Encompass Health Corp. 2025 Annual Report (10-K) Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2025. Encompass Health Corporation is the nation's largest owner and operator of inpatient rehabilitation hospitals, operating 173 hospitals across 39 states and Puerto Rico. The company provides specialized rehabilitative treatment for patients recovering from major injuries or illnesses, with approximately 92% of patients admitted from acute-care hospitals. The company is a large accelerated filer and maintains a strong balance sheet with no significant debt maturities until 2028.
Key Financial Metrics
| Metric (in millions, except per share) | 2025 | 2024 | Change |
|---|---|---|---|
| Net Operating Revenues | $5,935.2 | $5,373.2 | +10.5% |
| Net Income Attributable to Encompass Health | $566.2 | $455.7 | +24.2% |
| Diluted EPS | $5.54 | $4.46 | +24.2% |
| Adjusted EBITDA | $1,267.9 | $1,103.7 | +14.9% |
| Operating Cash Flow | $1,175.6 | $1,002.8 | +17.2% |
| Long-Term Debt (excluding current) | $2,447.2 | $2,359.2 | N/A |
| Cash and Cash Equivalents | $72.2 | $85.4 | -15.5% |
| Revolving Credit Facility Availability | $824.0 | N/A | N/A |
Operational Highlights: Discharges increased 6.0% to 263,299. Net patient revenue per discharge rose 3.9% to $21,862. Occupancy rates improved to 75.9%.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 3.4% increase in same-store discharges and favorable pricing. New hospital openings in Georgia, Florida, Connecticut, and Texas contributed to volume growth.
- Profitability Expansion: Operating expenses as a percentage of revenue decreased from 83.9% in 2024 to 82.3% in 2025. Salaries and benefits as a percentage of revenue declined to 52.5% due to improved efficiency (lower employees per occupied bed) and reduced contract labor usage.
- Debt Reduction: The company redeemed the remaining $100 million of its 5.75% Senior Notes due 2025 at maturity in September 2025. Interest expense decreased 10.3% to $123.2 million.
- Tax Impact: The "One Big Beautiful Bill Act" (OBBBA) signed in July 2025 provided approximately $22 million in cash tax savings for 2025 through extended bonus depreciation and immediate expensing of R&D costs.
Guidance, Outlook, and Risks
Outlook: Management remains optimistic regarding long-term prospects driven by an aging population. The company expects to spend approximately $920 million to $995 million on capital expenditures in 2026. The company plans to continue returning capital to shareholders via dividends (increased to $0.19 per share in Q3 2025) and stock repurchases ($332 million remaining authorization).
Key Risks and Contingencies:
- Medicare Reimbursement: Approximately 82% of revenue is derived from Medicare and Medicare Advantage. The 2026 IRF Rule is expected to result in a net 2.9% increase in payment rates. However, the company faces risks from potential legislative cuts, sequestration, and restrictive interpretations of coverage rules.
- Audits and Denials: As of December 31, 2025, approximately $39 million in denied claims were under review or audit. The company is challenging the use of extrapolation in a 2017 UPIC audit involving $18 million.
- Regulatory Changes: The Review Choice Demonstration (RCD) program is expanding to Texas and California in 2026, affecting 33 hospitals (11.9% of Medicare claims). The company has not achieved opt-out validation rates in previous cycles in Alabama.
- Staffing: Competition for clinical personnel remains intense, though contract labor usage decreased in 2025.
Investor Verification Checklist
- Reimbursement Rates: Verify the actual impact of the 2026 IRF Rule on net payment rates versus the projected 2.9% increase.
- Claim Denials: Monitor the resolution of the $39 million in denied claims and the outcome of the $18 million UPIC audit appeal.
- RCD Program Impact: Assess the financial impact of the expanded Review Choice Demonstration (RCD) program in Texas and California starting in 2026.
- Capital Expenditures: Track the execution of the $920M-$995M 2026 capital budget against projected returns on new hospital openings.
- Debt Covenants: Confirm continued compliance with the 4.50x leverage ratio and 3.0x interest coverage ratio covenants under the credit agreement.