Encompass Health Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone Q4 report; quarterly financial results are not clearly provided in the supplied text.
Business context
Encompass Health is the largest U.S. owner and operator of inpatient rehabilitation hospitals by patients treated, revenue, and hospital count. At year-end it operated 161 hospitals in 37 states and Puerto Rico, with 10,778 licensed beds. The company completed the spin-off of its home health and hospice business, Enhabit, in July 2022; reported continuing operations now comprise a single reporting segment focused on inpatient rehabilitation.
Key financial and operating metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net operating revenue | $4,801.2 million | $4,348.6 million | +10.4% |
| Income from continuing operations | $475.0 million | $350.7 million | +35.4% |
| Net income attributable to Encompass Health | $352.0 million | $271.0 million | +29.9% |
| Diluted EPS, continuing operations | $3.59 | $2.56 | Up |
| Adjusted EBITDA | $971.1 million | $819.3 million | +18.5% |
| Net cash provided by operating activities | $850.8 million | $705.8 million | +20.5% |
| Capital expenditures | $583.1 million | $584.1 million | Approximately flat |
Adjusted EBITDA is a non-GAAP measure defined under the credit agreement and should not be treated as a substitute for GAAP earnings or cash flow. The company separately reports $866.8 million of operating cash flow from continuing operations for 2023; the consolidated cash-flow statement’s $850.8 million includes discontinued-operation cash use.
Operating trends: Discharges rose 8.7% to 229,480, including 4.8% same-store growth. Net patient revenue per discharge increased 1.6% to $20,454; occupancy improved to 72.1% from 70.9%. Average length of stay declined to 12.4 days from 12.7. Medicare and Medicare Advantage together accounted for 81.2% of revenue (65.0% and 16.2%, respectively).
Costs and margins: Total operating expenses were $4,069.4 million, or 84.8% of revenue, versus 85.5% in 2022. Salaries and benefits increased 8.6% to $2,600.1 million, but declined as a share of revenue. General and administrative expense rose 30.7% to $201.7 million, primarily due to incentive compensation and deferred-compensation mark-to-market adjustments. Interest expense fell 18.3% to $143.5 million.
Liquidity and debt: Year-end cash and cash equivalents were $69.1 million; an additional $35.1 million was restricted cash and $126.2 million of marketable securities was restricted. The company had $968 million available under its $1 billion revolving credit facility and no revolver borrowings at year-end. Long-term debt excluding finance leases was approximately $2.37 billion; total debt including finance lease obligations was $2.71 billion. There were no significant debt maturities in 2024; senior notes include $350 million due in 2025. The company reported compliance with its credit agreement covenants.
Material changes versus 2022
- Revenue growth reflected higher volumes and pricing, with new hospital openings contributing to discharge growth.
- Operating cash flow increased, while cash used in investing activities declined modestly. Financing cash use also decreased, partly because 2022 included substantial debt repayments related to the spin-off.
- Contract labor and sign-on/shift bonuses totaled $137.0 million, down from $204.3 million, helping improve labor costs as a percentage of revenue.
- The company recorded a $21.9 million fourth-quarter 2023 reserve for certain older denied claims under appeal, reflecting less favorable appeal outcomes.
- Encompass Health reported a $12.0 million loss from discontinued operations in 2023, including $15.8 million of legal costs related to litigation against former Enhabit executives.
Outlook, commentary, risks, and unusual items
- Management expressed optimism about longer-term demand, citing an aging population, and plans to expand hospital and bed capacity. For 2024 it expects to open six hospitals with approximately 280 beds and add approximately 150 beds to existing hospitals. It targets $580–$610 million of 2024 capital expenditures, including $185–$195 million characterized as nondiscretionary.
- The FY2024 Medicare IRF payment rule was expected by management to increase rates by approximately 3.3% effective October 1, 2023. Management estimated 2024 cash income-tax payments, net of refunds, of approximately $145–$165 million.
- Management cited labor-cost inflation and clinical staffing availability as ongoing challenges. Wage and benefit costs increased faster than aggregate Medicare reimbursement rates in 2022 and 2023, and fixed prospective payments limit the ability to pass higher costs through to payors.
- Reimbursement is highly concentrated in Medicare. Risks include rate reductions, Medicare Advantage and other payor-mix shifts, restrictive coverage interpretations, claim denials and lengthy appeals, audits and extrapolated recoupments, and potential site-neutral or other post-acute payment reforms.
- The company is participating in the Medicare IRF Review Choice Demonstration, initially using pre-claim review in Alabama. It cannot be certain it will meet future claim-validation thresholds or predict the demonstration’s effect on collections and revenue.
- At year-end, $18.0 million remained under appeal from a UPIC audit; the company is challenging both denials and extrapolation. Separately, approximately $3 million of SMRC-reviewed claims remained under appeal. These matters’ timing and outcomes are uncertain.
- After year-end, a joint-venture partner gave notice it would close an acute-care hospital housing a rehabilitation hospital. Encompass Health closed the rehabilitation hospital in February 2024 and expected a one-time charge of approximately $2–$4 million, net of tax and noncontrolling interest.
- Change Healthcare, which processes claims for all payors, reported a cybersecurity incident on February 21, 2024. The filing said the disruption affected claim submission, not other operations as of the report date; prolonged disruption could delay collections and increase receivables.
- Other material risks include staffing shortages, competition and dependence on acute-care referral sources, healthcare compliance and litigation, cybersecurity and privacy incidents, joint-venture partner pressures, and potential tax liabilities if the Enhabit spin-off fails to retain tax-free treatment.
Important facts for investors to verify
- Whether discharge and same-store growth, revenue per discharge, and occupancy trends continue, and how new hospitals ramp toward profitability.
- The collectability and eventual resolution of denied Medicare claims, including the $21.9 million reserve, the $18.0 million UPIC appeal, and claims under the IRF review demonstration.
- Whether reimbursement increases keep pace with labor, supply, and other operating costs, particularly as Medicare Advantage becomes a larger share of revenue.
- Execution of planned 2024 openings, bed additions, and capital spending, alongside leverage, covenant headroom, dividends, and debt maturities.
- The duration and financial impact of the Change Healthcare claims-submission disruption and any subsequent effects on cash collections.