Business Overview and History
Encompass Health Corporation (EHC) is the largest owner and operator of inpatient rehabilitation hospitals in the United States. With a national footprint that includes 166 hospitals across 38 states and Puerto Rico, the company has established itself as a premier provider of high-quality, compassionate rehabilitative care for patients recovering from major injuries, illnesses, and neurological disorders.
Encompass Health's origins can be traced back to 1984 when it was founded as HealthSouth Corporation. The company initially focused on operating freestanding outpatient rehabilitation clinics but quickly expanded into the inpatient rehabilitation hospital market, recognizing the growing demand for specialized rehabilitative care. Over the decades, Encompass Health has undergone significant transformation, streamlining its business model to concentrate solely on inpatient rehabilitation services.
In 2018, the company rebranded to Encompass Health, reflecting its strategic shift and commitment to delivering comprehensive, integrated care to its patients. This name change better represented the company's focus on integrated healthcare services. Throughout its history, Encompass Health has faced and overcome significant challenges, including an accounting scandal and federal investigations in the early 2000s, which led to a major restructuring and turnaround effort.
The company has continued to expand its nationwide network of inpatient rehabilitation hospitals, both through organic growth and strategic acquisitions. Encompass Health has made strategic investments in technology and data analytics to improve patient outcomes and operational efficiency. In 2022, the company reached a significant milestone with the spin-off of its home health and hospice business, allowing it to focus exclusively on its core inpatient rehabilitation hospital operations.
Throughout its growth, Encompass Health has successfully navigated significant regulatory and reimbursement changes in the healthcare industry, adapting its business model to comply with new rules and remain competitive. The company's relentless focus on operational excellence, clinical outcomes, and technological innovation has positioned it as an industry leader, with a strong presence in key states such as Florida and Texas.
Financial Performance and Liquidity
Encompass Health's financial performance has been consistent and robust over the years. In 2024, the company reported total revenue of $5.37 billion, an 11.9% increase from the previous year. Net income attributable to Encompass Health for the full year 2024 was $455.7 million, or $4.46 per diluted share, demonstrating the company's ability to generate sustainable profits.
The company's balance sheet remains strong, with a net debt position of $2.41 billion as of December 31, 2024. Encompass Health's leverage ratio, defined as net debt-to-adjusted EBITDA, stood at 2.2x, well within its target range. This financial flexibility allows the company to continue investing in growth initiatives, such as de novo hospital openings and capacity expansions, while also returning capital to shareholders through dividends and share repurchases.
In 2024, Encompass Health generated $690 million in adjusted free cash flow, a 31.3% increase from the prior year. This robust cash flow generation has enabled the company to fund its capital expenditures, which totaled $642.5 million in 2024, while also maintaining a disciplined approach to capital allocation.
The company's liquidity position remains strong, with a debt-to-equity ratio of 0.127, $85.4 million in cash on hand, and $944 million available on its $1 billion revolving credit facility. Encompass Health's current ratio and quick ratio both stand at 1.05, indicating a healthy short-term financial position.
In the fourth quarter of 2024, Encompass Health demonstrated strong financial performance with revenue increasing 12.7% year-over-year to $1.405 billion. Net income for the quarter grew 25.5% to $120.9 million, while operating cash flow increased 38.7% to $278.8 million. Free cash flow saw a significant jump of 103.7% to $190.5 million. This growth was driven by higher inpatient and outpatient volumes, an increase in net revenue per discharge, and disciplined cost management.
Business Segments and Market Position
Encompass Health operates primarily in the Inpatient Rehabilitation segment, which accounted for approximately 97% of total revenues in 2024. This segment provides specialized rehabilitative treatment on an inpatient basis to patients recovering from conditions such as strokes, hip fractures, neurological disorders, cardiac and pulmonary conditions, brain and spinal cord injuries, and amputations.
In 2024, the Inpatient Rehabilitation segment generated $5.23 billion in net operating revenues, an 11.4% increase over the prior year. This growth was driven by an 8.3% increase in discharges to 248,500 and a 2.9% increase in net patient revenue per discharge to $21,050. Occupancy rates also increased to 74.6% of licensed beds compared to 72.1% in 2023.
Prior to July 2022, Encompass Health also operated a Home Health and Hospice segment, which was spun off as a separate public company, Enhabit, Inc. This strategic move allowed Encompass Health to focus solely on its core inpatient rehabilitation operations.
Growth Strategies and Outlook
Encompass Health's growth strategy is multifaceted, focusing on both organic expansion and strategic acquisitions. The company has a proven track record of successfully executing its de novo hospital development program, opening 6 new hospitals with a total of 370 new beds in 2024. Encompass Health also increased capacity at existing hospitals by adding 147 new beds. Looking ahead, the company has announced plans to open an additional 11 de novo hospitals with 670 new beds over the next three years.
For the full year 2025, Encompass Health has provided guidance for net operating revenues in the range of $5.8 billion to $5.9 billion and adjusted EBITDA between $1.16 billion and $1.20 billion. The company expects adjusted earnings per share of $4.67 to $4.96. This guidance reflects the company's confidence in its ability to deliver sustainable growth and maintain its position as the industry's leading provider of inpatient rehabilitation services.
Encompass Health anticipates $18 to $22 million of hospital net preopening and ramp-up costs in 2025, with the majority occurring in the second half of the year as 5 of the 8 new hospitals are expected to open between September and year-end. Additionally, 2025 will include a full-year impact of $5.5 to $6.5 million for Oracle Fusion implementation costs and $6 to $7 million in NCI expense related to the Augusta joint venture.
Industry Trends and Market Dynamics
The inpatient rehabilitation industry has seen steady growth, with Encompass Health reporting a 5-year compound annual growth rate (CAGR) of 3.4% for Medicare discharges and 11.6% for Medicare Advantage discharges. This growth trend underscores the increasing demand for specialized rehabilitative care, particularly as the population ages and the prevalence of chronic conditions rises.
Encompass Health's strong market position and focus on high-quality, cost-effective care have enabled it to capitalize on these industry trends. The company's ability to adapt to regulatory changes and reimbursement models has been crucial to its success in navigating the complex healthcare landscape.
Risks and Challenges
While Encompass Health's growth prospects remain promising, the company is not without its risks and challenges. The highly regulated healthcare industry in which it operates presents ongoing compliance and reimbursement risks. Changes in government policies, such as adjustments to Medicare reimbursement rates, could potentially impact the company's financial performance.
Additionally, Encompass Health faces competition from other healthcare providers, including acute-care hospitals and skilled nursing facilities, which may seek to expand their own rehabilitation services. The company's ability to attract and retain qualified healthcare professionals, such as nurses and therapists, is also crucial to its success.
Conclusion
Encompass Health's position as the largest owner and operator of inpatient rehabilitation hospitals in the United States, coupled with its proven track record of financial performance and growth, makes it a compelling investment opportunity. The company's focus on clinical excellence, technological innovation, and strategic expansion positions it well to capitalize on the growing demand for specialized rehabilitative care.
Despite the inherent risks and challenges of the healthcare industry, Encompass Health's strong balance sheet, robust cash flow generation, and experienced management team instill confidence in the company's ability to navigate the evolving landscape and deliver long-term value for its shareholders. With a clear growth strategy, solid financial guidance, and a commitment to operational excellence, Encompass Health is well-positioned to maintain its leadership in the inpatient rehabilitation sector and drive continued success in the years to come.