Encompass Health Corporation · NYSE:EHC
Encompass Health — Q4 2017 Earnings Presentation
110 slides from Encompass Health's earnings presentation, Mar 13, 2018
Slide 1: Investor Reference Book Post Q4 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 Q4 201
Slide 2: Forward-Looking Statements
Encompass Health 2 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
Slide 3: Table of Contents
Encompass Health 3 Company Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16 Investment Thesis and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-24 Business Outlook, Including Guidance . . . . .
Slide 4: Company Overview
Encompass Health 4 Company Overview Encompass Health is a leading provider of inpatient rehabilitation and home-based care committed to delivering high-quality, cost-effective, integrated care across the post-acute continuum.
Slide 5: Portfolio as of December 31, 2017
Encompass Health 5 Portfolio as of December 31, 2017 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Locations 7 Future IRFs** 36 States and Puerto Rico ~37,900 Employees * Excluding markets that have home health licensure barriers ** Previously announced under development
Slide 6: Major Services: Inpatient Rehabilitation Hospitals
Encompass Health 6 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, strength, balance,
Slide 7: Major Services: Home Health and Hospice
Encompass Health 7 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 • Occup
Slide 8: IRF and Home Health Patient Mix
Encompass Health 8 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. • All IRF patients must be medically stable and have potential to toler
Slide 9: Leading Positions in Quality of Care
Encompass Health 9 2015 2016 2017 10.6% 10.4% 10.4% 10.6% 10.7% 10.7% 2015 2016 2017 13.9% 13.1% 12.7% 10.7% 10.1% 9.3% 2015 2016 2017 75.2% 75.7% 76.0% 78.0% 78.7% 79.4% Home Health QualityIRF Quality Discharge to Community Discharge to Skilled Nursing Discharge to Acute Hospital Refer to pages 106
Slide 10: Leading Position in Cost Effectiveness: Inpatient Rehabilitation
Encompass Health 10 Leading Position in Cost Effectiveness Inpatient Rehabilitation Medicare pays Encompass Health less per discharge, on average, and Encompass Health treats a higher acuity patient. # Avg. Beds per IRF Avg. Medicare Discharges per IRF(5) Case Mix Index(6) Avg. Est. Total Cost per D
Slide 11: Leading Position in Cost Effectiveness: Home Health
Encompass Health 11 2017 Episodes Average Revenue per Episode Average Visits per Episode Average Revenue per Visit Cost per Visit Encompass Health 211,743 $2,998 17.9 $161 $75 Public Peer Average 283,366 $2,835 17.4* $148* $81* Comparison to Peer Average 5.7% 2.9% 8.8% (7.4)% Public peer average rep
Slide 12: New-Store/Same-Store Growth: Inpatient Rehabilitation
Encompass Health 12* Includes consolidated inpatient rehabilitation hospitals classified as same store during each period ** Data provided by UDSMRRefer to pages 106-110 for end notes. New-Store/Same-Store Growth Inpatient Rehabilitation 25.0 20.0 15.0 10.0 5.0 0.0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1
Slide 13: New-Store/Same-Store Growth: Home Health
Encompass Health 13* Includes consolidated home health agencies classified as same store during each period New-Store/Same-Store Growth Home Health 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017Admissions Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Slide 14: Payors and Payment Methodology
Encompass Health 14 Medicaid Medicare Advantage Managed Care Medicare Other 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
Slide 15: Independent Research: IRFs Better Than SNFs for Stroke Patients
Encompass Health 15 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…”* “W
Slide 16: Strong and Sustainable Business Fundamentals
Encompass Health 16 • 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., clin
Slide 17: Investment Thesis and Strategy
Encompass Health 17 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.
Slide 18: Investment Thesis
Encompass Health 18 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 rela
Slide 19: Elements of Strategy
Encompass Health 19 Elements of Strategy Strategy The Company’s strategy is to expand its network of inpatient rehabilitation hospitals and home health and hospice agencies, further strengthen its relationships with healthcare systems, provider networks, and payors in order to connect patient care a
Slide 20: Elements of Strategy: Details
Encompass Health 20 Elements of Strategy Clinical Expertise and High-Quality Outcomes Institutional programs and advanced treatment protocols connect care and allow seamless transition of patients across the healthcare continuum Leverage technology to strengthen clinical data analytics Integration o
Slide 21: Future Post-Acute Providers
Encompass Health 21 Home-Based Post-Acute Services • More care in the home (lowest cost setting) • Ability to care for high-acuity patients with multiple chronic conditions Future Post-Acute Providers Inpatient Rehabilitation Hospitals • Full range: low acuity à high acuity • 24/7 nursing coverage •
Slide 22: Progression to Site Neutrality
Encompass Health 22 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 Traine
Slide 23: Integrated Care Delivery and Clinical Collaboration
Encompass Health 23 The Company Continues to Improve the Patient Experience Through Integrated Care Delivery Inpatient Rehabilitation–Home Health Clinical Collaboration (All Payors) Overlap Markets* Q4 2016 Q4 2017 10,074 10,660 3,963 4,939 28.2% Collaboration Rate 31.7% Collaboration Rateu As of De
Slide 24: Clinical Initiatives: Problems and Solutions
Encompass Health 24 Solution: Utilize extensive proprietary database of IRF patients to engage in predictive modeling 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
Slide 25: Business Outlook, Including Guidance
Encompass Health 25 Business Outlook, Including Guidance (as of March 13, 2018)
Slide 26: 2017 Summary
Encompass Health 26 2017 Summary GROWTH CAPITAL STRUCTURE OPERATIONAL INITIATIVES u Opened or acquired 4 new IRFs (including 3 joint ventures) Ÿ 6 IRF projects underway as of December 31, 2017 u Expanded existing IRFs by 166 beds u Acquired or opened 15 home health agencies and 2 hospice locations u
Slide 27: Priorities for 2018: Growth
Encompass Health 27 GROWTH OPERATIONAL INITIATIVES CAPITAL STRUCTURE Priorities for 2018 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 progressi
Slide 28: Priorities for 2018: Operational Initiatives and Capital Structure
Encompass Health 28 CAPITAL STRUCTURE OPERATIONAL INITIATIVES u Implement rebranding and name change (see page 34) u Continue to develop and implement post-acute patient navigation tools • Post-Acute Innovation Center ü Enhanced data analytics to design post-acute clinical pathways ü Formation of po
Slide 29: Guidance - as of March 13, 2018
Encompass Health 29Refer to pages 106-110 for end notes. Guidance - as of March 13, 2018 Adjusted EBITDA(10) Adjusted Earnings per Share from Continuing Operations Attributable to Encompass Health(11) Net Operating Revenues* 2018 Guidance Net Operating Revenues* Adjusted EBITDA(10) $830 million to $
Slide 30: Expected Impact of the New Revenue Standard
Encompass Health 30 Expected Impact of the New Revenue Standard - Historical Periods As Reported Recast Q4-17 Q3-17 Q2-17 Q1-17 FY 2017 FY 2016 Q4-17 Q3-17 Q2-17 Q1-17 FY 2017 FY 2016 Net operating revenue (millions) $1,019.7 $ 995.6 $ 981.3 $ 974.8 $3,971.4 $3,707.2 $1,010.0 $ 983.0 $ 967.6 $ 958.4
Slide 31: 2018 Guidance Considerations
Encompass Health 31 2018 Guidance Considerations Inpatient Rehabilitation u Estimated 0.8% increase in Medicare pricing for Q1 through Q3; ~1.25% for Q4 u Salary increase of ~3.0%; benefits increase of ~8.0% to 12.0% u Bad debt expense of 1.6% to 1.9% of net operating revenues* Home Health and Hospi
Slide 32: Adjusted Free Cash Flow Assumptions
Encompass Health 32Reconciliations to GAAP provided on pages 93-104. Refer to pages 106-110 for end notes. u Increased cash payments for taxes in 2018 primarily due to exhaustion of federal NOL in Q1 2017 Adjusted Free Cash Flow(12) Assumptions Certain Cash Flow Items (millions) 2017 Actuals 2018 As
Slide 33: Uses of Free Cash Flow
Encompass Health 33See the debt schedule on page 62. Refer to pages 106-110 for end notes. Uses of Free Cash Flow 2017 Actuals 2018 Assumptions Growth in Core Business IRF bed expansions $25.5 $30 to $40 New IRFs - De novos 75.2 80 to 110 - Acquisitions 10.9 opportunistic - Replacement IRFs and othe
Slide 34: Rebranding and Name Change
Encompass Health 34 Rebranding and Name Change u The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. Ÿ Effective January 1, 2018, HealthSouth Corporation changed its name to Encompass Health Corporation, wi
Slide 35: Business Outlook: 2018 to 2020
Encompass Health 35 Business Outlook: 2018 to 2020 2018 2019 2020 Key Operational Initiatives • Implement rebranding and name change • Develop and implement post-acute patient navigation tools • Enhance clinical collaboration between the Company’s IRFs and home health locations, including TEAMWORKS
Slide 36: Business Outlook 2018 to 2020: Revenue Assumptions
Encompass Health 36 Business Outlook 2018 to 2020: Revenue Assumptions Volume (Includes New Stores) Inpatient Rehabilitation* Home Health* 3+% annual discharge growth 10+% annual admission growth Medicare Pricing Approx. 73% of Revenue Approx. 85% of Revenue FY 2018 Q417-Q318(14) FY 2019 Q418-Q319 E
Slide 37: Business Outlook 2018 to 2020: Labor and Other Expense Assumptions
Encompass Health 37 Inpatient Rehabilitation Home Health and Hospice Business Outlook 2018 to 2020: Labor and Other Expense Assumptions Salaries and Benefits ~70% IRF Expenses ~30% Salaries and Benefits 2018 2019 2020 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 8-12%* 5
Slide 38: IRF-PPS Fiscal Year 2018 Final Rule: Key Provisions
Encompass Health 38 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 36) • Because of its efficient cost structure, the Company receives very few outlier payments des
Slide 39: Home Health Final Rule Update to 2018 Payment Rates
Encompass Health 39 The final rule: • Implemented a net 1.0% market basket increase as established by the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 and • Implemented year three of a three-year nominal case-mix coding intensity reduction adjustment of (0.9%). The final rule would h
Slide 40: IMPACT Act Observations
Encompass Health 40 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 responded to the Committ
Slide 41: Growth
Encompass Health 41 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.
Slide 42: Multiple Avenues for Sustained Growth in Both Segments
Encompass Health 42 The Company Has Multiple Avenues Available for Sustained Growth in Both Segments u The Company continues to have excellent organic growth opportunities ininpatient rehabilitation, home health, and hospice. — Track record of consistent market share gains — IRF organic growth suppl
Slide 43: Demographic Tailwind: Medicare Beneficiary Growth
Encompass Health 43 Both Segments Benefit from a Demographic Tailwind: Growth in the Medicare Beneficiary Population Projected Population of Age 65+ Age 80+Age 70-79Age 65-69 Millions • The growth rate of Medicare beneficiaries increased in 2011 to an approx. 3% CAGR as “Baby Boomers” started turnin
Slide 44: Multi-faceted Inpatient Rehabilitation Growth Strategy
Encompass Health 44 1,600 1,400 1,200 1,000 800 600 400 200 0 132 127 122 117 112 107 102 97 92 87 82 77 72 2013 2014 2015 2016 2017 Projected 2018 % Increase in licensed beds 4% 18% 1% 4% 3% Total number of licensed beds 6,825 7,095 8,404 8,504* 8,851 9,120 Total number of IRFs 103 107 121 123* 127
Slide 45: Disciplined Approach to New Store Growth
Encompass Health 45 Disciplined Approach to New Store Growth – $7.4 Billion Medicare IRF Market – Considerations: – Market demographics – Presence of other IRFs – Geographic proximity to other Company IRFs and home health locations – Potential joint venture partners Source: MedPAC December 2016 Publ
Slide 46: IRF Acute Care Joint Venture Partnerships
Encompass Health 46 • 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%. • 41 of 42 IRFs are consolidated joint ventures, with one accounted for under the equity
Slide 47: De Novo IRFs and Acquisitions
Encompass Health 47 De Novo IRFs and Acquisitions Investment Considerations • IRR objective of 13% (after tax) • Joint venture capitalization • Certificate of Need (“CON”) costs, where applicable • Clinical Information System (“CIS”) installation costs • Medicare certification for new hospitals (min
Slide 48: De Novo Costs and Timeline
Encompass Health 48 CON Process (if applicable) Zoning & Design Permitting Construction OpeningGroundbreaking De Novo Costs and Timeline Capital Cost (millions) Low High Construction, design, permitting, etc. $17 $21 Land 2 3 Equipment (including CIS) 3 4 Range of a typical 40-50 bed IRF $22 $28 Pre
Slide 49: IRF De Novo Occupancy and EBITDA Trends
Encompass Health 49 Stuart (06/2013) Altamonte Springs (10/2014) Newnan (12/2014) Middletown (12/2014) Franklin (12/2015) Modesto (10/2016) Westerville (04/2017) Pearland (10/2017) 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 Occupan
Slide 50: Home Health and Hospice Growth Strategy
Encompass Health 50 • Strong demand due to cost effectiveness of home-based care and implementation of alternative payment models • Strong organic growth from existing agencies • Located in markets with attractive demographics * Currently located in states that represent ~67% of total Medicare home
Slide 51: Home Health Growth Pipeline
Encompass Health 51 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 • $18.1 billion Medicare home health market is highly fragmented with over 12,300 home health agencies. • Approx. 94% of
Slide 52: Hospice Growth Pipeline
Encompass Health 52 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 • Medicare hospice market is approx. $16 billion. • 1.4 million Medicare beneficiaries
Slide 53: Alternative Payment Models
Encompass Health 53 Alternative Payment Models
Slide 54: Accountable Care Organizations
Encompass Health 54 Accountable Care Organizations (“ACOs”) Medicare Shared Savings Program (MSSP) (2018 - 561 ACOs / 10.5 million Medicare beneficiaries) • Performance Year 4 (2016) results: ◦ 241 of 432 ACOs (56%) held spending below their benchmark. ▪ 107 of these ACOs reduced health costs compar
Slide 55: Bundled Payments Model
Encompass Health 55 Bundled Payments Model 1 All acute patients (all DRGs) – Concluded December 31, 2016 – The Bundled Payments for Care Improvement (BPCI) initiative currently tests four types of bundles (i.e. “Models”): Model 2* Hospital plus post-acute period (selected DRGs) Model 3* Post acute o
Slide 56: The Company's Participation in BPCI Model
Encompass Health 56 The Company’s Participation in BPCI Model 3 Inpatient Rehabilitation BPCI Bundle ParticipatingIRFs Bundle Length (in days) % of the Company’s Total Discharges Stroke 3 60 0.12% Simple Pneumonia 1 60 0.02% Sepsis 1 60 0.01% Double-lower extremity joint replacement 2 60 <0.01% Uppe
Slide 57: Comprehensive Care for Joint Replacement Model
Encompass Health 57* These comorbidities are specific to acute care hospitals and are defined differently than IRFs’ comorbidities.Source: https://innovation.cms.gov/initiatives/cjr Acute care hospital patients are categorized by Medicare Severity Diagnosis Related Groups (“MS-DRGs”); the CJR model
Slide 58: Home Health Value-Based Purchasing Model
Encompass Health 58 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 Locat
Slide 59: Capital Structure
Encompass Health 59 Capital Structure Encompass Health is positioned with a cost-efficient, flexible capital structure.
Slide 60: Debt Maturity Profile - Face Value
Encompass Health 60 Debt Maturity Profile - Face Value 2018 2021 2022 2022 2023 2024 2025 $350 Senior Notes 5.75% $1,200 Senior Notes 5.75% $300 Senior Notes 5.125% $95 Drawn + $35 reserved for LC’s As of December 31, 2017* ($ in millions) $570 Available Callable beginning November 2017 Revolver Rev
Slide 61: Financial Leverage and Liquidity
Encompass Health 61 2013 2014 2015 2016 2017 1.52 2.11 3.17 3.02 2.58 S&P Moody’s Corporate Rating BB- Ba3 Outlook Stable Stable Revolver Rating BB+ Baa3 Senior Notes Rating B+ B1 Financial Leverage and Liquidity (1) Liquidity Credit Ratings (billions) Leverage Ratio(19) Total Debt 3.1x December 31,
Slide 62: Debt Schedule
Encompass Health 62Reconciliations to GAAP provided on pages 93-104. Debt Schedule Change in December 31, December 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 95.0 $ 152.0 $ (57.0) Term loan facility, September 20
Slide 63: IRF Real Estate Portfolio
Encompass Health 63 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 29 Own Building Only IRF Real Estate Portf
Slide 64: Home Health Holdings Rollover Shares Options
Encompass Health 64 Options Holder – The right (but not the obligation) to sell for cash up to 1/3 of the Rollover Shares to the parent after 1/1/18*; 2/3 after 1/1/19; and all outstanding Rollover Shares after 1/1/20 Company – The right (but not the obligation) to purchase for cash all or any porti
Slide 65: Information Technology
Encompass Health 65 Information Technology Encompass Health utilizes information technology to improve patient care and generate operating efficiencies.
Slide 66: IRF Clinical Information System
Encompass Health 66 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 R
Slide 67: IRF Proprietary Management System: Beacon
Encompass Health 67 IRF Proprietary Management System: Beacon
Slide 68: Home Health and Hospice Information System: Homecare Homebase
Encompass Health 68 Homecare Homebase (“HCHB”) was born out of the Company’s operating model; HCHB is a leading IT platform provider in the home health and hospice industry. Optimization of capabilities in leading-edge technology embedded in culture, driving superior clinical, operational, and finan
Slide 69: Operational Metrics
Encompass Health 69 Operational Metrics
Slide 70: IRF Labor and Expense Metrics
Encompass Health 70 •Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient volumes. •IRF-related Expenses includes other operating expenses (excluding loss on disposal or impairment of assets), supplies, and occupancy costs. •Provision for Doubtful Ac
Slide 71: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Encompass Health 71 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) Q4 2017 $0.7 $(7.8) $0.2 $— Q3 2017 7.4 (6.2) 2.2
Slide 72: Inpatient Rehabilitation Operational and Labor Metrics
Encompass Health 72 Inpatient Rehabilitation Operational and Labor Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 (In Millions) Net patient revenue- inpatient $ 784.7 $ 768.6 $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 3,082.4 $ 2,905.5 Net patient
Slide 73: Home Health and Hospice Operational Metrics
Encompass Health 73Refer to pages 106-110 for end notes. Home Health and Hospice Operational Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 (In Millions) Net home health revenue $ 187.3 $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 706.7 $ 635
Slide 74: Payment Sources (Percent of Revenues)
Encompass Health 74 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q4 Q4 Q4 Full Year 2017 2016 2017 2016 2017 2016 2017 2016 Medicare 73.6% 73.3% 86.1% 84.3% 76.2% 75.3% 75.5% 75.2% Medicare Advantage 8.3% 7.8% 8.9% 8.7% 8.4% 8.0%
Slide 75: Industry Structure
Encompass Health 75 Industry Structure
Slide 76: National Healthcare Spending
Encompass Health 76 Health Consumption Spending*: $2,840. 7 Overall Healthcare Spending (billions) Source: Centers for Medicare & Medicaid Services, National Health Expenditure Data (Historical), Table 2 - 2015 * Excludes Net Cost of Health Insurance National Healthcare Spending: $3,205.6 billion in
Slide 77: Medicare Spending
Encompass Health 77Source: 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 Ph
Slide 78: Continuum of Healthcare Services
Encompass Health 78 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 disease
Slide 79: Post-Acute Care Services Comparison
Encompass Health 79 Post-Acute Care Services Acute Care Hospital Home Health Long-Term Acute Care Hospital Inpatient Rehabilitation Hospital 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 2
Slide 80: Medicare Spending and Margins on Post-Acute Services
Encompass Health 80 $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 nurs
Slide 81: Different Levels of Services: IRF vs Nursing Home
Encompass Health 81 Different Levels of Services Inpatient Rehabilitation 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: Requirements: IRFs must also satisfy regulatory/policy req
Slide 82: Supply of IRFs is Relatively Stable
Encompass Health 82 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 Rura
Slide 83: Inpatient Rehabilitation Sector Margins
Encompass Health 83 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
Slide 84: Inpatient Rehabilitation Standardized Comparison of Costs
Encompass Health 84 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
Slide 85: 60% Rule: Medicare Regulation for IRFs
Encompass Health 85 “60% Rule”: Medicare Regulation for IRFs 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 tra
Slide 86: IRF Qualifying Conditions
Encompass Health 86 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 d
Slide 87: Inpatient Rehabilitation Outlier Payments
Encompass Health 87 Inpatient Rehabilitation Outlier Payments(7) Refer to pages 106-110 for end notes. More Efficient Less Outlier Observations: • 10% of IRFs receive 50% of the outlier payments; none of the 10% are Encompass Health IRFs. • The Company receives 1.7% of the IRF outlier payments despi
Slide 88: Segment Operating Results
Encompass Health 88 Segment Operating Results
Slide 89: Inpatient Rehabilitation Segment Adjusted EBITDA
Encompass Health 89 Inpatient Rehabilitation Segment Adjusted EBITDA Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year Full Year 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 Net operating revenues: (In Millions) Inpatient $ 784.7 $ 768.6 $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 3,082.4 $ 2,905.5 Outpati
Slide 90: Home Health and Hospice Segment Adjusted EBITDA
Encompass Health 90 Home Health and Hospice Segment Adjusted EBITDA Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year Full Year 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 Net operating revenues: (In Millions) Home health revenue $ 187.3 $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 706.7 $ 635.2
Slide 91: Segment Operating Results Q4 2017
Encompass Health 91Reconciliations to GAAP provided on pages 93-104. Segment Operating Results Q4 2017 Q4 2016 IRF Home Health and Hospice Reclasses Consolidated IRF Home Health and Hospice Reclasses Consolidated Net operating revenues $ 810.8 $ 208.9 $ — $ 1,019.7 $ 767.6 $ 182.3 $ — $ 949.9 Less:
Slide 92: Segment Operating Results Full Year 2017
Encompass Health 92Reconciliations to GAAP provided on pages 93-104. Year Ended December 31, 2017 Year Ended December 31, 2016 IRF Home Health and Hospice Reclasses Consolidated IRF Home Health and Hospice Reclasses Consolidated Net operating revenues $ 3,188.1 $ 783.3 $ — $ 3,971.4 $ 3,021.1 $ 686.
Slide 93: Reconciliations to GAAP and Share Information
Encompass Health 93 Reconciliations to GAAP and Share Information
Slide 94: Reconciliation of Net Income to Adjusted EBITDA 2017
Encompass Health 94 Reconciliation of Net Income to Adjusted EBITDA(10) * Per share amounts for each period presented are based on diluted weighted-average shares outstanding. Refer to pages 106-110 for end notes. 2017 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total
Slide 95: Reconciliation of Net Income to Adjusted EBITDA 2016
Encompass Health 95 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 Encompass Health 0.1 0.1 0.1 (0.
Slide 96: Reconciliation of Segment Adjusted EBITDA to Pre-Tax Income
Encompass Health 96 Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 (In Millions) Total segment Adjusted EBITDA $ 241.5 $ 235.1 $ 241.2 $ 229.3 $ 225.6 $ 224.4
Slide 97: Adjusted EPS - Q4 2017
Encompass Health 97 Adjusted EPS(11) - Q4 2017 Reconciliation to GAAP provided on pages 93-104. Refer to pages 106-110 for end notes. * Adjusted EPS may not sum across due to rounding. For the Three Months Ended December 31, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciat
Slide 98: Adjusted EPS - Q3 2017
Encompass Health 98 For the Three Months Ended September 30, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights(26) Income Tax Adjustments(27) Loss on Early Extinguishment of Debt(28) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 204.6 $ — $
Slide 99: Adjusted EPS - Q2 2017
Encompass Health 99 Adjusted EPS(11) - Q2 2017 For the Three Months Ended June 30, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights(26) Income Tax Adjustments(27) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 209.5 $ — $ — $ 209.5 Deprecia
Slide 100: Adjusted EPS - Q1 2017
Encompass Health 100 Adjusted EPS(11) - Q1 2017 For the Three Months Ended March 31, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights(26) Income Tax Adjustments and Settlements(27) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 200.8 $ — $
Slide 101: Adjusted EPS - 2017
Encompass Health 101 Adjusted EPS(11) - 2017 For the Year Ended December 31, 2017 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights(26) Tax Reform Impact(25) Loss on Early Extinguishment of Debt(28) Income Tax Adjustments(27) As Adjusted (In Millions, Except Per Share
Slide 102: Adjusted EPS - 2016
Encompass Health 102 For the Year Ended December 31, 2016 Adjustments As Reported Pro. Fees - Acct., Tax, & Legal Mark-to- Market Adjustment for Stock Appreciation Rights(26) Loss on Early Exting. of Debt Sale of Pediatric Home Health Assets and Hospital Income Tax Valuation and Other Adjustments As
Slide 103: Adjusted Free Cash Flow History
Encompass Health 103 Adjusted Free Cash Flow History(12) Q4 Full Year (Millions) 2017 2016 2017 2016 Net cash provided by operating activities $ 151.4 $ 135.0 $ 657.2 $ 634.4 Impact of discontinued operations (0.1) 0.1 0.6 0.7 Net cash provided by operating activities of continuing operations 151.3
Slide 104: Net Cash from Operating Activities Reconciled to Adjusted EBITDA
Encompass Health 104 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Information regarding investing and financing categories of the statement of cash flows for the periods presented can be found on Encompass Health’s website in the Earnings Releases for those periods. Q4 Ful
Slide 105: Share Information
Encompass Health 105Refer to pages 106-110 for end notes. Share Information Weighted Average for the Period Q4 Full Year 2017 2016 2017 2016 Basic shares outstanding(29) 97.6 88.6 93.7 89.1 Convertible senior subordinated notes(29) — 8.6 4.0 8.5 Restricted stock awards, dilutive stock options, restr
Slide 106: End Notes
Encompass Health 106 End Notes
Slide 107: End Notes (1)-(10)
Encompass Health 107 (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 clin
Slide 108: End Notes (11)-(14)
Encompass Health 108 (11) 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 inf
Slide 109: End Notes (15)-(27)
Encompass Health 109 (15) The Bipartisan Budget Act of 2018, signed into law on February 9, 2018, provides for a home health market basket update of 1.5% for CY 2020 and the elimination of any productivity adjustment to the market basket for that year. It also provides for the extension of the rural
Slide 110: End Notes (28)-(30)
Encompass Health 110 (28) The interest and amortization and the loss on early extinguishment of debt related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share because the debt was assumed to have been converted