Enhabit, Inc (EHAB) Risk Analysis

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, 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: - 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. Applying this methodology, CMS implemented a 3.925%, 2.89% and 1.975% permanent adjustment reduction to the home health base rate for 2023, 2024 and 2025, respectively. 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. - 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 the permanent adjustment reduction to the home health base rate. For fiscal year 2025, for example, CMS implemented a 2.7% net increase for home health reimbursement rates and a 2.9% net increase to hospice reimbursement rates, each as compared to 2024 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 permanent 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, in 2011, President Obama signed into law the Budget Control Act of 2011, which provided for an automatic 2% reduction of Medicare program payments, known as 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. - 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 final rule for the 2019 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 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," in this Annual Report.

Other legislative and regulatory changes may affect healthcare providers like us from time to time by lowering reimbursements, increasing the cost of compliance, decreasing patient volumes, promoting frivolous or baseless litigation, and otherwise adversely affecting our business. For example, the 2010 Healthcare Reform Laws provide for the expansion of the federal Anti-Kickback Law and the FCA increasing investigation and enforcement efforts in the healthcare industry generally. Changes include increased resources for enforcement, lowered burden of proof for the government in healthcare fraud matters, expanded definition of claims under the FCA, enhanced penalties, and increased rewards for relators in successful prosecutions. CMS may also suspend payment for claims prospectively if, in its opinion, credible allegations of fraud exist. While the initial suspension period may be up to 180 days, it can be extended almost indefinitely if the matter is under investigation by the HHS-OIG or the DOJ. Any such suspension would adversely affect our financial position, results of operations, and cash flows. Some states in which we operate have undertaken, or are considering, healthcare reform initiatives that address similar issues. The results of the 2024 federal elections further increase legislative and regulatory uncertainty. For example, changes in agency structure and staffing of government subsidized healthcare programs, including Medicare, could affect these programs by changing the number of persons enrolled in or eligible for these programs, reducing or delaying funding, changing reimbursement rules or increasing our administrative and compliance costs. Further, legislation and administrative actions at the federal level may impact funding for, or the structure of, the Medicaid program at the state level. We cannot predict what legislative or regulatory reforms or changes, if any, will ultimately be enacted or the timing or effect any of those changes or reforms will have on our Net service revenue, financial position, results of operations, and cash flows. For additional discussion of healthcare reform and other factors affecting reimbursement for our services, see Item 1, "Business-Sources of Revenue-Medicare Reimbursement," in this Annual Report.

Healthcare providers are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. These laws and regulations relate to, among other things: - licensure, certification, enrollments, and accreditation;- policies, at either the national or local level, delineating what conditions must be met to qualify for reimbursement under federal programs;- coding and billing for services;- relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws;- quality of medical care;- use and maintenance of medical supplies and equipment;- implementation, maintenance, security, and privacy of patient information and medical records, including electronic health data and health system interoperability;- minimum staffing;- acquisition and dispensing of pharmaceuticals and controlled substances; and - disposal of medical and hazardous waste. Any changes in these laws or regulations or the manner in which they are enforced could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our equipment, personnel, services, capital expenditure programs, operating procedures, and contractual arrangements, as well as the way in which we deliver home health and hospice services. Those changes could also affect reimbursements as well as future costs related to compliance, training, and staffing. Examples of regulatory changes that can affect our business, beyond direct changes to Medicare reimbursement rates, can be found from time to time in CMS's annual rulemaking. See Item 1A, "Risk Factors-Risks Related to Our Business-Reimbursement Risks," in this Annual Report. In addition, the use of sub-regulatory guidance, statistical sampling, and extrapolation by CMS, Medicare contractors, HHS-OIG, and DOJ to deny claims, expand enforcement claims, and advocate for changes in reimbursement policy increases our risk of experiencing reduced revenue, financial penalties, or significant required changes to our operations. Because our business is both highly regulated and dependent on payment from federal programs, failure to comply with applicable laws and regulations could materially and adversely affect us. As stated in Item 1, "Business-Regulation," we are required to comply with various federal anti-fraud and abuse laws, including the False Claims Act, the federal Anti-Kickback Statute, the Stark or Physician Self-Referral Law, and Civil Monetary Penalties Law, as well as state laws and regulations. Settlements of alleged violations of applicable regulations or imposed reductions in reimbursements, substantial damages and other remedies assessed against us could have a material adverse effect on our business, financial position, results of operations, and cash flows. Even the assertion of a violation, depending on its nature, could have a material adverse effect upon our stock price or reputation and could cost us significant time and expense to defend.

Many third-party payers are exerting pressure on our industry to control healthcare costs and to reduce or limit increases in reimbursement rates for medical services. Our relationships with managed care and non-governmental third-party payers are generally governed by negotiated agreements. Our Net service revenue and our ability to grow our business with these payers could be adversely affected if we are unable to negotiate and maintain favorable agreements with them. In addition, CMS has established several ACO programs, the largest of which is the Medicare Shared Savings Program ("MSSP"), a voluntary ACO program in which hospitals, physicians, and other care providers pursue the delivery of coordinated healthcare on a more efficient, patient-centered basis. While the ACO rules are extremely complex and remain subject to further refinement by CMS, ACOs generally receive a portion of any savings generated from care coordination as long as benchmarks for the quality of care are maintained. It is possible, however, that ACOs may seek to reduce costs by discouraging referrals to post-acute care altogether. Health insurers and managed care companies, including Medicare Advantage plans, may also utilize certain third parties, known as conveners, to attempt to control costs. Conveners offer patient placement and care transition services to those payers with the intent of managing post-acute utilization and associated costs. Conveners may influence referral source decisions on which post-acute setting to recommend, as well as how long to remain in a particular setting. As a result of various alternative payment models, many referral sources-such as physicians, acute care hospitals, and other healthcare providers in the communities we serve-are increasingly focused on reducing post-acute costs by eliminating post-acute care referrals. Our ability to attract patients could be adversely affected if any of our home health agencies fails to provide or maintain a reputation for providing high-quality care on a cost-effective basis as compared to other providers.