Chemed's Q3 2025: Contradictions Emerge on Medicare Cap Liabilities, Margins, and Growth

Date of Call: October 29, 2025

Financials Results

• Revenue: VITAS net revenue $407.7M, up 4.2% YOY; Roto-Rooter branch residential $150.9M, up 3.4% YOY; Roto-Rooter branch commercial $55.0M, up 2.8% YOY; independent contractor revenue down 4.7% YOY.
• Gross Margin: VITAS adjusted EBITDA margin (excl. Medicare Cap) 17.0%, down 157 bps YOY; Roto-Rooter adjusted EBITDA margin 22.7%, down 351 bps YOY (management: gross margins in line with guidance).

Guidance:

• Management reiterated FY guidance of $22.00 to $22.30 per share (excl. certain noncash and discrete items).
• Guidance assumes no Medicare Cap billing limitation for the Florida combined program in government FY2026.
• Management expects VITAS to avoid a Medicare Cap in 2026 due to higher hospital-admission mix and normalized length of stay.
• Roto-Rooter long-term EBITDA target ~25%–26%; near-term marketing spend expected but offset by operational improvements.
• Preliminary budgeting outlook: Roto-Rooter growth ~3%–5%; VITAS revenue could be higher (~8% discussed) pending Q4 outcomes.

Business Commentary:

* VITAS Segment Performance: - VITAS net revenue was $407.7 million in Q3 2025, up 4.2% year-on-year. - Growth was driven by a 2.5% increase in days-of-care and a 4.1% Medicare reimbursement rate increase, despite negative impacts from acuity mix and Medicare Cap.

• Roto-Rooter Revenue and Cost Trends:
• Roto-Rooter revenue increased 1.1% in Q3 2025, with residential and commercial revenue rising 3.4% and 2.8%, respectively.

• The increase in residential plumbing revenue by 8.2% was supported by targeted marketing campaigns, though independent contractor revenue remained a challenge.

• Medicare Cap and Patient Admission Strategy:

• VITAS Florida program's billing limitation was $18.9 million, below the estimated $19 million.

• This was due to a higher percentage of hospital admissions, now at 44.5%, indicating better management of the Florida Medicare Cap issue.

• Seasonal Factors and Guidance Expectations:

• The company reaffirmed its guidance of $22 to $22.30 per share, excluding noncash expenses, expecting fourth-quarter improvements.
• Seasonal factors and a rate increase in VITAS, as well as expected revenue growth and margin improvements in Roto-Rooter, contributed to this confidence.

Sentiment Analysis:

Overall Tone: Positive

• Management reiterated guidance and said both operating units were in line with expectations; VITAS expects no Florida Medicare Cap limitation in 2026; Roto-Rooter showed early stabilization with targeted initiatives and improving residential revenue and close rates.

Q&A:

• Question from Benjamin Hendrix (RBC Capital Markets): Appreciate the reaffirmation and guidance with results in line with your expectations. Can you run through in each segment what you're seeing from a demand and cost trend perspective and from a seasonal perspective that gives you confidence you can ramp back up to the guidance midpoint in Q4?
  Response: Q4 seasonality and a VITAS Oct 1 reimbursement increase should lift margins; Roto-Rooter benefits from seasonal weather-driven demand — management expects modest sequential improvement into Q4.

• Question from Benjamin Hendrix (RBC Capital Markets): Could you talk about your receivables? DSO looks elevated — how are cash collections progressing; is this timing or a collections issue?
  Response: Elevated DSO is a timing issue primarily at VITAS tied to slower Medicaid payments, not a deterioration in collection ability.

• Question from Brian Tanquilut (Jefferies): On 2026, where do you see the growth algorithm and margins heading given the Medicare rate outcome?
  Response: Early budget stage; Q4 and Florida cap outcome will guide 2026 planning; preliminary thinking: revenue ~8% and VITAS margins in the ~17.5%–18% area, subject to final budgets.

• Question from Brian Tanquilut (Jefferies): Can you speak to improvements in Roto competitive dynamics and opportunities to improve G&A for both Roto and VITAS?
  Response: Roto sees higher paid leads with less competitive offset, improving conversions; management expects to absorb marketing spend and drive margin via pricing discipline and operational fixes while tightly managing SG&A.

• Question from Joanna Gajuk (BofA Securities): If marketing costs are higher, how should we think about sustainable margins at Roto-Rooter over the medium term?
  Response: Long-term target EBITDA margin is 25%–26%; near-term marketing pressure expected but can be offset by operational improvements and better lead economics.

• Question from Joanna Gajuk (BofA Securities): Can Roto-Rooter grow closer to mid-single digits and when might that occur?
  Response: Management expects better growth next year than 2025; early budgeting assumptions target roughly 3%–5% growth with upside possible given recent green shoots.

• Question from Joanna Gajuk (BofA Securities): On Florida Medicare Cap — is the expectation of no liability for 2026 driven by rate changes alone or by operational offsets/new markets?
  Response: It's driven by operational mix (higher hospital admissions at ~44.5%), normalized length of stay, and a much smaller rate delta in 2026 (30–40 bps, ~$3–4M headwind) versus last year's ~$22–25M, supporting no cap expectation.

• Question from Joanna Gajuk (BofA Securities): Regarding short-stay vs long-stay patients, are you now shifting back toward longer-stay patients?
  Response: Management moderated the prior short-stay focus; they will responsibly reintroduce long-stay patient growth over time as cap risk declines and hospital-admission mix stabilizes.

• Question from Joanna Gajuk (BofA Securities): What will drive the VITAS margin improvement — mix, rate, SG&A?
  Response: Margin improvement will come from the Oct 1 rate increase, program-level staffing efficiencies, and targeted SG&A reductions (SG&A down YOY in Q3).

• Question from Joanna Gajuk (BofA Securities): You saw a bigger-than-usual sequential gross-margin improvement this quarter — was there any specific action?
  Response: No single initiative; improvement reflects program-by-program staffing adjustments and ongoing efficiency measures across VITAS programs.

Contradiction Point 1

VITAS Florida's Medicare Cap Liability Expectation

It involves differing expectations regarding Medicare Cap liabilities in Florida, which could significantly impact VITAS' financial performance.

Why are you confident that VITAS Florida will not have a Medicare Cap liability in 2026? - Joanna Gajuk(BofA Securities)

2025Q3: We are confident due to our strategy focusing on more hospital admissions, which shifts to shorter stay patients. Additionally, efficiency improvements and new location openings like Pinellas County further support this expectation. - Joel Wherley(CEO)

What strategies are being used to avoid Medicare billing caps in Florida for the 2026 cap year? How is the impact on EBITDA margins and growth rate for VITAS revenues being assessed? - Brian Gil Tanquilut(Jefferies)

2025Q2: We anticipate EBITDA margins will be below the 2024 level, with a potential range of 17.5% to 18.5% for 2026. The expectation for VITAS is to return to consistent higher growth post-2025 adjustments. - Michael D. Witzeman(CFO)

Contradiction Point 2

Roto-Rooter's Sustainable Margins

It involves differing expectations regarding Roto-Rooter's sustainable margins, which are crucial for understanding the company's financial performance.

How should we assess Roto-Rooter's sustainable margins considering marketing cost impacts? - Joanna Gajuk(BofA Securities)

2025Q3: We think Roto-Rooter should reach a sustainable margin of 25% to 26% long term. We can absorb higher marketing costs due to the increased revenue from leads. But we expect continued pressure on marketing costs in the near term. - Michael Witzeman(CFO)

Did local management initiatives at Roto-Rooter contribute to the July recovery? - Benjamin Hendrix(RBC Capital Markets)

2025Q2: We've addressed previous management issues, and we're more focused on operating efficiencies. The current issues are due to a new insurance policy and not management or labor force problems. The challenge remains in increasing the call volume. - Michael D. Witzeman(CFO)

Contradiction Point 3

Medicare Cap Management Strategy and Impact on Growth

It involves the company's strategic approach to Medicare Cap management and its expected impact on growth, which are critical for financial forecasting and investor expectations.

How do you expect growth and margins to be affected by Medicare rate changes in 2026? - Brian Tanquilut (Jefferies LLC)

2025Q3: VITAS' fourth quarter will inform our strategy for 2026. If Medicare Cap liabilities are minimal, we can return to a more balanced revenue and EBITDA margin trajectory. Revenue growth could be in the 8% range, while margins might reach 17.5% to 18%. - Michael Witzeman(CFO)

How will rate setting cycles and Medicare Cap resets impact your long-term cap management strategy? - Benjamin Hendrix (RBC Capital Markets)

2025Q1: Nicholas Westfall: Medicare Cap management is routine and long-term sustainable. Regulatory changes can accelerate or reduce growth. Medicare cap management involves continuous monitoring and adjustment. - Nicholas Westfall(CEO, VITAS Healthcare)

Contradiction Point 4

VITAS Florida Medicare Cap Liability Expectations

It involves expectations regarding Medicare Cap liabilities for VITAS Florida, which could impact revenue and margin forecasts.

Why are you confident VITAS Florida will avoid a Medicare Cap liability in 2026? - Joanna Gajuk (BofA Securities)

2025Q3: We are confident due to our strategy focusing on more hospital admissions, which shifts to shorter stay patients. Additionally, efficiency improvements and new location openings like Pinellas County further support this expectation. - Joel Wherley(CEO)

Can you explain your long-term cap management strategy and how rate-setting cycles and the Medicare Cap reset will affect it? - Benjamin Hendrix (RBC Capital Markets)

2025Q1: Kevin McNamara: Ideally, cap cushion should be 0 to maximize opportunities. Staffing needs during pandemic required adjustments. Higher-than-expected Florida reimbursement rates provided more cushion. - Kevin McNamara(President and CEO)

Contradiction Point 5

Roto-Rooter Revenue Growth Expectations

It involves the company's expectations regarding Roto-Rooter's revenue growth, which is crucial for investors and strategic planning.

How do marketing costs impact Roto-Rooter's sustainable margins? - Joanna Gajuk (BofA Securities)

2025Q3: We think Roto-Rooter should reach a sustainable margin of 25% to 26% long term. We can absorb higher marketing costs due to the increased revenue from leads. - Michael Witzeman(Executive VP, Controller, Principal Accounting Officer & CFO)

What supports the confidence in this revenue growth, and what is the assumed seasonality for 2025? - Christian Porter (Bank of America)

2024Q4: Confidence comes from the positive start in 2025 and improvements seen in the fourth quarter. Seasonality remains strong in Q1 and Q4 due to weather conditions, with sales expected to build positively through the year. - Kevin McNamara(CEO)