Hunting for New Segment CEO, Encompass Health to Stay Aggressive in Home Health

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Encompass Health Corp. (NYSE: EHC) announced in December that it was “exploring strategic alternatives” for its home health and hospice segment. Four months later, April Anthony, the CEO and original founder of the segment, revealed she was stepping down this summer.

With the home health business well on its way to recovering from the COVID-19 crisis, Encompass Health executives are signaling that they’re bullish on the strategic opportunities that are out there. They’re still keeping the details close to the vest, however.

“I think the scale [of our home health and hospice business] is sufficient enough to accommodate any of the array of alternatives that are currently on the table,” Encompass Health CFO Doug Coltharp said on the company’s Q1 earnings call Wednesday.

Those alternatives would include the home health and hospice business becoming a standalone company or merging with a larger entity that’s also looking at a strategic deal for its business, among others. Recently, Encompass Health’s corporate jet was spotted in Rhode Island, prompting speculation about CVS Health’s (NYSE: CVS) potential interest.

For now, though, Coltharp’s comments are as much as Encompass Health is willing to comment on the matter. It won’t provide further commentary until July, according to leadership.

“Until then, we’re dedicated to identifying the best path forward for a company to generate value creation for our shareholders,” Encompass Health CEO Mark Tarr said on the call.

Birmingham, Alabama-based Encompass Health offers a wide range of care in both facility and home-based settings. It has 138 hospitals, 241 home health locations and 82 hospice locations in 39 states and Puerto Rico.

The company reported total net operating revenues of about $1.23 billion in Q1 2021, an over 4% increase compared to the $1.18 billion the company brought in during the same period last year.

The company’s home health and hospice segment posted net operating revenues of about $270.5 million for the quarter, a 0.8% decrease compared to the $272.8 million it brought in during Q1 2020. Home health specifically was down 2.2% year over year.

The delay of elective procedures was one of the largest issues home health agencies talked about facing early on in the pandemic, but those woes haven’t totally subsided yet, according to Tarr.

“We’re beginning to see the return of elective procedures in many of our markets,” Tarr said. “However, we believe our elderly patients with complex medical conditions are not choosing to go first. Our numbers show this — we treated approximately 1,600 fewer orthopedic and lower-extremity joint-replacement patients in the first quarter of 2021 than we did in the first quarter of 2020.”

Adding back those 1,600 lost patients, discharge growth would have been at 2.2%, he added. The company expects that elective procedures will be closer to normal in the back half of this year.

“We do carry out a certain amount of very positive momentum out of March,” Tarr said. “Having those elective procedures come back will have an impact on both of the operating segments, but there is a certain amount of uncertainty on exactly when that will happen. … We just don’t have a lot of insight in terms of exactly when.”

Non-episodic admissions on the rise

A major bright spot for Encompass Health in the first quarter was the results from its relationship with Minnesota-based UnitedHealthcare.

“We’re seeing continued strength in Medicare Advantage, … and we are encouraged by the strong start to the UnitedHealthcare national contract in home health,” Tarr said.

Whereas home health revenue was slightly down in Q1, the company’s non-episodic admissions increased 3% year over year, mostly due to the partnership with UnitedHealthcare.

In 2019, UnitedHealthcare announced it would be expanding the company’s bundled payment offerings to providers participating in its MA plan networks — and that home health would play a major part in that.

Encompass Health jumped on that opportunity, and it has paid off for them thus far.

“Non-episodic admissions increased 3%, primarily due to the new national contract with UnitedHealthcare, which began in February 2021,” Coltharp said. “That moved out-of-network volume — historically paid on an episodic basis — to in-network volume paid on a per-visit basis.”

Future of the home health and hospice segment

Encompass is planning on using a third-party firm to launch a nationwide search for Anthony’s replacement.

Anthony started Encompass Home Health & Hospice in 1998, growing the business from a single-location startup to a large and successful home health player. In 2014, HealthSouth Corporation acquired the business for $750 million, eventually changing its name to Encompass Health in 2018.

“We will have a smooth transition there,” Tarr said. “In terms of the timing, that is a bit uncertain in terms of whether that is a 60- or 90-day timeframe. But we are well underway with that, and April and I will work collaboratively on a near-term interim transition to make sure everything operates smoothly with a core group of the senior management staff there in Dallas.”

For now, Anthony continues to run the segment that she originally launched herself. Encompass Health does not plan to slow down M&A during that interim period, and even recently announced the acquisition of Frontier Home Health and Hospice.

“We are seeing a resumption of home health acquisition activity, and have a solid pipeline and development opportunities,” Tarr said.

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