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In December 2020, Encompass Health Corporation (NYSE: EHC) announced it was pursuing strategic alternatives for its home health and hospice arm.
Not even three years later, the product of that strategic review – Enhabit Inc. (NYSE: EHAB) – is exploring a strategic review of its own.
Encompass leaders saw an opportunity to refine their focus areas and maximize shareholder value by spinning off a home health and hospice business that did over $1 billion in revenue in 2019.
A health system with over 150 hospitals in 36 states and Puerto Rico, Encompass was previously dubbed HealthSouth Corporation (NYSE: HLS). That was until it bought Encompass Home Health and Hospice from the home health titan April Anthony in 2014, eventually adopting the name across the enterprise.
Anthony led the home health and hospice segment at the health system for years, but ultimately stepped down in April 2021, a few months after the “strategic alternatives” process was launched.
Tabbed to lead the business into its next stage, and beyond, was Encompass veteran Barbara Jacobsmeyer. She had previously led the health system’s in-patient rehab facility (IRF) business.
A first timer to home health care, Jacobsmeyer set out to immediately address key concerns such as staff retention and the nationwide expansion of the Home Health Value-Based Purchasing (HHVBP) Model.
Enhabit began trading on the New York Stock Exchange in June 2022 at $24 per share.
While Jacobsmeyer may have been prepared for staffing woes and HHVBP, it would have been impossible to ready herself for all the headwinds that were set to come her and Enhabit’s way.
Those included: lingering consequences related to the Patient-Driven Groupings Model; Medicare fee-for-service rate cuts; Medicare Advantage (MA) beneficiary growth outpacing projections, while 80% of Enhabit’s revenue was tied to Medicare fee-for-service business; and an even more unpredictable staffing environment.
It’s possible that Enhabit will not be listed on the stock exchange by this time next year. How Enhabit arrived at this point in the road – and how its journey reflects broader home health market challenges – is the topic of this week’s exclusive, members-only HHCN+ Update.
A tall task
Part of Encompass Health’s rationale in spinning off Enhabit was that it had well-established relationships already with the home health locations it would be letting go.
“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 CFO Doug Coltharp said in March 2022.
Comparatively, when Enhabit and its leadership team set out on their own last summer, they were starting at the plate with two strikes and an all-star pitcher on the mound.
Enhabit had all the makings of a successful home health and hospice provider: 252 home health locations and 99 hospice locations across 34 states, high-quality outcomes and preexisting health system relationships.
But the industry was shifting underneath the feet of a company that had just made landfall.
To put it into context, Amedisys Inc. (Nasdaq: AMED) – another one of the largest home health and hospice providers – previously had shut down outside acquisition inquiries based on the long-term outlook of the home health industry. By December 2021, however, as Enhabit was rebranding locations and gearing up for an IPO, Amedisys had already changed course given multiple emerging headwinds.
UnitedHealth Group’s (NYSE: UNH) Optum is now in the process of acquiring Amedisys.
The first of those headwinds, and perhaps most important, was MA. At the beginning of 2020, the amount of Medicare beneficiaries under MA had already been rising consistently. But most estimates suggested it would take 8-10 years for MA members to represent more than 50% of Medicare beneficiaries.
By 2023, 51% of beneficiaries were enrolled in MA.
MA plans traditionally pay far less for home health services compared to traditional Medicare, sometimes even 40% less.
“If one of our managed care partners came to us with those [traditional Medicare] rates, we would be jumping for joy,” April Anthony, now the CEO of the home health company VitalCaring, said last month at Home Health Care News’ FUTURE Conference. “We’d be saying, ‘This is the greatest contract we could possibly hope for.’”
For a long time, home health providers – particularly in states with lower MA penetration rates – were able to cling onto fee-for-service rates from the Centers for Medicare & Medicaid Services (CMS).
But, in the last two years, that strategy no longer seemed plausible, especially for a public company like Enhabit that now had to demonstrate admissions and revenue growth on a quarterly basis.
Enhabit, in particular, was going to struggle with the evolving payer landscape. In July 2022, as it introduced itself to investors, 80% of its revenue was from fee-for-service Medicare.
Weaning off fee-for-service was not just an Enhabit problem. Home health providers across the country have also had to adjust. There are two differences between Enhabit and just any other provider, however. The first was Enhabit’s standing as a publicly traded company, which meant its leaders would be unable to tell investors to simply hang tight. The second was just how reliant it was on fee-for-service revenue.
To put that 80% number into context, the aforementioned Amedisys – as early as the first quarter of 2017 – had less than 63% of its home health revenue coming from fee-for-service Medicare.
All the while, those rosier fee-for-service rates were becoming less rosy. In Enhabit’s first year operating as a standalone company, CMS proposed and finalized rate cuts for the following year.
In June, CMS proposed a second round of cuts for CY2024, while also continuing to suggest that clawbacks for “overpayments” could be coming in the future.
A rocky start
Enhabit immediately sprung into action, building out a “payer innovation” team to try to become more diversified, and to try to strike better contracts with payers. It has had some success in that area, but not with enough volume or speed to satisfy investors.
“In our discussions with the larger payers, we’ve been talking about things like episodic [payment] or case rates, because I think we’re all very interested in going that direction,” Enhabit’s Jacobsmeyer said on the company’s Q2 2022 earnings call. “But without a fix now to where we are on a per-visit rate, we’re left with continuing to deprioritize [MA] patients.”
Inflationary headwinds hit the home health business hard. Enhabit’s cost per visit went up, while per visit revenue was becoming less stable.
Its staff was also taking more PTO than ever, with vacation opportunities opening back up as the pandemic eased. That meant Enhabit had to also scramble to accelerate hiring, a tall task for any home health provider.
Quarter by quarter, Enhabit leaders tried to emphasize that the company was doing what was necessary to achieve long-term growth. But its stock price was quickly halved from $24 to $12.
Those issues finally came to a head. On June 13, less than a year after Enhabit’s spinoff from Encompass, the hedge fund AREX Capital Management – which held about 4.5% of the shares of Enhabit’s common stock – wrote an open letter to the Enhabit board, urging it to explore a sale.
“Given Enhabit’s objectively challenged execution and share price performance, the board should fully explore the potential delivery of substantial and fair value to shareholders through a sale of the company,” AREX wrote in the letter. “We are highly confident that a full and fair strategic alternatives review will make it very clear to the board that, as compared to the risks and potential rewards inherent in the status quo, a sale is the obvious way to maximize value for all shareholders.”
Many industry experts believe the process is likely to result in a sale.
A sale could mean a positive or negative outcome for shareholders – that remains to be seen.
Ultimately, though, Enhabit and its leaders faced sweeping market challenges from the outset. They entered into turbulent external and internal markets. They weren’t given the leeway to course correct.Now, the company could be the next large home health provider to end up in someone else’s hands.
Whether that’s a financial sponsor, a managed care company or another health care provider also remains to be seen.