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Resolution of the EHAB Strategic Review Process

The bulk of Enhance Home Health & Hospice’s revenue comes from patients using traditional Medicare and Medicaid Advantage programs, which together account for more than 90% of the company’s consolidated revenue.

In September 2023, they announced the formal start of the strategic review process. The assets of Home health agencies (HHA) have shown their strategic value to several parties, including health management organizations.

Assets in the field of home healthcare and hospice care will continue to be attractive to healthcare management organizations (MCOs) as the expansion of the value-based care (VBC) model is strengthened in their strategy. Companies such as UNH and HUM, which served 47% of Medicare Advantage (MA) participants in 2023, have acquired specialized national platforms: HUM acquired Kindred, and UNH acquired LHCG and AMED.

The dual effect of running a business that generates positive margins and free cash flow, combined with the ability to transfer participants to care settings that are twice as cheap as inpatient facilities such as long-term care facilities (SNF), should be attractive to the MCO, which currently does not operate a national platform.

Enhabit trades at about 11 times its EBITDA, which gives a discount of 43% and 24% compared to the acquisition multiplicity of LHCG and AMED, respectively. The probability of a sale is about 50/50, and for an MCO with a large business under the Medicare Advantage program, such a deal seems the most logical; approximately 90% of EHAB’s income from HHA comes from Medicare.

Macroeconomic trends and further growth 

From 2020 to 2030, the number of people over the age of 65 in the United States is expected to increase by about 30% and reach 73 million people. This age group will make up almost one fifth of the country’s population. This segment of the population is expected to drive health spending of approximately $250 billion due to the likely increase in the burden of disease and the desire of patients to avoid long-term stays in institutional settings such as long-term care facilities (SNF).

Each of EHAB’s two business segments is located in an extremely fragmented sector, where most competitors are represented by small, localized operators who face increasingly difficult business conditions. EHAB has experience in conducting acquisitions, but the current credit burden makes new acquisitions unlikely in the near future. Despite this, the company can continue to use its scale, size and quality of results to increase market share by attracting customers from smaller operators, while at the same time demonstrating its value to partners in the field of payment services.

Innovation strategy 

The Payer Innovation Team was established in May 2022 with the aim of focusing on maintaining the growth of home healthcare while achieving attractive tariffs and stimulating an increase in episodic care. As the number of Medicare eligible individuals who enroll in the Medicare Advantage (MA) program has increased, this strategy has become vital in light of the perceived ability to negotiate with healthcare organizations managing contracts. EHAB continues to negotiate national contracts and seeks to strengthen the strategy of regional agreements.

Since the start of the project, the company has successfully negotiated 48 new contracts, about two thirds of which are designed for occasional payment. In the third quarter of 2023, EHAB admitted more than 6,000 patients under these new contracts, an increase of 72% compared to the previous period.

Non-recurring tariffs are now at a 25-30% discount versus the historical 35-40%, and EHAB estimates that each 5% move to new innovative contracts increases annual revenue and adjusted EBITDA by about $2 million. 

The Tax-free status may become an obstacle

Despite receiving approval to explore strategic alternatives from Encompass in August, the press release states: “Certain transactions involving the company are still subject to additional conditions under the Tax Matters Agreement (TMA), including the need to obtain an additional tax opinion on a specific transaction, which must satisfy Encompass Health on their sole and the absolute discretion that such a proposed transaction would not jeopardize the tax-free status of the Enhance branch.

There can be no certainty that the process of exploring strategic alternatives to the company will lead to the fact that Enhance will decide on a deal that would satisfy the remaining conditions in TMA.”

Performing tax–free divisions is an extremely difficult task, and we understand that in certain transaction scenarios EHAB will still be subject to additional conditions, including obtaining an additional tax opinion and the need for its approval by Encompass Health at their sole and absolute discretion, so that the specifically proposed transaction does not threaten the non-tax status of the EHAB branch.

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