Encompass Health Q3 Earnings Call Highlights

Key Points

• Strong third-quarter performance led to higher 2026 guidance: Revenue rose 8.9%, adjusted EBITDA increased 15.5% and adjusted EPS grew 23.6%. Encompass Health now expects 2026 revenue of $6.45 billion-$6.5 billion, adjusted EBITDA of $1.395 billion-$1.415 billion and adjusted EPS of $6.23-$6.37.
• Results were supported by a 5.7% increase in discharges, higher patient acuity and a 4% rise in net revenue per discharge. However, a billing-system conversion temporarily increased bad debt expense, while lower Medicaid supplemental payments reduced provider-tax contributions.
• Capacity expansion remains a central growth strategy: The company opened new hospitals and added beds during the quarter, with 15 hospitals and 654 beds in its post-2026 pipeline. Encompass Health also plans further bed additions, share repurchases and dividends while maintaining relatively low net leverage of 1.8 times.

Encompass Health NYSE: EHC raised its full-year 2026 outlook after reporting third-quarter revenue growth of 8.9%, adjusted EBITDA growth of 15.5% and adjusted earnings-per-share growth of 23.6%, driven by higher discharges, increased patient acuity and revenue per discharge.

President and Chief Executive Officer Mark Tarr said revenue increased 9.2% during the first nine months of 2026, while adjusted EBITDA rose 11.9% and adjusted EPS increased 17%. The company also highlighted patient-outcome measures that exceeded industry averages, including a 84.7% discharge-to-community rate, an 8.4% discharge-to-acute-care rate and a 6.2% discharge-to-skilled-nursing-facility rate in the third quarter.

Tarr said Encompass Health treated 37,620 stroke-recovery patients through the first three quarters of 2026, representing about 18% of its patient mix. He also cited updated American Heart Association and American Stroke Association guidelines that recommend inpatient rehabilitation facilities over skilled nursing facilities for eligible stroke patients when both settings are available.

Higher volumes and acuity support results

Chief Financial Officer Doug Coltharp said third-quarter revenue growth reflected a 5.7% increase in discharges and a 4% rise in net revenue per discharge. Revenue per discharge continued to benefit from higher patient acuity, he said.

Adjusted EBITDA reached $346.6 million in the quarter. The company absorbed an $11.5 million year-over-year decrease in net provider-tax contribution, as Medicaid supplemental payments declined compared with the prior-year period. Encompass Health now expects net provider-tax contribution to adjusted EBITDA of about $3 million for 2026, down from a previous expectation of approximately $10 million.

Bad debt expense was 2.7% of revenue in the third quarter, which Coltharp attributed primarily to a billing and collections disruption following a second-quarter system conversion. The company transitioned from its legacy PATCOM patient-billing platform to an Oracle module. Pending claims in the legacy system required manual processing, creating a backlog, particularly for managed-care and Medicare Advantage claims.

Coltharp said the company expects the backlog to be cleared by year-end and expects fourth-quarter bad debt expense to return to its recent historical range of 2% to 2.5% of revenue.

Labor costs also remained an area of focus. Salaries, wages and benefits per full-time equivalent employee increased 3.8%, partly reflecting greater participation in career-ladder programs. However, premium labor costs fell $3.9 million from a year earlier to $23.1 million. Contract labor represented 0.9% of total FTEs, down 30 basis points year over year and the company’s lowest level since the fourth quarter of 2020.

Chief Operating Officer Pat Tuer said turnover rose slightly to 20.7% during the quarter but remained below the company’s historical average. He added that Encompass Health has recorded more full-time net registered-nurse hires through the first nine months of 2026 than it had in any of the previous five full calendar years.

Capacity expansion remains central to growth plans

Encompass Health continued to add inpatient rehabilitation capacity during the quarter, opening a 50-bed hospital in Norristown, Pennsylvania, and adding 31 beds at existing hospitals. Through the third quarter, the company had opened four hospitals with 189 beds and added 85 beds at existing facilities.

Earlier in October, the company opened two additional 50-bed hospitals in Bangor, Maine, and San Antonio, Texas, and added 60 beds to existing hospitals. It expects to open two more hospitals with a combined 100 beds and add as many as 45 additional beds at existing facilities during the remainder of 2026.

The company’s announced development pipeline beyond 2026 includes 15 hospitals with 654 beds. This includes its first two small-format hospitals in Conroe and Richmond, Texas, which will expand its Houston market presence. One small-format hospital is expected to open in late 2027, with the company expecting development to accelerate in 2028 and 2029 as permitting and licensing models are established.

Coltharp said the company has identified roughly 200 potential locations for small-format hospitals. Encompass Health estimates a cost of about $1 million per bed and targets an internal rate of return of approximately 20% for these facilities. By comparison, the company said its de novo hospitals have targeted mid-teens returns, while bed additions at existing hospitals have produced internal rates of return of 25% or more.

The company also plans to add 150 to 200 beds at existing hospitals in 2027. Tarr said North Carolina’s repeal of its Certificate of Need law, effective Oct. 1, creates an opportunity in an underserved market. Encompass Health currently operates one North Carolina hospital, has prioritized 15 markets for development and has six real-estate parcels under contract.

Managed-care strategy and regulatory considerations

Management said higher-acuity patient categories continued to grow. Tuer cited same-store growth of 9.3% in neurological rehabilitation, 5.1% in stroke, 5.7% in brain injury and 10.3% in major trauma. Lower-extremity joint replacements, a lower-acuity category, declined 5.3% on a same-store basis in the third quarter.

The company also reported continued growth in Veterans Affairs Community Care Network volume, which rose 21% in the third quarter following 26.4% growth in the prior-year period. Tuer said this business has grown at least 20% for six consecutive quarters.

Encompass Health is expanding its Medicare Advantage admit-and-appeal initiative after reporting that 87% of 294 reviewed claims were overturned in its favor, with 81% overturned before reaching an administrative law judge. The pilot, initially operated in nine markets, is being expanded across the company’s hospitals for stroke cases and to 13 pilot hospitals. Management said brain injury and spine could be the next diagnostic categories considered for broader expansion.

Coltharp also discussed the expected expansion of the Medicare Recovery Audit Contractor’s Review Choice Demonstration into Jurisdiction JJ, covering 75 additional Encompass Health hospitals beginning Jan. 1, 2027. The company expects hospitals initially to undergo 100% prepayment claim review through June 30. Hospitals that exceed an 80% affirmation rate could move to a 5% spot-check process beginning July 1.

Raised 2026 outlook and capital deployment

Encompass Health raised its 2026 guidance and now expects:

• Net operating revenue of $6.45 billion to $6.5 billion;
• Adjusted EBITDA of $1.395 billion to $1.415 billion; and
• Adjusted earnings per share of $6.23 to $6.37.

Adjusted free cash flow for the first nine months of 2026 increased 8.9% to $634.2 million. During the third quarter, the company repurchased approximately 495,000 shares for $57.9 million, bringing year-to-date repurchases to roughly 1.91 million shares for $203.7 million. It also paid a quarterly cash dividend of $0.21 per share.

The company issued an additional $100 million of 5.875% senior notes due in 2034 during the quarter, bringing that note series to $600 million. Net leverage stood at 1.8 times at quarter-end, while Encompass Health had approximately $870 million available under its $1 billion revolving credit facility.

About Encompass Health (NYSE:EHC)

Encompass Health Corporation NYSE: EHC is a healthcare services company that operates inpatient rehabilitation hospitals in the United States and Puerto Rico. Its hospitals provide intensive rehabilitation to patients recovering from conditions such as stroke, brain and spinal cord injuries, neurological disorders, amputations, hip fractures and other serious illnesses or injuries.

The company's services typically include nursing care, physical therapy, occupational therapy, speech and language therapy, respiratory therapy and medical management.

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