After becoming a public entity last year, Enhabit Inc.’s (NYSE: EHAB) M&A journey has narrowed towards hospice, diverting less in home health’s direction.
Reimbursement uncertainties, shrinking pools of available assets, and rising valuations in the home health space are forces steering the company’s sights towards hospice, according to Enhabit executives.
Large-scale consolidation in both home health and hospice has occurred at a rapid pace in recent years, leaving more small- to mid-sized providers left in the remaining mix of available assets up for grabs. However, the market has taken a dip in the first half of 2023, though some expect a rebound before year’s end.
Nevertheless, smaller deals will likely reign this year.
One sticking point on some deals is the number of discrepancies between what sellers are asking and what buyers are willing to spend, according to Enhabit CFO Crissy Carlisle, speaking during Jeffries Financial Group’s Healthcare Management Conference in New York.
“What’s happening there is you’ve got a different, tougher capital market,” Carlisle said. “What’s really driving it is the bid-ask spread. There’s so much friction between the bid and ask from buyer to seller that they’re unable to come to an agreement. I think that M&A continues to be an important part of our growth strategy. But it’s a matter of finding an attractive asset at an appropriate price. [Sellers are] very aware that we’re willing to walk, and so that’s what happens when you have that friction and somebody is really in the market to sell.”
Dallas-based Enhabit’s footprint includes 252 home health locations and 105 hospice locations across 34 states. The company emerged from the 2021 spinoff of Encompass Health’s (NYSE: EHC) home health and hospice segment.
The company has been focused on growth since the outset, through de novos and acquisitions — with an emphasis on its hospice business. Enhabit opened two hospice de novos in Texas in March, and acquired an Indiana home health agency that same month.
Enhabit plans to pour $2 million to $4 million into de novos this year, with an emphasis on hospice growth to co-locate more of these operations with its home health operations. The company’s strategy includes opening 10 hospice de novos annually, primarily colocating these with existing home health assets.
In terms of expenses, de novos typically cost around $250,000 to $300,000 per location to launch, but can generate up to roughly $2 million in annual revenue within 24 months, Carlisle stated.
Both home health and hospice acquisitions remain a cornerstone of Enhabit’s expansion strategy. Acquisitions contributed $36.3 million to Enhabit’s growth in core business throughout the course of last year, while de novos added $1.2 million, the company reported.
“A lot of our focus right now when you think about growing the company, our de novo strategy is a bit more focused on hospice,” Carlisle said. “Given that they don’t face some of the same uncertainties as home health does, and that rapid M&A shift as well. We are experiencing an increase in our leverage – a lot of that is being driven by the decline in EBITDA over the last 12 months and our total debt is actually a bit less than when we spun off.”
Enhabit’s EBITDA reached $25.3 million in Q1 of 2023 with an overall net service revenue of $265.1 million during that period. Its hospice segment brought in $49.3 million, while home health revenue reached $215.8 million.
Potential shifts in home health reimbursement is cooling interest among buyers, while leading some companies to the sellers table, according to Enhabit President and CEO Barbara Jacobsmeyer.
These trends could impact the size and scale of assets that come to market, Jacobsmeyer indicated. For one, increased consolidation of smaller home health and hospice providers may be on the horizon, she said.
“I’m not sure I would have seen this fast or this far with the changes that have happened in the last couple years,” Jacobsmeyer said during the conference. “I do think [it] continues to reinforce the value of home health, and I do think that there will continue to be a lot of consolidation going on. That will happen particularly with some of the smaller folks. We’re seeing that already, where we’re not even sure if some of them are going to even get to the point of being able to sell. Some are going to face some issues with the [Medicare Advantage (MA)], and particularly Medicare pricing, that the volume may just become available for us in the market.”
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