CHE Q2 Deep Dive: Margin Pressure, Medicare Cap Challenges, and Strategic Repositioning

Healthcare services company Chemed Corporation (NYSE:CHE) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 3.8% year on year to $618.8 million. Its non-GAAP profit of $4.27 per share was 14.3% below analysts’ consensus estimates.

Is now the time to buy CHE? Find out in our full research report (it’s free).

StockStory’s Take

Chemed’s second quarter saw a negative market reaction, driven by operating shortfalls in both core businesses. Management highlighted that VITAS, its hospice division, faced ongoing headwinds from Medicare cap limitations in Florida, while Roto-Rooter’s residential revenue was impacted by a sudden drop in consumer demand. CEO Kevin McNamara acknowledged that “performance of both operating units did not meet our expectations,” citing disruption from patient mix adjustments at VITAS and a challenging April and May for Roto-Rooter. The focus for the quarter was on mitigating the Medicare cap issue and addressing inefficiencies in workforce deployment, with management emphasizing that these were unusual conditions unlikely to persist.

Looking ahead, management’s guidance is shaped by efforts to rebalance VITAS’ patient mix and resolve the Medicare cap limitation in Florida. The company is prioritizing admissions of short-stay patients and rapid ramp-up at new Certificate of Need (CON) locations, with CEO McNamara stating, “We are very confident... we’re not looking at any— we’re projecting surplus back here, let me put it that way.” For Roto-Rooter, the outlook includes continued adaptation to digital marketing dynamics and operational cost control, as management works to restore margin levels and sustain revenue growth in a more competitive environment.

Key Insights from Management’s Remarks

Management attributed the quarter’s underperformance to persistent Medicare cap constraints in Florida and a notable slowdown in Roto-Rooter’s residential call volume, while emphasizing ongoing strategic initiatives to address these challenges.

• VITAS Medicare cap pressures: The Florida Medicare cap limitation drove a $19 million billing shortfall, with management explaining it resulted from weaker-than-expected admissions in April and May, compounded by a complex rate differential unique to the current year.
• Shift in patient mix strategy: VITAS intentionally increased hospital-directed admissions and reduced long-stay admits from nursing homes and assisted living facilities, aiming to rebalance the patient mix and limit future Medicare cap exposure—even though this shift temporarily pressured margins and revenue growth.
• Roto-Rooter demand drop: Roto-Rooter’s residential revenue suffered from lower consumer demand in April and May, which management linked to broader consumer uncertainty and increased competition in digital marketing channels, specifically the impact of paid search advertising costs rising as organic placement declined.
• Branch operational inefficiencies: In response to earlier positive trends, Roto-Rooter had increased hiring in some branches, but the abrupt drop in call volume led to labor inefficiency and higher commission rates as top technicians competed for fewer jobs, further compressing operating margins.
• Insurance and casualty cost spike: Roto-Rooter experienced a significant increase in casualty and workers’ compensation costs, attributed to actuarial adjustments and changes in insurance arrangements. Management expects these costs to moderate with better accident prevention and claims management but included an additional $4 million in anticipated expense for the second half of the year.

Drivers of Future Performance

Chemed’s outlook is defined by actions to resolve Florida Medicare cap exposure, patient mix optimization at VITAS, and continued adaptation to competitive and cost pressures at Roto-Rooter.

• VITAS patient mix and admissions: Management is focusing on increasing short-stay admissions, especially from hospitals, and leveraging new CON locations in Florida to offset Medicare cap risk. These efforts are expected to stabilize revenue and improve margins over time, though some disruption in operating metrics will persist until the patient mix fully realigns.
• Roto-Rooter digital adaptation: The company is investing in digital marketing and conversion tools to counteract declining organic search visibility and higher paid search costs. Management also highlighted improved lead conversion rates, but noted that restoring higher call volumes is critical for sustainable margin recovery.
• Cost control and strategic acquisitions: Both business segments are reviewing expenses at all levels to offset recent margin pressures. On the capital deployment front, Chemed continues to pursue opportunistic acquisitions in hospice at the right valuation and location, while maintaining flexibility for share buybacks.

Catalysts in Upcoming Quarters

Looking forward, our analysts will focus on (1) VITAS’ progress in rebalancing its patient mix and reducing Medicare cap exposure in Florida, (2) whether Roto-Rooter’s digital marketing investments can restore call volume and improve residential revenue trends, and (3) the impact of expense management initiatives on operating margins. Updates on new CON locations and any hospice acquisitions will also be closely watched.

Chemed currently trades at $443.45, down from $466.55 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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