Chemed (CHE) Q1 2026 Earnings Call Transcript

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Date

Friday, April 24, 2026 at 10 a.m. ET

Call participants

• President and Chief Executive Officer — Kevin J. McNamara
• Chief Financial Officer — Michael Witzeman
• President and Chief Executive Officer, VITAS HealthCare Corporation — Joel Wherley

Takeaways

• VITAS Admissions -- 19,394 admissions, a 6.9% increase.
• Florida Combined Program Hospital Admission Mix -- 43.8% of total admissions from hospitals, within the 42%-45% stability range management targets.
• Admissions from Non-hospital Locations in Florida -- Increased 8.4% versus the prior year.
• Florida Medicare Cap Position -- Added $32.5 million to cap cushion; no Medicare cap billing limitation anticipated for the fiscal period.
• VITAS Net Revenue -- $420 million, a 3.1% increase.
• VITAS Adjusted EBITDA (Excluding Medicare Cap) -- $70.8 million, up 0.6%; margin at 16.8%.
• Average Daily Census (ADC) -- 22,723 patients, up 2.2%.
• Average Revenue Per Day -- $210.62, up 1.46 percentage points.
• Average Length of Stay -- 102.7 days, down from 118.7 days; median length of stay 15 days, down 1 day.
• Roto-Rooter Branch Commercial Revenue -- $56.5 million, down 1.9%; select branches with new commercial managers saw ~10% growth.
• Roto-Rooter Branch Residential Revenue -- $166.3 million, down 1.5%; all services up except water restoration.
• Water Restoration Revenue Per Job -- Declined about 13%.
• Independent Contractor Revenue -- Decreased 3.3%.
• Roto-Rooter Adjusted EBITDA -- $53.5 million, down 9.6%; margin at 22.5%, 218 basis points lower.
• Gross Margin Roto-Rooter -- 51%, in line with expectations.
• Paid Leads Ratio (Roto-Rooter) -- 53.4% of total leads, up from 46.5% prior year; paid leads increased 18.7%.
• Marketing Spend -- Increased by nearly $3 million, of which $1 million attributed to weather-related unserved leads and $2 million above budgeted expectations.
• Asset Acquisitions -- Acquired San Francisco, CA and Fort Worth, TX franchises for $20.6 billion total; anticipated to add $5 billion to $5.5 billion revenue for the rest of 2026.
• Revenue Growth Guidance — VITAS -- Updated ex-Medicare cap revenue growth guidance to 6.5%-7.5%, up from 5.5%-6.5%; ADC growth guidance raised to 4.5%-5.5% from 3.5%-4%; EBITDA margin guidance ex-Medicare cap increased to 18%-18.5%.
• Revenue Growth/EBITDA Margin Guidance — Roto-Rooter -- Revenue growth guidance unchanged at 3%-3.5%; adjusted EBITDA margin guidance lowered to 21.5%-22.5% from prior 22.5%-23%.
• 2026 Adjusted EPS Guidance -- Range set to $24-$24.75, midpoint 13% above 2025's $21.5; original guidance was $23.25-$24.25.
• Effective Tax Rate Assumption -- 24.5% on adjusted earnings.
• Employment/FTE Trends -- VITAS operated with 100 FTEs below budget; plan to increase hiring to about 60 per month to support ADC growth through 2026.
• Collections Improvement (Roto-Rooter) -- Centralized processes improved write-offs by $1.5 million and collections are expected to further improve collections and revenue per job as staff gains experience.
• New Florida Market Penetration (VITAS) -- New starts in Marion, Pasco, and Pinellas counties reached 526 admissions and ADC exceeded management expectations.

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Risks

• Michael Witzeman stated, the decline in adjusted EBITDA margin was mainly caused by increased Internet marketing costs. Guidance was lowered on 2026 EBITDA margin due to persistently higher marketing costs.
• Weather disruptions caused 24 Roto-Rooter branches to lose an estimated $3 million to $4 million in revenue for five days.
• Average revenue per water restoration job declined roughly 13% due to billing process transition, which management expects to gradually improve.
• Independent contractor revenue declined 3.3%, and management acknowledged underperformance in this business segment could persist.

Summary

Chemed Corporation (NYSE:CHE) reported higher VITAS admissions and admissions from non-hospital sources, contributing to updated guidance that raises both growth and margin targets for the segment. Expansion within Florida through new county starts drove census metrics above expectations, while Roto-Rooter's quarter was shaped by acquisitions of major franchises, a shift toward more paid marketing, and weather disruptions that offset revenue from core services. Management emphasized sustained acquisition appetite in the Roto-Rooter business and ongoing efforts to address operational hurdles in billing and independent contractor performance. Hiring plans have been increased at VITAS to support higher census levels, and leadership, while positive on transitions, noted continued margin pressure from digital marketing costs and lingering operational challenges.

• Kevin McNamara said the franchise acquisitions in San Francisco and Fort Worth are These acquisitions are immediately accretive to earnings. though initial gross and EBITDA margins are lower than the existing portfolio.
• Marketing challenges are expected to persist, as McNamara explained, we expect—to see some tough sledding on the natural side of search with Google.
• VITAS management reported no material weather disruption impact on revenue due to the per-day reimbursement business model.
• Joel Wherley indicated, We feel really good about the balance between hospitals as a preadmission source and all of our other community-based type admissions.
• Updated earnings guidance includes a 24.5% effective tax rate and a diluted share count of 13.6 million; original and revised guidance for VITAS and Roto-Rooter was clarified by Michael Witzeman.

Industry glossary

• ADC (Average Daily Census): The average number of patients served by a healthcare provider each day, used as a key operational metric in hospice and home health services.
• Medicare Cap: Regulatory payment limit imposed by Medicare on aggregate reimbursements to hospice providers to prevent excess or inappropriate utilization.
• EBITDA: Earnings before interest, taxes, depreciation, and amortization, a proxy for operational profitability.
• Write-offs: Revenue not collectible, typically removed from accounts receivable, impacting net realized gains.
• Peadmission Locations: Points of referral for patients prior to admission, such as hospitals, nursing homes, assisted living facilities, or community settings.

Full Conference Call Transcript

Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Michael 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 First Quarter 2026 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. VITAS performance during the quarter exceeded even the high end of our expectations. We believed that 2026 would be a tough comparison as we continue to transition to balance our patient mix between short-stay and long-stay patients. VITAS management was able to add ADC through accelerated admissions from non-hospital preadmission locations while also maintaining a high level of hospital-based admissions. This was achieved while also keeping hospice labor costs lower than budgeted.

These factors combined to allow VITAS to achieve higher than expected revenue growth and EBITDA margins, while continuing to add cushion to the Medicare cap position in our Florida combined program. Admissions at VITAS during the quarter totaled 19,394, which equates to a 6.9% improvement from the same period of 2025. Hospital admissions as a percent of total admissions for our Florida combined program were 43.8% during 2026. As we have discussed previously, appropriate balance for the sustained long-term stability in the Florida patient base given the current mix of referral sources is that between 42%–45% of total admissions come from hospitals.

Equally as important, as Joel will discuss in greater detail, admissions from all other preadmission locations increased 8.4% compared to 2025 in our Florida combined program. Improved admissions led VITAS to outperform our expectations while also adding over $32.5 million to cap cushion in the Florida combined program in 2026. March 31 represents the halfway point in the government fiscal year. We are more confident than ever that VITAS has put the Florida cap issue of 2025 behind us and has returned to a normalized rate of growth. Now let us turn to Roto-Rooter. Over the past two years, we have talked about the many headwinds that have persisted at Roto-Rooter, which has made a difficult operating environment.

While we believe that Roto-Rooter will continue to face some of those headwinds, 2026 also showed some signs of improvement across multiple fronts. For the first time since 2022, residential plumbing and residential sewer and drain revenue both increased during the quarter. We consider these Roto-Rooter's core services which drive the add-on revenue from excavation and water restoration. We see this as a very positive development for the company. Driving the increase in core residential service revenue was an increase in total leads of 3.3%. Paid leads during 2026 increased 18.7% compared to the same quarter of 2025. Continuing the same trend as past quarters, 53.4% of those leads were the result of paid advertisements.

In 2025, we paid for 46.5% of the leads. The change of approximately 7% required Roto-Rooter to increase marketing spend by almost $3 million in the quarter compared to 2025. The centralization of water restoration billing and collections continues and has resulted in improved collections. These improvements resulted in a $1.5 million improvement in overall write-offs compared with 2025. Weather patterns in the first quarter of any given year are positive for Roto-Rooter. However, in 2026, unusual ice and snowstorms across large parts of the country led to significant service disruptions due to road conditions. Twenty-four Roto-Rooter branches experienced some level of service disruption for a period of time across five days of the quarter.

We estimate that these service disruptions resulted in a net lost revenue of between $3 million and $4 million during the quarter. On 03/31/2026, we repurchased the territory and assets of the franchises operating in San Francisco, California and Fort Worth, Texas in two separate transactions. The aggregated combined purchase price of these transactions was approximately $20.6 billion. Collectively, these Roto-Rooter locations serve a population of approximately 3.3 million people. This purchase is part of Roto-Rooter's ongoing strategy of acquiring franchises to boost productivity, market share, and profitability. These two acquisitions are anticipated to add between $5 billion and $5.5 billion of revenue for the remainder of 2026. These acquisitions are immediately accretive to earnings.

However, initially, gross margins, EBITDA margins, pricing and mix of service offerings tend to be below the average of our existing Roto-Rooter portfolio. We are happy with the performance of VITAS for the quarter and its prospects for the remainder of 2026 and beyond. In our February conference call, we described this as a year of transition for Roto-Rooter. The first quarter clearly demonstrated this transition. We feel very positive that the initiatives we have discussed over the last few quarters are beginning to take hold. With that, I would now like to turn the teleconference over to Mike.

Michael Witzeman: Thanks, Kevin. VITAS net revenue was $420 million in 2026, which is an increase of 3.1% when compared to the prior-year period. This revenue increase is the result of a 2.2% increase in days of care and a geographically weighted average Medicare reimbursement rate increase of approximately 2.6%. The acuity mix shift negatively impacted revenue growth 120 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 47 basis points. In 2026, VITAS accrued $2.4 million in Medicare cap billing limitation.

No Medicare cap billing limitation was recorded in 2026 for the Florida combined program and none is anticipated for the 2026 fiscal period. Average revenue per day in 2026 was $210.62, which is a 146 basis point improvement from the prior-year period. During the quarter, high-acuity days of care were 2.3% of total days of care, a decline of 28 basis points when compared to the prior-year quarter. Adjusted EBITDA, excluding Medicare cap, totaled $70.8 million in the quarter, an increase of 0.6% when compared to the prior-year period. Adjusted EBITDA margin in the quarter, excluding Medicare cap, was 16.8%. Now let us turn to Roto-Rooter.

Roto-Rooter branch commercial revenue in the quarter totaled $56.5 million, a decrease of 1.9% from the prior-year period. Commercial revenue was negatively impacted by the weather events discussed earlier by Kevin. However, for the 13 branches that had commercial business managers coming into 2026, commercial revenue was up approximately 10%. We added 18 new commercial business managers during 2026. We expect commercial business revenue to accelerate as these 18 new commercial business managers complete their training and begin to become productive sales leaders in their locations. Roto-Rooter branch residential revenue in the quarter totaled $166.3 million, a decrease of 1.5% over the prior-year period. All lines of service increased from 2025 with the exception of water restoration.

Demand for water restoration services continues to be strong, and our conversion rates remain high. During the transition to a centralized billing and collection model, we anticipated some disruption to the day-to-day billing processing function. In 2026, the average revenue per water restoration job declined by roughly 13%. We anticipate that this issue will improve as the year progresses with the centralized staff gaining experience and proficiency. Revenue from our independent contractors declined 3.3% in 2026 compared to the same period of 2025. Our independent contractors are generally smaller operations in middle market cities. Because they are independent contractors, they tend to operate more like a small mom-and-pop business than our owned and operated branch locations.

We are actively working with the contractor group to help mitigate the issues in this segment of our business to get it back to a growth trajectory. Adjusted EBITDA in 2026 totaled $53.5 million, a decrease of 9.6% when compared to 2025. The adjusted EBITDA margin in the quarter was 22.5%, which represents a 218 basis point decline from 2025. Roto-Rooter's gross margin of 51% was in line with our expectations. As discussed by Kevin, the decline in adjusted EBITDA margin was mainly caused by increased Internet marketing costs. Finally, let us discuss the revised guidance for fiscal 2026. Historically, we do not give quarterly updates to guidance.

Due to the materially improved performance of VITAS, coupled with the level of share repurchases in 2026, we believe updating guidance is appropriate in this instance. As a result of the better than anticipated first quarter for VITAS, we have increased projections for the remainder of 2026. Full-year ADC growth for 2026 is updated to a range of 4.5% to 5.5% compared to the original guidance of 3.5% to 4%. Anticipated revenue growth excluding the impact of the Medicare cap improves from the original guidance of 5.5% to 6.5% to a revised range of 6.5% to 7.5%.

Finally, revised EBITDA margin excluding the impact of the Medicare cap is anticipated to be 18% to 18.5% compared to the original guidance of 17.5% to 18.5%. When factoring all the gives and takes within the expected Roto-Rooter performance for the remainder of fiscal 2026, anticipated revenue growth remains unchanged at 3% to 3.5%. Estimated adjusted EBITDA margin is lowered slightly to 21.5% to 22.5% compared to the original guidance of 22.5% to 23%. This is primarily due to elevated marketing costs now expected to persist above our original guidance for the remainder of the year.

Based on the above, full-year 2026 earnings per diluted share excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items, is estimated to be in the range of $24 to $24.75. The midpoint of the revised guidance represents a 13% increase from 2025 adjusted earnings per diluted share of $21.5. The revised 2026 guidance assumes an effective corporate tax rate on adjusted earnings of 24.5% and a diluted share count of 13.6 million shares. The original 2026 guidance was for adjusted earnings per diluted share to be between $23.25 and $24.25. I will now turn the call over to Joel.

Joel Wherley: Thanks, Mike. In 2026, our average daily census was 22,723, an increase of 2.2%. In the quarter, hospital-directed admissions increased 13.6%. Home-based patient admissions increased 0.2%. Assisted living facility admissions increased 2.9%, and nursing home admissions declined 5.4% when compared to the prior-year period. The continued high level of hospital admissions allowed us to quickly transition in the quarter and start emphasizing admissions from other preadmission locations that generate a longer length-of-stay patient. This resulted in ADC growth that was ahead of the original projections. We were able to achieve this level of ADC growth while maintaining full-time equivalents below our budgeted targets for the quarter. Our average length of stay in the quarter was 102.7 days.

This compares to 118.7 days in 2025. Our median length of stay was 15 days in 2026, a decline of one day from 2025. The new starts in Florida continue to grow at a very rapid pace. Marion, Pasco, and Pinellas Counties combined had 526 admissions in 2026, exceeding our expectations. ADC for each new start continues to exceed our expectations, and we anticipate opening Manatee County in late second quarter or early third quarter. We intend to aggressively grow Manatee as we have in our other three new starts. I believe the opportunity for growth at VITAS has never been better.

We have put the difficulties of the 2025 cap circumstance behind us and are looking forward to continuing to execute our strategies for the remainder of 2026 and beyond. That will translate into high sustainable growth while providing the best possible care to our patients and families. And with that, I will turn the call back to Kevin.

Kevin McNamara: I will now open this teleconference to questions. We will now open the call for questions.

Operator: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Brian Tanquilut from Jefferies.

Analyst: Good morning. This is Megan Holt on for Brian Tanquilut. Congratulations on the quarter and the guidance for the year. First on the VITAS side, margins looked good in the quarter. How much of that was headcount reduction that contributed to it? And then since you are raising the ADC guidance, do you expect to expand labor capacity to support the growth for the remainder of the year? And then just lastly on the VITAS side, can you speak to any fraud enforcement you are seeing in Southern California given the CMS scrutiny?

Michael Witzeman: I can start with the margin discussion, Megan, and then I will let Joel talk about the fraud topic. We averaged roughly 100 FTEs below our budget in the quarter. We were able to efficiently serve the increased ADC at that level. But to your point, that is not something that we view as sustainable for the rest of the year. Our original budget was adding 30 to 40 FTEs a month. We have increased that to closer to 60 per month for the remainder of the year. We feel very good that if we add those 60, we can achieve the level of ADC growth we have currently budgeted and maybe a little better than that. Joel, fraud?

Joel Wherley: We are very sensitive to the national campaign to root out fraud, waste, and abuse within the health care system. Certainly, the hospice concerns in California have been very public. There were just congressional hearings on Tuesday speaking specifically to it. We are very supportive of the efforts. However, we also want to avoid direct implications associated with the fraudsters and ensure that does not limit access for patients in need in those counties, not only in California but across the United States, for legitimate providers to impact the quality of that patient and their loved ones' final journey.

Analyst: Got it. Thank you. And then on the Roto-Rooter side, it looked like you had some additional marketing expense in the quarter. Is that now the right run rate going forward? And you started seeing some pressure on the customers this time last year given the macro backdrop, and we are facing a similar headwind in terms of the economy right now. Are you seeing that similarly as we are a month into Q2 now?

Kevin McNamara: Let me start with marketing costs. Marketing costs are a proxy for Google costs. As we indicated, our leads were up 3%. However, to get that 3%, we had to battle with the fact that, due to changes in the Google algorithm, our leads from the natural or free side of the search spectrum were down almost 16%. Those were down 16%—nothing Roto-Rooter could do. We expect that to basically continue. We have several efforts afoot to increase our visibility beyond the natural side. In the short term, it will be something approaching that.

We hope to improve our position, but for your models, that is what we expect—to see some tough sledding on the natural side of search with Google. On the positive side, without increasing the amount we bid in the various domains, we have been getting a lot more clicks. Our clicks on the paid side went up over 18%. In order to keep our business where it is and our sales where we budgeted, we have to pay for more of the leads, and that means more marketing costs. It is kind of inexorable in the short and midterm. So to answer your question, yes, we expect that to continue.

Michael Witzeman: From a specific number standpoint, we were, from a year-over-year comparison, $3 million above last year in marketing costs. We had budgeted—or guided—an increase of $1 million. So we basically spent about $2 million in the quarter higher than what we had budgeted. Of that, we think that roughly $1 million was related to some of the weather things we talked about. When we could not get on the road, we were still getting calls, probably at a much higher volume than we would. Weather like that is good for us, but we could not serve it, and so we were paying for calls that ultimately we could not serve.

We expect that was about $1 million of additional expense that should not really be considered in the run rate. So on a run-rate basis, we spent about $1 million more in the quarter than we anticipated. And the entire change in the EBITDA margin in the guidance is us adding $1 million per quarter of marketing costs for the next three quarters.

Analyst: Thanks. And then just any trends you can speak to so far in Q2?

Michael Witzeman: It is real early in Q2. I think things continue to progress the way we expect them to.

Analyst: Got it. Thank you.

Michael Witzeman: Thanks, Megan.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Joanna Gajuk from Bank of America. Your line is open.

Joanna Gajuk: Hi. Good morning. Thanks so much for taking the question. Maybe first on the water business. You talked about the higher marketing cost and the weather disruption, and I want to tie the quarter to the full-year outlook. The full-year outlook includes, call it, $5 million from the two franchises that you acquired, so there is some contribution in there too. You still expect the same revenue growth. Was there some sort of offset after that good guy, so to speak, in the guidance that you can walk us through?

Michael Witzeman: What we talked about, Joanna, is that within the guidance, and even in the first quarter, there are some positives, but there are also continued headwinds. The contractor operations still performed slightly below our expectations. The water restoration revenue, particularly on a price per job, is still a little bit below our expectations. Those gives and takes sort of offset the acquisition revenue we anticipated. Revenue stays in line with where we thought it would be at the beginning of the year—just maybe the underlying components are slightly different than what we anticipated. Ultimately, the revenue continues to grow as we expected.

Joanna Gajuk: Thanks for that. On the collection rate, did I hear right there was some improvement, but not what you expected in Q2? I want to make sure—are you still expecting to improve collections by $4 million to $6 million for the year?

Michael Witzeman: We were slightly better than our expectations in the first quarter. Having said that, part of that comes from the idea that we are billing less per job. We anticipate both of those things improving as we finalize the centralization and those centralized employees get more experience, so we can bring up the revenue per job while still maintaining a higher collection rate.

Joanna Gajuk: That makes sense. With these acquisitions, you mentioned they usually come with somewhat lower margins—obviously accretive and still making money—and the goal is to improve over time. Do you anticipate doing more of these this year? Are there other assets you would consider acquiring for that business?

Kevin McNamara: It is hard to say, but yes, given the operating environment out there, we have noted that there are a number of franchise holders that have held the franchise for a couple generations, and they are saying, “Boy, this is tough. Maybe I will consider selling to you,” and we are considering a number of possibilities. The two that we mentioned this quarter—San Francisco and Fort Worth—are unusual. They are real plums. The ones that are generally available tend to be groups of smaller franchisees that are very likely going to be participants in the independent contractor portfolio. But yes, we anticipate continuing to add additional locations for Roto-Rooter. It is a good acquisition environment for us at this time.

Joanna Gajuk: Any progress with Google and your new SEO partner? Can you give us an update there?

Kevin McNamara: We immediately saw an improvement in what we call visibility. The best way to describe visibility is how often you appear in the map section—that is the biggest driver of the natural, or free, leads. At the end of 2024, we were appearing nationwide 72% of the time. Halfway through the first quarter of last year, we dropped like a rock to the mid- to low-20% range. In the first quarter of this year, working with our outside contractor, we saw an improvement—basically a 10 percentage point improvement in our visibility. Then in March, we saw a change in the algorithm again, which knocked us back a bit.

Again, working with them, we have been able to improve that almost back to the previous run rate from earlier this year. It is a constant battle, Joanna. We are looking to stabilize the percentage of leads we get that are free. We are winning the battle in a major way on paid search—we are getting substantially more leads without increasing the amount we are offering per lead. The private equity firms that have come and kind of upended the Google market for leads—do not know if they are pulling back or not as scientific as we have become in our bidding process—but that is a real success story.

The only problem is, if you are comparing it to a prior period where you were paying nothing for the lead, it is a tough comparison. We anticipate improving our position—no question about it. Will Google change their algorithm again? They tend to do it in a significant way once a year. Maybe we are past that at this point, but we will see.

Joanna Gajuk: Thank you for that. Switching to VITAS, we are hearing from other companies calling out weather disruption in health care services. It sounds like it was not material because you did not call it out in the hospice business.

Michael Witzeman: We get paid on a per-day basis, Joanna. We do not do fee-for-service. There could be a disruption in a location where we cannot get to patients for a day, but that does not really impact our revenue.

Kevin McNamara: It might affect admissions if it is prolonged, but not if it is a disruption of just a day or two.

Joel Wherley: That is correct. To answer your question, we did not have any weather disruption in our business model.

Joanna Gajuk: Perfect. Thanks for the update on the Florida cushion. Now we have the proposal for fiscal 2027, and the rate update is going to increase costs, call it, 2.4%. I know you do not have all the details yet, but any indication or initial estimate in terms of the proposed increase in Florida versus the cap for 2027?

Michael Witzeman: At a very high level, we think that the rate increase might be slightly lower in Florida than the national average, but we are still crunching the numbers, and we do not have the details. They do not come out until sometime in the summer.

Joel Wherley: Keeping in mind, that is the proposed wage rule. We are still in the comment period, and a final wage rule typically is not put into place until the late part of the third quarter.

Joanna Gajuk: Exactly. There was also the proposed new scoring system, the SSVI index. Some of the data show VITAS scoring above average, but one measure seemed to penalize large providers. Any thoughts about these efforts in the proposal? How could that impact your operations?

Joel Wherley: We are very supportive of the efforts to eliminate any waste, fraud, and abuse from the hospice environment. But keep in mind, over 50% of patients needing hospice do not have access or receive that end-of-life care today. We want to ensure any effort to weed out fraudsters does not in any way impact legitimate providers’ ability to provide care to those in need. On the proposed additional scrutiny in the wage rule, we are continuing to evaluate the potential impact on VITAS.

This is in the comment period, and we will be providing comments to ensure that the scoring and oversight are aligned with what legitimate providers would be evaluated on across the country—weed out the fraud, and focus on improved quality and access for those in need.

Kevin McNamara: Very generally speaking, when we hear about fraud in hospice, especially with a focus on California, you have to remember there are two buildings in Los Angeles County where there are more hospices located in those two buildings than there are in the whole state of Florida. The fraud we are talking about is real fraud—almost fake business—mailbox offices for hospices, no real patients, no real care. Totally different from what has historically been “fraud” in hospice, which tends to be highly specialized arguments between doctors on whether a six-month terminal prognosis is indicated or not. We do not want to be a dolphin swept into a tuna net accidentally. We are watching it very carefully.

Joanna Gajuk: Understood. On that new scoring system, do you think it will actually be finalized?

Joel Wherley: We want to make sure that the criteria and the algorithms used to evaluate the scoring with SSVI make sense, are accurate, and do not include data that has been infiltrated by fraudulent claims processing from these providers. They have to be able to filter that out and focus on legitimate providers and the measurement of the care and services provided by those providers.

Joanna Gajuk: And on revalidation efforts—there was discussion that states would have to revalidate all providers within 30 days. Have you seen any of that starting?

Joel Wherley: We have not seen it to that level. There is in place a higher degree of evaluation on new locations and the review of their claims on a regular basis to ensure that these new providers are legitimate in providing actual care. In LA County, the expansion from 400-plus providers to nearly 1,500 providers—those companies received licenses. We are very supportive of an improved surveying environment to ensure that they are legitimate and that their patients are legitimate.

Kevin McNamara: One reason Joel is a little perturbed on this is we attempted to get a license in San Francisco. It took us about six years, dealing with a number of surveys, where people did not understand what hospice was. But we got it through after six years. Joel is sitting here saying, how could 1,100 fake hospices get a license in 18 months, whereas it took us six years with a legitimate application? A state issues a license, not the federal government—different silos—but they have to coordinate their activities. If you put any type of scrutiny—anywhere near the type of scrutiny we are used to—on licensing, it would knock out about 95% of these fake hospices.

Joanna Gajuk: Exactly. Thank you so much for the additional color and for taking the questions.

Michael Witzeman: Thanks, Joanna.

Operator: Thank you. Again, it is star 11 to ask a question. Our next question comes from the line of Michael Murray from RBC Capital Markets. Your line is open.

Analyst: Hey, thanks for taking my question. For VITAS, I think you are probably seeing a higher mix of admissions from hospitals in your new Florida markets. Given your current cap situation in the state, how are you thinking about community-based admissions in these markets?

Joel Wherley: Thanks for the question. As we have talked previously, we are managing the balance in those preadmission environments, and we look at that on a daily basis—specifically where our resources are deployed. We feel that our community-based initiatives are responsibly growing back from where we needed to be in the last half of 2025. We feel really good about the balance between hospitals as a preadmission source and all of our other community-based type admissions.

Michael Witzeman: And, Michael, keep in mind—with the new starts—there is not, by definition, an existing base of long-stay patients. Regardless of the preadmission location in the new starts, for some period of time, they are all short-stay patients because we do not have a base of existing long-stay patients from past plan years. When you are talking specifically about the new starts, think of them all as short-stay patients for at least a period of time.

Analyst: These new markets are pretty sizable. How should we think about the volume opportunity longer term? What is your typical market share in Florida, and how should we think about the rank?

Joel Wherley: In our historical markets—many where we were the original hospice—the numbers are strong. We are a dominant provider in almost any county where we have the license to operate, and we do not see a significant change in our outlook specific to our ability to grow into a market. Our last three new starts have demonstrated that. We feel really good about the long-term outlook on our ability to continue to effectively grow those markets as we have in the past.

Analyst: One more on Roto-Rooter. What is your current mix of paid leads versus organic leads, and what are your expectations embedded in your guidance?

Michael Witzeman: Paid leads are roughly 53% to 54% of our total leads at the moment. We anticipate that mix to continue. We have not anticipated a deterioration or a significant improvement, which is why we took our guidance and added $3 million of additional marketing costs for the rest of the year. We have not projected a significant deterioration from the first quarter.

Kevin McNamara: It is a constant battle. In the first quarter, we had two months of improving visibility on maps, then a change in March where we had a deterioration, and then we go to April to fight the battle and improve our visibility. As far as a prognosticator, there are going to be some ins and some outs. Our hope, of course, is that we have improvement there, but it remains to be seen. Less than three years ago, our percentage of leads from free sources was 55%, not 47%. That is an expensive, significant shift. Roto-Rooter went through something similar when we changed from the importance of Yellow Pages—where we had a dominant position in virtually every directory—to the Internet.

That was tough, but Roto-Rooter developed into the dominant position nationwide on the Internet side. Now the Internet is changing. I have confidence that Roto-Rooter will be able to transition to the new normal better than our competitors. If you look at the growth we have had on paid search—our 18% plus increase in leads on the paid side—that is a demonstration of that. There is a cost to the transition, and we are prepared to deal with it as we have in the past.

Analyst: Thank you.

Operator: Thank you. I am not showing any further questions in the queue. I would like to turn it back over to Kevin for any closing remarks.

Kevin McNamara: Thank you, everyone. We had what we thought was a good quarter—an excellent quarter at VITAS—and some good trends at both companies. We look forward to reporting on our results for the current quarter in due course. Thank you very much.

Holley Schmidt: Thank you for your participation.

Operator: Participation in today's conference has concluded. You may now disconnect. Have a great rest of your day.

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