Enhabit, Inc (EHAB) Risk Analysis

The focus on alternative payment models and value-based purchasing of healthcare services has led to more extensive quality of care reporting requirements. In many cases, our reporting requirements are linked to reimbursement incentives. For example, home health and hospice agencies are required to submit quality of care data to CMS each year. Failure to comply with quality reporting requirements may result in a penalty on our reimbursement. For home health agencies that do not comply with quality reporting requirements, the penalty is 2%; for hospices that do not comply, the penalty is 4%. Increased scrutiny and oversight in these industries may pose a heightened risk to reimbursement. The IMPACT Act mandated that CMS adopt several new quality reporting measures for the various post-acute provider types. The adoption of additional quality reporting measures to track and report will require additional time and expense and could affect reimbursement in the future. In healthcare generally, the burdens associated with collecting, recording, and reporting quality data are increasing. Currently, CMS requires home health providers to track and submit patient assessment data to support the calculation of 20 quality of care reporting measures. In addition, CMS instituted a Star rating methodology for home health agencies to meet the 2010 Healthcare Reform Laws' call for more transparent public information on provider quality. All Medicare-certified home health agencies are eligible to receive a Star rating (from 1 to 5 Stars) based on a number of quality of care measures, such as timely initiation of care, drug education provided to patients, fall risk assessment, depression assessments, improvements in bed transferring, and bathing, among others. Failing to maintain satisfactory Star rating scores could affect some of our reimbursement and patient referrals and have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows. There can be no assurance that all of our agencies will meet quality reporting requirements or quality performance expectations in the future, which may result in one or more of our agencies seeing a reduction in its Medicare reimbursements or patient referral volume. We, like other healthcare providers, are likely to incur additional expenses in an effort to comply with additional and changing quality reporting requirements.

We derive a substantial portion of our Net service revenue from the Medicare program. In addition to many ordinary course reimbursement rate changes that CMS adopts each year as part of its annual rulemaking processes, Congress and certain state legislatures periodically propose significant changes in laws and regulations governing the healthcare system. These changes may result in limitations on increases and, in some cases, significant reductions in the levels of payments to healthcare providers. There can be no assurance that future governmental initiatives will not result in pricing freezes, reimbursement reductions, or levels of reimbursement increases that are less than the increases we may experience in our costs of operations. There is also no assurance that our patient accounts receivable will be collected in a timely fashion, or at all. See Item 1, "Business-Sources of Revenue," in this Annual Report for a table identifying the sources and relative payor mix of our revenues. Many provisions within the 2010 Healthcare Reform Laws have impacted or could in the future impact our business, including Medicare reimbursement reductions and promotion of alternative payment models, such as ACOs and bundled payment initiatives. For Medicare providers like us, the 2010 Healthcare Reform Laws included reductions in CMS's annual adjustments to Medicare reimbursement rates, commonly known as a "market basket update." The 2010 Healthcare Reform Laws also require market basket updates for home health and hospice providers to be reduced by a productivity adjustment on an annual basis. The productivity adjustment equals the trailing 10-year average of changes in annual economy-wide private nonfarm business multi-factor productivity. The Fiscal Year 2024 Hospice Payment Rate Update Final Rule finalized a 3.1% hospice payment update percentage. This was a result of a 3.3% inpatient hospital market basket percentage increase reduced by a 0.2% productivity adjustment. The hospice payment update includes a statutory aggregate cap that limits the overall annual payments per patient made to hospices. The 2024 Home Health Final Rule reflects an estimated overall increase in Medicare home health reimbursement rates of 0.8% relative to 2023 levels. This payment update is the collective impact of a 3.3% market basket positive adjustment and a 0.4% fixed-dollar loss ratio positive adjustment, offset by a 0.3% productivity negative adjustment and a 2.6% permanent behavioral negative adjustment. There is no assurance that rates will increase in future years or that rate increases will be adequate to offset increases in operating costs. Other federal legislation can also have a significant direct impact on our Medicare reimbursement. In 2011, President Obama signed into law the Budget Control Act of 2011, which provided for an automatic 2% reduction of Medicare program payments. This automatic reduction, known as "sequestration," began affecting payments received after April 1, 2013. Under current law, the reimbursement we receive from Medicare will be reduced by this sequestration. Additional Medicare payment reductions are also possible under Statutory PAYGO. Statutory PAYGO requires, among other things, that mandatory spending and revenue legislation not increase the federal budget deficit over a five-or ten-year period. If the Office of Management and Budget (the "OMB") finds there is a deficit in the federal budget, Statutory PAYGO requires OMB to order sequestration of Medicare. In 2021, President Biden signed the American Rescue Plan Act of 2021 (the "American Rescue Plan Act"). The Protecting Medicare and American Farmers from Sequester Cuts Act also suspends until 2025 the Statutory PAYGO reductions that would have gone into effect because of the American Rescue Plan Act. Concerns held by federal policymakers about the federal deficit, national debt levels, or healthcare spending specifically, including solvency of the Medicare trust fund, could result in enactment of further federal spending reductions or limitations, further entitlement reform legislation affecting the Medicare program, and further reductions to provider payments. Each year, MedPAC advises Congress on issues affecting Medicare, including, among others, the HH-PPS and the Hospice payment systems. MedPAC's advice can affect the rates we are paid for our services. For example, CMS incorporated some of MedPAC's recommendations into the PDGM system mandated by the 2018 Bipartisan Budget Act and set out in the final rule for the 2019 HH-PPS. Beginning in 2020, PDGM replaced the prior 60-day episode payment methodology with a 30-day payment period and eliminated therapy usage as a factor in setting payments. CMS was required to make assumptions about potential behavior changes caused by the implementation of the 30-day unit of payment and the PDGM. As a result, CMS must annually determine the impact of differences between assumed and actual behavior changes on estimated aggregate expenditures, beginning with 2020 and ending with 2026, and make permanent and temporary increases or decreases to the 30-day payment amount to account for such differences. In the 2023 Home Health PPS final rule, CMS finalized a methodology for analyzing the impact of differences between assumed versus actual behavior changes on estimated aggregate expenditures and calculated levels of actual and estimated aggregate expenditures using 2020 and 2021 claims. This resulted in the application of a 3.925% permanent adjustment reduction to the home health base rate for 2023. In the 2024 Home Health PPS final rule, CMS finalized an additional 2.89% permanent adjustment reduction to the home health base rate. CMS may make future permanent or temporary adjustments based on analysis of estimated aggregate expenditures through 2026, which could significantly impact our home health agencies. Changes to MedPAC's recommendations could also affect reimbursements for our services. For example, in 2023, MedPAC recommended that, for fiscal year 2024, Congress should update the hospice base payment rate and wage adjust and reduce the hospice aggregate cap by 20%. Similarly, MedPAC has previously recommended that Congress adopt a unified payment system for all post-acute care, but has more recently concluded that due to the considerable resources this would require, and other changes already made, policymakers should consider smaller-scale site-neutral policies. There can be no assurance that future governmental action will not result in substantial changes to, or material reduction in, our reimbursements. In any given year, the net effect of statutory and regulatory changes may result in a decrease in our reimbursement rate, and that decrease may occur at a time when our expenses are increasing. As a result, there could be a material adverse effect on our business, financial position, results of operations, and cash flows. For additional discussion of how we are reimbursed by Medicare, see Item 1, "Business-Sources of Revenue-Medicare Reimbursement-Regulation," in this Annual Report.