Executive Summary / Key Takeaways

• Strategic Momentum and Deleveraging: Enhabit ($EHAB) has achieved its first year-over-year consolidated revenue growth post-spin and consistently reduced debt, with its net debt to adjusted EBITDA leverage ratio improving to 4.3x in Q2 2025. This financial discipline, coupled with the early exit from its credit covenant adjustment period, enhances operational flexibility and positions the company for future growth.
• Hospice Segment as a Growth Engine: The Hospice segment is a standout performer, delivering six consecutive quarters of sequential census growth and a 53.8% year-over-year adjusted EBITDA increase in Q2 2025. This robust performance is driven by a fully deployed case management model and effective business development strategies.
• Home Health Stabilization and Optimization: While facing industry-wide reimbursement pressures, Enhabit's Home Health segment is stabilizing, with Medicare average daily census (ADC) decline significantly slowing. The company is aggressively leveraging its Medalogix Pulse technology and advanced visit per episode (VPE) management to drive efficiency and mitigate proposed rate cuts.
• Technological Differentiation for Cost Control: Enhabit's investment in Medalogix Pulse and new internal applications provides a critical competitive advantage, enabling optimized care plans and improved clinical staff productivity. Each 0.5 VPE reduction is estimated to generate $5 million to $8 million in value, crucial for offsetting inflationary pressures and reimbursement headwinds.
• Navigating Regulatory Headwinds with Strategic Levers: Despite a proposed 6.4% decrease in 2026 home health payments from CMS, Enhabit is proactively evaluating multiple levers, including advanced VPE management, further branch consolidations, and G&A expense reductions, to maintain profitability and competitive wage rates.

Setting the Scene: A Resilient Foundation in Home-Based Care

Enhabit, Inc. ($EHAB) operates at the crucial intersection of healthcare delivery, providing essential home health and hospice services across 34 states. Founded in 1998 and spun off from Encompass Health Corporation (EHC) in 2022, Enhabit has rapidly established itself as an independent public entity, navigating the complexities of a highly regulated and evolving industry. The company's core mission is to deliver superior, cost-effective care in the comfort of patients' homes, a model increasingly vital given the aging demographic and a societal shift towards lower-cost care settings.

EHAB's Strategic Blueprint and Competitive Edge

Enhabit's strategy centers on achieving profitable growth through operational excellence, strategic payer partnerships, and disciplined cost management. The company operates two distinct yet complementary segments: Home Health and Hospice. In the competitive landscape, Enhabit faces formidable rivals such as Amedisys (AMED), Humana (HUM), UnitedHealth Group (UNH), and Chemed (CHE). While these competitors offer similar services, Enhabit distinguishes itself through a scalable operating model, proprietary clinical pathways, and a disciplined cost structure.

Compared to a diversified healthcare conglomerate like UnitedHealth Group, Enhabit's focused approach allows for greater agility in localized service delivery and a deeper emphasis on personalized patient care. Against a hospice specialist like Chemed, Enhabit's broader continuum of care, integrating both home health and hospice, offers a more holistic patient journey. The company's scale provides meaningful access to payer members, and its high-quality outcomes position it favorably for continued progress within its payer strategy, allowing it to selectively gain market share as smaller or less capitalized providers struggle under reimbursement constraints.

A History Forged in Adaptation

Enhabit's journey as an independent entity has been marked by strategic adaptation. Post-spin in 2022, the company embarked on a de novo growth strategy, particularly in hospice, launching seven locations between 2022 and 2023. Financial challenges in 2023 led to adjustments in its credit agreement covenants, which Enhabit successfully addressed through focused deleveraging. A significant divestment occurred on March 19, 2025, when Enhabit sold its investment in TVG Holdings, LLC (which included Medalogix) for approximately $21 million, realizing a $19.3 million gain. This capital was strategically used to reduce debt, underscoring the company's commitment to strengthening its balance sheet.

The company has consistently grappled with CMS reimbursement rates, which have seen "repeated cuts" over several years, failing to keep pace with inflation and presenting a "significant headwind" to revenue growth. This challenging backdrop has necessitated a proactive approach to cost control and operational efficiency, including strategic branch closures and the integration of advanced technologies.

Technological Edge: Precision Care and Operational Efficiency

Enhabit's commitment to technology is a foundational element of its strategy, serving as a critical differentiator and a powerful lever for operational efficiency and cost control. The company has strategically invested in and developed technologies aimed at optimizing care delivery and enhancing productivity.

Medalogix Pulse: The "Just Right" Care Plan

At the core of Enhabit's technological differentiation is its utilization of Medalogix Pulse, a predictive data and analytics platform. This technology is instrumental in developing a "just right care plan" for each patient, ensuring that visits are allocated effectively based on patient acuity and progression. The tangible benefits are clear: in Q1 2025, total visits per episode (VPE) declined 6.7% year-over-year, from 14.9 to 13.9, further improving to 13.7 in Q2 2025. This optimization creates "additional clinical capacity" by reducing unnecessary visits, allowing clinicians to serve more patients without compromising quality. Management estimates that "every 0.5 VPE reduction, value could be in the approximately $5 million to $8 million," a significant financial impact that directly offsets inflationary pressures and reimbursement cuts.

Innovation Beyond the Bedside

Beyond Medalogix Pulse, Enhabit is actively engaged in R&D and new technological developments. The company is piloting two internally developed applications: one designed to improve clinician and patient communication regarding scheduled visits, and another to streamline communication between business development and operations teams during the patient referral-to-admission process. These initiatives aim to reduce "inefficient and redundant tasks," further enhancing productivity and reducing operational costs.

For investors, these technological advancements represent a crucial competitive moat. They enable Enhabit to deliver high-quality care more efficiently than many peers, particularly in an environment of tightening reimbursement. This technological edge directly contributes to better margins, a stronger market position, and the long-term growth strategy by allowing the company to absorb cost pressures while maintaining service quality and expanding capacity.

Financial Performance: Momentum Amidst Headwinds

Enhabit's recent financial performance reflects a strategic pivot towards profitable growth and disciplined capital management, demonstrating resilience in a challenging market.

Consolidated Strength and Deleveraging Success

The second quarter of 2025 marked a significant milestone, with consolidated net service revenue reaching $266.1 million, representing the first quarter of year-over-year consolidated revenue growth (+2.1%) since the company's spin-off. This also marked the third consecutive quarter of sequential revenue growth. For the first half of 2025, consolidated net service revenue increased 0.6% year-over-year to $526.0 million. This revenue momentum translated into improved profitability, with consolidated Adjusted EBITDA growing 6.7% year-over-year to $26.9 million in Q2 2025, and 5.9% to $53.5 million for the first half. The Adjusted EBITDA margin expanded to 10.1% in Q2 2025, up 40 basis points from the prior year.

A core strategic priority has been deleveraging the balance sheet. Enhabit has made debt prepayments for five consecutive quarters, totaling $45 million through Q2 2025, with an additional $5 million prepayment in late July, bringing the total to $50 million through Q3 2025. This has reduced cash interest expense by $10 million annually. The company's net debt to adjusted EBITDA leverage ratio significantly improved to 4.3x in Q2 2025, down from 5.1x in Q2 2024. This strong performance allowed Enhabit to exit its Credit Agreement's Covenant Adjustment Period on May 9, 2025, a quarter earlier than anticipated, providing improved pricing on its debt and greater operational flexibility, including for future acquisitions. Adjusted free cash flow for the first half of 2025 stood at $27.8 million, representing a healthy 51.9% conversion rate.

Home Health: Stabilizing and Optimizing

The Home Health segment, representing 77.4% of consolidated revenue in Q2 2025, reported $205.9 million in net service revenue, a 2.0% decrease year-over-year. Segment Adjusted EBITDA for Home Health was $39.3 million, down 11.1% year-over-year, with the margin contracting by 190 basis points to 19.1%. This was primarily due to a decrease in unit revenue per patient day (-2.5%) related to the growth in non-Medicare patients.

Despite these pressures, operational metrics show signs of stabilization and strategic effectiveness. Total admissions increased 1.3% year-over-year in Q2 2025, and average daily census (ADC) grew 0.5%. Crucially, the rate of decline in Medicare patient volumes has significantly slowed, with Q2 2025 Medicare ADC down 3.4% year-over-year, a marked improvement compared to a 14.1% decline in the corresponding 2024 period. Non-Medicare admissions were up 5.2% year-over-year, largely driven by payer innovation contracts. The segment also demonstrated strong cost control, with unit cost per patient day remaining flat in Q2 2025 due to improved clinical staff productivity offsetting market-related inflation.

Hospice: A Beacon of Growth

The Hospice segment continues to be a strong growth driver, contributing $60.2 million in net service revenue in Q2 2025, a robust 19.4% increase year-over-year. This segment's Adjusted EBITDA surged 53.8% year-over-year to $14.0 million, with the margin expanding significantly by 520 basis points to 23.3%. This exceptional performance is a direct result of investments in its case management model and business development teams, leading to six consecutive quarters of sequential census growth.

Total admissions grew 8.7% year-over-year in Q2 2025 (10% normalized for closed branches), and average daily census (ADC) increased 12.3% to 3,950. Revenue per patient day improved 6.3% year-over-year, primarily due to improved Medicare reimbursement rates and a reduction in estimated Medicare cap liability. The segment also achieved impressive cost leverage, with unit cost per patient day increasing minimally by 1.0% year-over-year, as improved clinical staff productivity largely offset inflationary pressures. All hospice regions delivered double-digit year-over-year revenue growth, indicating a fully deployed and effective operating model.

Outlook and Strategic Levers: Charting a Course for 2025 and Beyond

Enhabit's updated full-year 2025 guidance reflects confidence in its strategic execution and the momentum generated in the first half of the year, even as the company prepares for significant industry headwinds.

2025 Guidance: A Confident Path Forward

For the full year 2025, Enhabit now expects:

• Net Service Revenue: Between $1.060 billion and $1.073 billion.
• Adjusted EBITDA: Between $104 million and $108 million.
• Adjusted Free Cash Flow: Between $47 million and $57 million.

These figures are predicated on several key assumptions. In Home Health, the company anticipates 4-5% ADC growth, with a focus on reducing the rate of Medicare volume decline by approximately half compared to 2024. Revenue per patient day is expected to decrease 0.5% to remain flat, as improvements in Medicare and Medicare Advantage pricing are largely offset by an unfavorable payer mix shift. For Hospice, robust growth is projected, with 7-8.5% ADC growth and unit revenue per patient day improving in the 4-5% range, reflecting the 2.6% payment increase from the CMS Hospice Final Rule effective October 1, 2025, and favorable cap liability development. Overall, the company anticipates a 3% wage inflation, with unit costs expected to increase between 2% and 3% due to productivity and optimization improvements.

Mitigating Regulatory Pressures

A significant challenge looms with the CMS proposed 2026 Home Health Rule, which suggests a 6.4% estimated decrease in payments. Management views these "repeated cuts" as "destructive of the home health industry" and acknowledges that "if CMS does not change its extreme position, something will have to give." The cumulative permanent and temporary rate cuts since PDGM implementation now total over 20%, at a time when the cost of care has rapidly increased.

In response, Enhabit is proactively evaluating a range of strategic levers:

• Advanced Visit Per Episode (VPE) Management: A pilot program is being initiated in 11 branches to further optimize VPE, with trained virtual clinicians reviewing override recommendations. This aims to balance quality with efficiency, with each 0.5 VPE reduction potentially generating $5 million to $8 million in value.
• Branch Optimization: 11 underperforming branches were closed or consolidated by the end of Q2 2025, with an additional home health and hospice branch to be consolidated by the end of Q3 2025, as part of ongoing cost structure evaluation.
• Cost Control Initiatives: General and administrative expenses have already decreased year-over-year due to cost control. The transition of all coding functions to an outsourced resource in Q1 2025 is expected to deliver $1.5 million in cost savings for the remainder of 2025.
• Payer Innovation: Successful renegotiation of a national payer contract resulted in a low double-digit increase in per-visit rates, effective August 15, 2025. Enhabit's scale and quality outcomes position it well for continued progress in its payer strategy, aiming to shift towards more episodic and higher-paying contracts.

Risks and the Road Ahead: Vigilance in a Dynamic Landscape

Despite Enhabit's strategic momentum, investors must consider several key risks. The most prominent is the ongoing regulatory uncertainty surrounding CMS reimbursement rates, particularly the proposed 2026 Home Health Rule. If finalized as proposed, these cuts could significantly impact revenue and profitability, potentially forcing further "tough decisions" regarding operations and investments. While Enhabit is actively engaged in advocacy efforts and developing mitigation strategies, there are "no guarantees or indications at this time where the final rule will ultimately land."

Labor costs and the ability to recruit and retain high-quality personnel remain a critical factor, especially in a competitive market. While management anticipates 2-3% wage inflation, the need to maintain competitive compensation packages could pressure margins if not fully offset by productivity gains and reimbursement increases. Additionally, the decline in home health recertifications, driven by a shift towards admissions from acute care facilities with shorter lengths of stay and changes in payer mix within congregate living settings, presents a challenge to volume stability. While the company is currently in compliance with its financial covenants, management cannot guarantee continued compliance throughout the one-year period from the Q2 2025 filing date, underscoring the need for continued financial discipline.

Conclusion

Enhabit, Inc. stands at a pivotal juncture, having successfully stabilized its operations and initiated a path of profitable growth and deleveraging amidst a challenging healthcare environment. The company's strategic focus on operational excellence, driven by its proprietary Medalogix Pulse technology and advanced visit management, provides a crucial competitive advantage in optimizing care delivery and controlling costs. This technological leadership, coupled with a robust de novo strategy and aggressive payer innovation, underpins its resilience.

The Hospice segment's sustained double-digit growth and expanding margins highlight the success of its case management model, serving as a powerful engine for consolidated performance. While the Home Health segment faces significant regulatory headwinds, Enhabit's proactive mitigation strategies, including targeted cost controls and a focus on a healthier payer mix, demonstrate a clear commitment to navigating these pressures. The improved balance sheet and enhanced liquidity provide the necessary flexibility to execute these initiatives. For investors, Enhabit represents an opportunity to invest in a company that is not merely reacting to industry shifts but is strategically leveraging its operational strengths and technological capabilities to carve out a sustainable and profitable future in the essential home-based care market.