Encompass Health (NYSE:EHC) reported what executives described as a “very strong” fourth quarter, capping a “stellar” 2025 marked by double-digit revenue growth, expanding EBITDA, and continued reductions in premium labor spending even as the company added capacity and treated more patients.
Full-year 2025 results highlighted revenue and EBITDA growth
Chief Executive Officer Mark Tarr said 2025 revenue increased 10.5%, driven by 6% discharge growth and pricing growth, which he attributed to patient mix and patient outcome quality. He added that 2025 EBITDA grew 14.9% on operating leverage and “disciplined expense management.”
Fourth-quarter performance, cash flow, and labor trends
Chief Financial Officer Doug noted fourth-quarter revenue increased 9.9% to $1.5 billion, while adjusted EBITDA rose 15.9% to $335.6 million. The revenue increase included 5.3% discharge growth and a 4.1% increase in net revenue per discharge, which benefited from a $2.7 million settlement with a managed care payer related to prior-year claims.
Bad debt expense was 2.1% for the quarter, flat year over year. Salary, wages, and benefits per FTE increased 2.1% in Q4, and benefits expense per FTE increased 2.9%, which management attributed to lapping a prior-year increase in group medical expense.
Premium labor costs continued to fall. Doug said premium labor (contract labor plus sign-on and shift bonuses) declined $5.8 million year over year to $23.8 million, the lowest since the first quarter of 2021. Contract labor FTEs as a percentage of total FTEs was 1.1%, also the lowest since Q1 2021. Leadership tied improvements to a softening labor market, operational discipline, reduced turnover, and hiring progress, including a net addition of 300 same-store RNs during 2025.
Net reopening and ramp-up costs were $2.9 million in Q4 and $13.9 million for the full year. Doug said Q4 costs came in lower than expected because some newly opened hospitals contributed positive adjusted EBITDA in the quarter and others ramped better than budgeted, partly due to faster Medicare certifications.
Encompass also highlighted cash generation. Adjusted free cash flow increased 23.6% in Q4 to $235.4 million, and full-year adjusted free cash flow rose 18.5% to $818 million. Management said the company funded $736 million in capital expenditures, $158 million of share repurchases, and $71 million in cash dividends while keeping long-term debt “essentially flat.” Year-end net leverage was 1.9x.
2026 guidance and capital allocation framework
Doug provided initial 2026 guidance calling for:
- Net operating revenue: $6.365 billion to $6.465 billion
- Adjusted EBITDA: $1.34 billion to $1.38 billion
- Adjusted EPS: $5.81 to $6.10
On capital allocation, Doug discussed leverage targets in response to an analyst question, outlining an example based on midpoints. He said midpoint adjusted free cash flow assumptions were “about $828 million,” with growth capex around $725 million and dividend cash use around $77 million. Under those assumptions, he said leverage would end 2026 around 1.83x, and even keeping leverage at 2x could imply capacity for an additional $230 million to $250 million of share repurchases or other distributions. He said there were not meaningful opportunities to buy back leases, and suggested excess cash would most likely be used for additional buybacks and dividend increases.
Capacity expansion, small-format hospitals, and technology initiatives
Management continued to frame bed capacity additions as a key growth driver. Tarr said the company added 517 beds in 2025—390 through eight new hospitals and 127 through expansions at existing hospitals—and expects ongoing investment as the target demographic grows at roughly 4% and the “demand-supply gap” for licensed inpatient rehab facility (IRF) beds widens.
Executives said the company will add a third capacity modality beginning in 2027: small-format hospitals as part of a hub-and-spoke strategy. Doug described a planned 24-bed, single-story prototype on roughly 2 to 2.5 acres that leverages the management team and marketing resources of a host hospital, with no on-site food preparation and a smaller gym. He said these sites would operate under the same Medicare provider number as the host, allowing managed care contracts to extend without renegotiation and avoiding a separate Medicare certification and “30 free patients” ramp-up. Pat added the company already has three locations that “operate like” the model and said there are “dozens” of potential locations under consideration.
On technology, Tarr said Encompass converted its ERP system to Oracle Fusion in October “without significant disruptions,” providing a cloud-based infrastructure to support growth. Executives also discussed an expanded relationship with Palantir, citing 2025 initiatives to streamline admission documentation and improve responses to claims denials. While management said quantifying ROI is difficult, they pointed to potential benefits such as improved denial outcomes and reduced staffing needs to process denials, and highlighted potential projects in CRM, market analysis for siting new capacity (including small-format hospitals), revenue cycle management, and clinical staffing.
Regulatory and payer dynamics: RCD, TEAM model, and Medicare Advantage denials
Management spent significant time addressing investor concerns about regulatory changes, specifically the expansion of RCD and the launch of the TEAM model.
On RCD, Tarr said the company engaged with Palmetto and CMS during 2025 and reported its seven Alabama hospitals had an aggregate average affirmation rate of approximately 93% for cycle four. Doug characterized RCD as “a new acronym for the same old thing,” noting Medicare coverage and documentation requirements have not changed and CMS has long had authority to audit claims through various programs. He said Encompass appeals “the overwhelming majority” of non-affirmed claims and is having “good success” reversing denials, though he said it is still early to call ultimate resolution rates. Management said Pennsylvania’s experience suggests 98% to 99% affirmation rates may be more representative broadly, and reiterated that 2026 guidance assumes a bad debt rate of 2% to 2.5%. The company also said RCD had “virtually” no impact on Alabama volumes and noted planned expansions at most of its hospitals in the state.
On TEAM, executives said implementation began Jan. 1 and that Encompass has 89 hospitals in initial TEAM markets, including 41 joint ventures. They emphasized there is “no downside risk” to subject acute care hospitals in 2026 under the default track and compared TEAM to prior episodic payment models such as CJR and BPCI, which management said did not ultimately derail Encompass’ discharge growth. Pat said early analysis showed “no impact” on TEAM-associated diagnosis volumes one month into the program. Management also discussed potential offsets, including growth in other diagnostic categories and dialysis patients with end-stage renal disease who are exempt from TEAM; Pat said about 4% of current volume falls into that bucket and cited the company’s Tablo dialysis investments, with nearly 70% of hospitals covered.
Executives also raised concerns about Medicare Advantage behavior. Doug said Medicare fee-for-service mix was higher in Q4 partly because the company saw “challenges” with one national Medicare Advantage payer, where the conversion rate dropped significantly despite referral growth. Management said the plan’s denials appeared inconsistent with Medicare coverage requirements and that Encompass plans to communicate with both the plan and CMS, implement an “admit and appeal” strategy in select markets, and reinforce patient choice with referral sources, patients, and caregivers. Pat added the company’s Veterans Community Care Network continued to grow and now represents 19% of managed care volume, with over 20% discharge growth in the segment for the third consecutive quarter.
Elsewhere in the Q&A, management said it saw no significant change in general and professional liability activity from 2024 to 2025, and discussed upcoming unit closures and consolidations that could create a headwind to same-store discharge growth in early 2026, which the company expects to partially mitigate.
About Encompass Health (NYSE:EHC)
Encompass Health Corporation is a leading provider of post‐acute healthcare services in the United States, operating a comprehensive network of inpatient rehabilitation hospitals and home health and hospice agencies. Its inpatient rehabilitation hospitals offer intensive therapy programs for patients recovering from conditions such as stroke, brain injury, spinal cord injury, cardiac and pulmonary disorders, and orthopedic procedures. Through its home health segment, Encompass Health delivers skilled nursing, physical therapy, occupational therapy and speech therapy to patients in the comfort of their homes, while its hospice services provide end‐of‐life care focused on symptom management and emotional support for patients and families.
Founded in 1984 as HealthSouth Corporation and rebranded as Encompass Health in 2018, the company has grown organically and through acquisitions to serve patients across more than 30 states.
