Aveanna Healthcare (AVAH) recently concluded a four-year battle for increased pediatric private duty nursing rates, announcing a significant win with California's 2027 budget. This pivotal development, effective January 1, 2027, marks a successful culmination of advocacy efforts that now span all 32 states where Aveanna offers private duty services. The news coincided with the company's strong second-quarter earnings report, where revenue surged by 13.7% year-over-year, reaching approximately $670 million, with growth observed across all three of its divisions. This breakthrough signals a turning point for the company, addressing a critical challenge that has impacted its operations for several years.
For several years, Aveanna's primary business approach has been to align its caregiver workforce with payers willing to compensate adequately for its services. Recent financial results indicate that this strategy is yielding positive outcomes. The home health and hospice sectors experienced a 14.8% increase in revenue year-over-year, while private duty services saw a 14.0% expansion, and medical solutions grew by 9.4%. Consequently, adjusted EBITDA rose by 8% to $95.4 million. On the governmental front, Aveanna successfully secured rate enhancements in seven states by the second quarter, with anticipation of further approvals as state budget processes finalize in the third quarter; California's approval represents the most substantial achievement. Regarding payers, the private duty services division now boasts 37 preferred payer agreements, adding three in the last quarter, which now encompass 64% of the division's managed care volume, an increase from 60% in the first quarter. The home health division has already achieved its annual target of 50 preferred payers, with episodic admissions comprising 81% of the total mix and an 18.5% growth in episodic volume.
Furthermore, management highlighted the supportive nature of CMS's proposed home health rule, issued on July 1, and its finalized hospice rule, published on August 6, both of which are expected to contribute to stable industry rates. The acquisition of Family First Homecare, completed in early June, is on track for full integration by the end of the fourth quarter. These positive developments have led to an upward revision of guidance, with projected revenue exceeding $2.68 billion and adjusted EBITDA surpassing $365 million for the year.
Despite these positive trends, not all financial indicators moved in Aveanna's favor. The revenue generated per hour for private duty services increased by only 1.7% to $44.62, while the corresponding cost of revenue per hour escalated by 7.8% to $31.74. This resulted in a reduced spread per hour of $12.88, reflecting the ongoing impact of rising caregiver wages on the business. Management also pointed out that the previous year's second quarter included approximately $9 million in non-recurring favorable items, making the current growth rate appear less significant in comparison. Much of the company's future success remains dependent on governmental decisions, such as the finalization of Medi-Cal details for the California rate increase and the outcomes of ongoing state budget cycles. The Family First Homecare acquisition, funded entirely from existing cash reserves, is still in its integration phase, meaning its full financial benefits are yet to be realized.
The company's financial position includes $1.48 billion in variable rate debt, with $1.4 billion hedged against interest rate increases, along with $24.5 million in outstanding letters of credit. Moreover, the medical solutions division, the smallest of the three, has secured only 20 of its targeted 25 preferred payer agreements for the year, lagging behind the progress seen in other business segments. As of August 21, the stock is trading at a forward P/E of 17.30, a valuation that already factors in the expected benefits from rate relief and increased preferred payer agreements.
The second-quarter report from Aveanna Healthcare depicts a company that, after years of addressing foundational issues, is now beginning to see the benefits of its strategic adjustments. The securing of the California rate increase and the expansion of preferred payer agreements are poised to provide a more extended period of growth, particularly once the specifics of Medi-Cal are finalized. However, the private duty services segment continues to face challenges from escalating labor costs, which are outpacing reimbursement rates. It is also important to note that a portion of this quarter's growth can be attributed to a comparison with a prior year that included one-time positive financial events, suggesting a nuanced perspective on the company's trajectory is warranted.
