Encompass Health Corporation

What they do

Encompass Health operates inpatient rehabilitation hospitals providing specialized rehabilitative care for patients recovering from major injuries or illnesses, such as strokes and hip fractures. The company's hospitals admit substantially all patients (92%) from acute-care hospitals following physician referrals. Revenue is generated primarily through Medicare and other payors for inpatient rehabilitation services, supplemented by other revenue streams.

Revenue drivers

• Inpatient rehabilitation services — Core business; net operating revenues of $5,756.3 million in 2025, up from $5,230.5 million in 2024.
• Other revenue — Includes ancillary and non-inpatient services; $178.9 million in 2025, growing from $142.7 million in 2024.
• Volume growth — Discharges increased to 68,895 in Q2 2026, up 5.6% year-over-year, with same-store discharge growth of 2.8%.
• Pricing — Net patient revenue per discharge rose 3.9% to $22,521 in Q2 2026 from $21,670 in Q2 2025.

Recent performance

For Q2 2026, net operating revenue increased 9.6% to $1,597.4 million, and adjusted EBITDA grew 9.2% to $348.0 million. Diluted EPS from continuing operations was $1.55, up 10.7% year-over-year. Cash flows from operating activities were $282.6 million in Q2, and adjusted free cash flow was $177.0 million.

Strategy

The company's strategy focuses on expanding its hospital network through de novo developments and bed additions, strengthening relationships with healthcare systems and payors, and improving patient outcomes cost-effectively. In the first half of 2026, it opened three new hospitals (139 beds in South Carolina, Pennsylvania, and Georgia) and added 54 beds to existing facilities. Management expects to open five additional hospitals and add over 100 beds by year-end, with a pipeline of de novo projects scheduled for 2026 and 2027.

Risks

• Medicare reimbursement reductions — A substantial portion of revenue comes from Medicare, and rate cuts or changes could materially reduce revenues.
• Regulatory and audit exposure — Reimbursement claims are subject to audits that may lead to overpayment assertions, requiring refunds or additional costs.
• Payor mix and pre-authorization restrictions — Shifts in payor mix or restrictive coverage determinations by Medicare Advantage plans could lower revenue or profitability.
• Healthcare policy uncertainty — Changes in healthcare laws, including payment system reforms or value-based models, could increase costs or reduce reimbursement.

Outlook

Management increased full-year 2026 guidance, now expecting net operating revenue of $6,410–$6,490 million, adjusted EBITDA of $1,365–$1,395 million, and adjusted EPS of $6.02–$6.25. The company cites favorable demographic trends—aging population and expected growth in Medicare enrollees—as supporting long-term demand. Management remains optimistic about near-term growth from new hospital openings and capacity expansions.