Encompass Health (EHC) investor relations material

Volume growth and capacity management

• Five-year discharge growth CAGR target is 6%-8%, with 7.6% achieved through 2025 so far, though recent quarters saw slower growth due to specific headwinds.

• Q1 discharge growth was 4.3%, impacted by closure of non-strategic units and seasonal factors like a mild flu season.

• Closures of joint venture units and a skilled nursing facility created an 85 basis point headwind in Q1, expected to diminish by 20 basis points each subsequent quarter.

• High occupancy (95% at 35% of hospitals) is being addressed with targeted bed additions, with 70% of 2026 and 90% of 2027 additions focused on these locations.

• Bed additions and new hospital formats are expected to alleviate constraints and support volume growth acceleration through the year.

Expansion strategy and investment returns

• Small bed additions offer the highest returns, typically above 30%, with an average cost of $850,000 per bed.

• Small format hospitals, a new concept, are being piloted in dense markets, offering 20%-25% returns and $1 million per bed cost.

• De novo hospitals yield low to mid-teens returns, with larger hospitals (60+ beds) in a similar range depending on market factors.

• Small format hospitals will open starting in 2027, using a hub-and-spoke model to address high occupancy in dense markets.

• Expansion is funded primarily through internally generated cash flow, with leverage now below 2x and a focus on maintaining 2x-2.5x going forward.

Payer mix and Medicare Advantage dynamics

• Medicare Advantage (MA) penetration grew from under 9% to 17% but has recently slowed due to stricter pre-authorization, with Q1 MA discharge growth at 0.6% total and negative same store.

• MA penetration appears to have peaked at 52% nationally, with declines in 20 states and 54 counties where the company operates.

• A new admit-and-appeal strategy is being piloted to counteract aggressive MA denials, showing early promising results.

• Payment gap between fee-for-service and MA has narrowed to 1% due to contract changes and higher acuity in MA patients.

• Higher pre-authorization requirements are concentrated with one large payer, not seen broadly across others.