AdaptHealth (AHCO) Q1 2020 Earnings Call Transcript

AdaptHealth (AHCO -1.60%)
Q1 2020 Earnings Call
May 05, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to AdaptHealth first-quarter 2020 financial results conference call. [Operator instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Chris Joyce, general counsel.

Thank you. You may begin.

Chris Joyce -- General Counsel

Thank you, Devon. I'd like to welcome everyone to Adapt Health Corp.'s earnings conference call for the quarter ended March 31, 2020. Everyone should have received a copy of our earnings release earlier this morning. If not, I'd like to highlight that the earnings release, as well as supplemental slide presentation regarding Q1 2020 results, is posted on our investor relations page.

In a moment, we'll have some prepared comments from Luke McGee, chief executive officer; Josh Parnes, president; and Gregg Holst, chief financial officer. Then, we'll open the call for questions. Before we start, I'd like to remind everyone that statements included in this conference call and in our earnings release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements include, but are not limited to, comments regarding our financial results for 2020 and beyond.

Actual results could differ materially from those projected in forward-looking statements because of a number of risk factors and uncertainties, which are discussed in our annual and quarterly SEC filings. AdaptHealth Corp. shall have no obligation to update the information provided on this call to reflect such subsequent events. Additionally, on this morning's call, we will reference certain financial measures, such as EBITDA and adjusted EBITDA, which are non-GAAP financial measures.

A table providing supplemental information on EBITDA and adjusted EBITDA is included in today's first-quarter earnings release. This morning's call is being recorded, and a replay of that call will be available later today. I'm now pleased to introduce our chief executive officer, Luke McGee.

Luke McGee -- Chief Executive Officer

Thanks, Chris, and thanks, everyone, for joining this morning's call. In a few moments, I'll turn the call over to Josh Parnes, AdaptHealth's president, to report on our response to the COVID-19 pandemic and its impact on our business. Before I get to my remarks on the first quarter, I would like to acknowledge the tremendous efforts of AdaptHealth's frontline brand staff, clinical teams, and delivery drivers who have played such an important role in AdaptHealth's continued service of our patients' health needs during these extraordinary times. Our priorities have been and will continue to be the health and well-being of our workforce and our patients.

And I'm grateful to be able to report that our technology platforms and business interruption protocols have allowed us to effectively transition more than 75% of our staff to work-from-home status while maintaining our business operations. Let me assure everyone we are operating effectively and continuing to provide excellent service to our patients, referrals and payers. I am incredibly proud of the entire AdaptHealth team and how each and every team member has stepped up to help those in need throughout the COVID-19 crisis. I always expect that our first full quarter as a public company would present unexpected challenges, but I certainly never imagined anything like we've experienced this year.

Like most other companies, parts of our business were negatively impacted by the COVID-19 pandemic. But despite those challenges, our performance in the aggregate exceeded our expectations for the first quarter. Financially, we are running ahead of the plan we established at the beginning of the year. For the quarter, we generated 191 million in net revenue, 30.5 million of adjusted EBITDA, and most importantly, 17.5 million of adjusted EBITDA less patient equipment capex, our standard for financial success.

Excluding the results of our patient care solutions acquisition, which we previously communicated would require investments in the first year, we earned 35 million and 22 million of adjusted EBITDA and adjusted EBITDA less patient equipment capex, respectively, which are record quarterly results for our company and validation of our strategy of growing both organically and integrating accretive acquisitions onto our technology platform. In the first quarter, we closed on three acquisitions that will set us up for continued future growth. The first was the patient care solutions business that we acquired from McKesson Corporation on January 2, 2020. As we have discussed, PCS diversifies our business into home medical equipment supplies, including urology, ostomy, incontinence and, importantly, diabetic supplies.

Like our existing CPAP resupply business, most of the PCS product categories have recurring revenue on a monthly or quarterly basis. In addition to PCS, we closed on two home medical equipment acquisitions at the beginning of March, the HME division of Advanced Homecare and Healthline Medical. With branches in North Carolina, Virginia, Georgia, South Carolina and Tennessee, Advanced expands our presence into the southeastern United States, a strategically important market for AdaptHealth. Advanced went live on our technology platform on Day 1, and we're pleased with the results over the first 60 days.

Similarly, Healthline, a leading Texas-based HME, is off to a good start and was fully transitioned to our technology platform as of April 30. Advanced and Healthline represent two scaled acquisitions that strengthen our presence in important markets and add important depth to our management team. Importantly, they were immediately accretive to our earnings. We will continue to look for opportunities to expand our product offerings, deepen our penetration with end markets and offer geographic expansion.

Of particular interest are companies that provide products which help chronically ill patients stay at home, such as continuous glucose monitors, insulin pumps, incontinence and other supply categories that are part of the PCS acquisition. Notwithstanding the continued impact and challenges of the COVID-19 pandemic, we have maintained a strong pipeline of acquisition opportunities, and we will continue to pursue our M&A growth strategy for the balance of 2020. Now, I'd like to turn the call over to Josh Parnes, our president, to discuss more fully the impact of the COVID-19 pandemic and our response.

Josh Parnes -- President

Thanks, Luke. The past 60 days have been unlike anything I've experienced in my 15 years in the HME industry. More than anything, I am humbled by the way our employees have responded to the events in the past two months. In a short six-day period in early March, we transitioned more than 75% of our workforce to a work-from-home environment.

Despite expected operational challenges and the disruption experienced by our vendors, payers, referrals and patients, we've continued to meet the needs of our patients and referrals on a daily basis. The health and safety of Adapt's employees and patients has been our highest priority throughout this difficult period. We have purchased significant amounts of personal protective gear for our patient-facing employees. We have employees working from home where possible, and we are continuing to operate effectively.

We've made significant investments in new telephony and IP infrastructure last year, and those investments have paid off in terms of our ability to have an effective remote workforce. We also made advanced purchases in the quarter of inventory and equipment as a safeguard against potential shortages. Not unexpectedly, we've seen slowdowns in certain areas of our business, including CPAP new starts, orthotics, walkers, commodes and other products closely linked to discharges from emergency room and facilities following elective procedures. The slowdown started in the middle of March, and we expect it to continue until facilities begin to open up for elective procedures and doctors begin to treat new patients for sleep disorders.

As a result of these slowdowns and primarily the integration efforts related to the PCS, Advanced and Healthline acquisitions, we initiated a number of workforce initiatives, including a workforce reduction, which in April, resulted in the elimination of approximately 6% of our workforce. We expect the cost of the separations to be approximately 1.6 million, including the cost of maintaining healthcare coverage for the impacted employees through December 31, 2020. Conversely, we are seeing an increased demand for respiratory products, in particular, home oxygen, especially in markets hardest hit by the COVID-19 pandemic. We believe this increase in home oxygen is primarily related to COVID-19-impacted patients, and we believe that this increased need may be sustained beyond the acute stages of the pandemic and continue for longer than our typical oxygen patient.

Similarly, our resupply business and CPAP resupply specifically has remained strong as more patients are home to answer our resupply calls, and there's a heightened awareness of the need for respiratory hygiene. The federal government has provided some needed relief to healthcare providers in general, and HME suppliers in particular, under the CARES Act and CMS' revised regulatory guidance. Among other things, the CARES Act suspended the 2% Medicare sequester through December 31, 2020, and also provided for advanced payments and relief funds to Medicare providers. In April 2020, we received 47 million of Medicare advance payments which will be repaid over the balance of 2020.

In addition, we received 17 million of COVID-19 relief funds that we expect to use to maintain our services to our patients during the ongoing COVID-19 pandemic. We greatly appreciate the receipt of these advanced payments and relief funds, and we'll be fully complying with the letter and spirit of the rules associated with these funds as these rules become more clear. During this crisis, we have been a valuable partner to our health system referrals in procuring equipment on a business-to-business basis. Although not a typical distribution channel for us, as a reminder, we focus on discharge business into the home, we've been able to help hospitals in New York, New Jersey, Pennsylvania, Washington, Kentucky and North Carolina procure oxygen concentrators, ventilators, BiPAPS, hospital beds, pulse oximeters and thermometers.

The bulk of these transactions will be reflected in our second-quarter financial results. At this point, I'll turn the call back over to Luke.

Luke McGee -- Chief Executive Officer

Thanks, Josh. Before Gregg provides comments on the financial results for the quarter in more detail, I want to comment on some key new hires and promotions at AdaptHealth. As we continue to grow, we are focused on building out the senior management team at AdaptHealth. We recently hired Andy Palan as our chief technology officer.

Andy's experience as a digital-first and business transformation leader brings an expanded set of skills to AdaptHealth Passionate about patient and referral experience, Andy will also drive collaboration on initiatives that help AdaptHealth enhance its relationship with patients and healthcare partners across the country. Additionally, we promoted Shaw Rietkirk, our former chief revenue officer, to the position of chief operating officer. Sean has been a key leader for AdaptHealth over the past few years, and I am looking forward to his increased contribution in his new role. At this point, I'll turn the call over to our CFO, Gregg Holst, to review our Q1 financial results.

Gregg Holst -- Chief Financial Officer

Thanks, Luke. In the first quarter of 2020, we generated net revenue of 191.4 million. That's a 60% increase over the first quarter of 2019, and it's 28% higher than the fourth quarter of 2019. This includes 33.9 million of net revenue from PCS.

For the quarter, organic growth was at the high end of our previous guidance of 6 to 8%. In particular, CPAP resupply sales were quite strong, as were respiratory rentals. For the first quarter of 2020, we reported a GAAP net loss attributable to AdaptHealth of 158,000, which rounds to zero cents per share. This compares to a net loss of 5.8 million, or $0.42 per share for the first quarter of 2019.

On a non-GAAP basis, excluding PCS, we reported adjusted EBITDA of 35.0 million for the first quarter of 2020, which was 24% higher than the first-quarter 2019 and 4% higher than Q4 2019. Excluding PCS, we reported adjusted EBITDA, less patient equipment capex, of 22 million. That's 29% higher than the first quarter of 2019 and slightly ahead of our fourth-quarter 2019. I'd like to remind you that our business is somewhat seasonal, with profits accelerating through the quarters.

PCS incurred an adjusted EBITDA loss of 4.5 million. This is better than our expectations as a result of higher-than-planned revenues. As previously communicated, we plan to incur restructuring costs and operating losses of 15 million in 2020, and we view this as part of our investment in that business. Our goal is for the business to achieve profitability in the fourth quarter of 2020.

As we've previously discussed, we believe that adjusted EBITDA less patient equipment capex is the best way to judge our financial performance, and our internal budgets and incentive compensation plans are driven by this measure. Our focus on adjusted EBITDA less patient equipment capex is ingrained in our operational DNA and heavily influences everything we do. We ended the quarter with 48.2 million of cash and 93 million of undrawn capacity on our credit line. We drew down 20 million on our revolver in March as precaution when markets were dramatically affected by the COVID-19 crisis.

We repaid that amount back in April after receiving the advanced payments from CMS and the provider relief funds under the CARES Act. Our current liquidity is approximately 90 million. With that, I'll turn it back to Luke.

Luke McGee -- Chief Executive Officer

Thanks, Gregg. Before we open it up to questions, I want to provide a brief outlook for the remainder of 2020. We cannot predict the duration of the COVID-19 crisis or the full impact on our business. But based on our current trends, we are affirming our financial guidance for 2020 of net revenue of between 790 and 808 million, adjusted EBITDA of 160 to 164 million, and adjusted EBITDA less patient equipment capex of 98 to 101 million.

As a reminder, this outlook excludes anticipated first year PCS operating losses as well as severance and restructuring costs associated with the PCS acquisition totaling approximately 15 million. In conclusion, I'd like to reiterate my thanks and appreciation for all the AdoptHealth employees. They stepped up and delivered record financial results while continuing to serve our patients and our referral partners with courage and professionalism. I remain more confident than ever about our strategy and prospects.

Operator, can you open the line for questions?

Questions & Answers:

Operator

Absolutely. [Operator instructions] Our first question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

Pito Chickering -- Deutsche Bank -- Analyst

Good morning, guys, and thanks for taking my question. First of all, I do love the new disclosures on the revenues you guys provided in the presentation. So thank you guys for doing that. You're very unique within my coverage right now in terms of confirming revenue and EBITDA.

So I want to sort of dig a little bit on that. Is there any chance that you can quantify the gives and takes you're looking at 2Q versus 1Q? Talk about sort of where you guys see CPAP starts going and products tied to discharges. How we should model that for 2Q. And then talk about the hospital sales and rentals, which increased.

Is that continuing sort of throughout 2Q? Or did that peak in April? And then finally, in oxygen concentrators, how should we be modeling that sort of throughout 2Q? And I have a couple of follow-ups, too.

Luke McGee -- Chief Executive Officer

Sure. So I'll try to unpack this in a couple of pieces, Pito. This is Luke. And so as you've mentioned, there's puts and takes.

As we've discussed, there are parts of our business where we started to see the downturn in the second half of March, and it's continued into April. The most impacted lines of business have been those tied to emergency room and elective surgery discharges. So whether that be the HME broadly in our revenue disclosure, some of the HME products where new starts are off anywhere from 15 to 20%, or 10 to 20% for beds and wheelchairs, to up to 50% for orthotic new starts. Importantly, for the beds and wheelchairs, that's just the new starts.

Obviously, we have a much larger rental census, so we can see the full impact there. If you go across the product categories, something like PAP new starts, we're seeing -- and it's regionally different, really depending on the closures and the impact of COVID. But PAP new starts off between 15 and 20% in April. We do expect that to continue.

We don't have a crystal ball. But certainly, as things continue to open up, some of that will get mitigated. The decline in the new starts in April and May, certainly on the rental business, that will have an ongoing effect. The drop-off isn't dramatic, but it certainly impacts our census throughout the year.

Conversely, you're seeing oxygen broadly up across the entire business. Again, very much related to the impact of COVID. So in New York, we've seen oxygen discharges into the home up well more than 100% in April and continuing into May. But if you look across the blended business, it's probably closer to 20 to 25%.

Again, with sort of hotspots depending on the COVID impact. Interestingly, we expect that to almost be a structural or secular shift in the need for home oxygen. As these patients are -- some percentage of the patients are going to need respiratory therapy for quite some time. On our resupply business, I guess you guys get a sense for that.

It was up about 5% in April over the first quarter. Again, as people are home and answering our calls and focused on respiratory hygiene, we continue to think that they will need more supplies. Other puts and takes to call out. Obviously, we got the onetime stimulus dollars.

We're working through all the regulatory guidance there in terms of loss revenue and COVID-related expenses, but that's certainly a boost, whether it be the 17 million in grant funding, the removal of the sequester, or the increase in the non-rural rates, those are the biggest sort of positives from the government relief. In terms of the B2B business, we did see sort of a bolus or a spike in the first half of April when hospitals in New York are really scrambling to get equipment. We do see it continuing to some smaller effect throughout the rest of the second quarter, needs for things like pulse oximeters, thermometers that we have access to in our supply chain.

Pito Chickering -- Deutsche Bank -- Analyst

For the B2B side, that was primarily, I think, BiPAPS was, I'm assuming, was one of the big demands. Has that demand sort of decline at this point? Is it picking up elsewhere besides New York? Kind of where is the BiPAPS or B2B demand at this point?

Luke McGee -- Chief Executive Officer

Yes. No. We saw -- and it really feels that, in retrospect, more like of a preparatory purchase of equipment. And so we have not seen much BiPAP demand outside of New York.

We think that given how hard New York was hit, that was really just making sure that they were ready in case there was a shortage of ventilators. We are seeing B2B or did see B2B demand for things like hospital beds, perhaps some of these nontraditional hospital facilities to be able to take patients. We've seen things for oxygen, hospitals wanting to have oxygen concentrators sort of on hand for themselves to more quickly discharge patients. We saw certain facilities in New York almost discharging any non-acutely sick COVID patient with a pulse oximeter and an oxygen concentrator, with instructions to monitor their blood oxygen as there was a shortage of hospital beds.

As the system is able to absorb more patients, we expect that the sort of demand from the hospitals on the B2B side to suppliers like Adapt will go down. But again, we're proud of our response. And we think that we will have earned stronger ongoing relationships as a result of our ability to step up and service those hospitals.

Pito Chickering -- Deutsche Bank -- Analyst

Great. Then last question for me from the M&A perspective, I think you mentioned in the script that you guys are still sort of looking at deals at this point. Are you seeing more deals come to tables because of COVID? Do you see pricing changes? I mean, what impact do you think that COVID will have on M&A for you guys throughout the next -- I guess, throughout 2020? Thanks so much.

Luke McGee -- Chief Executive Officer

Yeah. So we are continuing to remain active in the M&A market. I can't say we've seen a COVID-related spike or slowdown. A lot of the people who are in market and are in discussions with now and getting closer with, started their processes prior to COVID.

And so we haven't seen anyone pull back. But we're excited. I mean, I am just thrilled by what the team has done with PCS, Healthline and Advanced. Obviously, those are three large acquisitions we did in the first quarter.

And to see them all on our platforms already just makes us a little bit more bullish on our ability to accelerate the M&A pipeline throughout the rest of the year.

Pito Chickering -- Deutsche Bank -- Analyst

Great. Thanks so much, guys.

Operator

Our next question comes from the line of Matt Blackman with Stifel. Please proceed with your question.

Matt Blackman -- Stifel Financial Corp. -- Analyst

Good morning, everyone. Thanks for taking the question. Let's start with maybe a couple of big-picture questions for Luke. So Luke, does everything we've experienced with COVID impact your vision for what Adapt could be, or the pace at which you can build that vision? Does it slow you down? Does it potentially accelerate where you're going or open up new opportunities you hadn't previously considered? Just any early thoughts on what you've seen in the last few months and how that plays with your longer-term strategy? And then I got a couple of quick follow-ups.

Thanks.

Luke McGee -- Chief Executive Officer

Yeah. I mean, obviously, the COVID pandemic has just been such a dramatic shock to the system. And again, I want to just reiterate how proud we are of the way our staff has been able to service our patients, service our referrals and step up, including building payer relationships. In markets like New York, there's a few payers that we didn't have, and we've been one of the few suppliers who've been able to continually deliver oxygen.

And so we've gotten calls from payers where we may not have had a contract, asking them to take their members on service. So again, I think that there will be long-lasting impacts from our -- as a result of our team's ability to stand up in this crisis. But to your point about what are the long-term impacts. I think this accelerates our vision of the importance of care in home, of the importance of the provision of equipment into the home and excitingly connected equipment like the CPAP machines that have modes on, continuous glucose monitors, even sort of simpler devices like scales and blood pressure cuffs, pulse oximeters.

I think as patients get care in the home, we're -- that trend has accelerated. I think people have talked for years and years and years about home being a patient-preferred cost effective. What we're seeing is COVID was just a jolt to the system to accelerate that. CMS, I think, has been a thought leader in thinking through sort of removing some of the guidance or restrictions to telemedicine and other ways, patients can get care at home.

And so we want to lean into that. We want to continue to make sure that our referrals and our payers know that we are ready, willing and able to provide equipment and monitoring of that equipment into the home. I think you're going to continue to see us build out our suite of products. We'd love to be bigger in the diabetes space.

We think that is an expensive chronic condition that maps quite well to our core competencies. And so it's a long way of saying we think COVID is just accelerating our long-term vision, and we're planning to make sure that we're in place to be able to be the beneficiary of that over the long term.

Matt Blackman -- Stifel Financial Corp. -- Analyst

Alright. I appreciate that, Luke. And then the next question, how is PCS tracking with respect to the turnaround initiatives? You talked to it a little bit in the prepared comments. But what have you been able to do these first few months? What's left to do? And I guess, really, what are the critical steps still left to ensure you hit that 4Q profitability mark? And I guess on the product opportunity side of PCS, you just mentioned diabetes and CGM.

How big do you think the CGM opportunity could be for you guys? And what do you have to do to execute against that opportunity?

Luke McGee -- Chief Executive Officer

Yeah. So that's a great question. And so first and foremost, the team that we brought on, both the legacy managers that were part of PCS as part of McKesson Corporation, as well as Rodney Carson, have just done a phenomenal job. It's not easy to carve a big business out of a very large corporate like McKesson, and then do that with sort of COVID-19 starting to impact the business two months in.

But we've been able to disconnect fully from McKesson systems, and that was sort of the goal of the first quarter, to make sure that we could stand on our own and not have legacy costs continue sort of thereafter. And so I'm proud to say we are off of McKesson systems. Revenue is holding in much better than we expected. We anticipated a disruption in disconnecting from those systems, taking a different point of view on how to accept new patients onto service.

I've been really impressed that the revenue has stayed strong, even throughout April with sort of some of the impacts in patients -- new orders and new patients coming on to service being more difficult as patients aren't seeing their prescribing physicians. You asked about what has to continue to hit our targets. We have to continue to work on our supply chain and make sure that we're procuring equipment. We think there's a couple of hundred basis points of margin to go out and get from just sort of buying better.

And then we just need to continue our resupply opportunity. One of the things we talked about when we bought PCS was the need to do a better job resupplying patients similar to the way we resupply our PAP resupply patients. We've done a nice job so far, but I think there's a bigger opportunity to make sure that every patient that comes on service and is on service, gets the order the next month. You're talking about patients at home with chronic diseases.

This isn't optional. They need these things. And a lot of times, the failure of that patient to get that is as much a failure of ours in PCS, than the patient not wanting or not needing the supplies. In terms of the continuous glucose opportunity, that was a new business for PCS that they started in late 2018.

It has grown very nicely. I think our core business, if you look at it on an annualized basis, is about a $20 million business today. But we think that the CGM market opportunity is much, much larger than that. It will be an area that we'll look.

We've been acquisitive historically. We've liked the ability to add scale quickly through acquisition. We're seeing fantastic sort of new growth trends. And so we will be a disciplined buyer.

We do think there are a number of assets in the market. But most importantly, we'll continue the growth we've seen organically. COVID has not helped. I mean, obviously, most of the analysts on this call cover or are pretty familiar with the diabetic space.

New CGM scripts are down anywhere from 30 to 50%. And in spite of that, we're still seeing our business grow.

Matt Blackman -- Stifel Financial Corp. -- Analyst

OK. I appreciate that. And the last quick one here. Can you quantify the magnitude of investment you made in the quarter to acquire -- I think you said PPE and other sort of safety-related measures.

How much did that weigh on EBITDA? And as we sort of think ahead, whatever that amount is, is that a onetime expense? Or is this going to just be the cost of doing business for at least the immediate future? Thanks, and congratulations on a great quarter.

Luke McGee -- Chief Executive Officer

I'm going to turn it over to Gregg to go through specifics. I'll comment that we do think the bulk of the expense was incurred in the first quarter. There is going to be some marginal increase in expense to make sure our patients and our -- all of our employees in their homes are safe. And so we will not skimp and we will not be shy about spending on necessary PPE.

I do think that we will have sort of perpetually higher inventory holds, but we've sort of bulked up and you saw that cost largely getting incurred in the first quarter. But I'll turn it over to Gregg to walk through some details.

Gregg Holst -- Chief Financial Officer

Yes. So yeah, thank you. So we did have -- as Luke mentioned, it will be, obviously, an ongoing expense, but there is certainly a bulk in Q3. It was probably kind of 3 to 400,000 for the PPE.

We also stockpiled some inventory, trying to get ahead of any potential supply disruptions. So we bought ahead on commodes, walkers, things which potentially would have been disrupted by the China situation. And we also purchased some additional capex, which was about $500,000. And as you recall, the way we book capex or the way we count capex in our measure is when we receive it.

So the fact that some of those assets are sitting in our warehouse, it still affects our EBITDA minus capex measure negatively.

Matt Blackman -- Stifel Financial Corp. -- Analyst

Alright. Thanks, Gregg.

Operator

Our final question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Tanquilut -- Jefferies -- Analyst

Hey, good morning, guys. Hope everyone's safe. Most of my questions have been asked already. But Luke, I just wanted to follow-up on the delayed start that you called out in the quarter.

I mean, not surprising there. But how do you think -- from a modeling perspective, how do you think that will impact longer-term in terms of -- since your census is lower probably presumably than what you were expecting, right? I mean, how does that balance out with uptick in all the other business lines, whether it's resupply, oxygen concentrators? I mean, just wanted to hear your thoughts on that balance.

Luke McGee -- Chief Executive Officer

Yeah. So obviously, first and foremost, we are affirming and reiterating our guidance for the year. And so I think on balance, the combination of some of the sort of ongoing census impact from new starts certainly gets countervailed by the oxygen and PAP resupply upticks, as well as some of our lower labor costs due to pulling forward some of the restructuring and sort of cost redundancy initiatives that have already been planned the rest of the year. I think that, certainly, the impact we're seeing on that PAP census.

Average PAP, from a modeling perspective, if you were to look and say an average patient is on service for nine or 10 months, and we're seeing sort of a decline in the magnitude of 20% for the foreseeable future, at least until things start to open up, I think that's the best way to think about it running through the model. There is a residual impact on the resupply census, as well as a new start patient becomes a resupply patient. We're hoping, and we believe, that may be countervailed by just a longer length of stay as people are more cognizant of the need for both respiratory hygiene and the importance of respiratory health.

Brian Tanquilut -- Jefferies -- Analyst

I appreciate that. So I guess my follow-up, as we talk about resupply, I mean, obviously, you're seeing pretty good growth there. Do you think that's just pantry stuffing or stocking? Or is there market share gains? Is there increase in the per capita utilization that you're seeing among your patients? I mean, what exactly is driving that, and will that have an impact in out quarters?

Luke McGee -- Chief Executive Officer

Sure. I'm going to turn it over to Josh to talk about that more specifically.

Josh Parnes -- President

Yes. I think we're seeing an increase -- like I referenced on the call, just an increased awareness of respiratory hygiene in general, No. 1. And I think that's driving a lot of kind of inbound patient demand as well, as well as better responses to our outreach to patients.

I think that's No. 1. I think also just patients being available less kind of running around and more focused on their health in general is driving some additional resupply opportunities. Also as we reach out to patients in different ways, not just phone calls, but different methodologies to reach out to patients via text message or email campaigns.

So I think we're seeing just overall better patient engagement, both through technology, but also organically through patients. And we expect that to continue primarily through Q2 and Q3 as kind of impact of COVID get felt throughout the country. We're seeing increased awareness on resupply, both on CPAP resupply, but also on medical supply resupply with the PCS line of business. So really, we're seeing just in general, very -- stronger-than-anticipated resupply demand.

Brian Tanquilut -- Jefferies -- Analyst

I appreciate that. I guess my last question. Anything that you would call out in competitive bidding, which should be, in theory, we're scheduled to hear results of comp bidding soon. But what are you hearing in DC in terms of whether or not that's going to go through for 2021?

Luke McGee -- Chief Executive Officer

Yeah. So obviously, the -- sort of the known impact so far is they did remove noninvasive ventilation from this round of competitive bidding. Our understanding is that it will be removed until the -- just for next scheduled around, which we think is 2024. So it's a relatively small line of business for us, and certainly, on a relative basis to our large peers.

At the same time, the removal, assuming rates stay the same, it is the benefit to 2021 for us. We had expected to see pretty significant rate decline in that category. And although CMS reserves are right to use discretion to change rates, I think that that may be unlikely, at least in the near term, given the importance of ventilators in responding to the COVID crisis. As of now, we understand that CMS is preparing to go through with sort of the next round of bidding.

We are urging responsibility and potentially the removal of some of the respiratory categories, oxygen, in particular. What we've tried to make clear to the administration and CMS and our legislators is a competitive bid process that is based on a stated amount of demand, which is really a 2018 number. When the demand curve has shifted maybe permanently and by big percentages, it may be unwise to proceed with bidding at this time. We are members of a home care BGM and CTRC.

And collectively, those groups have advocated removing the respiratory categories as well as hospital beds for at least a year from competitive bidding. But we have no guidance to suggest that that will happen at this time. So we are fully preparing our business for competitive bidding to happen and get the rate information sometime in Q3 and for effectiveness on January 1, 2021.

Brian Tanquilut -- Jefferies -- Analyst

Got it. Appreciate it. Thanks, guys.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the floor back over to Mr. Luke McGee for any closing remarks.

Luke McGee -- Chief Executive Officer

Just in closing, I just want to, again, reiterate my thanks to the entire AdaptHealth team. They've really set up for our patients, our payers and referrals in the first quarter. I'd also like to reiterate our excitement of the prospects of AdaptHealth. We are affirming our guidance for the year, and we will continue to build for the future.

With that, thank you, and we'll talk soon.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Chris Joyce -- General Counsel

Luke McGee -- Chief Executive Officer

Josh Parnes -- President

Gregg Holst -- Chief Financial Officer

Pito Chickering -- Deutsche Bank -- Analyst

Matt Blackman -- Stifel Financial Corp. -- Analyst

Brian Tanquilut -- Jefferies -- Analyst

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