Encompass Health NYSE: EHC reported second-quarter 2026 results marked by revenue, earnings and discharge growth, prompting the inpatient rehabilitation provider to raise its full-year outlook.
Revenue increased 9.6% from the prior-year quarter, while adjusted EBITDA rose 9.2% to $348 million and adjusted earnings per share increased 10.7%, President and Chief Executive Officer Mark Tarr said on the company’s earnings call. The revenue increase reflected 5.6% discharge growth and a 3.9% increase in net revenue per discharge, according to Executive Vice President and Chief Financial Officer Doug Coltharp.
Coltharp said the increase in net revenue per discharge was driven by higher patient acuity, including growth in medically complex categories such as stroke and brain injury. Same-store stroke volume rose 5.5%, while same-store brain injury volume increased 3.9%. Total growth in those categories was 7.9% and 8.0%, respectively. Knee and hip replacement volume increased about 1% during the quarter.
Guidance Raised Following Second-Quarter Results
The company raised its full-year 2026 outlook and now expects net operating revenue of $6.41 billion to $6.49 billion, adjusted EBITDA of $1.365 billion to $1.395 billion, and adjusted EPS of $6.02 to $6.25.
The updated outlook incorporates an estimated 2.3% increase in net revenue per Medicare discharge beginning Oct. 1, based on the 2027 inpatient rehabilitation facility final rule issued by the Centers for Medicare & Medicaid Services on July 30. The company expects the rule’s Medicare pricing impact in the fourth quarter to be approximately 2.3%.
Encompass also revised its assumptions for salaries, wages and benefits per full-time equivalent employee, now expecting growth of 3.5% to 4.0% for 2026. Coltharp said the increase reflects greater participation in nursing and therapy career ladder programs, although the company expects the investments to support retention, quality and lower reliance on premium labor.
Premium labor costs declined $2.6 million year over year to $25 million in the quarter. Contract labor represented 1.1% of total FTEs, improving 20 basis points from the second quarter of 2025. The company has recorded 11 consecutive quarters of year-over-year declines in premium labor costs, Coltharp said.
However, Encompass reduced its expected 2026 net provider-tax benefit to adjusted EBITDA to approximately $10 million, from a prior expectation of roughly $21 million. The change stemmed primarily from retroactive adjustments related to the 2025 Florida Medicaid program.
Capacity Expansion Continues
Demand for inpatient rehabilitation services remained strong, Tarr said. During the second quarter, Encompass opened a 50-bed hospital in Concordville, Pennsylvania, and a 40-bed hospital in Loganville, Georgia. The Loganville facility is the company’s eighth joint venture with Piedmont. It also added 10 beds at existing hospitals.
Through the first half of 2026, the company opened three hospitals totaling 139 beds and added 54 beds at existing facilities. It plans to open another five hospitals with 250 total beds during the remainder of the year and add between 100 and 150 beds to existing hospitals.
Encompass’ announced development pipeline beyond 2026 includes 13 hospitals and 606 beds. Management said it expects to announce additional projects, including smaller-format hospitals, later this year.
Systemwide occupancy was 77.4% in the second quarter, up 290 basis points from a year earlier. The company had 60 hospitals with occupancy above 90%, averaging 94% occupancy. About 90% of planned bed additions for the second half of 2026 and first half of 2027 are slated for hospitals in that highly occupied group.
New hospitals have generally reached four-wall positive EBITDA by month six and occupancy above 70% by month 10, Coltharp said. The company has lowered the occupancy threshold at which it begins evaluating bed expansions to 70% to 75%, compared with its historical range of 80% to 85%.
North Carolina Opportunity and Capital Allocation
North Carolina repealed its certificate-of-need law for inpatient rehabilitation care effective Oct. 1. Encompass currently operates one hospital in the state and has identified 15 priority markets after conducting a market-by-market review. The company has three real-estate parcels under contract and expects its next North Carolina hospital opening in late 2028 or early 2029.
Management said the state could move the company toward the upper end of its target to open six to 10 new facilities annually beginning in 2029. The opportunity may also include a hub-and-spoke approach combining traditional hospitals and small-format facilities.
During the quarter, Encompass repurchased about 704,000 shares for $74.2 million, bringing year-to-date repurchases to approximately 1.41 million shares for $145.8 million. The company also increased its quarterly dividend to $0.21 per share, payable in October, and raised its share repurchase authorization to $1 billion.
The company issued $500 million of 5.875% senior notes due 2034 during the quarter and used most of the proceeds to redeem $400 million of 4.5% senior notes due 2028. Net leverage stood at 1.9 times at quarter-end.
Medicare Advantage Appeals and Workforce Programs
Management said Medicare Advantage preauthorization denials remained a challenge, despite marginal improvement from the fourth quarter of 2025 and first quarter of 2026. Encompass has been piloting an “admit and appeal” program across nine hospital markets since late February.
Through July, the company had admitted 298 patients under the program. Of 144 cases that had been fully adjudicated, Encompass prevailed in 128 cases, an 89% success rate. Chief Operating Officer Pat Tuer said the company may initially expand the effort for diagnoses where results have been strongest, including potentially stroke patients, before considering a broader rollout by year-end.
The company also cited improvement in clinical turnover. Annualized nursing turnover was about 19%, the lowest level in more than 12 years, while therapy turnover was just above 7%, the lowest in five years. Tuer said 43% of eligible registered nurses and certified nurses participate in the company’s career ladder programs, and turnover among ladder participants was approximately 5%.
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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