those projected in forward looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. Adapt Health Corp. Shall have no obligation to update the information provided on this call to reflect such subsequent events.

Additionally, on this morning's call, we'll reference certain financial measures such as EBITDA and adjusted EBITDA, which are non GAAP financial measures. A table providing supplemental information on EBITDA and adjusted EBITDA is included in today's first quarter earnings release. This morning's call is being recorded, and a replay of that call will be available later today. I'm now pleased to introduce our Chief Executive Officer, Luke McGee.

Speaker 3

Thanks, Chris, and thanks, everyone, for joining this morning's call. In a few moments, I'll turn the call over to Josh Parnas, Adapt Health's President, to report on our response to the COVID-nineteen pandemic and its impact on our business. Before I get to my remarks on the first quarter, I would like to acknowledge the tremendous efforts of Adapt Health frontline branch staff, clinical teams, and delivery drivers who have played such an important role in Adapt Health's continued service of our patients' health needs during these extraordinary times. Our priorities have been and will continue to be the health and well-being of our workforce and our patients, and I'm grateful to be able to report that our technology platforms and business interruption protocols have allowed us to effectively transition more than 75% of our staff to work from home status while maintaining our business operations. Let me assure everyone we are operating effectively and continuing to provide excellent service to our patients, referrals, and payers.

I'm incredibly proud of the entire Adapt Health team and how each and every team member has stepped up to help those in need throughout the COVID nineteen crisis. I always expected that our first full quarter as a public company would present unexpected challenges, but I certainly never imagined anything like we've experienced this year. Like most other companies, parts of our business were negatively impacted by the COVID-nineteen pandemic, but despite those challenges, our performance in the aggregate exceeded our expectations for the first quarter. Financially, we are running ahead of the plan we established at the beginning of the year. For the quarter, we generated $191,000,000 in net revenue, dollars 30,500,000.0 of adjusted EBITDA and most importantly, 17,500,000.0 of adjusted EBITDA less patient equipment CapEx, our standard for financial success.

Excluding the results of our Patient Care Solutions acquisition, which we previously communicated would require investments in the first year, we earned $35,000,000 and $22,000,000 of adjusted EBITDA and adjusted EBITDA less patient equipment CapEx, respectively, which are record quarterly results for our company and validation of our strategy of growing both organically and integrating accretive acquisitions onto our technology platform. In the first quarter, we closed on three acquisitions that will set us up for continued future growth. The first was the patient care solutions business that we acquired from McKesson Corporation on 01/02/2020. As we have discussed, PCS diversifies our business into home medical equipment supplies, including urology, ostomy, incontinence, and importantly, diabetic supplies. Like our existing CPAP resupply business, most of the PCS product categories have recurring revenue on a monthly or quarterly basis.

In addition to PCS, we closed on two home medical equipment acquisitions at the March, the HME division of Advanced Home Care and Healthline Medical. With branches in North Carolina, Virginia, Georgia, South Carolina, and Tennessee, Advance expands our presence into the Southeastern United States, a strategically important market for Adapt Health. Advance went live on our technology platform on day one, and we're pleased with the results over the first sixty days. Similarly, Healthline, a leading Texas based HME, is off to a good start and was fully transitioned to our technology platform as of April 30. Advance and Healthline represent two scaled acquisitions that strengthen our presence in important markets and add important depth to our management team.

Importantly, they were immediately accretive to our earnings. We will continue to look for opportunities to expand our product offerings, deepen our penetration within markets, and offer geographic expansion. Of particular interest are companies that provide products which help chronically ill patients stay at home, such as continuous glucose monitors, insulin pumps, incontinence, and other supply categories that were part of the PCS acquisition. Notwithstanding the continued impact and challenges of the COVID-nineteen pandemic, we have maintained a strong pipeline of acquisition opportunities, and we will continue to pursue our M and A growth strategy for the balance of 2020. Now I'd like to turn the call over to Josh Parnas, our President, to discuss more fully the impact of the COVID-nineteen pandemic and our response.

Speaker 4

Thanks, Luke. The past sixty days have been unlike anything I've experienced in my fifteen years in the HME industry. More than anything, I am humbled by the way our employees have responded to the events in the past two months. In a short six day period in early March, we transitioned more than 75% of our workforce to a work from home environment. Despite expected operational challenges and the disruption experienced by our vendors, payers, referrals, and patients, we've continued to meet the needs of our patients and referrals on a daily basis.

The health and safety of Adapt's employees and patients has been our highest priority throughout this difficult period. We have purchased significant amounts of personal protective gear for our patient facing employees. We have employees working from home where possible, and we are continuing to operate effectively. We've made significant investments in new telephony and IT infrastructure last year, and those investments have paid off in terms of our ability to have an effective remote workforce. We also made advanced purchases in the quarter of inventory and equipment as a safeguard against potential shortages.

Not unexpectedly, we've seen slowdowns in certain areas of our business, including CPAP new starts, orthotics, walkers, commodes, and other products closely linked to discharges from emergency room and facilities following elective procedures. The slowdown started in the March, and we expect it to continue until facilities begin to open up for elective procedures and doctors begin to treat new patients for sleep disorders. As a result of these slowdowns and primarily the integration efforts related to the PCS, Advance, and Healthline acquisitions, we initiated a number of workforce initiatives, including a workforce reduction, which in April resulted in the elimination of approximately 6% of our workforce. We expect the cost of these separations to be approximately 1,600,000.0, including the cost of maintaining health care coverage for the impacted employees through 12/31/2020. Conversely, we are seeing an increased demand for respiratory products, in particular home oxygen, especially in markets hardest hit by the COVID COVID nineteen pandemic.

We believe this increase in home oxygen is primarily related to COVID nineteen impacted patients, and we believe that this increased need may be sustained beyond the acute stages of the pandemic and continue for longer than our typical oxygen patient. Similarly, our resupply business and CPAP resupply specifically has remained strong as more patients are home to answer our resupply calls, and there's a heightened awareness of the need for respiratory hygiene. The federal government has provided some needed relief to health care providers in general and HME suppliers in particular under the CARES Act and CMS's revised regulatory guidance. Among other things, the CARES Act suspended the 2% Medicare sequester through 12/31/2020 and also provided for advanced payments and relief funds to Medicare providers. In April 2020, we received 47,000,000 of Medicare advanced payments, which will be repaid over the balance of twenty twenty.

In addition, we received 70,000,000 of COVID nineteen relief funds that we expect to use to maintain our services to our patients during the ongoing COVID nineteen pandemic. We greatly appreciate the receipt of these advance payments and relief funds and we'll be fully complying with the letter and spirit of the rules associated with these funds as these rules become more clear. During this crisis, we have been a valuable partner to our health system referrals in procuring equipment on a business to business basis. Although not a typical distribution channel for us, as a reminder, we focus on discharge business into the home. We've been able to help hospitals in New York, New Jersey, Pennsylvania, Washington, Kentucky, and North Carolina procure oxygen concentrators, ventilators, BiPAPs, hospital beds, pulse oximeters and thermometers.

The bulk of these transactions will be reflected in our second quarter financial results. At this point, I'll turn the call back over to Luke.

Speaker 3

Thanks, Josh. Before Greg provides comments on the financial results for the quarter in more detail, I want to comment on some key new hires and promotions at Adapt Health. As we continue to grow, we are focused on building out the senior management team at Adapt Health. We recently hired Andy Talin as our chief technology officer. Andy's experience as a digital first and business transformation leader brings an expanded set of skills to Adapt Health.

Passionate about patient and referral experience, Andy will also drive collaboration on initiatives that help Adapt Health enhance its relationship with patients and health care partners across the country. Additionally, we promoted Shah Reed Kirk, our former chief revenue officer, to the position of chief operating officer. Shaw has been a key leader for Adapt Health over the past few years, and I am looking forward to his increased contribution in his new role. At this point, I'll turn the call over to our CFO, Greg Holz, to review our Q1 financial results.

Speaker 5

Thanks, Luke. During the 2020, we generated net revenue of $191,400,000 That's a 60% increase over the 2019, and it's 28% higher than the 2019. This includes $33,900,000 of net revenue from PCS. For the quarter, organic growth was at the high end of our previous guidance of 6% to 8%. In particular, CPAP resupply sales were quite strong as were respiratory rentals.

For the 2020, we reported a GAAP net loss attributable to Adapt Health of $158,000 which rounds to zero zero per share. This compares to a net loss of $5,800,000 or $0.42 per share for the 2019. On a non GAAP basis, excluding PCS, we reported adjusted EBITDA of $35,000,000 for the 2020, which was 24% higher than the 2019 and four percent higher than Q4 twenty nineteen. Excluding PCS, we reported adjusted EBITDA less patient equipment CapEx of $22,000,000 That's 29% higher than the first quarter of twenty nineteen and slightly ahead of our 2019. I'd like to remind you that our business is somewhat seasonal with profits accelerating through the quarters.

PCS incurred an adjusted EBITDA loss of $4,500,000 This is better than our expectations as a result of higher than planned revenues. As previously communicated, we plan to incur restructuring costs and operating losses of $15,000,000 in 2020, and we view this as part of our investment in that business. Our goal is for the business to achieve profitability in the 2020. As we previously discussed, we believe that adjusted EBITDA less patient equipment CapEx is the best way to judge our financial performance, and our internal budgets and incentive compensation plans are driven by this measure. Our focus on adjusted EBITDA less patient equipment CapEx is ingrained in our operational DNA and heavily influences everything we do.

We ended the quarter with $48,200,000 of cash and $93,000,000 of undrawn capacity on our credit lines. We drew down $20,000,000 on our revolver in March as a precaution when markets were dramatically affected by the COVID-nineteen crisis. We repaid that amount back in April after receiving the advanced payments from CMS and the provider relief funds under the CARES Act. Our current liquidity is approximately $90,000,000 With that, I'll turn it back to Luke.

Speaker 3

Thanks, Greg. Before we open it up to questions, I want to provide a brief outlook for the remainder of 2020. We cannot predict the duration of the COVID-nineteen crisis or the full impact on our business. But based on our current trends, we are affirming our financial guidance for 2020 of net revenue of between $790,000,000 and $8.00 $8,000,000 adjusted EBITDA of 160,000,000 to $164,000,000 and adjusted EBITDA less patient equipment CapEx of $98,000,000 to $101,000,000 As a reminder, this outlook excludes anticipated first year PCS operating losses as well as severance and restructuring costs associated with the PCS acquisition totaling approximately 15,000,000 In conclusion, I'd like to reiterate my thanks and appreciation for all the Adaptalp employees. They stepped up and delivered record financial results while continuing to serve our patients and our referral partners with courage and professionalism.

I remain more confident than ever about our strategy and prospects. Operator, can you open the line for questions?

Speaker 0

Absolutely. At this time, we will be conducting a question and answer session. Our first question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

Speaker 6

Good morning, guys, and thanks for taking my questions. First of all, I do love the new disclosures on the revenues you guys provided in the presentation. So thank you guys for doing that. You're very unique within my coverage right now in terms of confirming revenue and EBITDA. So I want to sort of dig a little bit on that.

Is there any chance that they can quantify the gives and takes sort of looking at 2Q versus 1Q? Talk about sort of where you guys see CPAP starts going and products tied to discharges? How should we model that for 2Q? And then talk about the hospital sales and rentals which increased. Is that continuing sort of throughout 2Q or did that peak in April?

And then finally in oxygen concentrators, how should we be modeling that sort of throughout 2Q? And I've got a couple of follow ups too.

Speaker 3

Sure. So I'll try to unpack this in a couple of pieces. Pito, this is Luke. And so as you've mentioned, there's puts and takes. As we've discussed, you know, there are parts of our business where we started to see the the downturn in the sort of March, and it's continued into April.

The most impacted lines of business have been those tied to, you know, emergency room and elective surgery discharges. So whether that be, you know, the HME you know, broadly in in our revenue disclosure, some of the HME products where new starts are off anywhere from, you know, 15 to 20%, or 10 to 20% for beds and wheelchairs to up to 50% for orthotic, new starts. You know, importantly, for the beds and wheelchairs, that's just the new starts. Obviously, we have a much larger rental census, so we don't see the full impact there. You know, if you go across the product categories, something like past new starts we're seeing, and it's it's regionally different really depending on the closures and the impact of of COVID.

But past new starts, you know, off between fifteen and twenty percent in April, you know, we do expect that to continue. We don't have a crystal ball. But certainly, as things continue to open up, you know, some of that, will get mitigated. You know, the decline in the new starts in in April and May, certainly on the rental business, that will have a ongoing effect. The drop off isn't dramatic, but it certainly impacts our census throughout the year.

Conversely, you know, you're seeing oxygen broadly up across the entire business, again, you know, very much related to the impact of COVID. So in New York, we've seen oxygen discharges into the home up well more than a 100% in April and continuing into May. But if you look up across the blended business, it's probably closer to twenty to twenty five percent, again, with sort of hot spots depending on the the COVID impact. You know, interestingly, we expect that to almost be a structural or a secular shift in the need for home oxygen, you know, as these patients or some percentage of the patients are going to need, you know, respiratory therapy for quite some time. On our resupply business, just to see, yeah, how you guys get a sense for that, you know, it was up about 5% in April over the first quarter.

You know, again, as people are home and answering our calls and focus on respiratory hygiene, you know, we continue to think that they will, you know, need need more supplies. You know, other puts and takes, you know, to call out. Obviously, we got the onetime stimulus dollars. You know, we're working through all of regulatory guidance there, you know, in terms of lost revenue and COVID related expenses. You know, that but that's certainly a a boost, whether it be the the $17,000,000 in grant funding, the removal of the sequester or the increase in the nonrural rates.

Those are the biggest sort of positives, from the government relief. In terms of the, b to b business, you know, we did see sort of a bolus or a spike in the the April, you know, when hospitals in New York are really scrambling to get equipment. We do see it, you know, you know, continuing to some smaller effect throughout the rest of the second quarter needs for things like pulse oximeters, thermometers that, you we have access to in our supply chain.

Speaker 6

For the B2B side, that was primarily, I think, BiPAPs was, I'm assuming, was one of the big demands. Is that demand sort of declined at this point? Is it picking up elsewhere besides New York? Kind of where is the BiPAPs or B2B demand at this point?

Speaker 3

Yeah. No. We saw and it it really feels like, in retrospect, more like of a preparatory, you know, purchase of equipment. And so we have not seen much bypass demand outside of New York. We think that, you know, given how hard New York was hit, that was really just making sure that they were ready in case there was a shortage of ventilators.

We are seeing, you know, b to b or did see b to b demand for things like hospital beds as they prepped some of these, you know, nontraditional hospital facilities, yeah, to be able to take patients. You know, we've seen things for oxygen, hospitals wanting to have, oxygen concentrators sort of on hand for themselves to more quickly discharge patients. We saw certain facilities in New York almost discharging any, you know, nonacutely sick COVID patient with a pulse oximeter and an oxygen concentrator with instructions to monitor their blood oxygen as there was a shortage of hospital beds. As the system is able to sort of absorb more patients, you know, we expect that the sort of demand from the hospitals on the b to b side to suppliers like Adapt will go down. But, again, we're proud of our response.

And when we think that we will have, you know, earned stronger ongoing relationships as a result of our ability to step up and service those hospitals.

Speaker 6

Great. The last question for me from M and A perspective. I think you mentioned in the script that you guys are still sort of looking at deals at this point. Are you seeing more deals come to the table for because of COVID? Do you see pricing changes?

I mean what impact do you think that COVID will have on M and A for you guys throughout the next I guess, throughout 2020? Yes.

Speaker 3

So we are continuing to remain you know, active in the m and a market. I can't say we've seen a a COVID related spike or slowdown. A lot of the people who are in market and are in discussions with now and getting closer with, you know, started their processes prior to COVID. And so we haven't seen anyone pull back. But we're excited.

I mean, I am just thrilled by what the team has done with, PCS Healthline and Advance. Obviously, those are three large acquisitions we did in the first quarter, and to see them all on our platforms already, yeah, just makes us a little bit more bullish on our ability to accelerate the M and A pipeline throughout the rest of the year.

Speaker 6

Great. Thanks so much, guys.

Speaker 0

Our next question comes from the line of Matt Blackman with Stifel. Please proceed with your question.

Speaker 7

Good morning, everyone. Thanks for taking the questions. Let me start with maybe a couple of big picture questions for Luke. So, Luke, does does everything we've experienced with COVID impact your vision for what a DAP could be or the pace at which you can build that vision? Does it slow you down?

Does it potentially accelerate where you're going or open up new opportunities you hadn't previously considered? Just any early thoughts on what you've seen the last few months and how that plays with your longer term strategy. And then I got a couple of quick follow ups. Thanks.

Speaker 3

Yeah. I mean, obviously, the COVID pandemic has just been such a dramatic shock for the system. And I'm again, I wanna just reiterate how proud we are of the way our staff has been able to service our patients, service our referrals, and step up, including building payer relationships. You know, in markets like New York, there's a few payers that we didn't have, and and we've been one of the few suppliers who've been able to continually deliver oxygen. And so we've gotten calls from payers where we may not have had a contract, you know, asking them to take their members on service.

So, again, I think that there'll be long lasting impacts from our you know, as a result of our team's ability to stand up in this crisis. But to your point about what are the long term impacts, you know, I think this accelerates our vision, you know, of the importance of care in the home, of importance of the provision of equipment into the home, and excitingly connected equipment like the CPAP machines that have modems, continuous glucose monitors, even, you know, sort of simpler devices like scales and blood pressure cuffs, pulse oximeters. I think as patients get care in the home, you know, we're you know, that trend has accelerated. I think people have talked for years and years and years about home being a patient preferred cost effective. What we're seeing is COVID was just a jolt to the system to accelerate that.

You know, CMS, I think, has been a thought leader in thinking through sort of removing some of the guidance or restrictions to telemedicine and other ways patients can get care at home. And so, you know, we want to lean into that. We wanna continue to make sure that our referrals and our payers know that we are ready, willing, and able to provide equipment and monitoring of that equipment into the home. You know, I think you're gonna continue to see us build out, you our suite of products. We'd love to be bigger in the diabetes space.

We think that is a expensive chronic condition that maps quite well to our core competencies. And so, you know, it's a long way of saying, you know, we think COVID is just accelerating our long term vision, and, you know, we're planning to make sure that we're in place to to be able to, you be know, the beneficiary of that over the long term.

Speaker 7

Alright. Appreciate that, Luke. And then the next question, how is PCS tracking with respect to to turnaround initiatives? You talked to it a little bit in the prepared comments. But what have you been able to do these first few months?

What's left to do? And I guess, really, what what are the critical steps still left to ensure you hit that four q profitability mark? And I guess on the the product opportunity side of PCOS, you just you just mentioned diabetes and CGM. How big do you think the CGM opportunity could be for you guys, and what do you have to do to actually, execute against that opportunity?

Speaker 3

Yeah. So that's a great question. And so, you know, first and foremost, the the team that we brought on, both the the legacy managers that were part of PCS as part of McKesson Corporation as well as Rodney Carson have just done a phenomenal job. You know, it's not easy to carve a big business out of a, you know, very large corporate like McKesson and then do that with sort of COVID nineteen starting to impact the business two months in. But we've been able to disconnect, fully from McKesson Systems, and that was sort of the goal of the first quarter to make sure that we could stand on our own and not have legacy costs continue sort of thereafter.

And so I'm proud to say that we are off of McKesson systems. Revenue has holding in much better than we expected. We anticipated a disruption, you know, in, you know, disconnecting from those systems, taking a different point of view on how to accept new patients onto service. And I've been, you know, really impressed that the revenue has stayed strong even throughout April, you know, with sort of some of the impacts, you know, in patients new orders and new patients coming onto service being more difficult as patients aren't seeing their prescribing physicians. You know, you asked about what has to continue to to hit our targets.

We have to continue to work, our supply chain and make sure that we're procuring equipment. We think there's a couple 100 basis points of margin to go out and get from just sort of buying better. And then we just need to continue our resupply opportunity. You know, one of the things you talked about when we bought PCS was the need to do a better job resupplying patients, similar to the way we resupply our pap resupply patients. We've done a nice job so far, but I think there's a bigger opportunity to make sure that, you know, every patient that comes on service and is on service, you know, gets the order the next month.

You're talking about patients at home with chronic diseases. This isn't optional. They need these things. And a lot of times, you know, the failure of that patient to get that is, you know, as much a failure of of ours in PCS than the patient not wanting or not needing the supplies. In terms of the to continuous glucose opportunity, now that was a new business for PCS that they started in late twenty eighteen.

It has grown very nicely. I think, you know, our core business, if you look at it on an annualized basis, is about a $20,000,000 business today. But we think that the CGM market opportunity is much, much larger than that. It will be an area that we'll look, you know, we've been acquisitive historically. We've liked the ability to, you know, you know, add scale quickly through acquisition.

We're seeing fantastic sort of new growth trends, and so we will be a disciplined buyer. We do think there are a number of assets in the market. But most importantly, we'll continue the the growth we've seen organically. COVID has not helped. I mean, obviously, most of the analysts on this call cover, or are are pretty familiar with the diabetic space.

New CGM scripts are down anywhere from 30 to 50%. You know? And in spite of that, we're still seeing our business grow.

Speaker 7

Okay. Appreciate that. And the last quick one here. Can you quantify the magnitude of investment you made in the quarter to acquire, I think you said PPE and other sort of safety related measures? How much did that weigh on on EBITDA?

And as we sort of think ahead, whatever that amount is, is that a onetime expense, or is this going to just be the cost of doing business for at least the immediate future? Thanks, and congratulations on a great quarter.

Speaker 3

I'm going to turn it over to Greg to go through specifics. You know, I'll comment that, you know, we we do think the bulk of the expense was incurred in the first quarter. There is going to be some, you know, marginal increase in expansion expense to make sure our patients and our all of our employees in their homes are safe. And so we will not and we will not be shy about spending on necessary PPE. You know, I do think that we will have sort of perpetually higher inventory holds, but we've sort of bulked up, and you saw that cost largely getting incurred in the first quarter.

But I'll turn it over to Greg to walk through some details.

Speaker 0

Yep.

Speaker 5

So yeah. Yeah. Thank you. So we did have as Luke mentioned, it will be, obviously, an ongoing expense, but there's certainly a a bulk in q three. There's probably, kind of 300 to 400,000 for the, PPE.

We also stockpiled some inventory trying to get ahead of any potential, supply disruptions. So we, you know, bought ahead on commos, walkers, things which, you know, potentially would have been disrupted by the China situation. And we also, purchased some additional, CapEx, which was about $500,000. And as you recall, the way we book CapEx or the way we count CapEx in our measure is when we receive it. So the fact that, you know, some of that those assets are sitting in our warehouse, it still affected our, EBITDA minus CapEx measure negatively.

Speaker 7

All right. Thanks, Greg.

Speaker 0

Our final question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Speaker 1

Hey. Good morning, guys. Hope everyone's safe. Most of my questions have been asked already, but, Luke, I just wanted to follow-up on the delayed start that you called out in the quarter. I mean, not surprising there.

But how do you think, you know, from a modeling perspective, how do you think that will impact, you know, longer term in terms of since your census is lower probably presumably than than what you were expecting. Right? I mean, how does that balance out with uptick in all the other business lines, whether it's resupply, oxygen concentrators? We you know, just wanted to hear your thoughts on on that balance.

Speaker 3

Yeah. So, obviously, first and foremost, we are affirming and reiterating our guidance for the year. And so I think on balance, you know, the combination of some of the sort of ongoing census impact from the new starts certainly gets countervailed by the oxygen and and PAP resupply upticks as well as, you know, some of our lower labor costs due to pulling forward some of the restructuring and sort of cost redundancy initiatives that had already been planned the rest of the year. Know, I think that, you know, certainly, the the impact we're seeing on that that Pap census, you know, average Pap, you know, from a modeling perspective, if you were to look and say an average Pap patient is on service for nine or ten months, and we're seeing sort of a decline in the magnitude of twenty percent, you know, for the foreseeable future, at least, until things start to open up. I think that's the best way to think about it running through the model.

There is a residual impact on the the resupply census as well as a a new start patient becomes a resupply patient. You know, we're hoping and we believe that may be counter you know, countervailed by just a longer length of stay as people are more cognizant of the need for both respiratory hygiene and the importance of respiratory health.

Speaker 1

I appreciate that. So I guess my follow-up is we talk about resupply. I mean, obviously, you're seeing pretty good growth there. Do you think that's just pantry stuffing or stocking, or is there your market share gains? Is there increase in the per capita utilization that you're seeing among, among your patients?

I mean, what exactly is driving that, and will that have an impact in in, you know, out quarters?

Speaker 3

Sure. I'm gonna turn it over to Josh to talk about that more specifically.

Speaker 4

Yes. I think we're seeing, an increase that, like I referenced on the on the call, just an increased awareness of respiratory hygiene in general, number one, and I think that's driving a lot of kind of inbound patient demand as well as well as better responses to our outreach to patients. I think that's number one. I think also just patients being available, less kind of running around and and more focused on their health in general is driving some additional resupply opportunities. Also, as we as we reach out to patients in different ways, not just phone calls, but different methodologies to reach out to patients via text message or email, campaigns.

So I think we're seeing just overall better patient engagement both through technology, but also organically through patients. And we expect that to continue, primarily through q two and q three as as, you know, kind of impact of COVID get felt throughout the country. We're seeing increased awareness on resupply, both on on CPAP resupply, but also on on medical supply resupply, with the PCS line of business. So, really, we're we're seeing this in general very stronger than anticipated, resupply resupply demand.

Speaker 1

I appreciate that. I guess my last question, anything that you would call out in competitive bidding? You know, we should be it's in theory, we're scheduled to hear results of comp bidding soon. But, you know, what are you hearing in DC in terms of whether or not it's gonna go through, for 2021?

Speaker 5

Yeah. So, obviously, the sort of

Speaker 3

the known impact so far is they did remove noninvasive ventilation from this round of competitive bidding. Our understanding is that, it will be removed until the the next scheduled round, which we think is twenty twenty twenty four. Just relatively small line of business for us, and certainly on a relative basis to our our large peers. At the same time, the removal, you know, assuming rates stay the same, you know, it is a benefit to 2021 for us. You we had expected to see pretty significant rate decline, in that category.

And, although CMS, you know, reserves the right to use discretion to change rates, I I think that that may be unlikely at least in the near term given the importance of ventilators in responding, to the COVID crisis. You know, as of now, we understand that, you know, CMS is preparing to go through with of the next round of of bidding. You know, we are urging responsibility and potentially the removal of some of the respiratory categories, oxygen in particular. You know, what we've, you know, tried to make clear to the administration and CMS and our legislators is, you know, a competitive bid process that is, you know, based on a stated amount of demand, which is really a twenty eighteen number. When the demand curve has has shifted maybe permanently and by big percentages, it may be unwise to proceed with bidding at this time.

You know, as we are members of a home care of BGM and of the CQRC, and collectively, those groups have advocated removing, the respiratory categories as well as hospital beds for at least a year from competitive bidding. But, you know, we have no guidance to suggest that that will happen at this time. So we are fully preparing, you know, our business, for competitive bidding to happen and get to get the rate information sometime in q three and for effectiveness on 01/01/2021.

Speaker 1

Got it. Appreciate it. Thanks, guys. Ladies

Speaker 0

and gentlemen, we have reached the end of our question and answer session, and I would like to turn the floor back over to mister Luke McGee for any closing remarks.

Speaker 3

Just in closing, I just wanna, again, reiterate my thanks to the entire Adapt Health team. They've really stood up for our patients, our payers, and referrals in the first quarter. I'd also like to reiterate our excitement of the prospects of Adapt Health. You know, we are affirming our guidance for the year, and we will continue to build, for the future. With that, thank you, and we'll talk soon.

Speaker 0

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.