Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q4 2014 Earnings Presentation
107 slides from Encompass Health's earnings presentation, Mar 27, 2015
Slide 1: Post Q4 2014 Earnings Release Investor Reference Book
Post Q4 2014 Earnings Release INVESTOR REFERENCE BOOK Last updated March 27, 2015
Slide 2: Forward-Looking Statements
2 The information contained in this presentation includes certain estimates, projections and other forward- looking information that reflect our current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capital expenditures, developm
Slide 3: Table of Contents
3 Table of Contents Our Company ....................................................................................................................................... 4-20 Industry Structure ............................................................................................................
Slide 4: Inpatient Rehabilitation Portfolio and Home Health and Hospice
4 Refer to pages 103-107 for end notes. Inpatient Rehabilitation Portfolio - As of December 31, 2014 107 Inpatient Rehabilitation Hospitals (“IRF”) • 32 operate as JV’s with Acute Care Hospitals 25 Hospital-Based Home Health Agencies(2) 29 Number of States (plus Puerto Rico) ~ 24,100 Employees Key S
Slide 5: Our Hospitals (IRFs)
5 Our Hospitals (IRFs) Major Services • Rehabilitation Physicians: manage and treat medical needs of patients • Rehabilitation Nurses: oversee treatment programs of patients • Physical Therapists: address physical function, mobility, safety • Occupational Therapists: promote independence and re-inte
Slide 6: Our IRF Patients
6 Our IRF Patients Referral Sources: 93% Acute Care Hospitals 6% Physician Offices/Home 1% Skilled Nursing Facilities Census Data(4) - Population Growth by Age 5 Year CAGR Age 2015-2020 2020-2025 2025-2030 65 to 69 years 2.5% 2.1% 0.2% 70 to 74 years 5.3% 2.6% 2.2% 75 to 79 years 4.5% 5.4% 2.7% 80 t
Slide 7: Our IRF Quality
7 Our IRF Quality • Inpatient rehabilitation hospitals evaluate all patients at admission and upon discharge to determine their functional status. — FIM® is the tool for measuring functional independence. • The difference between the FIM® scores at admission and upon discharge is called the “FIM® Ga
Slide 8: Our IRF Cost Effectiveness
8 Total Inpatient Rehabilitation Facilities (IRFs): 1,142 Our IRF Cost Effectiveness(8) • The Avg. Est. Total Payment per Discharge has not been reduced by 2% for sequestration.(12) • Medicare pays HealthSouth less per discharge, on average, and HealthSouth treats a higher acuity patient. Avg. Beds
Slide 9: Our IRF Payors (Q4 2014)
9 Workers’ Comp/ Patients/Other Our IRF Payors (Q4 2014) Medicaid- 2.0% Varies by state Prospective Payment System (“PPS”) - Payments based on Case Mix Groups (“CMGs”) • Diagnosis of patient’s treatment - Fixed payment per CMG adjusted for: • Acuity/severity • Regional wage differential • Patient ou
Slide 10: Same-Store HealthSouth vs. Industry
10 Same-Store HealthSouth vs. Industry 3.3% 2.9% 2.5% 1.3% 2.3% 0.0% (0.7)% (0.2)% Our IRF Discharge Growth vs. Industry ▪ Medicare Enrollment (Age 65+) is growing at approx. 3% per year. ▪ TeamWorks = standardized and enhanced sales & marketing ▪ Bed additions to existing facilities will enhance or
Slide 11: Our IRF New-Store/Same-Store Growth
11 10.0 8.0 6.0 4.0 2.0 0.0 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Our IRF New-Store/Same-Store Growth HealthSouth's IRF volume growth is driven by bed expansions and new IRFs. Q4 2010 Q1 2011 Q2 2011 Q3
Slide 12: Our Track Record
12 Adjusted EBITDA* Revenue 2010 2011 2012 2013 2014 $1,878 $2,027 $2,162 $2,273 $2,406 2010 2011 2012 2013 2014 $410 $466 $506 $552 $578 Discharge Volume 2010 2011 2012 2013 2014 112,514 118,354 123,854 129,988 134,515 Income from Continuing Operations Attributable to HealthSouth 2010 2011 2012 201
Slide 13: Our Track Record (con't)
13 2010 2011 2012 2013 2014 $181 $243 $268 $331 $311 $119 $97 Our Track Record (con’t) 2010 2011 2012 2013 2014 $1.51 $1.25 $1.25 $1.52 $2.13 (billions) Leverage Ratio(19) Total Debt (millions) Adjusted Free Cash Flow* Cash Interest Expense(20) 3.7x 3.7x * Reconciliation to GAAP provided on page 60.
Slide 14: Our IRF Assets
14 Our IRF Assets 107 Inpatient Rehabilitation Hospitals: 7,095 Licensed Beds(21) 27 Lease Building and Land A Certificate of Need (CON) is a legal document required in many states and some federal jurisdictions before proposed acquisitions, expansions, or creations of facilities are allowed. 3,634
Slide 15: Our IRF Joint Venture Partnerships
15 Our IRF Joint Venture Partnerships 1 Equity Method Joint Venture Hospital 31 Consolidated Joint Venture Hospitals 75 Consolidated 100% Ownership 32 joint venture hospitals in place include major healthcare systems: • Barnes-Jewish • University of Virginia Medical Center • Vanderbilt University •
Slide 16: Our Home Health & Hospice
16 Our Home Health & Hospice: Completed Acquisition December 31, 2014 • 5th largest provider of Medicare-focused (83% Medicare) skilled home health services in the U.S. with 135 locations across 12 states • Approx. 4,900 employees making over 2.1 million total patient visits annually • Approx. reven
Slide 17: Our Home-Based Services: Home Health and Hospice
17 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 2013 HH National Avg. 17.2% 15.8% 17.3% 17.0% 16.8% 15.5% 15.6% 14.9% 15.6% 15.6% 15.9% 15.2% 18.6% Our Home-Based Services: Home Health and Hospice Home-Based Services • Skilled Nursing: performed by
Slide 18: HealthSouth and Encompass Market Overlap
18 Approx. 54%, or approx. 72,300(23), of HealthSouth's discharges went to home health in 2014. 55% of Encompass' locations overlap with 30% of HealthSouth's hospitals. ~72,300 Discharges to Home Health HealthSouth 70% non-overlap Encompass 45% non-overlap ~21,700 Discharges to Home Health HealthSou
Slide 19: Future Growth: Coordinated Care Delivery Models
19 Future Growth: Coordinated Care Delivery Models Commitment to coordinated care is enhanced by utilization of technology: • Electronic clinical information system in 58 hospitals as of YE 2014; capable of interfacing with all major acute care EMR systems • Homecare Homebase (HCHB) leading home car
Slide 20: Our Strong and Sustainable Business Fundamentals
20 Our Strong and Sustainable Business Fundamentals • Focused labor management • Continued improvements in supply chain • Significant operating leverage of G&A and occupancy expenses Cost-Effectiveness Financial Strength • Strong balance sheet; ample liquidity, no near-term maturities • Minimal cash
Slide 21: Industry Structure
21 Industry Structure
Slide 22: Overall Healthcare Spending
22 Overall Healthcare Spending Hospital Care Includes Inpatient Rehabilitation, Long-Term Care Hospitals $151.5 $777.9 $148.2 $79.8 $370.0 Nursing Care Facilities and Continuing Care Retirement Communities Professional Services Other Health, Residential and Personal Care Home Health Care Retail of M
Slide 23: Medicare 2013 Spending
23 Medicare 2013 Spending = $582.9 Billion $ 28.4B Skilled Nursing $136.8B Inpatient Hospital(27) $68.6B Physician Payments $41.8B Outpatient Hospital $18.4B Home Health $69.3B Other Services(28) $145.9B Medicare Managed Care $69.3B Outpatient Rx $6.8B (1%) Inpatient Rehabilitation Hospitals (Includ
Slide 24: Continuum of Healthcare Services
24 Continuum of Healthcare Services Preventive Routine health care that includes screenings, check-ups, and patient counseling to prevent illnesses, disease, or other health problems Ambulatory Medical care delivered on an outpatient basis. e.g., blood tests, X-rays, endoscopy, certain biopsies, cer
Slide 25: Medicare Spending on Post-Acute Services
25 $35 $30 $25 $20 $15 $10 $5 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Medicare Spending on Post-Acute Services Post-Acute Settings 2013 Medicare Margin Projected 2015 Medicare Margin Sources: (1) 13.1% 10.5% 12.7% 10.3% 11.4% 12.6% 6.6% 4.6% Skilled nursing facilities Hom
Slide 26: Geographic Distribution of IRFs, 2012
26 Geographic Distribution of IRFs, 2012 Source: MedPAC Report to Congress, Medicare Payment Policy, March 2014 – page 243
Slide 27: Supply of IRFs Remained Stable
27 Supply of IRFs Remained Stable Average Annual Change Share of Medicare DischargesType of IRF 2004 2006 2008 2010 2012 2013 2006-2012 2012-2013 All IRFs 100% 1,221 1,225 1,202 1,179 1,166 1,161 -0.8% -0.4% Urban 92 1,024 1,018 1,001 981 973 977 -0.8 0.4 Rural 8 197 207 201 198 193 184 -1.2 -4.7 Fr
Slide 28: Inpatient Rehabilitation Sector Margins
28 Inpatient Rehabilitation Sector Margins Share of Medicare discharges Margins Type of IRF 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 All IRFs 100% 16.7% 13.4% 12.3% 11.8% 9.3% 8.4% 8.7% 9.9% 11.3% 11.4% Urban 92 17.0 13.6 12.6 12.0 9.5 8.7 9.0 10.3 11.7 11.8 Rural 8 13.2 11.1 10.1 9.5
Slide 29: Inpatient Rehabilitation Standardized Comparison of Costs
29 Inpatient Rehabilitation Standardized Comparison of Costs Type of IRF Mean Adjusted Cost Per Discharge All IRFs $16,517 Hospital based 17,627 Freestanding 12,474 Nonprofit 17,233 For profit 14,632 Government 18,740 Urban 15,969 Rural 19,431 Number of beds 1 to 10 20,173 11 to 21 17,676 22 to 59 1
Slide 30: Post-Acute Care Setting Readmission Rates
30 Post-Acute Care ("PAC") Setting Percent Discharged from Hospital to PAC Setting Percent Rehospitalized after Using PAC Setting Percent Died in PAC Setting Skilled Nursing Facility 17.3% 22.0% 5.4% Home Health 16.0% 18.1% 0.8% Long-Term Care Hospital 1.0% 10.0% 15.5% Inpatient Rehabilitation 3.2%
Slide 31: 60% Rule: Medicare Regulation for Rehabilitation Hospitals
31 “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 32: IRF Qualifying Conditions
32 Inpatient Rehabilitation Hospital (IRF): Qualifying Conditions 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 10. Osteoarthritis (after less intensive setting) 11. Rheumatoid arthritis (a
Slide 33: Inpatient Rehabilitation Outlier Payments
33 Inpatient Rehabilitation Outlier Payments(8) # of Hospitals Total Outlier Payments Avg Outlier Payment per Discharge Hospital Deciles HLS Non- HLS Total HLS Non-HLS Total % HLS Non-HLS Total 90-100 — 114 114 $ — $ 114,351,232 $ 114,351,232 50.9% N/A $ 2,459 $ 2,459 80-90 — 114 114 $ — $ 41,028,15
Slide 34: IRF-PPS Fiscal Year 2015 Final Rule: Key Provisions
34 IRF-PPS Fiscal Year 2015 Final Rule: Key Provisions Source: http://www.gpo.gov/fdsys/pkg/FR-2014-08-06/pdf/2014-18447.pdf Refer to pages 103-107 for end notes. The final rule: • Will implement a net 2.2% market basket increase – 2.9% market basket increase – (20 bps) Affordable Care Act reduction
Slide 35: IMPACT Act of 2014
35 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 36: Different Levels of Services: Rehab Hospital vs. Nursing Home
36 Different Levels of Services Rehab Hospital Nursing Home Average length of stay(30) = 12.9 days Covered days per admission(30) = 27.6 days Discharge to community(30) = 75.9% Discharge to community(30) = 37.5% Requirements: Requirements: Rehab hospitals must also satisfy regulatory/policy requirem
Slide 37: CMS: Inpatient Rehabilitation vs. Skilled Nursing
37 CMS: Inpatient Rehabilitation vs. Skilled Nursing “… MedPAC’s analysis of recent quality measure data related to rehospitalizations suggests that quality of care within SNFs has not been improving … Since 2000, one outcome measure (the risk- adjusted rate of rehospitalization for any of five care
Slide 38: Specific Post-Acute Regulatory Changes
38 Specific Post-Acute Regulatory Changes Future Regulatory Risk Inpatient Rehabilitation Facility Skilled Nursing Facility Long-Term Acute Care Hospital Home Health Hospice 1. Re-basing payment system No Yes; Rebased in FY 2012 (-12.6%) Starting in FY 2016, LTCHs will be paid “site- neutral payment
Slide 39: Future Regulatory Risk
39 Future Regulatory Risk Inpatient Rehabilitation Facility Skilled Nursing Facility Long-Term Acute Care Hospital Home Health Hospice 6. Other Changes to ICD-9-CM Codes under Presumptive testing for compliance review periods beginning on or after Oct.1, 2015; PAI changes to record mode/minutes of t
Slide 40: Historical Perspective
40 Historical Perspective
Slide 41: Historical Perspective: Massive Restructuring Effort 2004 to 2008
41 Historical Perspective: Massive Restructuring Effort 2004 thru early 2008 December 2004 June 2005 December 2005 June 2006 December 2006 June 2007 December 2007 Received Tax Recovery ($440M) June 2008 Reached DOJ/ CMS Settlement ($325M) Filed 2000-2003 Form 10-K Completed Senior Notes Offering ($1
Slide 42: Historical Perspective 2010-2011
42 Historical Perspective 2010 2011 2012 2013 2014 $410 $466 $506 $552 $578 Adjusted EBITDA* * Reconcilliation to GAAP provided on slides 61 and 97-100. Refer to pages 103-107 for end notes. • Grew volumes 5.2% • Sold five long-term acute care hospitals (LTCHs); closed remaining LTCH • Raised $122 m
Slide 43: Historical Perspective: 2012
43 $200 $150 $100 $50 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Historical Perspective YOY Growth 8.5 % (millions) 2012 Adjusted EBITDA* = $505.9 2012: Focused on Accelerating Organic Growth and Deployment of Free Cash Flow • Established 2012 – 2014 business model(31) — 2.5-3.5% di
Slide 44: Historical Perspective: 2013
44 $200 $150 $100 $50 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Historical Perspective YOY Growth 9.0 % (millions) 2012 Adjusted EBITDA* = $505.9 2013 Adjusted EBITDA* = $551.6 2013: Focus on Growth and Shareholder Value • Established 2013 – 2015 business model(32) — 2.5-3.5% disch
Slide 45: Historical Perspective: 2014
45 $200 $150 $100 $50 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Historical Perspective YOY Growth 4.7 % (millions) 2012 Adjusted EBITDA* = $505.9 2013 Adjusted EBITDA* = $551.6 2014 Adjusted EBITDA* = $577.6 2014: Focus on Growth and Shareholder Value • Established 2014 – 2016 busi
Slide 46: Managed Through Medicare Payment Cuts and Recession
46 HealthSouth has successfully managed through Medicare payment cuts and an economic recession… Recession Adjusted EBITDA ($millions) Discharges Sequestration Anniversaried Sequestration Began Medicare Price Rollback & 18-Month Freeze MMSEA (Final Establishment of 60% rule) 1st Medicare IRF Price I
Slide 47: Revenues & Expenses
47 Revenues & Expenses Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full-Year Revenues (millions) 2014 2014 2014 2014 2013 2013 2013 2013 2014 2013 2012 Inpatient $ 580.9 $ 563.7 $ 569.7 $ 558.2 $ 537.5 $ 528.8 $ 527.4 $ 537.1 $ 2,272.5 $ 2,130.8 $ 2,012.6 Outpatient and other 32.5 33.2 34.7 33.0 34.6 35.2 37.1 35.5 133
Slide 48: Adjusted EBITDA History
48 Adjusted EBITDA History* Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full-Year (Millions) 2014 2014 2014 2014 2013 2013 2013 2013 2014 2013 2012 Net operating revenues $ 613.4 $ 596.9 $ 604.4 $ 591.2 $ 572.1 $ 564.0 $ 564.5 $ 572.6 $2,405.9 $ 2,273.2 $ 2,161.9 Less: Provision for doubtful accounts (6.6) (8.2) (9.3)
Slide 49: Outstanding Share Summary, Warrant Information, Conversion Price
49 Outstanding Share Summary, Warrant Information, Conversion Price Weighted Average for the Period Q4 Full-Year (Millions) 2014 2013 2014 2013 2012 2011 2010 Basic shares outstanding(35)(37)(38) 86.6 86.4 86.8 88.1 94.6 93.3 92.8 Diluted shares outstanding(35)(36)(37)(38) 100.8 100.8 100.7 102.1 10
Slide 50: Business Outlook 2015 to 2017
50 Business Outlook 2015 to 2017 (as of March 27, 2015)
Slide 51: Key Operational Initiatives and Business Outlook 2015 to 2017
51 Key Operational Initiatives Shareholder Distributions Core Growth Opportunistic Growth 2015 2016 2017 • Quarterly cash dividends • Opportunistic repurchases ($207 million authorization remaining as of December 31, 2014) • Target Leverage < 3.0x (subject to shareholder value-creating opportunities
Slide 52: Volume and Pricing Assumptions
52 2% Sequestration( ) • 10% to15% annual episode growth • Includes $35-$40 million per annum in agency acquisitions Volume Inpatient Rehabilitation Home Health & Hospice Medicare Pricing Inpatient Rehabilitation Approx. 74% of Revenue Home Health & Hospice Approx. 83% of Revenue FY 2015(41) Q414-Q3
Slide 53: Business Outlook: Labor and Other Expense Assumptions
53 Inpatient Rehabilitation Home Health and Hospice Business Outlook: Labor and Other Expense Assumptions Salaries & Benefits ~70% Hospital Expenses ~30% Salaries and Benefits 2015 2016 2017 Merit increases 2.25-2.75% 2.5-3.0% 2.5-3.0% Benefit costs 5-8% 5-8% 5-8% Hospital Expenses • Other operating
Slide 54: Guidance
54 Guidance (as of March 27, 2015)
Slide 55: 2015 Guidance - Adjusted EBITDA
55 2015 Guidance - Adjusted EBITDA* Ÿ Inpatient rehabilitation segment considerations for 2015: ― Revenue growth between 5.9% and 7.3% ― Discharge growth between 3.5% and 4.5% ― Revenue per discharge growth between 2.3% and 2.6% ― Bad debt expense of approx. 1.5% Ÿ Home health and hospice segment co
Slide 56: 2015 Guidance - EPS
56 2015 Guidance - EPS Considerations: Ÿ Higher depreciation and amortization related to recent capital investments Ÿ Higher interest expense and amortization of debt discounts and fees related to the increased debt for the Encompass acquisition Ÿ Assumes provision for income tax of approx. 40% (cas
Slide 57: Free Cash Flow
57 Free Cash Flow
Slide 58: Adjusted Free Cash Flow and Tax Assumptions
58 Adjusted Free Cash Flow* and Tax Assumptions Certain Cash Flow Items(47) (millions) 2015 Assumptions 2014 Actual 2013 Actual • Cash interest expense(20) $106 to $111 $96.5 $95.4 • Cash payments for taxes, net of refunds $15 to $20 $16.4 $7.7 • Working Capital and Other(48) $40 to $50 $55.0 $19.6
Slide 59: Priorities for Reinvesting Free Cash Flow
59 Priorities for Reinvesting Free Cash Flow Opportunity «« Remain s Highest Priorit y 2015 2014 2013 Assumptions Actuals Actuals IRF bed expansions $30 to $40 $23.6 $24.9 New IRF's - De novos 40 to 60 53.7 26.6 - Acquisitions TBD 20.2 28.9 New home health and hospice acquisitions 30 to 40 674.6(50)
Slide 60: Adjusted Free Cash Flow History
60 Adjusted Free Cash Flow History(47) Q4 Full-Year (Millions) 2014 2013 2014 2013 2012 2011 2010 Net cash provided by operating activities $ 70.2 $ 100.9 $ 444.9 $ 470.3 $ 411.5 $ 342.7 $ 331.0 Impact of discontinued operations 0.2 0.5 1.2 1.9 (2.0) (9.1) (13.2) Net cash provided by operating activ
Slide 61: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
61 Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q4 Full-Year (Millions) 2014 2013 2014 2013 2012 2011 2010 Net cash provided by operating activities $ 70.2 $ 100.9 $ 444.9 $ 470.3 $ 411.5 $ 342.7 $ 331.0 Provision for doubtful accounts (6.6) (3.6) (31.6) (26.0) (27.0) (21.
Slide 62: Refinancing and Delevering
62 Refinancing and Delevering
Slide 63: Debt Maturity Profile
63 2015 2018 2019 2019 2020 2021 2022 2023 2024 2043 $850 Senior Notes 5.75% $320 Conv. Sr. Sub. Notes(36) 2.0% $226 Senior Notes 7.75% $175 Drawn + $32 LC Holders have a put option in 2020 December 31, 2014 Pro forma for Issuances and Repayments(52)(55) Debt Maturity Profile - Face Value HealthSout
Slide 64: Debt and Liquidity, Credit Ratings
64 S&P Moodys Corporate Rating BB- Ba3 Stable Stable Revolver Rating BB+ Baa3 Senior Notes Rating BB- Ba3 Debt and Liquidity (1) Liquidity Credit Ratings 2010 2011 2012 2013 2014 Pro Forma $1.51 $1.25 $1.25 $1.52 $2.13 $2.15 (billions) Leverage Ratio(19) Total Debt 3.7x 3.7x Pro Forma(52) Dec. 31, 2
Slide 65: Debt Schedule
65 Debt Schedule Credit Rating Dec. 31, 2014 Pro forma Pro Forma Change in S&P Moody for Issuances and Dec. 31, Dec. 31, Debt vs. (Millions) Corporate BB- Ba3 Repayments(52) 2014 2013 YE 2013 Advances under $600 million revolving credit facility, September 2019 - LIBOR +175bps(51)(52) BB+ Baa3 $ 175
Slide 66: Credit Agreement Key Covenants
66 Credit Agreement Key Covenants(57) All transactions are subject to no defaults under covenants and pro forma leverage of less than 4.25x and interest coverage of at least 3.00x. Transaction Limitations Acquisitions No additional limitations Unsecured debt issuance No additional limitations Restri
Slide 67: Growth
67 Growth
Slide 68: Organic IRF Growth: A Strategic Framework
68 Organic IRF Growth: A Strategic Framework Bottoms-up approach to HealthSouth’s growth projections Market Dynamics • Existing IRF beds • Managed care penetration • Competition Sales and Marketing Strategies • Defining “upstream” opportunities • Identifying CMS-13 discharges • “Converting” CMS-13 p
Slide 69: Organic IRF Growth: Compounded Annual Growth Rate
69 Organic IRF Growth: Compounded Annual Growth Rate (CAGR) Weighted for "Rehab Services"- methodology weights growth in rehab age groups higher. % CAGR Weighted for Rehab Services Treasure Coast Primary 2.64% Treasure Coast SSA – Glades 1.47% Treasure Coast SSA – Martin 2.92% Okeechobee 2.34% Treas
Slide 70: New IRFs: De Novo Market Selection Process
70 New IRFs: De Novo Market Selection Process Active Development List Corporate Assessment Strategic Approach • Build • Buy • JV Regional President Priority Assessment “Deep Dive” Market Assessments Potential Opportunity List (160 opportunities identified) • Population and Demographics • IRF Convers
Slide 71: New IRFs: De Novo Evaluation Process
71 New IRFs: De Novo Evaluation Process Market Selection CON Approval • No guarantee on timeframe or ultimate success Site Selection • Input from design, operations and real estate • ~ Seven acres for initial construction and future expansion • Proximity to acute-care providers Cost Assessment • Per
Slide 72: New IRFs: Illustrative De Novo Timeline
72 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 73: Investment Considerations
73 Investment Considerations • Cash Payback(59) = 5 to 7 years • Inclusive of CON costs (where applicable) • Includes cost of CIS installation • May be structured as a joint venture • Prototype includes all private rooms • A minimum of 30 patients treated for zero revenue (Medicare certification) •
Slide 74: IRF De Novo Occupancy and EBITDA Trends
74 Cypress Ocala Littleton Stuart Altamonte Springs Johnson City Newnan Middletown HLS Avg. 2014 Occupancy 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(61) Trends Occupancy Sustained Positive EBITDA Range Refer to pages 103-107 for en
Slide 75: New IRFs: Acquisition Assumptions, Timing and Performance
75 New IRFs: Acquisition Assumptions, Timing and Performance Unit/Equity Acquisitions Location Beds Date Acquired 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 76: New Home Health and Hospice Acquisitions
76 New Home Health and Hospice Acquisitions Acquisitions Revenue Acquired 9 8 7 6 5 4 3 2 1 Ac qu is iti on s Pe rY ea r( 63 ) 60 50 40 30 20 10 0 R ev en ue Ac qu ire d Pe rY ea r 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2 7 3 3 3 2 3 6 8 5 Investment Considerations Value Added by Encompas
Slide 77: Potential Expansion: Post-Acute Care Services
77 Potential Expansion: Post-Acute Care Services Acute Care Hospital Home HealthHospice Long-Term Acute Care Hospital Inpatient Rehabilitation Facility Skilled Nursing Facility Discharge Medicare Spending (billions) $5.5 $15.1 $6.8 $28.8 $17.9 # of Discharges 138,000 1,300,000 373,000 2,365,743 3,50
Slide 78: Summary: Multiple Avenues Available for Sustained Growth
78 Summary: Multiple Avenues Available for Sustained Growth • The Company continues to have excellent organic growth opportunities, including bed expansions and unit consolidations. — Nondiscretionary nature of many conditions served — Track record of consistent market share gains • Organic growth w
Slide 79: Operational Initiatives
79 Operational Initiatives
Slide 80: Operational Strategy
80 Operational Strategy Excellence in … • Care Management TeamWorks project • Identify trends and establish “best practices” for the prevention of acute care transfers • Provide a robust rehabilitation specific clinical education program for nurses and therapists • BEACON management reporting system
Slide 81: CIS Standardization Improves Patient Safety and Operational Efficiencies
81 CIS Standardization Improves Patient Safety and Streamlines 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 •Treatment and Interventions
Slide 82: CIS Benefits and Value Proposition
82 CIS Benefits and Value Proposition Operational Efficiencies Cost-Effectiveness • Automated medication administration at the point of care • Clinical data repository (reporting and outcomes) • Real time patient condition awareness • Rule driven identification of preventable adverse medical events
Slide 83: CIS Timeline
83 • Installed ACE IT in HealthSouth Rehabilitation Hospital of Northern VA hospital • Pilot project kickoff in August; designated “ACE IT” • Core team assembled; pilot hospitals identified • Cerner selected for pilot • Signed contract with Cerner for Company-wide implementation starting in 2012 • I
Slide 84: CIS Cost
84 CIS Cost • No incentive payments (i.e. “HITECH”) for inpatient rehabilitation hospitals(64) — Only acute care hospitals are eligible • Installation cost will vary by hospital depending on items such as size and physical plan. — Installation cost in a range of $1 million to $1.5 million per hospit
Slide 85: TeamWorks: Care Management
85 TeamWorks: Care Management Goals • Improve operational effectiveness, patient satisfaction, and quality outcomes • Engage interdisciplinary teams • Reduce: — Complication rates — Cost per case — Payor denials • Increase: — Quality outcomes — Patient involvement in care decisions • Standardize “Ca
Slide 86: CPR: Comfort, Professionalism, Respect
86 CPR: Comfort, Professionalism, Respect • All employees trained in the CPR campaign • Hospital-based trained facilitators work directly with employees. • A series of short videos is used to depict common scenarios of patient/staff situations. • Facilitator training is highly interactive, encouragi
Slide 87: HealthSouth Management Reporting
HEALTHSOUTH MANAGEMENT REPORTING
Slide 88: BEACON: Management Reporting
88 BEACON: Management Reporting(65) Beacon - “Proprietary Operation Management Tool” ü Provides regional and hospital leadership near real-time data to run the business ü Benchmarking – side-by-side hospital comparison to promote best practices ü Quality • Key care indicators • Patient satisfaction
Slide 89: BEACON: SmartSystem Analytics
89 BEACON: SmartSystem Analytics ü Standardized best practices and purchasing ü Optimize vendor relationships through Electronic Data Interchange (EDI) and vendor consolidation ü National procurement contracts awarded through standardized RFP processes ü Leverage scale to receive competitive terms a
Slide 90: Operational Initiatives: SmartSystem
90 Operational Initiatives: SmartSystem Completed initiatives: • Dialysis • Food • Pharmacy • Office Supplies • Outside patient service • Therapy equipment Supply Cost per Discharge 2010 2011 2012 2013 2014 $883 $869 $827 $811 $832 5.3% 5.1% 4.7% 4.6% 4.7% Supplies as a percent of Revenue • Discipli
Slide 91: Operational Metrics
91 Operational Metrics
Slide 92: Expense Metrics as Percent of Revenue
92 Salaries and Benefits Hospital-related expenses General & Administrative Provision for Doubtful Accounts 49.1 22.0 4.8 0.9 48.4 21.5 4.5 1.0 48.6 20.8 4.3 1.2 47.9 20.7 4.1 1.1 48.3 20.7 3.8 1.3 • Salaries and Benefits reflects continued improvement from productivity gains and growing revenue bas
Slide 93: Operational and Labor Metrics
93 Operational and Labor Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full-Year 2014 2014 2014 2014 2013 2013 2013 2013 2014 2013 2012 (In Millions) Net patient revenue-inpatient $ 580.9 $ 563.7 $ 569.7 $ 558.2 $ 537.5 $ 528.8 $ 527.4 $ 537.1 $ 2,272.5 $ 2,130.8 $ 2,012.6 Net patient revenue-outpatient and other
Slide 94: Payment Sources (Percent of Revenues)
94 Payment Sources (Percent of Revenues) Q4 Full-Year 2014 2013 2014 2013 2012 Medicare 73.9% 74.7% 74.1% 74.5% 73.4% Medicaid 2.0% 1.2% 1.8% 1.2% 1.2% Workers' compensation 1.1% 1.2% 1.2% 1.2% 1.5% Managed care and other discount plans, including Medicare Advantage which represents approx. 8% of to
Slide 95: Encompass Operational Metrics
95 Medicare: 83% Medicaid: 7% Medicare Advantage, commercial, and other: 10% 2013 2014 39,350 49,032 Encompass Operational Metrics 2013 2014 $302 $369 Revenue Payor Mix (% 2014 Revenues) Home Health Home Health Hospice Admissions Total Episodes Daily Census 2013 2014 80,594 98,461 Visits per Episode
Slide 96: Reconciliations to GAAP
96 Reconciliations to GAAP
Slide 97: Reconciliation of Net Income to Adjusted EBITDA 2014
97 Reconciliation of Net Income to Adjusted EBITDA(68) 2014 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 $ 61.5 $ 97.9 $ 64.8 $ 57.5 281.7 Loss (income) from disc ops, net of tax, attributable to
Slide 98: Reconciliation of Net Income to Adjusted EBITDA 2013
98 Reconciliation of Net Income to Adjusted EBITDA(68) 2013 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 $ 65.9 $ 179.0 $ 72.3 $ 64.2 $ 381.4 Loss (income) from disc ops, net of tax, attributable
Slide 99: Reconciliation of Net Income to Adjusted EBITDA 2012
99 Reconciliation of Net Income to Adjusted EBITDA(68) 2012 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 $ 56.8 $ 59.9 $ 59.9 $ 59.3 $ 235.9 Loss (income) from disc ops, net of tax, attributable
Slide 100: Reconciliation of Net Income to Adjusted EBITDA 2010-2011
100 Reconciliation of Net Income to Adjusted EBITDA(68) 2010 2011 (in millions, except per share data) Total Per Share Total Per Share Net income $ 939.8 $ 254.6 Income from disc ops, net of tax, attributable to HealthSouth (9.2) (49.9) Net income attributable to noncontrolling interests (40.8) (45.
Slide 101: Impact of Consolidation of Fairlawn Rehabilitation Hospital
101 Reconciliation of Net Income to Adjusted EBITDA(68) - Impact of Consolidation of Fairlawn Rehabilitation Hospital(15) Fairlawn Rehabilitation Hospital as Consolidated Entity Fairlawn Rehabilitation Hospital as Equity Method Entity Fairlawn Rehabilitation Hospital as Consolidated Entity Fairlawn
Slide 102: Fairlawn Consolidation Operating Metrics
102 Refer to pages 103-107 for end notes. Fairlawn Rehabilitation Hospital as Consolidated Entity Fairlawn Rehabilitation Hospital as Equity Method Entity Fairlawn Rehabilitation Hospital as Consolidated Entity Fairlawn Rehabilitation Hospital as Equity Method Entity Q4 2014 As Reported Q4 2014 With
Slide 103: End Notes
103 End Notes (1) HealthSouth completed the acquisition of Encompass Home Health and Hospice on December 31, 2014. (2) Beginning in Q1 2015, HealthSouth's legacy 25 home health agencies will be included in the home health and hospice segment. The 2014 results for these agencies will be recast and re
Slide 104: End Notes, con't.
104 End Notes, con't. (15) 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 f
Slide 105: End Notes, con't.
105 End Notes, con't. (36) The difference between the basic and diluted shares outstanding is primarily related to the convertible senior subordinated notes and our convertible perpetual preferred stock (convertible into 8.2 million and 3.2 million common shares, respectively, as of December 31, 201
Slide 106: End Notes, con't.
106 End Notes, con't. (47) Definition of adjusted free cash flow is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and nonrecurring items. Common stock divide
Slide 107: End Notes, con't.
107 (64) The American Recovery and Reinvestment Act of 2009 (Pub. L. 111–5) provides incentive payments to eligible professionals, eligible hospitals, and critical access hospitals participating in Medicare and Medicaid programs that adopt and successfully demonstrate professional, eligible “meaning