Encompass Health Earnings Call Highlights Strong Growth

Encompass Health ((EHC)) has held its Q4 earnings call. Read on for the main highlights of the call.

Encompass Health’s latest earnings call struck an upbeat tone, as management detailed double‑digit revenue and EBITDA growth, record free cash flow and improving labor metrics. While they acknowledged pressure from Medicare Advantage payers, regulatory audits and a few unit closures, the overall message was one of resilience and proactive strategy, with positives clearly outweighing the headwinds.

Revenue and EBITDA Momentum Underpins Growth Story

Full‑year 2025 revenue rose 10.5%, with Q4 revenue up 9.9% to $1.5 billion, underscoring solid demand across the portfolio. Adjusted EBITDA grew even faster, climbing 14.9% for the year and 15.9% in Q4 to $335.6 million, signaling expanding operating leverage and disciplined cost control.

Free Cash Flow Fuels Aggressive Capital Deployment

Adjusted free cash flow surged to $818 million for 2025, up 18.5% year over year, with Q4 alone generating $235.4 million, up 23.6%. Management put that cash to work, funding $736 million of capex, buying back $158 million of stock and paying $71 million in dividends, all while keeping long‑term debt essentially flat.

Volume Growth and Favorable Patient Mix Support Pricing

Discharges increased 6% for 2025 and 5.3% in Q4, reinforcing the company’s volume story despite localized headwinds. Net revenue per discharge rose 4.1% in Q4, helped by a managed‑care settlement, and case mix was favorable, with strong growth in brain injury, cardiac, neuro, major trauma and stroke diagnoses.

Quality Outcomes Remain a Competitive Advantage

Management highlighted standout clinical quality, with an 84.6% discharge‑to‑community rate and lower‑than‑industry discharges to acute‑care and skilled‑nursing facilities. Patient outcome scores and satisfaction reached record levels in 2025, strengthening the company’s positioning with physicians, partners and payers.

Labor Cost Improvement Bolsters Margins

Premium labor spending fell by more than $21 million in 2025, with Q4 premium costs dropping to $23.8 million, the lowest since early 2021. Contract labor represented just 1.1% of total FTEs, while the company modestly increased compensation per FTE, reduced nursing and therapy turnover and added roughly 300 net RNs on a same‑store basis.

Capacity Expansion and Small‑Format Hospitals Drive Growth

The company added 517 beds in 2025, including eight new hospitals and expansions at existing sites, extending its geographic footprint. Looking ahead, Encompass plans to launch 24‑bed small‑format hospitals from 2027 to support a hub‑and‑spoke model, deepen market density and tap into underserved demand pockets.

Technology Investments Enhance Efficiency and Denial Management

Encompass completed its ERP migration to Oracle Fusion in October, modernizing its finance and operations backbone. It also expanded its partnership with Palantir to streamline admission documentation and strengthen responses to claim denials, with plans to extend analytics into CRM, revenue cycle and clinical staffing.

Balance Sheet Strength Supports Ambitious 2026 Targets

Net financial leverage ended 2025 at 1.9x, providing ample flexibility for growth and shareholder returns. Management’s 2026 guidance calls for net operating revenue of $6.365–$6.465 billion and adjusted EBITDA of $1.34–$1.38 billion, implying continued mid‑single‑digit top‑line growth and solid profitability.

Medicare Advantage Conversion Weakness Concentrated in Key Payers

The biggest operational blemish was a sharp drop in conversion rates with a large Medicare Advantage plan, with about a 500‑basis‑point decline despite rising referrals. Historically, Medicare Advantage converts far below fee‑for‑service, prompting an “admit‑and‑appeal” strategy and targeted engagement that may create short‑term volume volatility but could unlock upside if conversion improves.

RCD Audits Create Friction but Are Largely Affirmed

Recovery and coverage determinations, particularly under the Palmetto MAC in Alabama, created administrative friction and required multi‑level appeals on some non‑affirmed claims. Even so, Alabama’s aggregate affirmation rate reached roughly 93% in the latest cycle, and management expects rates to improve as education and processes mature.

Unit Consolidations Add Same‑Store Headwinds

Lease terminations and unit closures in Pennsylvania, Ohio and West Virginia weighed on same‑store discharge growth, with Cincinnati alone cutting Q4 same‑store volume by about 45 basis points. The Bridgeport closure is expected to create a roughly 70‑basis‑point same‑store headwind in 2026, though management believes it can mitigate roughly half of that impact.

Regulatory and Provider Tax Headwinds Remain Manageable

Management noted ongoing regulatory uncertainty from the TEAM model pilot and potential RCD expansion into large states, which could require additional resources but are not expected to be near‑term earnings shocks. Provider taxes also rose, trimming EBITDA by about $21 million in 2025 versus $15.5 million a year earlier, representing a modest but persistent margin drag.

2026 Outlook Anchored in Cash Generation and Capex

For 2026, Encompass expects net operating revenue between $6.365 billion and $6.465 billion, adjusted EBITDA of $1.34–$1.38 billion and adjusted EPS of $5.81–$6.10, assuming a bad‑debt rate of roughly 2.0–2.5%. At the midpoint, management models adjusted free cash flow near $828 million, enough to fund about $725 million of growth capex while continuing share repurchases and dividends.

Encompass Health’s call painted a picture of a company growing volumes, expanding margins and reinvesting heavily, even as it navigates payer and regulatory friction. For investors, the story hinges on continued execution in labor, technology and capacity expansion, with Medicare Advantage conversion and regulatory developments as the key swing factors for returns.