Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q1 2017 Earnings Presentation
117 slides from Encompass Health's earnings presentation, May 16, 2017
Slide 1: Investor Reference Book - Post Q1 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 Q1 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 HealthSouth’s current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capital ex
Slide 3: Table of Contents
3 Table of Contents Guidance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-11 The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Slide 4: Guidance (as of May 16, 2017)
4 Guidance (as of May 16, 2017)
Slide 5: Priorities for 2017 - Growth
5 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 Ÿ Continue emphasis on joint vent
Slide 6: Priorities for 2017 - Operational Initiatives
6 Priorities for 2017 GROWTH CAPITAL STRUCTURE OPERATIONAL INITIATIVES u Develop and implement initial risk sharing strategies Ÿ Implement collaborator and/or preferred provider agreements in select CJR markets (includes SHFFT which has been delayed until at least October 1, 2017) Ÿ Design and pilot
Slide 7: Guidance (as of May 16, 2017)
7 Refer to pages 113-117 for end notes. Guidance (as of May 16, 2017) Adjusted EBITDA(1) Adjusted Earnings per Share from Continuing Operations Attributable to HealthSouth(2) Net Operating Revenues Net Operating Revenues $3,850 million to $3,950 million Adjusted EBITDA(1) $800 million to $820 millio
Slide 8: Adjusted EBITDA Guidance Bridge
8 Refer to pages xxx-xxx for end notes. Adjusted EBITDA(1) Guidance Bridge Net Operating Revenues $3,xxx million to $3,xxx million Adjusted EBITDA(x) $8xx million to $8xx million Adjusted Earnings per Share from Continuing Operations Attributable to HealthSouth(x) $x.xx to $x.xx 2017 2016 Adjusted E
Slide 9: Guidance Considerations
9 Guidance Considerations Inpatient Rehabilitation u Estimated 1.9% increase in Medicare pricing for Q1 through Q3; 0.8% for Q4 (see page 34) u Salary increase of ~3.0% (see page 35) u 2016 included the benefit of a retroactive indirect medical education (“IME”) adjustment of ~$4 million at the form
Slide 10: Adjusted Free Cash Flow and Tax Assumptions
10 Reconciliations to GAAP provided on pages 97-111. Refer to pages 113-117 for end notes. Adjusted Free Cash Flow(3) and Tax Assumptions Certain Cash Flow Items (millions) 3 Months 2017 Actual 2017 Assumptions 2016 Actual • Cash interest expense (net of amortization of debt discounts and fees) $37.
Slide 11: Free Cash Flow Priorities
11 Contractual debt repayment obligations in 2017 include ~$15 million of capital lease payments and ~$1 million of other notes payable. See the debt schedule on page 66. Refer to pages 113-117 for end notes. Free Cash Flow Priorities (In Millions) 3 Months 2017 2017 2016 Actuals Assumptions Actuals
Slide 12: The Company
12 The Company
Slide 13: HealthSouth: A Leading Provider of Post-Acute Care
13 HealthSouth: A Leading Provider of Post-Acute Care 61% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Inpatient Rehabilitation Portfolio - As of March 31, 2017 123 Inpatient Rehabilitation Hospitals • 37 operate as joint ventures with acute care hospitals 30 N
Slide 14: Inpatient Rehabilitation Segment
14 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 15: Home Health and Hospice Segment
15 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 16: Payors and payment methodology
16 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 17: Patient mix and referral sources
17 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 physic
Slide 18: Quality outcomes: IRF and home health
18 2015 2016 Q1 2017 10.6% 10.4% 10.8% 10.6% 10.7% 11.2% 2015 2016 Q1 2017 13.9% 13.1% 13.3% 10.7% 10.1% 9.7% 2015 2016 Q1 2017 75.2% 75.7% 75.1% 78.0% 78.7% 78.5% Home Health QualityIRF Quality Discharge to Community Discharge to Skilled Nursing Discharge to Acute Hospital Percent of cases discharg
Slide 19: IRFs a Better Option for Stroke Patients than SNFs
19 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 20: Leading Position in Cost Effectiveness - IRFs
20 Leading Position in Cost Effectiveness(9) - 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(11) Case Mix Index(12) Avg. Est. Total Cost per Discharge for FY 2018 Avg. Est. Total Payment per Discharge fo
Slide 21: Leading Position in Cost Effectiveness - Home Health
21 2016 AverageRevenue Average Visits Average Revenue Cost Episodes per Episode per Episode per Visit per Visit Encompass 185,737 $3,031 18.8 $154 $74 Public Peer Average 270,223 $2,825 17.5* $149 $86* Encompass Compared to Peer Average 7.3% 7.4% 3.4% (14.0)% Leading Position in Cost Effectiveness -
Slide 22: IRF New-Store/Same-Store Growth
22 IRF New-Store/Same-Store Growth * Includes consolidated HealthSouth inpatient rehabilitation hospitals classified as same store during each period Refer to pages 113-117 for end notes. 25.0 20.0 15.0 10.0 5.0 0.0 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2
Slide 23: Home Health New-Store/Same-Store Growth
23 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 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 New Store 11.9% 13.6% 15.7% 37.4% 43.5% 41.6% 35.4% 8.1% 5.7% S
Slide 24: Financial track record
24 Adjusted EPS(2) Track Record 2012 2013 2014 2015 2016 Trailing 4 Qtrs $2,162 $2,273 $2,406 $3,163 $3,707 $3,772 ($ millions) 2012 2013 2014 2015 2016 Trailing 4 Qtrs $506 $552 $578 $683 $794 $802 ’12-’16 CAGR = 11.9 % ($ millions) ’12-’16 CAGR = 14.4 % Adjusted EBITDA(1) 2012 2013 2014 2015 2016
Slide 25: Strong and Sustainable Business Fundamentals
25 • 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 26: Our Strategy
26 Our Strategy
Slide 27: Demographic Tailwind: Expanding Medicare Beneficiary Population
27 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 “baby boomers” started turning 65. • In 2030, the Medicare population is projected to increase to 8
Slide 28: CMS: Driving Change Toward Integrated Delivery Payment Models
28 CMS: Driving Change Toward Integrated Delivery Payment Models, Value-Based Purchasing, and Site Neutrality Future Post-Acute Providers (Timing?) Inpatient Rehabilitation Facilities • Full range: low acuity g high acuity • 24/7 nursing coverage • Eliminates payment silos Home-Based Post-Acute Serv
Slide 29: Well-Positioned for Site Neutrality
29 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 30: IRF-Home Health Clinical Collaboration
30 IRF-Home Health Clinical Collaboration (All Payors) Q1 2016 Q1 2017 10,297 10,603 3,007 4,308 22.6% Collaboration Rate 28.9% Collaboration Rate HealthSouth IRF Discharges to Non- Encompass Home Health HealthSouth IRF Discharges to Encompass Home Health Clinical collaboration rate with HealthSouth
Slide 31: Clinical enhancements: problems and solutions
31 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 32: Business Outlook 2017 to 2019
32 Business Outlook 2017 to 2019 (as of May 16, 2017)
Slide 33: Business Outlook 2017 to 2019
33 • 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 Opportunistic Growth Business Out
Slide 34: Volume and Medicare pricing assumptions
34 • 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 Revenue Approx. 84% of Revenue FY 2017 Q416-Q317 FY 2018 Q417-Q318(16) FY 2019 Q418-Q319 Mgmt.
Slide 35: Labor and Other Expense Assumptions
35 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 5-10% 5-10% 5-10% Hosp
Slide 36: IRF-PPS Fiscal Year 2018 Proposed Rule
36 CMS proposes to: • Remove All-Cause Unplanned Readmission Measure for 30 Days Post- Discharge from IRF • Remove and replace the Percent of Residents or Patients with Pressure Ulcers That Are New or Worsened (Short Stay) (NQF #0678) measure with a modified version entitled Changes in Skin Integrit
Slide 37: HH-PPS Calendar Year 2017 Final Rule
37 Pricing: • Net pricing impact to Encompass expected to be a reduction of approx. 3.6% for CY 2017 (see page 34) • The final rule requires the recalibration of case-mix weights and the conversion of outlier payments to a per-unit methodology to be budget neutral for the industry. However, these ch
Slide 38: Home Health Pre-Claim Review Demonstration
38 Home Health Pre-Claim Review Demonstration State Start Date EncompassLocations Illinois Paused** — Florida* Delayed** 17 Texas To be determined 52 Michigan To be determined — Massachusetts To be determined 3 Encompass is well-prepared. * Encompass estimates the incremental cost of implementation
Slide 39: IMPACT Act of 2014
39 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 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* 8,841 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 – Bed need – Geographic proximity to other HLS IRFs and Encompass agencies – Abi
Slide 43: IRF Acute Care Joint Venture Partnerships
43 • • HealthSouth's IRF joint ventures began in 1991 with Vanderbilt University Medical Center. • HealthSouth's joint venture hospital partners own equity that ranges from 2.5% to 50%. • 36 of 37 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 Ocala (12/2012) Littleton (05/2013) Stuart (06/2013) Altamonte Springs (10/2014) Newnan (12/2014) Middletown (12/2014) Franklin (12/2015) Modesto (10/2016) HLS average 2016 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* Trends Occup
Slide 47: New IRFs: Assumptions for Hospital Acquisitions
47 New IRFs: Assumptions for Individual Hospital Acquisitions Unit/Equity Acquisitions Location Beds DateAcquired Worcester, MA(14) 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: Hospice and home health growth considerations
48 • Complementary business to core home health services • Prioritization of Encompass home health markets * No Encompass hospice offering in the majority of Encompass' current home health locations • Ability to leverage existing Encompass infrastructure • Strong demand due to cost effectiveness of
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 Available for Sustained Growth
51 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. — Track record of consistent market share gains — IRF organic growth supplemented by bed addition
Slide 52: Alternative Payment Models
52 Alternative Payment Models
Slide 53: Accountable Care Organizations (ACOs)
53 Accountable Care Organizations (ACOs) Pioneer ACOs (2016 – 9 ACOs / ~275,000 Medicare beneficiaries) • 32 Pioneer ACOs launched since program’s inception; 9 remained in the program prior to the model concluding on December 31, 2016 (some had voluntarily transferred to the Next Generation ACO prog
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 HLS Referral Source Bundle Type % of HLS MedicareDischarges % of Total HLS 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 of 48 BPCI-eligibl
Slide 56: Bundling Participation - Home Health and Hospice
56 Bundling Participation - Home Health and Hospice Encompass made the strategic decision to participate in BPCI Model 3 in select markets and episodes (below). In addition, Encompass is participating in other alternative payment models such as BPCI Model 2, CJR, and ACOs. 52 Encompass providers hav
Slide 57: CJR Model and Episode Payment Model - SHFFT
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 - 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 - Potential Impact to HealthSouth
60 CJR and SHFFT Models - What's the Potential Impact to HealthSouth? 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 - HealthSouth's Strategies
61 CJR and SHFFT Models - HealthSouth's Strategies Opportunities Outweigh the Risks Increase the number of CJR and SHFFT discharges in all markets where HealthSouth 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 4 2. Florida 17 3. Iowa — 4. Maryland 3 5. Massachusetts 3 6. Nebraska — 7. North Carolina 6 8. Tennessee 5 9. Washington — Encompass Locations 38 In the
Slide 63: Capital Structure
63 Capital Structure
Slide 64: Debt Maturity Profile
64 2016 2019 2020 2020 2021 2022 2023 2024 2025 2043 $350 Senior Notes 5.75% $1,200 Senior Notes 5.75% $320 Conv. Sr. Sub. Notes 2.0% $300 Senior Notes 5.125% $85 Drawn + $36 reserved for LC’s Holders have a put option in 2020 As of March 31, 2017* Debt Maturity Profile - Face Value ($ in millions)
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 2.95 (billions) Leverage Ratio(21) Total Debt 3.7x Marc
Slide 66: Debt Schedule
66 Debt Schedule Reconciliations to GAAP provided on pages 97-111. Change in March 31, Dec. 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 85.0 $ 152.0 $ (67.0) Term loan facility, July 2020 - LIBOR +200bps 415.7 421.2 (5
Slide 67: 2.0% Convertible Senior Subordinated Notes Due 2043
67 2.0% Convertible Senior Subordinated Notes Due 2043 Background • In November 2013, the Company issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. • The Company viewed the Convertible
Slide 68: IRF Real Estate Portfolio
68 38 Lease Building and Land A CON (Certificate of Need) is a regulatory requirement in some states and federal jurisdictions that require state authorization prior to proposed acquisitions, expansions, or construction of new hospitals. 58 Own Building and Land 27 Own Building Only* IRF Real Estate
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: Operating expense and labor metric notes
74 • Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient volumes. ◦ Salaries and Benefits in Q1 2017 were impacted by planned increases in full-time equivalents (staffing increases at former Reliant hospitals, additional clinical staff for increased
Slide 75: Pre-Payment Claims Denials - Inpatient Rehabilitation
75 Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Impact to Balance Sheet March 31, 2017 Dec. 31, 2016 Dec. 31, 2015 (In Millions) Pre-payment claims denials $ 171.4 $ 159.7 $ 114.8 Recorded reserves (51.9) (47.9) (31.2) Net accounts receivable from pre-payment claims denials $ 119.5
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 113-117 for end notes. Q1 Q4 Q3 Q2 Q1 Full Year 2017 2016 2016 2016 2016 2016 (In Millions) Net patient reve
Slide 77: Home Health and Hospice Operational Metrics
77 Home Health and Hospice Operational Metrics Refer to pages 113-117 for end notes. Q1 Q4 Q3 Q2 Q1 Full Year 2017 2016 2016 2016 2016 2016 (In Millions) Net home health revenue $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Net hospice and other revenue 17.0 17.1 13.1 11.0 9.7 50.9 Net operating r
Slide 78: Payment Sources (Percent of Revenues)
78 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q1 Q1 Q1 Full Year 2017 2016 2017 2016 2017 2016 2016 Medicare 73.3% 73.8% 84.1% 83.5% 75.2% 75.4% 75.2% Medicare Advantage 8.5% 7.6% 10.3% 8.7% 8.8% 7.8% 7.9% Managed care 11.2% 11
Slide 79: Industry Structure
79 Industry Structure
Slide 80: National 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 Spending 2015
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: Rehab Hospital vs Nursing Home Levels of Service
85 Source: MedPAC, Medicare Payment Policy, March 2017 - pages 208, 271, and 275;MedPAC, Health Care Spending and the Medicare Program, June 2016 - page 115 Different Levels of Services Rehab Hospital Nursing Home Average length of stay = 12.7 days Average length of stay = 40 days Discharge to commu
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(9) # 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 — 113 113 $ — $ 124,783,482 $ 124,783,482 50.1% N/A $ 2,686 $ 2,686 80-90 1 112 113 $ 361,999 $ 47,
Slide 92: Segment Operating Results
92 Segment Operating Results
Slide 93: Inpatient Rehabilitation Segment Adjusted EBITDA
93 Inpatient Rehabilitation Segment Adjusted EBITDA Q1 Q4 Q3 Q2 Q1 Full Year 2017 2016 2016 2016 2016 2016 Net operating revenues: (In Millions) Inpatient $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 2,905.5 Outpatient and other 26.3 26.7 27.6 31.4 29.8 115.6 Total segment revenue 792.5 767.6 751.7 752
Slide 94: Home Health and Hospice Segment Adjusted EBITDA
94 Home Health and Hospice Segment Adjusted EBITDA Q1 Q4 Q3 Q2 Q1 Full Year 2017 2016 2016 2016 2016 2016 Net operating revenues: (In Millions) Home health revenue $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Hospice revenue 17.0 17.1 13.1 11.0 9.7 50.9 Total segment revenue 182.3 182.3 175.1 168
Slide 95: Segment Operating Results - Q1 2017 and Q1 2016
95 Segment Operating Results Reconciliations to GAAP provided on pages 97-111. Q1 2017 Q1 2016 (In Millions) IRF Home Health and Hospice Reclasses HealthSouth Consolidated IRF Home Health and Hospice Reclasses HealthSouth Consolidated Net operating revenues $ 792.5 $ 182.3 $ — $ 974.8 $ 749.2 $ 160.
Slide 96: Segment Operating Results - Year Ended 2016
96 Segment Operating Results Reconciliations to GAAP provided on pages 97-111. Year Ended December 31, 2016 (In Millions) 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)
Slide 97: Reconciliations to GAAP and Share Information
97 Reconciliations to GAAP and Share Information
Slide 98: Reconciliation of Net Income to Adjusted EBITDA - Q1 2017
98 2017 Q1 (in millions, except per share data) Total Per Share Net Income $ 84.4 Loss from disc ops, net of tax, attributable to HealthSouth 0.3 Net income attributable to noncontrolling interests (17.6) Income from continuing operations attributable to HealthSouth* 67.1 $ 0.70 Provision for income
Slide 99: Reconciliation of Net Income to Adjusted EBITDA - 2016
99 Reconciliation of Net Income to Adjusted EBITDA(1) 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 t
Slide 100: Reconciliation of Net Income to Adjusted EBITDA - 2015
100 Reconciliation of Net Income to Adjusted EBITDA(1) 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
Slide 101: Reconciliation of Net Income to Adjusted EBITDA - 2012-2014
101 Reconciliation of Net Income to Adjusted EBITDA(1) 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 t
Slide 102: Reconciliation of Segment Adjusted EBITDA to Pre-Tax Income
102 Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Full Year 2016 (In Millions) Total segment Adjusted EBITDA $ 229.3 $ 225.6 $ 224.4 $ 230.1 $ 219.5 $ 899.6 General and administrative expenses (36.5) (
Slide 103: Adjusted EPS - Q1 2017
103 Adjusted EPS(2) - Q1 2017 Reconciliation to GAAP provided on pages 97-111. Refer to pages 113-117 for end notes. * Adjusted EPS may not sum across due to rounding. For the Three Months Ended March 31, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights Income Ta
Slide 104: Adjusted EPS - Q1 2016
104 Adjusted EPS(2) - Q1 2016 For the Three Months Ended March 31, 2016 Adjustments As Reported Professional Fees — Accounting, Tax, & Legal Mark-to- Market Adjustment for Stock Appreciation Rights Loss on Early Extinguishment of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBIT
Slide 105: Adjusted EPS - 2016
105 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 106: Adjusted EPS - 2015
106 Adjusted EPS(2) - 2015 For the Year Ended December 31, 2015 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 Debt As Adjuste
Slide 107: Adjusted EPS - 2014
107 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 108: Adjusted EPS - 2013
108 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 109: Adjusted EPS - 2012
109 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 110: Adjusted Free Cash Flow History
110 Adjusted Free Cash Flow History(3) Q1 Full Year (Millions) 2017 2016 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 180.8 $ 169.6 $ 634.4 $ 502.0 $ 454.6 $ 476.1 $ 423.4 Impact of discontinued operations 0.4 0.2 0.7 0.7 1.2 1.9 (2.0) Net cash provided by operating activitie
Slide 111: Net Cash from Operating Activities Reconciled to Adjusted EBITDA
111 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q1 Full Year (Millions) 2017 2016 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 180.8 $ 169.6 $ 634.4 $ 502.0 $ 454.6 $ 476.1 $ 423.4 Provision for doubtful accounts (16.4) (16.5) (61.2) (47.2) (31.6)
Slide 112: Share Information
112 Share Information Refer to pages 113-117 for end notes. Weighted Average for the Period Q1 Full Year (Millions) 2017 2016 2016 2015 2014 Basic shares outstanding 88.8 89.5 89.1 89.4 86.8 Convertible perpetual preferred stock(28) — — — 1.0 3.2 Convertible senior subordinated notes(29) 8.6 8.4 8.5
Slide 113: End Notes
113 End Notes
Slide 114: End Notes (1)-(3)
114 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 115: End Notes (4)-(13)
115 (4) In March 2017, the Internal Revenue Service approved HealthSouth’s request for a tax accounting method change related to billings denied under pre- payment claims reviews conducted by certain of its Medicare Administrative Contractors. This approval resulted in approximately $54 million of a
Slide 116: End Notes (14)-(28)
116 (14) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth's ownership interest from 50% to 80% and resulted in a change in accounting for the hospital from the equity met
Slide 117: End Notes (29)-(30)
117 (29) In November 2013, the Company closed separate, privately negotiated exchanges in which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded ~$249 million