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    EHC
    Earnings call· Jun 2026(Q2 FY26)

    Encompass Health Q2 FY26 earnings call EHC

    Aug 6, 2026 Source

    Executive summary

    Encompass Health Q2 FY26 — Strong Growth and Raised Full-Year Guidance

    Encompass Health delivered strong Q2 FY26 results, driven by robust discharge growth and increased patient acuity, leading to another full-year guidance raise. The company continues to invest in capacity expansion and workforce development, which is yielding favorable clinical staff retention and improved patient outcomes. While facing some headwinds from provider tax changes and increased ramp-up costs, strategic initiatives like the "admit and appeal" program for MA patients are showing promising early results.

    Highlights

    5

    • Revenue grew 9.6% in Q2 FY26.

    • Adjusted EBITDA increased 9.2% to $348 million in Q2 FY26.

    • Adjusted EPS increased 10.7% in Q2 FY26.

    • Full-year 2026 guidance for revenue, adjusted EBITDA, and adjusted EPS was raised.

    • Clinical staff turnover rates reached multi-year lows (nursing 19%, therapy 7%).

    Concerns

    3

    • Net provider tax impact decreased by $11.5 million year-over-year in Q2 FY26.

    • Net preopening and ramp-up costs increased $2.9 million year-over-year to $6.9 million in Q2 FY26.

    • Medicare Advantage preauthorization denials continue to be a challenge, adding administrative costs.

    Guidance & targets

    7
    CategoryTargetConfidence
    Full-year 2026 Net Operating Revenue
    $6.41 billion to $6.49 billion
    high materiality
    High
    Full-year 2026 Adjusted EBITDA
    $1.365 billion to $1.395 billion
    high materiality
    High
    Full-year 2026 Adjusted EPS
    $6.02 to $6.25
    high materiality
    High
    Full-year 2026 Net Preopening and Ramp-up Costs
    $18 million to $22 million
    medium materiality
    High
    Full-year 2026 SWB per FTE Growth
    3.5% to 4%
    medium materiality
    High
    Full-year 2026 Net Provider Tax Impact to Adjusted EBITDA
    approximately $10 million
    medium materiality
    High
    Medicare Pricing Assumption
    approximately 2.3% increase in net revenue per discharge
    medium materiality
    High

    Operational metrics

    41
    Revenue growth
    9.6%YoY
    Q2 FY26

    Q2 revenue was up 9.6% over the second quarter of 2025.

    Discharge growth
    5.6%YoY
    Q2 FY26

    The increase was comprised of 5.6% discharge growth.

    Net revenue per discharge growth
    3.9%YoY
    Q2 FY26

    a 3.9% increase in net revenue per discharge. Net revenue per discharge growth was driven by higher patient acuity.

    Discharge acuity rate
    84.7%
    Q2 FY26

    Our Q2 discharge acuity rate was 84.7%.

    Discharge to acute rate
    8.4%
    Q2 FY26

    Discharge to acute rate was 8.4%.

    Discharge to skilled nursing facilities rate
    6.1%
    Q2 FY26

    discharge to skilled nursing facilities was 6.1%.

    SWB per FTE increase
    3.4%YoY
    Q2 FY26

    Q2 SWB per FTE increased 3.4%, in part driven by increased participation in our career ladder programs, partly offset by a decline in premium labor.

    Premium labor costs
    $25 milliondeclined $2.6 million from Q2 '25
    Q2 FY26

    Premium labor costs comprised of contract labor and sign-on and shift bonuses declined $2.6 million from Q2 '25 to $25 million.

    Contract labor FTEs as % of total FTEs
    1.1%improvement of 20 basis points from Q2 '25
    Q2 FY26

    Contract labor FTEs as a percent of total FTEs was 1.1% and an improvement of 20 basis points from Q2 '25.

    Net preopening and ramp-up costs
    $6.9 millionup $2.9 million from Q2 '25
    Q2 FY26

    Net reopening and ramp-up costs were $6.9 million, up $2.9 million from Q2 '25 and were $10.9 million on a year-to-date basis compared to $6.1 million in the first half of 2025.

    Shares repurchased
    704,000
    Q2 FY26

    During Q2, we repurchased approximately 704,000 shares of our common stock for a total of $74.2 million.

    Shares repurchased
    1,412,000
    YTD FY26

    bringing our year-to-date total share repurchases to approximately 1,412,000 shares and $145.8 million.

    Quarterly dividend
    $0.21increased
    Q4 FY26

    We recently announced an increase in our quarterly dividend next payable in October to $0.21 per share.

    Share repurchase authorization
    $1 billionincreased
    ongoing

    we announced an increase in our common stock repurchase authorization to $1 billion.

    Nursing turnover
    19%12-plus year low
    annualized through Q2 FY26

    our nursing turnover sits around 19%. That represents a low of 12-plus years.

    Therapy turnover
    7%5-year low
    annualized through Q2 FY26

    On the therapy perspective, we're just above 7%. That's our lowest turnover on an annualized basis in 5 years.

    Eligible RNs participating in career ladder
    43%
    Q2 FY26

    we are up to 43% of eligible RNs and certified nurses that are participating on the ladder.

    Turnover for laddered nurses
    5%
    Q2 FY26

    If there are a non-laddered nurse, the turnover is closer to 25%. If we can get a nurse certified, even if they're not on the ladder, turnover is only 12%. (The 5% is for laddered nurses).

    Certified nurses
    21%vs prior year
    Q2 FY26

    And we've increased the number of certified nurses by almost 21% versus prior year and 60% since 2023.

    CRRN certification wage premium
    9%
    Q2 FY26

    It's about 9% over their peers who do not have that certification.

    RNs with CRRN certification
    22%
    Q2 FY26

    We currently have approximately 22% of our RNs have the CRRN certification.

    VA program growth
    33%YoY
    Q2 FY26

    in Q2, we hit VA growth of around 33%.

    VA program as % of managed care volume
    23%
    Q2 FY26

    It now represents about 23% -- just under 23% of our managed care volume.

    Veterans over 65
    8 million
    current

    there's $8 million veterans over the age of 65 in the country

    Patients treated by VA program
    10,000
    FY26

    we're on pace to treat somewhere close to 10,000 by the end of the year.

    Hospitals opened
    3
    H1 FY26

    Through the first half of the year, we opened 3 hospitals with a total of 139 beds.

    Beds added to existing hospitals
    54
    H1 FY26

    and added 54 beds to existing hospitals.

    Hospitals to open
    5
    H2 FY26

    Over the balance of the year, we intend to open 5 more hospitals with a total of 250 beds.

    Beds to add to existing hospitals
    100 to 150
    H2 FY26

    and add 100 to 150 beds to existing hospitals.

    Pipeline of announced new hospital projects
    13
    beyond 2026

    Our pipeline of announced new hospital projects with opening dates beyond 2026, currently consists of 13 hospitals with 606 beds.

    Capital expenditure
    15%
    FY26

    CapEx this year is running right at about 15% of revenue.

    De novo hospitals achieving four-wall positive EBITDA
    6 months
    average

    On average, our de novos achieved four-wall positive EBITDA by the time they hit month 6.

    De novo hospitals achieving 70% occupancy
    10 months
    average

    and they're typically north of a 70% occupancy rate by the time they get to month 10.

    Hospitals with occupancy >90%
    65
    Q1 FY26

    In Q1, we had 65 hospitals with occupancy rates greater than 90% and an average in that cohort of 95%.

    Hospitals with occupancy >90%
    60decrease of 5% from Q1 FY26
    Q2 FY26

    In Q2, we had 60 hospitals at greater than 90%, so a decrease of 5% with an average occupancy rate of 94%.

    Bed additions going into >90% occupied hospitals
    90%
    H2 FY26 and H1 FY27

    approximately 90% of the bed additions that we have in the pipeline and targeted for the second half of this year and the first half of next year are going into hospitals that are in that greater than 90% cohort.

    Stroke category growth
    7.9%YoY
    Q2 FY26

    Two of the largest categories, the growth for us were in stroke and brain injury. Those were up 7.9% and 8%, respectively. On a same-store basis, 5.5%, 3.9%, respectively.

    Brain injury category growth
    8%YoY
    Q2 FY26

    Two of the largest categories, the growth for us were in stroke and brain injury. Those were up 7.9% and 8%, respectively. On a same-store basis, 5.5%, 3.9%, respectively.

    Lower extremity joint replacement growth
    1%YoY
    Q2 FY26

    I think you asked specifically about lower extremity joint replacement, knee and hip replacement, which is how we categorize that, that was up only modestly about 1% in the quarter.

    MA admit and appeal program success rate
    89%
    through July 2026

    Through the end of July, we had a total of 298 patients who had been admitted into our hospitals on that basis. 144 of those have been fully adjudicated. And of that 144, we have prevailed on 128, which is an 89% success rate.

    Occupancy evaluation threshold for bed additions
    70% to 75%vs historical 80% to 85%
    current

    We have lowered the threshold of when we start the evaluation process for bed additions, just to try to time that capacity coming online to when we actually need it. So we're not missing out on potential volume. So we, again, have lowered that threshold to 70% to 75% versus the historical 80% to 85% threshold.

    Industry KPIs

    3
    MetricValueDetails
    Utilization trends77.4%%
    Same facility volumes2.8%%
    Adjusted EPS EBITDA leverage guidanceAdjusted EBITDA $1.365B-$1.395B; Adjusted EPS $6.02-$6.25; Net leverage 1.9xUSD

    Deals & partnerships

    2
    PiedmontOpened a new 40-bed hospital in Loganville, Georgia, as the eighth joint venture.

    Our Loganville Hospital is our eighth joint venture with Piedmont.

    BondholdersIssued $500 million of 5.875% senior notes due 2034 and redeemed $400 million of 4.5% senior notes due 2028.Issued $500 million; Redeemed $400 millionIssued notes due 2034; Redeemed notes due 2028

    During Q2, we issued $500 million of 5.875% senior notes due 2034 and used most of the proceeds from that issuance to redeem $400 million of our 4.5% senior notes due in 2028.

    Risks & headwinds

    3
    Decrease in net provider tax impactQ2 FY26

    $11.5 million year-over-year decrease in Q2 FY26

    Mitigation: Management adjusted full-year guidance to reflect this.

    Increased net preopening and ramp-up costsQ2 FY26

    $2.9 million increase year-over-year to $6.9 million in Q2 FY26

    Mitigation: Management expects full-year costs to be $18 million to $22 million, indicating these are planned investments for growth.

    Medicare Advantage preauthorization denialsOngoing

    Substantial disparity between MA plans and Medicare fee-for-service patients

    Mitigation: Pilot 'admit and appeal' program showing 89% success rate; planning to scale this program, starting with specific diagnoses like stroke.

    What to watch in Q3 FY26

    5

    Scaling of MA 'admit and appeal' program

    coming quarters
    Current89% success rate in pilot (128/144 cases prevailed)
    TargetBroader rollout or scaling to more diagnoses/markets

    Why it matters

    This program addresses a significant headwind from MA denials, potentially improving revenue capture and reducing administrative costs.

    I think you could see that we'll look to scale a certain part of this in the coming quarters⏳ and then by the end of the year, I think we'll be in a position to evaluate for a full broader rollout across the company.

    Q&A highlights

    6

    Can you bridge the raised guidance, specifically how EBITDA was raised despite lower Medicare pricing assumption and higher SWB per FTE growth?

    Doug Coltharp explained favorability in Q2 from pricing (due to patient acuity) and EPOB (due to higher occupancy and career ladder participation leading to lower turnover and less orientation time for new hires).

    “So we had some favorability in the second quarter and really for the first half in a couple of areas. One is pricing, which was driven predominantly by patient acuity.”

    asked by Pito Chickering · answered by Douglas Coltharp

    2 min read6 chapters

    Detailed Narrative

    01

    Capacity Expansion and New Hospital Development

    Encompass Health continues to aggressively expand its capacity, opening three new hospitals and adding 54 beds to existing facilities in the first half of 2026. The company plans to open five more hospitals and add 100-150 beds in the second half, maintaining a robust pipeline of 13 announced hospitals with 606 beds beyond 2026. This strategy is supported by strong demand for inpatient rehabilitation services and high occupancy rates in existing facilities, with approximately 90% of planned bed additions targeting hospitals with over 90% occupancy.

    02

    North Carolina CON Repeal Opportunity

    The repeal of North Carolina's Certificate of Need law for inpatient rehabilitation care, effective October 1, 2026, presents a significant growth opportunity. Encompass Health has identified 15 priority markets and has three real estate parcels under contract, with the first new hospital expected to open in late 2028 or early 2029. The company plans to leverage a combination of traditional de novos and small-format hospitals to pursue a "hub-and-spoke" strategy in the state, aiming to push towards the upper end of its 6-10 annual de novo target.

    03

    Workforce Development and Retention

    Investments in clinical staff professional growth and development programs, such as career ladders, are yielding positive results. Nursing turnover reached a 12-year low of 19%, and therapy turnover was at a 5-year low of 7%. Participation in career ladders is high (43% of eligible RNs), with significantly lower turnover rates (5%) for participating nurses, contributing to reduced premium labor spend and enhanced clinical capabilities. These programs also support the ability to treat high-acuity, medically-complex patients.

    04

    Medicare Advantage Denials and Appeal Strategy

    Medicare Advantage preauthorization denials remain a challenge, with a substantial disparity compared to Medicare fee-for-service patients. Encompass Health's "admit and appeal" pilot program, initiated in February across nine markets, has shown an 89% success rate (128 out of 144 fully adjudicated cases prevailed). The company plans to scale this program, focusing initially on high-success-rate diagnoses like stroke, to address inappropriate care denials and the associated administrative burden on the healthcare system.

    05

    Technology and AI Initiatives

    The company is actively investing in technology and AI, particularly through a partnership with Palantir. AI is being embedded in clinical workflows to aid patient journeys (e.g., prescreen narrative, automation of face-to-face notes, enhanced risk models) and administrative processes (e.g., monthly closing, exception scanning). Future initiatives include an enhanced market analytics tool to optimize real estate strategy, especially for new market entries like North Carolina, and proactive scanning of medical records for potential risks.

    06

    Capital Allocation and Financial Strength

    Encompass Health maintains a strong balance sheet with net leverage at 1.9x. The company increased its quarterly dividend to $0.21 per share and authorized an additional $1 billion for common stock repurchases. Capital expenditures are running at about 15% of revenue, primarily driven by capacity expansions. This reflects a balanced approach to growth investments, shareholder returns, and debt management, with the capacity for increased share repurchase activity in the future.

    AI-generated summary of the company’s earnings call. Not investment advice.