Encompass Health NYSE: EHC reported first-quarter 2026 results that management said reflect strong underlying demand for inpatient rehabilitation facility (IRF) services, improving staffing trends, and continued investment in new capacity. The company also raised its full-year 2026 guidance following the quarter’s performance.
Quarterly results and updated outlook
President and CEO Mark Tarr said the company was “pleased with our start to 2026,” noting that first-quarter revenue rose 9% and adjusted EBITDA increased 11.2% year over year. CFO Doug Coltharp reported revenue of $1.59 billion and adjusted EBITDA of $348.8 million.
Coltharp said the revenue increase was driven by both volume and pricing: discharge growth of 4.3% (including 1.6% same-store discharge growth) and a 3.7% increase in net revenue per discharge. He attributed net revenue per discharge growth to patient mix and a favorable comparison related to the annual Medicare Supplemental Security Income (SSI) adjustment.
Bad debt expense increased 20 basis points to 2.2%, which Coltharp said was “primarily as a result of writing off claims from 2013 associated with a legacy audit appeal.”
Based “primarily on our Q1 results,” Coltharp said the company raised full-year 2026 guidance to:
- Net operating revenue: $6.375 billion to $6.470 billion
- Adjusted EBITDA: $1.35 billion to $1.38 billion
- Adjusted earnings per share: $5.89 to $6.11
Quality metrics, turnover improvements, and labor costs
Tarr highlighted improvements in clinical outcomes versus the first quarter of 2025, including discharge-to-community rates and lower discharge rates to acute care hospitals and skilled nursing facilities (SNFs). He said discharge-to-community “TME” rates improved 50 basis points to 84.5%, discharge acute rates improved 30 basis points to 8.6%, and discharge SNF rates improved 20 basis points to 6.2%, adding that performance on each metric exceeded the industry average.
Management also emphasized staffing and retention. Tarr said first-quarter 2026 annualized registered nurse (RN) turnover was 17.8%, down from 20.2% in fiscal 2025, while annualized therapist turnover was 6.4%, down from 7.8%. He called it the company’s “lowest RN turnover rate since at least 2012,” and said the improvement contributed to a 9.4% decline in premium labor spend compared with the first quarter of 2025.
In response to an analyst question, EVP and COO Pat Tuer credited centralized talent acquisition and growing participation in clinical career ladders. Tuer said about 35% of the nursing staff is now on clinical ladders, up roughly 300 basis points from the prior quarter. He also compared turnover rates between laddered and non-laddered nurses, saying turnover for laddered nurses in the first quarter was “a little over 2%…2.6% compared to 20.7% for non-laddered nurses.”
Coltharp reported salary, wages and benefits (SWB) per full-time equivalent increased 3.7% year over year, which he partly tied to career ladder participation that can raise licensing and compensation levels. Premium labor costs (contract labor and bonuses) declined $2.7 million year over year to $25.9 million, and contract labor FTEs were 1.2% of total FTEs, down 10 basis points from the prior year.
Capacity expansion, occupancy constraints, and “small format” hospitals
Tarr said demand for IRF services “remains strong” and that the company is investing to add capacity. During the first quarter, Encompass opened a new 49-bed hospital in Irmo, South Carolina, and added 44 beds to existing hospitals. Over the remainder of 2026, Tarr said the company plans to open seven additional hospitals totaling 340 beds and add another 100 to 150 beds to existing hospitals.
On the call, Coltharp provided more detail on occupancy trends and constraints. He said first-quarter average occupancy was 78.7%, essentially flat with “record high levels” in the first quarter of 2025. Occupancy was up 200 basis points from the first quarter of 2024 and more than 500 basis points from the first quarter of 2023. Coltharp added that about 35% of hospitals had occupancy above 90%, with that group averaging 95%.
Management described efforts to add capacity and reconfigure existing beds. Coltharp said 58% of beds were private at the end of the quarter, up from 41% at year-end 2020, reflecting continued conversion from semi-private to private rooms.
Tuer said the company has adjusted its internal trigger to start evaluating expansions. Historically, Encompass began expansion efforts when occupancy reached 80% to 85%, but Tuer said permitting and regulatory processes now “take longer than it used to,” so the company lowered its threshold to 70% to 75% to better time capacity additions. He also said the company is evaluating whether larger-than-typical hospital footprints make sense in some markets.
Tarr discussed “small format hospitals” as part of a hub-and-spoke strategy in large and growing markets. He said they would operate as remote locations under the same Medicare provider number as an existing hospital and share some administrative services. Tarr said the company is confident it will open “at least one small format hospital in 2027.”
Coltharp told analysts the return profile for small format hospitals is “between a bed expansion… and a de novo,” with bed expansions being the highest ROI. He also said that in certificate-of-need (CON) states, adding beds is “almost always subject to CON requirements,” but small format hospitals “tend to be a lower hurdle” than a de novo because they use an existing provider number and involve fewer beds.
Volume drivers: closures, flu season, Medicare Advantage, and occupancy
Coltharp said total and same-store discharge growth was reduced by about 85 basis points due to unit closures. He reminded listeners that the company has closed three IRF units within acute care hospitals and one SNF unit within a freestanding hospital since the end of the second quarter of 2025. Coltharp said these units were “essentially break even in terms of adjusted EBITDA,” and Tarr emphasized the closures affected discharges but not EBITDA.
When asked about the pace of same-store volumes, Coltharp cited four factors affecting first-quarter trends: unit closures, high occupancy levels in certain markets, a “relatively light” flu and respiratory season, and continued Medicare Advantage (MA) trends experienced in the fourth quarter.
On seasonality, Coltharp said “debility” is a proxy for flu and respiratory severity, representing about 11% of patient mix. Debility grew 70 basis points in total for the quarter but declined 1.5% on a same-store basis, which he described as a year-to-year seasonal fluctuation.
Management also discussed MA dynamics and a pilot “admit and appeal” strategy. Coltharp said in nine hospitals, Encompass has begun admitting certain MA patients even after an initial denial when the company believes the referral is appropriate, and then pursuing multiple appeal levels. Tuer said the company has seen “nice improvement in the approval rate” in pilot markets, but it is “way too early” to draw broad conclusions, adding that it may take six to eight months to understand success rates at the administrative law judge (ALJ) level and 12 to 18 months to have “a lot of clarity.”
Coltharp also said MA penetration nationwide appears to have peaked around 52% and is “receding slightly,” citing that 20 states saw year-over-year MA penetration declines in the year ended March 2026, and that Encompass has hospitals in 12 of those states.
Regulatory developments, capital deployment, and other items
Tarr called 2026 “a particularly active year on the regulatory front,” citing TeamWorks implementation beginning Jan. 1 and expansion of the Review Choice Demonstration (RCD) into Texas effective March 1 and California beginning the day of the call. He said the company has prepared for such changes but cautioned it may not be “immune from short-term transitory impacts.”
On April 2, Tarr said CMS issued the 2027 IRF proposed rule, which included a net market basket update of 2.4%. Encompass estimates that would translate to a 2.4% pricing increase for Medicare patients beginning Oct. 1, 2026. Tarr said the final rule is expected in late July or early August, and management said it plans to submit comments and work with trade associations.
Coltharp reported first-quarter adjusted free cash flow of $194 million. The company repurchased about 708,000 shares for $71.6 million, paid a $0.19 per share dividend, and declared another $0.19 dividend that was paid in April. Net leverage at quarter end was 1.9x, which Coltharp said left the company “well-positioned” on leverage and liquidity.
Coltharp said net pre-opening and ramp-up costs were $4 million in the quarter, and the company continues to expect $18 million to $22 million for full-year 2026, with costs weighted more to the second half, particularly the third quarter.
On state-directed payments and provider taxes, Coltharp said first-quarter results were higher than expected due to out-of-period items, with an out-of-period EBITDA impact of about $4.2 million. He said the company still expects the full-year EBITDA impact from net provider taxes to be roughly flat with last year, around $21 million, characterizing the quarterly change as largely timing.
Management also discussed ongoing analytics and automation efforts. Tuer said the company is using Palantir in areas including pre-screen narratives and appeal letters and is implementing documentation efficiency tools for providers to “give our physicians and our clinical staff time back so that they can do direct patient care instead of documenting.” Coltharp also cited projects in the queue including market and real estate analysis, CRM, revenue cycle management, and clinical staffing.
About Encompass Health NYSE: EHC
Encompass Health Corporation is a leading provider of post‐acute healthcare services in the United States, operating a comprehensive network of inpatient rehabilitation hospitals and home health and hospice agencies. Its inpatient rehabilitation hospitals offer intensive therapy programs for patients recovering from conditions such as stroke, brain injury, spinal cord injury, cardiac and pulmonary disorders, and orthopedic procedures. Through its home health segment, Encompass Health delivers skilled nursing, physical therapy, occupational therapy and speech therapy to patients in the comfort of their homes, while its hospice services provide end‐of‐life care focused on symptom management and emotional support for patients and families.
Founded in 1984 as HealthSouth Corporation and rebranded as Encompass Health in 2018, the company has grown organically and through acquisitions to serve patients across more than 30 states.
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