Q4 2023 Adapthealth Corp Earnings Call
Participants
Brian Tanquilut; Analyst; Jefferies
Eric Coldwell; Analyst; Baird
Pito Chickering; Analyst; Deutsche Bank
Ben Hendrix; Analyst; RBC Capital Market
Joanna Gajuk; Analyst; BofA Securities
Presentation
Operator
Good day everyone. Welcome to today's AdaptHealth Fourth Quarter and Full Year 2023 earnings release. (Operator instructions)
Speakers will be Richard Barasch, Chairman and Interim CEO Of AdaptHealth; and Jason Clemens, Chief Financial Officer of AdaptHealth, Josh Parnes, President of AdaptHealth, will join Richard and Jason for the question-and-answer portion of today's call.
Before we begin, I'd like to remind everyone that statements included in this conference call, the press release issued today 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 financial results for 2023 and beyond. Actual results could differ materially from those projected in the forward-looking statements because of a number of risk factors and uncertainties, which are discussed at length in the Company's annual and quarterly SEC filings. Adapthealth Corp. Have no obligation to update the information provided on this call to reflect such subsequent events.
Additionally, on this morning's call, the Company will reference certain financial measures such as EBITDA, adjusted EBITDA and free cash flow, all of which are non-GAAP financial measures on this call. This morning's call is being recorded and a replay of this call will be available later today, and I am now pleased to introduce the Chairman and Interim CEO of AdaptHealth, Richard Barasch.
Good morning, everyone, and thank you for joining us this morning to review AdaptHealth Fourth Quarter and Full Year 2023 performance. Stated simply, we had a terrific fourth quarter and ended 2023 with a great deal of positive momentum throughout our business. For the year, our net revenue grew by 7.7% and adjusted EBITDA grew 13% compared to the prior year.
This is the fourth year in a row that AdaptHealth grew both top and bottom line, and it's especially notable and nearly 95% from the 2023 revenue growth was non-acquired. We finished the year with a very favorable quarter, driven by continued strength in our sleep and respiratory product lines and the expected improvement in our Humana contract. It's also noteworthy that adjusted EBITDA grew faster than revenue, largely as a result of the cost-out program and technology driven operating improvements.
Another highlight of 2023 was a significant increase in cash flow from operations and free cash flow even absorbing elevated interest rates on the floating rate portion of our term loan. As a result, our net leverage decreased from 3.69 times to 3.16 times, and we expect to be below 3 times before the end of this year. We have a favorable debt structure with a good portion of our debt in longer terms at attractive fixed rates. But as we generate further increases in free cash flow in 2024, we will lean into reducing our overall debt.
Turning to our product lines, our suite product line was the primary driver for our full year and fourth quarter performance. Jason will give you more detail for our top line for the year grew 16%, powered by a 12% increase in our resupply census, which resulted in record line based on reliable industry data, we have yet again increased our market share. There are clearly the number one provider of C-BASS and related supplies in the United States.
The increase in our census is a direct result of our intentional efforts to improve our adherence rates, which we believe are best in the industry. We have more than 300 suite coaches whose job is to improve the patient experience, which we also believe is best in class.
Our respiratory business also exceeded our expectations for revenue for the year increased by nearly 8% over last year with a 10% increase in the fourth quarter here, again, driven by the expertise of our respiratory therapists. We believe we have increased our share and are striving to become number one in this product category too. Diabetes continues to be a work in progress, but the progress is tangible.
We have enhanced the management team, including the recent hiring of a new head of diabetes. We've ramped the operations of the product line and have reinvigorated our selling efforts by doubling the size of our sales force. While we are still feeling the pressure of the compression on pumps and some continued mix shift to the pharmacy channel.
Government business continues to be our focus and government-sponsored payers accounted for 79% of CGM census from the fourth quarter, up another 30 basis points from last quarter. Further, as I mentioned last quarter, we are ramping up to participate in the growing pharmacy channel. As we predicted last quarter, the Humana contract is now performing as we had originally expected. The transition is now largely behind us, but we are on track to substantially complete patient conversion this quarter, we value our relationship with Humana and are working hard to be a good partner. We've learned valuable lessons in onboarding these types of agreements and are now in a position to do more of this.
Now I would like to continue the discussion about the possible effect of GLP-1 drugs on our business. First, there seems to be a consensus that GLP ones will not have a negative effect on CGM growth. Excuse me, it's logical to assume that patients on GLP ones are actively engaged in their health and will be inclined to monitor their A1C levels through CGMs.
We also believe that increased insurance coverage of CGMs, especially in the government sector, is a strong tailwind as if we didn't have to think first and most important, we see no current impact on our business. Our sleep census, which is a combination of new starts and ongoing PAP resupply, continues to grow at a pace that both bodes well for future revenue growth.
Further, we take particular note of the real world real world study recently conducted by ResMed. This study shows a modest increase to adherence when CPAP users also take JLP. Once this is consistent with what we are seeing in our population. Our recent survey suggests that 16% for currency path users are already using GLP-1. We want our patients to be healthy, healthier. So this is good news.
We believe that greater awareness and diagnosis of obstructive sleep apnea, so offset the potential of reduced usage of C tests resulting from GP GLP ones. It's also reasonable to assume that increased awareness of obesity will also increase awareness of related co-morbidities like OSA., these trends are beneficial forever. That said, we're not dismissive of the potential issues from GLP ones.
So we are proactively responding to this possible long-term pressure. We believe we can overcome any reduction in the growth of SafePath usage by continuing to increase our share of the market through enhanced traditional sales efforts and enterprise sales, increased operating costs through automation and better processes, an increased focus on patient adherence and retention.
You can click on each of these measures over the past few years from the GLP. one conversation has expedited our progress in these basic areas. The recent focus on GLP ones has also accelerated our efforts to enhance our role in the ecosystem of providing care in the home and community AdaptHealth is at the epicenter of the movement to improve the people of food, the health of people with chronic conditions like obesity, diabetes, sleep apnea and COPD.
We occupy unique position connecting providers, patients and payers. We also generate and have access to reams of data that we've curated properly to assist providers and payers in providing better care more efficiently. We currently have ongoing relationships with more than 1.5 million people with sleep apnea, more than 230,000 people with diabetes and more than 300,000 people with chronic respiratory conditions. We interact with these patients on a regular basis to help them it adheres to the therapies by teaching them how to use their devices properly and supplying and resupply needed equip.
Our initial work on adherence indicates that we can improve proper utilization of the devices and therapies we believe are also improving outcomes, and we are beginning to use the data that we are generating to prove it.
I'd also like to provide a brief update on the ongoing CEO. search. We now have a couple of very promising candidates for currently advancing through the recruiting process. We will keep you updated as we move forward. But as you can see from our results, our progress has not slowed down during this process.
I'll now turn it over to Jason to take you through the numbers. Jason?
Thank you, Richard, and thanks to all for joining the call. Like Richard, I was very pleased with the fourth quarter results. We made significant investments in the business during the year, and they are beginning to bear fruit.
We will look to build on that momentum across the business in 2024, AdaptHealth's net revenue grew 7.7% over 2022, and non-acquired growth was 7.3%, led by our sleep and respiratory product categories. Adjusted EBITDA grew 13% over that same period as we delivered the cost management program that we announced in early 2023.
Cash flow from operations of $480.7 million grew 28.6% over the prior year. Free cash flow of $143 million improved significantly over 2022, led by DSO improvement of 1.5 days and significantly improved CapEx management. Our net leverage ratio finished the year at 3.16 times, down half a turn from 2022.
Turning to fourth-quarter results. Net revenue of $858.2 million increased 10.0% compared to the fourth quarter of 2022. Fleet revenue of $328.8 million grew 15.2% compared to a year ago. Patient demand for new PAP equipment was steady and appetites from the third quarter.
New starts for PAP equipment met our expectations. Our adherence performance met our expectations and resupply continues to be very strong. Our resupply census has reached 1.55 million patients with electronic reordering now over 40% of total orders. Not only electronic reordering easier for the patient, but it also drives more efficiency in our operations.
Respiratory revenue of $151 million increased 10.1% year over year. Our oxygen census is the highest it has ever been now over 315,000 patients, for oxygen as well as for non-invasive ventilation industry data shows that we continue to take market share in these important categories.
Our diabetes revenue was down 3.8% against the fourth quarter of 2022. As expected, we continued to absorb pressure in our pump and pump supply revenue as the market shifted toward tubeless pumps. We believe the pressure will start to ease in the second half of 2024 as the transition stabilizes and as we grow our tubeless pump revenue as expected, CGM census was up a few points. We overcame some reimbursement pressure from shift to the pharmacy benefit, resulting in 1% CGM revenue growth.
Turning to profitability. Fourth quarter adjusted EBITDA of $204.6 million reflects an adjusted EBITDA margin of 23.8%. We outperformed our expectations due to increased revenue, especially in high margin categories. Improvement in our Humana contract to original expectations, improvement in COGS and improvements in labor and operating expenses.
Cash flow from operations of $155.3 million grew 60.2% over the fourth quarter of 2023. CapEx of $88.6 million, representing 10.3% of revenue, beat our expectations, resulting in free cash flow of $66.6 million in the fourth quarter.
For the full year, free cash flow was $143.2 million or 4.5% of total revenue, exceeding our goal of 3% to 4%. As Richard noted, most of our debt is long term with favorable interest rates. We are highly focused on generating free cash flow and reducing our overall debt load.
During 2023, we paid down $45 million of our term loan, including a $10 million voluntary payment in the fourth quarter. As a result of our strong free cash flow. During the first quarter of this year, we expect to pay down our TLA by approximately $25 million. As mentioned earlier, our net leverage ratio at year end increased by more than half a turn to 3.16 times, down from 3.69 times a year ago, and our goal is to reduce our leverage to below three times in the course of 2024.
As part of our Q4 results, we recorded a $318.9 million pretax write-down to goodwill. As we announced in our earnings release this morning, this non-cash, pretax charge was triggered by the reduction in our stock price as of December 31, we also recorded a $25 million pretax charge to settle a pending securities action filed in 2021, premised on allegations regarding disclosures related to our former CEO and organic growth.
Turning now to guidance for 2024, we currently anticipate revenue to be in the range of $3.25 billion to $3.35 billion, adjusted EBITDA to be between $650 million and $710 million and free cash flow to be between $150 million and $180 million.
Let me share with you some assumptions that support our views on guidance for 75-25 reimbursement for non-competitively bid nonreal MSAs expired on January first. And although it is possible, the range will still be extended, we are budgeting approximately $25 million of headwind to revenue and to adjusted EBITDA.
We expect revenue for our sleep category to grow mid-single digit over 2023, in very tough comparable period that benefited from the backlog demand pent-up following the supply chain shortages faced in 2022 and early 2023.
We recently doubled our dedicated sales force for our diabetes products. And although we expect limited growth in the first half of 2023 that team ramps production, we expect to bridge to low single digit growth in the second half of the year. We anticipate the rest of the product categories to deliver the remaining top line growth.
As we look to 2024, we expected very similar quarterly slope to full year revenue and adjusted EBITDA that we experienced in 2023. We expect to improve free cash flow generation over 2023 by 15% at the midpoint, as we're already securing efficiencies in procuring and managing our CapEx and inventory.
For Q1 and 2024, we expect revenue and adjusted EBITDA to grow about 3% over the first quarter of 2023. Free cash flow to be approximately zero as we absorb the seasonal effects of patient deductible resets on our cash inflows as well as interest, bonus payments and cash related to the previously mentioned shareholder lawsuit settlement we ended the year in a position of strength and have built a solid foundation to grow. We look forward to keeping you updated as the year unfolds.
I'll turn it back to Richard for closing remarks.
Thank you, Jason. And now I'd like to add some color to Jason's remarks on 2024 guidance. We know that one of the risks in the health care is reimbursement changes and the non-expansion of the 75-25 rate relief masks growth rates that would have been more expected in 2024, considering the tough comparable in sleep and respiratory.
Here's how we can improve on these numbers over the base that we've established for 2024 and into the future, we can close on the strategic relationships in our pipeline, not as large as Humana, but certainly large enough singly in the aggregate to boost growth if we can continue to pick up share in the sleep and respiratory categories, we can bring our diabetes category back to market rates of growth.
And finally, we can continue to get more efficient if we accomplish this basic blocking and tackling, we can achieve our target of mid to upper single digit non-acquired growth in 2025 and beyond.
Before I turn it over for questions, I'd be remiss if I didn't thank our nearly 11,000 employees who are focused on improving the lives of the 4.1 million people who rely on us for needed medical devices and supply.
Operator please open the line for questions now and thank you. Thank you.
Question and Answer Session
Operator
(Operator instructions)
Brian Tanquilut, Jefferies.
Brian Tanquilut
Hello? Can you hear me?
Yes. Loud and clear.
Brian Tanquilut
There you go. Awesome. Congrats on the quarter. I guess the first question I would add just for Richard, as we think about kind of normalized run rate up as we get past 2024, how are you thinking about the growth rate for the business, maybe either by product category or just in totality.
As you know what I said in my prepared remarks is our target is mid to upper single digit growth in 2025 and beyond. I don't want to get more specific than that, but I kind of alluded to some of the building blocks. And one of the key issues for us is to bring diabetes is back to closer to a market rate of growth, maintain or maintain our dominance in sleep. And then respiratory as an example is it was a pleasant pleasant surprise for us this year. We think we have the tools to continue.
So Brian, I think we've talked about the broad, though, let's get through 2024 to get to the specifics thereafter.
Brian Tanquilut
Appreciate that. And then maybe, Jason, just as I think about the cadence for the year. I know you gave guidance for Q1. Anything to call out as it relates to cash flow in terms of how any seasonality factors there that we need to be considering.
Nothing unusual for '24, Brian, and we should expect approximately a third of our free cash you generate in the first half of the year. And the remainder to be generated in the second half year, much like we did in 2023. If you're getting down to the quarter level, certainly Q1 is pressured as we call it out, Q2 is historically stronger as there is no interest payments that quarter, Q3 got interest. So there's there's there's a shift there. And then in Q4, as usual is a big quarter, Tom, as we just demonstrated.
Brian Tanquilut
Thanks and congrats again.
Thanks, Brian.
Operator
Eric Coldwell, Baird.
Eric Coldwell
Thanks very much. I have a couple here. First one on pumps. In the past you did give some revenue numbers and headwind expectations for 2023. I believe hoping we could get the final tally on pump revenue in 23 and how much that was down? And then in 2024, what your expectation is for the full year, how much of a I assume a net headwind still, but maybe not just hoping you could give us some color on that.
Sure. This is Jason. So firstly, as we have reported previously. Pump revenue in '22 was about $160 million, and we expected about $120 million in 2023, Tom, so we came right in line with expectation. You'd previously talked about a $35 million to $40 million headwind.
And if it literally came square in the middle that we think as we stand here today that the headwind in '24 will be about half that. So call it in the range of high 10s to $20 million. We do think that the second half of the year, we'll do a bit better than the first half. The reason for that is that as discussed in the prepared remarks, Tom, some of the transition is stabilizing.
So in other words, if you were going to have to base pump and you wanted to move to respond, you've made that decision already. And then secondly, we are growing our tubeless pump revenue. And we had a we had a solid quarter in new starts related to tubeless pumps. And for the first time, we overcame some to the base pumps in terms of new starts. And so again, it will take some time for that to work through the system, if you will. But those are the thoughts on the pump and pump supplies for the for the year.
Eric Coldwell
That's of great detail. Thank you. And then not sleep mid single digit growth, not a not a surprise there at all, but I am curious how does resupply or sales growth compare to rental performance in 2024? I would think the resupply would be up stronger than mid mid-single digit rental, maybe flat to down, but I was hoping to get to a little more detail on that, if you will.
Yes, you got that exactly right, Eric. We're expecting higher single digit in the resupply operations as we just continue to increase the average sales price and the number of products per order as well as improving our adherence rates. So just kind of continuing to compound. That census is what we feel great about resupply in 2024.
At your point of rental, our new start growth is strong. Patient demand is strong, frankly, as strong as it's ever been done within rental revenue, the nuance of the 13 month rental cycle means that the record setups we reported in the first half of 2023 are rolling off of that rental revenue and in 2024. And so it is creating just a tough comp of rental revenues, probably around flat is what we're expecting for the year. But again, this is not anything other than a tough comp period and just larger number of patients rolling off from from a year ago.
Eric Coldwell
That's great. And then last one for me. Thank you for all the details here. The efficiencies you've cited in patient CapEx, could you dig into that a little bit, but was there any unusual timing or items in the fourth quarter? And then what are the major structural or dramatic changes in your CapEx requirements that, you know, perhaps could be sustainable?
Correct. So maybe start with a level setting of '23 by quarter from Q1 and '23. But CapEx represented 12% of revenue. And as has reported, that was related to a purposeful stockpiling of CPAP. and that we felt was necessary to meet the continued demand in insulin therapies. And then that delta off to kind of high 10% mid 10% and then low 10%. I don't think we're 3% for Q4.
And so that kind of mid 10% range is a good run rate. We think we'll get half a point out in '24, which is why free cash flow conversion is up half a point. And structurally, what's changing here is technology really related to the Oracle fixed assets and inventory digitalization projects that we've been we've been hard at work on for about a year now, that is taking hold.
We just went live and within the last few weeks in our first sites for HME, and we're finding benefit there of compressing on our data and on inventory and just getting more efficient about the way we order now and how we are and just kind of what we're comfortable with in terms of mins and maxes. And we expect to to bring more improvement throughout the year.
Eric Coldwell
Thanks very much. Nice seeing the good progress here. Congrats.
Thanks, Eric.
Operator
Mathew Blackman, Stifel.
Good morning, guys. This is Doug calling on for Matt. I thought I'd start by asking for a bit of a state of union of sorts on the diabetes franchise and particularly on the CGM side, are you seeing any lift from a basal patient, particularly Medicare coverage decision that went through last year or any new centers like the G7 launch? And is the government mix going to stabilize this year? What are your thoughts around that?
It's a compound question. Let me start and then I'll turn this over to Jason.
We're not seeing the benefits yet from the extensions in Medicare and in some of the other other governmental programs. But we think we well in 2024. So that's that's a you know, and a pillar of why we think we can ultimately get back to more growth so that we see as it has upside for going forward.
A compound question, Jason's got it.
Yes, I'd say calling on as it relates to newer products and those trends, I mean, we are distributing the new remodels for both Dexcom and Abbott. They've been great partners and we're continuing to run that transition, frankly, faster than we had planned or expected. And we think that's a good thing, obviously, for our patients and then certainly for our economics.
And I guess I'd say in terms of the government's split, we think that we will grow that government census a touch more in 2024. And the reason is the doubling of the sales force is really intended to go after geographies that we've never been in before. And so as you'd expect, a lot of data and analysis went into where the business is. What we think in these geographies, particularly urban areas will will produce and were pointed directly at a primary care sale and which which happens to be a very heavily government patient population. And so we again, we do expect to grow in that area in 2024 and particularly in the second half of the year, we expect to get back to growth mode.
And then I had one follow up on the gross margin outperformance during the quarter. Was that primarily a function of the Humana dynamic or any one-time items or was it just the underlying business and the COGS efficiencies that you've put in place this year? How should we think about that kind of progressing in 2024? Thanks.
You know, I'd say all the above common. I mean, we were just pleased. I mean, frankly, we beat on essentially every every assumption every measure some documented to your point, we have done a good job transitioning patients from and we have gone faster than we committed to, which is resulting in a in a big improvement in Q2 for over two three.
And secondly, in reference to the cost management program, when you look across labor, OpEx and G&A, I mean Q4 is essentially flat over the prior year. And so, you know, the company was able to deliver on that, that cost containment program and then also deliver in what I think is about $80 million of growth over the prior year. So I mean, it's really those of those couple of factors that drove the performance in the quarter.
Thank you so much.
Operator
Pito Chickering, Deutsche Bank.
Pito Chickering
Yes, good morning. Thanks for taking my questions. Come back to sleep rentals for a second. I understand the flat growth guidance for 2024, it's due to really tough comps in '23. If I just sort of plug 2024 into a category from '22, it's about 12% is that the right growth we should be thinking about for 2025 for steep rentals?
Well, I'd say, Pito, the sleep as a category, um, you know, mid to upper single digit as Richard alluded to, across the enterprise, we think that sleep growth will continue to be healthy. You know, once you get to a point that your comparable period is clean, it up then. Yes, I mean both whether Toronto resupply should grow at approximately the same rate.
Pito Chickering
Okay. Great. And then a few follow-ups here. On diabetes. What percent of your pumps today are tubeless versus tubed. What's the cost difference for patients if they get a tubeless pump and a pharmacy versus DME arm? And then would you think that the payer mix ends the year.
I'd say to take the last part first is probably up a point or two. So the 79% on that we just reported, we think it's up a couple of points as we exit '24 regarding pumps on the tubeless pumps that we are putting now, which are Omnipod five's as well as a new entry of Avonex. I mean, we're running those through funds mean that we're tapping our pharmacy capability and running those through the pharmacy channel today. So and there really is no differential versus like a DME channel because those products are really going through gone through pharmacy.
Pito Chickering
Okay. So that looks certainly revenues for diabetes or pharmacy versus DME. And I guess if you're guiding the whole sector to be flat for the first half of the year, the growing list of lives in the back half of the year. Any sort of color on how we should think about DME growing versus pharmacy?
Yes, I'd say, we haven't we're not ready to put out a split of revenue or pumps tubeless versus versus a pump or tubeless versus two days. But I will say for the quarter our new starts, it was outweighed in two Bliss and so that that will take some time as you got a pretty long length of stay for foundations that will take some time for that to start equalizing. And in terms of getting back to growth in the second half, really, really three factors you got the pump pressures we think will be heavier in the first half and later in the second half.
And then secondly, in CGNs, we think growth will be lighter in the first half as sales team starts ramping and then we'll deliver in Q4, so Q3 and Q4. So we think the second half is going to be stronger than the first.
Pito Chickering
Okay. Great. And then two more quickies here, a but the revenues are pretty driver in Q2, as you remind me what other is and then free cash flow conversion ratio for next couple of years, bad news for 24% free cash flow conversion versus adjusted EBITDA.
Yes, on free cash, that's an easy one. And the reason is we think that conversion from EBITDA down to cash flow from operations and then just better CapEx efficiencies you get to that same place?#
And I'm sorry, Pito, the first part of the question was related to
Pito Chickering
US hits revenues and other, I guess, can you just kind of curious how do you sort of see?
Yes. So historically and currently, other included some items such as e-commerce, hospice, orthotics and on the. So it's a it's kind of a grouping of various lines of business some since July. It also includes on the PMPM revenue and from a capitated agreement. And so that's why you're seeing a large growth in Q4 over Q3 and sequential.
Pito Chickering
Makes sense. Thank you.
Operator
Kevin Caliendo, UBS.
I actually have just as a follow-up to the last set of questions on the guidance on free cash flow. You talked about some of the moving parts there that underlie your expectations were '24, if we sort of just single out certain improvements like cash collections, for example, how to think about and the next tranche there of capturing some of those benefits? And maybe if there are any working capital commitments commitments a little from the ramp of Qimonda, how do you balance those improvements against that? And then I have one more follow-up question.
Sure. Andrea, I might I'd say, firstly, Tom, that you know, in terms of DSO and kind of the AR side of things, I mean, we saw we brought we brought DSOs down considerably over the last 12 months. And you had previously discussed that that was really as a result of big investments in technology, particularly in claims editor engine that we've built.
I guess, proprietary tech that we own and operate, Tom and you know that that was a just up just a home run of an investment, and that's really the people and the processes have been recycled, was that, Andreas, I mean, we are not anticipating much of a shift in DSOs versus the 2023 by quarter. We are, however, actively investing in particularly the denial management portion of rev cycle. We've got big tech and new process going in there.
And so we're not ready to talk about it. But again, we're investing millions and we will expect some improvement from that point, but you're really looking more 2025 when you have the working capital that you'll know inventory a little bit better job in inventory management over the course of '23, particularly the end of '23. We're expecting that whether you call it inventory management, our CapEx improvement, we're expecting half a point better on revenue over the course of 2024.
Thanks. And just again on a follow-up question on Tito's prior question about the other revenue line. So if I look at kind of that [$77 million] or so that you reported on the sales line, is that how do you think about the cadence going forward? Or was there some sort of a capture of an accelerated benefit that's all expected to recur. Thanks so much for taking my questions.
So you have that other revenue category, if you will, in the third quarter of '23 sales. Other we reported $64 million of revenue, and that's now up in Q4 to $77 million of revenue. So again, the PMPM revenue from capitated agreements is inside of that category. And so as we far outpaced the patient transitions that we committed to as part of the key agreement in Q4, this cap reductions came down significantly, and that's a top line and bottom line impacts of both, but good gas. So that's the predominance what you're seeing there and that sales other growth.
Thanks a lot.
Another question?
Operator
Ben Hendrix, RBC Capital Market.
Ben Hendrix
Thanks, guys. I would just go a little deeper into the Humana contract conversions. Just want to get an idea of where we are in that process. And you said you've had some good success lately and getting that ramped up, if you could quantify perhaps the PMPM contribution to that $77 million. And then again, just how that does how you expect that portion of it to track through the year.
Jason here, we won't comment much on the economics of the arrangement. But to help out, I would tell you that we have committed to being substantially complete with patient transitions by the end of this quarter at the end of this first quarter. And if we are able to execute on that you'll see a fully loaded quarter that we've found essentially remove those cap deductions. So in other words, kind of a fully loaded quarter and then you can run the math from there.
Ben Hendrix
Thank you. Follow up on the diabetes and pharmacy channel share commentary, I guess if you could describe a little more detail about your efforts and how the penetration into the pharmacy channel, what does that look like? And kind of where are we in that process and timing.
We should have something more significant to say about this in the first quarter. We're working in Q1 call. We're working diligently to identify appropriate partners to work with us on this entering the pharmacy channel and home is not a small enterprise for us. We've got 50 state pharmacy, but we do need from the backup tools and pipes in order to do this as efficiently as some of our competitors so we are going to we are in fact, spending time and resources to get ramped up in this quarter and hope to have something to talk about in a couple of months.
Ben Hendrix
Thank you.
Operator
Joanna Gajuk, Bank of America.
Joanna Gajuk
Hi, good morning. Thanks for taking the question. So I guess first to follow up on up excuse me on the questions around the Humana contract and the other revenue. So there was that $92 million, I guess revenue in this quarter in Q4, it sounds like there's still more ramp up. So the question is, is this $92 million a good starting point, but there's more and I guess when it comes to on thinking about this being a strong quarter overall, was there some sort of pull forward of this revenue from instrument out with some adjustments from '24 into 203 Q?
There were no adjustments or unusual items at the end the quarter from the $92 million, you're referencing the total other revenue, I think earlier we were talking about the other sales revenue at $77 million.
But as we said, Joanna, we expect to be substantially complete with patient transitions before the end of the first quarter of 2024. And if we're able to execute on that, that should give you a good run rate within that sales. Other category of what we believe is a is our baseline, our new baseline.
Joanna Gajuk
Okay, great. Thank you. Appreciate it and done. So I guess just coming back to about the performance in the quarter since it became annum EBITDA came in at or above your higher end of your range on and you said I know the revenue on that came with higher margin and obviously the Humana contract and couple of other things. Any way to quantify any of these things? Or you had cited that equally contributed to the outperformance?
Yes. I mean, it's a little bit here a little bit there little everywhere, um, you know, adds up to some raw material numbers, I guess, Tom, I'd say if we look back at what we said in Q3, we had expected talking to sleep and diabetes sequentially, the resupply growth to be about $20 million. I mean it was 40. And so you've got all the flow through on that. I mean, we have various other lines that B. And like I said, it's kind of a couple of million here, a couple of million there. And certainly on labor and OpEx, we put out conservative expectations and we beat them. So that was about another $5 million of sequential improvement across labor and OpEx.
Joanna Gajuk
Thank you. And another, I guess, follow up on when it comes to the expiration of the 75 25 rule, which I guess product category will be hit the most would be against respiratory.
Yes, I mean, it will be will generally fall in line with the size of those businesses, right? So sleepy and I'm going to be about 40% of our revenue, right, which would arguably be impacted most. And but this is done at an MSA level and actually in product pick pick level. And so there's a lot of detail and nuance there, but that for a proxy. It's safe to assume that it spreads across the business based on the size of the product.
Joanna Gajuk
All right. Thank you for that. And just talking about, I guess the government exposure. And as it relates to diabetes business abates and you talk about the sense of being almost and the percent and I guess growing from here on. So when you when you talk about these government payer exposure, how much of this in that bucket is from Medicare fee-for-service versus Medicare Advantage managed Medicaid? And also, we know when it comes to these payers is managed Medicare and managed Medicaid. Are those payers largely in the pharmacy benefit or medical benefit is there I guess there's still potential for some movement in some of these payers that are actually in the government. Okay, but they have more flexibility versus the fee-for-service? Thank you.
In general, I'd say that I mean, I mean, we're not we're not going to provide a lot of detail of the components from, you know, kind of the you're asking for to make up the total. So the reason that we are categorizing it as government-sponsored payers is that we believe that this part of the business is fairly well insulated from the risks that you're highlighting. And so that's that's the reason we're reporting it that way.
Joanna Gajuk
Thank you. Thanks so much for taking my questions.
Thank you.
Operator
Eric Coldwell with Baird.
Eric Coldwell
Thanks. I wanted to go back to the reimbursement and regulatory environment in in the recent past, CMS has issued a few private or final rules that helped bring in Medicare Advantage and Managed Medicaid programs for things like improper denials, unnecessary or improper prior authorizations. Also, CMS is forcing these plans to cover everything covered under fee-for-service, provide faster appeals resolution and also more transparency. I mean, it would seem like those would all be are good guys for ADAPT and the rest of the industry. But I'm curious, it's very early here and obviously with the last final rule, I'm curious, have you seen any benefit or change in in payer behavior since this came out? And what are you up? What are you expecting? Thank you.
No, we haven't seen nothing so far, but your intuition that this is all positive for us is think rents.
Eric Coldwell
Have you incorporated any forecasting of a potential lift or benefit in your guidance around?
No.
Eric Coldwell
So anything that happens would be upside potential?
That's right.
Eric Coldwell
Okay. Thanks very much.
Operator
Thank you. And we have no further questions on the queue in the queue at this time. I would now like to thank everyone for joining today's call.
