Encompass Health Corp (EHC)

Encompass Health Corporation is the nation's largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals. The company operates hospitals in 39 states and Puerto Rico, with concentrations in Florida and Texas. As of December 31, 2025, the company operated 173 inpatient rehabilitation hospitals. The inpatient rehabilitation industry, outside of the company's leading position, is highly fragmented. The company's hospitals compete primarily with rehabilitation units, most of which are within acute-care hospitals, in the markets served. Other providers of post-acute care services, including nursing homes, compete for some rehabilitation patients. Competitive factors in any given market include the quality of care and service provided, treatment outcomes achieved, relationships with managed care and other private payors and referral sources, and regulatory barriers to entry in certificate of need states.

The company believes it differentiates itself from competitors based on the quality of its clinical outcomes, cost-effectiveness, financial strength, and extensive application of technology. The company has a long and successful history of building strategic relationships with major healthcare systems, with more than a third of its inpatient rehabilitation hospitals currently operating as joint ventures with acute-care hospitals or systems. The company has extensive clinical experience from which it has developed standardized best practices and protocols. As of December 31, 2025, the company operated 149 hospitals that hold one or more Joint Commission Disease-Specific Care Certifications. The company has a proven track record of generating strong cash flows from operations and as of December 31, 2025, had a strong, well-capitalized balance sheet, including ownership of approximately 79% of its hospital real estate, no significant debt maturities until 2028, and ample availability under its revolving credit facility.

The company generates revenue by providing specialized rehabilitative treatment on an inpatient basis for patients recovering from a major injury or illness. The company receives payment for patient care services from the federal government (primarily under the Medicare program), managed care plans and private insurers, and to a considerably lesser degree, state governments (under their respective Medicaid or similar programs) and directly from patients. Revenues from Medicare and Medicare Advantage represent approximately 82% of total revenues. The company's inpatient rehabilitation hospitals receive a fixed payment reimbursement amount per discharge under the IRF-PPS based on the patient's rehabilitation impairment category and other characteristics and conditions. The company's hospitals benefit from being cost-effective providers as they retain the difference between the fixed payment from Medicare and their operating costs.

The company's inpatient rehabilitation hospitals offer specialized rehabilitative care across an array of diagnoses and deliver comprehensive, high-quality, cost-effective patient care services. Substantially all (92%) of the patients served are admitted from acute-care hospitals following physician referrals for specific acute inpatient rehabilitative care. As of December 31, 2025, the company operated 173 inpatient rehabilitation hospitals with 11,465 licensed beds. For the year ended December 31, 2025, the company had 263,299 discharges. The company's inpatient net operating revenues were $5,756.3 million ¹ for 2025, compared to $5,230.5 million ² for 2024 and $4,693.8 million ³ for 2023. Other net operating revenues were $178.9 million ⁴ for 2025, compared to $142.7 million ⁵ for 2024 and $107.4 million ⁶ for 2023. Total net operating revenues were $5,935.2 million ⁷ for 2025, compared to $5,373.2 million ⁸ for 2024 and $4,801.2 million ⁹ for 2023.

The company's strategy is to expand its network of inpatient rehabilitation hospitals, add capacity to existing hospitals, further strengthen relationships with healthcare systems, provider networks, and payors, and deliver superior patient outcomes in a cost-effective manner. The company actively pursues capacity expansions through the development of new inpatient rehabilitation hospitals and additions to existing hospitals each year. The company also pursues operational initiatives to lower its rate of transfers to acute-care hospitals, improve its rate of discharges to community, and improve the patient experience. As of December 31, 2025, 148 of the company's 173 hospitals held stroke-specific certifications. The company seeks to maintain balance sheet flexibility, consider opportunistic refinancings, and augment returns from investments in operations with shareholder distributions via common stock dividends and repurchases of common stock.

During 2025, the company began operating new inpatient rehabilitation hospitals in Athens, Georgia (40-bed), Fort Myers, Florida (60-bed), Daytona Beach, Florida (50-bed), Danbury, Connecticut (40-bed), St. Petersburg, Florida (50-bed), Amarillo, Texas (50-bed), and Lake Worth, Florida (50-bed). The company expanded its capacity by adding 177 new beds to existing hospitals. The company also continued its shareholder distributions in 2025 through common stock repurchases and paying a quarterly cash dividend on its common stock. During 2025, the company repurchased 1.5 million shares of its common stock in the open market for $158.0 million ¹⁰ under its repurchase authorization using cash on hand. On October 23, 2025, the board of directors declared a cash dividend of $0.19 per share ¹¹, payable on January 15, 2026. In September 2025, the company redeemed the remaining $100 million ¹² of the outstanding principal balance of its 5.75% Senior Notes due 2025 at maturity using cash on hand and capacity under its revolving credit facility.

For the year ended December 31, 2025, net operating revenues increased 10.5% over 2024 due primarily to volume growth and increased pricing. Net operating revenues were $5,935.2 million ¹³ for 2025, compared to $5,373.2 million ¹⁴ for 2024. Net income attributable to Encompass Health was $566.2 million ¹⁵ for 2025, compared to $455.7 million ¹⁶ for 2024. Diluted earnings per share from continuing operations was $5.55 ¹⁷ for 2025, compared to $4.49 ¹⁸ for 2024. Net cash provided by operating activities was $1,177.0 million ¹⁹ for 2025, compared to $1,005.9 million ²⁰ for 2024.

The company's primary growth vector is the expansion of its network of inpatient rehabilitation hospitals through de novo developments and capacity additions to existing hospitals. The company announced or continued the development of several hospitals with expected open dates in 2026 and 2027, including projects in Irmo, South Carolina (49 beds, 1Q26), Concordville, Pennsylvania (50 beds, 2Q26), Loganville, Georgia (40 beds, 2Q26), Norristown, Pennsylvania (50 beds, 3Q26), San Antonio, Texas (50 beds, 4Q26), Bangor, Maine (50 beds, 4Q26), Avondale, Arizona (60 beds, 4Q26), Wesley Chapel, Florida (50 beds, 2027), St. George, Utah (50 beds, 2027), Apollo Beach, Florida (50 beds, 2027), Haslet, Texas (50 beds, 2027), and Fishers, Indiana (50 beds, 2027). The company also expects to add 150 to 200 other beds through bed additions in 2026 and 2027. The company believes demographic trends, such as population aging, should continue to increase long-term demand for its services, with the population group for ages 75 and older expected to grow at approximately 4% per year through 2030.

The company's growth strategy also includes strengthening relationships with healthcare systems, provider networks, and payors. The company has a long and successful history of building strategic relationships with major healthcare systems, with more than a third of its inpatient rehabilitation hospitals currently operating as joint ventures with acute-care hospitals or systems. The company will continue to develop and implement post-acute solutions that allow it to apply its clinical expertise, large post-acute datasets, electronic medical record technologies, and strategic partnerships to drive improved patient outcomes and lower the cost of care across the entire post-acute episode. The company will seek to expand efforts and initiatives to recruit and retain a qualified clinical workforce.

The company's salaries and benefits decreased as a percent of net operating revenues during 2025 compared to 2024 primarily due to a decline in employees per occupied bed and decreases in both contract labor and sign-on and shift bonuses. The company expects depreciation and amortization to increase going forward as a result of its recent and ongoing capital investments. The company's salaries and benefits as a percentage of net operating revenues were 52.5% ²¹ for 2025, compared to 54.0% ²² for 2024. Total operating expenses as a percentage of net operating revenues were 82.3% ²³ for 2025, compared to 83.9% ²⁴ for 2024.

The company expects to spend approximately $920 million to $995 million ²⁵ for capital expenditures during 2026 using cash on hand and borrowings under its revolving credit facility. Approximately $225 million to $240 million ²⁶ of this budgeted amount is considered nondiscretionary maintenance expenditures. At December 31, 2025, the company had projects under construction with an estimated additional cost to complete over the next two years of approximately $441 million ²⁷. The company expects to fund capital expenditures using cash on hand and borrowings under its revolving credit facility.

The company's capital allocation strategy includes maintaining balance sheet flexibility, considering opportunistic refinancings, and augmenting returns from investments in operations with shareholder distributions via common stock dividends and repurchases of common stock. As of December 31, 2025, approximately $332 million ²⁸ remained under the common stock repurchase authorization. The company expects quarterly dividends to continue to be paid in January, April, July, and October. The company's free cash flow is the primary source of funding for its de novo and bed addition growth plans. As an additional source of liquidity, the company can access its $1 billion ²⁹ revolving credit facility, of which $824 million ³⁰ was available for borrowing as of December 31, 2025.

The company faces headwinds from operating in a highly regulated industry, particularly regarding Medicare reimbursement. The company derives approximately 65% of its net operating revenues from fee-for-service Medicare and approximately 16% from Medicare Advantage. The company faces the risk of reductions or changes in reimbursement from government or third-party payors. The Budget Control Act of 2011 provides for an automatic 2% reduction, or sequestration, of Medicare program payments for all healthcare providers, which will continue through the first five months of fiscal year 2033 unless Congress and the President take further action. Additional Medicare payment reductions are also possible under the Statutory Pay-As-You-Go Act of 2010, which could result in Medicare program payments reductions of up to four percent. The company also faces headwinds from the Review Choice Demonstration (RCD) for inpatient rehabilitation services, which was expanded to Texas and California effective March 2, 2026 and May 1, 2026, respectively, with 33 of the company's current inpatient rehabilitation hospitals (representing approximately 11.9% of its IRF Medicare claims) expected to be subject to RCD.

The company faces headwinds from competition for staffing and shortages of qualified personnel. The lack of availability of clinical personnel is a significant ongoing operating issue facing healthcare providers. Staffing shortages or retention concerns in one or more markets have required and may again require the company to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. The company also faces headwinds from competitive pressures in the healthcare industry, including from large acute-care hospitals that would typically serve as a referral source. The company's ability to attract patients could be adversely affected if any of its hospitals fail to provide or maintain a reputation for providing high-quality care on a cost-effective basis as compared to other providers.

Management's message emphasizes optimism regarding the intermediate and long-term prospects of the business, citing demographic trends such as population aging that should continue to increase long-term demand for services. Management states that the average age of the company's Medicare patients is approximately 77, and the population group for ages 75 and older is expected to grow at approximately 4% per year through 2030. Management believes the company differentiates itself from competitors based on the quality of clinical outcomes, cost-effectiveness, financial strength, and extensive application of technology. Management's strategic priorities for the period ahead are growth through capacity expansions and new hospital developments, operational initiatives to improve patient outcomes and demonstrate value to payors, and maintaining a flexible capital structure with shareholder distributions. Management believes the 2026 IRF Rule will result in a net increase to the company's Medicare payment rates of approximately 2.9% ³⁴ effective October 1, 2025.

For the year ended December 31, 2025, total net operating revenues were $5,935.2 million ³⁵, compared to $5,373.2 million ³⁶ for 2024. Net income attributable to Encompass Health was $566.2 million ³⁷ for 2025, compared to $455.7 million ³⁸ for 2024. Diluted earnings per share from continuing operations was $5.55 ³⁹ for 2025, compared to $4.49 ⁴⁰ for 2024. Income from continuing operations was $760.1 million ⁴¹ for 2025, compared to $599.4 million ⁴² for 2024. Operating income, calculated as net operating revenues less total operating expenses, was $1,053.1 million ⁴³ for 2025, compared to $864.5 million ⁴⁴ for 2024. Net cash provided by operating activities was $1,177.0 million ⁴⁵ for 2025, compared to $1,005.9 million ⁴⁶ for 2024. As of December 31, 2025, the company had $72.2 million ⁴⁷ in cash and cash equivalents and long-term debt, net of current portion, of $2,447.2 million ⁴⁸. The company's inpatient segment net operating revenues were $5,756.3 million ⁴⁹ for 2025, compared to $5,230.5 million ⁵⁰ for 2024. The company's other revenue, which includes Medicaid supplemental payments, was $178.9 million ⁵¹ for 2025, compared to $142.7 million ⁵² for 2024.

The company derives a substantial portion of its net operating revenues from the Medicare program, and reductions or changes in reimbursement from government or third-party payors could adversely affect net operating revenues and other operating results. The company faces risks from various Medicare audit programs, including the Review Choice Demonstration (RCD), which was expanded to Texas and California, with 33 of the company's current inpatient rehabilitation hospitals (representing approximately 11.9% of its IRF Medicare claims) expected to be subject to RCD. As of December 31, 2025, the company had approximately $12 million ³¹ and $21 million ³² in denied claims awaiting review at the ALJ and DAB levels, respectively, and approximately $6 million ³³ in claims denied by the DAB pending review by United States district courts. The company faces risks from changes in its payor mix or the acuity of its patients, as reimbursement rates from traditional Medicare fee-for-service are generally higher than those from other payors. The company faces intense competition for patients from other healthcare providers, including acute-care hospitals that may choose to expand or begin offering post-acute rehabilitation services, given that approximately 92% of the company's hospitals' admissions come from acute-care hospitals. The company faces risks from the inability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages, which could increase staffing costs and adversely affect financial and operating results.