Enhabit, Inc. (EHAB) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Joanna Gajuk.

Thank you. Good afternoon, everyone. Thanks so much for joining our second day of our virtual home care Conference. It's my pleasure now to host this session with Enhabit. They're one of the largest home health and hospice providers in the U.S. And today with us is Barb Jacobsmeyer, who is the President and CEO; and also Ryan Salmon, who's -- Solomon sorry, who is the CFO. And they -- so thanks so much for joining us. And we're going to go right into Q&A. But I want to make sure that the audience is aware that there's a way for them to pose a question. So you can use the ask question window, I guess, in the panel there. So please feel free to submit your questions.

So maybe -- Barb, Ryan, thank you so much again. And let's start with the final home held rig, right? It just came out feels like yesterday, we're very delayed. But finally, it's out, so that's good. And the headline number, much better than the proposal, but it's still a cut, right? So how we should think about the impact that you expect now based on this final rate update? And also in terms of your mitigation strategies, I mean, it sounds like clearly, it's going to be easier, but kind of walk us through how you're thinking about that now based on the final reg?

Yes. Thanks, Joanna. So -- and we produced an 8-K this morning that actually gives some of our initial views in this regard. At a high level, as we think about where the final rule ended up, we think that a combination of our ongoing efficiency efforts across, whether it be VPE growth and our broader G&A and cost efforts that overall, we are confident that we can deliver organic profitability growth in 2026 at a similar rate to 2025, despite, as you touched on, a negative rate reimbursement in the final rule. When you combine that with our consistent execution through 2025 and the improved balance sheet flexibility that we have, we also outlined there that with the improved rate clarity that we see in that CMS final rate rule, which I'm sure we'll talk a little bit more about some of the specifics there. But combine that with the clarity, we feel like that increased investment is something that we could target in 2026 as well, whether it be through de novos or targeted strategic M&A, which is really more returning to business as usual from an inhabit perspective where historically, prior to some of the covenants and other restrictions, we've not been able to participate in some of that historically. And so we're feeling good about that. One item I would call out as we think about increased profitability in 2026 at a similar rate that may be more back-end weighted just given the nature of some of the rate cut being effective on January 1 and some ramp to the VPE but we'll give more specifics as we give more definitive guidance early next year.

And yes, the -- in the reg, right, there were a couple of different points, I guess, of discussions. So the first, maybe let's talk about the behavior adjustment. So it sounds like CMS is kind of say, "Hey, guys, I kind of agree with you in terms of the -- what we observed in behavior changes?" Might not be just the reimbursement on the PDGM along it could be other things right? So they only finalized 1% cut. So is that your interpretation that they're kind of done with the behavior adjustment? Because also in another place in the reg, they kind of talk about, they might come back and analyze and try to figure out the PDGM alone impact in '23, '24. So sort of kind of how is your read on what they're trying to tell us about the behavior adjustment going forward?

Yes. We think this is one of the favorable elements of the final rule. Based on the language in the final rule, it does appear that CMS is acknowledging the comments of the broader industry and the alliance in general and specifically said it would be difficult to attribute behavior changes beyond 2022. And so we view that as effectively a narrowing of the scope or rescoping the permanent to end as of the 2022 look-back period from a CMS perspective, and it felt like through the comments there that with that, that they were signaling and into the permanent adjustments going forward. And so we felt like that was really a favorable development. It's almost -- the rate rule was important, but how CMS got there was particularly more important. This wasn't a wash, rinse, repeat of several years where you would see, while we'll just cut the permanents and kick the can, if you will, there was very clear guidance in our read of that, what they were signaling as an in to the permanent adjustment.

But I guess on the flip side, right, there's still some questions about the temporary adjustment or the recruitment. I mean clearly, they lowered it, right? So that was good, right? At 3% versus the 5% in the proposal, but they still talk about this pretty sizable overpayment that they estimate, right? I mean the number itself came down a little bit. So that's good. But, kind of, what is your take on what CMS is planning to do when it comes to the recruitments? Would you expect additional recruitment cut added to get to that 5% in '27 or kind of -- any kind of read you guys have on that piece?

Yes. So when we look at the temporary, there was some knockoff benefit, if you will, around the permanent in our read of the final rule, in the context that in the narrowing of the scope, that shrunk the proposed rule of $5.3 billion to $4.76 billion of perceived recoupments [ over ] reimbursement of the industry over that period of time. They also outlined the negative 2.7% temporary adjustment would recoup approximately $460 million in the 2026 year. And so when you look at that, if you were to assume that essentially a reversal and then reapplication of that same 2.7% basis, you would recoup that over an approximate 10 year -- approximately a 10-year period of the $4.7 billion. They were not as clear around the time line, but they did recognize the need for -- from an industry perspective for planning purposes, the need to provide more clarity. And so we would expect that over time, it's something that we'll work with the alliance prospectively to try to get some more clarity as to that time line. But in our 8-K, we did put in an illustrative view of how we believe the temporary could be applied based on the assumptions that the permanent is completed or finished, assuming that, that recoupment would be covered over a reasonable period of 10 years. That would start to frame out the early innings of some improved rate clarity and potentially positive rate reimbursement on a prospective basis if you were to assume similar market basket adjustments to what we saw in the 2026 final rule.

And I guess sort of a follow-up question in terms of -- because you alluded to this earlier in the first question around the company looking back are investing more because of the final payer looks better than the proposal. So the question is about can you talk about the outlook for M&A in terms of both, I guess, Home health and hospice as you think about next year and also longer term?

Yes. The way we viewed that is based on the execution in 2025 and the flexibility that's provided us with the balance sheet combined with the improved rate clarity that it was prudent to use that balance sheet flexibility with the improved clarity to target increased de novo investment in M&A. Now as you think about home health versus hospice, I think one thing we want to make sure we're clear, we're going to be -- continue to be very disciplined in our approach there to make sure that we're not targeting M&A just to acquire M&A. It needs to be disciplined and provide value for our shareholders. And so if we think about accretive transactions, those potentially more likely manifest themselves on the home health side with smaller- to medium-sized type assets. Hospice continues to be relatively high multiples, not to say that there aren't potentially opportunities there from an M&A perspective. But that's likely if you look at our framing that we outlined in our 8-K where most of our de novo activity would occur is on the hospice side with the acceleration there as we feel like we've got an awful lot of opportunity particularly in overlap markets with our home health to de novo and create growth and profitability that should benefit our shareholders.

Okay. Great. And then just coming back to home health specifically. So we talk about the Medicare rates and where we stand in terms of the '26 rate out there. But I guess the other piece that's growing is Medicare Advantage rate. So can you talk about what percent of your Medicare Advantage book is actually linked to Medicare fee-for-service? Because the way I'm thinking about is, is there a risk that like the MA plans will actually follow that negative 1% cut into '26. So kind of, just want to make sure we clarify that.

Yes. So I mean the specific percentage, approximately 20% of our census is MA kind of episodic linked to more of a Medicare fee-for-service or CMS rate schedule, if you will. More importantly, there is, as you can imagine, this really requires discussion with our partners in the context of how the temporary in particular, would be applied given that the temporary is meant as we understand it from a CMS perspective to recoup over reimbursement in periods prior to, that's not really, in our view, meant for our partners in the context of over reimbursement in some cases, some of these contracts are episodic agreements weren't even in place in the period of time that would have -- CMS would be asserting an over reimbursement. And so those are ongoing conversations or discussions that we would have. That said, so there's always some risk with that, but that is included in our pricing impact that we outlined in our 8-K materials. So we've already assumed that anything linked to that would have seen a similar temporary adjustment, recognizing those conversations are still ongoing. And so probably more of an upside opportunity relative to how we framed out the pricing impacts in 2026 to the extent that we conclude those conversations in a healthy manner.

And I guess, switching to the payer innovation strategy. Can you provide us what percent of revenue now is in those payer innovation contracts. And with this latest quarter, you start talking about renewals, right, of these contracts, so that's good. And can you share a little bit more color in terms of what type of rate increases you're getting? And also similar to my other question in terms of are these contracts are somehow linked to Medicare fee-for-service or they're completely like de-linked from that.

Sure. Well, historically, what we've looked at is what percent of our non-Medicare are in payer innovation. And so in Q3 of our admissions, 57% of our non-Medicare were in payer innovation contracts. That was up from 52% same time last year. As you mentioned, we are in the point now where we're actually beginning to start to renegotiate payer innovation agreements. I would say the 2 large national ones that were renegotiated in Q2 and Q3, those are not set towards fee-for-service Medicare. So they're not at risk with this temporary adjustment. When we think about being back at the table, renegotiating, I would say we bring additional data. The first go around when payer innovation strategy started back in 2022 and 2023, the focus was really on selling our quality and making sure that we could get good rates with our good quality metrics. Now at the time that we're renegotiating, we're not only bringing back to the table the continued high-quality metrics but we're bringing back the member access information that we have given their members. So now at the table renegotiating, the payer has to decide, can I really find replacement of same high-quality home health if Enhabit is not going to be caring for my members going forward. And I think that has created a new lever for us that helped these last 2 negotiations be successful because it really does beg the question maybe you can find the coverage, but can you find it from the same high-quality provider. And so that's kind of the information we're bringing back to the table as we sit and renegotiate these contracts going forward.

And you alluded to this renegotiation and it sounds like you guys are able to I guess, even give up by some of the volume or at least temporarily disrupt the business as you're negotiating these contracts, right? So is that you kind of implying that you got -- you're working maybe from the more position of power, so to speak, or in a better spot now versus maybe a couple of years ago with these payers?

Yes, it's a great question. I would say that it has been one of the largest benefits of our payer strategy because, as you mentioned, Joanna a couple of years ago, it would have been really difficult to risk losing an agreement, whereas now we can really look and say, if we have to walk away, we're confident we can fill that void with other payer members. And so we are at the table in a different place. I think yes, we had to disrupt access for the 1 payer to get to a successful rate increase, but we were successful getting a low double-digit increase. I think with the next payer that we were negotiating with they knew and saw that we had been willing to experience that disruption. And therefore, we were able to negotiate without a disruption on this last payer negotiation. So I do think, again, that access that we bring to the table is meaningful.

No, exactly. That's good to hear there. And when it comes to these contracts, right? So clearly, a pretty good job there improving the contract with these plans. And can you just give us a flavor of when you look at that Medicare Advantage business, right? How much, I guess, is there still to be done in terms of the per visit contracts right? Because clearly, you're doing a good job on these episodic type contracts, but any update there on per visit.

We'll continue as we renegotiate those, but we'll always start by, again, asking to try to move towards episodic. The episodic just does allow us to manage the visits more appropriately to the clinical condition of the patient versus being given, if you will, certain off for numbers of visits. So I think first and foremost, as we -- obviously, rate will be part of the discussion. But on those per visits, it will also be trying to get them to move towards it being an episodic payer being an episodic payer.

So I guess what's the mix now? Like how much, I guess, is in the per visit versus episodic of your MA book?

Yes, about 1/3 of our volume is still in the per visit.

Okay, right. So there's still, I guess, more home there. And when we're thinking about the MA plans, right, they're seeing some rate pressure there. And we heard from some providers, hospital space about increase in denials and some issues there. So I want to ask you whether there's anything you kind of see in your home health business when it comes to MA, putting maybe more pressure than typical in terms of -- we know about the right but in terms of just payments and maybe the NAHC increasing and such.

Yes. What I would say is what we have done is included our payer innovation team in that full circle of not only the contracting and getting those rates, but really being part of the team around the table as we look at revenue cycle. So if a payer looks really great on paper on what they're going to reimburse us, but they create a lot of disruption in the back office side of things and have an increase in denials or maybe they denied a certain number of visits. If in the end, we are not actually receiving what we were contracted to receive because of additional layers of either auth or denials or what have you, we will go back to the payer and we will talk with them and let them know that at some point, if we can't resolve these revenue cycle issues, we're going to have to drop them in a payer that we're no longer going to be prioritizing. I will say we've already had these types of discussions with several of the payers and we've really seen attention come to the disruption they're causing on the back office side because, again, they may think they're going to get access to Enhabit and they will with great contract rates, but not if we actually don't recognize and receive those great rates. And so it's really a full circle discussion with the payer. Again, we've been successful because what we've said is, if at some point, we can't resolve those types of issues, then we will deprioritize them even though they on paper, look like a good payer.

Right. And -- so coming back a little bit to the Medicare fee-for-service and talking about volumes, right? So here, Medicare fee-for-service admissions declined about 3% in third quarter and like it's still sequentially down couple of percentage points. So can you walk us through kind of what's happening there? Are you losing market share? Kind of what's the outlook for you to kind of stem that or try to improve that business, the mix.

Yes, I'll have Ryan kind of talk a little bit of how we are as we see ourselves compared to the Kaiser Family Foundation rates, but also a little bit of what caused that disruption in Q3. And then I can talk about some of the things we're doing kind of at the sales and market level looking at some best practices.

Yes. So if we look at Q3 and you look at our Medicare and we'll just look at ADC as a percent of the total, our Medicare ADC was roughly 47% of our total and 53% MA. When you look at the Kaiser projection for 2025, it would have indicated MA penetration closer to 54%. And so while I think -- when we look at Q3 and really throughout 2025, we see really a normalization imbalance that's occurring there. We're in line with the market from an overall kind of percentage basis a bit ahead of that. And so a combination of the payer strategy, normalization on a mix basis of our Medicare volumes relative to the broader industry or projections, if you will. And so we feel like we're in a pretty good zone at this point as we think about mix and prospectively what that would look like.

When I think about our strategy going forward. For example, in Q3, we had 118 of our branches that actually saw fee-for-service Medicare year-over-year admission growth. So it really is about continuing to understand the best practices happening at the local level and then deploying that. A lot of that comes down to what we call our books of business and making sure that we're assessing what's happening to those payer mixes within those referral sources and making sure that even if we had committed referral sources in the past, is that still the right referral sources for us to be going with. In addition, looking at specialty programs to really drive that fee-for-service mix, the team model will go into effect January 1. There's about 250 hospitals in our markets that are going to be part of the mandatory team model. So we're out there already meeting with those hospitals to really talk about the value we'll bring for those diagnosis that will be part of that model. That is fee-for-service business. As well as looking at other areas that do have a strong mix of fee-for-service like some of your ACOs.

Okay. So you're saying that in some instances, it might be that kind of your referral sources have that mix that maybe skews lower fee-for-service higher MA or other or others. And that's what's kind of happening. So now you mentioned that T model could be one of the things that maybe allows you to kind of change that mix. Anything else you can call out that could that could help improve the mix towards future service?

Sure. So we have, again, renewed some of our ACO partnerships. Some of them have allowed us to actually create some co-branding where we can actually go to the physicians that are part of the ACOs and remind them we're a preferred provider and actually co-brand with that ACO. That, again, is all fee-for-service business. So that's another good example. And then I would say just really, again, assessing as there -- we've done a lot of community care business in the past and really looking at some of those community care settings and say, is there still a good mix within those settings? And if so, then obviously continue to focus our attention, but if not, then really making sure that we're building out a book of business for that local sales team to focus where there are healthy payer mixes.

And switching gears a little bit to cost discussions. So I think for your -- for this year, for '25 guidance, you assume cost per day were actually decline year-over-year. So kind of what is driving that and how we should think about this going forward?

Sure. There's a couple of things that really when we look at a cost per day for home health, it's been really continuing to build volume on most of our staff are salaried. So you have a pretty fixed set of cost as we have been managing our visits per episode, while not at probably the same rate that we'll experience with our new methodology on VPE management. We have seen a decline in our visits per episode. That has helped us as we redeploy those visits for additional patients. And then our continued focus on not only productivity but optimization has also been some key levers as we look at that cost per day.

And talking about labor, what's the current state there of labor in home health, I guess, first? And how are you thinking about the wage inflation into next year?

We think we're still kind of more in that normal zone unlike what we would have seen in '21 and '22. We are more kind of at that about 3% wage increase this year and don't see really anything that's pointing to a big change for next year.

And when are we thinking about the home health census growth going forward? Kind of how should we think about the rate there of growth? Is the low single digits sustainable growth for home health?

As we look at it, we put it in, I think our debt kind of that mid- to high single digits as we look at admission growth. And again, a lot of that coming through the payer strategy as well as the initiative with VPE, because a big part of VPE management is really filling the capacity that we're freeing up by managing those visits.

And switching to hospice. So their hospice census has been growing sequentially and grew double digits, I think year-to-date, right, is a pretty robust growth. So can you kind of help us understand how much is same-store really census growing there, right? Because I think you don't give that number, you give the same-store admissions, which grew like 3.5% or so. So my question is around the census same-store census growth and also de novo. So, you alluded to this before that because of the multiples being higher, kind of more focused on doing de novos there. So how much, I guess, is de novo versus same-store? And anything, I guess, in there from acquisitions in that number year-to-date?

So in the same store, we do show same-store versus full store admission growth. It's fair to kind of assume similar as you look at that census growth. And then we do have some de novos that will be moving into same-store next year that will anniversary and we've continued to be successful this year opening additional de novos.

So how you think about census into next year, right? Is there some number is fair to assume sort of similar growth or kind of more normalized growth into next year?

Yes. We still think long term, we're kind of looking at that mid- to high single-digit growth for both home health and hospice from a volume perspective.

Okay. And is this assuming some de novos in that number when you talk about the high single digits?

It would include the de novos, that would be the organic growth of the de novos.

And I guess I want to say that in the past, you also talked about some changes you were doing around recruiting and retention because when we look at this hospice census growth improvement, right? And you said like there's some of the de novo and some of the de novo ramping, that helps that number. But can you talk about hospice, I guess, labor and some of the metrics in terms of turnover and retention there in that business?

Sure. So hospice has done better since we put in that new case management model. It is something that our hospice team was asking for is to have that support from an on-call and triage and we've seen that benefit our retention rate for hospice. Really, as you look at hospice going forward, as we continue to grow, obviously, there will be need to add additional clinical resources to kind of get to that next level of growth as well as some G&A as it relates to sales team members. So you kind of see a little bit of that investment like we saw a couple of years ago and then you grow into that investment. So we will see continued investment to continue to grow census both from a referral source as well as from the patient census.

And when we talk about wage growth for home health in the 3% range, so is that something similar you would expect for hospice here?

Yes.

Okay. So pretty comparable number. Any, I guess, difference in terms of the labor market situation between home health and hospice in your mind?

No. I mean more you see difference in certain markets than you do within the segments.

And your guidance for hospice assumes revenue per patient day to grow 6% year-over-year. So obviously, there's the Medicare rate, right? But it seems like there's something else. So is it just higher length of stay? Or what else is, I guess, driving that average revenue per day?

Yes. And I think you're looking at the 2024, '25 guidance. And when you look at that, I think, in particular, as you mentioned, there is some mix there as we think about that guide. I would also highlight, in particular, I mean, I think our teams have done a really good job on visits in the last 7 days of life. We're currently running at just over 67% versus a national average of 47.4%, which is great for the patient, their families and the outcome there in that particular scenario, but it also comes with a service intensity add-on that also helps in overall unit revenue and rate. The other item I would call out there, and it's more just a reminder that, that full year number includes the benefit of some favorable cap benefits that we saw in the first half of the year that we called out in some of our results. And so I think it's a combination of those factors that really drive that full year 2025 guidance.

And as we think about the next year, so we talk a little bit about the census and I guess we kind of know the rate growth for fiscal '26. So kind of as you combine that to? And would you expect additional benefit from the mix? I mean I understand the cup maybe that you would have put it in another tailwind from that. But kind of walk us through the kind of high-level math in terms of how we should think about the top line growth for hospice.

Yes. I mean I think top line growth, I mean, I think when you look at particularly our run rate there, unit revenues in Q3, we've got the assumed rate increase as we talked about. I don't think there's anything that's materially different. I think you take your growth and broader unit revenue assumptions and that would drive the overall kind of top line revenue assumptions. So we -- there's not anything unique or differentiated there in 2026 as we think about the building blocks.

Okay. And then the other piece of the question in terms of the cost per day. So you guys have been doing a pretty good job there. So what is driving that and kind of how we should think about this into next year?

Yes, I think very similar, as Barb touched on the home health side, particularly with the case management model and how we think about the ability to build census on top of a largely salaried cost base there has benefited. I think that unit cost profile is durable. And just generally, you've seen our margin on that segment relatively consistent throughout 2025. So again, we wouldn't call out anything unique or different as we move into 2026 outside of the building blocks of overall rate increase, as we've outlined, merit kind of inflation and unit costs with that being somewhat similar as we think about, aside from the merit increase into 2026.

And one more thing, I guess, when it comes to, I guess, both businesses in hospice, but also in home health, sounds like you closed branches during third quarter. So I guess how many? And kind of what drove that decision? And should we expect more of this happening going forward in terms of just consolidation or closing of the branches?

At this point, we don't really see any future closures. Obviously, we keep an eye on the performance of all the branches. And so I think the closures and the consolidations that we saw this year were ones that had kind of been on the radar, but don't see anything at this point that we're targeting as we look in the future.

So what was exactly driving the decision to close the branches?

Yes. So when you look at the branch, it's either -- we closed some and we consolidated some, and we really came down to when you were looking at just the overall metrics of that branch and being able to support in the past, if the branch was struggling from a flat to no margin. In the past, we were able to support it, but looking down at the future of a potential rate -- large rate decrease, which now obviously has been mitigated, but it's still a negative rate update kind of how to make those tough decisions that you can't continue to support branches that are at a low to negative margin.

And you also mentioned the idea around de novos and also kind of having the 2 services in the same market. So can you remind us kind of the percent of your markets where you have the overlap. And sort of what are the benefits of having hospice in the same market as you have home health?

So we have 109 of our hospice locations right now that are in markets with home health. When we look at the portfolio of our home health where we don't have hospice. It's really knowing there's obviously areas that have CON, for example, Florida, which will be a little bit more difficult to get into. But then there's also other areas that we can do a de novo. And so it's looking at -- we do have home health that transitions patients to hospice in non-overlap and really looking at our post-transition data to know where should we prioritize putting hospice where we have home health. There's a lot of benefit from the branding, right? People are already aware of Enhabit in the market, both from a referral source as well as from a clinical base. So it really then comes down to that local market, what does that state require as far as putting in a de novo. That's how we kind of prioritize where we'll put them.

Is there any percentage you have in terms of percent of, I guess, your home health patients getting into your hospice or percent of hospice, I guess, that you get from your own home health in the markets where you have overlap?

In general, about 25% of our hospice admissions come from home health, a home health. And so there is definitely a benefit to having that transition from home health to hospice.

Okay. And I guess maybe transitioning into the corporate level on your leverage ratio, where you exited the quarter with 3.9x, I think. So can you talk about your leverage targets? And also how do you plan to get to that?

Yes. And we did a bit of highlighting this in our 8-K document as well. 2025 execution delivered an emerging growth story and an improved balance sheet, positioning us for growth. While we've not historically communicated a leverage target, current leverage profile provides improved flexibility, which we'd want to maintain going forward. As we think about free cash flow and that may be a separate discussion, but the free cash flow and use of that free cash flow, we think it makes sense to opportunistically deploy that around some of the targeted M&A. But we really feel like the improved profile that we have, the interest expense savings that's generated on an annualized basis of approximately $19 million continues to accelerate the overall free cash flow story as well. And we're really in a position that we can start to deploy that in a more meaningful way for our shareholders.

So I guess you're kind of suggesting that 3.9x is sort of where you feel comfortable? Or are you saying that there could be more, I guess, the leveraging that's happening. While at the same time, it sounds like you plan to -- we deploy some of the free cash flow into acquisitions.

Yes. I think there's a realistic scenario where we could continue to do both in the context of free cash flow, the target there that we put out in our document of the $25 million to $50 million of targeted acquisition or investment in acquisitions. If you look at our levered free cash flow, combined with EBITDA growth at a similar level to 2025 and 2026, we think there's capability to do both. That said, we're going to continue to be very disciplined in our approach to that. It needs to be accretive for our shareholders. Absent that, I think we'd continue to focus on deleveraging the balance sheet in a similar manner to the way we had in 2025.

All right. I think that's all the questions that I had here. So thank you so much to Barb and Ryan, and thanks, everyone, for joining us today and yesterday and hope we -- because see you pretty soon somewhere maybe in person as well. Thanks, everyone.

Great. Thank you.