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The Medicare CY2026 rate proposed rule created a thunderstorm of anxiety across the home health industry. Some larger providers said that they anticipated their organizations would be largely immune from the rule’s effects – but only one reported that they anticipated growth opportunities if the final rule resembles the proposed one.
With a proposed cut that would be the largest the home health industry has ever faced, I was surprised that any company anticipated benefits from such a drastic rate reduction.
Enhabit (NYSE: EHAB) leaders said at the Jefferies Healthcare Services Conference that they saw potential upside from the disruption that would be caused if the rule passes as-is.
In this week’s exclusive, members-only HHCN+ Update, I’ll share my analysis of Enhabit’s prediction and offer analysis and key takeaways, including:
– What Enhabit’s anticipated growth opportunities could look like
– Why the company’s statement is surprising
– How the industry would transform if large home health players capitalize on these opportunities
Enhabit’s prediction
At Jefferies, Enhabit’s Chief Financial Officer Ryan Solomon highlighted the company’s tactics to prevent bottom-line impacts if the final rule includes the proposed 6.4% rate cut, stating that Enhabit could meaningfully offset rate headwinds.
Still, the company’s leaders are concerned about the pressures caused by a rate cut. At HHCN’s FUTURE conference last month, Bud Langham, Enhabit advisor and former executive vice president, said that the proposed rule was his number one concern for the industry.
“A significant cut like that is significantly disruptive to the industry for a variety of reasons,” Langham said. “It’s not just about margin. At the end of the day, it’s about patient access. There’s no debate. That’s the one that we’ve got to figure out.”
While the company certainly doesn’t seem to welcome the final rule, it has found a potential silver lining.
“Should the final rule look more like the proposed, I think there will be potentially some disruption that could create some growth opportunity above and beyond what we have seen this year in our home health platform,” Solomon said.
While Solomon didn’t paint a clear picture of the type of growth the company expected to see come of rate-related disruption, it’s not hard to guess what he meant.
A drastic rate cut would hit smaller and rural providers the hardest.
“We will see agencies close, period,” Marisa Crecelius, deputy general counsel for the Pennant Group (Nasdaq: PTNG), previously told HHCN.
Large companies like Enhabit, therefore, stand to sweep in and acquire struggling agencies, or open their own branches in areas recently left bereft of home health services after local agencies closed.
Why Enhabit expects a windfall amid rate disarray
One reason Solomon’s statement surprised me is that Enhabit is among the most reliant on Medicare among its publicly traded home-based care peers.
According to a presentation recently released by Aveanna (Nasdaq: AVAH), Enhabit’s payer mix consists of 66% Medicare reimbursement. The only mentioned company with a higher percentage of Medicare payment is Amedysis (which is no longer publicly traded), with a 2% higher Medicare mix.
Aveanna touted its diversified payer and segment mix in the presentation, contrasting it with companies like Enhabit, which have a much more singular focus. It’s worth keeping in mind that Aveanna’s data did not separate home health from hospice, meaning that Enhabit’s segment mix is more diversified than is represented in the above figure.
To me, it’s unsurprising that Enhabit anticipates being insulated from rate cut headwinds. With 249 home health locations and 114 hospice locations across 34 states, it has the size that allows for technology investments, meaningful payer negotiations and major innovation. With a payer mix so heavily Medicare-based, however, it is still a bit shocking that the company is among the only ones anticipating opportunities – or at least publicly speaking about them – amidst a broadly-decried regulation proposal.
It’s possible that this single-minded focus best equips the company to do what it does best: home health and hospice, and be ready to expand its clear vision. I expect Pennant would make similar acquisitive moves, given that the company has doubled down on acquiring home health agencies despite industry headwinds. Recently, it has acted on this strategy by spending $146.5 million to acquire 54 home health and hospice agencies divested as part of UnitedHealth’s acquisition of Amedisys.
The bigger picture for the industry
The bottom line from publicly traded home health companies is that their businesses will survive even the largest-ever Medicare reimbursement rate cut. Without the size that provides a cushion, smaller providers may not, creating significant consolidation opportunities. We will see the giants grow from this rate cut.
Consolidation is already ramping up in the home health industry, but the rate cut could dramatically hasten this trend – and could be a concern to patients.
A study published in May in Health Services Management Research examined the impact of home health agency acquisition on quality of care, using a sample of 10,184 agencies in the U.S. Of those sampled, 169 were acquired during the study period. Researchers found a “modest” 1.07% improvement in process measures among those acquired agencies, but no significant changes in outcome or patient experience measures.
“These findings suggest that, while integration has the potential to modestly improve home health process efficiency, there is very little benefit to patients,” researchers wrote.
Still, larger providers snapping up smaller ones without the resources to withstand such a drastic rate cut could be the only way to preserve access to care. Without those acquisitions, the smaller agencies could potentially disintegrate, leaving a gap in care access.
I expect we will still see these mega-providers change their approaches to business as usual, namely, through diversification and more targeted growth. Without a reimbursement cushion, providers are likely to target geographic areas with a more sure-fire patient and worker base, rather than taking a gamble on a rural region. Areas that are usually underserved may therefore be even less likely to see meaningful improvements to access to care.
Unless the final rule looks substantially different than the proposed, one thing is clear. The face of home health care would be transformed in profound and lasting ways.
