Encompass Health Corporation (NYSE: EHC) publicly appears to be moving forward with its plan to separate its $1.1 billion home health and hospice segment into a standalone business.
Speaking at the Barclays Global Healthcare Conference, CFO Doug Coltharp offered a new level of transparency and rationale behind that spinoff plan on Wednesday.
The update came just over a week after a report surfaced claiming the Birmingham, Alabama-based company was receiving newfound acquisition interest from a group of suitors, including private equity firm Advent International and in-home care provider Aveanna Healthcare Holdings (Nasdaq: AVAH).
Overall, Encompass Health’s home health and hospice segment makes up about 20% of its total business. The in-patient rehabilitation facility (IRF) operator – the largest in the country, by far – is already in the process of rebranding the segment to “Enhabit Home Health & Hospice.”
“This process started in February of this year with the Dallas corporate office that serves as the administrative hub for this business segment,” Coltharp said. “We’re going to begin rebranding field assets in the middle of April, and our anticipation is that the vast majority of that will be completed by the end of the second quarter.”
The Encompass Health network consists of 145 freestanding IRFs, in addition to 251 home health locations and 96 hospice agencies. Its geographic footprint spreads across 42 states and Puerto Rico.
Originally, Encompass Health got into home health and hospice to improve clinical collaboration between settings. Roughly 60% of the patients discharged from its $4 billion IRF business need follow-on home health services, Coltharp explained.
“In markets where we have both of our service lines, [we] try to use that for care coordination,” he said. “And to enhance the patient transition from one site of care to another, which historically has not been done well by any providers.”
Formerly known as HealthSouth Corporation, the company struck a deal for Encompass Home Health & Hospice in 2014, rebranding to the “Encompass Health” name four years later.
When Encompass Health first got into the home health field through that transaction, it had just 17 markets where its IRF business overlapped with a home health agency. Today, it has 96 overlapping markets, with an Encompass Health IRF patient being discharged to one of its home health or hospice branches between 30% to 35% of the time, depending on the measurement period.
In part, it’s this clinical collaboration success that’s pushing Encompass Health to separate Enhabit, Coltharp noted. The company can use the lessons learned in-house to confidently work with providers outside of its direct network.
“Those protocols are so well defined that we have been in the process, for about the last two years, of looking to expand many of the same procedures, many of the same operating approaches to third-party home health providers in non-overlap markets,” the CFO said. “We’ve been able to see some of the same success with regard to the coordinated patient care journey, even when we don’t own the business.”
In other words, Encompass Health feels like it no longer needs its own home health and hospice segment to minimize care gaps.
“You’ve got to have overlap locations,” Coltharp said. “So we start really on third base, in that out of our 145 IRFs, 96 of them already have one of our home health businesses.”
Encompass Health invested $102 million in home health and hospice acquisitions in 2021. It also opened three de novo locations, with plans to open 10 more in 2022.
Other strategic considerations
Timing wise, Encompass Health anticipates to execute Enhabit’s spinoff toward the end of the second quarter, when the rebranding push is completed.
On a full-year run-rate basis, the spinoff will add about $26 million to $28 million in administrative expenses to the home health and hospice business. The rebrand alone will require $10 million to $13 million in one-time operating expenses.
“Not surprisingly, when you separate these businesses into two public companies, there are going to be some administrative cost additions that take place,” Coltharp said.
Clinical collaboration and an ability to build overlap markets factored into the spinoff decision, but it wasn’t the only consideration. As suspected, as the company was exploring strategic alternatives, it was not blown away by the interest shown.
“As we began the strategic alternatives review for this business, that segment, in December of 2020, … we did not believe that we were getting adequate appreciation for the home health business that we held within the confines of Encompass Health,” Coltharp said.
Post-acute care payment policy likewise played a role in the spinoff decision.
“I think it was a belief that was shared by many others at the time, that we were moving rapidly and inextricably toward episodic payment models across all payers,” Coltharp said. “We sit here, now seven years later, and very little progress has been made in that regard.”
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