Chemed Corp (CHE)

Chemed is an outlier in American business: two operating divisions that appear to have nothing to do with each other, yet each earns the company substantial profits. VITAS Healthcare is the largest hospice provider in the United States — physicians and nurses who care for patients in the last months of life in their own homes or in residential facilities. Roto-Rooter is a nationwide network of local plumbing and drain-cleaning franchises where a technician arrives to fix your clogged pipes. One is among the most serious, emotionally intensive services a person ever buys; the other is utterly routine. Together, they generate roughly even splits of revenue and earnings, and the plumbing business has historically funded the expansion of hospice care into new markets.

VITAS and the growth of hospice in America

Hospice is a philosophy and a service: care focused on comfort and dignity rather than cure, for people with a prognosis of six months or less to live. In the United States, hospice is covered by Medicare for qualifying patients, and increasingly by private insurance and Medicaid — which means VITAS gets paid by government and insurance plans, not by individual patients or families. That payment model removes the worst financial friction from end-of-life care, though it also exposes the business to regulatory change and pricing pressure from Medicare.

VITAS provides nurses, aides, counselors, and volunteers who visit patients at home or in partnered facilities. The company manages medication, pain control, and symptom relief; it arranges spiritual and grief counseling; it coordinates with family members and treating physicians. In the United States, Medicare covers about three-quarters of hospice patients, and VITAS is large enough that its pricing power with Medicare matters — a 1% or 2% cut in government reimbursement ripples across the entire company.

The hospice market has grown steadily as the U.S. population ages and as end-of-life care has shifted away from intensive hospital treatment toward palliative, home-based care. That structural trend is durable: as long as people age and die, hospice demand will grow. VITAS has used that demand to build the dominant national provider by acquiring smaller hospice operators and by building new programs in markets with high elderly populations. The business is recurring (patients enroll and stay through the remainder of their lives) but also churn-heavy (no patient stays longer than a few months before either recovering or dying).

Roto-Rooter: the cash machine that owns the hospital business

Roto-Rooter is among the oldest and most recognizable plumbing brands in the United States. The company operates through franchised local plumbers and through company-owned locations in major markets. A customer calls with a clogged drain or a pipe problem, a technician arrives, fixes it, and invoices the customer or their building owner. Roto-Rooter also contracts with apartment buildings, office parks, and facility-management companies for routine drain cleaning and maintenance, which generates steadier cash than emergency calls.

The business model is nearly perfect for producing consistent cash. The barriers to entry are high (brand reputation, local market position, a network of trained technicians), the customer base is vast and recurring (everyone has pipes that occasionally need attention), and the pricing is inelastic (people will not negotiate much on a burst pipe). Gross margins are strong because a Roto-Rooter technician can do five to seven calls a day once the network is full, and the company takes a percentage of each franchise location’s revenue.

Chemed acquired Roto-Rooter in 1983, a move that seemed odd at the time — why should a funeral services company (Chemed’s original business) own plumbing franchises? The answer became clear: Roto-Rooter generates high, stable margins and strong free cash flow that has never required reinvestment at the scale hospice does. Chemed ploughed that cash into VITAS, funding the acquisition of independent hospice operators across the country. Over time, hospice grew to rival plumbing in size and profit, but Roto-Rooter remains the stability and cash-generation engine while VITAS is the growth story.

Regulatory risk and reimbursement pressure

VITAS’s dependence on Medicare reimbursement is the central risk to the Chemed investment story. Medicare pays VITAS a per-patient-per-day rate set by regulators, adjusted for the patient’s acuity and other factors. When Congress or the Centers for Medicare and Medicaid Services (CMS) reduce that rate or tighten the rules for qualifying as a hospice patient, VITAS’s revenue and margins fall. The 2020s have seen persistent pressure on hospice reimbursement, with CMS concerned about overuse of hospice services and rising costs.

The other VITAS risk is competitive. Hospice is fragmented — thousands of providers across the country — but consolidation has been ongoing, and larger rivals (including national health systems) have been building hospice programs. VITAS’s scale is an advantage (it can invest in technology and training that smaller operators cannot), but scale also makes the company a regulatory and political target. If lawmakers decide hospice reimbursement is too high, VITAS feels the impact first and hardest.

Roto-Rooter is not immune to recession — in downturns, some discretionary drain cleaning gets deferred — but it is far less sensitive to regulatory or reimbursement risk. The company earns high returns on capital because its business is so capital-light; the main investment is in franchise support and marketing.

How to research Chemed

The annual 10-K (SEC CIK 0000019584) reports VITAS and Roto-Rooter results separately, which is essential because they are genuinely different businesses with different risks. For VITAS, focus on the number of patients served, the average length of stay, the mix of Medicare versus private insurance, and management’s commentary on reimbursement trends. For Roto-Rooter, look at same-unit revenue growth and the franchise system’s health.

Key metrics to track: VITAS patient volume and acuity mix, hospice reimbursement rates per patient per day, Roto-Rooter same-unit service revenue growth, and the ratio of debt to operating cash flow. Because VITAS is so dependent on Medicare policy, reading CMS notices and congressional healthcare debates is as important as reading the earnings call. Any hospice provider trading at a significant discount to the broader market is usually reflecting reimbursement concerns — whether those concerns are overblown or justified requires digging into the details of the current regulatory environment.