InnovAge's Pivot: From Turnaround to Growth, but Rates Bite

InnovAge delivered another strong quarter, raising FY26 guidance for the third time. Revenue grew 15% yoy to $252M, center-level contribution margin hit 24.2% (up 550 bps), and adjusted EBITDA nearly tripled to $30.5M. “We delivered a solid third quarter and continue to see steady momentum across the business.” — Patrick Blair, Chief Executive Officer · 2026-05-05 This is a company that has moved past its compliance and operational troubles, now generating consistent cash flow and beating expectations.

The key new development is the rate environment outlook for fiscal 2027. Management now explicitly guides Medicare rate increases to only 1.5-2%, a more modest step than what MA plans will likely see, while early Medicaid signals from state partners point to budget pressure. “The net result is that we expect Medicare rates to increase approximately 1.5% to 2% in fiscal year 2027” — Patrick Blair, Chief Executive Officer · 2026-05-05 Patrick frames this as normal cycle variability, but it's a shift from prior guidance where V28 was the main headwind. In the February call, management expressed confidence that V28 was captured in guidance. “we think we've captured appropriately in the guidance” — Ben Adams, Chief Financial Officer · 2026-02-03 Now they see a broader repricing across both Medicare and Medicaid, a more complex challenge.

To offset, InnovAge is investing in AI supported efficiencies and new growth vectors. They are piloting AI tools to synthesize clinical data and optimize scheduling, and have brought Dr. Paul Taheri to lead clinical AI. They are also shifting from pure operational stability to proactive expansion. “We're beginning to evaluate a broader set of potential growth alternatives that could allow us to expand our model to more seniors over time.” — Patrick Blair, Chief Executive Officer · 2026-05-05 This includes M&A, joint ventures, and participation in new programs – a clear strategic pivot.

The financials show real operating leverage, but litigation costs remain a drag. “Corporate general and administrative expenses of $76.5 million increased 98.3% compared to the third quarter of fiscal year 2025, primarily driven by an increase in litigation liability.” — Benjamin Adams, Chief Financial Officer · 2026-05-05 This drove a net loss despite strong underlying care margins. Still, the core business is improving: gross margin expanded to 24.2% as a sign of operating discipline.

The stock has rallied 34% over the past 90 days, yet remains 58% below its 2021 peak. The market is rewarding the execution and the growth narrative, but the rate headwind could cap upside. Management is confident it can navigate the cycle, citing cost discipline and AI-enabled productivity.

We believe we're seeing normal cycle variability, not a change in the underlying economics of the model.