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Enhabit Uncertain About The Collectability of Receivables
Healthcare firm is not providing a public estimate for bad receivables despite strategically targeting certain customers less likely to pay.
May 18, 2023
Enhabit (EHAB), a home health and hospice services provider, offered little new detail in its latest quarterly report regarding progress in remediating a control deficiency we believe is crucial in accurately reporting results.

The company acknowledges it has not designed effective controls to monitor and review the estimated recoverability of its accounts receivable, including the impact of changes to its third-party payor mix.

The lack of certainty with regard to receivables collectability is troubling, in our view, in that Enhabit is strategically targeting healthcare payors that do not pay bills in their entirety as often as other payors.

Enhabit is currently attempting to grow the number of Medicare Advantage networks in which it participates. Unfortunately for a company already lacking visibility into receivables collectability, Medicare Advantage and managed care payors generally pay less than Medicare Fee for Service.

Subsequently, the bad debt associated with these payors tends to be slightly higher, as patients typically retain more payment responsibility under those arrangements.

Though Enhabit estimates bad receivables— and presents receivables net of uncollectible amounts— the company does not appear to disclose the estimate publicly. The lack of disclosure, as well as the accuracy of the estimate, also caught the eye of the company’s auditor, PwC, which flagged Valuation of Accounts Receivable as a critical audit matter (CAM).

Notably, the estimate is made based on historical collection patterns.

This means historical collection patterns may not be a valid base on which to form an estimate, in our view.

In the quarter ended March 31, 2023, Ehabit’s receivables as a percent of revenue jumped 450 basis points to 59%.
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