Detailed narrative
VITAS Outperformance and Strategic Growth
VITAS significantly exceeded expectations in Q2 FY26, driven by accelerated admissions from non-hospital preadmission locations and sustained hospital-based admissions. Admissions increased 9% year-over-year, leading to a 6.1% increase in average daily census (ADC) to over 24,000 patients. This performance allowed VITAS to add $8.9 million to its Medicare cap cushion in Florida and achieve higher-than-expected revenue growth and EBITDA margins, signaling a return to normalized growth patterns after managing the 2025 Medicare Cap issue.
Roto-Rooter Commercial Momentum and Water Restoration Improvements
Roto-Rooter demonstrated positive operating momentum, with commercial revenue increasing 6.8% year-over-year. The commercial business manager program proved highly effective, driving a 13% revenue increase in branches where it was implemented. The centralization of water restoration billing and collections continued to yield benefits, resulting in a $1.3 million improvement in total write-offs and a reduction of approximately 20 employees.
The average revenue per water restoration job also showed sequential improvement, declining only 3.5% compared to a 13% decline in the prior quarter.
Roto-Rooter Marketing Challenges and Lead Generation Strategy
Roto-Rooter faced ongoing challenges with lead generation and customer acquisition costs. Total leads were down 1.6% year-over-year, with internet search leads declining 13.1%. Paid leads increased 7.3% and now constitute 59% of all leads, up from 54% in Q2 2025, leading to a $3.1 million increase in marketing spend.
Management is actively working to minimize reliance on paid search by developing alternative lead generation strategies, such as commercial business managers and exploring app-based solutions, to stabilize marketing expenses.
Franchise Acquisitions and Long-Term Growth Opportunities
Roto-Rooter continues to pursue strategic franchise acquisitions to expand its footprint. In Q2, the company purchased the South Texas territory, including Corpus Christi, for approximately $12 million. This acquisition is expected to contribute to growth in 2027 and beyond. Through the first half of 2026, Chemed spent an aggregate of $33.5 million repurchasing four franchises in strategically advantageous locations, indicating a sustained focus on consolidating its franchise network for future growth.
Hospice Growth Sustainability and Resource Management
Management expressed confidence in the sustainability of VITAS's growth, attributing it to effective strategic management of resources and key performance indicators. The ability to balance hospital-based admissions (shorter length of stay) with community-based admissions (longer length of stay) is crucial for maintaining margin and cap cushion.
The company also noted that its back-office SG&A costs are expected to grow at half the rate of revenue, providing leverage and supporting sustainable EBITDA margins in the long term.
Hospice Regulatory Environment and Future Outlook
Chemed does not anticipate significant or material reimbursement changes to the current hospice structure, despite ongoing discussions around program integrity and various government reports. While a moratorium on new CONs influences growth in some states, it does not prevent acquisitions of existing providers.
The company expects increased program integrity oversight, such as the SSVI, and a focus on quality metrics, but sees no immediate indication of unbundling the hospice benefit or major reimbursement shifts for 2027.