Net service revenue, net income and home health admissions all decreased year over year for Enhabit Inc. (NYSE: EHAB) in the fourth quarter.
And it’s not just the headwinds that are driving down key performance indicators, but also the strategies that the company is employing to combat those headwinds. In other words, to thrive later, Enhabit is swallowing a tough pill now.
There are multiple hurdles to overcome for the company, which has been publicly listed for less than eight months.
The most pressing, however, seem to be staffing challenges and Medicare Advantage (MA).
“All in all, we estimate we have approximately $40 million of adjusted EBITDA headwinds to overcome in 2023,” Enhabit CFO Crissy Carlisle said Wednesday on the company’s fourth-quarter earnings call.
The Dallas-based Enhabit has 252 home health locations and 105 hospice locations across 24 states. It spun off from Encompass Health Corporation (NYSE: EHC) in July 2022.
The $40 million in headwinds includes: a $14 million impact from the continued shift to non-episodic patients; $9 million to $10 million of costs associated with becoming a standalone company; $8 million from wages increasing at a higher rate than the CY 2023 home health final payment rule accounted for; and $8 million from the resumption of sequestration.
For additional context on the wages front, Carlisle said that staffing costs account for 90% of Enhabit’s cost per home health visit.
“The impact of this increase will be felt more in our home health segment, due to the Medicare net market basket update of 0.7% in the final rule for 2023,” Carlisle said.
Contract labor, which was a major pain point for home health providers in early 2022, remained a struggle for Enhabit in the back half of the year. The company had 26 contract RNs in 20 branches during a fourth-quarter peak. That was mostly due to new hires being in orientation during that time period.
By the end of January, that number had dwindled to just 12 contract RNs at seven branches, Enhabit CEO Barb Jacobsmeyer said during the call. She also said that there are positive labor signs, as the company saw a 19% year-over-year increase in its full-time nursing applicant pool in the quarter.
On the MA front, Enhabit is certainly making progress. But MA progress and positive bottom-line results are not mutually exclusive.
“It’s a balance between growing visits and getting improved rates,” Carlisle said.
MA enrollees have increased by 11% in Enhabit’s markets, while Medicare fee-for-service enrollees have decreased by 4%, Jacobsmeyer said.
Due to all of those cost pressures, it is unlikely that Enhabit will be a frequent home health acquirer in 2023.
“I don’t want to say that acquisitions are off the table,” Carlisle said. “I just want to say that we’re going to be very disciplined.”
Enhabit’s net service revenue was $275.1 million in the fourth quarter, a 0.4% year-over-year decrease. Home health revenue decreased 1.6% year over year. For the full year, net service revenue was $1.08 billion, an over 2% year-over-year decrease.
Home health episodic admissions were at 34,572 in the fourth quarter, an 8.8% year-over-year decline. Meanwhile, home health non-episodic admissions were at 15,476 for the quarter, a nearly 20% year-over-year increase. Overall, admissions were down 1.5% year over year.
Mitigation strategies
Enhabit leaders are not shrugging their shoulders at these problems and moving forward. They outlined what they were doing to combat each pain point.
“Significant changes were required in 2022 to lead important strategies for our future success,” Jacobsmeyer said.
Those changes included the additions of a chief human resources officer and a “payer innovation team.” Each is tasked with tackling those two big issues: staffing and MA, respectively.
Tanya Marion was named to the chief human resources officer role in January 2022.
“Our chief human resources officer has worked with our data and analytics team to develop a robust human capital dataset,” Jacobsmeyer said. “This is allowing us to drill down much further than we could historically on understanding what’s happening with our workforce and what we need to do to recruit and retain our staff so that we can meet the demands for our care.”
In turn, that focus drove 101 net new full-time nurse hires for Enhabit in the fourth quarter – 60 in home health and 41 in hospice.
Part of the staffing issue within Enhabit is an industry-wide trend of more employees preferring part-time work as PRNs. In December, 35% of Enhabit’s staff was comprised of PRNs. That number is now at 39%.
“This means we need more people, or full-time equivalents, to meet demand,” Jacobsmeyer said.
All the while, the payer innovation team is working hard at Enhabit to get more – and better – contracts with MA plans.
“The continued progress of our payer innovation team in negotiating more – and improved – Medicare Advantage contracts is a key to our performance in 2023,” Carlisle said.
Gaining more admissions via MA is important because of the growing number of MA beneficiaries in the U.S. At the same time, MA generally pays less for home health services compared to Medicare fee for service.
Therefore, Enhabit’s payer innovation team is tasked with finding a way to make the economics work with a greater share of MA admissions coming in.
“It really is about that balance between growing the rates and growing the number of contracts,” Carlisle further emphasized. “It’s hard to pinpoint that most sensitive factor … it’s not X and Y exactly. It’s going to be a balance.”
The overarching struggle is proving to MA plans the value proposition of Enhabit’s services, and then hopefully being rewarded for that.
“Each successful agreement creates an opportunity for us to be a stronger resource to our referral sources,” Jacobsmeyer said. “It creates access for patients to Enhabit’s home health care, and, in turn, the outcome data we need to continue to reinforce our value proposition with the payers.”
Companies featured in this article:
