On Monday, Enhabit Inc. (NYSE: EHAB) defended its strategy of taking on more Medicare Advantage (MA) revenue over the last couple of years.
It did so in yet another response to AREX Capital Management, an activist investor that owns 4.9% of Enhabit shares. Enhabit and AREX Capital – which wants to replace Enhabit’s current board members – have gone back and forth publicly over recent months. Specifically, the two have gone back and forth after Enhabit decided to remain a public, independent company after its strategic review.
“AREX continues to criticize past actions, including in many cases those that were made prior to Enhabit’s separation,” Enhabit wrote. “To be clear, seven of the proposed eight Enhabit independent directors were not even on the Board at that time, having joined the Company on the date of the spin-off or thereafter.”
Based in Dallas, Enhabit has 255 home health locations and 112 hospice locations across 34 states. The company spun off from Encompass Health Corp. (NYSE: EHC) two years ago.
Since then, it has had to balance its home health revenue mix, having been over reliant on fee-for-service revenue prior to the separation.
Last week, AREX Capital took aim at that balancing.
“Rather than gradually normalizing its payer mix by growing Medicare Advantage volumes in a controlled manner while protecting its existing Medicare fee-for-service (“FFS”) market share, Enhabit allowed a precipitous drop in its substantially more profitable FFS volumes,” AREX Capital wrote. “The sharp decline in FFS volumes was significantly out of proportion with any underlying decline in FFS beneficiaries. While FFS beneficiaries nationwide shrank by ~7% from 2021 to 2023, we estimate Enhabit’s FFS admissions declined by more than 20% during that period.”
Enhabit now has about 61% of its home health revenue tied to fee-for-service Medicare. At the spinoff, that number was at about 75%.
“Following the separation, it became clear that patients were trending from traditional fee-for-service Medicare, the more profitable payer, to Medicare Advantage plans more quickly than the industry as a whole anticipated,” Enhabit responded. “At that time, traditional Medicare made up approximately 75% of Enhabit’s total Home Health revenue. Furthermore, referral sources needing to service a mix of Medicare and Medicare Advantage patients were seeking providers that would take all patients. As a result, not only were we not growing, but we were also losing Medicare fee-for-service business we had because we were not seen as ‘full service.’”
While adjusting its payer mix, Enhabit has also worked to get MA plans to pay it closer to the traditional Medicare rate. It has been mostly successful in doing so, and believes those new contracts will yield more positive financial results in the near-term future.
In addition to defending its payer strategy, Enhabit also defended its hospice business and how it “optimizes” its overhead.
“Enhabit’s hospice revenue grew by 2.9% from Q2 2022 to Q1 2024, while Amedisys’ revenue grew by 1.3% during the same period,” Enhabit continued. “Similarly, Enhabit’s hospice admissions grew by 6.9% from Q2 2022 to Q1 2024, while Amedisys’ admissions declined by 5.3% during the same period. Enhabit’s monthly hospice census has continued to increase sequentially in Q2 2024.”
Enhabit mentions Amedisys (Nasdaq: AMED) because AREX Capital compared Amedisys’ numbers with Enhabit’s to support its points in its last open letter.
Enhabit evoked Amedisys again when defending its overhead costs.
“AREX also incorrectly asserts that there are ‘significant cost savings opportunities’ based on a crude comparison of our overhead costs to “public peers”, which inherently ignores differences in the size, business models and cost allocation methodologies and doesn’t account for the lack of true public peers for Enhabit,” the company wrote. “Furthermore, Enhabit’s home office G&A as a percentage of revenue is at approximately 10%, which is ahead of our closest public peer, Amedisys, at approximately 11%. Notably, Enhabit achieved this level of efficiency while also being less than half the size of Amedisys.”
A vote is currently underway, one that will help decide the future of Enhabit’s board come the company’s annual meeting later this summer.
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