Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q3 2017 Earnings Presentation
120 slides from Encompass Health's earnings presentation, Nov 13, 2017
Slide 1: Investor Reference Book - Post Q3 2017 Earnings Release
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 hospitals, home health agencies, and hospice agencies. INVESTOR REFERENCE BOOK Post Q3 201
Slide 2: Forward-looking statements and non-GAAP measures
2 The information contained in this Investor Reference Book includes certain estimates, projections and other forward- looking information that reflect the Company’s current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capital e
Slide 3: Table of Contents
3 Table of Contents Guidance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-11 Business Outlook: 2017 to 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Slide 4: Guidance (as of November 13, 2017)
4 Guidance (as of November 13, 2017)
Slide 5: Guidance - as of November 13, 2017
5 Refer to pages 116-120 for end notes. Guidance - as of November 13, 2017 Adjusted EBITDA(1) Adjusted Earnings per Share from Continuing Operations Attributable to HealthSouth(2) Net Operating Revenues Previous Full-Year Guidance (Last Reiterated on August 15, 2017) Updated 2017 Full-Year Guidance
Slide 6: Guidance Considerations
6 Guidance Considerations Inpatient Rehabilitation u Estimated 1.9% increase in Medicare pricing for Q1 through Q3; ~0.8% for Q4 u Salary increase of ~3.0% u Q3 2016 included the benefit of a retroactive IME(3) adjustment of ~$4 million at the former Reliant hospital in Woburn, MA. u Bad debt expens
Slide 7: Adjusted Free Cash Flow and Tax Assumptions
7 Reconciliations to GAAP provided on pages 98-114. Refer to pages 116-120 for end notes. Adjusted Free Cash Flow(4) and Tax Assumptions Certain Cash Flow Items (millions) 9 Months 2017 Actual 2017 Assumptions 2016 Actual • Cash interest expense (net of amortization of debt discounts and fees) $110.
Slide 8: Free Cash Flow Priorities
8 Free Cash Flow Priorities * Net redemptions in 2017 exclude ~$276 million associated with the non-cash conversion of the Convertible Senior Subordinated Notes. See the debt schedule on page 66. Refer to pages 116-120 for end notes. (In Millions) 9 Months 2017 2017 2016 Actuals Assumptions Actuals
Slide 9: Rebranding and Name Change
9 Rebranding and Name Change u Both business segments — inpatient rehabilitation and home health and hospice — will transition to the Encompass Health branding by the end of 2019. Ÿ Rebranding and name change reinforce the Company’s existing strategy and position as an integrated provider of inpatie
Slide 10: Priorities for 2017
10 Priorities for 2017 GROWTH u Expand network of freestanding inpatient rehabilitation hospitals ("IRFs") Ÿ Demographic trends driving increasing demand for IRF services Ÿ IRFs are best positioned to expand service offering in the progression towards site neutrality (see page 37) Ÿ Continue emphasi
Slide 11: Priorities for 2017
11 Priorities for 2017 GROWTH CAPITAL STRUCTURE OPERATIONAL INITIATIVES u Implement rebranding and name change u Enhance clinical collaboration between the Company's IRFs and home health locations Ÿ Structure and implement initiative to extrapolate best practices across all overlap markets Ÿ Utilize
Slide 12: Business Outlook 2017 to 2019
12 Business Outlook 2017 to 2019 (as of November 13, 2017)
Slide 13: Business Outlook 2017 to 2019
13 Business Outlook 2017 to 2019* • Same-store IRF growth • New-store IRF growth (de novos and acquisitions) • Same-store home health and hospice growth • New-store home health and hospice growth (acquisitions) Core Growth Strong Balance Sheet Key Operational Initiatives Shareholder Distributions Op
Slide 14: Business Outlook: Revenue Assumptions
14 Business Outlook 2017 to 2019: Revenue Assumptions Refer to pages 116-120 for end notes. • 10% to15% annual episode growth • Includes $35-$40 million per annum in agency acquisitions Volume (Includes New Stores) Inpatient Rehabilitation Home Health & Hospice Medicare Pricing Approx. 73% of Revenu
Slide 15: Business Outlook: Labor and Other Expense Assumptions
15 Inpatient Rehabilitation Home Health and Hospice Business Outlook 2017 to 2019: Labor and Other Expense Assumptions Salaries & Benefits ~70% Hospital Expenses ~30% Salaries and Benefits 2017 2018 2019 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 2-5% 5-10% 5-10% Hospi
Slide 16: IRF-PPS Fiscal Year 2018 Final Rule: Key Provisions
16 IRF-PPS Fiscal Year 2018 Final Rule: Key Provisions Company Observations Pricing: • Net pricing impact to the Company expected to be an increase of approx. 0.8% for FY 2018 (see page 14) • Because of the Company's efficient cost structure, it receives very few outlier payments despite higher acui
Slide 17: HH-PPS Calendar Year 2018 Final Rule: Key Provisions
17 Pricing: • Net pricing impact to the Company expected to be a decrease of approx. 1.0% for CY 2018 (see page 14) Quality: • The Company will supplement existing processes and systems to meet the new requirements. HH-PPS Calendar Year 2018 Final Rule: Key Provisions New Quality Reporting Measures
Slide 18: Home Health Pre-Claim Review Demonstration
18 Home Health Pre-Claim Review Demonstration* State Start Date CompanyLocations Illinois Paused* 3 Florida Delayed* 17 Texas To be determined 53 Michigan To be determined — Massachusetts To be determined 3 The Company is well-prepared. * On March 31, 2017, CMS announced that it has suspended the Pr
Slide 19: IMPACT Act of 2014
19 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 t
Slide 20: The Company
20 The Company
Slide 21: A Leading Provider of Post-Acute Care
21 A Leading Provider of Post-Acute Care ~60% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Inpatient Rehabilitation Portfolio - As of September 30, 2017 126 Inpatient Rehabilitation Hospitals • 42 operate as joint ventures with acute care hospitals 31 Number of
Slide 22: Inpatient Rehabilitation Segment
22 Inpatient Rehabilitation Segment Major Services • Rehabilitation Physicians: manage and treat medical conditions and oversee rehabilitation program • Rehabilitation Nurses: provide personal care and oversee treatment plan for patients • Physical Therapists: address physical function, mobility, st
Slide 23: Home Health and Hospice Segment
23 Major Services • Skilled Nurses: comprehensively assess, teach, train, and manage care related to injury or illness • Home Health Aides: provide personal care and assistance with ADLs • Physical Therapists: address physical function, mobility, strength, balance, and safety • Occupational Therapis
Slide 24: Payors and Payment Methodology
24 Managed Care Other Variety of methodologies Per Diem/Visit or CMG/Episodes - Negotiated rate - Some are “tiered” for acuity/severity Per Diem/Visit or CMG/Episodes - Negotiated rate - Some are “tiered” for acuity/severity Prospective Payment System (“PPS”) - IRF: Paid per discharge by Case Mix Gr
Slide 25: Patient Mix and Referral Sources
25 Acute Care Hospitals – 36% Physician Offices / Community – 37% IRFs / LTCHs / SNFs – 27% IRF Patient Mix Referral Sources: • Physicians and acute care hospital case managers are key decision makers. • All IRF patients must meet reasonable and necessary criteria and must be admitted by a physician
Slide 26: Quality of Care Metrics
26 2015 2016 YTD 2017 10.6% 10.4% 10.4% 10.6% 10.7% 10.7% 2015 2016 YTD 2017 13.9% 13.1% 12.8% 10.7% 10.1% 9.3% 2015 2016 YTD 2017 75.2% 75.7% 75.9% 78.0% 78.7% 79.4% Home Health QualityIRF Quality Discharge to Community Discharge to Skilled Nursing Discharge to Acute Hospital Percent of cases disch
Slide 27: Research: IRFs a Better Option for Stroke Patients than SNFs
27 Independent Research Concludes IRFs are a Better Rehabilitation Option for Stroke Patients than SNFs “If the hospital suggests sending your loved one to a skilled nursing facility after a stroke, advocate for the patient to go to an inpatient rehabilitation facility instead…”* “Whenever possible,
Slide 28: Leading Position in Cost Effectiveness - IRFs
28 Leading Position in Cost Effectiveness(12) - IRFs Medicare pays us less per discharge, on average, and we treat a higher acuity patient. Avg. Beds per IRF Avg. Medicare Discharges per IRF(14) Case Mix Index(15) Avg. Est. Total Cost per Discharge for FY 2018 Avg. Est. Total Payment per Discharge f
Slide 29: Leading Position in Cost Effectiveness - Home Health
29 2016 AverageRevenue Average Visits Average Revenue Cost Episodes per Episode per Episode per Visit per Visit Encompass Home Health & Hospice 185,737 $3,031 18.8 $154 $74 Public Peer Average 270,223 $2,825 17.5* $149 $86* Comparison to Peer Average 7.3% 7.4% 3.4% (14.0)% Leading Position in Cost E
Slide 30: IRF New-Store/Same-Store Growth
30 IRF New-Store/Same-Store Growth * Includes consolidated inpatient rehabilitation hospitals classified as same store during each period Refer to pages 116-120 for end notes. 25.0 20.0 15.0 10.0 5.0 0.0 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017Q
Slide 31: Home Health New-Store/Same-Store Growth
31 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Home Health New-Store/Same-Store Growth Admissions Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 New Store 11.9% 13.6% 15.7% 37.
Slide 32: Adjusted EPS Track Record
32 Adjusted EPS(2) Track Record 2012 2013 2014 2015 2016 Trailing 4 Qtrs $2,162 $2,273 $2,406 $3,163 $3,707 $3,902 ($ millions) 2012 2013 2014 2015 2016 Trailing 4 Qtrs $506 $552 $578 $683 $794 $814 ’12-’16 CAGR = 11.9 % ($ millions) ’12-’16 CAGR = 14.4 % Adjusted EBITDA(1) 2012 2013 2014 2015 2016
Slide 33: Strong and Sustainable Business Fundamentals
33 • Largest provider of inpatient rehabilitation services • 4th largest provider of Medicare-certified skilled home health services • Consistent delivery of high-quality, cost-effective, integrated facility- based and home-based care • Enhanced utilization of technology (e.g., clinical, data manage
Slide 34: Strategy
34 Strategy
Slide 35: Demographic Tailwind: Expanding Medicare Beneficiary Population
35 Medicare Enrollment 90 80 70 60 50 40 30 B en ef ic ar ie s 2000 2005 2010 2015 2020 2025 2030 Both Segments Benefit from a Demographic Tailwind: Expanding Medicare Beneficiary Population Key Observations: • The growth rate of Medicare beneficiaries increased in 2011 to an approx. 3% CAGR as “bab
Slide 36: Future Post-Acute Providers
36 Future Post-Acute Providers Inpatient Rehabilitation Facilities • Full range: low acuity g high acuity • 24/7 nursing coverage • Eliminates payment silos Home-Based Post-Acute Services • More care in the home (lowest cost setting) • Differentiator: Ability to care for high-acuity, poly-chronic pa
Slide 37: Well-Positioned for Progression Towards Site Neutrality
37 Always Available Sometimes Available Seldom Available Therapy Gym & Training Systems for All PAC Patients Staff Trained for All Acuity Therapy Gym & Training Systems for All PAC Patients Staff Trained for All Acuity Therapy Gym & Training Systems for All PAC Patients Staff Trained for All Acuity
Slide 38: Improving the Patient Experience Through Integrated Care Delivery
38 The Company Continues to Make Progress on Improving the Patient Experience Through Integrated Care Delivery IRF-Home Health Clinical Collaboration (All Payors) Overlap Markets* * Overlap markets are defined as a Company IRF located within a 30-mile radius of a Company home health location. Q3 201
Slide 39: Clinical Initiatives: Problems and Solutions
39 Solution: Utilize extensive proprietary database of IRF patients to engage in predictive modelling to identify patients at risk for acute care transfer and implement intervention strategies as part of the plan of care. Solution: Standardize and improve infection control practices across the compa
Slide 40: Growth
40 Growth
Slide 41: Multi-faceted IRF Growth Strategy
41 1,600 1,400 1,200 1,000 800 600 400 200 0 130 125 120 115 110 105 100 95 90 85 80 75 70 2012 2013 2014 2015 2016 Projected 2017 % Increase in licensed beds 3% 4% 18% 1% 4% Total number of licensed beds 6,656 6,825 7,095 8,404 8,504* 8,852 Total number of IRFs 100 103 107 121 123* 127 Multi-facete
Slide 42: Disciplined Approach to New Store Growth
42 Disciplined Approach to New Store Growth – $7.4 Billion Medicare IRF Market – Considerations: – Demographics – Forecasted growth in the number of patients requiring rehab- level of care – Presence of other IRFs; SNFs – Geographic proximity to other Company IRFs and home health locations – Ability
Slide 43: IRF Acute Care Joint Venture Partnerships
43 • • The Company's IRF joint ventures began in 1991 with Vanderbilt University Medical Center. • The Company's joint venture hospital partners own equity that ranges from 2.5% to 50%. • 41 of 42 hospitals are consolidated joint ventures, with one accounted for under the equity method. IRF Acute Ca
Slide 44: New IRFs: Illustrative De Novo Timeline
44 New IRFs: Illustrative De Novo Timeline Day 1 With CON Permitting & Design Planning & Zoning Groundbreaking Permitting & Design Planning & Zoning Groundbreaking Day 1 Without CON 6 months to 3 years 20 months CON Process Construction Construction Opening Month 20 Opening In California, the design
Slide 45: New IRFs: De Novo Investment Considerations
45 Investment Considerations • IRR objective of 13% (after tax) • Includes CON costs (where applicable) • Includes cost of CIS installation • May be structured through a joint venture • Prototype includes all private rooms • Minimum of 30 patients treated for zero revenue (Medicare certification) •
Slide 46: IRF De Novo Occupancy and EBITDA Trends
46 Littleton (05/2013) Stuart (06/2013) Altamonte Springs (10/2014) Newnan (12/2014) Middletown (12/2014) Franklin (12/2015) Modesto (10/2016) Westerville (04/2017) The Company's average 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 Months IRF De Novo Occupancy and EBITDA* T
Slide 47: New IRFs: Assumptions for Individual Hospital Acquisitions
47 New IRFs: Assumptions for Individual Hospital Acquisitions Unit/Equity Acquisitions Location Beds DateAcquired Worcester, MA(17) 110 Q2 2014 San Antonio, TX 34 Q3 2012 Ft. Smith, AR 30 Q3 2010 Little Rock, AR 23 Q1 2010 Altoona, PA 18 Q4 2009 Arlington, TX 30 Q3 2008 IRF Acquisitions Location Dat
Slide 48: Home Health and Hospice Growth Considerations
48 • Complementary business to core home health services • Prioritization of existing home health markets • Ability to leverage components of existing infrastructure • Strong demand due to cost effectiveness of home-based care and implementation of bundled payments • Strong organic growth from exist
Slide 49: Home Health Growth Pipeline
49 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 # of Ag en ci es 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Home Health Growth Pipeline Ÿ $18.1 billion Medicare home health market is highly fragmented with over 12,300 home health agencies. Ÿ Approx. 93% of these have annual
Slide 50: Hospice Growth Pipeline
50 Freestanding Hospital/SNF based Home Health based 4,000 3,000 2,000 1,000 0 2000 2007 2013 2014 2015 1,069 2,103 2,844 3,024 3,138807 704 578 558 547 378 443 503 510 514 Hospice Growth Pipeline Ÿ In 2015, Medicare hospice spending totaled approx. $16 billion. Ÿ 1.4 million Medicare beneficiaries
Slide 51: Multiple Avenues for Sustained Growth in Both Segments
51 Medicare Enrollment 90 80 70 60 50 40 30 B en ef ic ar ie s 2000 2005 2010 2015 2020 2025 2030 Summary: Multiple Avenues Available for Sustained Growth in Both Segments • The Company continues to have excellent organic growth opportunities in inpatient rehabilitation, home health, and hospice. —
Slide 52: Alternative Payment Models
52 Alternative Payment Models
Slide 53: Accountable Care Organizations
53 Accountable Care Organizations ("ACOs") Pioneer ACOs (2016 – 8 ACOs / ~275,000 Medicare beneficiaries) • 32 Pioneer ACOs launched since program’s inception; 8 remained in the program prior to the model concluding on December 31, 2016 (some had voluntarily transferred to the Next Generation ACO pr
Slide 54: Bundled Payments
54 Bundled Payments How the Retrospective Models Work Ÿ The BPCI “convener” is responsible for bringing providers together to provide a continuum of services throughout an episode of care. The BPCI "awardee" is the entity that bears the financial risk and receives the shared savings from CMS. Ÿ Each
Slide 55: BPCI Model 2, CJR, and EPM Opportunities
55 BPCI Model 2, CJR, and EPM Opportunities Referral Source Bundle Type % of the Company's Medicare Discharges % of the Company's Total Discharges 115 acute care hospitals participating in Model 2 / Phase 2 in 80 HLS IRF markets(20) Bundles selected for Model 2 participation are chosen from a list o
Slide 56: Bundling Participation - Home Health and Hospice
56 Bundling Participation - Home Health and Hospice The Company made the strategic decision to participate in BPCI Model 3 in select markets and episodes (below). In addition, the Company is participating in other alternative payment models such as BPCI Model 2, CJR, and ACOs. 101 of the Company's l
Slide 57: CJR and Episode Payment Model - Surgical Hip/Femur Fracture
57 Alternative Payment Models: Comprehensive Care for Joint Replacement Model and Episode Payment Model – Surgical Hip/Femur Fracture Treatment * These comorbidities are specific to acute care hospitals and are defined differently than IRFs' comorbidities. Source: https://innovation.cms.gov/initiati
Slide 58: CJR and SHFFT Models - How Do They Work?
58 If episode spending < target price, acute care hospital receives additional payment from Medicare. If episode spending > target price, acute care hospital returns a portion of the Medicare episode payment. CJR and SHFFT Models - How Do They Work? POST-ACUTE CARE PROVIDERS Acute care hospitals are
Slide 59: CJR Model - How Does It Work? - Collaborators
59 CJR Model - How Does It Work? - Collaborators* Reconciliation Payment Limit Repayment Limit Payment Limits for CJR Acute Care Hospitals 20 10 0 -10 -20% of Q ua lit y- Ad ju st ed Ta rg et Pr ic e 2016 2017 2018 2019 2020 Year of Implementation 5% 5% 10% 20% 20% (5)% (10)% (20)% (20)% Risk Sharin
Slide 60: CJR and SHFFT Models - Potential Impact to the Company
60 CJR and SHFFT Models - What's the Potential Impact to the Company? Participation by acute care hospitals subject to limitation, notably if the hospital is participating in certain other alternative payment programs, such as certain models of the BPCI initiative * Complicating comorbidities includ
Slide 61: CJR and SHFFT Models - The Company's Strategies
61 CJR and SHFFT Models - The Company's Strategies Opportunities Outweigh the Risks Increase the number of CJR and SHFFT discharges in all markets where the Company has a cost advantage ü Present the empirical data to referral sources ü Further improve advantage by reducing acute care transfers and
Slide 62: Home Health Value-Based Purchasing Model
62 Medicare-certified home health agencies that provide services in the following states will be required to participate in the model: 1. Arizona 5 2. Florida 17 3. Iowa — 4. Maryland 3 5. Massachusetts 3 6. Nebraska — 7. North Carolina 6 8. Tennessee 5 9. Washington — Company Locations 39 In the ca
Slide 63: Capital Structure
63 Capital Structure
Slide 64: Debt Maturity Profile - Face Value
64 Debt Maturity Profile - Face Value 2017 2021 2022 2022 2023 2024 2025 $350 Senior Notes 5.75% $1,200 Senior Notes 5.75% $300 Senior Notes 5.125% $138 Drawn + $35 reserved for LC’s As of September 30, 2017* ($ in millions) $527 Available Callable beginning November 2017 HealthSouth is positioned w
Slide 65: Financial Leverage, Liquidity and Credit Ratings
65 S&P Moody's Corporate Rating BB- Ba3 Outlook Stable Stable Revolver Rating BB+ Baa3 Senior Notes Rating B+ B1 Financial Leverage and Liquidity (1) Liquidity Credit Ratings 2012 2013 2014 2015 2016 Trailing 4 Quarters 1.25 1.52 2.11 3.17 3.02 2.62 (billions) Leverage Ratio(21) Total Debt 3.2x Sept
Slide 66: Debt Schedule
66 Debt Schedule Reconciliations to GAAP provided on pages 98-114. Change in September 30, Dec. 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 138.0 $ 152.0 $ (14.0) Term loan facility, September 2022 - LIBOR +150bps
Slide 67: IRF Real Estate Portfolio
67 39 Lease Building and Land A CON is a regulatory requirement in some states and federal jurisdictions that require state authorization prior to proposed acquisitions, expansions, or construction of new hospitals. 59 Own Building and Land 28 Own Building Only IRF Real Estate Portfolio 126 Inpatien
Slide 68: Home Health Holdings Rollover Shares
68 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 entity (“Home Health Holdings”) resulting in a 16.7% ownership interest (the “Rollover Shares”). • Ho
Slide 69: Information Technology
69 Information Technology
Slide 70: IRF Clinical Information System
70 IRF Clinical Information System (“CIS”): Improved Patient Safety and Streamlined Operational Efficiencies Pre-Admission Assessment & Approval Discharge Planning and Patient Education •Patient History •Problems and Diagnoses •Orders and Results •Plan of Care •Workflow Alerts and Reminders •Treatme
Slide 71: IRF Proprietary Management System: Beacon
71 IRF Proprietary Management System: Beacon
Slide 72: Home Health and Hospice Information System: Homecare Homebase
72 Home Health and Hospice Information System: Homecare Homebase Clinical Ÿ HCHB manages the entire patient workflow and provides field clinicians with access to patient records, diagnostic information, and notes from prior visits via a mobile application. Ÿ Real-time, customized feedback and instru
Slide 73: Operational Metrics
73 Operational Metrics
Slide 74: Cost Metrics: Salaries, Hospital Expenses, Doubtful Accounts
74 Salaries and Benefits Hospital-Related Expenses Provision for Doubtful Accounts 48.6 20.8 1.2 47.9 20.7 1.1 48.3 20.7 1.3 49.4 20.9 1.7 49.4 20.6 1.9 50.3 20.6 1.6 • Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient volumes. ◦ Salaries and Bene
Slide 75: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
75 Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Impact to Income Statement Period New Denials Collections of Previously Denied Claims Bad Debt Expense for New Denials Update of Reserve for Prior Denials (In Millions) Q3 2017 $7.4 $(6.2) $2.2 $— Q2 2017 16.5 (7.7) 4.9 — Q1 2017 19.0
Slide 76: Inpatient Rehabilitation Operational and Labor Metrics
76 Inpatient Rehabilitation Operational and Labor Metrics * The decrease in licensed beds from Q1 2016 to Q2 2016 was due to the sale of the hospital in Beaumont, TX (61 beds). Refer to pages 116-120 for end notes. Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 (In Millions)
Slide 77: Home Health and Hospice Operational Metrics
77 Home Health and Hospice Operational Metrics Refer to pages 116-120 for end notes. Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 (In Millions) Net home health revenue $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Net hospice and other revenue 19.6 18.4 17
Slide 78: Payment Sources (Percent of Revenues)
78 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q3 Q3 Q3 9 Months Full Year 2017 2016 2017 2016 2017 2016 2017 2016 2016 Medicare 73.3% 73.3% 85.2% 81.8% 75.7% 74.8% 75.3% 75.0% 75.2% Medicare Advantage 8.1% 7.6% 9.6% 8.8% 8.4% 7
Slide 79: Industry Structure
79 Industry Structure
Slide 80: Overall Healthcare Spending
80 Overall Healthcare Spending Hospital Care Includes Inpatient Rehabilitation, Long-Term Care Hospitals $840.2 $163.3 $88.8 $432.0 Nursing Care Facilities and Continuing Care Retirement Communities Professional Services Other Health, Residential and Personal Care Home Health Care Retail of Medical
Slide 81: Medicare 2015 Spending
81 Source: Centers for Medicare & Medicaid Services, Medicare Trustee’s Report July 2016 – page 10; and MedPAC, Medicare Payment Policy, March 2017 - pages 197, 231, 257, 289, and 317 Medicare 2015 Spending = $647.6 Billion $ 29.8B Skilled Nursing $141.7B Inpatient Hospital $70.3B Physician Payments
Slide 82: Continuum of Healthcare Services
82 Preventive Routine health care (screenings, check- ups, patient counseling) to prevent illnesses, disease, or other health problems. Home health and care management services to prevent or reduce acute admissions. Continuum of Healthcare Services Acute Medical treatment of diseases for which a pat
Slide 83: Post-Acute Care Services Comparison
83 Post-Acute Care Services Acute Care Hospital Home Health Long-Term Acute Care Hospital Inpatient Rehabilitation Facility Skilled Nursing Facility Discharge Medicare Spending (billions) $5.3 $7.4 $29.8 $18.1* # of Discharges ~131,000 ~381,000 ~2,400,000 ~3,500,000 Length of Stay 26.6 days 12.7 day
Slide 84: Medicare Spending on Post-Acute Services
84 $35 $30 $25 $20 $15 $10 $5 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Medicare Spending on Post-Acute Services Post-Acute Settings 2015 Medicare Margin** Projected 2017 Medicare Margin** 12.6% 10.6% 15.6% 13.7% 13.9% 14.3% 4.6% 5.4% Skilled nursing facilities Ho
Slide 85: Different Levels of Services: Rehab Hospital vs Nursing Home
85 Source: MedPAC, Medicare Payment Policy, March 2017 - pages 208, 216, 217, 271, and 275 Different Levels of Services Rehab Hospital Nursing Home Average length of stay = 12.7 days Average length of stay = 38.5 days Discharge to community = 76.0% Discharge to community = 38.8% Requirements: Requir
Slide 86: Supply of IRFs is Relatively Stable
86 Supply of IRFs is Relatively Stable Average Annual Change Share of Medicare DischargesType of IRF 2004 2006 2008 2010 2013 2014 2015 2006-2013 2013-2015 All IRFs 100% 1,221 1,225 1,202 1,179 1,161 1,177 1,182 -0.8% 0.9% Urban 92 1,024 1,018 1,001 981 977 1,013 1,020 -0.6 2.2 Rural 8 197 207 201 1
Slide 87: Inpatient Rehabilitation Sector Margins
87 Inpatient Rehabilitation Sector Margins Share of Medicare discharges Margins Type of IRF 2015 2004 2006 2008 2010 2012 2013 2014 2015 All IRFs 100% 16.7% 12.5% 9.3% 8.6% 11.2% 11.5% 12.5% 13.9% Urban 92 17.0 12.8 9.6 9.0 11.6 11.9 12.9 14.2 Rural 8 13.2 10.0 6.9 4.7 6.5 6.0 6.4 8.6 Freestanding 4
Slide 88: Inpatient Rehabilitation Standardized Comparison of Costs
88 Inpatient Rehabilitation Standardized Comparison of Costs Type of IRF Median Standardized Cost Per Discharge All IRFs $14,960 Hospital based 15,847 Freestanding 11,436 Nonprofit 15,574 For profit 12,960 Government 16,601 Urban 14,608 Rural 17,724 Number of beds 1 to 10 18,085 11 to 24 16,169 25 t
Slide 89: 60% Rule: Medicare Regulation for Rehabilitation Hospitals
89 “60% Rule”: Medicare Regulation for Rehabilitation Hospitals 1983 1983: 75% Rule established – Requires 75% of IRF patients to have a qualifying condition if the IRF is to maintain reimbursement on a “cost plus” basis vs. “prospective” ( i.e., fixed) basis. 2002 2004 2007 2002: IRF reimbursement
Slide 90: IRF Qualifying Conditions
90 1. Stroke 2. Brain injury 3. Amputation 4. Spinal cord 5. Fracture of the femur 6. Neurological disorder 7. Multiple trauma 8. Congenital deformity 9. Burns IRF Qualifying Conditions 1. Stroke 2. Brain injury 3. Amputation 4. Spinal cord 5. Fracture of the femur 6. Neurological disorder 7. Multip
Slide 91: Inpatient Rehabilitation Outlier Payments
91 Inpatient Rehabilitation Outlier Payments(12) # of Hospitals Total Outlier Payments Avg Outlier Payment per Discharge Hospital Deciles HLS Non- HLS Total HLS Non-HLS Total % HLS Non-HLS Total 90-100 — 114 114 $ — $ 126,369,880 $ 126,369,880 50.5% N/A $ 2,733 $ 2,733 80-90 1 113 114 $ 358,714 $ 47
Slide 92: Segment Operating Results
92 Segment Operating Results
Slide 93: Inpatient Rehabilitation Segment Adjusted EBITDA
93 Inpatient Rehabilitation Segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 Net operating revenues: (In Millions) Inpatient $ 768.6 $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 2,905.5 Outpatient and other 26.2 27.1 26.3 26.7 27.6 31.4 29.8 115.6 T
Slide 94: Home Health and Hospice Segment Adjusted EBITDA
94 Home Health and Hospice Segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 Net operating revenues: (In Millions) Home health revenue $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Hospice revenue 19.6 18.4 17.0 17.1 13.1 11.0 9.7 50.9 T
Slide 95: Segment Operating Results - Q3 2017 and Q3 2016
95 Segment Operating Results Reconciliations to GAAP provided on pages 98-114. Q3 2017 Q3 2016 IRF Home Health and Hospice Reclasses HealthSouth Consolidated IRF Home Health and Hospice Reclasses HealthSouth Consolidated Net operating revenues $ 794.8 $ 200.8 $ — $ 995.6 $ 751.7 $ 175.1 $ — $ 926.8
Slide 96: Segment Operating Results - Nine Months
96 Segment Operating Results Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 IRF Home Health and Hospice Reclasses HealthSouth Consolidated IRF Home Health and Hospice Reclasses HealthSouth Consolidated Net operating revenues $ 2,377.3 $ 574.4 $ — $ 2,951.7 $ 2,253.5 $ 503.
Slide 97: Segment Operating Results - Year Ended December 31, 2016
97 Segment Operating Results Year Ended December 31, 2016 IRF Home Health and Hospice Reclasses HealthSouth Consolidated Net operating revenues $ 3,021.1 $ 686.1 $ — $ 3,707.2 Less: Provision for doubtful accounts (57.0) (4.2) — (61.2) 2,964.1 681.9 — 3,646.0 Operating Expenses: Inpatient Rehabilita
Slide 98: Reconciliations to GAAP and Share Information
98 Reconciliations to GAAP and Share Information
Slide 99: Reconciliation of Net Income to Adjusted EBITDA - 2017
99 2017 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 $ 84.4 $ 79.4 $ 85.1 $ 248.9 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.3 (0.2) 0.1 0.2 Net income attributable to noncontrolling inte
Slide 100: Reconciliation of Net Income to Adjusted EBITDA - 2016
100 2016 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 76.7 $ 81.2 $ 78.1 $ 82.1 $ 318.1 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.1 0.1 0.1 (0.3) — Net income attri
Slide 101: Reconciliation of Net Income to Adjusted EBITDA - 2015
101 2015 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 59.0 $ 60.2 $ 67.8 $ 65.8 $ 252.8 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.3 1.6 (0.3) (0.7) 0.9 Net income a
Slide 102: Reconciliation of Net Income to Adjusted EBITDA - 2012 to 2014
102 2012 2013 2014 (in millions, except per share data) Total Per Share Total Per Share Total Per Share Net income $ 235.9 $ 381.4 $ 281.7 (Income) loss from disc ops, net of tax, attributable to HealthSouth (4.5) 1.1 (5.5) Net income attributable to noncontrolling interests (50.9) (57.8) (59.7) Inc
Slide 103: Reconciliation of Segment Adjusted EBITDA to Pre-Tax Income
103 Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Full Year 2016 (In Millions) Total segment Adjusted EBITDA $ 235.1 $ 241.2 $ 229.3 $ 225.6 $ 224.4 $ 230.1 $ 219.5 $ 899.6 General and
Slide 104: Adjusted EPS - Q3 2017
104 Adjusted EPS(2) - Q3 2017 Reconciliation to GAAP provided on pages 98-114. Refer to pages 116-120 for end notes. * Adjusted EPS may not sum across due to rounding. For the Three Months Ended September 30, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights Incom
Slide 105: Adjusted EPS - Q3 2016
105 Adjusted EPS(2) - Q3 2016 For the Three Months Ended September 30, 2016 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Extinguishment of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 198.4 $ — $ — $ 198.4 Depreciation a
Slide 106: Adjusted EPS - YTD 2017
106 Adjusted EPS(2) - YTD 2017 For the Nine Months Ended September 30, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Extinguishment of Debt Income Tax Adjustments(28) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 614.9 $ —
Slide 107: Adjusted EPS - YTD 2016
107 Adjusted EPS(2) - YTD 2016 For the Nine Months Ended September 30, 2016 Adjustments As Reported Professional Fees — Accounting, Tax, & Legal Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Extinguishment of Debt Sale of Hospital As Adjusted (In Millions, Except Per Share A
Slide 108: Adjusted EPS - 2016
108 Adjusted EPS(2) - 2016 For the Year Ended December 31, 2016 Adjustments As Reported Pro. Fees - Acct., Tax, & Legal Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Exting. of Debt Sale of Pediatric Home Health Assets and Hospital Income Tax Valuation and Other Adjustments
Slide 109: Adjusted EPS - 2015
109 Adjusted EPS(2) - 2015 For the Year Ended December 31, 2015 Adjustments As Reported Gov’t, Class Action, & Related Settlements Pro. Fees - Acct., Tax, & Legal Income Tax Valuation & Other Adj. Mark-to- Market Adjustment for Stock Appreciation Rights Transaction Costs Loss on Early Exting. of Deb
Slide 110: Adjusted EPS - 2014
110 For the Year Ended December 31, 2014 Adjustments As Reported Gov't, Class Action, and Related Settlements Pro. Fees - Acct, Tax, and Legal Transaction Costs Gain on Consolidation of Fairlawn Rehabilitation Hospital Loss on Early Exting. of Debt Income Tax Valuation Adjustment As Adjusted (In Mil
Slide 111: Adjusted EPS - 2013
111 For the Year Ended December 31, 2013 Adjustments As Reported Gov't, Class Action, and Related Settlements Pro. Fees - Acct., Tax, and Legal Loss on Early Exting. of Debt Income Tax Valuation Allowance Adjustment Settlement of Income Tax Claims Repurchase of Preferred Stock As Adjusted (In Millio
Slide 112: Adjusted EPS - 2012
112 For the Year Ended December 31, 2012 Adjustments As Reported Gov't, Class Action, and Related Settlements Pro. Fees - Acct, Tax, and Legal Gain on Consolidation of St. Vincent Rehabilitation Hospital Loss on Early Exting. of Debt Income Tax Valuation Allowance Adjustment Settlement of Income Tax
Slide 113: Adjusted Free Cash Flow History
113 Adjusted Free Cash Flow History(4) Q3 9 Months Full Year (Millions) 2017 2016 2017 2016 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 173.8 $ 177.6 $ 505.8 $ 499.4 $ 634.4 $ 502.0 $ 454.6 $ 476.1 $ 423.4 Impact of discontinued operations 0.1 0.1 0.7 0.6 0.7 0.7 1.2 1.9 (2.
Slide 114: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
114 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q3 9 Months Full Year (Millions) 2017 2016 2017 2016 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 173.8 $ 177.6 $ 505.8 $ 499.4 $ 634.4 $ 502.0 $ 454.6 $ 476.1 $ 423.4 Provision for doubtful accounts
Slide 115: Share Information
115 Share Information Refer to pages 116-120 for end notes. Weighted Average for the Period Q3 9 Months Full Year 2017 2016 2017 2016 2016 2015 2014 Basic shares outstanding(29)(30) 97.8 89.1 92.3 89.3 89.1 89.4 86.8 Convertible perpetual preferred stock(29) — — — — — 1.0 3.2 Convertible senior subo
Slide 116: End Notes
116 End Notes
Slide 117: End Notes
117 End Notes (1) Adjusted EBITDA is a non-GAAP financial measure. The Company’s leverage ratio (total consolidated debt to Adjusted EBITDA for the trailing four quarters) is, likewise, a non-GAAP measure. Management and some members of the investment community utilize Adjusted EBITDA as a financial
Slide 118: End Notes (5) onward
118 (5) On July 21, 2016, the board of directors approved a $0.01 per share, or 4.3%, increase to the quarterly cash dividend on the Company’s common stock, bringing the quarterly cash dividend to $0.24 per common share. On July 20, 2017, the board of directors approved a $0.01 per share, or 4.2%, i
Slide 119: End Notes (17) onward
119 (17) The Company acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased the Company's ownership interest from 50% to 80% and resulted in a change in accounting for the hospital from the equity met
Slide 120: End Notes (31)
120 (31) The agreement to settle the Company’s class action securities litigation received final court approval in January 2007. The 5.0 million shares of common stock and warrants to purchase ~8.2 million shares of common stock at a strike price of $41.40 (expired January 17, 2017) related to this