Encompass Health Corporation · NYSE:EHC
Encompass Health — Investor Presentation (August 2018)
109 slides from Encompass Health's investor presentation, Aug 14, 2018
Slide 1: Investor Reference Book Post Q2 2018 Earnings Release
Investor Reference Book Post Q2 2018 Earnings Release Last Updated August 14, 2018 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 hospita
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16 Investment Thesis and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-24 Business Outlook, Including Guidance . . . . .
Slide 4: Company Overview
Company Overview Encompass Health is a leading provider of inpatient rehabilitation and home-based care committed to delivering high-quality, cost-effective, integrated care across the post-acute continuum. Encompass Health 4
Slide 5: A Leading Provider of Inpatient Rehabilitation and Home-Based Care
Encompass Health A Leading Provider of Inpatient Rehabilitation and Home-Based Care Market Overlap ~60% of EHC’s IRFs have an EHC home health location within an approximate 30-mile radius.* Portfolio as of June 30, 2018 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Locati
Slide 6: Company Overview: Inpatient Rehabilitation
Company Overview Inpatient Rehabilitation Inpatient Rehabilitation 109 of the Company’s IRFs hold one or more disease-specific 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 Referral Sources: Referral Sources: Acute Care Hospitals – 91% Acute Care Hospitals – 35% Physician Offices / Community – 7% Physician Offices / Community – 38% Skilled Nursing Facilities – 2% IRFs / LTCHs / SNFs – 27% Rehabilitation Impairment Category* YTD-1
Slide 9: Leading Positions in Quality of Care
Leading Positions in Quality of Care IRF Quality Home Health Quality Discharge to Community 3.8 79.4% 79.7% Percent of cases 78.7% discharged to Quality of Care 76.6% 75.7% 76.0% the community, Star Ratings(3) including home 3.3 93% of our home health agencies or home with home health. are 3 Stars o
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: Leading Position in Cost Effectiveness: Home Health
Leading Position in Cost Effectiveness Home Health Average Average revenue per Average Average Revenue episode is 5.7% 2017 Revenue Visits per Visit Cost Episodes per Episode per Episode (all payors) per Visit higher than the peer average due to higher Encompass acuity patient mix. Health 211,743 $2
Slide 12: New-Store/Same-Store Growth: Inpatient Rehabilitation
New-Store/Same-Store Growth Inpatient Rehabilitation Reliant (857 beds) 25.0 Franklin, TN (40 beds) Bryan, TX (49 beds) Broken Arrow, OK (22 beds) Shelby County, AL (34 beds) Hilton Head, SC (38 beds) 20.0 Hot Springs, AR (27 beds) Pearland, TX 15.0 Gulfport, MS (33 beds) (40 beds) Westerville, OH (
Slide 13: New-Store/Same-Store Growth: Home Health
New-Store/Same-Store Growth Home Health Acquired CareSouth 70.0 (44 home health agencies in 7 states) in November 2015 60.0 50.0 40.0 Acquired Camellia Healthcare 30.0 (14 home health agencies in 3 states) in May 2018 20.0 10.0 0.0 Admissions Q1Q1 20162016 Q2Q2 20162016 Q3Q3 20162016 Q4Q4 20162016 Q
Slide 14: Payors (Q2 2018)
Payors (Q2 2018) 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 (“HHRG”) Health & Rehab • An episode is paid in
Slide 15: Research: IRFs Better Rehabilitation Option for Stroke Patients than SNFs
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. While in an inp
Slide 16: Strong and Sustainable Business Fundamentals
Strong and Sustainable Business Fundamentals • Favorable demographic trends driving increased demand • Nondiscretionary nature of many conditions treated Attractive Healthcare Sectors • Highly fragmented post-acute sectors present acquisition and joint venture opportunities • Largest provider of inp
Slide 17: 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 17
Slide 18: 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 19: Strategy
Strategy The Company’s strategy is to expand its network of inpatient rehabilitation hospitals and home health and hospice agencies, further strengthen its relationships with healthcare systems, provider networks, and payors in order to connect patient care across the healthcare continuum, and to de
Slide 20: Elements of Strategy
Elements of Strategy Institutional programs and advanced treatment protocols connect care and allow seamless transition of patients across the healthcare continuum Clinical Leverage technology to strengthen clinical data analytics Expertise and Integration of care transition coordinators High-Qualit
Slide 21: The Healthcare Landscape is Changing
The Healthcare Landscape is Changing. 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, outcome focused. “preponderance” of one-to-one therapy). • Many existing regulations
Slide 22: Well-Positioned for Progression Towards Site Neutrality
The Company is Well-Positioned for the Progression Towards 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’s IRFs have the physical construct, clinical staffin
Slide 23: Improving Patient Experience Through Integrated Care Delivery
The Company Continues to Improve the Patient Experience Through Integrated Care Delivery Inpatient Rehabilitation–Home Health Clinical Collaboration (All Payors) Overlap Markets* 33.2% u As of June 30, 2018, ~60% of Encompass Health’s 28.6% Collaboration Rate inpatient rehabilitation hospitals were
Slide 24: Clinical Initiatives to Further Improve Quality
Clinical Initiatives to Further Improve Quality Reduce Acute Care Transfers Pain Control / Reducing Infection Control Clinical Collaboration (tracked in the IRF QRP*) the Use of Opioids Problem: Problem: Problem: Poor coordination of the discharge Acute care transfers can Problem: Infections are a t
Slide 25: Business Outlook, Including Guidance
Business Outlook, Including Guidance (as of August 14, 2018) Encompass Health 25
Slide 26: Priorities for 2018: Growth
Priorities for 2018 GROWTH u Expand portfolio of inpatient rehabilitation hospitals Ÿ Demographic trends driving increased demand for inpatient rehabilitation services Ÿ IRFs are best positioned to expand service offering in the progression towards site neutrality (see page 22) Ÿ Joint venture or wh
Slide 27: Priorities for 2018: Operational Initiatives and Capital Structure
Priorities for 2018 GROWTH OPERATIONAL INITIATIVES u Implement rebranding and name change (see page 33) u Continue to develop and implement post-acute patient navigation tools • Post-Acute Innovation Center ü Enhanced data analytics to design post-acute clinical pathways ü Formation of post-acute ne
Slide 28: Guidance - as of August 14, 2018
Guidance - as of August 14, 2018 Previous 2018 Full-Year Updated 2018 Full-Year Guidance Guidance (Provided Initially on July 25, 2018) Net Operating Revenues* Net Operating Revenues* $4,110 million to $4,210 million $4,200 million to $4,275 million Adjusted EBITDA(9) Adjusted EBITDA(9) $845 million
Slide 29: Impact of the New Revenue Recognition Accounting Standard
Impact of the New Revenue Recognition Accounting Standard u During the first quarter of 2018, Encompass Health adopted a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standard for recognizing revenue. u The primary impact to the Company’s financial rep
Slide 30: 2018 Guidance Considerations
2018 Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 0.8% increase in Medicare pricing u Estimated 0.5% net Medicare pricing before reserves related to bad debt for Q3; reduction before reserves related to bad ~1.2% for Q4 debt for second half of 2018 u Salary in
Slide 31: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(11) Assumptions 6 Months Certain Cash Flow Items 2018 2018 2017 (millions) Actual Assumptions Actual • Cash interest expense (net of amortization of debt $71.3 $140 to $150 $145.7 discounts and fees) u Increased cash payments for taxes in 2018 primarily due to exhaustion of t
Slide 32: Uses of Free Cash Flow
Uses of Free Cash Flow 6 Months 2018 2018 2017 Actuals Assumptions Actuals IRF bed expansions $9.0 $30 to $40 $25.5 New IRFs - De novos 32.9 80 to 110 75.2 Growth in - Acquisitions — opportunistic 10.9 Core - Replacement IRFs and other 8.7 40 to 50 9.7 Business Home health and hospice acquisitions (
Slide 33: Rebranding and Name Change
Rebranding and Name Change u The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. Ÿ Effective January 1, 2018, HealthSouth Corporation changed its name to Encompass Health Corporation, with a corresponding t
Slide 34: Business Outlook: 2018 to 2020
Business Outlook: 2018 to 2020 2018 2019 2020 • Implement rebranding and name change • Enhance clinical collaboration between the Company’s IRFs and home health locations Key • Develop and implement post-acute patient navigation tools (e.g., Post-Acute Operational Innovation Center) Initiatives • Re
Slide 35: Business Outlook 2018 to 2020: Revenue Assumptions
Business Outlook 2018 to 2020: Revenue Assumptions Volume Inpatient Rehabilitation* Home Health* (Includes New Stores) 3+% annual discharge growth 10+% annual admission growth Approx. 74% of Segment Revenue Approx. 86% of Segment Revenue Medicare Pricing FY 2018 FY 2019 FY 2020 CY 2018 CY 2019 (16)
Slide 36: Business Outlook 2018 to 2020: Labor and Other Expense Assumptions
Business Outlook 2018 to 2020: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2018 2019 2020 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 6-8%* 5-10% 5-10% % of Salaries and Benefits Salaries Salaries Salaries ~
Slide 37: IRF-PPS Fiscal Year 2019 Final Rule: Key Provisions
IRF-PPS Fiscal Year 2019 Final Rule: Key Provisions Update to Payment Rates Company Observations The final rule will: • Implement a net 1.35% market basket increase – 2.9% market basket increase Pricing: – (75 bps) healthcare reform reduction • Net pricing impact to the – (80 bps) healthcare reform
Slide 38: HH-PPS Calendar Year 2019 Proposed Rule: Key Provisions
HH-PPS Calendar Year 2019 Proposed Rule: Key Provisions Proposed Rule Update to 2019 Payment Rates Company Observations The proposed rule would: • Implement a net 2.1% market basket increase (2.8% market basket less a 0.7% healthcare reform productivity reduction); Pricing: • Implement the rural add
Slide 39: Home Health Review Choice Demonstration
Home Health Review Choice Demonstration (“RCD”)* State Start Date Company Overview Locations Illinois Not earlier than 10/1/18 3 Following the pause of the Pre-Claim Review Demonstration (“PCRD”) on April 1, 2017, CMS worked Ohio To be determined 1 to revise PCRD to offer more flexibility and choice
Slide 40: IMPACT Act of 2014
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 that
Slide 41: 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 increased demand. Encompass Health 41
Slide 42: Multiple Avenues Available 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 market share gains — IRF organic growth supplemented by bed addi
Slide 43: Demographic Tailwind: Growth in Medicare Beneficiary Population
Both Segments Benefit from a Demographic Tailwind: Growth in the Medicare Beneficiary Population Projected Population of Age 65+ Baby Boomer wave • The growth rate of Medicare reaches average age of beneficiaries increased in 2011 to an Millions an Encompass Health approx. 3% CAGR as “Baby Boomers”
Slide 44: Multi-faceted Inpatient Rehabilitation Growth Strategy
Multi-faceted Inpatient Rehabilitation Growth Strategy 2017 bed count increase New Beds Total IRFs 1,600 132 • Gulfport, MS (33 beds) 127 1,400 • Westerville, OH (60 beds) 122 De Novos 1,200 117 • Jackson, TN (48 beds) 112 1,000 107 • Pearland, TX (40 beds) Acquisitions 800 102 • Bed expansions (166
Slide 45: Inpatient Rehabilitation Growth Pipeline
Inpatient Rehabilitation Growth Pipeline Disciplined Approach to New Store Growth The Company’s Value Proposition – $7.7 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 46: 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%. • 41 of 42 IRFs are consolidated joint ventur
Slide 47: De Novo IRFs and Acquisitions
De Novo IRFs and Acquisitions Joint # of New Beds Location Operations Date Venture? Investment Considerations 2017 2018 2019 • IRR objective of 13% (after tax) De Novo IRFs: • Joint venture capitalization Westerville, OH Q2 2017 Yes 60 • Certificate of Need (“CON”) costs, Jackson, TN* Q3 2017 Yes 48
Slide 48: 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 $21 future expansion (accretive to financial Land 2 3 returns) Equipment (including CIS) 3 4 • Factors that impa
Slide 49: 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 Altamonte Newnan (12/2014) Middletown (12/2014) Franklin (12/2015) Springs (10/2014) Modesto (10/2016) Westerville (04/2017) Pearland (10/2017) S
Slide 50: 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 implementation of alternative payment models Organic Growth • Strong organic growth from existing agencies • Located in markets with attractive demographics * Currently located in s
Slide 51: Home Health Growth Pipeline
Home Health Growth Pipeline Number of Home Health Agencies Over Time • $18.1 billion Medicare home health market is highly 13,000 The number of home health agencies fragmented with over 12,200 is near an all-time high and presents home health agencies. 12,000 significant consolidation opportunities.
Slide 52: Hospice Growth Pipeline
Hospice Growth Pipeline • Medicare hospice market is approx. $17 billion. • 1.4 million Medicare beneficiaries received hospice Acquisition Strategy for services from approx. 4,400 providers in 2016. Hospice • Hospice use among Medicare beneficiaries has grown • Build additional scale substantially
Slide 53: Alternative Payment Models
Alternative Payment Models Encompass Health 53
Slide 54: Accountable Care Organizations
Accountable Care Organizations (“ACOs”) As of Medicare Shared Savings Program (MSSP) January 2018, (2018 - 561 ACOs / 10.5 million Medicare beneficiaries) there were • Performance Year 4 (2016) results: ◦ 241 of 432 ACOs (56%) held spending below their benchmark. 619 ▪ 107 of these ACOs reduced heal
Slide 55: Bundled Payments
Bundled Payments The Bundled Payments for Care Improvement How the Retrospective Models Work (BPCI) initiative currently tests Ÿ The BPCI “convener” is responsible for bringing four types of bundles providers together to provide a continuum of services (i.e. “Models”): throughout an episode of care.
Slide 56: The Company's Participation in BPCI
The Company’s Participation in BPCI Model 3 Inpatient Rehabilitation Participating Bundle Length % of the Company’s BPCI Bundle IRFs (in days) Total Discharges Stroke 3 60 0.12% Simple Pneumonia 1 60 0.02% Sepsis 1 60 0.01% Double-lower extremity joint replacement 2 60 <0.01% Upper extremity joint r
Slide 57: Home Health Value-Based Purchasing Model
Home Health Value-Based Purchasing Model Over the long term, the Company believes it is well-positioned to benefit from a delivery system that rewards providers who are committed to providing high-quality care. In the calendar year 2016 HH-PPS final rule, Total Performance Scores (a numeric score ra
Slide 58: Capital Structure
Capital Structure Encompass Health is positioned with a cost-efficient, flexible capital structure. Encompass Health 58
Slide 59: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value As of June 30, 2018* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $512 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $150 Drawn Revolver + $38 Capacity reserved for $350 Senior LC’s $287 $300 Senior Term Loa
Slide 60: Financial Leverage and Liquidity
Financial Leverage and Liquidity Total Debt Liquidity Leverage Ratio(21) (billions) December 31, 4.6x* June 30, 2018 2017 Cash Available $ 59.0 $ 54.4 Revolver $ 700.0 $ 700.0 Less: 3.0x - Draws (150.0) (95.0) 3.17 3.02 - Letters of Credit (38.1) (35.4) 2.8x Available $ 511.9 $ 569.6 2.58 2.64 Total
Slide 61: Debt Schedule
Debt Schedule Change in June 30, December 31, Debt vs. ($millions) 2018 2017 YE 2017 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 150.0 $ 95.0 $ 55.0 Term loan facility, September 2022 - LIBOR +150bps 287.4 294.7 (7.3) Bonds Payable: 5.125% Senior Notes due
Slide 62: IRF Real Estate Portfolio
IRF Real Estate Portfolio 128 Inpatient Rehabilitation Hospitals: 8,848 Licensed Beds 4,576 Licensed Beds Own ~70% of IRF Real Estate in CON States As of June 30, 2018 60 Own Building and Land 29 Own Building Only 39 Lease Building and Land 4,272 Licensed Beds in Non-CON States 1 of the 128 IRFs is
Slide 63: Overview of Rollover Shares Held by Home Health and Hospice Management
Overview of Rollover Shares 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-acquisition en
Slide 64: Information Technology
Information Technology Encompass Health utilizes information technology to improve patient care and generate operating efficiencies. Encompass Health 64
Slide 65: IRF Clinical Information System
IRF Clinical Information System (“CIS”): Improved Patient Safety and Streamlined Operational Efficiencies Pre-Admission Assessment Document & Approval Imaging Treatment Plan • Computerized Physician Order Entry ("CPOE") • Clinical Decision Referral Hospitals Support ("CDS") Quality Reporting Integra
Slide 66: IRF Proprietary Management System: Beacon
IRF Proprietary Management System: Beacon Encompass Health 66
Slide 67: 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 68: Operational Metrics
Operational Metrics Encompass Health 68
Slide 69: IRF Operational Metrics: Expense Efficiencies
IRF Operational Metrics: Expense Efficiencies •Salaries and Benefits includes group medical costs and is impacted by staffing levels based on patient (Percent of Net Operating Revenues) volumes. •IRF-related Expenses includes other operating expenses (excluding loss on disposal or impairment of asse
Slide 70: 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, under programs designated as “widespread probes,” net operating revenues upon notice from a MAC a claim is under review. certain Medicar
Slide 71: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net patient revenue-inpatient $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,039.3 Net patient revenue-outpatient and other revenues 25.0 23.2 25.5 25.3 26.1 25.1
Slide 72: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net home health revenue $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 702.4 Net hospice revenue 28.3 20.4 20.1 17.8 16.9 15.4 70.2 Net operating revenues* $ 233.1 $ 205.7 $ 20
Slide 73: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Rehabilitation Home Health and Consolidated Segment Hospice Segment Q2 Q2 Q2 Full Year 2018 2017 2018 2017 2018 2017 2017 Medicare 72.8% 73.2% 85.5% 85.5% 75.5% 75.6% 76.0% Medicare Advantage 9.4% 8.6% 9.3% 10.1% 9.4% 8.9% 8.6% Managed care 10.4% 11.0%
Slide 74: Industry Structure
Industry Structure Encompass Health 74
Slide 75: Overall Healthcare Spending
Overall Healthcare Spending National Healthcare Spending: $3,337.2 billion in 2016 (billions) $157.4 Investment $43.8 Government Administration $82.2 Government Public Health $441.7 Retail of Medical Products $92.4 Home Health Care $173.5 Other Health, Residential and Personal Care $881.2 Profession
Slide 76: Medicare 2016 Spending
Medicare 2016 Spending = $678.7 Billion $7.7B (1%) Inpatient Rehabilitation Hospitals (Included in Inpatient Hospitals) $ 29.1B Skilled Nursing Medicare Part A $141.3B Inpatient Hospital 4% 21% $69.9B Physician Payments Medicare Part B 15% $49.6B Outpatient Hospital $18.1B Home Health $16.8B Hospice
Slide 77: Continuum of Healthcare Services
Continuum of Healthcare Services Preventive Routine health care Post-Acute Ambulatory Acute (screenings, check- Medical care Palliative Medical care Medical ups, patient provided after a Medical care delivered on an treatment of counseling) to period of acute that is focused outpatient basis disease
Slide 78: Post-Acute Care Services
Post-Acute 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) $5.1 $7.7 $29.1 $18.1* # of Discharges ~126,000 ~391,000 ~2,300,000 ~3,400,000 Len
Slide 79: Medicare Spending on Post-Acute Services
Medicare Spending on Post-Acute Services 6 Home health spending* 3.6 3.6 3.5 3.7 ) (% of total Medicare t 3.2 3.6 3.8 n 3.2 3.6 3.7 3.4 e 3.3 3.1 spending) c 2.9 r 2.8 2.7 e 3 P ( Inpatient rehabilitation 2.1 2.2 2.1 1.9 1.8 1.5 spending (% of total 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.1 1.1 0 Medicare
Slide 80: Different Levels of Services
Different Levels of Services Inpatient Rehabilitation Hospital Nursing Home Average length of stay = 12.7 days Average length of stay = 38.4 days Discharge to community = 76.9% Discharge to community = 39.5% Requirements: Requirements: IRFs must also satisfy regulatory/policy requirements for hospit
Slide 81: Supply of IRFs is Relatively Stable
Supply of IRFs is Relatively Stable Average Annual Change Share of Medicare Discharges Type of IRF 2016 2004 2006 2008 2010 2013 2014 2015 2016 2006-2013 2013-2016 All IRFs 100% 1,221 1,225 1,202 1,179 1,161 1,177 1,182 1,188 -0.8% 0.8% Urban 93 1,024 1,018 1,001 981 977 1,013 1,020 1,026 -0.6 1.6 R
Slide 82: Inpatient Rehabilitation Sector Margins
Inpatient Rehabilitation Sector Margins Share of Medicare Discharges Margins Type of IRF 2016 2004 2006 2008 2010 2012 2013 2014 2015 2016 All IRFs 100% 16.7% 12.5% 9.4% 8.6% 11.2% 11.5% 12.4% 13.8% 13.0% Urban 93 17.0 12.8 9.6 9.0 11.6 11.9 12.8 14.2 13.2 Rural 7 13.2 10.0 6.9 4.7 6.5 6.0 6.2 8.3 9
Slide 83: Inpatient Rehabilitation Standardized Comparison of Costs
Inpatient Rehabilitation Standardized Comparison of Costs Quartile Characteristic Low Cost High Cost Median Standardized Type of IRF Cost Per Discharge Percent: Hospital based 38% 94% All IRFs $15,494 Freestanding 62 6 Hospital based 16,406 Median standardized Nonprofit 31 62 For profit 66 20 Freest
Slide 84: "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 85: 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 86: Inpatient Rehabilitation Outlier Payments
Inpatient Rehabilitation Outlier Payments(7) # 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 $ — $ 134,977,428 $ 13
Slide 87: Segment Operating Results
Segment Operating Results Encompass Health 87
Slide 88: Inpatient Rehabilitation Segment Adjusted EBITDA
Inpatient Rehabilitation Segment Adjusted EBITDA Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2018 2018 2017 2017 2017 2017 2017 Net operating revenues: Inpatient $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 3,039.3 Outpatient and other 25.0 23.2 25.5 25.3 26.1 25.1 102.0 Total segment revenue* 834.
Slide 89: Home Health and Hospice Segment Adjusted EBITDA
Home Health and Hospice Segment Adjusted EBITDA Q2 Q1 Q4 Q3 Q2 Q1 Full Year (In Millions) 2018 2018 2017 2017 2017 2017 2017 Net operating revenues: Home health revenue $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 702.4 Hospice revenue 28.3 20.4 20.1 17.8 16.9 15.4 70.2 Total segment revenue* 2
Slide 90: Segment Operating Results Q2 2018 and Q2 2017
Segment Operating Results Q2 2018 Q2 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 834.6 $ 233.1 $ — $ 1,067.7 $ 777.6 $ 188.8 $ — $ 966.4 Operating Expenses: Inpatient Rehabilitation: Salaries and be
Slide 91: Segment Operating Results Six Months Ended June 30
Segment Operating Results Six Months Ended June 30, 2018 Six Months Ended June 30, 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 1,674.9 $ 438.8 $ — $ 2,113.7 $ 1,555.4 $ 368.1 $ — $ 1,923.5 Operating
Slide 92: Segment Operating Results Year Ended December 31, 2017
Segment Operating Results Year Ended December 31, 2017 Home Health and (In Millions) IRF Hospice Reclasses Consolidated Net operating revenues $ 3,141.3 $ 772.6 $ — $ 3,913.9 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,603.8) — (550.8) (2,154.6) Other operating expenses(a)
Slide 93: Reconciliations to GAAP and Share Information
Reconciliations to GAAP and Share Information Encompass Health 93
Slide 94: Reconciliation of Net Income to Adjusted EBITDA 2018
Reconciliation of Net Income to Adjusted EBITDA(9) 2018 Q1 Q2 6 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Net Income $ 105.2 $ 113.2 $ 218.4 Loss (income) from disc ops, net of tax, attributable to Encompass Health 0.5 (0.2) 0.3 Net income attributab
Slide 95: Reconciliation of Net Income to Adjusted EBITDA 2017
Reconciliation of Net Income to Adjusted EBITDA(9) 2017 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 $ 84.4 $ 79.4 $ 85.1 $ 86.5 $ 335.4 Loss (income) from disc ops, net of tax, attributable to E
Slide 96: Reconciliation of Segment Adjusted EBITDA to Income Before Tax
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Three Months Ended Six Months Ended Year Ended June 30, June 30, December 31, 2018 2017 2018 2017 2017 (In Millions) Total segment Adjusted EBITDA $ 265.1 $ 241.2 $ 522.4 $ 470.5 $ 947.1 General
Slide 97: Adjusted EPS - Q2 2018
Adjusted EPS(10) - Q2 2018 For the Three Months Ended June 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(27) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 231.6
Slide 98: Adjusted EPS - Q2 2017
Adjusted EPS(10) - Q2 2017 For the Three Months Ended June 30, 2017 Adjustments Mark-to- Market Adjustment on Stock As Compensation Income Tax As Reported Expense Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 209.5 $ — $ — $ 209.5 Depreciation and amortization (45.8)
Slide 99: Adjusted EPS - YTD 2018
Adjusted EPS(10) - YTD 2018 For the Six Months Ended June 30, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Transaction Equity As Reported Expense Adjustments Costs Securities(27) Adjusted (In Millions, Except Per Share Amounts) Adjust
Slide 100: Adjusted EPS - YTD 2017
Adjusted EPS(10) - YTD 2017 For the Six Months Ended June 30, 2017 Adjustments Mark-to-Market Adjustment for Stock As Compensation Income Tax As Reported Expense Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 410.3 $ — $ — $ 410.3 Depreciation and amortization (91.0)
Slide 101: Adjusted EPS - 2017
Adjusted EPS(10) - 2017 For the Year Ended December 31, 2017 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Appreciation Tax Reform Extinguishment Income Tax As Reported Rights(29) Impact(28) of Debt(30) Adjustments(31) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBI
Slide 102: Adjusted Free Cash Flow History
Adjusted Free Cash Flow History(11) Q2 6 Months Full Year (Millions) 2018 2017 2018 2017 2017 2016 Net cash provided by operating activities $ 169.2 $ 151.2 $ 385.5 $ 332.0 $ 658.3 $ 634.4 Impact of discontinued operations (0.1) 0.2 0.6 0.6 0.6 0.7 Net cash provided by operating activities of contin
Slide 103: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q2 6 Months Full Year (Millions) 2018 2017 2018 2017 2017 2016 2015 2014 2013 Net cash provided by operating activities $ 169.2 $ 151.2 $ 385.5 $ 332.0 $ 658.3 $ 640.2 $ 505.9 $ 458.9 $ 477.8 Professional fees — accounting, tax,
Slide 104: Share Information
Share Information Weighted Average for the Period Q2 6 Months Full Year 2018 2017 2018 2017 2017 2016 2015 Basic shares outstanding(12) 97.9 90.3 97.9 89.5 93.7 89.1 89.4 Convertible perpetual preferred stock(32) — — — — — — 1.0 Convertible senior subordinated notes(12) — 7.5 — 8.1 4.0 8.5 8.3 Restr
Slide 105: End Notes
End Notes Encompass Health 105
Slide 106: 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 107: 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 inform
Slide 108: End Notes, con't.
End Notes, con't. (17) The Bipartisan Budget Act (“BBA”) of 2018, signed into law on February 9, 2018, provides for a home health market basket update of 1.5% for CY 2020 and the elimination of any productivity adjustment to the market basket for that year. It also provides for the extension of the
Slide 109: End Notes, con't.
End Notes, con't. (28) The application of the lower income tax rate that resulted from the Tax Cuts and Jobs Act to the Company’s net deferred tax assets resulted in a net $1.2 million increase in tax expense in Q4 2017. Application of the new tax rate to the Company’s joint venture entities’ deferr
Encompass Health — Investor Presentation (August 2018) on 6ix