Encompass Health (EHC) Q1 FY26 earnings call: guidance and Q&A

What was the organic volume/discharge growth excluding the impact of unit closures, and how will this trend for the rest of 2026?

Unit closures impacted total and same-store discharge growth by approximately 85 basis points. This impact is expected to diminish throughout the year as volume is consolidated into other proximate hospitals and bed additions are made. There was no impact on EBITDA from these closures.

“As I mentioned in my comments, the impact of the closures was approximately 85 basis points, and that would be the same for both total and same store.”

asked by Ann Hynes · answered by Douglas Coltharp

What factors are driving the lowest nursing turnover rate since 2012?

The low turnover is driven by a centralized talent acquisition team and the success of clinical ladder programs. Approximately 35% of nursing staff are on clinical ladders, and turnover for laddered nurses was significantly lower (2.6%) compared to non-laddered nurses (20.7%).

“So we have about 35% of our nursing staff is now on clinical ladders. That's up about 300 basis points from last quarter turnover. If we can get a nurse on the latter in Q1, the turnover for that group was a little over 2%. It was 2.6% compared to 20.7% for non-laddered nurses.”

asked by Ann Hynes · answered by Patrick Tuer

Given the moderated same-store volume growth, what are the underlying factors, and how is the company thinking about same-store volume for the rest of 2026?

Four factors impacted Q1 volumes: unit closures (85 bps), high occupancy levels (78.7% average, 35% of hospitals >90%), a light flu/respiratory season (ABILITY volume grew only 70 bps total, declined 1.5% same-store), and continued MA trends. The company is addressing occupancy by lowering the internal expansion threshold to 70-75% and evaluating larger footprints and small-format hospitals.

“Our Q1 average occupancy of 78.7% was essentially flat with our record high levels in Q1 of '25 and that was up 200 basis points from Q1 of '24 and up over 500 basis points from Q1 of '23.”

asked by Matthew Gillmor · answered by Douglas Coltharp

Has aggressive MA utilization management broadened to other payers, and why would receding MA penetration be a volume drag if fee-for-service is higher?

MA trends remain consistent, not broadened to other payers. The 'admit and appeal' strategy in 9 hospitals for initially denied MA claims is showing positive early results. Receding MA penetration is not a volume drag; it means a higher percentage of fee-for-service patients, which is generally favorable for the company.

“I was going to the opposite. I think for many years, what we were observing is that an increasing percentage newly minted Medicare beneficiaries. We're signing up for MA. And so the total MA penetration of the beneficiary population have been increasing but it appears that it peaked at about 52%, and it's actually backing up now.”

asked by Andrew Mok · answered by Douglas Coltharp

What is the right level of CapEx to meet demand, and will CapEx as a percentage of revenue increase?

CapEx as a percentage of revenue is expected to increase modestly over the next 2-3 years, peaking at approximately 15%, before receding to a longer-term run rate of 10-12%. The company is confident in its ability to address occupancy and capacity issues through new projects and bed additions.

“I think it's going to increase as a percent of revenue relatively modestly over the next 2 to 3 years and peak at probably about 15% and then start to recede back towards the, call it, 10% to 12%, which was probably going to represent a longer-term run rate.”

asked by Pito Chickering · answered by Douglas Coltharp

What is the latest thinking on the longer-term share buyback strategy, especially with leverage drifting lower?

Share buybacks are considered an attractive complement to the overall strategy. With an estimated $56 million available after CapEx and dividends, and additional capacity from the balance sheet (e.g., $212 million if leverage goes from 1.9x to 2x), share repurchases will continue to be part of free cash flow allocation. The company executed $71.6 million in buybacks in Q1.

“If you simply took the leverage up to 2 from 1.9, that would suggest total incremental capacity of $212 million for share buyback. We did $71 million in the first quarter. So you've got at least $140 million available.”

asked by Whitner Marshall · answered by Douglas Coltharp

Does the ROI for small format hospitals differ materially, and do they offer more flexibility regarding certificate of need (CON) requirements?

The ROI for small format hospitals falls between bed expansion (highest ROI) and de novo hospitals. They are not a substitute for de novo but a complement. Operating under the same Medicare provider number and having fewer beds often results in a lower hurdle for CON requirements, though it's not always a bypass.

“So the ROI falls squarely between bed expansion, which is our highest ROI and a de novo better than the de novo, not quite a bed expansion because of the infrastructure leverage. In CON states, the addition of beds is almost always subject to CON requirements.”

asked by Albert Rice · answered by Douglas Coltharp

What AI initiatives are underway, and is there room for AI to improve clinical/operational aspects like length of stay?

The company is not actively trying to reduce the average length of stay (around 12 days) to maintain quality metrics. AI, particularly with Palantir, is being used for documentation efficiency (histories and physicals, face-to-face notes, discharge summaries) to free up clinical staff for direct patient care. Other AI opportunities include real estate analysis, CRM, revenue cycle management, and clinical staffing.

“We're not actively trying to get our length of stay down further. What we're trying to do is make sure that each patient has and appropriate care plan for their needs. That just happens to average around 12 days.”

asked by Brian Tanquilut · answered by Patrick Tuer