Chemed's Hospice Headwinds and Hospice Horizons: Can Medicare Cap Challenges Be Overcome?

Chemed Corporation (CHC) is facing a critical juncture in 2025, as its VITAS Healthcare subsidiary grapples with Medicare Cap limitations in Florida—a problem that threatens near-term profitability but could also catalyze strategic shifts to secure long-term growth. Meanwhile, the company's Roto-Rooter division has stumbled, adding to short-term pressures. With the July 29 earnings report looming, investors must weigh whether the current pullback presents an opportunity to buy into a turnaround story or avoid a stock still navigating regulatory and operational headwinds.

The Medicare Cap Quagmire: A 2025-Specific Problem?

The Medicare Cap limitation for VITAS' Florida consolidated program (excluding Tallahassee) now projects a $18 million to $25 million revenue shortfall for fiscal 2025, a stark reversal from earlier optimism about a “cushion” of unused capacity. This reversal stems from two key factors:

1. Accelerated Medicare Cap Usage: The Community Access Program, designed to expand access to hospice care, succeeded in boosting admissions and days-of-care by 11.9% in Q1 2025. However, this initiative also drew criticism for admitting patients earlier in their disease trajectory, thereby depleting the Medicare Cap faster.
2. Rate Differential Anomaly: While national Medicare reimbursement rates rose 2.9% in 2025, Florida's rates jumped 5.2%, creating a $25 million shortfall. This divergence suggests that Florida's hospice providers are bearing an unfair burden compared to other states.

Near-Term Risks: Cap Pressures and Roto-Rooter's Slump

The Medicare Cap issue remains the primary concern. VITAS' Q2 admissions were weaker than expected in April and May, though June saw improvement. If the trend continues, the full-year cap limitation could shrink closer to $18 million—a silver lining—but the uncertainty around admissions and reimbursement rates leaves room for downside.

Meanwhile, Roto-Rooter's Q2 performance added to the gloom. Residential demand fell unexpectedly, breaking from Q1's rebound, and commercial demand only partially offset the decline. Management's analysis of these trends could impact full-year guidance, though Roto-Rooter's smaller scale relative to VITAS means the hospice division's issues are the bigger driver of investor sentiment.

Long-Term Catalysts: Expanding into Florida and Beyond

VITAS' mitigation strategies focus on structural solutions to avoid repeating 2025's woes:
- Geographic Expansion: Securing a Certificate of Need (CON) for Pinellas County—a densely populated area with low hospice utilization (8,600 Medicare admissions in 2024)—and expanding in Marion County aims to reduce reliance on the Florida consolidated program's Medicare Cap. These moves could position VITAS to avoid cap limitations by 2026, assuming reimbursement rates normalize.
- Operational Adjustments: Management has signaled that 2026 should see no significant Medicare Cap constraints unless the Florida reimbursement rate anomaly repeats. This suggests that the current problem is temporary, but investors must monitor whether the rate differential persists.

Valuation and Investment Considerations

Chemed's stock trades at a forward P/E of ~18x, below its five-year average of 21x, reflecting investor skepticism about the Medicare Cap's long-term impact. However, Wall Street analysts remain bullish, with a median price target of $400 (vs. the current $350 price), assuming VITAS' strategies succeed.

The July 29 earnings report will be pivotal. Key metrics to watch:
- Q2 Medicare Cap Impact: Did June's admissions momentum reduce the projected $25M limit?
- Roto-Rooter's Recovery: Can residential demand rebound, or does the division need further restructuring?
- 2026 Guidance: Will management reaffirm its expectation of no Medicare Cap issues next year?

The Bottom Line: A Buying Opportunity?

Chemed's near-term risks are real, but the stock's pullback may have overdiscounted its long-term potential. The Florida expansion and operational adjustments suggest that 2025's challenges are a speed bump, not a cliff. Investors should view the upcoming earnings call as a litmus test: If VITAS' June trends continue and Roto-Rooter's issues prove transitory, the stock could rebound sharply.

However, caution is warranted. If the Medicare Cap limitation balloons closer to $25M or the Florida rate differential persists, Chemed's margin recovery timeline could slip. For now, this appears a “wait-and-see” situation—hold off on buying until the July 29 results clarify the path forward.

Final advice: Chemed's shares could be a compelling buy if the Q2 report confirms that the Medicare Cap is indeed a one-year issue and VITAS' growth engines are firing on all cylinders. Until then, proceed with caution.

The article was prepared by a financial analyst and does not constitute personalized investment advice. Readers should conduct their own research or consult a financial advisor before making investment decisions.