Enhabit, Inc (EHAB) Risk Analysis

We derive a substantial portion of our Net service revenue from the Medicare program. In addition to reimbursement rate changes resulting from CMS's annual rulemaking processes, Congress and certain state legislatures periodically propose significant changes in laws and regulations governing the healthcare system, which have resulted in, and may result in future, limitations on increases and, in some cases, significant reductions in the levels of payments to healthcare providers. For example: - In July 2025, President Trump signed into law the OBBBA, which provided for significant changes to Medicare and Medicaid aimed at reducing overall federal spending, including certain work mandates for Medicaid eligibility. With the pending eligibility changes, enrollees could lose health care coverage, leading to increased demand for more affordable, non-institutional care options, such as home health and hospice services. The OBBBA also introduced significant financial and operational challenges for the services we provide, however. These challenges include, but are not limited to, reduced Medicaid funding, potential increases in uncompensated care, and semi-annual eligible redeterminations with stricter documentation verification for enrollees. - 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. Through 2026, CMS must annually determine the impact on estimated aggregate expenditures of differences between assumed and actual behavior changes and make permanent and temporary increases or decreases to the 30-day payment amount to account for such differences. Applying this methodology, CMS implemented a 3.925%, 2.89%, 1.975%, and 0.9% permanent adjustment reduction to the home health base rate for 2023, 2024, 2025, and 2026, respectively, and implemented a temporary reduction to the home health base rate for 2026 of 2.7%. CMS may make future permanent or temporary adjustments based on analysis of estimated aggregate expenditures, which could significantly impact reimbursement for our services. - For Medicare providers like us, the 2010 Healthcare Reform Laws provide that CMS will make annual adjustments to Medicare reimbursement rates, commonly known as a "market basket update," that in recent years has been largely offset by adjustment reductions to the home health base rate. For calendar year 2026, for example, CMS implemented a 1.3% payment update percentage decrease for home health reimbursement rates and, for fiscal year 2026, a 2.6% payment update percentage increase to hospice reimbursement rates, each as compared to 2025 reimbursement rates. There is no assurance that future market basket updates will result in increases, or that such updates will be sufficient to offset increases in operating costs or the effects of other adjustments to the home health or hospice base rates. - Other federal legislation can also have a significant direct impact on our Medicare reimbursement. For example, the Budget Control Act of 2011 provided for an automatic 2% reduction of Medicare program payments, known as sequestration. In August 2025, the Congressional Budget Office estimated that required limits on spending connected to the OBBBA may result in a 4% sequestration under the Statutory Pay-As-You-Go Act of 2010 ("Statutory PAYGO"). In November 2025, President Trump signed the Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, setting the Statutory PAYGO to zero for the year and reducing the risk of such sequestration. 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. State policymakers may consider similar measures relating to Medicaid in response to potential reductions associated with the OBBBA. - Each year, MedPAC advises Congress on issues affecting Medicare, including, among others, the HH-PPS and the Hospice payment systems, which 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 Budget Act and set out in the 2019 final rule for the HH-PPS. MedPAC has also recommended that, for fiscal year 2026, Congress should reduce the home health base rate by 7% and eliminate the hospice base payment update. There can be no assurance that the government will not enact future initiatives that 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, which could have material adverse effects 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," in this Annual Report.

As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews, audits, and investigations to verify our compliance with these programs and applicable laws and regulations. We also are subject to audits under various federal and state government programs in which third-party firms engaged by CMS, the HHS-OIG, and private payers conduct extensive reviews of claims data and medical and other records to identify potential improper payments. If billing errors are identified in the sample of reviewed claims, these reviewers sometimes extrapolate the billing error to all claims filed, which could result in a larger alleged overpayment than originally identified in the sample. Our costs to respond to and defend reviews, audits and investigations may be significant and could have a material adverse effect on our business, financial position, results of operations, and cash flows. Moreover, an adverse review, audit or investigation could, among other things, result in: - required refunding or retroactive adjustment of amounts we have been paid by federal or state programs or private payers;- state or federal agencies imposing fines, penalties, and other sanctions on us;- loss of our ability to participate in federal programs like Medicare, state programs or one or more private payer networks; and/or - damage to our business and reputation in various markets. For additional discussion of the reviews, audits, and investigations to which we are subject, see Item 1, "Business-Regulation-Governmental Review, Audits, Surveys, and Investigations," in this Annual Report.

Government and private payers are increasingly looking for alternative payment models and VBP to contain costs. In May 2025, the Center for Medicare and Medicaid Innovation ("CMMI") announced its updated strategic approach to alternative payment models and value-based care, including, among other things, exploring additional waivers for ACOs and models focused on lifestyle education and services. CMMI may develop new models that directly affect our business. The healthcare industry faces uncertainty around attempts to improve outcomes and reduce costs, including coordinated care and integrated delivery payment models. In an integrated payment delivery model, hospitals, physicians, and other care providers are incentivized to coordinate healthcare on a more efficient, patient-centered basis. While this is consistent with our goal of being a high-quality, cost-effective provider, broad-based implementation of a new delivery payment model could disrupt the healthcare industry, and may have a significant impact on our business and results of operations. In recent years, HHS has been studying the feasibility of bundling and episode-based care. CMS's Bundled Payments for Care Improvement ("BPCI") Advanced initiative, a voluntary, multi-year bundling program intended to test and evaluate alternative payment methodologies, ended December 31, 2025. The BPCI Advanced initiative covered 29 types of inpatient and three types of outpatient clinical episodes, including stroke and hip fracture, over a 90-day episode period. In January 2026, the Transforming Episode Accountability Model ("TEAM"), a five-year mandatory, episode-based payment model for certain acute care hospitals, will begin, requiring covered acute care hospitals to coordinate care for 30 days following one of five covered procedure episodes, including surgical hip femur fracture treatment. TEAM participants bill Medicare FFS but receive a target price based on certain Medicare items and services. TEAM participants will either, subject to quality performance adjustments, earn payments from CMS or owe payment to CMS depending on whether the participant's spending is below or above the target price. We may not be able to properly adjust to the end of the BPCI Advanced initiative or the beginning of TEAM, and effects on reimbursement remain uncertain. Additionally, as the number and types of bundling, direct contracting, and ACO models increase, the number of patients who are treated in these models likely increases as well. Our unwillingness or inability to participate in integrated delivery payment and other alternative payment models and the referral patterns of other providers participating in those models may limit our access to patients who would benefit from treatment by home health services. Government and private payers' implementation of alternative payment models and VBP requirements could have a material adverse effect on our business. We may not be able to effectively adapt to such changes, or our competitors may be able to adapt more quickly, which would harm our ability to increase our volume of patients and revenue and harm our business, financial position, results of operations, and cash flows.

Our operations depend on the efforts, abilities, and experience of our medical personnel, such as physical therapists, occupational therapists, speech pathologists, nurses, and other healthcare professionals. We compete with other healthcare providers for qualified personnel responsible for the daily operations of each of our locations. Our ability to attract and retain qualified personnel depends on several factors, including our ability to provide competitive wages and benefits. In some markets, the lack of available medical personnel is a significant operating issue facing all healthcare providers, including us. A shortage may require us to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. A failure to recruit and retain qualified medical personnel could cause the quality of our services to decline or constrain our ability to grow. If our staffing costs increase, we may not experience reimbursement rate or pricing increases to offset these additional costs. Because a significant percentage of our revenues consists of fixed, prospective payments, our ability to pass along increased staffing costs is limited. In particular, if staffing costs continue to rise at an annual rate greater than the annual net impact of reimbursement rates from Medicare, or we experience a significant shift in our payer mix to lower rate payers such as Medicare Advantage, our results of operations and cash flows will be adversely affected. Conversely, decreases in reimbursement revenues, such as with sequestration, may limit our ability to increase compensation or benefits to the extent necessary to retain key employees, increasing our turnover and associated costs.

Our employees drive to our patients using either company fleet vehicles or personal vehicles. For the company fleet vehicles, we reimburse our employees' out-of-pocket expenses, including fuel cost, and we reimburse our employees using their personal vehicles for mileage pursuant to an established reimbursement methodology. Fluctuations in fuel prices affect our cost per visit and per patient day, and in an environment of increasing fuel prices, our cost per visit and per patient day can increase due to factors beyond our control. If the costs associated with fuel, repair expenses, and new fleet vehicles continue to rise, our future operations and financial results may be adversely affected, and our profits and profit margins will likely be reduced.