Two days after Encompass Health (NYSE: EHC) filed a lawsuit against its former home health and hospice segment CEO for allegedly violating her non-compete agreement, the company gave a little more insight into what was next for the business.
“We’re taking a step further today in saying that we now believe that separating [the home health and hospice segment] into a separate independent public company makes the most sense,” Encompass Health CFO Doug Coltharp said on a Q3 earnings call Thursday.
It has been nearly a year since Encompass Health first suggested that a spinoff was being explored. Now, a clearer time frame has been set, with more details sure to come in Q4.
Currently, the actual spinoff is expected in the first half of 2022, according to the company.
“Our objective is to position both of our businesses to optimize long-term value creation,” Coltharp said. “And our board has instructed us from the beginning to thoroughly evaluate all reasonable means to achieve this. To be done right, this is a process that requires time and extensive resources. And we have devoted both.”
Birmingham, Alabama-based Encompass Health’s network includes 145 hospitals, 249 home health locations and 95 hospice locations in 42 states and Puerto Rico.
The company reported total net operating revenues of about $1.28 billion in Q3, an over 9% increase compared to the $1.17 billion the company brought in during the same period last year.
Meanwhile, its home health and hospice segment posted net operating revenues of about $273.9 million for the quarter, a slight decrease compared to the $274.5 million it brought in during Q3 2020.
COVID-19 specifically exacerbated staffing woes for the company, Barb Jacobsmeyer, the CEO of Encompass Health’s home health and hospice segment, said on the call. Ten of its most prioritized locations, for instance, were not able to take on a normal case count because of staffing issues.
That COVID-19 surge led to a 0.9% decrease in home health admissions and a cost-per-visit increase of 9.3%
“The main challenge has been staffing constraints,” Jacobsmeyer said. “That’s really been about the areas where we’ve seen the quarantines. The referrals, frankly, have been there. So it really has come to the quarantines and getting folks out of orientation to start to build up their caseload. Where we’re seeing growth is really in the branches moving away from being constrained because of staffing limitations to now being able to take more of these referrals. That’s really been where we’ve seen some progress.”
At a high point, 85 of Encompass Health’s home health locations had staffing constraints. As the quarter closed, however, the number was down to 62; it’s now at just 50.
“Demand for home care has remained strong,” Encompass Health CEO Mark Tarr said on the call. “In Q3, we estimate that we lost approximately 2,500 admissions due to staffing constraints. The constraints are resulting from the combination of quarantined employees due to COVID exposures, and industry-wide staffing shortages.”
Whereas demand may have been down during last year’s COVID-19 surges – causing some decline in revenue – that is not the case in 2021, the company’s executives emphasized repeatedly.
Instead, it’s been about being able to handle all of the demand that is there.
“As we think about volume going forward, our view is that there’s no limitation on volume growth imposed by demand,” Coltharp said. “We have some additional work that we need to do on the sales side to be able to capitalize on all of it, but we’ve made very substantial progress there. The area of focus is the clinical staffing limitations. And based on some of the programs that Barb [has put together], we feel like we’re going to make good progress on that in Q4.”
Jacobsmeyer said that extra bonuses for staff have been applied both for current workers and new workers with sign-on bonuses.
The company’s success in recruitment may be a lagging indicator, however, because the company is making sure that it doesn’t ramp up new employees’ caseloads too quickly, which could make them subject to burnout.
Because a dip in home health affects the hospice side of the business, Encompass Health is also working on diversifying its hospice sources outside of the organization.
“We’re working to diversify our referral sources, because our [hospice] does have a little bit less reliance on our own home health patients,” Jacobsmeyer said. “Today, our home health patients represent about 23% of the hospice referrals. So obviously, when our home health volume is down, that impacts the potential of the referrals for hospice. We’re working to fill the staffing holes, but also working to diversify those referral sources.”
An organizational reshuffling
Another staffing issue that Encompass Health and Jacobsmeyer – who began her role as CEO in June – have had to deal with is solidifying upper management.
While five of the eight executives in home health and hospice have been with the segment for a long time, there’s a few other roles, including a chief human resource officer, that have not yet been filled.
“We feel really good about the executive management team,” Jacobsmeyer said. “But shortly after I took the role, I focused on the structure of what I would say is our senior management, that’s the group that looks over the operations in the field and our sales leadership. We made some promotions with some increased responsibilities. And all of these leaders signed a non-compete and non-solicit agreement. So I’m feeling very confident about the team we now have in place.”
Tarr specifically mentioned that he was pleased with how the senior leadership team was now coming together in the segment.
“While we’re certainly impressed with what Barb has done there in a short time frame, we’re not surprised,” Tarr said. “Barb has been with this organization for 14 years, and we’ve seen the response to her leadership style from staff. People like to work for Barb, and she has a knack for recruiting and retaining very talented people for her management team. And those skill sets are transferable from the hospitals segment to the home health segment.”
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