Business Overview
Encompass Health Corporation (EHC) has established itself as the leading owner and operator of inpatient rehabilitation hospitals in the United States. With a strong track record of growth and a steadfast commitment to delivering high-quality patient care, Encompass Health has cemented its position as a formidable player in the healthcare industry.
Founded in 1984 and incorporated in Delaware, Encompass Health's origins can be traced back to the creation of HealthSouth Corporation, a pioneering company in the field of inpatient rehabilitation. Initially focusing on operating inpatient rehabilitation hospitals, the company provided specialized rehabilitative treatment on an inpatient basis. Over the years, Encompass Health has undergone a strategic transformation, evolving into a focused, specialized provider of rehabilitation services. In its early years, the company faced challenges common to many young businesses, including establishing its market presence and building its brand. However, Encompass Health was able to capitalize on the growing demand for inpatient rehabilitation services as the U.S. population aged.
By the late 1990s, Encompass Health had established a strong foothold in the industry and was operating hospitals across multiple states. A significant milestone for the company came in 2006 when it changed its name from HealthSouth Corporation to Encompass Health Corporation. This rebranding effort reflected the company's expansion beyond its initial focus on inpatient rehabilitation to include a broader range of post-acute care services. Today, the company operates a vast network of 165 inpatient rehabilitation hospitals across 38 states and Puerto Rico, making it the nation's largest owner and operator of such facilities in terms of patients treated, revenues, and number of hospitals.
Encompass Health's success is underpinned by its unwavering focus on patient outcomes and its ability to adapt to the ever-changing healthcare landscape. The company's hospitals specialize in treating patients recovering from a wide range of conditions, including strokes, brain and spinal cord injuries, amputations, and complex orthopedic injuries. By providing personalized, intensive rehabilitation services, Encompass Health has consistently demonstrated its ability to help patients regain their independence and improve their quality of life.
Financials
The company's financial performance has been equally impressive, with a strong track record of revenue and earnings growth. In 2023, Encompass Health reported total revenue of $4.80 billion, up from $4.35 billion in 2021, representing a compound annual growth rate (CAGR) of 5.2% over the two-year period. Similarly, the company's net income has grown from $271.0 million in 2021 to $352.0 million in 2023, a CAGR of 13.8%.
In the most recent quarter, Encompass Health reported revenue of $1.35 billion, marking an impressive year-over-year growth of 11.9%. This increase was primarily driven by higher patient volumes, with discharge growth including a 6.8% increase in same-store discharges. The growth in net patient revenue per discharge was attributed to an increase in reimbursement rates and lower revenue reserves related to bad debt, partially offset by changes in patient mix. Net income for the quarter stood at $108.20 million.
Liquidity
Encompass Health's financial strength is further evidenced by its robust cash flow generation. In 2023, the company reported operating cash flow of $850.8 million and free cash flow of $267.7 million, underscoring its ability to fund ongoing operations, capital expenditures, and shareholder distributions. However, it's worth noting that in the most recent quarter, the company reported negative operating cash flow of $459.90 million and negative free cash flow of $607.40 million.
The company maintains a solid liquidity position with $147.80 million in cash and cash equivalents and access to a $964.00 million credit line. Encompass Health's debt-to-equity ratio stands at 1.33, while its current and quick ratios are both 1.04, indicating a balanced approach to managing short-term obligations.
The company's strong financial position has also enabled it to pursue strategic growth initiatives, including the expansion of its existing hospital network and the development of new facilities. In 2023, Encompass Health added 23 new hospitals to its portfolio, further solidifying its market dominance. The company has continued this momentum in 2024, with the opening of several new hospitals, including a 61-bed facility in Houston, Texas, which marks a significant milestone as Encompass Health's first fully prefabricated hospital.
Encompass Health's focus on innovation and operational excellence has not gone unnoticed. The company has consistently received recognition for its high-quality care, with several of its hospitals achieving top rankings from organizations such as U.S. News & World Report and the Uniform Data System for Medical Rehabilitation.
However, Encompass Health's success has not been without its challenges. The healthcare industry is highly regulated, and the company must navigate a complex web of reimbursement policies and compliance requirements. In 2023, Encompass Health faced headwinds related to the implementation of the Review Choice Demonstration (RCD) program in certain states, which resulted in increased claims review and lower reimbursement rates. The company has proactively addressed these challenges, working closely with regulatory authorities and implementing operational improvements to mitigate the impact on its financial performance.
Looking ahead, Encompass Health remains well-positioned for continued growth. The aging of the U.S. population, coupled with the increasing prevalence of chronic health conditions, is expected to drive sustained demand for the company's rehabilitation services. This trend is supported by industry data showing that over the past decade, the age cohort most in need of inpatient rehabilitation services has grown at a 4-5% CAGR, while the total supply of licensed IRF beds has remained essentially static.
Encompass Health operates in one reportable business segment - inpatient rehabilitation hospitals. The company's primary source of revenue is from providing specialized rehabilitative treatment on an inpatient basis. Net operating revenues are derived mainly from the following payor sources: Medicare (65.4% of revenues in Q3 2024, 64.8% in first 9 months of 2024), Medicare Advantage (16.4% in Q3 2024, 16.9% in first 9 months of 2024), Managed care (11.0% in Q3 2024, 10.9% in first 9 months of 2024), and Medicaid (3.4% in Q3 2024, 3.4% in first 9 months of 2024).
The company has focused on growing its network of inpatient rehabilitation hospitals through de novo developments, acquisitions, and joint ventures. During 2024 year-to-date, Encompass Health began operating several new hospitals and expanded capacity at existing facilities. The company's capital expenditure budget for 2024 is set between $595 million and $625 million, reflecting its commitment to continued growth and expansion.
In terms of future outlook, Encompass Health has recently increased its guidance for the full year 2024. The company now expects net operating revenue of $5.325 billion to $5.375 billion, adjusted EBITDA of $1.07 billion to $1.09 billion, and adjusted earnings per share of $4.19 to $4.33. While specific guidance for 2025 has not been provided, the company has mentioned some key considerations, including expected SWB per FTE inflation of 3% to 3.5% and pre-opening and ramp-up costs likely to be similar to the impact seen in 2024.
In conclusion, Encompass Health's journey as the nation's largest owner and operator of inpatient rehabilitation hospitals has been marked by a relentless pursuit of excellence, strategic vision, and an unwavering dedication to patient care. As the company navigates the evolving healthcare landscape, its robust business model, financial strength, and innovative spirit suggest a bright future ahead. With a strong market position, solid financial performance, and a clear growth strategy, Encompass Health is well-positioned to capitalize on the increasing demand for inpatient rehabilitation services in the coming years.