Why Enhabit’s Strategic Review Did Not End With A Transaction

Enhabit Inc. (NYSE: EHAB) announced Wednesday the result of its strategic review. It was not a sale or a merger, but instead a commitment to the path forward as an independent public company.

On Thursday, company leaders explained the rationale behind that decision, which was made unanimously by the board. Part of it is tied to external factors that make a large-scale transaction difficult right now, and part of it is tied to the success Enhabit has had in changing its business model.

“Our strategic review process has concluded, and there was serious interest based on parties’ engagement in the process,” Enhabit CEO Barb Jacobsmeyer said Thursday on the company’s first-quarter earnings call. “However, the company did not receive any formal proposals for a transaction. We believe this is largely due to macro headwinds, including, among other things, uncertain regulatory developments, including Medicare reimbursement policies throughout the health care industry, an evolving antitrust landscape, a difficult health care and operating environment and persistently high interest rates.”


The Dallas-based Enhabit has 255 home health locations and 112 hospice locations across 34 states. It first launched its strategic review process in August of last year, finalizing it this week. It spun off from Encompass Health (NYSE: EHC) in July of 2022.

External factors undoubtedly played a part in Enhabit’s board not finding a deal that it found desirable. Transactions are still considerably down across the health care industry, including within the home health and hospice subsectors.

Labor pressures and Medicare Advantage (MA) penetration were two of the main reasons why Enhabit began to struggle on the public market in the first place. Over the last two years, it has laid the groundwork for a turnaround in those areas, however.


Interest rates, antitrust regulation and the Centers for Medicare & Medicaid Services’ (CMS) home health payment policy may have led to undesirable deal conversations during the strategic review. Enhabit’s board – and its operating leaders – also may feel like now is not the time to transact, right as the company is about to be done with the dirty work of a company transformation.

In the end, it’s likely that both the external headwinds and the bright spots internally led to the decision to abstain from a sale or merger at this juncture.

When Enhabit first spun off Encompass Health, it was uniquely unfit for the current home health landscape. More than half of Medicare beneficiaries are now under MA plans, and all the while, Enhabit had 80% of its revenue tied to Medicare fee-for-service business.

That immediately meant trouble for the company, as did the extreme labor pressures placed on all home health providers in late 2022.

Since those problems came to a head, Enhabit has had to place a focus on simultaneously taking on more MA business, while also renegotiating new contracts with plans and allocating capacity to high-quality payers.

That inevitably led to a downturn in financials, but some of the company’s wins are beginning to materialize.

“With our traditional Medicare home health revenue mix now in line with peers, we are experiencing stabilization of our fee-for-service Medicare mix,” Jacobsmeyer said. “While year-over-year fee-for-service Medicare admissions declined 11.4%, we experienced a sequential increase of 3.4%. Our payer innovation team continues to do a great job building our portfolio of payer contracts. And our field teams are successfully shifting admission out of historically lower paying contracts to these new contracts at improved rates – contracts that acknowledge the high-quality care we provide to the payers members.”

Admissions from subpar payers have declined from 42% in Q1 of 2023 to 29% now, Jacobsmeyer added. Non-Medicare admissions grew by 25.2% year over year, contributing to 5.3% year-over-year growth for home health admissions overall.

About 38% of non-Medicare visits are now in payer innovation contracts at improved rates, according to Enhabit.

“Our payer innovation strategy is working,” Jacobsmeyer said. “We continue to be disciplined in our approach with payers as we work to negotiate new agreements. And we’ve been focused on moving away from the lower paying agreements. We are committed to the renegotiation of historic contracts to improve rates while holding firm to our conviction in the value we provide.”

In the quarter, Enhabit’s net service revenues totaled $262.1 million, a 1% year-over-year decrease. Home health revenue decreased by 1.2% year over year, while hospice revenue decreased slightly.

AREX Capital Management – an investor which owns 4.8% of Enhabit shares – expressed its dismay with the result of the strategic review Thursday morning. AREX Capital initially urged Enhabit’s board to pursue a strategic review, and later called a sale “the only acceptable outcome” of the review.

“We are disappointed that Enhabit’s strategic review process has concluded without a sale of the company,” AREX Capital wrote in a statement. “We do not believe that this failure reflects Enhabit’s intrinsic value or strategic potential. Rather, this failure lies with Enhabit’s Board. In March, we nominated a slate of seven highly qualified candidates to stand for election at the 2024 Annual Meeting. We chose not to publicly disclose our nomination to avoid disrupting the strategic review process to the detriment of shareholders, but clearly our hope that this board might finally deliver a positive result for its shareholders was wishful thinking.”

While the result of the strategic review was not a sale, Enhabit has left the door open for a transaction at some point later down the road.

“The board will continue to be open to and consider all opportunities to enhance shareholder value,” Jacobsmeyer said.

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