The activist investor AREX Capital Management has again taken aim at Enhabit Inc. (NYSE: EHAB) in what has become an ongoing, public and back-and-forth feud.
AREX Capital – which owns 4.9% of Enhabit shares, making it a top-5 shareholder – initially urged the Enhabit board to undergo a strategic review last year when the company had failed to meet financial expectations.
Enhabit then finalized that review, and ultimately decided to remain an independent, public company. AREX Capital, who had called a sale the “only acceptable outcome” of that review, was dismayed by the decision.
Since then, AREX Capital has nominated seven new board members it hopes will be elected at Enhabit’s annual meeting this year. Enhabit, on the other hand, has responded to AREX Capital by revealing more intricate details around its strategic review. It has also responded by backing its current board, and suggesting that “AREX’s public statements contain numerous mischaracterizations, cherry-picked time periods and misleading assertions.”
On Monday, AREX Capital responded in a six-page letter “setting the record straight” on Enhabit.
“The last two years have not been easy for the home health and hospice industries, but Enhabit’s peers have demonstrated an ability to navigate these challenges without substantially reducing their profitability. While peers caught colds, Enhabit caught pneumonia,” AREX Capital wrote. “We believe Enhabit’s significant underperformance versus peers is a direct result of the Board lacking the necessary industry expertise to hold management accountable.”
AREX Capital also cited Enhabit’s current stock price, which has sunk over 60% lower since it spun off of Encompass Health (NYSE: EHC) two years ago.
Enhabit leaders have agreed that its financial performance has not been acceptable, while also pointing out that it has had to adjust to Medicare Advantage (MA) penetration and Medicare fee-for-service rate cuts over the last two years.
After Enhabit’s spinoff, its revenue mix was heavily tilted toward Medicare fee for service. Since then, it’s had to revamp its payer strategy to take on more MA patients, while also trying to get MA plans to pay more for its services.
AREX Capital disagrees with the way in which Enhabit is going about its payer innovation strategy, however.
“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.”
AREX Capital also included comparisons to Enhabit’s peer Amedisys Inc. (Nasdaq: AMED) to drive home its point.
“Enhabit has significantly underperformed its peers in both home health and hospice on a same-store basis, and the assertion that its inability to make acquisitions is responsible for this underperformance, in our view, blatantly misrepresents the facts and is an attempt to distract from terrible execution,” AREX Capital continued. “Since its spin-off, Enhabit has acquired two home health locations and five hospice locations for a total of ~$40 million, while its closest peer, Amedisys, has made only one acquisition (for less than $1 million). During this time, Amedisys has performed far better than Enhabit in both its home health and hospice businesses.”
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