Encompass Health Corporation · NYSE:EHC
Encompass Health — Investor Presentation (January 2020)
119 slides from Encompass Health's investor presentation, Jan 13, 2020
Slide 1: Investor Reference Book Post Q3 2019 earnings release
Investor Reference Book Post Q3 2019 earnings release Last updated January 13, 2020 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 hospit
Slide 2: Forward-looking statements
Forward-looking statements The information contained in this Investor Reference Book includes certain estimates, projections and other forward- looking information that reflect Encompass Health’s current outlook, views and plans with respect to future events, including legislative and regulatory dev
Slide 3: Table of contents
Table of contents Company overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-17 Investment thesis and strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-23 Business outlook, including guidance. . . . .
Slide 4: Company overview
Company overview Encompass Health is a national leader in integrated healthcare services offering both facility-based and home-based patient care through its network of inpatient rehabilitation hospitals, home health agencies, and hospice agencies. The Company is committed to delivering high-quality
Slide 5: Leading provider of inpatient rehabilitation and home-based care
Encompass Health a leading provider of inpatient rehabilitation and home-based care Market overlap 89 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio as of December 31, 2019 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 8 Futur
Slide 6: Company overview: inpatient rehabilitation hospitals
Company overview inpatient rehabilitation 123 of the Company’s IRFs hold one or more disease-specific Inpatient rehabilitation certifications from The Joint Commission’s Disease-Specific hospitals Care Certification Program.(1) Major services • Rehabilitation physicians: manage and treat medical con
Slide 7: Company overview: home health and hospice
Company overview home health and hospice The Company offers evidence-based specialty programs Home health agencies related to: post-operative care, fall prevention, chronic disease management, and transitional care. Major services • Skilled nurses: comprehensively assess, teach, train, and manage ca
Slide 8: IRF and home health patient mix
IRF patient mix Home health patient mix Admission sources: Admission sources: Acute care hospitals – 90% Acute care hospitals – 36% Physician offices / community – 8% Physician offices / community – 37% Skilled nursing facilities – 2% IRFs / LTCHs / SNFs – 27% YTD Demographics of all Medicare home h
Slide 9: High-quality care
High-quality care IRF quality Home health quality Discharge to community 3.9 Percent of cases 79.9% 80.3% 79.4% 78.8% discharged to Quality of care (3) 76.7% the community, Star ratings 76.0% including home 3.3 98% of our home health agencies or home with are 3 Stars or higher; home health. Higher i
Slide 10: Leading position in cost effectiveness: inpatient rehabilitation
Leading position in cost effectiveness inpatient rehabilitation Avg. est. Avg. est. total Avg. total cost payment Medicare pays Avg. Medicare Case per per Encompass Health beds discharges mix discharge discharge less per discharge, # per IRF per IRF(5) index(6) for FY 2019 for FY 2019 on average, an
Slide 11: Low cost leader: home health
Low cost leader home health Average revenue per episode is 3.5% Average Average Average revenue higher than the peer 2018 revenue visits per visit Cost average primarily Episodes per episode per episode (all payors) per visit due to higher acuity Encompass patient mix. Health 243,698 $2,968 17.6 $16
Slide 12: New-store/same-store growth: Inpatient Rehabilitation
New-store/same-store growth Inpatient Rehabilitation 25.0 20.0 Yuma, AZ (51 beds)* Shelby County, AL (34 beds) Boise, ID (40 beds) Bluffton, SC (38 beds) Gulfport, MS (33 beds) Katy, TX (40 beds) 15.0 Westerville, OH (60 beds) Murrells Inlet, Lubbock, TX Pearland, TX SC (29 beds) 10.0 (40 beds) (40
Slide 13: New-store/same-store growth: Home Health
New-store/same-store growth Home Health Acquired Alacare Home Health & Hospice 30.0 (23 home health locations in Alabama) in July 2019 25.0 Acquired Camellia Healthcare (14 home health locations in 3 states) 20.0 in May 2018 15.0 10.0 5.0 0.0 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q
Slide 14: New-store/same-store growth: Hospice
New-store/same-store growth Hospice Acquired Camellia Healthcare (18 hospice locations in 3 states) Acquired Alacare Home Health & Hospice in May 2018 (23 hospice locations in Alabama) 60.0 in July 2019 40.0 20.0 0.0 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3
Slide 15: Payors (Q3 2019)
Payors (Q3 2019) Payor source % of Revenues Payment methodology Prospective Payment System (“PPS”) - IRF: paid per discharge by Case Mix Group (“CMG”) Home - Home health: paid per 60-day episode of care by Medicare Inpatient Home Health Resource Group health & rehab • An episode is paid in two insta
Slide 16: Strong and sustainable business fundamentals
Strong and sustainable business fundamentals Ÿ Favorable demographic trends driving increasing demand Ÿ Attractive healthcare sectors Nondiscretionary nature of many conditions treated Ÿ Highly fragmented post-acute sectors present acquisition and joint venture opportunities Ÿ Largest provider of in
Slide 17: Proven track record
Proven track record Period Adjusted EBITDA % change history ending R MMSEA* final Q1-09 We have successfully managed E establishment Q2-09 C Q3-09 of IRF 60% Rule through an economic recession, Q4-09 E Q1-10 S regulatory changes, sequestration, Q2-10 S Medicare price rollback Q3-10 I and 18-month fr
Slide 18: Investment thesis and strategy
Investment thesis and strategy Encompass Health’s ability to adapt to changes, build strategic relationships, and consistently provide high-quality, cost-effective care positions the Company for success in the evolving healthcare industry. Encompass Health 18
Slide 19: Investment thesis
Investment thesis Encompass Health is positioned to become the nation's leading provider of integrated post-acute services. The healthcare industry is evolving toward integrated delivery models and value-based care. Providers must be able to adapt to changes, build strategic relationships across the
Slide 20: Strategy
Strategy The Company’s strategy is to expand its network of inpatient rehabilitation hospitals and home health and hospice locations, further strengthen its relationships with healthcare systems, provider networks, and payors in order to connect patient care across the healthcare continuum, and to d
Slide 21: Elements of strategy
Elements of strategy Diagnosis-specific treatment protocols drive high-quality outcomes Technology facilitates information flow across the provider continuum and supports the use of predictive analytics Clinical expertise Integration of care transition coordinators in a patient’s care plans ensures
Slide 22: The post-acute landscape continues to evolve
The post-acute landscape continues to evolve. Current post-acute providers Future post-acute providers • Medicare payments/regulations are site • Medicare payments/regulations will be specific (e.g., 60% Rule, 3-Hour Rule, condition and outcome focused. “preponderance” of one-to-one therapy, • Many
Slide 23: Well-positioned for integrated delivery models and site neutrality
We believe the Company is well-positioned for the progression towards integrated delivery models and post-acute site neutrality as it will be able to treat all types of post-acute patients by leveraging its operational expertise across its network of facility-based and home-based assets. The Company
Slide 24: Business outlook, including guidance
Business outlook, including guidance (as of January 13, 2020) Encompass Health 24
Slide 25: Updated 2019 guidance
Updated 2019 guidance 2019 2019 previous guidance updated guidance Net operating revenues Net operating revenues $4,500 million to $4,600 million $4,590 million to $4,610 million Adjusted EBITDA(9) Adjusted EBITDA(9) $940 million to $960 million $962 million to $967 million Adjusted earnings per sha
Slide 26: 2019 Highlights
2019 Highlights GROWTH u Opened or acquired 3 new IRFs (including 2 joint ventures) Ÿ 8 IRF projects underway as of January 13, 2020 u Expanded existing IRFs by 152 beds u Acquired or opened 27 home health locations and 25 hospice locations u Grew Medicare Advantage discharges 18.7% OPERATIONAL INIT
Slide 27: 2020 Guidance
2020 Guidance 2019 2020 updated guidance preliminary guidance Net operating revenues Net operating revenues $4,590 million to $4,610 million $4,850 million to $4,950 million Adjusted EBITDA(9) Adjusted EBITDA(9) $962 million to $967 million $935 million to $965 million Adjusted earnings per share Ad
Slide 28: 2020 Guidance considerations
2020 Guidance considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 0% to 0.75% increase in Medicare u Estimated 2.0% to 3.0% net Medicare pricing pricing for Q1 through Q3 and anticipated 2.5% decrease for CY 2020 for home health (see increase for Q4 (see page 34) page 35) u S
Slide 29: 2020 Priorities
2020 Priorities GROWTH u Demographic trends driving increasing demand u Expand portfolio of inpatient rehabilitation hospitals Ÿ Joint venture or wholly owned opportunities based on market-specific dynamics Ÿ Increase capacity at existing IRFs via bed additions u Expand portfolio of home health and
Slide 30: 2020 Priorities: operational initiatives and capital structure
2020 Priorities GROWTH OPERATIONAL INITIATIVES u Continue transition to Section GG (CARE Tool) - see page 53 u Implement Patient-Driven Groupings Model and Review Choice Demonstration program - see pages 54 and 63 u Increase clinical collaboration - see pages 55 and 56 u Build stroke market share -
Slide 31: Adjusted free cash flow assumptions
Adjusted free cash flow(11) assumptions Certain cash flow items 2019 2020 u Increased cash interest payments (millions) Estimates Assumptions expected in 2020 due to new borrowings in 2019 to fund the acquisition of Alacare and put of home health rollover shares and Cash interest payments (net of SA
Slide 32: Uses of free cash flow
Uses of free cash flow 2019 2020 Estimates Assumptions IRF bed expansions ~$40 $40 to $50 New IRFs - De novos ~114 200 to 240 - Acquisitions — opportunistic Growth in - Replacement IRFs and other ~83 45 to 65 core business Home health and hospice acquisitions ~232 50 to 100 (includes Alacare Home He
Slide 33: Business outlook: 2020 to 2022
Business outlook: 2020 to 2022 2020 2021 2022 • Enhance clinical collaboration between the Company’s IRFs and home health locations • Build stroke market share Key • Develop and implement post-acute solutions operational initiatives • Implement changes to reimbursement models in both business segmen
Slide 34: Revenue assumptions: Inpatient Rehabilitation
Business outlook 2020 to 2022: revenue assumptions Inpatient Rehabilitation* Volume (includes new stores) 3+% annual discharge growth Approx. 72% of segment revenue Medicare Pricing FY 2020 FY 2021 FY 2022 Amounts are approximations Q419-Q320(15) Q420-Q321 Q421-Q322 Final Rule Estimate† Estimate† Ma
Slide 35: Revenue assumptions: Home Health
Business outlook 2020 to 2022: revenue assumptions Home Health* Volume (includes new stores) 10+% annual admission growth Approx. 85% of segment revenue Medicare Pricing CY 2020 CY 2021 CY 2022 Amounts are approximations Q120-Q420(16) Q121-Q421 Q122-Q422 Final Rule Estimate† Estimate† Market basket
Slide 36: Labor and other expense assumptions
Business outlook 2020 to 2022: labor and other expense assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2020 2021 2022 Salary increases ~3.0% 2.85-3.35% 2.85-3.35% Benefit costs increases 8-12% 5-10% 5-10% Segment Operating Expenses Salaries Salaries and benefits an
Slide 37: IRF-PPS fiscal year 2020 final rule: key provisions
IRF-PPS fiscal year 2020 final rule: key provisions Update to payment rates The final rule: • implements a net 2.5% market basket increase Company observations – 2.9% market basket increase – (40 bps) healthcare reform productivity reduction; Pricing: • updates case mix group relative weights and av
Slide 38: HH-PPS calendar year 2020 final rule: key provisions
HH-PPS calendar year 2020 final rule: key provisions Final rule updates to 2020 payment rates The final rule will: Company observations • implement a net 1.3% market basket increase (1.5% market basket update less a 0.2% continued reduction related to the rural add-on modifications as required by th
Slide 39: IMPACT Act of 2014
IMPACT Act of 2014 - enacted Oct. 6, 2014 Company observations and considerations with respect to the IMPACT Act: It was developed on a bi-partisan basis by the House Ways and Means and Senate Finance Committees ▪ and incorporated feedback from healthcare providers and provider organizations that re
Slide 40: Growth
Growth Encompass Health is a leader in serving the post-acute patient population and has multiple avenues available for sustained growth in both segments. Favorable demographic trends are driving increasing demand. Encompass Health 40
Slide 41: Multiple avenues for sustained growth in both segments
The Company has multiple avenues available for sustained growth in both segments u The Company continues to have excellent organic growth opportunities in inpatient rehabilitation, home health, and hospice. — Track record of consistent growth — IRF organic growth supplemented by bed additions * Bed
Slide 42: Demographic tailwind: growth in Medicare beneficiary population
All business lines benefit from a demographic tailwind: growth in the Medicare beneficiary population Projected Population of Age 65+ • The growth rate of Medicare Millions beneficiaries increased in 2011 to an Baby Boomer wave reaches approx. 3% CAGR as “Baby Boomers” average age of an Encompass st
Slide 43: Multi-faceted inpatient rehabilitation growth strategy
Multi-faceted inpatient rehabilitation growth strategy New beds Total IRFs 2019 Bed count 400 140 increase 135 • Lubbock, TX (40 beds) 130 • De novos 300 125 Boise, ID (40 beds) 120 • Katy, TX (40 beds) 115 200 110 Acquisitions • Bed expansions (152 beds) 105 100 2020 Projected bed 100 95 count incr
Slide 44: Inpatient rehabilitation growth pipeline
Inpatient rehabilitation growth pipeline Disciplined approach to new store growth The Company’s value proposition – $7.9 billion Medicare IRF market – CAPEX to build free-standing IRF, freeing up space for Considerations: ü medical/surgical beds in an acute care facility for a JV partner – Market de
Slide 45: Acute care joint venture partnerships
Inpatient rehabilitation acute care joint venture partnerships • • The Company’s IRF joint ventures began in 1991 with Vanderbilt University Medical Center. • The Company’s joint venture acute care hospital partners own equity that ranges from 2.5% to 50%. 47* IRF joint venture hospitals in place wi
Slide 46: De novo IRFs and acquisitions
De novo IRFs and acquisitions Operations Joint # of new beds Location date Investment considerations venture? 2018 2019 2020 2021 De novo IRFs: • IRR objective of 13% (after tax) Shelby County, AL Q2 2018 34 • Joint venture capitalization Bluffton, SC Q2 2018 38 • Certificate of need (“CON”) costs,
Slide 47: De novo costs and timeline
De novo costs and timeline • Prototype includes all private rooms Capital cost (millions) Low High • Core infrastructure of building anticipates Construction, design, permitting, etc. $17 $24 future expansion (accretive to financial Land 2 5 returns) Equipment (including CIS) 3 5 • Factors that impa
Slide 48: IRF de novo occupancy and EBITDA trends
IRF de novo occupancy and EBITDA* trends Occupancy Sustained positive EBITDA 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 Months Modesto (10/2016) Westerville (04/2017) Pearland (10/2017) Shelby County (04/2018) Bluffton (06/2018) Murrells Inlet** (09/2018) Lubbock (05/2019
Slide 49: Multi-faceted home health and hospice growth strategy
Multi-faceted home health and hospice growth strategy • Strong demand due to cost effectiveness of home-based care and increasing preference of patients to be treated at home Organic growth • Strong organic growth from existing locations • Demographics * Currently located in states that represent ~7
Slide 50: Home health growth pipeline
Home health growth pipeline Number of home health agencies over time • $17.7 billion Medicare home health market is highly 13,000 The number of home health agencies fragmented with over 11,800 is near an all-time high and presents home health agencies. 12,000 significant consolidation opportunities.
Slide 51: Hospice growth pipeline
Hospice growth pipeline • Medicare hospice market is approx. $18 billion. • 1.5 million Medicare beneficiaries received Acquisition strategy for hospice hospice services from approx. 4,500 providers in • Build additional scale 2017. • Medicare focus • Hospice use among Medicare beneficiaries has • H
Slide 52: Operational Initiatives
Operational Initiatives Our operational initiatives are designed to respond to regulatory changes, expand our services to more patients in need of our higher level of care, enhance our clinical expertise, and ensure the delivery of high-quality outcomes. Encompass Health 52
Slide 53: Continue transition to IRF PAI Section GG
Inpatient rehabilitation: Continue transition to IRF PAI Section GG Elimination • Effective Oct. 1, 2019, CMS replaced the FIM™ TM functional independence measures with the of FIM Section GG functional outcome measures on the functional IRF-PAI for reporting and payment purposes. assessment • This n
Slide 54: Home health: Patient-Driven Groupings Model (PDGM)
Home health: Patient-Driven Groupings Model (PDGM) Effective January 1, 2020, PDGM, which relies more heavily on clinical characteristics: Move to the Ÿimplemented a 4.36% reduction in the base rate using assumed Patient Driven provider behavioral changes; Groupings Ÿeliminated therapy service use t
Slide 55: Inpatient rehabilitation–home health clinical collaboration
The Company continues to improve the patient experience and outcomes through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration As of December 31, 2019, (all payors) overlap markets* Encompass Health had 89 35.6% overlap markets.* 34.0% Collaboration Collaboration
Slide 56: Clinical collaboration - all markets
Clinical collaboration - all markets To continue building its clinical collaboration platform, the Company will: • focus on increasing its number of new overlap markets and building density in current overlap markets and • use Care Transition Coordinators and TeamWorks best practices to enhance pati
Slide 57: Building stroke market share
Building stroke market share Leveraging our: • quality outcomes • strategic sponsorship with the AHA/ASA • clinical collaboration • joint commission certifications ~800,000 123 EHC IRFs strokes ~142,000 hold stroke-specific per year deaths from stroke certifications. in the U.S. ~32,000 Continue to
Slide 58: Building stroke market share: share and payor mix
Building stroke market share Stroke market share EHC stroke payor mix 5.2% 2018 2019 Market share 4.9% Market share Other Other 25.2% 25.3% 4.7% Medicare FFS Medicare FFS Market share 34,465 Medicare Adv. 56.9% Medicare Adv. 54.8% 17.9% 19.9% 32,309 30,643 Stroke % of Payor 2018 2019 2017 2018 2019
Slide 59: Research concludes IRFs are better than SNFs for stroke patients
Independent research concludes IRFs are a better rehabilitation option for stroke patients than SNFs “Whenever possible, the American Stroke Association strongly recommends that stroke patients be treated at an inpatient rehabilitation facility rather than a skilled nursing facility.” “IRF patients
Slide 60: VA endorses AHA/ASA guidelines on stroke rehabilitation
The Department of Veterans Affairs endorses the AHA/ASA Guidelines in their 2019 Guidelines on Stroke Rehabilitation There are 18.2 million veterans and 9 million are served by the Veterans Administration each year. “The Management of Stroke Rehabilitation” issued November 2019 (https://annals.org/a
Slide 61: JAMA article comparing IRF vs SNF stroke outcomes
2019 JAMA published article comparing functional improvements of stroke patients receiving care in IRF vs SNF Conclusions This cohort study found that Medicare beneficiaries who received services at an IRF after a stroke demonstrated greater improvement in mobility and self-care compared with patien
Slide 62: Post-acute innovation
Post-acute innovation Our post-acute solutions will leverage our clinical expertise, large post-acute datasets, EMR technologies, and strategic partnerships to drive improved patient outcomes and lower cost of care across the entire post-acute episode. 2018 2019 2020 Ÿ Modified and implemented Ÿ Ref
Slide 63: Home health: Review Choice Demonstration
Home health: Review Choice Demonstration (RCD) State Start date Company Overview locations Following the pause of the Pre-Claim Review Illinois June 1, 2019 3 Demonstration (“PCRD”) on April 1, 2017, CMS worked Ohio September 30, 2019 1 to revise PCRD to offer more flexibility and choice for Texas M
Slide 64: Rebranding and name change
Rebranding and name change The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. JULY 2017 APRIL 2018 OCT. 2018 Announced Phase 1 field asset Phase 3 field asset planned conversions conversions name change JA
Slide 65: Capital structure
Capital structure Encompass Health is positioned with a cost-efficient, flexible capital structure. Encompass Health 65
Slide 66: Debt maturity profile - face value
Debt maturity profile - face value Preliminary as of December 31, 2019* ($ in millions) Focus Liquidity Duration Optionality Cost Flexibility $916 Available Callable beginning (17) $45 Drawn + November 2017 $39 reserved Callable beginning for LC’s Revolver February 2023 capacity Callable beginning F
Slide 67: Financial leverage and liquidity
Financial leverage and liquidity Total debt Liquidity Leverage ratio* (Billions) Preliminary December 31, December 31, 4.6x** 2019 2018 Cash available $ 94.8 $ 69.2 Revolver $ 1,000.0 $ 700.0 Less: 3.2x - Draws (45.0) (30.0) 3.17 - Letters of credit (38.9) (37.4) 3.02 3.06 Available $ 916.1 $ 632.6
Slide 68: Debt schedule
Debt schedule Preliminary Change in December 31, December 31, Debt vs. ($millions) 2019 2018 YE 2018 Advances under $1 billion revolving credit facility, November 2024 - LIBOR +150bps $ 45.0 $ 30.0 $ 15.0 Term loan facility, November 2024 - LIBOR +150bps 265.2 280.1 (14.9) Bonds Payable: 5.125% Seni
Slide 69: IRF real estate portfolio
IRF real estate portfolio 133 inpatient rehabilitation hospitals: 9,259 licensed beds 4,760 licensed beds Own ~70% of IRF real estate in CON states As of December 31, 2019 63 own building and land 31 own building; lease land 39 lease building and land 4,499 licensed beds in non-CON states A CON is a
Slide 70: Overview of rollover shares and SARs
Overview of rollover shares and SARs held by members of the home health and hospice management team Background In connection with the 2014 acquisition of Encompass Home Health and Hospice: • Certain members of that management team rolled a portion of their pre-acquisition equity into the post-acquis
Slide 71: Alternative payment models
Alternative payment models Most models remain in the early or pilot stage and results have been mixed. Both of our segments continue to participate in various alternative payment model initiatives. Encompass Health 71
Slide 72: Accountable Care Organizations (ACOs)
Accountable Care Organizations (“ACOs”) Medicare Shared Savings Program (MSSP) (2019 - 518 ACOs / 10.9 million Medicare beneficiaries) • Performance Year 6 (2018) results: ◦ 364 of 548 ACOs (66%) held spending below their benchmark. ▪ 159 of these ACOs reduced health costs compared to their benchmar
Slide 73: Home Health Value-Based Purchasing Model
Home Health Value-Based Purchasing Model Over the long term, the Company believes it is well-positioned to benefit from a delivery system that rewards providers who are committed to providing high-quality care. In the calendar year 2016 HH-PPS final rule, CMS finalized a Home Health Value-Based Tota
Slide 74: Information technology
Information technology Encompass Health utilizes information technology to improve patient care and generate operating efficiencies. Encompass Health 74
Slide 75: IRF clinical information system
IRF clinical information system: improved patient outcomes and streamlined operational efficiencies Treatment plan Pre-admission assessment • Computerized Physician Order Document & approval Entry ("CPOE") imaging • Clinical Decision Support ("CDS") • Predictive algorithm and clinical protocols to i
Slide 76: IRF proprietary management system: Beacon
IRF Proprietary management system: Beacon Operations management tool Supply chain procurement Encompass Health 76
Slide 77: Home health and hospice information system: Homecare Homebase
Home health and hospice information system: Homecare Homebase Homecare Homebase Clinical Management and operations (“HCHB”) was born • HCHB manages the entire patient • Best-in-class data management and workflow and provides field clinicians reporting ensures managers have access out of the Company’
Slide 78: Operational metrics
Operational metrics Encompass Health 78
Slide 79: IRF operational metrics
IRF operational metrics: •SALARIES AND BENEFITS includes group expense efficiencies medical costs and is impacted by staffing levels based on patient volumes. (Percent of net operating revenues) •IRF-RELATED EXPENSES includes other operating expenses (excluding loss on disposal or impairment of asse
Slide 80: Pre-payment claims denials - inpatient rehabilitation segment
Pre-payment claims denials - inpatient rehabilitation segment Background Encompass Health reserves pre-payment claim denials as a reduction of • For several years prior to 2018, under programs designated as net operating revenues upon notice from a MAC a claim is under review. “widespread probes,” c
Slide 81: Post-payment auditor activity - inpatient rehabilitation segment
Post-payment auditor activity - inpatient rehabilitation segment CMS supplements its pre-payment audits with post-payment audits. CMS uses Comprehensive Error Rate Testing (“CERT”) auditors to identify trends driving errors. CMS also uses the CERT error rate to evaluate the performance of Medicare c
Slide 82: Inpatient rehabilitation operational and labor metrics
Inpatient rehabilitation operational and labor metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2019 2018 2018 2018 2018 2018 (In Millions) Net patient revenue-inpatient $ 850.6 $ 851.8 $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,247.9 Net patient revenue-outpatient and other revenues 21.7 22.1 22.5
Slide 83: Home health and hospice operational metrics
Home health and hospice operational metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2019 2018 2018 2018 2018 2018 (In Millions) Net home health revenue $ 238.9 $ 222.7 $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 814.6 Net hospice revenue 50.4 38.4 34.4 35.0 32.8 28.3 20.4 116.5 Net operating revenues
Slide 84: Payment sources
Payment sources (percent of revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q3 Q3 Q3 9 Months Full Year 2019 2018 2019 2018 2019 2018 2019 2018 2018 Medicare 71.5% 72.8% 85.8% 85.0% 75.3% 75.4% 75.3% 75.8% 75.9% Medicare Advantage 10.9% 9.1% 8.7% 9.4% 10.3% 9.
Slide 85: Industry structure
Industry structure Encompass Health 85
Slide 86: Overall healthcare spending
Overall healthcare spending National healthcare spending: $3,263 billion in 2017 (billions) $168 Investment $45 Government administration $89 Government public health $452 Retail of medical products $97 Home health care $183 Other health, residential and personal care $920 Professional services $166
Slide 87: Medicare 2017 spending
Medicare 2017 spending = $710 billion $8 billion (1%) in billions Inpatient rehabilitation hospitals (Included in inpatient hospitals) $ 28 Skilled nursing Medicare Part A $145 Inpatient hospital 4% 20% $69 Physician payments Medicare Part B 14% $53 Outpatient hospital $18 Home health $18 Hospice Me
Slide 88: Continuum of healthcare services
Continuum of healthcare services Preventive Ambulatory Acute Post-acute Palliative Routine health care Medical care Medical Medical care Medical care (screenings, check- delivered on an treatment of provided after a that is focused ups, patient outpatient basis diseases for period of acute on provid
Slide 89: Post-acute fee-for-service care services
Post-acute fee-for-service care services (Highest acuity) (Lowest acuity) Long-term Inpatient Skilled Acute care Home Discharge acute care rehabilitation nursing hospital health hospital hospital facility Medicare spending (billions) $4.5 $7.9 $28.4 $17.7* # of Discharges ~116,000 ~380,000 ~2,300,00
Slide 90: Medicare fee-for-service spending on post-acute services
Medicare fee-for-service spending on post-acute services 6 4.8 Home health fee-for- 4.3 4.1 4.1 ) 3.9 3.8 3.7 service spending* (% of t 3.5 n e total Medicare spending) c r e 3 P ( Inpatient rehabilitation 1.6 1.5 1.5 1.6 1.5 1.6 1.6 1.6 fee-for-service spending 0 (% of total Medicare 2010 2011 2012
Slide 91: Different fee-for-service levels of services
Different fee-for-service levels of services Inpatient rehabilitation hospital Nursing home Average length of stay = 12.7 days Average length of stay = 37.3 days Discharge to community = 76.0% Discharge to community = 40.0% Requirements: Requirements: IRFs must also satisfy regulatory/policy require
Slide 92: Supply of IRFs is relatively stable
Supply of IRFs is relatively stable Share of Medicare Number of IRFs Average annual change FFS discharges 2009- 2013- 2016- Type of IRF 2017 2009 2013 2014 2015 2016 2017 2013 2016 2017 All IRFs 100% 1,196 1,161 1,177 1,182 1,188 1,178 -0.7% 0.8% -0.8% Urban 93 992 977 1,013 1,020 1,026 1,019 -0.4 1
Slide 93: IRF supply and demand as 65+ population grows
Supply of IRFs remains relatively stable while the age 65+ population continues to grow IRF supply and demand • From 2010 to 2018, the 65+ population grew by 12.5MM or ~32%, compared to Age 65-69 Age 70-79 Age 80+ Total IRFs ~2% growth for the 64 and under population (total population growth of 60 1
Slide 94: Inpatient rehabilitation sector margins
Inpatient rehabilitation sector margins Aggregate FFS Medicare IRF margins remained high in 2017 Share of Medicare fee-for- Margins service discharges Type of IRF 2017 2004 2006 2008 2010 2012 2014 2015 2016 2017 All IRFs 100% 16.7% 12.5% 9.4% 8.6% 11.2% 12.2% 13.9% 13.3% 13.8% Urban 93 17.0 12.8 9.
Slide 95: 60% Rule: Medicare regulation for IRFs
“60% Rule”: Medicare regulation for IRFs The 60% Rule requires at least 60% of all patients admitted must have at least one medical diagnosis or functional impairment from a list of 13 compliant conditions (a.k.a. “compliant conditions” or “CMS-13”). 1983 2002 2004 2007 1983: 75% Rule 2007: 75% Rule
Slide 96: IRF qualifying conditions
IRF qualifying conditions Original qualifying conditions Current qualifying conditions 1. Stroke 1. Stroke 2. Brain injury 2. Brain injury 3. Amputation 3. Amputation 4. Spinal cord 4. Spinal cord 5. Fracture of the femur 5. Fracture of the femur 6. Neurological disorder 6. Neurological disorder 7.
Slide 97: Inpatient rehabilitation outlier payments
Inpatient rehabilitation outlier payments(23) # of IRFs Total outlier payments Avg outlier payment per discharge Non- Non- Non- IRF Encompass Encompass Encompass Encompass Encompass Encompass deciles Health Health Total Health Health Total % Health Health Total 90-100 — 112 112 $ — $ 149,282,951 $ 1
Slide 98: Segment operating results
Segment operating results Encompass Health 98
Slide 99: Inpatient rehabilitation segment Adjusted EBITDA
Inpatient rehabilitation segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In millions) 2019 2019 2019 2018 2018 2018 2018 2018 Net operating revenues: Inpatient $ 850.6 $ 851.8 $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,247.9 Outpatient and other 21.7 22.1 22.5 22.9 27.2 25.0 23.2 98.3 Total
Slide 100: Home health and hospice segment Adjusted EBITDA
Home health and hospice segment Adjusted EBITDA Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2019 2019 2019 2018 2018 2018 2018 2018 Net operating revenues: Home health revenue $ 238.9 $ 222.7 $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 814.6 Hospice revenue 50.4 38.4 34.4 35.0 32.8 28.3 20.4 116.5 To
Slide 101: Segment operating results Q3 2019
Segment operating results Q3 2019 Q3 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 872.3 $ 289.3 $ — $ 1,161.6 $ 825.6 $ 242.0 $ — $ 1,067.6 Operating Expenses: Inpatient Rehabilitation: Salaries and
Slide 102: Segment operating results nine months ended September 30
Segment operating results Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 2,616.3 $ 804.3 $ — $ 3,420.6 $ 2,500.5 $ 680.8 $ — $ 3,181
Slide 103: Segment operating results year ended December 31, 2018
Segment operating results Year Ended December 31, 2018 Home Health (In Millions) IRF and Hospice Reclasses Consolidated Net operating revenues $ 3,346.2 $ 931.1 $ — $ 4,277.3 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,701.5) — (652.5) (2,354.0) Other operating expenses(a)
Slide 104: Reconciliations to GAAP and share information
Reconciliations to GAAP and share information Encompass Health 104
Slide 105: Reconciliation of net income to Adjusted EBITDA 2019
Reconciliation of net income to Adjusted EBITDA(9) 2019 Q1 Q2 Q3 9 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 125.2 $ 110.9 $ 119.5 $ 355.6 Loss from disc ops, net of tax, attributable to Encompass Health 0.5 0.1 — 0.6 Net
Slide 106: Reconciliation of net income to Adjusted EBITDA 2018
Reconciliation of net income to Adjusted EBITDA(9) 2018 Q1 Q2 Q3 Q4 Full Year Per Per Per Per Per (in millions, except per share data) Total share Total share Total share Total share Total share Net Income $ 105.2 $ 113.2 $ 109.3 $ 47.7 $ 375.4 Loss (income) from disc ops, net of tax, attributable t
Slide 107: Reconciliation of segment Adjusted EBITDA to pre-tax income
Reconciliation of segment Adjusted EBITDA to income from continuing operations before income tax expense Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2019 2018 2018 2018 2018 2018 (in millions) Total segment Adjusted EBITDA $ 261.4 $ 283.0 $ 276.3 $ 255.8 $ 256.1 $ 265.1 $ 257.3 $ 1,034.3 General and ad
Slide 108: Adjusted EPS - Q3 2019
Adjusted EPS(10) - Q3 2019 For the Three Months Ended September 30, 2019 Adjustments Mark-to- Market Payroll Adjustment Taxes for Stock Gain on on As Comp. Income Tax Transaction Consolidation SARs As Reported Expense Adjustments Costs of Yuma Exercise Adjusted (In Millions, Except Per Share Amounts
Slide 109: Adjusted EPS - Q3 2018
Adjusted EPS(10) - Q3 2018 For the Three Months Ended September 30, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Equity As Reported Expense Adjustments Securities Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 224.
Slide 110: Adjusted EPS - YTD 2019
Adjusted EPS(10) - YTD 2019 For the Nine Months Ended September 30, 2019 Adjustments Mark-to- Loss Market on Change in Adjustment Early Fair Market Payroll for Stock Exting. Value of Gain on Taxes on As Comp. of Income Tax Transaction Equity Consolidation SARs As Reported Expense Debt Adjustments Co
Slide 111: Adjusted EPS - YTD 2018
Adjusted EPS(10) - YTD 2018 For the Nine Months Ended September 30, 2018 Adjustments Mark-to- Market Change in Adjustment Fair Market on Stock Value of As Compensation Income Tax Transaction Equity As Reported Expense Adjustments costs Securities Adjusted (In Millions, Except Per Share Amounts) Adju
Slide 112: Adjusted EPS - 2018
Adjusted EPS(10) - 2018 For the Year Ended December 31, 2018 Adjustments Mark-to-Market Change in Government, Adjustment for Fair Market Class Action, Stock Value of As & Related Compensation Income Tax Transaction Equity As Reported Settlements Expense Adjustments Costs Securities Adjusted (In Mill
Slide 113: Adjusted Free Cash Flow History
Adjusted Free Cash Flow History(11) Q3 9 Months Full Year (In Millions) 2019 2018 2019 2018 2018 Net cash provided by operating activities $ 114.4 $ 198.5 $ 419.7 $ 584.0 $ 762.4 Impact of discontinued operations 0.1 0.1 4.6 0.7 (0.8) Net cash provided by operating activities of continuing operation
Slide 114: Net cash from operating activities reconciled to Adjusted EBITDA
Net cash provided by operating activities reconciled to Adjusted EBITDA Q3 9 Months Full Year (In Millions) 2019 2018 2019 2018 2018 2017 2016 2015 2014 Net cash provided by operating activities $ 114.4 $ 198.5 $ 419.7 $ 584.0 $ 762.4 $ 658.3 $ 640.2 $ 505.9 $ 458.9 Professional fees — accounting, t
Slide 115: Share information
Share information Weighted Average for the Period Q3 9 Months Full Year 2019 2018 2019 2018 2018 2017 2016 Basic shares outstanding(25) 97.8 98.0 98.1 97.9 97.9 93.7 89.1 Convertible senior subordinated notes(25) — — — — — 4.0 8.5 Restricted stock awards, dilutive stock options, restricted stock uni
Slide 116: End Notes
End Notes Encompass Health 116
Slide 117: End Notes
End Notes (1) Under this program, Joint Commission accredited organizations, like the Company’s IRFs, may seek certification for chronic diseases or conditions such as brain injury or stroke rehabilitation by complying with Joint Commission standards, effectively using evidence-based clinical practi
Slide 118: End Notes, con't.
End Notes, con't. (10) The Company is providing adjusted earnings per share from continuing operations attributable to Encompass Health (“adjusted earnings per share”), which is a non- GAAP measure. The Company believes the presentation of adjusted earnings per share provides useful additional infor
Slide 119: End Notes, con't.
End Notes, con't. (16) On October 31, 2019, CMS released its notice of final rulemaking for calendar year 2020 (the “2020 Final HH Rule”) for home health agencies under the home health prospective payment system (the “HH-PPS”). The 2020 Final HH Rule would implement a net 1.3% market basket increase
Encompass Health — Investor Presentation (January 2020) on 6ix