Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q1 2014 Earnings Presentation
102 slides from Encompass Health's earnings presentation, Jun 17, 2014
Slide 1: Post Q1 2014 Earnings Release Investor Reference Book
Post Q1 2014 Earnings Release Last updated June 17, 2014 I N V E S T O R R E F E R E N C E B O O K
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
Table of Contents 3 4-18 19-37 38-49 50-53 54-57 58-62 63-67 68-78 79-90 91-94 Reconciliat ions to GAAP………………………………………………………………………………………………………………………………………………………..95-102 Our Company…………………………………………………………………………………………………………………………… Industry Structure………………………………………………………………………………………………………………………………………………
Slide 4: Our Company: Portfolio as of March 31, 2014
Portfolio – As of March 31, 2014 103 Inpatient Rehabilitation Hospitals (“IRF”) • 31 operate as JV’s with Acute Care Hospitals 17 Outpatient Rehabilitation Satellite Clinics 25 Hospital-Based Home Health Agencies 28 + Puerto Rico Number of States ~ 23,700 Employees Key Statistics-Trailing 4 Quarters
Slide 5: Our Hospitals
Our Hospitals 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-integration •
Slide 6: Our Patients
Our Patients Admission to an IRF: • Physicians and acute care hospital case managers are key decision makers. • All IRF patients must meet reasonable and necessary criteria and must be admitted by a physician. • All IRF patients must be medically stable and have potential to tolerate three hours of
Slide 7: Our Quality
7 Our 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 Gain.”
Slide 8: Our Cost-Effectiveness
Total Inpatient Rehabilitation Facilities (IRFs): 1,134 8 Our Cost-Effectiveness (1) The 99 for HLS does not include HealthSouth Rehabilitation Hospital of Ocala, FL (opened December 2012), HealthSouth Rehabilitation Hospital of Littleton, CO (opened May 2013), or HealthSouth Rehabilitation Hospital
Slide 9: CMS Fiscal Year 2014 IRF Final Rule Rate Setting File Analysis
9 CMS Fiscal Year 2014 IRF Final Rule Rate Setting File Analysis Notes: (1) All data provided was filtered and compiled from the Centers for Medicare and Medicaid Services (CMS) Fiscal Year 2014 IRF Final Rule rate setting file found at http://www.cms.gov/Medicare/Medicare-Fee-for-Service- Payment/I
Slide 10: Our Payors (Q1 2014)
Workers’ Comp/ Patients/Other Our Payors (Q1 2014) 10 Managed Care (includes managed Medicare, which represents ~8% of total revenues) Other Third-Party Payors – 1.6% Medicaid- 1.3% Varies by state Prospective Payment System (“PPS”) – Payments based on Case Mix Groups (“CMGs”) • Diagnosis of patient
Slide 11: Our Discharge Growth vs. Industry
Our Discharge Growth vs. Industry 11 1.4% 3.3% 2.9% 2.5% 0.4% (0.5)% 2.3% 0.0% (0.7)% (2.0)% 2010 2011 2012 2013 Q1 2014 Same Store HealthSouth vs. Industry HLS Same Store UDS Industry Sites Medicare Enrollment (Age 65+) is growing at approx. 3% per year. TeamWorks = standardized and enhanced sa
Slide 12: Our New Store/Same Store Growth
Our New Store/Same Store Growth (con’t) Las Vegas, NV (50 beds) Loudoun County, VA (40 Beds) 12 (1) In Q3 2012, HealthSouth amended the joint venture agreement related to St. Vincent Rehabilitation Hospital in Sherwood, AR which resulted in a change in accounting for this hospital from the equity me
Slide 13: Our Track Record
$1,785 $1,878 $2,027 $2,162 $2,273 $2,292 2009 2010 2011 2012 2013 Trailing 4 Quarters Revenue Our Track Record 13 109,106 112,514 118,354 123,854 129,988 130,747 2009 2010 2011 2012 2013 Trailing 4 Quarters (1) Reconciliation to GAAP provided on slides 62 and 96 - 101. (2) 2010 includes an income t
Slide 14: Our Track Record (con't)
Our Track Record (con’t) 14 $1.66 $1.51 $1.25 $1.25 $1.52 $1.51 1 1.5 2 2.5 3 3.5 4 4.5 5 0 1 2 3 4 2009 2010 2011 2012 2013 Trailing 4 Quarters (billions) Leverage Ratio (1) 4.6x 2.7x Total Debt $155 $181 $243 $268 $331 $310 0 20 40 60 80 100 120 140 25 75 125 175 225 275 325 2009 2010 2011 2012 20
Slide 15: Our Assets
15 Our Assets 103 (1) Inpatient Rehabilitation Hospitals: 6,935 Licensed Beds(2) 50 Own Building and Land 26 Own Building Only 27 Lease Building and Land (1) 1 of the 103 HealthSouth hospitals is nonconsolidated. For that hospital, we own the building only. (2) Excludes 41 licensed beds at the nonco
Slide 16: Our Joint Venture Partnerships
Our Joint Venture Partnerships 16 1 Equity Method Joint Ventures 30 Consolidated Joint Venture Hospitals 72 Consolidated 100% Ownership 31 joint venture hospitals in place include major healthcare systems : • Barnes-Jewish • University of Virginia Medical Center • Vanderbilt University • Geisinger H
Slide 17: Our Preparation for Shifts to Coordinated Care Delivery Models
31 joint venture hospitals with acute care systems already in place (examples include): • Barnes-Jewish • University of Virginia Medical Center • Vanderbilt University Our Preparation for Shifts to Coordinated Care Delivery Models 17 Participation in new delivery models: • Exploring ACO participatio
Slide 18: Our Strong and Sustainable Business Fundamentals
Our Strong and Sustainable Business Fundamentals • Bed expansion at existing hospitals • Flexible de novo strategy • Flexible IRF acquisition and unit consolidation strategy • Ability to pursue other post-acute sectors opportunistically Growth Opportunities • Strong balance sheet; ample liquidity, n
Slide 19: Industry Structure
Industry Structure 19
Slide 20: Overall Healthcare Spending
Person a l He a lt hc a re: $2,360. 4 Source: Center for Medicare & Medicaid Services, National Health Expenditure Data for calendar year 2012 – Table 2 Overall Healthcare Spending 20 Hospital Care Includes Inpatient Rehabilitation, Long-Term Care Hospitals $882.3 $151.5 $752.3 $138.2 $77.8 $358.3 N
Slide 21: Medicare 2012 Spending
Medicare 2012 Spending = $565.9 Billion (1) (1) Percentages are based upon total Medicare spending of $565.9 billion (does not include administrative expenses), Center of Medicare & Medicaid Services, Medicare Trustee’s Report May 2013 – page 10 (2) Inpatient Hospital includes spending for acute car
Slide 22: Continuum of Healthcare Services
Continuum of Healthcare Services Preventive Routine health care that includes screenings, check-ups, and patient counseling to prevent illnesses, disease, or other health problems 22 Acute Medical treatment of diseases for which a patient is treated for a brief but severe episode of illness Ambulato
Slide 23: Medicare Spending on Post-Acute Services
23 Medicare Spending on Post-Acute Services 1.8% 2.1% 2.2% 2.1% 1.9% 1.5% 1.4% 1.3% 1.2% 1.2% 1.2% 1.2% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Inpatient rehabilitation spending (% of total Medicare spending) Total Medicare Spending on Post-Acute Ser
Slide 24: Geographic Distribution of IRFs, 2012
Geographic Distribution of IRFs, 2012 24 Source: MedPAC Report to Congress, Medicare Payment Policy, March 2014 – page 243
Slide 25: Supply of IRFs remained stable in 2012
Supply of IRFs remained stable in 2012 25 Source: MedPAC Report to Congress, Medicare Payment Policy, March 2014 – page 247 Note: IRF (inpatient rehabilitation facility). For all years, the rural/urban breakdown is by Core-Based Statistical Area (CBSA) definition. For 2012, the ownership of four fac
Slide 26: Inpatient Rehabilitation Sector Margins
Inpatient Rehabilitation Sector Margins 26 Type of IRF 2004 2006 2008 2009 2010 2011 2012 All IRFs 100% 16.7% 12.4% 9.3% 8.4% 8.7% 9.8% 11.1% Urban 91.2 17.0 12.6 9.5 8.6 9.0 10.2 11.4 Rural 8.8 13.9 10.6 7.2 5.9 5.6 6.1 7.3 Freestanding 45.3 24.7 17.5 18.1 20.5 21.3 22.9 23.8 Hospital based 54.7 12
Slide 27: Inpatient Rehabilitation Standardized Comparison of Costs
Inpatient Rehabilitation Standardized Comparison of Costs 27 Note: IRF (Inpatient rehabilitation facility). Costs per discharge are standardized for the wage index, case mix, and outliers. Government-owned facilities operate in a different financial context from other facilities, so costs are not ne
Slide 28: Post-Acute Care Settings and Readmission Rates
28 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 29: 60% Rule: Medicare Regulation for Rehabilitation Hospitals
“60% Rule”: Medicare Regulation for Rehabilitation Hospitals 29 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. The 60% Rule requires at least 60% of
Slide 30: IRF Qualifying Conditions
Inpatient Rehabilitation Hospital (IRF): Qualifying Conditions 30 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. Polyarthritis (includes “joint replacement”) Original Qualifying Conditio
Slide 31: Alternative to Re-Setting 60% Rule: Cap IRF Outlier Payments
Alternative to ”Re-Setting” “60% Rule” to “75% Rule”: Cap IRF Outlier Payments @ 10% 31 Hospital Deciles HLS Non-HLS Total HLS Non-HLS Total % HLS Non-HLS Total 90-100 - 114 114 -$ 112,760,917$ 112,760,917$ 52.6% N/A 2,087$ 2,087$ 80-90 - 113 113 -$ 38,619,910$ 38,619,910$ 18.0% N/A 1,261$ 1,261$ 70
Slide 32: IRF-PPS Fiscal Year 2015 Proposed Rule: Key Provisions
IRF-PPS Fiscal Year 2015 Proposed Rule: Key Provisions 32 The proposed rule: • Would implement a net 2.1% market basket increase − 2.7% market basket increase − (20 bps) Affordable Care Act reduction − (40 bps) Affordable Care Act productivity reduction • Freezes the update to the IRF facility-level
Slide 33: Post Acute Payment Reform – IMPACT Act of 2014
Post Acute Payment Reform – IMPACT Act of 2014 33 Source: http://www.finance.senate.gov/newsroom/ranking/release/?id=c0c98f25-db43-45d8-9055-3959a1c6d997 Source: http://waysandmeans.house.gov/uploadedfiles/pac_leg_text_final.pdf Take Aways Not a formal bill Reflects current thinking Acknowledg
Slide 34: Post-Acute Payment Reform – A Complicated Issue
Post-Acute Payment Reform – A Complicated Issue 34 (1) Post-Acute Care Payment Reform Demonstration Report to Congress Supplement—Interim Report, May 2011, RTI International 2005: • The Deficit Reduction Act of 2005 directed CMS to conduct a study aimed at reforming and harmonizing the disparate met
Slide 35: Different Levels of Services
Different Levels of Services 35 Rehab Hospital Nursing Home Average length of stay (1) = 12.9 days Covered days per admission (1) = 27.4 days Discharge to community (1) = 69.9% Discharge to community (1) = 30.6% Requirements: Requirements: Rehab hospitals must also satisfy regulatory/policy requirem
Slide 36: CMS: Inpatient Rehabilitation vs. Skilled Nursing
36 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 37: Future Regulatory Risk
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” rates for certain types of cases; such ca
Slide 38: Historical Perspective
Historical Perspective 38
Slide 39: Historical Perspective: Massive Restructuring Effort 2004 thru early 2008
Historical Perspective: Massive Restructuring Effort 2004 thru early 2008 39 December 2004 June 2005 December 2005 June 2006 December 2006 June 2007 December 2007 Reached DOJ/CMS Settlement ($325M) Filed 2000- 2003 Form 10-K Completed Senior Notes Offering ($1.0B) Announced Divestitures Finalized Se
Slide 40: Historical Perspective
40 • Continued focus on delevering (approx. $151 million in debt repaid) • Focused on organic growth; TeamWorks sustainability module rolled out • Issued 5 million shares for securities litigation settlement (Q3) • Received first Medicare market basket update in 18 months (Q4) • Reinvigorated develo
Slide 41: Historical Perspective: 2011
41 Historical Perspective (1) The Budget Control Act of 2011 included a reduction of up to 2% to Medicare payments for all providers that began on April 1, 2013 (as modified by H.R. 8). The reduction was made from whatever level of payment would otherwise have been provided under Medicare law and re
Slide 42: Historical Perspective: 2012
42 Historical Perspective • Established 2012 – 2014 business model (1) ― 2.5-3.5% discharge growth; 5-8% Adjusted EBITDA CAGR ― 12-17% adjusted free cash flow CAGR • Purchased 46,645 shares of our convertible perpetual preferred stock for $46.5 million • Upgraded to Ba3 and BB– by Moody’s and S&P, r
Slide 43: Historical Perspective: 2013
43 Historical Perspective • Established 2013 – 2015 business model (1) (includes sequestration(2)) ― 2.5-3.5% discharge growth; 4-8% Adjusted EBITDA CAGR;10-14% adjusted free cash flow CAGR • Completed tender offer for 9.5% of then-outstanding common shares (Q1) • Entered into agreements with the IR
Slide 44: Historical Perspective: 2014 Focus on Growth and Shareholder Value
44 Historical Perspective • Established 2014 – 2016 business model ― 2.5-3.5% discharge growth; 4-8% Adjusted EBITDA CAGR; • Adjusted EBITDA negatively impacted by $8 million for sequestration. • Repurchased $26.3 million of common stock (808,880 shares) (1) Reconciliation to GAAP provided on slides
Slide 45: Managing Through Medicare Payment Cuts and Recession
MMSEA (Final Establishment of 60% rule) Sequestration Began Price Increase: Less PPACA Adjustment PPACA Signed Into Law CMS Implemented New Coverage Criteria for IRF Admissions 1st Medicare IRF Price Increase Since 2007 Medicare Price Rollback & 18-Month Freeze 45 HealthSouth has successfully manage
Slide 46: Revenues & Expenses
Revenues & Expenses 46 (1) Employees per occupied bed, or “EPOB,” is calculated by dividing the number of full-time equivalents, including an estimate of full-time equivalents from the utilization of contract labor, by the number of occupied beds during each period. The number of occupied beds is de
Slide 47: Adjusted EBITDA
Adjusted EBITDA (1) 47 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 (Millions) 2014 2013 2013 2013 2013 2012 2012 2012 2012 2013 2012 2011 Net operating revenues 591.2$ 572.1$ 564.0$ 564.5$ 572.6$ 552.9$ 537.0$ 533.4$ 538.6$ 2,273.2$ 2,161.9$ 2,026.9$ Less: Provision for doubtful accounts (7.5) (3.6) (8.0) (7.0) (7.4
Slide 48: Outstanding Share Summary, Warrant Information, Conversion Price
Outstanding Share Summary, Warrant Information, Conversion Price Q1 Q1 (millions) 2014 2013 2013 2012 2011 2010 2009 Basic shares outstanding (1) (2) (3) (4) 87.3 94.0 88.1 94.6 93.3 92.8 88.8 Diluted shares outstanding (1) (2) (3) (4) 100.9 107.1 102.1 108.1 109.2 108.5 103.3 Q1 Q1 FY FY FY (millio
Slide 49: Outstanding Share Summary Notes
Outstanding Share Summary, Warrant Information, and Conversion Price Notes 49 (1) The Company purchased 9,119,450 common shares in Q1 2013 through a tender offer at a price of $25.50 per share. (2) 10 million warrants (pre-October 2006 reverse split) were issued in connection with a January 2004 loa
Slide 50: Business Outlook 2014 to 2016
Business Outlook 2014 to 2016 (as of June 17, 2014) 50
Slide 51: Business Outlook: 2014 to 2016
Business Outlook: 2014 to 2016(1) Business Model • Adjusted EBITDA CAGR: 4-8% (2) • Continued strong free cash flow generation Strategy Leverage < 3.0x Debt to Adjusted EBITDA < 3.0x Debt to Adjusted EBITDA (subject to shareholder value-creating opportunities) Core Growth Same-store Growth (Includes
Slide 52: Business Outlook: Revenue Assumptions
Business Outlook: Revenue Assumptions 52 Revenue Volume • 2.5% to 3.5% annual growth (excludes acquisitions) • Includes bed expansions, de novos and unit consolidations Payor Mix by Discharges 72% 7% 21% FY 2014 (3) FY 2015 (4) FY 2016 Q4 13 - Q3 14 Q4 14 - Q3 15 Q4 15 - Q3 16 Market basket update (
Slide 53: Business Outlook: Expense Assumptions
Business Outlook: Expense Assumptions 53 Expense Salaries & Benefits (1) Hospital Expenses • Other operating expenses and supply costs tracking with inflation • Occupancy costs declining as a percent of revenue • Bad debt expense of approx. 1.3% to 1.5 % 2014 2015 2016 Merit increases 2.0-2.5% 2.0-2
Slide 54: Guidance
Guidance (as of June 17, 2014) 54
Slide 55: 2014 Guidance - Adjusted EBITDA
2014 Guidance - Adjusted EBITDA(1) (as of June 17, 2014) 55 Adjusted EBITDA $555 million to $565 million (exceed high end of range) (1) Reconciliation to GAAP provided on slides 62, 96, and101 (2) The considerations have not been updated for the additional ownership interest and consolidation of Fai
Slide 56: 2014 Guidance - EPS
2014 Guidance - EPS (as of June 17, 2014) 56 Earnings per Share from Continuing Operations Attributable to HealthSouth (1) $ 1.86 to $ 1.91 Considerations (2) : Higher depreciation and amortization related to recent capital investments. Higher interest expense and amortization of debt discounts
Slide 57: Income Tax Considerations
Income Tax Considerations GAAP Considerations: •As of 3/31/14, the Company’s federal NOL had a gross balance of approx. $866 million. • The Company has a remaining valuation allowance of approx. $30 million related to state NOLs. Cash Tax Payments: • In 2014, the Company expects to pay approx. $10 m
Slide 58: Free Cash Flow
Free Cash Flow 58
Slide 59: Adjusted Free Cash Flow
Adjusted Free Cash Flow (1) Considerations (1) Reconciliation to GAAP provided on slide 61. (2) 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
Slide 60: Priorities for Reinvesting Free Cash Flow
Priorities for Reinvesting Free Cash Flow 60 Growth in Core Business Debt Reduction Shareholder Distribution (1) Issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock. Excluding f
Slide 61: Adjusted Free Cash Flow
Adjusted Free Cash Flow 61 (Millions) 2014 2013 2013 2012 2011 2010 2009 107.1$ 121.4$ 470.3$ 411.5$ 342.7$ 331.0$ 406.1$ 0.2 0.7 1.9 (2.0) (9.1) (13.2) (5.7) Capital expenditures for maintenance (1) (30.2) (18.9) (74.8) (83.0) (50.8) (37.9) (33.2) Net settlements on interest rate swaps - - - - (10.
Slide 62: Reconciliation of Net Cash from Operating Activities to Adjusted Free Cash Flow
(Millions) 2014 2013 2013 2012 2011 2010 2009 Net cash provided by operating activities 107.1$ 121.4$ 470.3$ 411.5$ 342.7$ 331.0$ 406.1$ Provision for doubtful accounts (7.5) (7.4) (26.0) (27.0) (21.0) (16.4) (30.7) Professional fees—accounting, tax, and legal 1.6 1.4 9.5 16.1 21.0 17.2 8.8 Interest
Slide 63: Refinancing and Delevering
Refinancing and Delevering 63
Slide 64: Debt Maturity Profile
$287 Senior Notes (2) 8.125% ($ in millions) $272 Senior Notes 7.25% $253 Senior Notes (2) 7.75% $275 Senior Notes (2) 5.75% 2014 2017 2018 2018 2019 2020 2021 2022 2023 2024 2043 $43 Drawn + $37 LC Debt Maturity Profile $600 Revolver L+175 March 31, 2014 (1) $520 Undrawn • 10% of the outstanding pr
Slide 65: Debt and Liquidity
65 Debt and Liquidity (1) Based on 2009 and trailing 4 quarters Adjusted EBITDA of $363.7 million and $556.4 million, respectively; reconciliation to GAAP provided on slides 62 and 96-101. March 31, Dec. 31, 2014 2013 Cash Available 53.1$ 64.5$ Revolver Total Line 600.0$ 600.0$ Less: - Draws (43.0)
Slide 66: Debt Schedule
Debt Schedule (1) On November 18, 2013, the Company closed separate, privately negotiated exchange agreements under which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of the Company’s 6.5% Series A Convertible Perpetual Preferred Stock.
Slide 67: Credit Agreement Key Covenants
Credit Agreement Key Covenants (1) 67 All Transactions are subject to no defaults under covenants and pro forma leverage of less than 4.5x and interest coverage of at least 2.75x Transaction Limitations Acquisitions No additional limitations Unsecured debt issuance No additional limitations Restrict
Slide 68: Growth
Growth 68
Slide 69: Organic Growth: A Strategic Framework
Demographics + population growth and changes (weighted by age) = Rehab CAGR Growth goals for the market and/or hospital Sales and Marketing Strategies • Defining “upstream” opportunities • Identifying CMS-13 discharges • “Converting” CMS-13 patients to rehab Market Dynamics • Existing IRF beds • Man
Slide 70: Organic Growth: Compounded Annual Growth Rate
Organic Growth: Compounded Annual Growth Rate (CAGR) (1) 70 (1) Numbers in map are for illustrative purposes only and do not represent actual results. (2)“Weighted for Rehab Services” - methodology weights growth in rehab age groups higher. % CAGR Rehab by Zip Code Weighted for Rehab Services (1) (2
Slide 71: De Novo Market Selection Process
De Novo Market Selection Process 71 Active Development List Corporate Assessment Strategic Approach • Build • Buy • JV Regional President Priority Assessment “Deep Dive” Market Assessments Potential Opportunity List (160 opportunities identified) National Market Assessment (3,141 counties in 48 stat
Slide 72: De Novo Evaluation Process
• No guarantee on timeframe or ultimate success • Input from design, operations and real estate • ~ Seven acres with building expansion capability • Proximity to acute-care providers • Permitting • Land • IRR • NPV • Cash payback ..... CON Approval Site Selection Cost Assessment Pro forma Financials
Slide 73: Illustrative De Novo Timeline
Illustrative De Novo Timeline 73 Day 1 CON Process Construction With CON Permitting & Design Planning & Zoning Groundbreaking Opening Construction Permitting & Design Planning & Zoning Groundbreaking Month 20 Opening Day 1 Without CON 6 months to 3 years 20 months
Slide 74: Portfolio Growth: De Novo Assumptions and Timing
Portfolio Growth: De Novo (40-50 beds) Assumptions and Timing 74 (1) Future cash payback periods may increase when the Company exhausts its NOLs (slide 57). (2) Does not include Franklin, TN; CON award is under appeal (3) Pre-opening expenses include expenses for training new employees on the clinic
Slide 75: De Novo Occupancy and EBITDA Trends
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 6 7 8 9 10 11 12 Mesa Loudoun Bristol Cypress Ocala Littleton Stuart HLS Avg. 2013 Occupancy Months (1) Hospital EBITDA = earnings before interest, taxes, depreciation and amortization directly attributable to the related hospital De Novo Occupan
Slide 76: Portfolio Growth: Acquisition Assumptions, Timing and Performance
Portfolio Growth: Acquisition Assumptions, Timing and Performance 76 (1) Future cash payback periods may increase when the Company exhausts its NOLs (slide 57). (2) Worcester, MA is an increase in equity and consolidation of Fairlawn Rehabilitation Hospital effective June 1, 2014. (3) Expect to fina
Slide 77: Potential Expansion: Post-Acute Care Services
Potential Expansion: Post-Acute Care Services 77 Acute Care Hospital Discharge Long-Term Acute Care Hospital Hospice Inpatient Rehabilitation Facility (1) Skilled Nursing Facility Home Health (1) (Highest Acuity) (Lowest Acuity) (1) For information on HealthSouth’s hospital portfolio, see slide 4. S
Slide 78: Summary: Multiple Avenues Available for Sustained Growth
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 will
Slide 79: Operational Initiatives
Operational Initiatives 79
Slide 80: Operational Strategy
Operational Strategy Excellence in … 80 • 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
CIS Standardization Improves Patient Safety and Streamlines Operational Efficiencies 81 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 Intervent
Slide 82: CIS Benefits and Value Proposition
CIS Benefits and Value Proposition 82 • Streamline sales and marketing process • Clinical charge capture efficiency • Real time awareness of therapy intensity (higher intensity associated with better outcomes) • Enterprise standardized clinical documentation and coding processes • Workflow managemen
Slide 83: CIS Timeline
• 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 • Inst
Slide 84: CIS Cost
CIS Cost • No incentive payments (i.e. “HITECH”) for inpatient rehabilitation hospitals (1) – Only acute care hospitals are eligible • Installation cost will vary by hospital depending on items such as size and physical plan. – Installation cost expected to be in a range of $1 million to $1.5 millio
Slide 85: TeamWorks: Care Management Goals
TeamWorks: Care Management 85 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
CPR: Comfort, Professionalism, Respect • All employees trained in the CPR campaign. • Hospital-based trained facilitators will work directly with employees. • A series of short videos is used to depict common scenarios of patient/staff situations. • Facilitator training is highly interactive, encour
Slide 87: HealthSouth Management Reporting
HEALTHSOUTH MANAGEMENT REPORTING ome —_ e& oi = _ co
Slide 88: BEACON: Management Reporting
BEACON: Management Reporting (1) 88 (1) Numbers in screen shot have been modified for presentation and do not represent actual results. Provides regional and hospital leadership near real-time data to run the business Benchmarking – side-by-side hospital comparison to promote best practices Qu
Slide 89: BEACON: SmartSystem Analytics
BEACON: SmartSystem Analytics 89 Standardized best practices and purchasing Optimize vendor relationships through Electronic Data Interchange (EDI) and vendor consolidation National procurement contracts awarded through standardized RFP processes Leverage scale to receive competitive terms a
Slide 90: Operational Initiatives: SmartSystem
Operational Initiatives: SmartSystem 90 90 Completed initiatives: • Dialysis • Food • Pharmacy • Office Supplies • Outside patient service • Therapy equipment • Disciplined management of supply costs while acuity is increasing • Savings have more than offset the effect of inflation. $887 $883 $869 $
Slide 91: Operational Metrics
Operational Metrics 91
Slide 92: Operational Metrics: Expense Efficiencies
• Salaries and Benefits reflects continued improvement from productivity gains and growing revenue base. • Hospital-related Expenses includes other operating (1), supplies, and occupancy. • General and Administrative excludes stock-based compensation. • Provision for Doubtful Accounts varies based o
Slide 93: Operational and Labor Metrics
Operational and Labor Metrics (1) Represents discharges from HealthSouth’s 101 consolidated hospitals in Q1 2014, Q4 2013, Q3 2013 and Q2 2013; 98 consolidated hospitals in Q1 2013 and Q4 2012; 97 consolidated hospitals in Q3 2012; 96 consolidated hospitals in Q2 2012, Q1 2012, and Q4 2011; 94 conso
Slide 94: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) 94 2014 2013 2013 2012 2011 Medicare 75.2% 74.7% 74.5% 73.4% 72.0% Medicaid 1.3% 1.1% 1.2% 1.2% 1.6% Workers' compensation 1.3% 1.3% 1.2% 1.5% 1.6% Managed care and other discount plans, including Medicare Adv antage(1) 18.1% 18.5% 18.5% 19.3% 19.8% Other third-
Slide 95: Reconciliations to GAAP
Reconciliations to GAAP 95
Slide 96: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 101. 96 (in millions, except per share data) Total Per Share Net income 61.5$ Loss from disc ops, net of tax, attributable to HealthSouth 0.1 Net income attributable to noncontrolling interests (14.8) Income from contin
Slide 97: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 101. (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 98: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 101. (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 t
Slide 99: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) (1) (2) – See notes on slide 101. 99 (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per Share Net income 91.5$ 32.3$ 68.3$ 62.5$ 254.6$ (Income) loss from disc ops, net of tax, attributabl
Slide 100: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) (in millions, except per share data) Total Per Share Total Per Share Net income 128.8$ 939.8$ Income from disc ops, net of tax, attributable to HealthSouth (17.7) (9.2) Net income attributable to noncontrolling interests (34.0) (40.8) Income from c
Slide 101: Reconciliation Notes for Slides 96-100
Reconciliation Notes for Slides 96-100 and 102 101 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 financial measure. Management and some members of the investment co
Slide 102: Impact of Consolidation of Fairlawn Rehabilitation Hospital
Reconciliation of Net Income to Adjusted EBITDA (1) - Impact of Consolidation of Fairlawn Rehabilitation Hospital at 50% Equity Interest 102 Total Per Share Total Per Share Total Per Share Net income 381.4$ 385.6$ 4.2$ Loss from discops, net of tax, attributable to HealthSouth 1.1 1.1 - Net income a