Enhabit Battles Workforce Pressures, Stays Bullish on Hospice M&A

Enhabit Home Health & Hospice (NYSE: EHAB) slowed its growth trajectory during the third quarter due to labor headwinds and some state licensing delays for its de novos.

The home health and hospice provider spun off from Encompass Health (NYSE: EHC) in July. The close of Q3 marked the company’s first quarter as a separate entity.

From the get-go, Enhabit set aggressive growth targets involving both de novos and acquisitions. The company planned to add 10 new home health and hospice locations each year, initially with a heavy focus on hospice, according to CEO Barbara Jacobsmeyer.

“We have opened three de novos year to date and expect to open another three to four in the fourth quarter. The pipeline of our de novos remains full for early 2023 as well,” Jacobsmeyer said in an earnings call. “We are experiencing delays with local licensing agencies and timing of local patient surveys. These delays are beyond our control and are impacting the timeliness in which we can open these new locations.”

On the acquisition front, the company plans to deploy $50 million to $100 million annually, with about 60% to 70% weighted toward hospice, Jacobsmeyer previously told Hospice News.

Recent transactions include the purchase of Caring Hearts Hospice in Texas and the Nov. acquisition of Arizona-based Unity Hospice. Financial terms for both deals were undisclosed.

Looking ahead, Enhabit’s deal pipeline continues to be “robust,” executives indicated in the earnings call.

“We are prioritizing opportunities that offer the greatest growth opportunity for our business. When we look at these opportunities, we’re looking at Medicare beneficiaries in the market, opportunities for scale and density in that market, and overlap with existing service lines,” CFO Chrissy Carlisle said. “And now especially, we’ve added staff availability when we’re looking at markets. That’s a critical success factor.”

The company’s consolidated net service revenue dropped 3% from Q3 2021 to $265.7 million. Enhabit’s hospice segment brought in $49.4 million in the third quarter, down 6.4% from $52.8 million during the prior year’s period.

Contributing to the decline were constraints on clinical capacity stemming from the labor shortage, as well as some instances of lower reimbursement for its home health services due to the shift of more patients towards Medicare Advantage.

These hurdles notwithstanding, the company saw some upward trends emerge late in the quarter and in the opening weeks of Q4. The number of hospice locations seeing diminished capacity shrunk to 11 in Q3, down from 17 in Q2. Enhabit also demonstrated improvement in admissions and patient census.

“In hospice, the strategic and operational changes previously made are starting to gain traction. From quarter two to quarter three, we saw growth and admissions and average daily census,” Jacobsmeyer said. “Our increased admissions came from hospital settings. While this lowers our average length of stay, it is an important step in diversifying our referral sources. Hospice referrals increased 5.2% year-over-year and 1.6% sequentially.”

Enhabit also gained forward momentum on labor. The company has taken steps to institute more flexible scheduling for clinicians and increase career development opportunities, as well as wage increases and expanded benefits. In addition, Enhabit has streamlined some of its onboarding processes through virtual clinical orientations.

The company hired 55 full-time nurses during Q3 and achieved a 10% reduction in turnover among those clinicians, inclusive of part-time employees.

The strain on revenues in Q3 are consistent with what similar companies in the space have experienced, according to Brian Tanquilut, equity analyst in health care services at investment banking company Jeffries LLC.

“As more Medicare beneficiaries enroll into [Medicare Advantage (MA)] plans, volumes from episodic admissions are soft, while admissions of lower-reimbursed MA patients have picked up, resulting in margin compression,” Tanquilut indicated in a research note. “We would argue though that after [Amedisys’ NASDAQ: AMED) Q3 release, most investors were anticipating similarly-challenged Q3 results and Q4 outlook from EHAB.”