AdaptHealth - Earnings Call - Q3 2025

Executive Summary

• Q3 revenue was $820.3M and adjusted EBITDA was $170.1M, with adjusted EBITDA margin at 20.7%; organic revenue growth was 5.1%, the highest since Q1 2024.
• Management maintained FY25 guidance (revenue $3.18–$3.26B; adjusted EBITDA $642–$682M; FCF $170–$190M), but expects EBITDA at the low end due to prudent upfront investments to stand up a large capitated contract.
• Balance sheet strengthening continued: $50M debt reduction in Q3, $225M YTD; net leverage improved to 2.68x vs 2.81x in Q2, approaching the 2.5x target.
• Strategic catalysts: (1) new exclusive capitated agreement with a payer (170k lives) and (2) major national healthcare system capitation announced in Q2; the latter expected to contribute ≥$200M annual revenue when fully ramped and elevate capitated revenue mix to ≥10% over time.

What Went Well and What Went Wrong

What Went Well

• Organic revenue growth of 5.1% across all four segments; CEO called Q3 a “milestone quarter” with “strong financial results that exceeded our expectations”.
• Sleep new starts ~130k (highest in two years); sleep census reached a record 1.72M; respiratory oxygen census reached 330k (3Q record).
• Rapid deleveraging: net leverage fell to 2.68x; $225M YTD debt reduction; operating cash flow robust at $161.1M for the quarter; FCF $66.8M.
• Digital traction: myApp registered users grew to 271k vs 118k in Q3 2024; early AI/automation benefits (e.g., ~5% reduction in offshore labor reliance in revenue cycle).

Quoted management remarks:

• “Q3 was a milestone quarter for AdaptHealth… The quarter demonstrated both the progress we've made and the significant opportunity ahead.” — CEO Suzanne Foster.
• “Adjusted EBITDA margin was 20.7%… up 30 bps YoY… even as we made forward investments in talent, technology, and infrastructure.” — CFO Jason Clemens.

What Went Wrong

• Wellness at Home revenue fell 16.0% YoY due to prior dispositions of non-core assets; segment mix still normalizing.
• Diabetes: CGM starts were softer than expected; while segment returned to YoY growth (+6.4%), payer mix and execution remain in focus to sustain momentum.
• Sleep: oxygen new starts were lower than anticipated; execution in certain geographies remains a focus, albeit census and starts metrics improved overall.
• FY25 adjusted EBITDA likely at the low end of guidance due to accelerated investments for the large capitated arrangement and timing slippage in certain payer rate negotiations; potential cash collection delay into Q1 2026 from government shutdown.

Transcript

Operator (participant)

Good day, everyone, and welcome to today's AdaptHealth third quarter 2025 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 this press release issued today 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 financial results for 2025 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 at length in the company's annual and quarterly SEC filings. AdaptHealth has no obligation to update the information provided on this call to reflect such subsequent events.

Additionally, on this morning's call, the company will reference certain financial measures such as adjusted EBITDA, adjusted EBITDA margin, and free cash flow, all of which are non-GAAP financial measures. You can find more information about these non-GAAP measures in the presentation materials accompanying today's call, which are posted on the company's website. This morning's call is being recorded, and a replay of the call will be available later today. I am now pleased to introduce the Chief Executive Officer of AdaptHealth, Suzanne Foster.

Suzanne Foster (CEO)

Thank you, and good morning, everyone, and welcome to the call. I'm pleased to report that Q3 was a milestone for AdaptHealth. If you recall, last year at this time, we realigned our business into four reporting segments, each under general managers and dedicated sales leaders. This was intended to focus our efforts on improving patient service and operational efficiency. By doing so, it allowed us to better manage our resources, and that decision was a key contributor to the mid-single-digit organic growth each segment produced this quarter. The theme for today's call is that over the past year, the team has worked tirelessly to transform our business, and we are now seeing our progress taking hold and flowing through to our financial results. In the third quarter, we completed substantial operational improvements across the organization and delivered financial results that exceeded our expectations.

We are continuing to demonstrate progress across all three value drivers: growth, profitability, and risk profile. Starting with growth, our third quarter revenue was $820.3 million, up 1.8% from prior year quarter. Organic revenue growth, which does not include changes in revenue from divestitures or acquisitions, was 5.1% versus the prior year quarter, with strength across each of our four reportable segments. Sleep new starts were up nearly 7% from the prior year quarter, making it our highest quarter in two years. We also set new patient census records in both sleep and respiratory health. We experienced robust year-over-year growth in our wellness at home segment, driven by orthotics and hospice. In diabetes health, we delivered the first quarter of revenue growth since Q1 2024.

Moving to profitability, our third quarter adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter and above the high end of our guidance range. Adjusted EBITDA margin was 20.7%, up 30 basis points from the prior year quarter, as we exhibited discipline on expenses, even as we made forward investments in talent, technology, and infrastructure to support our new large capitated partnership we announced in August. Turning to our risk profile, we reduced debt by another $50 million during the third quarter, bringing our year-to-date total debt reduction to $225 million. We are deleveraging quickly and rapidly approaching our 2.50 times target net leverage ratio, with our net leverage ratio standing at 2.68 times at quarter end. Debt reduction remains among our highest capital allocation priorities, as we believe a strong balance sheet is essential to unlocking and sustaining value for shareholders.

During the quarter, we continued to make significant strides towards improving patient service and field operations. As planned, we completed the implementation of our standard field operating model and organizational structure, starting with consolidating from six to four regions. This was a huge step forward. It required empowering our best operators to lead these four regions and realigning nearly 8,000 employees to our new field operating structure and standard workflows. As a reminder, we enter nearly 40,000 homes per day. We operate 640 locations across 47 states, and without a standard operating model and/or structure, rolling out standard workflows and technology can be slow and inefficient. Now, with a standard operating model across the country, we can more efficiently deploy operational improvements and technology solutions in a timely manner and at scale.

Another initiative that's taken place over the last many months is the consolidation of our previously fragmented call centers into a new national contact center and utilizing a single patient services technology platform. This is a significant enhancement that allows us to dramatically improve how we route our incoming call volume and standardize patient interaction, which creates a higher quality, more consistent experience for the patients we serve. Looking forward, as we deploy technology that allows more patients to self-serve, this new call center will supplement the local branches with increased capacity to manage the most critical patient concerns. We continue to believe that there is significant potential to deploy AI and automation across our business. Therefore, we continue to selectively but aggressively pursue and pilot the use of these tools to drive service excellence and operational efficiencies, and we are already beginning to see the early benefits.

For example, in the third quarter, automation enabled the revenue cycle management team to reduce its reliance on offshore labor by approximately 5%. Let me connect these results to where we are headed strategically. We are moving quickly to establish the infrastructure required to service our recently announced exclusive capitated agreement with a large integrated delivery network. This is a significant undertaking that will require approximately 1,200 employees, 30 locations, and 300 vehicles. Our partnership with this customer is off to a strong start because we share a philosophy about how best to unite our efforts to provide superior care for patients. This starts with a mutual recognition that the combination of an integrated delivery network and at-scale home medical equipment and service provider, working through a per member, per month, or capitated fee model, produces the strongest alignment of incentives.

This means we share a common commitment to a seamless handoff of care as patients are discharged from the hospital when they are at their most vulnerable, and the risk of readmission is the highest. It means being rewarded for clinical appropriateness and efficiency by providing exactly what the patients need, nothing more, nothing less. It also means being motivated to drive patient adherence by investing in setup, training, education, and ongoing support to ensure patients use equipment correctly. In short, we are strategic partners working to keep patients healthy at the lowest sustainable cost. We arrived at this moment because of our success with our Humana capitated arrangement, which demonstrated for the first time that an at-scale HME provider could lift and shift significant volumes of activity while maintaining high service standards.

Our immediate objective is to replicate that success by delivering on our promises to our new IVN partner, as well as to another new capitation partner, a major payer for whom we will be the exclusive provider to an additional 170,000 lives, as announced this morning. As we look out on the horizon, we intend to lead the evolution of our industry by using our results to prove to every IVN and large hospital system in the U.S. that partnering with us produces better outcomes for patients. That means faster time to therapy, higher adherence, greater patient satisfaction, and ultimately finding ways to lower readmission rates and deliver genuine clinical value in the home. AdaptHealth is uniquely positioned with our technology infrastructure and operational capacity to offer this value proposition at scale.

Our relentless focus on operational discipline and service excellence, demonstrated in our Q3 progress, is all about enhancing the value proposition. Our national contact center, centralized order intake, and adoption of AI and automation are just a few examples of how we are alleviating patient, physician, and hospital pain points. This focus extends beyond capitation to our entire business. To be clear about what is at stake, service excellence is where HME providers win or lose loyalty. Hospitals and physicians remember which HME companies respond timely, who handles logistics seamlessly, and who prevents patient readmissions. Service excellence creates referral stickiness. For us, operational discipline as the foundation for service excellence is not just about margin improvement. It's the key to competitive differentiation. Because of this, ingraining this discipline into our DNA is becoming one of our highest strategic imperatives.

As we look toward the upcoming round of CMS's competitive bidding program, our operating efficiency is a unique and critical strategic asset. While the final rule has yet to be released and the ongoing government shutdown holds the potential to delay it, CMS has not minced words about what it hopes to achieve with the redesign of the program. As outlined in the proposed rule, CMS sees the successful process as one that will cause HME participants, small and large, to submit competitive bids, and it seems to view limiting the number of contracts awarded as the key mechanism for achieving that aim. Some look at the bidding program and focus only on the reimbursement risk. However, rate compression is not a foregone conclusion, and moreover, it is only half the equation.

The other half is that if CMS retains its proposal to limit contract awards, this would, by definition, consolidate traditional Medicare market share with knock-on effects that would likely force industry consolidation more broadly. As a result, competitive bidding has more potential to transform HME industry structure than perhaps any other dynamic. AdaptHealth has been preparing for this moment for years. Our cost structure enables us to participate in the bidding program from an advantaged position. Furthermore, as government policy continues to evolve, our improving financial strength affords us the flexibility to take strategic action to consolidate market share. Where others may see risk, we see opportunity. Before I close, I'd like to express how grateful I am to my AdaptHealth colleagues. The progress we've made over the last year, and especially in the third quarter, demonstrated our grit, determination, and focus is paying off.

We have a lot of momentum coming into 2026 and expect to see continuous improvements across our business as our teams execute on these growth opportunities ahead of us. With that, I'd like to pass the call over to Jason to review our financials.

Jason Clemens (CFO)

Thank you, Suzanne. And thanks to everyone for joining our call today. After covering our third quarter 2025 results, I'll provide a review of the balance sheet and our plans for capital allocation. Then I'll finish with guidance for the remainder of 2025 and some perspective on our early expectations for 2026. For third quarter 2025, net revenue of $820.3 million increased 1.8% from the prior year quarter. Organic revenue growth was 5.1% in the quarter.

This does not include $34.4 million of prior year revenues related to the divestiture of certain assets from the wellness at home segment and $7.7 million of revenue from acquired businesses. As Suzanne noted, our third quarter revenues were characterized by strength across all four reportable segments, with each producing year-over-year organic growth. Third quarter sleep health segment net revenue increased 5.7% versus the prior year quarter to $354.8 million. Sleep health starts were approximately 130,000, up 6.8% versus the prior year quarter, resulting in our highest quarter in two years. Our sleep health census reached a new record of 1.72 million patients, up from 1.70 million in the prior quarter. Third quarter respiratory health segment net revenue increased 7.8% from the prior year quarter to $177.0 million.

Despite lower-than-anticipated oxygen new starts, retention remained strong, resulting in an oxygen census of 330,000 patients, which was a new third quarter record. Third quarter diabetes health segment net revenue increased 6.4% versus the prior year quarter to $150.1 million. Our first quarter of year-over-year growth since the first quarter of 2024. Although CGM starts were softer than we expected, CGM census grew over the prior year quarter for the third consecutive quarter, driven by continued improvement in retention rates. Pump and pump supplies revenue continued to grow over the prior year quarter. For the wellness at home segment, third quarter net revenue declined 16.0% from the prior year quarter to $138.4 million, including the previously mentioned impact of the dispositions of certain non-core assets. Turning to profitability, third quarter 2025 adjusted EBITDA was $170.1 million, up 3.5% from the prior year quarter.

Adjusted EBITDA margin was 20.7%, slightly above the midpoint of our Q3 guidance range and up 30 basis points from 20.4% in Q3 2024. The year-over-year margin trend reflected modest improvement in operating expenses, as well as the disposal of less profitable non-core product lines. Our labor expenses were well contained, even as we invested in advance of revenue for a new capitated agreement. Moving to cash flow, balance sheet, and capital allocation. Q3 2025 cash flow from operations was $161.1 million. CapEx of $94.2 million was 11.5% of revenue, up slightly from the prior quarter as we continue to invest in new patient growth. Free cash flow was $66.8 million, in line with our expectations, and unrestricted cash stood at $80.4 million at the end of the quarter. At quarter end, net debt stood at $1.73 billion, down from $1.80 billion at the end of the second quarter.

We reduced our TLA balance by $50 million in Q3 2025, bringing the year-to-date total to $225 million. Our focus on debt reduction has decreased year-to-date interest expense by over $15 million as compared with the same period for 2024. Our net leverage ratio stood at 2.68 times, down from 2.81 times at the end of the second quarter and rapidly approaching our target of two and a half times. Turning to capital allocation, our highest priorities continue to be investing to accelerate organic growth and debt reduction to strengthen our financial position. Followed by strategic acquisitions of home medical equipment providers to round out our geographic footprint and increase patient access. So far in 2025, we have allocated $19 million of capital to tuck-in deals, and we are continuing to advance modest tuck-in deals through our pipeline.

Turning to guidance, we are maintaining our full year 2025 revenue guidance range and expect to come in very modestly above the midpoint of that range. We are also maintaining our full year 2025 adjusted EBITDA guidance, but we expect to come in at the bottom end of that range as we prudently accelerate investments in infrastructure, technology, and labor to stand up our new capitated arrangement. We are maintaining our free cash flow guidance at a range of $170-$190 million. While the government shutdown has the potential to push some cash collections into Q1 2026. Given the free cash flow generated year-to-date, we remain confident that we will still achieve our prior guidance range. Given the number of moving parts affecting our expectations for 2026, let me provide a preview of how we are thinking about next year.

We anticipate the top line will grow 6-8% over full year 2025. Which assumes accelerating growth in our core products, revenue from our new capitated contract, and the impact of certain assets disposed in 2025. We expect revenue growth will start slower in the first half but will accelerate in the back half due to the timing of the ramp of the capitated contract and the dispositions. We anticipate full year 2026 adjusted EBITDA margin to be approximately 50 basis points better than 2025, even as we invest in new capitated infrastructure in early 2026 ahead of the revenue ramp. As a reminder, we expect this capitated contract, once fully ramped, to produce at least $200 million of annual revenue with adjusted EBITDA margin and free cash flow margin in line with the rest of our business.

As has been our practice, we intend to provide formal full year 2026 guidance when we report fourth quarter earnings this coming February. That brings me to the end of my remarks. Operator, would you kindly open up the call for questions?

Operator (participant)

Thank you. If you'd like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question, and we'll pause for just a moment to allow everyone a chance to join the queue. Our first question comes from Eric Coldwell with Baird. Please go ahead. Your line is now open.

Eric Coldwell (Senior Research Analyst)

Thanks very much. Nice, nice job in the quarter. Wanted to hit on the large capitated deal. Your comments on 2026, Jason, were very helpful. You mentioned slower growth in the first half, more in the second half. Conversely, the incumbent on that arrangement has been signaling that it actually expects the transition to begin this quarter and to be completely ramped or completed by the end of the second quarter of next year. The incumbent sounding like the transition is going to happen a little faster. If I'm reading you correctly, it still sounds like you're expecting a little slower. I'm hoping you can just help us triangulate those two data points.

Jason Clemens (CFO)

Sure, Eric. I mean, I guess I'd say firstly that we don't have a lot of perspective on what competitors might be saying out there. What we do know is that the contracted dates that we've signed up to deliver, that's very clear. We're in advance of the bulk of that ramp, and we think we're being appropriately conservative with our expectations of the ramp over the course of 2026. As markets come online, we'll certainly gain confidence on having all the infrastructure that we need in place before the first patient shows up. I mean, that in our mind is the priority, is making sure that we've got the labor and the people and the vehicles and the infrastructure in place for those patients prior to showing up. If we do that, we take good care of those patients, that ramp could get better than what we're suggesting.

Eric Coldwell (Senior Research Analyst)

Just one quick follow-up or additional question. You have obviously been pretty successful here recently with these new wins, particularly on the large capitated side. At the same time, again, a competitor has recently announced, at least in the near term, an exclusive with a large network, Optum Health. I am curious, based on your 2026 preview, it does not sound like that is a big impact, but I am hoping you can give us some color on perhaps how much exposure you might have had there or if that competitor announcement is at all impactful. I mean, certainly a larger Optum Health, larger network, somewhat visible to the street. I am just curious if you have any thoughts on that change.

Suzanne Foster (CEO)

I'll take that one, Eric. Taking a step back, I think that these capitated agreements or preferred provider agreements, as some will call other types of agreements, are evidence that the market, payers, and providers are interested in partnering with a single scaled partner to help their membership or patients. There is a distinction, in my understanding, between an exclusive capitated agreement and what we call a preferred provider agreement. The distinction here is that when we say capitated agreement, we are exclusive. They have to refer to us, and we have to service that patient pool. A preferred provider agreement means, "Hey, give us the business, we'll service it." It still means that people can compete for that business. It's still an open network. If I understand correctly, the contract that you're referring to, I have not heard that it is exclusive.

I have heard that at the end of the day, they have to earn the business just like anyone else would. Like I said, in this business, you earn that business by providing the best service. We believe, with all of the infrastructure and continuous improvement that we made, that we are going to continue to earn business on the basis of our service excellence. It does not preclude us from calling on that customer.

Jason Clemens (CFO)

No, Eric, I might add, since the announcement that you're referring to, there's been zero change in our trend lines and our expectations related to that contract. We'll see what, I guess, tomorrow brings. For now, we've got full access and coverage, and we feel just fine about it.

Eric Coldwell (Senior Research Analyst)

That's great. Thanks so much, guys. Good job with the quarter.

Operator (participant)

Thank you. We'll now move on to Brian Tanquilut with Jefferies. Your line is now open.

Brian Tanquilut (Senior Equity Research Analyst)

Hey, good morning. Congrats on the quarter. Maybe, Suzanne, I'll just hit on that last comment you made. As we think about the fact that you've already won Humana, the Kaiser contract, and then another one today, I mean, different dynamics there. Humana was not capitated prior. What are you seeing in the market, or what are the conversations like in terms of getting more payers to convert their approaches to DME to capitation? How far are we from, or is it reasonable to think that eventually this will be mostly capitated, at least for the national providers?

Suzanne Foster (CEO)

Thanks, Brian. I mean, I believe that this type of model is what's best for the industry. I was recently on the road meeting with some big hospital systems and their CEOs, and what they're talking about is reducing their length of stay, seamless handoffs, putting our people alongside their people for discharge planning. They are incented to move patients through the hospital or, if it's a physician practice, to have a seamless handoff. Having a strong partnership where we can hold each other accountable, they can hold us accountable for service level initiatives, that's a big deal to them. Because if they're managing many, many different players without strong SLAs in place, that makes it difficult.

Us showing up, saying we're a large public company that takes compliance and integrity seriously, that we cover 47 states, that we can do this at scale, that we agree to SLAs in the capitated agreement, they like that model. The idea that we can show up and have that seamless handoff for them and quarterly report out how that performance is going between us, that's something that's really getting a lot of interest. That's where we're putting a lot of resources to go see how many more hospital systems, IDNs, and payers that we can convince by aligning our incentives that this is best for patient care.

Brian Tanquilut (Senior Equity Research Analyst)

That makes sense. Maybe, Jason, just back to the point of the guidance. I mean, obviously, good quarter here. I think you're maintaining the guidance. First, what exactly are these investments that you've mentioned? How should we be thinking about the investments related to the new contract? Where are you tracking versus what you thought you'd be spending for Kaiser? Thanks.

Jason Clemens (CFO)

Right. I guess firstly, kind of when we say infrastructure, we're talking about an estimated 1,200 people that have to be recruited, onboarded, trained, and ready for day one of patients flowing across multiple states. It's procurement of vehicles to our standards. They've got to be outfitted. They've got to be painted, all this. Detail that needs to happen in order to have trucks running on day one. That's all well underway. Finally, it's the procurement of about three dozen locations in geographies that we don't compete in yet. As we get those locations identified and secured, they've got to get outfitted and ready. You've got to stock them with inventory and capital equipment and, again, be ready for that patient on day one. We're moving along according to our plans.

In fact, in some markets, we've actually advanced due to some local dynamics in those markets, which is why we're seeing expenses running hotter, particularly in the labor lines. I'd say related, I mean, we went from six regions to four. We took out two kind of operating regions as part of that operating model change. Look, there's a lot of talent in the organization, a lot of experience, long time in DME. We think it was prudent to hold on to the folks that want to continue to be part of our business, that potentially want to relocate. We're doing a fair amount of that to these markets to stand up new AdaptHealth operations and to grow from there. That's a little bit about kind of what we're investing in.

In terms of what to expect, we do expect to carry additional expense into the first quarter, potentially mid-second quarter. As this revenue comes online, the nice thing about it is, I mean, you immediately move up to the 20% EBITDA margin, which is our expectation for the contract, because the infrastructure is paid for, the capital equipment's in, trucks are running, and that day one, you start getting paid per member per month. There'll be a little bit of forward investment in the fourth quarter and in the first quarter, and then that'll start swinging out over the course of 2026. We expect high revenue growth as well as big improvement in EBITDA margin in the second half of 2026.

Brian Tanquilut (Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. We'll now move on to Richard Close with Canaccord Genuity. Your line is now open.

Richard Close (Managing Director and Equity Research Analyst)

Yeah. Just hitting on the capitated agreements a little bit more. In terms of the announcement or the new contract announced today, are there any more details that you can provide? Just curious if there's any geographic overlap with your other agreements that pretend maybe some additional operating leverage there or less infrastructure investments on that. Then is there an opportunity to expand the number of lives with that agreement?

Jason Clemens (CFO)

Yeah, Richard, I'd say that. We announced this agreement more so for the strategic implications to the company. And where we're heading in terms of taking control of our own destiny and reimbursement. Capping business exclusively where we can contain an entire population and take care of all of those patients. In terms of financial impact. I mean, 170,000 members, the math doesn't work exactly, but compared to over 10 million lives in this other contract that we've spoken about, you'll see it's maybe a couple of percentage points. So it's nowhere near size and scale. There is benefit to. The geography of this contract and potential growth. This is a major payer. If we do our jobs and we think we will, it does set up nicely for us to continue to work that payer's pipeline. So more to come.

Operator (participant)

Once again, if you'd like to ask a question, please press star and one on your keypad now. We'll now move on to Peter Chickering with Deutsche Bank. Your line is now open.

Kieran Ryan (Equity Research Associate)

Morning. This is Kieran Ryan on for Peter this morning. Appreciate you taking the questions. Just wanted to check in and see if you could provide any other color on diabetes. Appreciate the detail on CGM's versus pumps. Not sure if you can talk about anything you saw on the pharmacy side or with payer mix in the quarter that maybe contributed to the uptake. Thanks.

Suzanne Foster (CEO)

Okay. Appreciate the questions. Jason, I'll tag team this. I'll start with just what we're seeing in diabetes. We've talked about this now for the past year that this has been a focus of ours to improve our execution, that a lot of this was certainly an interesting market dynamic, but that was no excuse for our past year's performance. We have finally gotten our arms around the business, and we're seeing the best attrition rates from our resupply team. We've really stopped that bleeding and servicing patients really well there. Pumps have been strong, and our sales force has been trained, put in place. We've made the changes we've needed to. We have a strong leader there. We're getting out in front of the right customers and leveraging the HME side of our business. The diabetes team and our HME sales forces are working collectively to identify opportunities.

It's kind of been an all-hands-on-deck that finally has proven to show some success. In terms of the numbers, I'll hand that off to Jason to give you a little bit more for that purpose.

Jason Clemens (CFO)

Yeah. To get maybe into the weeds a little bit, this was the first quarter, or last quarter, I'd say, of a comparable against a different management team, a different resupply organization and processes. Because those changes were made late September of 2024. And so what you're seeing is just strength in retention, as Suzanne said. Now, when we get to Q4, now we're comping. That same team that we've got running in Nashville is now comping against themselves. We're setting record retention rates, but to grow above that, it does get more challenging. Although we were thrilled to see over 6% growth in diabetes in Q3, given the softer starts, we still have a ways to go until we're demonstrating consistency and stability and ultimately some growth in this business. That's a little bit about Q3 versus Q4.

As we get to 2026, again, we expect stable retention, modest improvement in sales. We're taking actions to make sure we secure that. With a little luck, we'll have a consistent, stable business to report in 2026.

Suzanne Foster (CEO)

To your point around pharmacy versus med benefit, during the past year, we did not. We made the decision to pursue the pharmacy channel. We were slower last year committing to that to wait to see what this business, how it would perform. Now that we are seeing that providers do really want the optionality to send both, we are making investments to make sure that we can efficiently process those types of orders as well.

Kieran Ryan (Equity Research Associate)

Thanks a lot. I guess just briefly on the sleep side, obviously strong new start and census numbers. Just wanted to still understand if you still expect that mixed headwind to be fully comped out as we exit 2025. That is kind of not a factor as we move into 2026. Thanks.

Jason Clemens (CFO)

Yeah, exactly. I mean, there'll be de minimis impact in Q4, but as we get into 2026, we'll be past all that. It will be a bit of an easier comp, if you will, as we look towards next year.

Kieran Ryan (Equity Research Associate)

Thanks a lot.

Operator (participant)

Thank you. We'll now move on to Whit Mayo with Leerink Partners. Your line is now open.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Hey, thanks. Good morning. Jason, the 6% to 8% revenue growth that you're guiding to for 2026, any way to unpack that by segment, how you're thinking about it?

Jason Clemens (CFO)

Sure. We can probably offer some high-level views. And then add a lot more to that when we guide in February. But if you look at the base business today, I mean, we've gone through a lot of disposition activity. Over the course of kind of late 2024 through current. We're starting modest M&A that's been going on around that same time frame. And so you're going to likely have a bit of a canceling effect as we look to 2026. Outside of that, our organic growth, which excludes dispositions, acquisitions, year to date, we're running 1.8%. So as we look to 2026, I mean, we think that we can get a little bit of growth there. Some of that will come through the accounting changes that Kieran mentioned in the last question. I mean, that alone is $30 million or about a point of revenue.

So if you look at sleep, I mean, that alone. We expect to produce a better growth rate in sleep. Not just that single factor, but we're starting to near records of new start activity. And so we aim to continue that through 2026. Respiratory in 2025 so far has just had a blowout year. I don't know that we'll be producing at these upper single-digit levels for respiratory. We think it'll normalize back to kind of a lower single digit, which is what we've seen historically as it relates to respiratory. And then as it relates to diabetes and wellness. We think we'll produce steady and stable revenue, potentially a little bit of growth. In one or both of those segments. But all that together, we think organic growth, again, today, a little under 2%, could move to a little under 3% next year.

And then you've got the benefit, which is also organic, of this capitated arrangement that gets you up to that 6% to 8%.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Okay. That's helpful. I was wondering, is there anything new on RAC audits for PAPs, ventilators, rentals, etc., that's on your radar that's concerning or not concerning to you? I think CMS did award a new contract recently, so just wanted to get an update there.

Jason Clemens (CFO)

That's right Whit, but the number of audits and the kind of frequency of audits, it's been very, very steady. There's been no change or impact.

Whit Mayo (Senior Managing Director and Senior Research Analyst)

Okay. Helpful. Thanks.

Operator (participant)

Thank you. This now brings us to the end of today's meeting. We appreciate your time and participation. You may [disconnect].