Chemed Corporation (NYSE:CHE) Q3 2025 Earnings Call Transcript

Chemed Corporation (NYSE:CHE) Q3 2025 Earnings Call Transcript October 29, 2025

Operator: Good morning, and thank you for standing by. Welcome to the Chemed Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Holley Schmidt, Assistant Controller. Please go ahead.

Holley Schmidt: Good morning. Our conference call this morning will review the financial results for the third quarter of 2025 ended September 30, 2025. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management’s expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company’s news release of October 28 and in various other filings with the SEC.

You are cautioned that any forward-looking statements reflect management’s current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today’s call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company’s press release dated October 28, which is available on the company’s website at chemed.com. I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed’s VITAS Healthcare Corporation subsidiary.

I will now turn the call over to Kevin McNamara.

Kevin McNamara: Thank you, Holley. Good morning. Welcome to Chemed Corporation’s Third Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions. Both operating units fell primarily in line with our expectations in the third quarter of 2025. VITAS continued to execute the strategies required to fully mitigate any potential Florida Medicare Cap billing limitation for the government’s fiscal 2026 year. Additions in VITAS during the quarter totaled 17,714, which equates to a 5.6% improvement from the same period of 2024. An important metric that we have been tracking related to Florida admissions is the percentage of total admissions that come from hospitals.

Our analysis indicates that an appropriate balance for sustained long-term stability in the Florida patient base given the current mix of referral sources is between 42% and 45% of the total admissions should come from hospitals. During our community access program, this ratio dipped below the preferred range for a sustained period of time. In the third quarter of 2025, this ratio was 44.5%, which represents a high watermark during the post-pandemic period. The ratio has been above 42% for all of 2025. We previously estimated that the consolidated Florida program with 2025 Medicare Cap year with a $19 million billing limitation. We came in slightly better than that with a billing limitation of $18.9 million. Management continues to believe there will be no Medicare Cap billing limitation related to our Florida program in 2026.

As discussed above, the initiative to admit a higher percentage of hospital-based admissions has gained traction, and we anticipate that to continue. We have cleared all hurdles to opening our new Pinellas County location, which is now on track to open in early November. Our new program in Marion County, Florida, which opened in May of 2025 has grown to an ADC of 75 as of September 30, 2025. We project that it could double in size to an ADC of 150 by the end of 2026. Now let’s turn to Roto-Rooter. Roto-Rooter revenue increased 1.1% in the third quarter of 2025 compared to the same period of 2024. Branch residential and commercial revenue were both encouraging with increases of 3.4% and 2.8%, respectively. Revenue from independent contractors continues to be disappointing, declining 4.7% in the third quarter of 2025.

For the first time in several quarters, we saw strength in our residential plumbing revenue service line. Residential plumbing revenue increased 8.2% in the third quarter of 2025 compared to the same period of 2024. A multipronged campaign to target selected high revenue dollar plumbing services yielded positive results in the quarter. The campaign included more targeted Internet focus on specific services, enhanced sales materials for the technicians in the field and more frequent close rate reporting to branch management related to the specific services. We are encouraged by the results of this campaign in the quarter. Total leads were down 1.3% in the third quarter of 2025 compared to the same period of 2024. This is a nice improvement compared to the trajectory we saw in 2024 and earlier in 2025.

As discussed in the past few quarters, the trend of increasing paid leads offset by declining natural leads continues. During the third quarter, paid leads increased 8.6% compared to the same quarter of 2024. The entire decline in leads is in the natural lead category. In my opinion, this trend is both a positive and a negative. While we are paying for more leads causing some margin pressure, we also believe this trend indicates a potential moderation of competition for leads from our most significant private equity competitors. We are monitoring these trends closely. As Mike will discuss further, Roto-Rooter margins continue to be below our long-term expectations. However, gross margin during the quarter was exactly in line with our guidance.

The many operational initiatives discussed in past calls are having positive impacts. The shift from unpaid leads to paid leads was the main driver of the $3.6 million increase in SG&A costs in the quarter. This led to EBITDA and EBITDA margins to be slightly lower than our expectations for the quarter. We are very encouraged with the performance of both businesses in the third quarter. VITAS is on track to ensure that the Florida Medicare Cap issue is behind us. While still below our long-term expectations, there are signs that the Roto-Rooter business has stabilized and is on the way to returning to a predictable, sustainable growth trajectory. With that, I would like to turn this conference over to Mike.

Michael Witzeman: Thanks, Kevin. VITAS net revenue was $407.7 million in the third quarter of 2025, which is an increase of 4.2% when compared to the prior year period. This revenue increase is comprised primarily of a 2.5% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 4.1%. The acuity mix shift negatively impacted revenue growth 121 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 124 basis points. The $6.1 million Medicare Cap billing limitation accrued in the third quarter of 2025 is comprised of $4.6 million for our Florida combined program and $1.5 million related to all other VITAS programs, mainly in California.

We came in slightly better than our estimates for the quarter in both Florida and California. Average revenue per patient day in the third quarter of 2025 was $205.08, which is 298 basis points above the prior year period. During the quarter, high acuity days-of-care were 2.3% of total days-of-care, a decline of 259 basis points when compared to the prior year quarter. Adjusted EBITDA excluding Medicare Cap totaled $70.4 million in the quarter, which is a decline of 3.8% when compared to the prior year period. Adjusted EBITDA margin in the quarter excluding Medicare Cap was 17.0%, which is 157 basis points below the prior year period. The lower EBITDA margin in the quarter reflects the impact of admitting more hospital-based short-stay patients.

The EBITDA margin is within our expectations and guidance. Now let’s turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $150.9 million, an increase of 3.4% from the prior year period. This aggregate residential revenue change consisted of plumbing increasing 8.2%, excavation increasing 4.5% and water restoration increasing 6.8%, offset by a decline in drain cleaning of 2.6%. Roto-Rooter branch commercial revenue in the quarter totaled $55 million, an increase of 2.8% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.2%, water restoration increasing 3.5% and drain cleaning revenue increasing 1.2%, offset by a decline in plumbing of 0.8%. Revenue from our independent contractor declined 4.7% in the third quarter of 2025 as compared to the same period of 2024.

Our independent contractors are generally smaller operations in middle-market cities. In many instances, based mainly on resourcing constraints, they have less effectively capitalized on the add-on service segment growth opportunities than our owned branch locations. We are actively working with the contractor group to help mitigate the issues in this segment of our business and get it back to a growth trajectory. Adjusted EBITDA at Roto-Rooter in the third quarter of 2025 totaled $49.4 million, a decrease of 12.4% compared to the prior year quarter. Adjusted EBITDA margin in the quarter was 22.7%. The third quarter adjusted EBITDA margin represents a 351 basis point decline from the third quarter of 2024. The third quarter EBITDA margin is a 90 basis point improvement over the second quarter of 2025.

While below our long-term expectations, Roto-Rooter’s third quarter gross margins within our guidance range. The many field-level initiatives discussed in prior quarters have begun to take hold. The paid versus natural lead generation shift discussed by Kevin drove the $3.6 million increase in SG&A costs and the resulting EBITDA margin pressure. This is the main reason for the slightly lower-than-expected EBITDA margin in the third quarter. Management reiterates its previously issued guidance of $22 to $22.30 per share, excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items. This guidance assumes that there will be no Medicare Cap related to our Florida combined program for the government fiscal year 2026, beginning on October 1, 2025.

I will now turn this call over to Joel.

Joel Wherley: Thanks, Mike. In the third quarter of 2025, our average daily census was 22,327 patients, an increase of 2.5%. In the quarter, hospital-directed admissions increased 10.4%. Home-based patient admissions increased 2.3%. Assisted living facility admissions increased 8.9%. And nursing home admissions declined 8.9% when compared to the prior year period. Our average length of stay in the quarter was 109.7 days. This compares to 102 days in the third quarter of 2024. The average length of stay in the second quarter of ’25 was 137.1 days. Our median length of stay was 18 days in the third quarter of 2025, equal to the median in the third quarter of 2024. The median length of stay in the second quarter of 2025 was 20 days.

It’s important to remember that length of stay statistics are calculated based on discharged patients, not active patients. The return to a more normal length of stay metric in the third quarter is indicative of the success with our renewed focus on higher admissions from hospital as a preadmission location as previously discussed. I’m excited about the opportunity to lead VITAS into its next chapter. The new CON in Pinellas County is a significant opportunity for VITAS. We will continue to put our best foot forward when applying for new CONs in the state of Florida. We will continue to focus on providing the best possible care to our patients and their families. That focus will be coupled with getting back to the basics of ensuring that we grow the business responsibly while effectively managing the Medicare Cap.

With that, I’ll turn the call back over to Kevin.

Kevin McNamara: Thank you, Joel. I will now open this teleconference to questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Ben Hendrix of RBC Capital Markets.

Benjamin Hendrix: Appreciate the reaffirmation and guidance with results in line with your expectations. But with the results in both segments falling a little bit below what the Street was modeling, we’re getting a lot of questions about the elements that bridge us back to guidance in the fourth quarter. Can you kind of run through in each segment what you’re seeing from a demand and cost trend perspective and even from a seasonal perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in fourth quarter?

Michael Witzeman: Sure, Ben. I think the biggest sort of distinction is that there’s a little more seasonality that we anticipate in the fourth quarter. And so when I looked at your — how you progress the third and fourth quarter, and it was across all the analysts, it’s not just you. But the third quarter was a little lower than our internal — or a little higher than our internal expectations and the fourth quarter was a little lower. So all in all, where you ended up the year was exactly in line with where we end up the year. It’s more of a seasonal thing. The two — when you break it down between VITAS and Roto-Rooter, VITAS’ fourth quarter is always their best quarter. It’s when the new rate increase goes in on October 1.

Our margin spikes in the fourth quarter from that because our cost structure really hasn’t changed from September, for instance, from September 30 to October 1. So we get a pretty nice bump in margin from that. From a Roto-Rooter perspective, they always do better in the fourth quarter and the first quarter. The fourth quarter, it’s a weather impact. When it’s colder, wetter, Roto-Rooter tends to get more jobs. So it’s just a little bit of a change. And I would tell you that the difference is only a couple of million dollars, right, between each quarter. And so it’s not — I don’t think there was a huge difference between what you had and what we had.

Kevin McNamara: Right. But now we’re giving you some specifics, Mike, some of the elements that we do expect to improve during the quarter compared to the third quarter.

Michael Witzeman: Sure, sure. So Roto-Rooter is probably the easier one where we talked about some of the things that we’ve been doing. We expect — we’ve talked in the past about some of the issues that we’ve had from a cost perspective at Roto-Rooter with discounting in the field, with higher commission rates. That improved, as I mentioned in the prepared remarks. I think our sequential margin improved about 90 basis points, and we expect that to continue. So we’re expecting some of the green shoots on the revenue side to continue but also to still improve margins as we go forward into the fourth quarter. And VITAS, I think, as steady as she goes in the fourth quarter from a margin and revenue perspective.

Kevin McNamara: Joel, anything with regard to areas where you see some comparative improvements from the third quarter to the fourth quarter by the results?

Joel Wherley: Yes. So — and thanks for the questions, Ben. As we have talked about in the previous 2 quarters, we knew that we would have additional marginal compression specific to our shift in strategy away from community access and focusing more on hospitals as a preadmit driving a higher volume of shorter length of stay patients. However, what we have done to offset that is institute additional efficiency gains internally with labor management, which we are really excited and have effectively put into place as well as going into the fourth quarter, as Mike indicated, is usually a good quarter for us. And as we manage that preadmit environment, and as I indicated earlier, back to a more reasonable length of stay, we’re effectively managing the fixed costs associated with that.

Kevin McNamara: And just to give you one specific, how this relates to the results for VITAS. As we mentioned in the third quarter, we shoot for between 42% and 45% is the ratio of hospital admissions. For the quarter, it was 44.5%. To the extent that, that were to moderate closer to 42%, you would expect to see longer stay patients, nonhospital admissions, would still be in a healthy range but it would yield more profitable patients. So I mean, that expectation is that 44.5% is a high watermark during a period of extensive scrutiny on Medicare Cap. And just the moderation of that alone would cause the type of improvement we’re talking quarter compared to quarter.

Benjamin Hendrix: And if I could just do one follow-up here. Could you talk a little bit about your receivables? It looks like DSO is a little elevated. Just wanted to get your thoughts on how cash collections are progressing and if there’s a timing issue there or kind of what we can expect from a cash collection perspective.

Michael Witzeman: That’s just a timing issue, Ben. I think it’s mainly at VITAS and it’s mainly relating to Medicaid, as you might imagine, with all the other sand in the air from a government perspective, Medicaid has — payments have slowed down, but it’s not an indication of any deterioration in our collection efforts or ability to collect. It’s just a timing issue.

Operator: Our next question comes from the line of Brian Tanquilut from Jefferies.

Brian Tanquilut: So maybe just as I think about 2026 with where the Medicare rate shook out. I know you had previously provided some insights into how you were thinking about margins and growth rates for next year. So curious where that stands now and just broadly speaking, without giving guidance obviously, how you’re thinking about the growth algorithm for 2026?

Michael Witzeman: Sure. I’ll start and then Joel or Kevin can follow up. But we — well, first, we’re only at the beginning stages of our budget process, as I know you know. But I think the fourth quarter, particularly as it relates to Florida and the Medicare Cap, will really inform our decisions on how the operations are going to — what’s the strategy for 2026 and then how that relates to the financial statements. And the reason I say that is, generally speaking, Florida in the fourth quarter is when we generate essentially all of our cap liability in a year. And then we spend the next 9 months overcoming that. And that’s how it’s operated. VITAS has operated since we started — since we’ve owned them. We saw that, that number in the fourth quarter last year was a lot — that liability in the fourth quarter was a lot higher than it has historically been.

And so we had to moderate, as we’ve talked about a lot, to more hospital admissions. To the extent — and we believe this to be the trajectory we’re on, but that number is much more moderate in the fourth quarter this year, that informs our ability, as Kevin mentioned before, to be able to start creeping back up the long-stay patients and improving both the revenue growth rate and the EBITDA margin. Of course, that takes a little time as well as all patients on the first day are short-stay patients. So over time, we’ll build a little more momentum in those long-stay categories to the extent we do it responsibly to make sure we don’t have a cap problem. But the fourth quarter is really going to inform 2026. If I had to say from a high-level perspective, again, a little bit of speculation, but I would say revenue in the 8-ish percent range, margins at the 27.5% to 28% range is what we would think — 17.5% to 18%, sorry, I was mixing that up.

sorry, is what we would think off the top of our head. But again, we’re putting the pen to paper now.

Kevin McNamara: Joel, anything with regard to – from an operating margin profitability that gives you renewed confidence for next year? And I know it’s — you’re early in your budgeting process.

Joel Wherley: So thanks, Kevin. First, I would reiterate what Mike said. The fourth quarter is going to be a significant indicator as to the speed for which we can look at responsibly getting back to active census growth, especially within the Florida market. We are very encouraged by the strategies we put in place, the steps that we have taken, the moderation of the average length of stay from a discharge perspective and all of the initiatives that we have put into place to mitigate any concerns going forward with cap, which then puts us in a position where we can be agile and responsibly get back focusing on census growth in those markets.

Brian Tanquilut: I appreciate that. And maybe my follow-up, just to try to keep this to two questions. Kevin, you talked about the improvement that you’re seeing in the competitive dynamics in Roto. So if you can speak to that. And then maybe as I go back to your comment about gross margin coming in, in mind, clearly, G&A is the area, the other lever there. So just wanted to hear your thoughts on improvement performance and opportunity on the G&A line as we think about both Roto and VITAS.

Kevin McNamara: Okay. Well, let me — let’s have Mike start with the numbers on it, but I’ll give you my overall perspective following that.

Michael Witzeman: Yes, sure. The first question, Brian, is our total leads for the second quarter in a row were up almost — were high single digits on a paid search basis. The entire deterioration in leads that we’ve seen is in unpaid search categories. Again, as we talked about that, that creates margin pressure because we’re paying for more leads. But ultimately, we are not seeing the competitive pressures for those paid leads that we have in the past. And we find that to be encouraging. The thing, I think, that gives us a little more confidence even in that is we’ve seen all other big players that — in a lot of consumer service areas are also having trouble with unpaid. So it’s not as if they’re sort of targeting Roto-Rooter.

All of the people who are willing to pay for leads are being forced to pay for more leads. And so that would include our private equity competitors and, as a result, we’re very encouraged that we’re getting the leads that maybe we hadn’t been getting a year ago at this time.

Kevin McNamara: I’ll give you an example. In the second quarter of last year, roto-Rooter paid more, spent more for Google advertising and all of the Internet. And we didn’t — and it was met by a competitive response. And the net result was everyone paid more, but there wasn’t a change in the balance of leads. That’s not what we’re seeing now. We’re seeing now as we spend more, we’re getting more. And it’s just up to us and basic economics to make sure that we maximize the utility of that spending.

Michael Witzeman: Yes. And then as far as sort of margin, when we talk about gross margin being in line, they’re in line with our expectations for the quarter. But they’re not necessarily, as Kevin mentioned in his prepared remarks, they’re not in line with our long-term expectations. There’s work to do there still. But we recognized — when we talk about it in the second quarter, we recognized it was a multi-quarter fix on some of those things, particularly some of the discounting in the field and commissions. So while the gross margins are in line with what we expected in the third quarter, there’s still work to do there.

Kevin McNamara: Yes. And let me just say it. I’ll make a subjective comment here. One of our biggest problems in getting margin on the calls we are getting is it’s pricing discipline. And it’s easier to have that pricing discipline when there’s enough work to go around. And we’re starting to see that as opposed to being down 10%, it’s up 1%. So I mean, it’s easier to have the discipline to not discount, to not — to make sure we get a price that gives us our traditional margin. And again, it’s the rising creek that more leads give you to provide that. And that’s really — it’s subjective, but that’s what we’re really shooting for, for the improvement for 2026 in Roto-Rooter.

Michael Witzeman: And then the last thing I would say, and this mirrors Kevin’s remarks on the SG&A line. We’re doing what we can to minimize the cost, but it’s — we want to make sure that we maximize the opportunities that are provided to us. And if it means spending a little more on paid search to provide the revenue growth that we think is appropriate, then we think that’s a good investment. And we track revenue per lead cost and those sorts of things. So we track that pretty closely. And so we think it’s the right use of money to drive top line to spend a little more on the paid marketing side.

Kevin McNamara: And something we’ve — it’s not enough, but we have been talking about the operational aspects of Roto-Rooter and the internal metrics that is close rate at the call center, close rate in the field. A lot of those operational metrics remain very strong. So we feel that we’re poised, if we get the calls, we should make more money from them.

Operator: Our next question comes from Joanna Gajuk from Bank of America.

Joanna Gajuk: So maybe just to continue on the Roto-Rooter segment. So if I read this right, margins are under pressure because of the marketing costs, right? So how should we think about sustainable margins? I mean, it sounds like maybe that’s a new kind of business model. You’ve got to pay more. So how should we think about — I know you don’t have specifics for next year, but say, over the medium term or longer term, how you think about margins in that business?

Michael Witzeman: Sure. From a longer-term perspective, we think that the right margin — and I’ll get it right this time, Kevin. The margin at Roto-Rooter is 25% to 26% is the right EBITDA margin over the longer term. We’re not quite there yet. We think that we should be able to absorb higher marketing costs because of the higher leads and the revenue that they generate. And so there’s no doubt that there’s going to be continued pressure for the near term — for certainly the foreseeable few quarters on marketing costs specifically. But we think that they are — we’re able to overcome them with other operational things we’ve talked about over the last few quarters.

Kevin McNamara: Yes. Just let me tell you how it works in the real world. When calls are down, the service man goes out, makes a written estimate and it’s all or nothing. Essentially, the customer says okay or no. And at that point, there’s not another job on the board for that service man to go run to. You can see how he’s inclined to say, “Well, what will it take for me to do it?” And that’s the discounting. That’s where you lose margin. And to the extent that we’re able to get enough leads and get enough jobs on the board for those service men, you can see how that could have a dramatic effect on margin just by having that additional potential work. And it’s like a multiplier effect. And again, we’re not that far from getting back on an even keel with regard to leads.

And when I say even keel, I mean something that’s not down double digits. So that’s the magic as far as paying a little bit more but still having strong margins. All or nothing. To the service man, if he cuts $70 off the job, that’s at least something for his time. But again it’s — bad business drives out good business, and that’s what we’re always at war with.

Michael Witzeman: And we’ve put in some a little bit tighter controls around what the technicians are able to do at the door, a little bit higher level approval requirements and things like that. But a learned behavior like that doesn’t change overnight. And that’s why we knew this was going to be at least a couple of quarters to really fix this learned behavior in the field. And we’re pleased with where it has progressed through the end of the third quarter.

Joanna Gajuk: Okay. Because like I say, if I look at year-to-date, adjusted EBITDA margin for the segment, about 23% or so. But I guess to get to your full year guidance, that just implies higher margin in fourth quarter. But you also alluded to the idea of like seasonality impact, right? So is that…

Michael Witzeman: Yes, fourth quarter is always the highest.

Joanna Gajuk: Always the higher margin. Okay. Because it kind of comes out to be like 25% or so to get to, call it, 24% for the year. So is that 24% like a good number to think about as we head into next year in terms of margins?

Michael Witzeman: I think we can do better than that next year. But again, we’re working on the budgets now. But I think we should see some margin improvement certainly next year compared to ’25.

Joanna Gajuk: And then when it comes to top line, right, so it’s tracking, call it, 1% growth this year. So how should we think about it? Can this business kind of grow closer to mid-single digits? Is that still kind of on the table? And when would you think we should be able to see that kind of growth?

Michael Witzeman: I think we, again, are in the early stages of our budgeting process. I think we’ll see better growth next year than we’ve seen this year, whether that’s 3% to 5%, it’s speculating at this point.

Kevin McNamara: I would say that’s probably going to be our budget. It’s the way, it’s — put it that way that our budget will definitely start in that range as submitted to us, let’s put it that way, and then we’ll go to more…

Michael Witzeman: Yes. And then with the green shoots we’ve seen in certain revenue categories, in the third quarter here, there could be upside to that. But we’re monitoring day-to-day what’s happening in the field. And we’re going to put together a budget that we think is achievable but also realistic.

Joanna Gajuk: Okay. And switching to VITAS, right? So just to clarify first, so when you said you do not have too many liabilities in Florida under the cap. Is it because you just kind of based on the rate increase, you can tell that, hey, like the delta between the rates in Florida versus the cap increase is much smaller, so that’s the reason for staying like no liability? Or are you in that statement, you also already assumed like some offsets from these new markets or other things?

Joel Wherley: Yes. So Joanna, it’s not just based on the year-over-year reduction in the rate increase. It actually is because of our focus and strategy within the marketplace and what Kevin referenced at the beginning of the call, which is the overall percentage of our admissions coming from hospital preadmit environment which, as we know, has a tendency to drive a shorter length of stay patients. So what we saw was, last year in the Medicare Cap year for ’25, we had multiple months where our overall percentage of hospital admissions dropped to a record low of our overall mix of admissions. That’s what Kevin was referencing, that sweet spot being between 42%, 42.5% and 45%. We are monitoring that on a regular basis. And as we indicated for the last quarter, we were at a high watermark of 44.5%.

That’s what gives us the confidence in knowing that we are in the right direction to mitigate any cap liability. Then with addition, on top of that, we have the Pinellas opening that we’re excited about.

Michael Witzeman: Also don’t forget, Joanna, the length of stay has really come back into line, which really indicates that the bubble of patients that we create — the bubble of long-stay patients that we created in community access has been moderating as we expected as well.

Kevin McNamara: But Joel — Joanna, you also pointed, there’s no question that last year, the thing that pushed VITAS over the edge ultimately in one fell swoop,was the increase, the fact that the increase was 200 basis points higher than the rate that the Medicare Cap was going to be calculated on. That means that alone was, in retrospect, too much to overcome, particularly in line with the issues Joel just spoke about. And then again, just to reiterate, the fact that we now have the rate increase for the nation and Florida, and it’s what we have characterized from our perspective is kind of in a sweet spot. It’s up but it’s very doable.

Joanna Gajuk: So what is that number, if you can share with us, versus the 200 delta in fiscal ’25? What is it in ’26?

Michael Witzeman: 30 to 40 basis points. The national average is around 2.6% or 2.7%. We’ve calculated our Florida average to be 3%. That equates to a $3 million or $4 million headwind, which is well within our ability to manage. That headwind last year was $22 million or $25 million.

Joanna Gajuk: All right. Exactly. Okay. Exactly, that’s what I was looking for. And then so I guess, when it comes to these short stay patients, and it sounds like you’re getting better — you’ve got better traction and now I guess you’re kind of maybe stopping that. Because at some point, you’re going to talk about sort of like some pause, as in like there was more competition for these patients. So it sounds like in third quarter, like things have changed to the point where you’re now also taking more of these longer stay patients. Is that the way to think about how you describe the situation?

Kevin McNamara: We definitely saw last year that — as we said, VITAS knew at the beginning of the year that it’s an uphill battle. And they’ve pulled various traditional levers that you would think would have the effect of getting more short-stay patients. That is more salespeople, more effort at the hospital level. And one of the things we observed, it didn’t have quite the effect that traditionally VITAS would have come to expect. And one aspect of that was pretty much everybody in Florida got this big increase. Not everybody — I mean, impact, that is hospices do continuous care got that type of 200 basis point increase. But there were increases in Florida that the hospices that traditionally weren’t that concerned with short stay patients became more concerned with them.

And the real effect last year was just we pulled some levers that we expected to have some reaction. And given that environment, they didn’t have quite the impact that we would have hoped. Those, for all the reasons we talked about, are kind of 2025 issues. 2026 issues for VITAS is to get the hospital admissions, get the first-time Medicare admits, have a reasonable average length of stay. And given the reimbursement environment, we should be back to the position where we don’t have the Medicare Cap limitation in Florida. It’s just — it’s pretty simple. And maybe it’s a lot of work to do those various components. But the conclusion from reasonable assumptions is pretty direct. Joel, anything to add just on that very general observation?

Joel Wherley: No, I think you’re spot on, Kevin. It was the combination of the census growth with the rate increase that just put us in a circumstance that was at a number where we couldn’t get out from underneath it throughout the calendar — throughout the Medicare Cap year.

Kevin McNamara: And keep in mind, it’s just one of those things. Even having said all that, no one likes a surprise $18.9 million hit. But that’s still less than 2% of the — I mean, it’s still flying pretty darn close to what would have been arriving on fumes. We just didn’t quite make it. We’re within 2%. So it wasn’t a big miss. It was a small miss. But it was — the problem with it, it was the first time ever and it was a scary specter, a term that we hadn’t really talked about in the past, that was Medicare Cap in Florida.

Joanna Gajuk: And if I may follow up on the discussion on seasonality, right? So if I do the same exercise in VITAS in terms of just like how margins are tracking so far this year and what this impact was fourth quarter, so it sounds like margins, I guess, would need to go up year-over-year, like 50 bps or so to get to your prior, I guess, segment margin pre cap. But they’ve been down year-over-year. So I guess, what’s going to be different? I guess, is this really the kind of the mix of patients you assume you’re going to be having more of the tailwind from the long stay patients?

Michael Witzeman: No, I think it’s the things we’ve talked about already. We get a bump from the rate increase, I think Joel has talked about some of the things they’re doing at the SG&A level. If you notice, in the third quarter for VITAS, SG&A actually is down year-over-year. That’s going to continue in the fourth quarter. So they’re combining rate increases, a little better efficiencies as well as some specific targeted cost-cutting measures.

Kevin McNamara: Joanna, let me make one comment. And — we don’t give quarterly guidance. But I’d say, we reiterated guidance just yesterday. And Ben mentioned something earlier that as far as was basically wasn’t aspirational to be shooting for midpoint of guidance. And I’ll just say at this point, no, I mean, we’re shooting at the upper end of guidance. We don’t think it’s aspirational in any respect. And you’re certainly right. Most of the questions have been along the lines of — okay, so it is doable. It is — that you are on course. And the answer is not only you are on course, we think that we’re on the upper end of the course.

Joanna Gajuk: And if I may, sorry, last question. But since you mentioned sequentially G&A down, but also the gross margin was actually up sequentially more than historically at third quarter versus Q2. Gross margin in VITAS will be higher. But this quarter it was like 220 basis points versus maybe like 100 or something in that range in the past. So is there something that you did this quarter?

Michael Witzeman: I don’t think there’s anything specific, Joanna. I think it’s all the things that we’ve talked about with Joel talking about efficiencies that they’ve looked at. They looked program by program and are they properly staffed in Florida, and they made the adjustments when they needed to. So I don’t think there’s — I wouldn’t call there any specific initiatives or anything. I would call out directly other than they’re looking program-by-program and managing costs appropriately.

Operator: At this time, that does conclude the question-and-answer session. I would now like to turn it back to Kevin McNamara, CEO, for closing remarks.

Kevin McNamara: I just want to thank everyone for their attention to our quarterly report. I guess the next time you’ll hear from us is mid-February where we’ll both have the fourth quarter and our guidance for next year. Thank you.

Operator: Thank you. And thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.