Prepared remarks
Good morning, and welcome to Aveanna Healthcare Holdings Second Quarter 2026 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the call over to Debbie Stewart, Aveanna's Chief Accounting Officer.
Thank you. Good morning, and welcome to Aveanna's Second Quarter 2026 Earnings Call. I am Debbie Stewart, the company's Chief Accounting Officer. With me today are Jeffrey Shaner, our Chief Executive Officer, and Matthew Buckhalter, our Chief Financial Officer. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release which is posted on our website, aveanna.com, and in our most recent quarterly report on Form 10-Q when filed. With that, I will turn the call over to Aveanna's Chief Executive Officer, Jeffrey Shaner.
Thank you, Debbie. Good morning, and thank you for joining us today. We appreciate each of you investing your time this morning to better understand our Q2 results and how we are moving Aveanna forward in 2026. My initial comments will briefly highlight our second quarter results, along with the steps we are taking to address the labor markets and our ongoing efforts with government and preferred payers to create additional capacity. I will then provide updates on the Family First Homecare integration, how we are progressing with our 2026 strategic initiatives, our enhanced 2026 guidance, and updated long-term growth outlook before turning the call over to Matthew. Let's move to the highlights of the second quarter. Revenue for the second quarter was approximately $670 million, representing a 13.7% increase over the prior year period. Second quarter adjusted EBITDA was $95.4 million, representing an 8% increase over the prior year period primarily due to the improved rate and volume environment and continued operational efficiencies. As we have previously discussed, the labor environment represented the primary challenge that we needed to address to see Aveanna resume the growth trajectory that we believed our company could achieve. It is important to note that our industry does not have a demand problem. The demand for home and community-based care continues to be strong with both state and federal governments and managed care organizations asking for solutions that create more capacity and reduce the total cost of care. Our Q2 results highlight that we continue to align our objectives with those of our preferred payers and government partners. By focusing our clinical capacity on our preferred payers, we achieved solid year-over-year growth in all three of our business segments. We also experienced improvement in our caregiver hiring and retention trends by aligning our efforts with those payers willing to engage with us on enhanced reimbursement rates and value-based agreements. While we continue to operate in a challenging environment, our preferred payer strategy supports our ability to achieve accelerated growth rates in all three of our business segments. Since our first quarter earnings call, I am pleased with the continued progress we have made on several of our rate improvement initiatives with both government and preferred payer partners, as well as continued signs of improvement in the caregiver labor market. Specifically, as it relates to our private duty services business, our government affairs strategy for 2026 was twofold. First, we wanted to expand our strong advocacy presence with both federal and state legislatures across our national footprint and enhance our value proposition. Second, we expected to achieve mid-single-digit state rate enhancements. As of Q2, we have achieved seven state rate enhancements and believe we will add a few additional states as they complete their budget process in Q3. Most importantly, after four years of dedicated advocacy and focus on the state of California, I am proud to announce the 2027 California budget includes a significant investment in pediatric private duty nursing rates effective January 1, 2027. While we are awaiting the final details from the Medi-Cal department, we believe the investment represents a meaningful increase in California's private duty nursing rates. This achievement on behalf of the California medically fragile pediatric patients and families is monumental in nature as private duty nursing rates and, as a result, nursing wages had fallen far behind the competitive market in California. We believe the California PDN rate increase will improve our ability to attract and retain nurses as well as support efficient discharges from the children's hospitals. We plan to proactively address nurse wages this fall in anticipation of the rate increase on January 1, 2027. As I reflect on the significance of the California private nursing rate increase, I think it is important to comment on the success of our government affairs strategy. Roughly four years ago, we set out on a deliberate strategy to address the reimbursement rates and caregiver wages in all 32 private duty services states in which we operate. California represented the final state in our goal to achieve enhanced PDN rates and caregiver wages across our national footprint. While our work is never done, we believe the disconnect that existed between reimbursement rates and caregiver wages has finally been addressed in every Aveanna state, and we can now focus on cost-of-living and inflation-type enhancements with our government partners. I am proud of our government affairs teams and the advocacy work of our employees, caregivers, patients, and families who have made this a reality. Now moving on to our private duty services preferred payer initiatives. Our preferred payer goal for 2026 was to achieve eight additional agreements for a total of 38 preferred payers. We signed three additional preferred payer agreements in Q2 and now have 37 agreements in total. We expect to exceed our 2026 private duty services preferred payer goal of 38 as we navigate the second half of 2026. Aveanna's preferred payer strategy continues to gain momentum and allows us to invest in caregiver wages and recruitment efforts to accelerate hiring and staffing of nurses for our payer partners. Additionally, our Q2 preferred pay agreements accounted for 64% of our total private duty services MCO volumes, up from 60% at the end of Q1. This positive momentum in preferred payer volumes continues to highlight the shift in our caregiver capacity and recruitment efforts towards our preferred payer partners. Moving to our preferred payer progress in home health. Our goal for 2026 was to maintain our episodic mix above 75% while returning to a more normalized growth rate. I am pleased to report in Q2 our episodic mix was approximately 81% and our total episodic volume growth was 18.5% compared with the prior year period. Further, we exited 2025 with 45 preferred pay agreements in home health, and expected to add five agreements in 2026 for a total of 50. I am pleased to report in Q2 we have achieved our goal of 50 preferred payers year to date. Our dedicated focus on aligning our home health caregiver capacity with those payers willing to reimburse us on an episodic basis has led to double-digit year-over-year growth in home health admissions and episodes as well as improvement in our clinical and financial outcomes. Also, we are pleased with CMS's proposed home health rule published on July 1st as well as the final hospice rule published on August 6th. The proposed 2027 home health rate shows positive movement by CMS aligned with a strong collaboration from the National Alliance for Home Health Quality and Innovation. While there still is work to be done addressing the temporary adjustment and its impact on the annual home health rate, we have come a long way as an industry. We believe the stability of the home health and hospice rates are important as we continue to meet the increasing demand for America's aging population cared for in the comfort of their home. Finally, as we have achieved our desired preferred payer model in private duty services and home health and hospice, we are continuing with a similar strategy in our medical solutions business. As we exited 2025, we had 18 preferred payer agreements and expected that number to grow to 25 by the end of 2026. As of Q2, we have a total of 20 preferred payer agreements. Our gross margins have stabilized in our desired range as we align our clinical capacity with those payers that value our services and pay us in a timely fashion. I am pleased with our Q2 volume growth of approximately 95 thousand unique pay patients served, or positive 4.4% over the prior year period. As we think about MedSolutions revenue growth in 2026, I still expect us to remain in the high single digits for the next few quarters and then return to double-digit growth by the beginning of 2027. We are encouraged by our rate increases, preferred payer agreements, and subsequent growth in our businesses. Our company has demonstrated a stable return to organic growth as we achieve our rate goals previously discussed. Home and community-based care will continue to grow and Aveanna is a comprehensive platform with a diverse payer base providing a cost-effective, high-quality alternative to higher-cost care settings. Now turning to our recently announced acquisition of Family First Homecare, a Florida-based company with a great reputation for quality in home pediatric care. We closed the Family First Homecare acquisition in early June and are progressing nicely in the early stages of integration. Our leadership teams continue to focus on exceptional clinical care and supporting our branches as we navigate the necessary back-office integrations. I expect us to wrap up the majority of the Family First Homecare integration efforts by late Q4. I believe the Family First Homecare team has already made a positive impact on Aveanna and is a welcome addition to our family. Additionally, let me comment on our strategic plan and enhanced outlook for 2026. We will continue to focus our efforts on five primary strategic initiatives. First, strengthening our partnerships with government partners and preferred payers to create additional capacity and growth. Second, improving clinical outcomes and customer engagement scores while lowering the total cost of care. Third, implementing high-priority artificial intelligence and automation efforts to improve operational efficiency and productivity gains. Fourth, growing through acquisitions while improving net leverage and free cash flow. Finally, engaging our leaders and employees and delivering our Aveanna mission. Based on the strength of our second quarter results and the continued execution of our key strategic initiatives, we are increasing our full-year revenue and adjusted EBITDA guidance to a revenue range greater than $2.6 billion and adjusted EBITDA greater than $365 million. As I reflect on the strong start to 2026 and the improved visibility with state and federal reimbursement rates, a year after the Big Beautiful Bill Act was passed into legislation we are now poised to update our long-term core organic growth rates in private duty services and home health and hospice. Specifically, we are adjusting our long-term private duty services organic growth rate from a range of 3% to 5% to now 5% to 6%, primarily driven by the improved state government affairs and continued preferred payer execution. Also, we are updating our long-term home health and hospice organic growth rate range from 5% to 7% to now 8% to 10%, primarily driven by the improved federal government affairs and preferred payer results. We remain consistent with our current growth rates in medical solutions of 8% to 10%. With the durability of our organic growth rates and thoughtful M&A activity, we believe Aveanna is well positioned to achieve double-digit revenue growth on an annual basis. Aveanna has a strong value proposition to our federal and state government partners as well as to our MCO preferred payers. These important relationships are underpinning our enhanced view on our future organic growth rates and our core business segments. We look forward to updating you on our continued execution of our business plans as we navigate the back half of 2026. With that, let me turn the call over to Matthew to provide further details on the quarter and our improved capital structure.
Thank you, Jeffrey. Good morning. I will first discuss our second quarter financial results and liquidity before providing additional details on our refreshed outlook for 2026. Starting with the top line, we saw revenues rise 13.7% over the prior year period to $670.5 million. We achieved year-over-year revenue growth in all three of our operating divisions, led by our home health and hospice, private duty services, and medical solutions divisions which grew by 14.8%, 14.0%, and 9.4% compared to the prior year period. Consolidated gross margin was $218.5 million or 32.6%. Consolidated adjusted EBITDA was $95.4 million, an 8% increase as compared to the prior year period. This growth reflects an improved rate environment, increased volumes, as well as enhanced operational efficiencies. Now taking a deeper look into each of our segments. Starting with private duty services, revenue for the quarter was approximately $554 million. Q2 revenue per hour of $44.62 was up 1.7% compared to the prior year quarter, primarily driven by growth in preferred payer volume and updated reimbursement agreements. We remain optimistic about our ability to attract caregivers and address market demands for our services when we obtain acceptable reimbursement rates. Turning to our cost of labor and gross margin metrics, we achieved $160 million gross margin or 28.9%. The cost of revenue rate of $31.74 in Q2 was up $2.06, or 7.8%, from the prior year period. Our Q2 spread per hour was $12.88, reflecting continued normalization driven in part by ongoing caregiver wage adjustments supporting higher volumes and improving clinical outcomes. As a reminder, Q2 of 2025 included approximately $9 million of nonrecurring favorable items in our PDS division, primarily driven by the timing of rate enhancements and favorable revenue reserve adjustments. Moving on to our home health and hospice segment. Revenue for the quarter was approximately $69 million, a 14.8% increase over the prior year. Revenue was driven by 10.5 thousand total admissions with approximately 81% being episodic, and 14.7 thousand total episodes of care, up 18.5% from the prior year quarter. Medicare revenue per episode was $3.2 thousand for the quarter. Our episodic focus has accelerated our margin expansion and improved clinical outcomes. With episodic admissions well over 75%, we have achieved our goal of rightsizing our margin profile and enhancing our clinical offerings. We are pleased with our Q2 gross margin of 53.9%, representing our continued focus on cost initiatives to achieve our targeted margin profile. Our home health and hospice platform is dedicated to creating value through effective operational management and the delivery of exceptional patient care. Now to our medical solutions segment results for Q2. During the quarter, we produced revenue of $47.5 million, up 9.4% over the prior year period. Revenue was driven by approximately 95 thousand unique patients served and revenue per UPS of approximately $500, up 5% over the prior year period. Gross margin was approximately $21.4 million or 45.1% for the quarter. As Jeff mentioned, we are in the final stages of our preferred payer strategy in medical solutions. By aligning our capacity to those payers that value our resources and appropriately reimburse us for the services we provide, we expect UPS to continue to accelerate its growth in the back half of 2026. In summary, we remain focused on keeping our patients' care at the center of everything we do. It is clear that aligning caregiver capacity with preferred payers who value our partnership is the right path forward at Aveanna. With strong momentum through Q2, we are optimistic these trends will continue throughout 2026. We will continue to pass through wage improvements and other benefits to our caregivers in the ongoing effort to improve volumes. Now turning to our balance sheet and liquidity. During the quarter, we were pleased to receive credit rating upgrades from all three major rating agencies, reflecting the continued strength in our financial profile and the consistent execution of our long-term strategy. At the end of the second quarter, we had liquidity of approximately $433 million representing cash on hand of approximately $97 million, $110 million of availability under our securitization facility, and approximately $226 million of availability on our revolver, which was undrawn as of the end of the quarter. We had $24.5 million in outstanding letters of credit at the end of Q2. As a reminder, we funded the Family First Homecare acquisition and associated closing costs during Q2 using exclusively cash on hand. On the debt service front, we had approximately $1.48 billion of variable rate debt at the end of Q2. Of this amount, $1.4 billion is hedged with interest rate caps, which limits exposure to increases in SOFR. Accordingly, substantially all of our variable rate debt is hedged. Additionally, during the second quarter, we successfully repriced our term loan reducing our interest rate by 75 basis points. This refinancing will lower our annual interest expense by approximately $10 million. The repricing reflects our continued strong operational performance and the ongoing support and confidence of our lending partners. Looking at year-to-date cash flow, cash generated by operating activities was $85.3 million and free cash flow was positive $75.4 million. We are encouraged by our strong cash collections and the cost-efficiency efforts which have driven solid operating and free cash flow in 2026. We expect similar cash flow performance in the back half of the year. Before I hand the call over to the operator for Q&A, let me take a moment to address our enhanced outlook for 2026. As Jeff mentioned, we expect full-year revenue to be greater than $2.68 billion and adjusted EBITDA greater than $365 million. This improved guidance reflects continued strength in our underlying business, supported by strong organic growth and sustained demand for our services. As we reflect on our Q2 results, I would like to take a moment to express my sincere gratitude to our Aveanna teammates. These strong results would not have been possible without your hard work and dedication. Looking ahead, I am excited for the continued execution of our 2026 strategic plan and look forward to providing you with further updates at the end of Q3. With that, I will turn the call over to the operator.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We ask that analysts limit themselves to one question and a follow-up so that others have the opportunity to do so as well. One moment, please, while we poll for questions. Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.
Good morning. This is Ben Hendrix on for Brian Tanquilut. Congrats on the quarter, guys, and the full-year guidance raise and the California rate increase. I know that has been in the works for a while. I guess starting on your long-run projections that you raised for the business segments, given that you are raising the revenue rate, should we be thinking about a corresponding margin increase in those segments as well?
Thank you, Ben, and good morning. We are excited. Now that we have more clarity, roughly 15 to 16 months after the legislation settled in, we have more visibility on how our state rate setting process has played through and will play through. We also have more confidence in both our home health and our hospice rate setting and rule-making processes. As we think of the long-term revenue growth, I think Matthew and I would lead you to continue to think about wage pass-through being a key component of our story. So from a gross margin standpoint, I would think about the gross margin percentage staying pretty consistent. Clearly, gross margin dollars will increase as revenue accelerates. But I think you are seeing that even in our results today. So we are really focused on continuing to grow the business at accelerated rates as well as continue our caregiver pass-through both on a government basis and a preferred payer basis. Matthew, do you want to add to that?
No, I think you said it really well, Jeffrey. Gross margins came right in line with our expectations in Q2. Obviously, 2025 had a little bit of timing-related items for the PDS segment and people are able to normalize that out and understand what that is. But we believe Q2 really does represent the results, specifically in the PDS business and everywhere else, where we expect gross margins to remain going forward.
Thank you. And then on the California state rate increase, is there any additional color you can provide on the expected benefit as we think about 2027? I know it is a little early. And then you mentioned passing through the wages prior to the rate going into place in the back half of this year. How should we be thinking about that? Thanks.
Thanks. Probably not the last California question we are going to get this morning. Really excited because the last rate increase in California was July 1, 2018. We have been advocating with industry peers and the California Homecare Association for almost five years. The legislature and the governor allocated specific dollars to the Medi-Cal department. The Medi-Cal department is now updating its fee-for-service schedule. We expect by the end of September for the Medi-Cal department to have updated the 2027 rate schedule to include the updated investment from the legislature. So it will be a few more weeks, probably about a month, before we see the final rates for the PDN rate increase in 2027. Matthew, with that, do you want to talk about the wage pass-through?
Yes. We have done this in the past and have had a lot of success. We will be proactive, once things settle, in passing through wages to really pull those patients out of the hospital. It has been about eight years since the last rate increase in the state of California and there is a lot of pent-up demand for services. We will be thoughtful on our approach in the back half of Q3 and into Q4 about starting to pass through some of those wages proactively even before the rate goes live so that we can pull that census out of the hospital, get our staffing rates and percentages up, and really hire those caregivers to provide that care.
Our next question comes from Raj Kumar with Stephens. Please proceed with your question.
Hey, good morning. Maybe just on 2026 guidance. I know you guys intra-quarter increased it for the Family First Homecare acquisition. But maybe kind of thinking about the new enhanced guidance, is there any increased contributions there from Family First Homecare, or should we just be thinking about the raise being solely driven by the core organic business?
You nailed it, Raj. Good question. We did previously increase our guidance for the Family First Homecare impact within the quarter itself, so that is already contemplated into our previous guidance that we provided earlier. What you are really seeing now is driven by strong operational performance in the core Aveanna business. All three divisions continuing to perform at very high levels gives us the confidence to increase our revenue and EBITDA guidance for 2026.
Got it. And then as my follow-up, looking at the long-term outlook, you guys also increased the contributions from M&A. As I think about that, maybe discuss your appetite in private duty nursing and home health and hospice and where you feel comfortable with the leverage profile as you think about doing these deals?
Great question. As I said in our prepared remarks, thoughtful M&A is continuing to be where we see the opportunity to grow. As Matthew talked about free cash flow generation, first half of the year was right around $75 million. We are quickly regenerating cash flow. We were able to pay for Family First Homecare and its closing costs with cash on hand. Although temporary leverage went up, the story will continue to be deleveraging between now and the end of the year. The ability to accelerate our model now using cash flow and being thoughtful about valuations is important. Matthew will add on leverage.
Our M&A pipeline continues to be very robust, but we are going to remain focused on acquisitions that fit our culture and create long-term value for Aveanna and our shareholders. We will remain disciplined around valuation and keep leverage top of mind. You may see us increase deal activity a bit, but we will continue to deleverage the organization to reach our long-term goal of being a sub-3x leveraged company.
That is an important point. We have had a long-term target to get the company under 3x leverage. That continues to be our target. The path gets clearer every quarter. Today's announcement on our growth rates gives us even more confidence in being able to achieve that in 2027. Thanks, Raj.
Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys, and thanks for taking my questions. Nice job again here. Going back to that long-term guidance change in PDS and home health and hospice, on the corporate level, my back-of-the-envelope math here is about a 150-basis-point revenue raise to long-term guidance. So a pretty big jump from 4.6% to 6.1% assuming my math is right. But can you talk about the margin leverage you can get on the EBITDA line from this revenue raise? And does it mean EBITDA now be growing long term in, like, the 7%, 8% plus range?
Your math is very tight. The roughly 6% core organic growth is where we landed on a forward-looking basis. I want to be careful — we have guided that 13% to 14% adjusted EBITDA is where we thought we would land as a primary Medicaid-driven organization. As you think of our forward-looking growth rates, our geriatric business, although smaller today, will be our fastest growing business. As you think of M&A, think of us leaning in deeper into home health for M&A. With that said, we want to be clear our job is to hire more nurses and put more caregivers to work. To do that, we need to continue passing through wage improvements where appropriate. California is an example where the rate increase won't begin until January 1, 2027, and we will start passing wages through early to mid-October to ramp up by the end of December. All of that is in the spirit of doing the right thing for our families and growing our business. I would not say our 14% EBITDA target is changing materially, though there may be some incremental upside.
Pito, gross margin has been pretty consistent over the last few years, but our SG&A leverage has been impressive. We've improved efficiency through automation and other initiatives. Fourteen percent is a pretty good spot and maybe that sneaks up to 15% as we get better with some of those growth rates, but I would not bake in it being much higher than that.
I know more about SG&A leverage than gross margin because gross margin will largely be a pass-through. We will continue to focus on both growth and the right level of pass-through.
I guess, as a follow-up, looking at the spreads in PDS in Q2, how should we think about that in the back half of the year? The hourly growth was incredibly impressive in the second quarter. As spreads maybe compress in the back half of the year, what should we be thinking about the PDS hourly growth rate for the back half?
I'll pull you back to gross margin. The 28.9% gross margin on the PDS segment came in right where we expected. We have guided to around that 26% to 28% range and said it would be north of that here in 2026. We expect the remainder of the year to be right in line with that 28% to 29% gross margin. That is our model. As we continue to win state rate increases and assign additional preferred payers, we will continue to pass those dollars down while keeping that 28% to 29% gross margin top of mind.
Our next question comes from Benjamin Rossi with JPMorgan. Please proceed with your question.
Hey. Good morning, all. Appreciate you taking my questions. Following up on PDS preferred payer mix, you highlighted a 400-basis-point sequential step up during Q2 to 64% of mix covered by these preferred payers. Do you expect that figure to remain largely flat through the remainder of the year? And then step up on January 1 when the new California rates take effect? How are you thinking about forward cadence as we head into 2027 with that notable state set to come through?
Let me separate those. The 64% is MCO volumes and the majority of California business is still Medi-Cal reimbursed, so we do not count that in the PDS MCO volume. We ended last year in the mid-to-high fifties and thought we'd hit the mid-sixties this year. From where we sit today, we would probably tell you we will be a little bit north — probably still shy of 70% in 2026. So likely another couple percentage points on the current 64% but not a whole lot more this year. Regarding California, the majority of our California business is Medi-Cal reimbursed and will behave more like preferred payer rates once this rate is applied through. We do have a small portion of our business in California that is preferred payer in nature. Long story short, I think we will end the year slightly above our prior preferred payer PDS volume expectations and are excited about the momentum heading into 2027.
Appreciate the clarification. Just a follow-up on capacity within PDS. Demand seems to remain elevated there. Where are you seeing the greatest opportunity to add capacity? Is it through new preferred payer wins in existing states, or expanding in new white-space geographies? Do you think the California rate unlock opens up some new market opportunities there?
California has obviously lagged over the last few years and this change will allow us to grow actively and hire caregivers. There are geographic opportunities to fill in, specifically in the middle of America — Ohio, Kentucky, West Virginia — which are attractive markets to grow inorganically. There is also still organic opportunity in states where we currently operate. So there is a lot of opportunity, and we will work with state legislators and preferred payers to continue to fill that demand.
To add, now that we can put California to bed on the catch-up rate issue, we can focus on cost-of-living adjustments going forward rather than long catch-up processes. That is the world we want to live in moving forward versus the multi-year catch-up we have been in. It is nice to turn that page.
Our next question comes from A.J. Rice with UBS. Please proceed with your question.
Hi, everybody. Just to lean into California a little more, can you talk about the percent of your business that is in California today? And when you think about the opportunity the rate update will present, do you need to put any additional infrastructure in place to address a state of that size fully now that it could become a growth area rather than a maintenance situation?
Great question. We've had people ask why we stayed in California when rates lagged. The lesson is to stay focused on the long term and advocacy for patients. As the company has accelerated, California was lethargic and fill rates dropped roughly a third. The first thing we will do is get the caregivers who are working to work more hours by paying them more. That is the first lever. The next steps unlock unnecessary hospital days, and the third group is families providing care themselves that we can help. The first short-term impact is getting current caregivers more engaged and filling more hours even before the rate is applied. The infrastructure to support growth exists; we have national onboarding, virtual orientation, and other scale capabilities that help onboard nurses quickly. Family First Homecare has benefited from our virtual onboarding — that allows nurses to start faster. So while wages are the main driver, our scale and infrastructure materially help.
To add, the infrastructure is already in place. We have a robust team and a targeted operating model in every market. The structure and infrastructure are set up to propel growth.
Maybe as a follow-up, you along with some others are feeling better about adult home care and the rate updates. Can you talk about the general backdrop for that segment and how you might lean into growth there — new states, or anything to encourage acceleration?
As we think about our M&A activity going forward, the majority will be in the adult/home health space because we have largely filled in private duty services states. We still have about five or six states to tuck in for PDS, but much of our inorganic activity will be on the home health side. We have a best-in-class home health and hospice team and with the cash generation we are seeing we can grow that business both organically and inorganically.
Our next question comes from Sean Dodge with BMO Capital Markets. Please proceed with your question.
Thanks. Good morning. Maybe just going back to the PDS preferred payer mix. Jeffrey, you said 64% now. Longer term, how much higher do you think you can drive that mix? And how should we think about how that impacts your spreads over time over the next couple of years? How additive can that be aside from timing dynamics around rate updates and subsequent pass-throughs?
Great question. Long term, our ultimate goal would be to reach the mid-80s, maybe the high 80s of PDS MCO volumes, which is probably three to five years out. Over the last three years we've been adding around 4% to 7% per year and we expect that to continue. The majority of our day-to-day admissions and nurse hires are now in a preferred payer environment, so the main trend is favorable. We are likely to end the year in the upper mid-60s and see steady growth of about 4% to 6% per year in that mix. As for spreads, our focus is not on increasing gross margin percentage but investing dollars to hire more caregivers and get better clinical outcomes — that's what our preferred payers want and what reduces total cost of care.
We will continue to keep gross margin consistent while using the leverage to hire caregivers and improve outcomes, which ultimately drives value to payers.
In home health, your episodic mix was 81%, well above your 75% goal. Is there any reason it would begin to normalize back down? Or is somewhere in the neighborhood of 80% or better sustainable going forward?
We have been around 80% for a few quarters and we'd be comfortable with the mix moving down to 77% to 79% if growth accelerates north of 20% year over year. We would likely update our target above 75% for 2027 because it has settled in around the 80% range. Also, it has become easier for Medicare Advantage MCOs to engage in episodic agreements as the industry has demonstrated it is a good payment model for clinical and financial outcomes. That will help us stay in the high 70s to low 80s long term.
Our next question comes from Jared Haase with William Blair. Please proceed with your question.
Hey, guys. Good morning. Thanks for taking the questions and congrats on the success. Aside from wages, is there anything incremental strategically or operationally that is resonating in how you find caregivers, onboard and train them, or get them matched to the cases they want to work?
Yes. Our infrastructure, size, and scale have allowed us to create advantages. Training, onboarding, quickness to onboarding, daily pay offerings, and technology for documentation all add up to a better caregiver experience. While wages are the dominant driver, our technological stack and onboarding processes make it more beneficial for caregivers to work for us.
We have a national onboarding team led by clinical leaders. Family First benefited from our virtual orientation and onboarding, which operate 24/7 and speed nurses to families quickly. While wages are the most important factor for most nurses, our efficiencies and scale materially help.
Thanks. As a follow-up, thinking about the home health industry getting more appealing with rate clarity, can you talk about potential synergies between offering both PDS and home health? Aside from corporate efficiencies, are there other synergies around clinical or operational overlap that are meaningful?
The primary synergies are corporate and back-office efficiencies — billing, collections, and leveraging brand recognition across payers. The clinical operating systems and EMRs differ between the businesses, and leaders run separate operations, so most synergies are back-office and corporate rather than direct nursing or caregiver efficiencies. We do get benefits from national scale and integrated leadership but the biggest gains are operational and administrative.
Our next question comes from Andrew Mok with Barclays. Please proceed with your question.
Hi. Good morning. Can you speak to how your government affairs team has been able to secure better rates under a difficult state funding environment? If we take a step back, state budgets still look constrained. Is the internal view that PDN is benefiting from a reallocation of funding within Medicaid and is that helped by ongoing efforts to curb spending in the adult Medicaid population?
Great question. We take a long-term approach to states — California is a good example. Geographic diversity matters and being spread across more than 30 states helps offset temporary pressure in any single state. Staying at the table and continually demonstrating the cost savings of PDN has resonated with payers and state legislators. While broader Medicaid funding pressures are real, PDN is relatively insulated and often viewed as a cost-saving alternative to higher-cost settings. That has opened doors in some states for reallocations toward PDN. We do not like cuts to Medicaid broadly, but PDN's value proposition has proven strong and is being recognized by payers and legislators.
Our next question comes from Andrew Cooper with Raymond James. Please proceed with your question.
Hi, everybody. Can you give us a little bit more quantitative starting point for California and PDS to think about as we head into 2027? And for other states where you've seen bigger step-function rate increases, how much have you been able to add to the labor pool and drive volume in response based on historical experience?
We do not provide specifics about any state or payer, but California's impact on Aveanna became less significant over the last few years because of PDN growth in our other states while California rates lagged. We are excited about the rate increase and its impact on the medically fragile patient population and our ability to recruit and retain caregivers going forward.
Georgia is a good historical example. After a long lag in rate increases there, we implemented a wage pass-through a few months before the rate change. Fill rates dramatically improved, and after the rate change hospitals saw faster discharges. That unlocked unnecessary hospital days. California is larger, but we expect a similar effect in early 2027 as unnecessary hospitalizations are pulled back to the home setting.
That is helpful. One more: even if you will not give 2027 guidance today, should we think 2027 may benefit from accelerated growth due to preferred payer progress and California taking effect? In other words, might 2027 have stronger growth than a typical year?
Yes. That is part of why we were comfortable increasing our growth rates for PDS from 3-5% to 5-6% and home health from 5-7% to 8-10%. The combination of OBBA clarity, ongoing preferred payer work, and state rate improvements supports higher growth rates. California may be a stronger contributor next year, but other states will be strong in subsequent years — the geographic diversity helps us sustain higher long-term growth.
I would also emphasize that the 5-6% PDS guidance is still more volume-driven than rate-driven — rate helps drive volume, but volume remains the biggest driver of organic growth.
Our next question comes from Grayson Joshua McAlister with Truist Securities. Please proceed with your question.
Hi. I will wrap up with one quick question. Could you talk a little more about the Family First Homecare integration thus far? How has the integration gone versus your expectations? Any bigger, more challenging aspects you expect in the second half as you look to get it wrapped up?
In our remarks we said we are incredibly pleased. The Thrive integration a year earlier gave us a great roadmap for PDS acquisitions. Family First Homecare is a little bigger but integration is going as well or better than expected. We are in the first third of the integration; the next few months will intensify as we work through back-office and EMR transitions, which are the biggest movements. The teams are doing great. Family First strengthened our business in key markets including Florida and bolstered service areas in Iowa and South Dakota. These rural markets benefit from better service distribution. Our integration management office does a phenomenal job leading integrations, so we are pleased and expect to wrap up the majority of the integration by the end of 2026.
Great. Thanks.
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Jeffrey Shaner for closing comments.
Thank you so much. We look forward to updating you on our continued progress at the end of Q3. Have a great day and thanks for your continued interest in Aveanna Healthcare.
This concludes today's teleconference. You may disconnect your lines at any time. Thank you for your participation.