AdaptHealth Sold Its Fraud Unit. The Rest of the Business Is Having a Worse Problem.

AdaptHealth settled a federal securities fraud class action for $35 million in June. The lawsuit was about improper billing codes for its diabetes equipment business. In July, AdaptHealth sold that diabetes business to Cardinal Health for $235 million.

The timing is not a coincidence. The timing is a company that discovered the segment generating the most legal trouble is also the one it wants to exit, and found a buyer.

Then on August 4, the stock dropped 38 percent on a terrible second-quarter report and a gutted guidance outlook, and a batch of law firms - including Holzer & Holzer, the same breed that usually runs these press releases - announced a new securities fraud investigation into AdaptHealth. The new investigation is triggered by the earnings miss, not by any new allegation of wrongdoing. These announcements are routine post-crash boilerplate: a law firm notices a stock fell hard, checks whether management misled investors before the fall, and files a public notice to build a class. It does not mean the SEC is knocking.

The odd thing here is that the actual fraud is behind them, in the diabetes unit that is now being sold, and the remaining business is facing a problem that has nothing to do with billing codes and everything to do with the economics of a new revenue model that the company has been betting on for years.

AdaptHealth is a home medical equipment company. It delivers oxygen concentrators, CPAP machines, diabetic testing supplies, and related gear to patients at home. The traditional business model is fee-for-service: you bill Medicare or a private insurer for each item you deliver. You make margin on the spread between what the payer reimburses and what the manufacturer charges you. It's unglamorous, regulatory, and margin-thin - the sort of business where growth comes from volume and acquisitions and squeezing costs.

The story AdaptHealth sold to investors over the last several years was that it could move away from fee-for-service toward a capitated model. Capitated means instead of getting paid per item, you get a fixed monthly payment per patient, regardless of how many machines or supplies they need. The upside: if you keep utilization efficient, you pocket the difference. The downside: if patients use more than expected, or if the transition is messier than planned, your margins vanish. It's a bet on operational efficiency, and it shifts revenue from variable to fixed - which sounds more like recurring SaaS revenue and less like a plumbing business delivering rented equipment.

The company signed an exclusive capitated contract with a "large national integrated delivery network" on the West Coast. That contract reached full scale in Q2 2026. It also signed a new capitated deal with Humana covering roughly 478,000 members in South Florida and Texas.

Capitated revenue hit $103.3 million in Q2, about 14 percent of continuing operations revenue. The number is growing, and that's the part management wants you to focus on.

The part management wants you to focus on is also the part that is currently on fire.

In Q2, AdaptHealth reported $132 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization - a rough proxy for cash operating earnings), down 3 percent from the prior year. Net income swung from a $4.2 million profit to a $145.3 million loss, though $144.2 million of that is a goodwill impairment charge, an accounting write-down rather than a cash hit. Free cash flow was negative $48.4 million year-to-date, compared to positive $73.3 million in the same period last year.

The company then slashed its full-year 2026 guidance. Revenue midpoint dropped from roughly $3.49 billion to $2.87 billion. Adjusted EBITDA guidance was cut from $680–$730 million down to $490–$520 million.

Management attributed the downgrade to three things: $55 million from the West Coast capitated contract, $30 million from an unexpected manufacturer price increase, and $15 million from "other portfolio actions."

The West Coast contract is the interesting one. CapEx tied to that contract alone was $166.2 million in the quarter. That's enormous for a company whose stock trades at around $6.50 and whose market cap has roughly halved since its peak near $13 in April. The company spent capital at the scale of its own market cap on one contract, and the margin hit is $55 million for the full year - and probably more if utilization doesn't improve.

Here's how this looks in practice. AdaptHealth takes a fixed monthly payment from its West Coast partner per member. It then has to staff facilities, buy or lease equipment, maintain a supply chain, and deliver to patients. If patient utilization runs higher than modeled - more frequent mask replacements, higher oxygen flow rates, more home visits - AdaptHealth absorbs the cost. It's a margin squeeze where the revenue is locked and the costs are variable. The capitated model only works if you can keep costs below the per-member payment. Management is saying they can't yet.

And they're also saying a manufacturer unexpectedly raised prices, adding another $30 million in costs. That sounds like a separate event, but it also sounds like a company with thin margins that has no pricing power over its suppliers. In a fee-for-service world, you can sometimes pass cost increases through to the payer. In a capitated world, the revenue is already fixed.

Let me back up to the diabetes business because the story here is structurally funny.

AdaptHealth settled a securities fraud class action in June 2026 for $35 million. The complaint alleged that AdaptHealth and certain officers "orchestrated a scheme to overcharge CMS and other insurance providers by submitting improper billing codes for diabetes equipment". The class period ran from August 2020 to November 2023. The settlement was court-approved. It's over.

Then in July, AdaptHealth agreed to sell its Diabetes Health business to Cardinal Health for $235 million in cash. The press release described this as "the most significant step yet in AdaptHealth's multi-year effort to focus on Sleep Health, Respiratory Health, and supporting Wellness-at-Home businesses."

This is not necessarily nefarious. Diabetes supply is a brutal business. Medicare reimbursement rates have been under pressure for years, the regulatory environment is hostile to the players who got too aggressive with billing, and the economics are already thin. Selling it at $235 million to a giant distributor like Cardinal Health that can absorb the compliance risk is rational portfolio surgery.

But you can't read this without noticing the sequence: settle the fraud claim that was about the diabetes business, then sell the diabetes business, then tell investors the remaining company is a higher-quality, lower-risk growth story. The diabetes unit was both the legal liability and a drag on margins. Removing it cleans up the balance sheet and narrows the narrative.

The problem is that the remaining business - Sleep, Respiratory, Wellness - is the one running the capitated contract that is currently destroying margins and burning cash.

There's also the data breach. On June 27, 2026, AdaptHealth filed an 8-K disclosing a material cybersecurity incident. A threat actor gained access through a social engineering attack on a third-party contractor, exfiltrating patient data and a password file tied to insurance billing. The company says the incident is contained but the full scope is unknown.

This is its own story, but it sits in the same pile as everything else. A company whose margin profile is already under stress, whose legal exposure is being wound down but not extinguished, whose new revenue model is proving more expensive than promised, now has an open-ended data breach with an undetermined number of affected patients. HIPAA breach costs, notification expenses, potential regulatory fines, and the kind of operational disruption that makes a capitated rollout harder - it's another cost line item that management didn't forecast into that guidance cut.

So here's the machine, stripped of the label.

AdaptHealth was a stable-but-boring home medical equipment business that tried to rebrand itself as a recurring-revenue capitated care platform. Investors bought the story - the stock hit $13 in April. The old business included a diabetes unit that had been billing aggressively and was eventually sued and settled for $35 million. The company is now selling that unit for $235 million to a buyer that can handle the compliance risk.

The new business model is real but early and expensive. The flagship West Coast capitated contract is at run-rate and is costing $55 million in margin impact for the year, with $166 million in capex already sunk. Free cash flow swung from positive $73 million to negative $48 million year-to-date. The company cut its revenue and profitability guidance by a combined several hundred million dollars. And then there's the breach, the manufacturer price spike, the goodwill write-down, and the restructuring.

The new securities fraud investigation announced on August 4 is the standard post-crash law firm announcement. The question it will explore is whether management's prior statements about the capitated model's margins, the cost trajectory, or the outlook were misleading before the Q2 print came out. That's a fair question, and it's the kind of question that usually matters most when a company has been telling investors a growth story while the unit economics are running in the other direction.

The simplest model here is this: AdaptHealth traded a predictable but legally risky business for a structurally more elegant one that turns out to be much more expensive than the pitch suggested. Capitated revenue sounds like recurring SaaS. It's actually a fixed-price service contract where the vendor takes the utilization risk. If you can't control costs below the per-member payment, the story doesn't become better over time - it becomes worse, because every additional member adds the same margin drag.

The diabetes settlement is behind them. The real test is whether the capitated contracts can ever reach the margin profile management assumed when they priced the guidance that the market just rejected.