Encompass Health Corporation · NYSE:EHC
Encompass Health — Investor Presentation (January 2019)
115 slides from Encompass Health's investor presentation, Jan 7, 2019
Slide 1: Investor Reference Book Post Q3 2018 Earnings Release
Investor Reference Book Post Q3 2018 Earnings Release Last Updated January 7, 2019 HealthSouth is a leading provider of post-acute healthcare services, offering both facility-based and home-based post-acute services in 34 states and Puerto Rico through its network of inpatient rehabilitation hospita
Slide 2: Forward-Looking Statements
Forward-Looking Statements The information contained in this Investor Reference Book includes certain estimates, projections and other forward- looking information that reflect Encompass Health’s current outlook, views and plans with respect to future events, including legislative and regulatory dev
Slide 3: Table of Contents
Table of Contents Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-17 Investment Thesis and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-25 Business Outlook, Including Guidance . . . . .
Slide 4: Company Overview
Company Overview Encompass Health is a leading provider of inpatient rehabilitation and home-based care committed to delivering high-quality, cost-effective, integrated care across the post-acute continuum. Encompass Health 4
Slide 5: A Leading Provider of Inpatient Rehabilitation and Home-Based Care
Encompass Health A Leading Provider of Inpatient Rehabilitation and Home-Based Care Market Overlap - 12/31/18 81 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio - 12/31/18 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Locations 5 Future
Slide 6: Inpatient Rehabilitation
Company Overview Inpatient Rehabilitation Inpatient Rehabilitation 114 of the Company’s IRFs hold one or more disease-specific certifications from The Joint Commission’s Disease-Specific Hospitals Care Certification Program.(1) Major Services • Rehabilitation Physicians: manage and treat medical con
Slide 7: Home Health and Hospice
Company Overview Home Health and Hospice The Company offers evidence-based specialty programs Home Health Agencies related to: Post-Operative Care, Fall Prevention, Chronic Disease Management, and Transitional Care. Major Services • Skilled Nurses: comprehensively assess, teach, train, and manage ca
Slide 8: IRF and Home Health Patient Mix
IRF Patient Mix Home Health Patient Mix Referral Sources: Referral Sources: Acute Care Hospitals – 91% Acute Care Hospitals – 35% Physician Offices / Community – 7% Physician Offices / Community – 38% Skilled Nursing Facilities – 2% IRFs / LTCHs / SNFs – 27% Rehabilitation Impairment Category* YTD-1
Slide 9: High-Quality Care
High-Quality Care IRF Quality Home Health Quality Discharge to Community 3.8 79.4% 79.9% Percent of cases 78.7% discharged to Quality of Care 76.8% 75.7% 76.0% the community, Star Ratings(3) including home 3.3 95% of our home health agencies or home with home health. are 3 Stars or higher; Higher is
Slide 10: Leading Position in Cost Effectiveness
Leading Position in Cost Effectiveness Inpatient Rehabilitation Avg. Est. Avg. Est. Total Avg. Total Cost Payment Medicare pays Avg. Medicare Case per per Encompass Health Beds Discharges Mix Discharge Discharge less per discharge, # per IRF per IRF(5) Index(6) for FY 2019 for FY 2019 on average, an
Slide 11: Low Cost Leader Home Health
Low Cost Leader Home Health Average revenue per Average episode is 5.7% Average Average Revenue higher than the peer 2017 Revenue Visits per Visit Cost average due to higher Episodes per Episode† per Episode (all payors) per Visit acuity patient mix. Encompass Health 211,743 $2,998 17.9 $161 $75 Cos
Slide 12: New-Store/Same-Store Growth Inpatient Rehabilitation
New-Store/Same-Store Growth Inpatient Rehabilitation Reliant (857 beds) 25.0 Franklin, TN (40 beds) Bryan, TX (49 beds) Broken Arrow, OK (22 beds) Shelby County, AL (34 beds) Bluffton, SC (38 beds) 20.0 Hot Springs, AR (27 beds) Pearland, TX 15.0 Gulfport, MS (33 beds) (40 beds) Westerville, OH (60
Slide 13: New-Store/Same-Store Growth Home Health
New-Store/Same-Store Growth Home Health Acquired CareSouth 70.0 (44 home health locations in 7 states) in November 2015 60.0 50.0 40.0 Acquired Camellia Healthcare (14 home health locations in 3 states) 30.0 in May 2018 20.0 10.0 0.0 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1
Slide 14: Payors (Q3 2018)
Payors (Q3 2018) Payor Source % of Revenues Payment Methodology Prospective Payment System (“PPS”) - IRF: Paid per discharge by Case Mix Group (“CMG”) Home - Home Health: Paid per 60-day episode of care by Medicare Inpatient Home Health Resource Group Health & Rehab • An episode is paid in two insta
Slide 15: Research Concludes IRFs Better Option for Stroke Patients than SNFs
Independent Research Concludes IRFs are a Better Rehabilitation Option for Stroke Patients than SNFs “Whenever possible, the American Stroke Association strongly recommends that stroke patients be treated at an inpatient rehabilitation facility rather than a skilled nursing facility. While in an inp
Slide 16: Strong and Sustainable Business Fundamentals
Strong and Sustainable Business Fundamentals • Favorable demographic trends driving increased demand • Nondiscretionary nature of many conditions treated Attractive Healthcare Sectors • Highly fragmented post-acute sectors present acquisition and joint venture opportunities • Largest provider of inp
Slide 17: Proven Track Record
Proven Track Record Period Adj. EBITDA % Change History Ending R We have successfully managed E MMSEA* Q1-09 Final Establishment through an economic recession, Q2-09 C Q3-09 E of IRF 60% Rule regulatory changes, sequestration, Q4-09 S Q1-10 S I Medicare Price Rollback and Medicare payment freezes/cu
Slide 18: Investment Thesis and Strategy
Investment Thesis and Strategy Encompass Health’s ability to adapt to changes, build strategic relationships, and consistently provide high-quality, cost-effective care positions the Company for success in the evolving healthcare industry. Encompass Health 18
Slide 19: Investment Thesis
Investment Thesis Encompass Health is positioned to become the nation's leading provider of integrated post-acute services. The healthcare industry is evolving toward integrated delivery models and value-based care. Providers must be able to adapt to changes, build strategic relationships across the
Slide 20: Strategy
Strategy The Company’s strategy is to expand its network of inpatient rehabilitation hospitals and home health and hospice locations, further strengthen its relationships with healthcare systems, provider networks, and payors in order to connect patient care across the healthcare continuum, and to d
Slide 21: Elements of Strategy
Elements of Strategy Institutional programs and advanced treatment protocols connect care and allow seamless transition of patients across the healthcare continuum Clinical Leverage technology to strengthen clinical data analytics Expertise and Integration of care transition coordinators High-Qualit
Slide 22: The Healthcare Landscape is Changing
The Healthcare Landscape is Changing. Current Post-Acute Providers Future Post-Acute Providers • Medicare payments/regulations are site • Medicare payments/regulations will be specific (e.g., 60% Rule, 3-Hour Rule, outcome focused. “preponderance” of one-to-one therapy). • Many existing regulations
Slide 23: Well-Positioned for Progression Towards Site Neutrality
The Company is Well-Positioned for the Progression Towards Site Neutrality as It Will be Able to Treat All Types of Post-Acute Patients by Leveraging Its Operational Expertise Across Its Network of Facility-Based and Home-Based Assets. The Company’s IRFs have the physical construct, clinical staffin
Slide 24: Clinical Collaboration - Overlap Markets
Clinical Collaboration - Overlap Markets* Inpatient Rehabilitation–Home Health Clinical Collaboration (All Payors) 28.7% 34.3% Collaboration Rate Collaboration Rate u The objectives of clinical collaboration are to improve patient experience and outcomes and to reduce the 4,395 total cost of care ac
Slide 25: Clinical Collaboration - All Markets
Clinical Collaboration - All Markets To continue building its clinical collaboration platform, the Company will: • focus on increasing its number of new overlap markets and building density in current overlap markets and • use Care Transition Coordinators and TeamWorks best practices to enhance pati
Slide 26: Business Outlook, Including Guidance
Business Outlook, Including Guidance (as of January 7, 2019) Encompass Health 26
Slide 27: 2018 Highlights
2018 Highlights GROWTH u Opened or acquired 4 new IRFs (including 2 joint ventures) Ÿ 5 IRF projects underway as of December 31, 2018 u Expanded existing IRFs by 26 beds u Acquired or opened 23 home health locations and 22 hospice locations OPERATIONAL INITIATIVES u Completed rebranding and name cha
Slide 28: Priorities for 2019
Priorities for 2019 GROWTH u Expand portfolio of inpatient rehabilitation hospitals Ÿ Demographic trends driving increased demand for inpatient rehabilitation services Ÿ IRFs are best positioned to expand service offering in the progression towards site neutrality (see page 23) Ÿ Joint venture or wh
Slide 29: Priorities for 2019
Priorities for 2019 GROWTH OPERATIONAL INITIATIVES u Continue to increase clinical collaboration - see page 24 and 25 u Build stroke market share - see page 30 u Continue to develop and implement post-acute solutions - see page 31 u Prepare for transition to IRF CARE Tool payment system - see page 3
Slide 30: Building Stroke Market Share
Building Stroke Market Share Leveraging our: • strategic partnership with the AHA/ASA • clinical collaboration • joint commission certifications ~800,000 Strokes ~130,000 per year Deaths from stroke in the U.S. 112 EHC IRFs hold stroke-specific ~31,000 certifications. Strokes treated in EHC IRFs Con
Slide 31: Post-Acute Solutions
Post-Acute Solutions Our post-acute solutions will leverage our clinical expertise, large post-acute datasets, EMR technologies, and strategic partnerships to drive improved patient outcomes and lower cost of care across the entire post-acute episode. 2018 2019 Ÿ Modified and implemented Cerner’s Ÿ
Slide 32: Transition to CARE Tool Payment System
Inpatient Rehabilitation: Transition to CARE Tool Payment System Background Elimination of FIM™ Functional Assessment items from IRF-PPS Ÿ Effective October 1, 2019, CMS will replace the FIM™ functional assessment measures with the CARE Tool measures for reporting and payment purposes. Ÿ This change
Slide 33: Home Health: Patient Driven Groupings Model
Home Health: Patient Driven Groupings Model (“PDGM”) Background Move to the Patient-Driven Groupings Model • Effective January 1, 2020, PDGM will: - move from 60-day episodes for payment to 30-day payment periods; - rely more heavily on clinical characteristics; and - eliminate therapy service use t
Slide 34: Home Health: Review Choice Demonstration
Home Health: Review Choice Demonstration (“RCD”)* State Start Date Company Overview Locations Following the pause of the Pre-Claim Review Illinois To be determined 3 Demonstration (“PCRD”) on April 1, 2017, CMS worked Ohio To be determined 1 to revise PCRD to offer more flexibility and choice for No
Slide 35: Guidance
Guidance 2018 2019 Updated Guidance Preliminary Guidance Net Operating Revenues* Net Operating Revenues $4,260 million to $4,280 million $4,500 million to $4,600 million Adjusted EBITDA(9) Adjusted EBITDA(9) $890 million to $895 million $925 million to $945 million Adjusted Earnings per Share Adjust
Slide 36: Impact of the New Revenue Recognition Accounting Standard
Impact of the New Revenue Recognition Accounting Standard u During the first quarter of 2018, Encompass Health adopted a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standard for recognizing revenue. u The primary impact to the Company’s financial rep
Slide 37: 2019 Guidance Considerations
2019 Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 1.2% increase in Medicare pricing u Estimated 1.5% net Medicare pricing for Q1 through Q3 and estimated 2.4% increase for CY 2019 (see page 42) increase for Q4 (see page 42) u Ÿ Transition to CARE Tool may nega
Slide 38: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(11) Assumptions Certain cash flow items 2018 2019 (millions) Estimates Assumptions • Cash interest expense, net of u Increased cash payments for amortization of debt discounts ~$144 $145 to $155 taxes in 2019 primarily due to and fees higher pre-tax income, as well as other c
Slide 39: Uses of Free Cash Flow
Uses of Free Cash Flow 2018 2019 Estimates Assumptions IRF bed expansions ~$25 $40 to $50 New IRFs - De novos ~80 85 to 115 Growth in - Acquisitions — opportunistic Core - Replacement IRFs and other ~25 90 to 110 Business Home health and hospice acquisitions (includes Camellia in 2018)* ~143 50 to 1
Slide 40: Rebranding and Name Change
Rebranding and Name Change The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. JULY 2017 APRIL 2018 OCT. 2018 Announced Phase 1 field asset Phase 3 field asset planned conversions conversions name change JA
Slide 41: Business Outlook: 2019 to 2021
Business Outlook: 2019 to 2021 2019 2020 2021 • Enhance clinical collaboration between the Company’s IRFs and home health locations Key Operational • Develop and implement post-acute solutions Initiatives • Participate in alternative payment models • Implement changes to reimbursement models in both
Slide 42: Business Outlook 2019 to 2021: Revenue Assumptions
Business Outlook 2019 to 2021: Revenue Assumptions Volume Inpatient Rehabilitation* Home Health* (Includes New Stores) 3+% annual discharge growth 10+% annual admission growth Approx. 73% of Segment Revenue Approx. 85% of Segment Revenue Medicare Pricing FY 2019 FY 2020 FY 2021 CY 2019 CY 2021 (14)
Slide 43: Business Outlook 2019 to 2021: Labor and Other Expense Assumptions
Business Outlook 2019 to 2021: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2019 2020 2021 Salary increases 2.75-3.25% 2.75-3.25% 2.85-3.35% Benefit costs increases 6-8% 5-10% 5-10% % of Salaries and Benefits Salaries Salaries Salaries ~9
Slide 44: IRF-PPS Fiscal Year 2019 Final Rule: Key Provisions
IRF-PPS Fiscal Year 2019 Final Rule: Key Provisions Update to Payment Rates Company Observations The final rule will: • Implement a net 1.35% market basket increase – 2.9% market basket increase Pricing: – (75 bps) healthcare reform reduction • Net pricing impact to the – (80 bps) healthcare reform
Slide 45: HH-PPS Calendar Year 2019 Final Rule: Key Provisions
HH-PPS Calendar Year 2019 Final Rule: Key Provisions Final Rule Update to 2019 Payment Rates Company Observations The final rule will: • Implement a net 2.2% market basket increase (3.0% market basket less a 0.8% healthcare reform productivity reduction); Pricing: • Implement the rural add-on modifi
Slide 46: IMPACT Act of 2014
IMPACT Act of 2014 - Enacted October 6, 2014 Company observations and considerations with respect to the IMPACT Act: ▪ It was developed on a bi-partisan basis by the House Ways and Means and Senate Finance Committees and incorporated feedback from healthcare providers and provider organizations that
Slide 47: Growth
Growth Encompass Health is a leader in serving the post-acute patient population and has multiple avenues available for sustained growth in both segments. Favorable demographic trends are driving increased demand. Encompass Health 47
Slide 48: Multiple Avenues Available for Sustained Growth in Both Segments
The Company Has Multiple Avenues Available for Sustained Growth in Both Segments u The Company continues to have excellent organic growth opportunities in inpatient rehabilitation, home health, and hospice. — Track record of consistent market share gains — IRF organic growth supplemented by bed addi
Slide 49: Demographic Tailwind: Growth in Medicare Beneficiary Population
Both Segments Benefit from a Demographic Tailwind: Growth in the Medicare Beneficiary Population Projected Population of Age 65+ Baby Boomer wave • The growth rate of Medicare reaches average age of beneficiaries increased in 2011 to an Millions an Encompass Health approx. 3% CAGR as “Baby Boomers”
Slide 50: Multi-faceted Inpatient Rehabilitation Growth Strategy
Multi-faceted Inpatient Rehabilitation Growth Strategy New Beds Total IRFs 2018 bed count increase 1,600 140 135 • Shelby County, AL (34 beds) 1,400 130 De Novos • Bluffton, SC (38 beds) 1,200 125 120 1,000 • Murrells Inlet, SC (29 beds) 115 Acquisitions 800 110 • Winston-Salem, NC (68 beds) 105 600
Slide 51: Inpatient Rehabilitation Growth Pipeline
Inpatient Rehabilitation Growth Pipeline Disciplined Approach to New Store Growth The Company’s Value Proposition – $7.7 Billion Medicare IRF Market – CAPEX to build free-standing IRF, freeing up space for Considerations: ü medical/surgical beds in an acute care facility for a JV partner – Market de
Slide 52: Inpatient Rehabilitation Acute Care Joint Venture Partnerships
Inpatient Rehabilitation Acute Care Joint Venture Partnerships • The Company’s IRF joint ventures began in 1991 with Vanderbilt University Medical Center. • The Company’s joint venture acute care hospital partners own equity that ranges from 2.5% to 50%. • 44 of 45 IRFs are consolidated joint ventur
Slide 53: De Novo IRFs and Acquisitions
De Novo IRFs and Acquisitions Operations Joint # of New Beds Location Date Investment Considerations Venture? 2017 2018 2019 2020 • IRR objective of 13% (after tax) De Novo IRFs: • Joint venture capitalization Westerville, OH Q2 2017 Yes 60 • Certificate of Need (“CON”) costs, Jackson, TN* Q3 2017 Y
Slide 54: De Novo Costs and Timeline
De Novo Costs and Timeline • Prototype includes all private rooms Capital Cost (millions) Low High • Core infrastructure of building anticipates Construction, design, permitting, etc. $17 $21 future expansion (accretive to financial Land 2 3 returns) Equipment (including CIS) 3 4 • Factors that impa
Slide 55: IRF De Novo Occupancy and EBITDA Trends
IRF De Novo Occupancy and EBITDA* Trends Occupancy Sustained Positive EBITDA 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 Months Newnan (12/2014) Middletown (12/2014) Franklin (12/2015) Modesto (10/2016) Westerville (04/2017) Pearland (10/2017) Shelby County (04/2018) Bluff
Slide 56: Multi-faceted Home Health and Hospice Growth Strategy
Multi-faceted Home Health and Hospice Growth Strategy • Strong demand due to cost effectiveness of home-based care and implementation of alternative payment models Organic Growth • Strong organic growth from existing locations • Located in markets with attractive demographics * Currently located in
Slide 57: Home Health Growth Pipeline
Home Health Growth Pipeline Number of Home Health Agencies Over Time • $18.1 billion Medicare home health market is highly 13,000 The number of home health agencies fragmented with over 12,200 is near an all-time high and presents home health agencies. 12,000 significant consolidation opportunities.
Slide 58: Hospice Growth Pipeline
Hospice Growth Pipeline • Medicare hospice market is approx. $17 billion. • 1.4 million Medicare beneficiaries received Acquisition Strategy for Hospice hospice services from approx. 4,400 providers in • Build additional scale 2016. • Medicare focus • Hospice use among Medicare beneficiaries has • H
Slide 59: Alternative Payment Models
Alternative Payment Models Most models remain in the early or pilot stage and results have been mixed. Both of our segments continue to participate in various APM initiatives. Encompass Health 59
Slide 60: Accountable Care Organizations
Accountable Care Organizations (“ACOs”) Medicare Shared Savings Program (MSSP) (2018 - 561 ACOs / 10.5 million Medicare beneficiaries) As of • Performance Year 5 (2017) results: January 2018, ◦ 284 of 472 ACOs (60%) held spending below their benchmark. ▪ 125 of these ACOs reduced health costs compar
Slide 61: Bundled Payments
Bundled Payments The Bundled Payments for Care Improvement How the Retrospective Models Work (BPCI) initiative currently tests Ÿ The BPCI “convener” is responsible for bringing four types of bundles providers together to provide a continuum of services (i.e. “Models”): throughout an episode of care.
Slide 62: Company's Participation in BPCI Model 3
The Company’s Participation in BPCI Model 3* (2017) Inpatient Rehabilitation Participating Bundle Length % of the Company’s BPCI Bundle IRFs (in days) Total Discharges Stroke 3 60 0.11% Simple Pneumonia 1 60 0.02% Sepsis 1 60 0.01% Double-lower extremity joint replacement 2 60 0.01% Upper extremity
Slide 63: Home Health Value-Based Purchasing Model
Home Health Value-Based Purchasing Model Over the long term, the Company believes it is well-positioned to benefit from a delivery system that rewards providers who are committed to providing high-quality care. In the calendar year 2016 HH-PPS final rule, Total Performance Scores (a numeric score ra
Slide 64: Capital Structure
Capital Structure Encompass Health is positioned with a cost-efficient, flexible capital structure. Encompass Health 64
Slide 65: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value As of December 31, 2018* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $633 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $30 Drawn + Revolver $37 reserved Capacity for LC’s $280 $300 Senior $350 Senior Term
Slide 66: Financial Leverage and Liquidity
Financial Leverage and Liquidity Total Debt Liquidity Leverage Ratio(19) (billions) Preliminary 4.6x* December 31, December 31, 2017 2018 Cash Available $ 52.5 $ 54.4 Revolver $ 700.0 $ 700.0 Less: - Draws (30.0) (95.0) 3.17 3.02 2.8x - Letters of Credit (37.4) (35.4) 2.8x Available $ 632.6 $ 569.6
Slide 67: Debt Schedule
Debt Schedule Preliminary Change in December 31, December 31, Debt vs. ($millions) 2018 2017 YE 2017 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 30.0 $ 95.0 $ (65.0) Term loan facility, September 2022 - LIBOR +150bps 280.1 294.7 (14.6) Bonds Payable: 5.125
Slide 68: IRF Real Estate Portfolio
IRF Real Estate Portfolio 130 Inpatient Rehabilitation Hospitals: 8,966 Licensed Beds 4,694 Licensed Beds Own ~70% of IRF Real Estate in CON States As of December 31, 2018 61 Own Building and Land 29 Own Building Only 40 Lease Building and Land 4,272 Licensed Beds in Non-CON States 1 of the 130 IRFs
Slide 69: Overview of Rollover Shares Held by Home Health and Hospice Management
Overview of Rollover Shares Held by Members of the Home Health and Hospice Management Team Background In connection with the 2014 acquisition of Encompass Home Health and Hospice: • Certain members of that management team rolled a portion of their pre- acquisition equity into the post-acquisition en
Slide 70: Information Technology
Information Technology Encompass Health utilizes information technology to improve patient care and generate operating efficiencies. Encompass Health 70
Slide 71: IRF Clinical Information System
IRF Clinical Information System: Improved Patient Safety and Streamlined Operational Efficiencies Pre-Admission Assessment Document & Approval Imaging Treatment Plan • Computerized Physician Order Entry ("CPOE") • Clinical Decision Referral Hospitals Support ("CDS") Quality Reporting Integrated and
Slide 72: IRF Proprietary Management System: Beacon
IRF Proprietary Management System: Beacon Encompass Health 72
Slide 73: Home Health and Hospice Information System: Homecare Homebase
Home Health and Hospice Information System: Homecare Homebase Homecare Homebase Clinical Management and Operations (“HCHB”) was born • HCHB manages the entire patient • Best-in-class data management and workflow and provides field clinicians reporting ensures managers have access out of the Company’
Slide 74: Operational Metrics
Operational Metrics Encompass Health 74
Slide 75: IRF Operational Metrics: Expense Efficiencies
IRF Operational Metrics: Expense Efficiencies •Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient (Percent of Net Operating Revenues) volumes. •IRF-related Expenses includes other operating expenses (excluding loss on disposal or impairment of asse
Slide 76: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Background Encompass Health reserves pre-payment claim denials as a reduction of • For several years, under programs designated as “widespread probes,” net operating revenues upon notice from a MAC a claim is under review. certain Medicar
Slide 77: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net patient revenue-inpatient $ 798.4 $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,039.3 Net patient revenue-outpatient and other revenues 27.2 25.0 23.2
Slide 78: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net home health revenue $ 209.2 $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 702.4 Net hospice revenue 32.8 28.3 20.4 20.1 17.8 16.9 15.4 70.2 Net operating revenues*
Slide 79: Payment Sources
Payment Sources (Percent of Revenues) Inpatient Rehabilitation Home Health and Consolidated Segment Hospice Segment Q3 Q3 Q3 Full Year 2018 2017 2018 2017 2018 2017 2017 Medicare 72.8% 73.5% 85.0% 85.8% 75.4% 76.0% 76.0% Medicare Advantage 9.1% 8.1% 9.4% 9.6% 9.2% 8.4% 8.6% Managed care 10.3% 10.6%
Slide 80: Industry Structure
Industry Structure Encompass Health 80
Slide 81: Overall Healthcare Spending
Overall Healthcare Spending National Healthcare Spending: $3,337.2 billion in 2016 (billions) $157.4 Investment $43.8 Government Administration $82.2 Government Public Health $441.7 Retail of Medical Products $92.4 Home Health Care $173.5 Other Health, Residential and Personal Care $881.2 Profession
Slide 82: Medicare 2016 Spending
Medicare 2016 Spending = $678.7 Billion $7.7B (1%) Inpatient Rehabilitation Hospitals (Included in Inpatient Hospitals) $ 29.1B Skilled Nursing Medicare Part A $141.3B Inpatient Hospital 4% 21% $69.9B Physician Payments Medicare Part B 15% $49.6B Outpatient Hospital $18.1B Home Health $16.8B Hospice
Slide 83: Continuum of Healthcare Services
Continuum of Healthcare Services Preventive Routine health care Post-Acute Ambulatory Acute (screenings, check- Medical care Palliative Medical care Medical ups, patient provided after a Medical care delivered on an treatment of counseling) to period of acute that is focused outpatient basis disease
Slide 84: Post-Acute Care Services
Post-Acute Care Services (Highest Acuity) (Lowest Acuity) Long-Term Inpatient Skilled Acute Care Home Discharge Acute Care Rehabilitation Nursing Hospital Health Hospital Hospital Facility Medicare Spending (billions) $5.1 $7.7 $29.1 $18.1* # of Discharges ~126,000 ~391,000 ~2,300,000 ~3,400,000 Len
Slide 85: Medicare Spending on Post-Acute Services
Medicare Spending on Post-Acute Services 6 Home health spending* 3.6 3.6 3.5 3.7 ) (% of total Medicare t 3.2 3.6 3.8 n 3.2 3.6 3.7 3.4 e 3.3 3.1 spending) c 2.9 r 2.8 2.7 e 3 P ( Inpatient rehabilitation 2.1 2.2 2.1 1.9 1.8 1.5 spending (% of total 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.1 1.1 0 Medicare
Slide 86: Different Levels of Services
Different Levels of Services Inpatient Rehabilitation Hospital Nursing Home Average length of stay = 12.7 days Average length of stay = 38.4 days Discharge to community = 76.9% Discharge to community = 39.5% Requirements: Requirements: IRFs must also satisfy regulatory/policy requirements for hospit
Slide 87: Supply of IRFs is Relatively Stable
Supply of IRFs is Relatively Stable Average Annual Change Share of Medicare Discharges Type of IRF 2016 2004 2006 2008 2010 2013 2014 2015 2016 2006-2013 2013-2016 All IRFs 100% 1,221 1,225 1,202 1,179 1,161 1,177 1,182 1,188 -0.8% 0.8% Urban 93 1,024 1,018 1,001 981 977 1,013 1,020 1,026 -0.6 1.6 R
Slide 88: Inpatient Rehabilitation Sector Margins
Inpatient Rehabilitation Sector Margins Share of Medicare Discharges Margins Type of IRF 2016 2004 2006 2008 2010 2012 2013 2014 2015 2016 All IRFs 100% 16.7% 12.5% 9.4% 8.6% 11.2% 11.5% 12.4% 13.8% 13.0% Urban 93 17.0 12.8 9.6 9.0 11.6 11.9 12.8 14.2 13.2 Rural 7 13.2 10.0 6.9 4.7 6.5 6.0 6.2 8.3 9
Slide 89: Inpatient Rehabilitation Standardized Comparison of Costs
Inpatient Rehabilitation Standardized Comparison of Costs Quartile Characteristic Low Cost High Cost Median Standardized Type of IRF Cost Per Discharge Percent: Hospital based 38% 94% All IRFs $15,494 Freestanding 62 6 Hospital based 16,406 Median standardized Nonprofit 31 62 For profit 66 20 Freest
Slide 90: 60% Rule: Medicare Regulation for IRFs
“60% Rule”: Medicare Regulation for IRFs The 60% Rule requires at least 60% of all patients admitted must have at least one medical diagnosis or functional impairment from a list of 13 compliant conditions (a.k.a. “compliant conditions” or “CMS-13”). 1983 2002 2004 2007 1983: 75% Rule 2007: 75% Rule
Slide 91: IRF Qualifying Conditions
IRF Qualifying Conditions Original Qualifying Conditions Current Qualifying Conditions 1. Stroke 1. Stroke 2. Brain injury 2. Brain injury 3. Amputation 3. Amputation 4. Spinal cord 4. Spinal cord 5. Fracture of the femur 5. Fracture of the femur 6. Neurological disorder 6. Neurological disorder 7.
Slide 92: Inpatient Rehabilitation Outlier Payments
Inpatient Rehabilitation Outlier Payments(7) # of IRFs Total Outlier Payments Avg Outlier Payment per Discharge Non- Non- Non- IRF Encompass Encompass Encompass Encompass Encompass Encompass Deciles Health Health Total Health Health Total % Health Health Total 90-100 — 112 112 $ — $ 134,977,428 $ 13
Slide 93: Segment Operating Results
Segment Operating Results Encompass Health 93
Slide 94: Inpatient Rehabilitation Segment Adjusted EBITDA
Inpatient Rehabilitation Segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2018 2018 2018 2017 2017 2017 2017 2017 Net operating revenues: Inpatient $ 798.4 $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,039.3 Outpatient and other 27.2 25.0 23.2 25.5 25.3 26.1 25.1 102.0 Tota
Slide 95: Home Health and Hospice Segment Adjusted EBITDA
Home Health and Hospice Segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2018 2018 2018 2017 2017 2017 2017 2017 Net operating revenues: Home health revenue $ 209.2 $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 702.4 Hospice revenue 32.8 28.3 20.4 20.1 17.8 16.9 15.4 70.2 Tot
Slide 96: Segment Operating Results Q3 2018
Segment Operating Results Q3 2018 Q3 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 825.6 $ 242.0 $ — $ 1,067.6 $ 783.5 $ 198.1 $ — $ 981.6 Operating Expenses: Inpatient Rehabilitation: Salaries and be
Slide 97: Segment Operating Results Nine Months 2018
Segment Operating Results Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 2,500.5 $ 680.8 $ — $ 3,181.3 $ 2,338.9 $ 566.2 $ — $ 2,905
Slide 98: Segment Operating Results Year Ended December 31, 2017
Segment Operating Results Year Ended December 31, 2017 Home Health and (In Millions) IRF Hospice Reclasses Consolidated Net operating revenues $ 3,141.3 $ 772.6 $ — $ 3,913.9 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,603.8) — (550.8) (2,154.6) Other operating expenses(a)
Slide 99: Reconciliations to GAAP and Share Information
Reconciliations to GAAP and Share Information Encompass Health 99
Slide 100: Reconciliation of Net Income to Adjusted EBITDA 2018
Reconciliation of Net Income to Adjusted EBITDA(9) 2018 Q1 Q2 Q3 9 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 105.2 $ 113.2 $ 109.3 $ 327.7 Loss (income) from disc ops, net of tax, attributable to Encompass Health 0.5 (0.2
Slide 101: Reconciliation of Net Income to Adjusted EBITDA 2017
Reconciliation of Net Income to Adjusted EBITDA(9) 2017 Q1 Q2 Q3 Q4 Full Year Per Per Per Per Per (in millions, except per share data) Total Share Total Share Total Share Total Share Total Share Net Income $ 84.4 $ 79.4 $ 85.1 $ 86.5 $ 335.4 Loss (income) from disc ops, net of tax, attributable to E
Slide 102: Reconciliation of Segment Adjusted EBITDA to Income Before Tax
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Three Months Ended Nine Months Ended Year Ended September 30, September 30, December 31, 2018 2017 2018 2017 2017 (In Millions) Total segment Adjusted EBITDA $ 256.1 $ 235.1 $ 778.5 $ 705.6 $ 947
Slide 103: Adjusted EPS - Q3 2018
Adjusted EPS(10) - Q3 2018 For the Three Months Ended September 30, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Equity As Reported Expense Adjustments Securities(25) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $
Slide 104: Adjusted EPS - Q3 2017
Adjusted EPS(10) - Q3 2017 For the Three Months Ended September 30, 2017 Adjustments Mark-to- Market Adjustment on Stock Loss on Early As Compensation Extinguishment Income Tax As Reported Expense of Debt Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 204.6 $ — $ — $
Slide 105: Adjusted EPS - YTD 2018
Adjusted EPS(10) - YTD 2018 For the Nine Months Ended September 30, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Transaction Equity As Reported Expense Adjustments Costs Securities(25) Adjusted (In Millions, Except Per Share Amounts)
Slide 106: Adjusted EPS - YTD 2017
Adjusted EPS(10) - YTD 2017 For the Nine Months Ended September 30, 2017 Adjustments Mark-to-Market Adjustment for Stock Loss on Early As Compensation Extinguishment Income Tax As Reported Expense(27) of Debt Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 614.9 $ — $
Slide 107: Adjusted EPS - 2017
Adjusted EPS(10) - 2017 For the Year Ended December 31, 2017 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Compensation Tax Reform Extinguishment Income Tax As Reported Expense(27) Impact(26) of Debt(28) Adjustments(29) Adjusted (In Millions, Except Per Share Amounts) Adjusted EB
Slide 108: Adjusted Free Cash Flow History
Adjusted Free Cash Flow History(11) Q3 9 Months Full Year (In Millions) 2018 2017 2018 2017 2017 2016 Net cash provided by operating activities $ 198.5 $ 174.9 $ 584.0 $ 506.9 $ 658.3 $ 634.4 Impact of discontinued operations 0.1 0.1 0.7 0.7 0.6 0.7 Net cash provided by operating activities of conti
Slide 109: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q3 9 Months Full Year (In Millions) 2018 2017 2018 2017 2017 2016 2015 2014 2013 Net cash provided by operating activities $ 198.5 $ 174.9 $ 584.0 $ 506.9 $ 658.3 $ 640.2 $ 505.9 $ 458.9 $ 477.8 Professional fees — accounting, t
Slide 110: Share Information
Share Information Weighted Average for the Period Q3 9 Months Full Year 2018 2017 2018 2017 2017 2016 2015 Basic shares outstanding(30) 98.0 97.8 97.9 92.3 93.7 89.1 89.4 Convertible perpetual preferred stock(31) — — — — — — 1.0 Convertible senior subordinated notes(30) — — — 5.4 4.0 8.5 8.3 Restric
Slide 111: End Notes
End Notes Encompass Health 111
Slide 112: End Notes
End Notes (1) Under this program, Joint Commission accredited organizations, like the Company’s IRFs, may seek certification for chronic diseases or conditions such as brain injury or stroke rehabilitation by complying with Joint Commission standards, effectively using evidence-based clinical practi
Slide 113: End Notes, con't.
End Notes, con't. (10) The Company is providing adjusted earnings per share from continuing operations attributable to Encompass Health (“adjusted earnings per share”), which is a non-GAAP measure. The Company believes the presentation of adjusted earnings per share provides useful additional inform
Slide 114: End Notes, con't.
End Notes, con't. (15) The Bipartisan Budget Act (“BBA”) of 2018, signed into law on February 9, 2018, provides for a home health market basket update of 1.5% for CY 2020 and the elimination of any productivity adjustment to the market basket for that year. It also provides for the extension of the
Slide 115: End Notes, con't.
End Notes, con't. (26) The application of the lower income tax rate that resulted from the Tax Cuts and Jobs Act to the Company’s net deferred tax assets resulted in a net $1.2 million increase in tax expense in Q4 2017. Application of the new tax rate to the Company’s joint venture entities’ deferr
Encompass Health — Investor Presentation (January 2019) on 6ix