Encompass Health Corporation · NYSE:EHC
Encompass Health — Investor Presentation (May 2019)
107 slides from Encompass Health's investor presentation, May 13, 2019
Slide 1: Investor Reference Book Post Q1 2019 earnings release
Investor Reference Book Post Q1 2019 earnings release Last updated May 13, 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 hospitals,
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 national leader in integrated healthcare services offering both facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. The Company is committed to delivering high-quality
Slide 5: A national leader in integrated healthcare services
Encompass Health a national leader in integrated healthcare services Market overlap 81 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio as of March 31, 2019 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 6 Future IRFs** 37 States
Slide 6: Company overview: inpatient rehabilitation hospitals
Company overview inpatient rehabilitation 115 of the Company’s IRFs hold one or more disease-specific Inpatient rehabilitation certifications from The Joint Commission’s Disease-Specific hospitals Care Certification Program.(1) Major services • Rehabilitation physicians: manage and treat medical con
Slide 7: Company overview: 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 Admission sources: Admission sources: Acute care hospitals – 90% Acute care hospitals – 36% Physician offices / community – 8% Physician offices / community – 37% Skilled nursing facilities – 2% IRFs / LTCHs / SNFs – 27% Rehabilitation impairment category Q1-1
Slide 9: High-quality care
High-quality care IRF quality Home health quality Discharge to community 3.8 79.4% 79.9% 79.3% Percent of cases discharged to Quality of care 76.7% 76.3% 76.0% the community, Star ratings(3) including home 3.3 96% of our home health agencies or home with home health. are 3 Stars or higher; are Stars
Slide 10: Leading position in cost effectiveness: inpatient rehabilitation
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 episode is 3.5% Average Average Average revenue higher than the peer 2018 revenue visits per visit Cost average primarily Episodes per episode per episode (all payors) per visit due to higher acuity Encompass patient mix. Health 243,698 $2,968 17.6 $16
Slide 12: New-store/same-store growth: Inpatient Rehabilitation
New-store/same-store growth Inpatient Rehabilitation 25.0 Shelby County, AL (34 beds) Bluffton, SC (38 beds) 20.0 Bryan, TX (49 beds) Broken Arrow, OK (22 beds) Pearland, TX (40 beds) 15.0 Gulfport, MS (33 beds) Murrells Inlet, Westerville, OH (60 beds) SC (29 beds) 10.0 Jackson, TN Winston-Salem, (
Slide 13: New-store/same-store growth: Home Health
New-store/same-store growth Home Health Acquired CareSouth 60.0 (44 home health locations in 7 states) in November 2015 50.0 40.0 30.0 Acquired Camellia Healthcare (14 home health locations in 3 states) in May 2018 20.0 10.0 0.0 Admissions QQ22 2 2016016 QQ33 22016016 QQ44 22016016 QQ11 22017017 QQ2
Slide 14: Payors (Q1 2019)
Payors (Q1 2019) 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 are better 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 Adjusted EBITDA % change history ending R MMSEA* final Q1-09 E establishment Q2-09 C of IRF 60% Rule Q3-09 E Q4-09 S Q1-10 S Medicare price rollback Q2-10 I and 18-month freeze Q3-10 O Q4-10 N Q1-11 Q2-11 1st Medicare IRF price We have posted Q3-11 increase since 2007 Q4-1
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 the 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: Improving patient experience through integrated care delivery
The Company continues to improve the patient experience and outcomes through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration (all payors) overlap markets* 33.5% 36.0% Collaboration rate Collaboration rate u As of March 31, 2019, Encompass Health had 81 overlap m
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 May 13, 2019) Encompass Health 26
Slide 27: Priorities for 2019: growth
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 28: Priorities for 2019: operations and capital structure
Priorities for 2019 GROWTH OPERATIONAL INITIATIVES u Increase clinical collaboration - see pages 24 and 25 u Build stroke market share - see page 29 u Develop and implement post-acute solutions - see page 30 u Transition to IRF CARE Tool payment system - see page 31 u Prepare for implementation of h
Slide 29: Building stroke market share
Building stroke market share Leveraging our: • strategic sponsorship with the AHA/ASA • clinical collaboration • joint commission certifications ~800,000 strokes ~142,000 113 EHC IRFs per year deaths from stroke hold stroke-specific in the U.S. certifications. ~32,000 Continue to increase market str
Slide 30: 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 31: Inpatient rehabilitation: 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 implem
Slide 32: Home health: Patient-Driven Groupings Model (PDGM)
Home health: Patient-Driven Groupings Model (PDGM) Background Move to the Patient-Driven Groupings Model • Effective Jan. 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 thresh
Slide 33: 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 June 1, 2019 3 Demonstration (“PCRD”) on April 1, 2017, CMS worked Ohio To be determined 1 to revise PCRD to offer more flexibility and choice for North Ca
Slide 34: Guidance - reiterated as of May 13, 2019
Guidance - reiterated as of May 13, 2019 2018 2019 Actuals Guidance Net operating revenues Net operating revenues $4,277.3 million $4,500 million to $4,600 million Adjusted EBITDA(9) Adjusted EBITDA(9) $901 million $925 million to $945 million Adjusted earnings per share Adjusted earnings per share
Slide 35: 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; estimated 0% to (0.25)% increase for CY 2019 (see page 40) reimbursement rate change for Q4 (see page u Salary increase
Slide 36: Adjusted free cash flow assumptions
Adjusted free cash flow(11) assumptions 3 Months 3 Months Certain cash flow items 2019 2018 2019 2018 (millions) Actual Actual Assumptions Actual Cash interest payments (net of amortization of debt discounts $36.2 $34.6 $145 to $155 $143.3 and fees) Cash payments for income taxes, $2.9 $1.5 $110 to
Slide 37: Uses of free cash flow
Uses of free cash flow 3 Months 2019 2019 2018 Actuals Assumptions Actuals IRF bed expansions $8.2 $40 to $50 $22.3 New IRFs - De novos 23.7 85 to 115 76.4 - Acquisitions — opportunistic — - Replacement IRFs and other 13.4 90 to 110 24.5 Growth in core Home health and hospice acquisitions business -
Slide 38: 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 39: Business outlook: 2019 to 2021
Business outlook: 2019 to 2021 2019 2020 2021 • Implement changes to reimbursement models in both business segments Key • Enhance clinical collaboration between the Company’s IRFs and home health locations operational • Build stroke market share (https://ehc.news/LifeAfterStroke) initiatives • Devel
Slide 40: 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. 74% of segment revenue Approx. 85% of segment revenue Medicare Pricing FY 2019 FY 2020 FY 2021 CY 2019 CY 2021 (14)
Slide 41: 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 42: IRF-PPS fiscal year 2020 proposed rule: key provisions
IRF-PPS fiscal year 2020 proposed rule: key provisions Update to payment rates The proposed rule would: Company observations • Implement a net 2.5% market basket increase – 3.0% market basket increase – (50 bps) healthcare reform productivity reduction; Pricing: • Update case mix group relative weig
Slide 43: 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 44: IMPACT Act of 2014
IMPACT Act of 2014 - enacted Oct. 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 re
Slide 45: 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 45
Slide 46: 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 47: Demographic tailwind: growth in the 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 48: 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 1,200 125 Bluffton, SC (38 beds) 120 1,000 • Murrells Inlet, SC (29 beds) 115 800 110 Acquisitions • Winston-Salem, NC (68 beds) 105 600
Slide 49: Inpatient rehabilitation growth pipeline
Inpatient rehabilitation growth pipeline Disciplined approach to new store growth The Company’s value proposition – $7.9 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 50: 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 51: De novo IRFs and acquisitions
De novo IRFs and acquisitions Operations Joint # of new beds Location date Investment considerations venture? 2017 2018 2019 2020 De novo IRFs: • IRR objective of 13% (after tax) • Joint venture capitalization Westerville, OH Q2 2017 Yes 60 • Certificate of need (“CON”) costs, Jackson, TN* Q3 2017 Y
Slide 52: 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 5 returns) Equipment (including CIS) 3 4 • Factors that impa
Slide 53: 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 Middletown (12/2014) Franklin (12/2015) Modesto (10/2016) Westerville (04/2017) Pearland (10/2017) Shelby County (04/2018) Bluffton (06/2018) Mur
Slide 54: 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 55: Home health growth pipeline
Home health growth pipeline Number of home health agencies over time • $17.7 billion Medicare home health market is highly 13,000 The number of home health agencies fragmented with over 11,800 is near an all-time high and presents home health agencies. 12,000 significant consolidation opportunities.
Slide 56: Hospice growth pipeline
Hospice growth pipeline • Medicare hospice market is approx. $18 billion. • 1.5 million Medicare beneficiaries received Acquisition strategy for hospice hospice services from approx. 4,500 providers in • Build additional scale 2017. • Medicare focus • Hospice use among Medicare beneficiaries has • H
Slide 57: Alternative payment models
Alternative payment models Most models remain in the early or pilot stage and results have been mixed. Both of our segments continue to participate in various alternative payment model initiatives. Encompass Health 57
Slide 58: Accountable Care Organizations (ACOs)
Accountable Care Organizations (“ACOs”) Medicare Shared Savings Program (MSSP) (2018 - 561 ACOs / 10.5 million Medicare beneficiaries) As of • Performance Year 5 (2017) results: January 2018, ◦ 284 of 472 ACOs (60%) held spending below their benchmark. ▪ 125 of these ACOs reduced health costs compar
Slide 59: Home Health Value-Based Purchasing Model
Home Health Value-Based Purchasing Model Over the long term, the Company believes it is well-positioned to benefit from a delivery system that rewards providers who are committed to providing high-quality care. In the calendar year 2016 HH-PPS final rule, Total Performance Scores (a numeric score ra
Slide 60: Capital structure
Capital structure Encompass Health is positioned with a cost-efficient, flexible capital structure. Encompass Health 60
Slide 61: Debt maturity profile - face value
Debt maturity profile - face value As of March 31, 2019* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $636 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $25 Drawn + Revolver $39 reserved capacity for LC’s $276 $300 Senior $350 Senior Term Loa
Slide 62: Financial leverage and liquidity
Financial leverage and liquidity Total debt Liquidity Leverage ratio* (Billions) March 31, Dec. 31, 4.6x** 2019 2018 Cash available $ 56.1 $ 69.2 Revolver $ 700.0 $ 700.0 Less: - Draws (25.0) (30.0) 3.17 2.8x - Letters of credit (39.1) (37.4) 3.02 Available $ 635.9 $ 632.6 2.58 2.51 2.56 Total liqui
Slide 63: Debt schedule
Debt schedule Change in March 31, December 31, Debt vs. ($millions) 2019 2018 YE 2018 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 25.0 $ 30.0 $ (5.0) Term loan facility, September 2022 - LIBOR +150bps 276.4 280.1 (3.7) Bonds Payable: 5.125% Senior Notes du
Slide 64: IRF real estate portfolio
IRF real estate portfolio 130 inpatient rehabilitation hospitals: 8,941 licensed beds 4,694 licensed beds Own ~70% of IRF real estate in CON states As of March 31, 2019 61 own building and land 29 own building only 40 lease building and land 4,247 licensed beds in non-CON states 1 of the 130 IRFs is
Slide 65: Overview of rollover shares and SARs held by home health management
Overview of rollover shares and SARs 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-acquis
Slide 66: Information technology
Information technology Encompass Health utilizes information technology to improve patient care and generate operating efficiencies. Encompass Health 66
Slide 67: 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") Integrated electronic medical rec
Slide 68: IRF proprietary management system: Beacon
IRF Proprietary management system: Beacon Operations management tool Supply chain procurement Encompass Health 68
Slide 69: 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 70: Operational metrics
Operational metrics Encompass Health 70
Slide 71: 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 72: 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 prior to 2018, under programs designated as net operating revenues upon notice from a MAC a claim is under review. “widespread probes,” c
Slide 73: Post-payment auditor activity - inpatient rehabilitation segment
Post-payment auditor activity - inpatient rehabilitation segment CMS supplements its pre-payment audits with post-payment audits. CMS uses Comprehensive Error Rate Testing (“CERT”) auditors to identify trends driving errors. CMS also uses the CERT error rate to evaluate the performance of Medicare c
Slide 74: Inpatient rehabilitation operational and labor metrics
Inpatient rehabilitation operational and labor metrics Q1 Q4 Q3 Q2 Q1 Full Year 2019 2018 2018 2018 2018 2018 (In Millions) Net patient revenue-inpatient $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,247.9 Net patient revenue-outpatient and other revenues 22.5 22.9 27.2 25.0 23.2 98.3 Net operating re
Slide 75: Home health and hospice operational metrics
Home health and hospice operational metrics Q1 Q4 Q3 Q2 Q1 Full Year 2019 2018 2018 2018 2018 2018 (In Millions) Net home health revenue $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 814.6 Net hospice revenue 34.4 35.0 32.8 28.3 20.4 116.5 Net operating revenues $ 253.9 $ 250.3 $ 242.0 $ 233.1 $ 205.7 $
Slide 76: Payment sources (percent of revenues)
Payment sources (percent of revenues) Inpatient Rehabilitation Home Health and Consolidated Segment Hospice Segment Q1 Q1 Q1 Full Year 2019 2018 2019 2018 2019 2018 2018 Medicare 73.5% 74.4% 84.6% 86.1% 76.0% 76.6% 75.9% Medicare Advantage 9.8% 8.6% 10.0% 9.7% 9.8% 8.8% 9.2% Managed care 9.6% 10.1%
Slide 77: Industry structure
Industry structure Encompass Health 77
Slide 78: Overall healthcare spending
Overall healthcare spending National healthcare spending: $3,263 billion in 2017 (billions) $168 Investment $45 Government administration $89 Government public health $452 Retail of medical products $97 Home health care $183 Other health, residential and personal care $920 Professional services $166
Slide 79: Medicare 2017 spending
Medicare 2017 spending = $710 billion $8 billion (1%) in billions Inpatient rehabilitation hospitals (Included in inpatient hospitals) $ 28 Skilled nursing Medicare Part A $145 Inpatient hospital 4% 20% $69 Physician payments Medicare Part B 14% $53 Outpatient hospital $18 Home health $18 Hospice Me
Slide 80: Continuum of healthcare services
Continuum of healthcare services Preventive Ambulatory Acute Post-acute Palliative Routine health care Medical care Medical Medical care Medical care (screenings, check- delivered on an treatment of provided after a that is focused ups, patient outpatient basis diseases for period of acute on provid
Slide 81: Post-acute fee-for-service care services
Post-acute fee-for-service 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) $4.5 $7.9 $28.4 $17.7* # of Discharges ~116,000 ~380,000 ~2,300,00
Slide 82: Medicare fee-for-service spending on post-acute services
Medicare fee-for-service spending on post-acute services 6 4.8 Home health fee-for- 4.3 4.1 4.1 ) 3.9 3.8 3.7 service spending* (% of t 3.5 n e total Medicare spending) c r e 3 P ( Inpatient rehabilitation 1.6 1.5 1.5 1.6 1.5 1.6 1.6 1.6 fee-for-service spending 0 (% of total Medicare 2010 2011 2012
Slide 83: Different fee-for-service levels of services
Different fee-for-service levels of services Inpatient rehabilitation hospital Nursing home Average length of stay = 12.7 days Average length of stay = 37.3 days Discharge to community = 76.0% Discharge to community = 40.0% Requirements: Requirements: IRFs must also satisfy regulatory/policy require
Slide 84: Supply of IRFs is relatively stable
Supply of IRFs is relatively stable Share of Medicare Number of IRFs Average annual change FFS discharges 2009- 2013- 2016- Type of IRF 2017 2009 2013 2014 2015 2016 2017 2013 2016 2017 All IRFs 100% 1,196 1,161 1,177 1,182 1,188 1,178 -0.7% 0.8% -0.8% Urban 93 992 977 1,013 1,020 1,026 1,019 -0.4 1
Slide 85: Inpatient rehabilitation sector margins
Inpatient rehabilitation sector margins Aggregate FFS Medicare IRF margins remained high in 2017 Share of Medicare fee-for- Margins service discharges Type of IRF 2017 2004 2006 2008 2010 2012 2014 2015 2016 2017 All IRFs 100% 16.7% 12.5% 9.4% 8.6% 11.2% 12.2% 13.9% 13.3% 13.8% Urban 93 17.0 12.8 9.
Slide 86: 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 87: 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 88: 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 89: Segment operating results
Segment operating results Encompass Health 89
Slide 90: Inpatient rehabilitation segment Adjusted EBITDA
Inpatient rehabilitation segment Adjusted EBITDA Q1 Q4 Q3 Q2 Q1 Full Year (In millions) 2019 2018 2018 2018 2018 2018 Net operating revenues: Inpatient $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,247.9 Outpatient and other 22.5 22.9 27.2 25.0 23.2 98.3 Total segment revenue 870.1 845.7 825.6 834.6 8
Slide 91: Home health and hospice segment Adjusted EBITDA
Home health and hospice segment Adjusted EBITDA Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2019 2018 2018 2018 2018 2018 Net operating revenues: Home health revenue $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 814.6 Hospice revenue 34.4 35.0 32.8 28.3 20.4 116.5 Total segment revenue 253.9 250.3 242.0 233.
Slide 92: Segment operating results Q1 2019 and Q1 2018
Segment operating results Q1 2019 Q1 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 870.1 $ 253.9 $ — $ 1,124.0 $ 840.3 $ 205.7 $ — $ 1,046.0 Operating Expenses: Inpatient Rehabilitation: Salaries and
Slide 93: Segment operating results Year Ended December 31, 2018
Segment operating results Year Ended December 31, 2018 Home Health (In Millions) IRF and Hospice Reclasses Consolidated Net operating revenues $ 3,346.2 $ 931.1 $ — $ 4,277.3 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,701.5) — (652.5) (2,354.0) Other operating expenses(a)
Slide 94: Reconciliations to GAAP and share information
Reconciliations to GAAP and share information Encompass Health 94
Slide 95: Reconciliation of net income to Adjusted EBITDA 2019
Reconciliation of net income to Adjusted EBITDA(9) 2019 Q1 (in millions, except per share data) Total Per Share Net Income $ 125.2 Loss from disc ops, net of tax, attributable to Encompass Health 0.5 Net income attributable to noncontrolling interests (22.9) Income from continuing operations attribu
Slide 96: Reconciliation of net income to Adjusted EBITDA 2018
Reconciliation of net income to Adjusted EBITDA(9) 2018 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 $ 105.2 $ 113.2 $ 109.3 $ 47.7 $ 375.4 Loss (income) from disc ops, net of tax, attributable t
Slide 97: Reconciliation of segment Adjusted EBITDA to pre-tax income
Reconciliation of segment Adjusted EBITDA to income from continuing operations before income tax expense Q1 Q4 Q3 Q2 Q1 Full Year 2019 2018 2018 2018 2018 2018 (in millions) Total segment Adjusted EBITDA $ 276.3 $ 255.8 $ 256.1 $ 265.1 $ 257.3 $ 1,034.3 General and administrative expenses (53.4) (54
Slide 98: Adjusted EPS - Q1 2019
Adjusted EPS(10) - Q1 2019 For the Three Months Ended March 31, 2019 Adjustments Mark-to- Market Change in Payroll Adjustment for Fair Market Taxes Stock Value of on As Compensation Income Tax Transaction Equity SARs As Reported Expense Adjustments Costs Securities Exercise Adjusted (In Millions, Ex
Slide 99: Adjusted EPS - Q1 2018
Adjusted EPS(10) - Q1 2018 For the Three Months Ended March 31, 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 Adjusted (In Millions, Except Per Share Amounts) Adjusted
Slide 100: Adjusted EPS - 2018
Adjusted EPS(10) - 2018 For the Year Ended December 31, 2018 Adjustments Mark-to-Market Change in Government, Adjustment for Fair Market Class Action, Stock Value of As & Related Compensation Income Tax Transaction Equity As Reported Settlements Expense Adjustments Costs Securities Adjusted (In Mill
Slide 101: Adjusted Free Cash Flow History
Adjusted Free Cash Flow History(11) Q1 Full Year (In Millions) 2019 2018 2018 Net cash provided by operating activities $ 159.9 $ 216.3 $ 762.4 Impact of discontinued operations 3.0 0.7 (0.8) Net cash provided by operating activities of continuing operations 162.9 217.0 761.6 Capital expenditures fo
Slide 102: Net cash provided by operating activities reconciled to Adjusted EBITDA
Net cash provided by operating activities reconciled to Adjusted EBITDA Q1 Full Year (In Millions) 2019 2018 2018 2017 2016 2015 2014 Net cash provided by operating activities $ 159.9 $ 216.3 $ 762.4 $ 658.3 $ 640.2 $ 505.9 $ 458.9 Professional fees — accounting, tax, and legal — — — — 1.9 3.0 9.3 I
Slide 103: Share information
Share information Weighted Average for the Period Q1 Full Year 2019 2018 2018 2017 2016 Basic shares outstanding(24) 98.4 97.8 97.9 93.7 89.1 Convertible senior subordinated notes(24) — — — 4.0 8.5 Restricted stock awards, dilutive stock options, restricted stock units, and common stock warrants 1.3
Slide 104: End Notes
End Notes Encompass Health 104
Slide 105: 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 106: 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 infor
Slide 107: End Notes, con't.
End Notes, con't. (16) The Company estimates the expected impact of each rule utilizing, among other things, the acuity of its patients over the 8-month (home health segment) to 3-month (inpatient rehabilitation segment) period prior to each rule’s release and incorporates other adjustments included