Home health provider Enhabit is considering a potential sale, merger or strategic transaction in another sign that continued financial headwinds are likely to force further consolidation in the sector.
The Dallas-based company announced plans to launch “a strategic alternatives process” as it reported a net loss of $74 million, or $1.49 per share, for its second quarter. However, President and CEO Barbara Jacobsmeyer declined to discuss details about a possible sale or merger during an earnings call with financial analysts on Thursday.
A possible sale of Enhabit comes at a time when merger and acquisition activity in home healthcare is spiking after a downturn last year, following an increase in valuations for some companies The sector accounted for 16 deals in the second quarter, according to merger and acquisition advisory firm Mertz Taggart. That was the largest number of home health transactions since the fourth quarter of 2021, according to the firm.
Enhabit is one of the nation’s largest home health and hospice providers, serving more than 225,000 patients across 34 states. The company has struggled financially since it was spun off from Encompass Health in July 2022.
Enhabit incurred rebranding costs associated with the separation from Encompass, as well as rising labor costs and declining revenue as patients increasingly transitioned from fee-for-service Medicare plans to Medicare Advantage. Medicare Advantage plans often negotiate lower rates with providers based on volume.
“This business was built on Medicare fee-for-service,” Enhabit Chief Financial Officer Crissy Carlisle said during the earnings call. “The market shifted rapidly and we had to adapt to changes in the last 12 months.”
Consolidation in the home health sector has been driven in part by growth in private insurers' Medicare Advantage business. Humana bought Kindred at Home, rebranded as CenterWell, for $8.1 billion in 2021. UnitedHealth Group closed on its $5.4 billion acquisition of LHC Group in February and is awaiting regulatory approval to complete its $3.3 billion bid to buy Amedisys.
Owning home health businesses and other healthcare providers helps private insurers coordinate care and reduce overall costs. At the same time, it's harder for competing home health businesses to negotiate lucrative contracts with those insurers.
Home health companies are also facing a potential 2.2% Medicare payment cut next year, along with rising labor costs due to a shortage of registered nurses and certified nursing assistants.
"Labor is the primary challenge we are addressing in 2023," said Jeff Shaner, CEO of Atlanta-based Aveanna Healthcare, during an earnings call Thursday.
Aveanna reported second-quarter net income of $25.6 million, or 13 cents per diluted share, compared with a loss of $474 million, or $2.56 per share, during the year-ago period, due in part to higher labor expenses and lower Medicaid reimbursement rates for its private duty business in some states.
The sector's challenges are presenting buying opportunities for some companies. The Pennant Group, which provides home health and hospice services in 14 states, is on the hunt to buy more agencies after already closing on two deals this year. On Wednesday, the company reported second-quarter net income of $2.8 million, or 9 cents per share, compared with a net loss of $2.7 million, or 9 cents per share, in the year-ago period.
Pennant President and Chief Operating Officer John Gochnour told analysts during an earnings call Wednesday that higher labor costs and looming Medicare payment cuts are prompting some smaller agencies to lower valuations for their businesses. “We see a number of attractive opportunities coming to the table,” Gochnour said.
