Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Investor Presentation (March 2017)
116 slides from Encompass Health's investor presentation, Mar 6, 2017
Slide 1: Investor Reference Book
INVESTOR REFERENCE BOOK Last updated March 6, 2017 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 ho
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 March 6, 2017)
4 Guidance (as of March 6, 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) Ÿ Design and pilot commercial bundle with select Medicare Advantage plan
Slide 7: Guidance
7 Refer to pages 113-116 for end notes. Guidance 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 million Adjusted Earnings p
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; ~1.0% for Q4 (see page 35) u Salary increase of ~3.0% (see page 36) u 2016 included the benefit of a retroactive indirect medical education (“IME”) adjustment of ~$4 million at the for
Slide 10: Adjusted Free Cash Flow and Tax Assumptions
10 Reconciliations to GAAP provided on pages 98-112. Refer to pages 113-116 for end notes. Adjusted Free Cash Flow(3) and Tax Assumptions Certain Cash Flow Items (millions) 2015 Actuals 2016 Actuals 2017 Assumptions • Cash interest expense (net of amortization of debt discounts and fees) $128.6 $158
Slide 11: Free Cash Flow Priorities
11 Note: 2015 amount for debt borrowings included ~$208 million related to the Reliant hospitals' capital lease obligations.See the debt schedule on page 67. Refer to pages 113-116 for end notes. Free Cash Flow Priorities (In Millions) 2015 2016 2017 Actuals Actuals Assumptions IRF bed expansions $2
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 59% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Inpatient Rehabilitation Portfolio - As of December 31, 2016 123 Inpatient Rehabilitation Hospitals • 37 operate as joint ventures with acute care hospitals 3
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 (Encompass)
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: Encompass Partnership
16 States with an Encompass presence Encompass Partnership • 4th largest provider of Medicare-focused (84% Medicare) skilled home health services in the U.S. with 223 locations across 25 states • Approx. 7,700 employees making 3.9 million total patient visits annually • Approx. revenue of $686 milli
Slide 17: Payors and Payment Methodology
17 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 18: IRF Patient Mix and Referral Sources
18 Acute Care Hospitals -- 37% Physician Offices / Community -- 34% IRFs / LTCHs / SNFs -- 29% IRF Patient Mix Referral Sources: Rehabilitation Impairment Category* (Q4 2016): • Physicians and acute care hospital case managers are key decision makers. • All IRF patients must meet reasonable and nece
Slide 19: Quality of Care: IRF and Home Health
19 2014 2015 2016 10.6% 10.6% 10.4% 10.7% 10.6% 10.7% 2014 2015 2016 14.5% 13.9% 13.1% 11.4% 10.7% 10.1% 2014 2015 2016 74.4% 75.2% 75.7% 77.1% 78.0% 78.7% Home Health QualityIRF Quality Discharge to Community Discharge to Skilled Nursing Discharge to Acute Hospital Percent of cases discharged to th
Slide 20: Research: IRFs Better for Stroke Patients than SNFs
20 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 21: Leading Position in Cost Effectiveness - IRFs
21 Leading Position in Cost Effectiveness(10) - IRFs Medicare pays HealthSouth less per discharge, on average, and HealthSouth treats a higher acuity patient. Avg. Beds per IRF Avg. Medicare Discharges per IRF(12) Case Mix Index(13) Avg. Est. Total Cost per Discharge for FY 2017 Avg. Est. Total Paym
Slide 22: Leading Position in Cost Effectiveness - Home Health
22 2015 AverageRevenue Visits Effective Revenue Cost Episodes per Episode per Episode per Visit per Visit Encompass 137,568 $3,072 19 $162 $72 Public Peer Average 259,215 $2,732 17* $161 $84* Encompass Compared to Peer Average 12.4% 11.8% 0.6% (14.3)% Leading Position in Cost Effectiveness - Home He
Slide 23: IRF New-Store/Same-Store Growth
23 IRF New-Store/Same-Store Growth * Includes consolidated HealthSouth inpatient rehabilitation hospitals classified as same store during each period Refer to pages 113-116 for end notes. 25.0 20.0 15.0 10.0 5.0 0.0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2
Slide 24: Home Health New-Store/Same-Store Growth
24 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 Home Health New-Store/Same-Store Growth Admissions Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 New Store 11.9% 13.6% 15.7% 37.4% 43.5% 41.6% 35.4% 8.1% Same Store* N/A N/A N/
Slide 25: Adjusted EPS Track Record
25 Adjusted EPS(2) Track Record 2012 2013 2014 2015 2016 $2,162 $2,273 $2,406 $3,163 $3,707($ millions) 2012 2013 2014 2015 2016 $506 $552 $578 $683 $794 ’12-’16 CAGR = 11.9 %($ millions) ’12-’16 CAGR = 14.4 % Adjusted EBITDA(1) 2012 2013 2014 2015 2016 $1.61 $1.94 $2.06 $2.24 $2.67 ’12-’16 CAGR = 1
Slide 26: Strong and Sustainable Business Fundamentals
26 • Largest provider of inpatient rehabilitation services • 4th largest provider of Medicare-certified skilled home health services • Consistent delivery of high-quality, cost-effective care • Enhanced utilization of technology (e.g., clinical, data management, and technology-enabled business proce
Slide 27: Our Strategy
27 Our Strategy
Slide 28: Demographic Tailwind: Expanding Medicare Population
28 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 29: CMS: Driving Change Toward Integrated Delivery Payment Models
29 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 30: Well-Positioned for Progression Towards Site Neutrality
30 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 31: IRF-Home Health Clinical Collaboration
31 IRF-Home Health Clinical Collaboration (All Payors) Q4 2015 Q4 2016 10,360 10,074 2,735 3,963 20.9% Collaboration Rate 28.2% Collaboration Rate HealthSouth IRF Discharges to Non- Encompass Home Health HealthSouth IRF Discharges to Encompass Home Health Clinical collaboration rate with HealthSouth
Slide 32: Clinical Enhancements: Problems and Solutions
32 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 33: Business Outlook 2017 to 2019
33 Business Outlook 2017 to 2019 (as of March 6, 2017)
Slide 34: Business Outlook 2017 to 2019
34 • 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 35: Volume and Medicare Pricing Assumptions
35 • 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. 83% of Revenue FY 2017 Q416-Q317 FY 2018 Q417-Q318(17) FY 2019 Q418-Q319 Mgmt.
Slide 36: Labor and Other Expense Assumptions
36 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 37: IRF-PPS Fiscal Year 2017 Final Rule
37 CMS: • Adopted four new claims-based quality reporting measures beginning October 1, 2016 to satisfy the reporting requirements of the IMPACT Act: – Discharge to Community; – Medicare Spending Per Beneficiary; – Potentially Preventable 30-Day Post-Discharge Readmission Measure; and – Potentially
Slide 38: HH-PPS Calendar Year 2017 Final Rule
38 Pricing: • Net pricing impact to Encompass expected to be a reduction of approx. 3.6% for CY 2017 (see page 35) • 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 39: Home Health Pre-Claim Review Demonstration
39 Home Health Pre-Claim Review Demonstration State Start Date EncompassAgencies Illinois August 3, 2016 — Florida* April 1, 2017 17 Texas To be determined 52 Michigan To be determined — Massachusetts To be determined 2 Encompass is well-prepared. * Encompass estimates the incremental cost of implem
Slide 40: IMPACT Act of 2014
40 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 41: Growth
41 Growth
Slide 42: Multi-faceted IRF Growth Strategy
42 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* 8,853 Total number of IRFs 100 103 107 121 123* 127 Multi-facete
Slide 43: Disciplined Approach to New Store Growth
43 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 44: IRF Acute Care Joint Venture Partnerships
44 • • 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 45: New IRFs: Illustrative De Novo Timeline
45 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 46: New IRFs: De Novo Investment Considerations
46 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 47: IRF De Novo Occupancy and EBITDA Trends
47 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 48: New IRFs: Hospital Acquisitions Assumptions
48 New IRFs: Assumptions for Individual Hospital Acquisitions Unit/Equity Acquisitions Location Beds DateAcquired Worcester, MA(15) 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 49: Home Health and Hospice Growth Strategy
49 • 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 50: Home Health Growth Pipeline
50 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 51: Hospice Growth Pipeline
51 Freestanding Hospital/SNF based Home Health based 4,000 3,000 2,000 1,000 0 2000 2007 2011 2012 2013 2014 1,069 2,103 2,491 2,643 2,844 3,027807 704 608 591 578 559 378 443 486 492 503 506 Hospice Growth Pipeline Ÿ In 2015, Medicare hospice spending totaled approx. $16 billion. Ÿ 1.4 million Medi
Slide 52: Multiple Avenues Available for Sustained Growth
52 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 53: Alternative Payment Models
53 Alternative Payment Models
Slide 54: Accountable Care Organizations
54 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 55: Bundled Payments
55 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 56: BPCI Model 2, CJR, and EPM Opportunities
56 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(21) Bundles selected for Model 2 participation are chosen from a list of 48 BPCI-eligibl
Slide 57: Bundling Participation - Home Health and Hospice
57 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 EPMs. 52 Encompass providers hav
Slide 58: CJR and Episode Payment Model - Hip/Femur Fracture
58 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 59: CJR and SHFFT Models - How Do They Work?
59 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 60: CJR Model - Collaborators and Payment Limits
60 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 61: CJR and SHFFT: Potential Impact to HealthSouth
61 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 certain models of the Bundled Payment for Care Improvement (BPCI) initiative
Slide 62: CJR and SHFFT Models - HealthSouth's Strategies
62 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 63: Home Health Value-Based Purchasing Model
63 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 1 5. Massachusetts 2 6. Nebraska — 7. North Carolina 6 8. Tennessee 5 9. Washington — Encompass Agencies 35 In the c
Slide 64: Capital Structure
64 Capital Structure
Slide 65: Debt Maturity Profile - Face Value
65 Debt Maturity Profile - Face Value * This chart does not include ~$279 million of capital lease obligations or ~$56 million of other notes payable. See the debt schedule on page 67. 2016 2019 2020 2020 2021 2022 2023 2024 2025 2043 $350 Senior Notes 5.75% $1,200 Senior Notes 5.75% $320 Conv. Sr.
Slide 66: Credit Ratings, Leverage and Liquidity
66 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 $1.25 $1.52 $2.11 $3.17 $3.02 (billions) Leverage Ratio(22) Total Debt 3.8x December 31, 2016 Decemb
Slide 67: Debt Schedule
67 Debt Schedule Reconciliations to GAAP provided on pages 98-112. Change in Dec. 31, Dec. 31, Debt vs. ($millions) 2016 2015 YE 2015 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 152.0 $ 130.0 $ 22.0 Term loan facility, July 2020 - LIBOR +200bps 421.2 443.3 (22.
Slide 68: 2.0% Convertible Senior Subordinated Notes Due 2043
68 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 69: IRF Real Estate Portfolio
69 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 70: Information Technology
70 Information Technology
Slide 71: IRF Clinical Information System
71 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 72: IRF Proprietary Management System: Beacon
72 IRF Proprietary Management System: Beacon
Slide 73: Home Health Information System: Homecare Homebase
73 Home Health 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 instructions provi
Slide 74: Operational Metrics
74 Operational Metrics
Slide 75: IRF Expense Metrics
75 Salaries and Benefits Hospital-Related Expenses Provision for Doubtful Accounts 48.6 20.8 1.2 47.9 20.7 1.1 48.3 20.7 1.3 49.4 20.9 1.7 49.4 20.6 1.9 • Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient volumes. ◦ Salaries and Benefits in 2016 w
Slide 76: Pre-Payment Claims Denials - Inpatient Rehabilitation
76 Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Impact to Balance Sheet Dec. 30, 2016 Dec. 31, 2015 Dec. 31, 2014 (In Millions) Pre-payment claims denials $ 159.7 $ 114.8 $ 59.3 Recorded reserves (47.9) (31.2) (22.8) Net accounts receivable from pre-payment claims denials $ 111.8 $
Slide 77: Inpatient Rehabilitation Operational and Labor Metrics
77 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 113-116 for end notes. Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 (
Slide 78: Home Health and Hospice Operational Metrics
78 Home Health and Hospice Operational Metrics Refer to pages 113-116 for end notes. Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 (In Millions) Net home health revenue $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 635.2 $ 478.1 Net hospice a
Slide 79: Payment Sources (Percent of Revenues)
79 Payment Sources (Percent of Revenues) Inpatient Rehabilitation Segment Home Health and Hospice Segment Consolidated Q4 Q4 Q4 Full Year 2016 2015 2016 2015 2016 2015 2016 2015 Medicare 73.3% 73.6% 84.3% 82.6% 75.3% 75.2% 75.2% 74.9% Medicare Advantage 7.8% 7.8% 8.7% 9.2% 8.0% 8.0% 7.9% 7.9% Manage
Slide 80: Industry Structure
80 Industry Structure
Slide 81: National Healthcare Spending
81 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 82: Medicare Spending
82 Source: Centers for Medicare & Medicaid Services, Medicare Trustee’s Report July 2016 – page 10 and MedPAC, December 8-9, 2016 Public Meeting slides Medicare 2015 Spending = $647.6 Billion $ 29.8B Skilled Nursing $141.7B Inpatient Hospital $70.3B Physician Payments $46.5B Outpatient Hospital $18.
Slide 83: Continuum of Healthcare Services
83 Continuum of Healthcare Services 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. Acute Medical treatment of diseases for which a pat
Slide 84: Post-Acute Care Services Comparison
84 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 ~2,300,000 ~3,500,000 Length of Stay 26.3 days 12.8 day
Slide 85: Medicare Spending on Post-Acute Services
85 $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 2014 Medicare Margin Projected 2016 Medicare Margin 12.5% 10.7% 10.8% 8.8% 12.5% 13.9% 4.9% 4.6% Skilled nursing facilities Home he
Slide 86: Different Levels of Services: Rehab Hospital vs Nursing Home
86 Different Levels of Services Rehab Hospital Nursing Home Average length of stay = 12.8 days Average length of stay = 40 days Discharge to community = 76.1% Discharge to community = 37.6% Requirements: Requirements: Rehab hospitals must also satisfy regulatory/policy requirements for hospitals, in
Slide 87: Supply of IRFs is Relatively Stable
87 Supply of IRFs is Relatively Stable Average Annual Change Share of Medicare DischargesType of IRF 2004 2006 2008 2010 2012 2013 2014 2006-2013 2013-2014 All IRFs 100% 1,221 1,225 1,202 1,179 1,166 1,161 1,177 -0.9% 1.4% Urban 93 1,024 1,018 1,001 981 973 977 1,013 -0.7 3.7 Rural 7 197 207 201 198
Slide 88: Inpatient Rehabilitation Sector Margins
88 Inpatient Rehabilitation Sector Margins Share of Medicare discharges Margins Type of IRF 2014 2004 2006 2008 2010 2011 2012 2013 2014 All IRFs 100% 16.7% 12.4% 9.3% 8.7% 9.7% 11.2% 11.6% 12.5% Urban 93 17.0 12.6 9.5 9.0 10.2 11.6 12.0 13.0 Rural 7 13.2 10.1 6.9 4.7 4.8 6.5 6.5 6.4 Freestanding 48
Slide 89: Inpatient Rehabilitation Standardized Comparison of Costs
89 Inpatient Rehabilitation Standardized Comparison of Costs Type of IRF Mean Adjusted Cost Per Discharge All IRFs $15,330 Hospital based 16,325 Freestanding 11,883 Nonprofit 16,565 For profit 13,044 Government 16,317 Urban 15,034 Rural 17,036 Number of beds 1 to 10 18,875 11 to 24 15,606 25 to 64 1
Slide 90: 60% Rule: Medicare Regulation for Rehabilitation Hospitals
90 “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 91: IRF Qualifying Conditions
91 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 92: Inpatient Rehabilitation Outlier Payments
92 Inpatient Rehabilitation Outlier Payments(10) # 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 $ — $ 120,926,079 $ 120,926,079 49.9% N/A $ 2,368 $ 2,368 80-90 — 113 113 $ — $ 45,316,0
Slide 93: Segment Operating Results
93 Segment Operating Results
Slide 94: Inpatient Rehabilitation Segment Adjusted EBITDA
94 Inpatient Rehabilitation Segment Adjusted EBITDA Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 Net operating revenues: (In Millions) Inpatient $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $2,905.5 $2,547.2 Outpatient and other 26.
Slide 95: Home Health and Hospice Segment Adjusted EBITDA
95 Home Health and Hospice Segment Adjusted EBITDA Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 Net operating revenues: (In Millions) Home health revenue $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 635.2 $ 478.1 Hospice revenue 1
Slide 96: Segment Operating Results Q4
96 Segment Operating Results Reconciliations to GAAP provided on pages 98-112. Q4 2016 Q4 2015 IRF Home Health and Hospice Reclasses HealthSouthConsolidated IRF Home Health and Hospice Reclasses HealthSouthConsolidated Net operating revenues $ 767.6 $ 182.3 $ — $ 949.9 $ 725.9 $ 153.4 $ — $ 879.3 Le
Slide 97: Segment Operating Results Full Year
97 Segment Operating Results Reconciliations to GAAP provided on pages 98-112. Year Ended December 31, 2016 Year Ended December 31, 2015 IRF Home Health and Hospice Reclasses HealthSouthConsolidated IRF Home Health and Hospice Reclasses HealthSouthConsolidated Net operating revenues $ 3,021.1 $ 686.
Slide 98: Reconciliations to GAAP and Share Information
98 Reconciliations to GAAP and Share Information
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
102 Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Full Year 2016 Full Year 2015 In Millions Total segment Adjusted EBITDA $ 225.6 $ 224.4 $ 230.1 $ 219.5 $ 216.4 $ 186.9 $ 189.5
Slide 103: Adjusted EPS - Q4 2016
103 Adjusted EPS(2) - Q4 2016 For the Three Months Ended December 31, 2016 Adjustments As Reported Mark-to- Market Adjustment for Stock Appreciation Rights Sale of Pediatric Home Health Assets and Hospital Income Tax Valuation and Other Adjustments As Adjusted (In Millions, Except Per Share Amounts)
Slide 104: Adjusted EPS - Q4 2015
104 For the Three Months Ended December 31, 2015 Adjustments As Reported Gov’t, Class Action, & Related Settlements Pro. Fees - Acct., Tax, & Legal Income Tax Valuation Allowance & Other Adj. Transaction Costs Loss on Early Exting. of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted
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) Q4 Full Year (Millions) 2016 2015 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 116.0 $ 116.6 $ 605.5 $ 484.8 $ 444.9 $ 470.3 $ 411.5 Impact of discontinued operations 0.1 (0.1) 0.7 0.7 1.2 1.9 (2.0) Net cash provided by operating activit
Slide 111: Net Cash from Operating Activities Reconciled to Adjusted EBITDA
111 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q4 Full Year (Millions) 2016 2015 2016 2015 2014 2013 2012 Net cash provided by operating activities $ 116.0 $ 116.6 $ 605.5 $ 484.8 $ 444.9 $ 470.3 $ 411.5 Provision for doubtful accounts (14.5) (14.0) (61.2) (47.2) (31.6)
Slide 112: Share Information
112 Share Information Refer to pages 113-116 for end notes. Weighted Average for the Period Q4 Full Year (Millions) 2016 2015 2016 2015 2014 Basic shares outstanding(4) 88.6 90.1 89.1 89.4 86.8 Convertible perpetual preferred stock(4) — — — 1.0 3.2 Convertible senior subordinated notes(28) 8.6 8.4 8
Slide 113: End Notes
113 End Notes
Slide 114: End Notes (1)-(7)
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 (8)-(19)
115 (8) Data compares HealthSouth hospitals to hospitals comprising the Uniform Data System for Medical Rehabilitation (“UDSMR”), a data gathering and analysis organization for the rehabilitation industry which represents approximately 70% of the industry, including HealthSouth sites. Data is adjust
Slide 116: End Notes (20)-(29)
116 (20) Pre-opening expenses include expenses for training new employees on the clinical information system, which vary based on the timing of the first admission. (21) CMS published an updated Bundled Payments for Care Episode analytic file in January 2017. Among other data, this file provided the