Encompass Health Corporation

Good morning everyone and welcome to Encompass Health's first quarter 2025 earnings conference call. At this time I'd like to inform all participants that their lines will be in a listen only mode. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time please press the star and 1 on your telephone keypad. You will be limited to one question and one follow up question. Today's call is recorded. If you have any objections to potentially being recorded you may disconnect at this time. I'll now turn the call over to Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning everyone. Thank you for joining Encompass Health's first quarter 2025 earnings call. Before we begin, if you do not already first quarter earnings release, supplemental information and related form 8K filed with the SEC are available on our website at EncompassHealth.com. On page 2 of the supplemental information you will find the safe harbor statements which are also set forth in greater detail on the last page of the earnings release. During the call we will make forward looking statements such as guidance and growth projections which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties like those relating to regulatory developments as well as volume, bad debt and cost trends that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in the company's SEC filings including the earnings release and related form 8K. The form 10K for the year ended December 31, 2024 and the form 10Q for the quarter ended March 31, 2025 when filed. We encourage you to read them. Your caution not to place undue reliance on the estimates, projections, guidance, and other forward looking information presented which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release, and as part of the form 8K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark Tarr, Encompass Health's President and Chief Executive Officer.

Thank you, Mark, and good morning, everyone. We are pleased to report another strong quarter. First quarter revenues increased .6% and suggested EVITA increased 14.9%. First quarter total discharge growth of .3% was a strong result particularly in light of Q1 2024's 10% discharge growth. Recall that Q1 of 2024 benefited from an extra day due to leap year and because the quarter ended on Easter Sunday. First quarter of 2025, same store discharges grew 4.4%. Once again, the efforts of our dedicated and highly competent clinical team allowed us to accommodate this volume while maintaining outstanding patient outcomes. Our Q1 discharge community rate was 84%. Our discharge to SNF rate was down to 6.4%. Our performance on each of these quality metrics compare favorably to the industry average. We continue to invest in our clinical team by providing professional growth and development programs such as our clinical ladder and inhouse continuing education opportunities. These programs contribute to the continuing improvement and our clinical turnover trends. Q1 of 2025 annualized RN turnover was .1% down from previous years .4% and annualized therapist turnover rate was .3% down from prior years 7.7%. Due in large part to our Q1 results, we are increasing our 2025 guidance. We are continuing to invest in capacity additions to meet the needs of patients requiring inpatient rehabilitation services. In Q1, we opened a new 40-bed joint venture hospital in Athens, Georgia, our seventh JV hospital in partnership with Piedmont. We also added 25 beds to existing hospitals. Over the balance of the year, we plan to open six denobos with a total of 300 beds as well as a 50-bed freestanding satellite hospital. Consistent with our historical practice, the satellite will be accounted for as a bed addition. We anticipate adding another 125 to 145 beds to existing hospitals in 2025 inclusive of the aforementioned satellite. We continue to build and maintain an active pipeline of denobo projects, both wholly owned and JVs while also monitoring and assessing bed expansion opportunities. Our pipeline of announced denobo projects with opening dates beyond 2025 currently consists of 10 hospitals with 500 beds and we anticipate additional projects will be announced over the balance of the year. In response to strong volumes and current occupancy levels at some of our hospitals, we have increased our bed expansion plans and now expect to add approximately 120 beds to existing hospitals in both 2026 and 2027. The demand for inpatient rehabilitation services remains considerably underserved and continues to grow as the U.S. population ages. We intend to continue to expand our capacity and capabilities to help meet this demand. On April 11th of this year, CMS released the 2026 Earth proposed rule. This included a proposed net market basket update of 2.6 percent which we estimate would result in a 2.7 percent increase for our Medicare patients beginning October 1st, 2025 based on our current plan. We expect the Earth final rule to be released in late July or early August. Yesterday we announced that Pat Toor has been promoted to the newly established position of Chief Operating Officer where he will oversee hospital operations across the organization. Pat's promotion was prompted by our significant growth and robust development pipeline. Since joining Encompass Health in 2018, Pat has held several leadership roles, most recently group president overseeing three of our geographic operating regions with a total of 69 hospitals. Pat has been instrumental in shaping our operational success and driving the delivery of exceptional care to the patients and communities we serve. Many of you met Pat at our investor day in 2023 and at investor conferences and meetings since then. And we are excited to have him in this new role. He's with us here in the room this morning. Now I'll turn it over to Doug.

Thank you, Mark, and good morning, everyone. Revenue for the quarter increased 10.6 percent to 1.46 billion and adjusted EBITDA increased 14.9 percent to 313.6 percent. Revenue growth for the quarter was driven by a 6.3 percent increase in total discharges and a 3.9 percent increase in net revenue per discharge. Same store discharges grew 4.4 percent. Our volume strength continues to be broad-based across geographies and patient and payor mix. Net revenue per discharge growth of 3.9 percent was higher than anticipated due in part to payor mix. Q1 SWB per FTE increased 3.2 percent. Premium labor cost comprised of contract labor and sign-on and ship bonuses declined $5 million from Q1 24 to 28.6 million. Contract labor in the quarter was $16.4 million, down $2.9 million from Q1 24, and sign-on and ship bonuses were $12.2 million, down $2.1 million. Contract labor FTEs as a percent of total FTEs was 1.3 percent for the quarter. Consistent with our recent trend, benefit expense per FTE increased 14 percent. Growth in benefits expense per FTE is being driven by an increase in the severity and frequency of group medical claims. Group medical expense growth is expected to remain elevated in Q2 and begin to ease in the second half of the year as we anniversary the increase experienced in 2024. It's also worth noting that the Q1's benefits per FTE increase comes off a low base as benefits per FTE growth in Q1 of 24 was .7 percent. Net pre-opening and ramp up costs were $2.1 million. As previously stated, we expect these costs to be heavily weighted towards the second half of the year due to the timing of our new hospital openings. Q1 adjusted free cash flow increased 32.7 percent to $222.4 million. We now expect full year adjusted free cash flow of $620 to $715 million. Our primary use of free cash flow continues to be capacity expansions. As Mark mentioned, given the growing demand for IRF services and our increasing occupancy rates, we have increased our pipeline of bed addition projects. This is reflected both in our raised growth related CAPEX assumptions for 2025 and our estimated bed additions through 2027. For 2025, we now anticipate adding 100 to 120 beds to existing hospitals. For 2026 and 2027, we now anticipate adding approximately 120 beds to existing hospitals. During Q1, we repurchased 333,679 shares of our common stock for a total of $32.1 million and declared a cash dividend of 17 cents per share. Our leverage and liquidity remain well positioned. Net leverage at quarter end was 2.1 times compared to 2.2 times at year end. We ended the quarter with $95.8 million in unrestricted cash and no amounts drawn on our billion dollar revolving credit facility. Moving on to guidance, as Mark stated, based primarily on our Q1 results, we are raising our 2025 guidance as follows. Net operating revenue of $5.85 to $5.925 billion, adjusted EBITDA of $1.185 to $1.220 billion, and adjusted earnings per share of $4.85 to $5.10. The key considerations for the 2020-2023 guidance underlying our guidance can be found on page 11 of the supplemental slides. With that, we'll open the lines for questions.

At this time, if you'd like to ask a question, please press the star and 1 keys on your telephone keypad. Keep in mind you will be limited to one question and one follow-up question at a time. You may also remove yourself from question queue at any time by pressing star and 2. Again, it's star and 1 to ask a question. We'll take our first question from Pito Chikaring with Deutsche Bank. Please go ahead, your line is open. Good morning,

Pito. Good morning, guys. Great quarter. First question here on PairMix. It's been a long time since we've seen such a big move up in Medicare or fee for service. Is this due to any strategic actions that you guys have put in place or something else? Because you added such a nice revenue per discharge in the quarter.

Yeah, Pito, your observation is absolutely correct. As a matter of fact, we haven't seen Medicare fee for service discharges grow faster than Medicare Advantage discharges since the year before. It's not the result of any deliberate strategic actions in which we're favoring referrals or patient admissions from fee for service versus Medicare Advantage. We like the rest of the world have heard anecdotally about the fact that perhaps M.A. growth based on new enrollment may have slowed a little bit. But we really don't think that that was having a discerning impact on the mix for the quarter. One quarter does not a trend make. So we're not necessarily anticipating that this is the new normal on a go forward basis. As a matter of fact, our revised guidance assumes that we get back into the kind of PairMix dynamic that we were seeing prior to this quarter. But it's certainly something we'll keep an eye on. Pito, just a reminder,

over 90 percent of our admissions come directly from the acute care hospitals, referral sources in our marketplaces. So as Doug noted, we don't know if this is a major trend or not, but we were pretty much just there to try to service the referral sources that are existing in our marketplaces.

You know, and it is interesting if you look at the PairMix in totality for the quarter and even with the reversal in terms of the trend between fee for service and Medicare Advantage. Medicare, fee for service and Medicare Advantage together as a percentage of our PairMix increased about 150 basis points. And those are our two highest reimbursement payers. And then Medicaid and managed care, which are below that in terms of reimbursement, declined by about 140 basis points. And so it was those factors that really contributed significantly to the 3.9 percent increase in revenue per discharge.

Okay, great. And then I can talk about your employees occupied by bed and occupancy. You know, it's a high class problem, but your occupancy hit a new high and your employees preoccupied by bed hit a new low. It's provided a lot of leverage on the P&L. Are you guys sort of behind on hiring with the current demand or is this a seasonal? And can you sort of give us the dynamics between occupancy, employees preoccupied by bed and how you think about planning for hiring in the next few quarters due to demand and productivity? Thank you.

Yeah, Peter, we remain committed to that three point four number on EPOB. Clearly, we got some leverage in the first quarter, as you noted, that's the highest occupancy rate we've had. A couple of notes on that would be as remember, we only had one de novo hospital came online in Q1. So you didn't have the delivering of the ramp up. We will have obviously a higher number of de novo's coming on, particularly in the third and fourth quarters. So that's going to impact EPOB as we bring on staff at those new hospitals that had not yet opened with patients. We're no, I don't think we're behind. We remain committed. We have the talent acquisition team that continues to hire, particularly focused on nurses, but they've done a great deal with with other positions. We did redirect some of those resources that were staffing new hospitals on to existing hospitals in markets where we continue to run a high percentage of contract labor that may have continued to contributed to the decrease in the contract labor dollars you saw in the first quarter. We were just able to fill more of those open positions at those hospitals with permanent staff versus contract labor. So I wouldn't read a whole lot into the EPOB. We'll continue to focus on running as efficient as we can, but we still think the 3.4 number is a good number.

Peter, you hit out a couple of key relationships in that number. One is that there is some seasonality factored in. Q1 is normally a very good volume quarter for us, and that proved to be the case this year as well. So there is some seasonality factored in. That said, I would say that overall the discharge growth in the quarter was higher than our initial expectations. The second thing is that there's definitely a correlation between labor productivity and occupancy because you're creating patient density when you run at higher levels of occupancy, and that gives rise to coverage issues. But to Mark's point, we're not anticipating that this is a new sustainable run rate, and when you factor in the seasonality in the business and the timing of new capacity additions through the course of the year, we expect that number to gravitate a little bit north.

And we will take our next question from Andrew Mock with Barclays. Play it. Please go ahead. 3. To re

-record it.

Hello, Andrew. 4.

Or not.

Andrew, you're after?

I believe Andrew may have disconnected. We'll take our next question then from Whit Mayo with Learing Partners. Please go ahead.

Hello, Whit.

Hey, guys. Good morning. Congrats. Yeah, congrats to Pat. I guess my first question, I'm curious, just there's a lot of conversation around tariffs and wanted to just get what your updated thoughts are on either supply cost or construction expenses, so I'll just start there.

Yeah, like probably everybody else in this country, we're a little bit in wait and see mode. We've done a pretty thorough assessment based on the information that is available to us, and it's obviously a very dynamic environment. Right now, we don't believe that we have much, in the way of near-term risk, either with related to construction costs or more generally speaking within our supply chain. Much of the material that is related to the projects that are currently under construction has already been procured and hasn't been subject to any of the tariffs. And within our broader supply chain, based on some of the reconfiguration that we originally did out of COVID and based on the underlying contracts that are in place, we're fairly insulated against that, at least for fiscal year 2025. We'll continue to keep an eye on this, but right now, we're not estimating any kind of significant impact.

Okay. And then, sounds like you guys are increasing a little bit, the commitments on bed growth and additions next year. Just was wondering if you had any initial expectations around your start-up costs for 2026 and also if you could just remind us on Medicaid supplemental, sort of what the exposure is there. Thanks.

Yeah. Don't have an initial range for you on the 2026 start-up cost. My guess is that I'd have to look more specifically and compare timing from quarter to quarter and specifically look at what is some of the timing around early 2027, but I wouldn't expect the number to be markedly different than what we're anticipating for 2025 into 2026. In terms of the Medicaid supplemental payments, as we've said previously, for us, it's just not nearly as big a deal as it is for the acute care hospitals. I want to remind you of some of the historical context. If we go back to 2023, the total EBITDA impact for us from provider tax revenue minus the provider tax expense was a negative $800,000. The year prior in 2022 was a positive $2 million. Last year was a bigger number with a $15.4 million favorable impact on EBITDA, but even that was a negative $2 million for the acute care hospitals. For the quarter, for Q1, the total impact was $3 million to EBITDA, which was a decrease of $1.9 million from the $4.9 million EBITDA impact in Q1 of 2024.

Great. Thanks.

We'll take our next question from Matthew Gilmore with KeyBank. Please go ahead. Your line is open.

Hey, Matthew. Hey, good morning, guys, and congrats as well, Pat. Maybe going back to labor efficiency and asking about the SWB per FTE metric, it seemed like that ran relatively modestly in the first quarter, so favorable. I was curious how that played out versus your expectations, and it sounded like from Doug's comments that labor and sign-on and shift bonuses was favorable. I was curious how you felt about the sustainability of that going forward.

Yeah, so you're absolutely right. At .2% in terms of the total SWB inflation rate for the first quarter, we were slightly below the low end of the guidance range that we had for the full year. The benefits piece being up 14% was pretty much in line with our expectations, and again, was consistent with the trend that we saw at least in Q4 of last year. The points of leverage that got us below the low end of the range were twofold. One you just mentioned was we had anticipated that across the course of the year, and we continue to have this anticipation, that the total spend on the premium labor categories from 24 to 25 would remain essentially flat from a nominal dollar perspective, and we saw a -over-year decrease. We're not sure again that, I know I've used this phrase already once today, but we're not sure that one quarter makes a trend, so we're still building into our guides the anticipation that that flat is a good assumption. And then the second is that just removing the premium labor categories are SW per FTE inflated at a more modest rate than we had recognized in the second half of the year. Again, we're not ready to call that a new trend, but it was a favorable outcome for the quarter.

Matthew, I would say that we have a history of running relatively low contract labor. Clearly, the volume growth that we've had the past couple of years has put some upward pressure on that, but our operating teams are very focused on filling their full-time and part-time positions and continuing to drive down the need for contract labor, and they have the tools to do that. So as we continue to see some of the labor markets normalize or even soften a bit from where they were in previous years, we remain very focused on driving down

those numbers. And we were pleased with the .3% of total FTEs being contract labor FTEs in the quarter. That's the lowest we've been at in a while. I'll remind you that our run rate prior to the initial peak in labor conditions, which really occurred in the third quarter of 2021, had been just below 1%. So we're not to that level. We don't know that we're getting back to that level. The rate for contract labor also has really stabilized kind of in that $175,000 to $180,000 on an annualized basis. Again, that's higher than it would have been prior to this peak conditions arising in Q1 of 21, which was closer to $145,000 to $150,000, but it's substantially down from the peak, which we hit in the first quarter of 2022, which was $240,000.

That's great. Thank you. And then one quick one on flu. I think in the past, sometimes you've called out flu leading to more patients with debility coming to your facilities. Just curious if there was any of that impact in the quarter and anything to flag there.

I don't think there was anything that's material. Yes, that seemed to be a pretty active flu season. The ability to measure that impact on our volumes for Q1, I think it's negligible, but it was out there. But I can't say it's any more significant or less significant than previous years. Yeah. I think

within the patient mix, the strength was actually more broad-based and driven as much by flu volume. You actually see that in the fact that the ability, and you're correct, Matthew, that that's typically where you'll see some of those flu volumes show up. And the ability on a -over-year basis only increased .2% in the quarter. That good growth in stroke again, it had roughly 4%. Brain injury was up 8%. Neurological up almost 7%.

Got it. Thank

you. We'll take our next question from Anne Hines with Mizzouho Securities. Please go ahead. Your line is open.

Morning, Anne. Hi. Good morning. Just getting back to the capacity because it was so high in the quarter. In this de novo strategy, obviously it's working. At what point do you think you could or would want to accelerate your growth strategy? Do you think that's in the cards over the next couple of years since the strategy has been so successful?

Well, we are accelerating the growth strategy starting with the bed expansions. And that's the most direct way to alleviate any pressures arising from higher occupancy rates. I do want to point out that because we've been increasing steadily, the proportion of our portfolio that is comprised of private rooms versus semi-private rooms, our theoretical occupancy rate has been increasing along the way. To give you some specifics on that, if we go back to 2020, just over 40% of our total beds were in private rooms. At the end of the first quarter, 56% of our total beds were in private rooms. So that .8% occupancy rate that we experienced was the highest that we can recall ever having occurred. And it does suggest that we need to accelerate some of these bed expansions over a multi-year period of time, which fortunately we have both the access to capital and the capabilities within our design and construction team to be able to do. With regard to accelerating de novo activity beyond the current range, that's got a longer lead time associated with it. It's typically from the time we ideate on a particular market to getting the doors open, it's about three years. As Mark alluded to in his comments, we would expect that through the course of this year, we're going to be announcing additional de novo projects that will be opening beyond 2025. But for the immediate time being, we believe staying in this range of six to 10 per year, perhaps trying to operate at the midpoint or higher is the appropriate place for us to be. And I'll remind you beyond just the spend and the demands on our design and construction team, each one of those hospitals has to be staffed with a trained clinical workforce at capacity. A 50-bed hospital is running about 100 FTEs and about two-thirds of those are clinical. We want to make sure that we are adding capacity into this demand curve, which is very real out there, that we're doing so in a way that is also ensuring that we produce high-quality patient outcomes.

Great. And just on guidance, obviously you beat consensus by a healthy margin. And I know, Doug, I believe you said during the call is that volume was ahead of your expectations. What did you beat your internal expectations by? And I guess the guidance range versus the beat, is that just conservatism on your part or is it something we should model that maybe the streets mismodeling through the rest of the year?

Well, that is a series of really loaded questions, you knew in advance I wasn't going to answer. The quarter was ahead of our expectations. I'm not going to give you a specific number on that. But I cited some of the specific areas where it was ahead earlier, which is we did a little bit better on volume than we anticipated. And the two biggest upside surprises for us were that revenue per discharge based on the mix that we hadn't anticipated. And then also the fact that we got a lot of leverage in the SWB line. Some of that was the EPOB coming down based on the higher volume and the occupancy rate. And some of it was the leverage that we got against premium labor. So certainly that was a favorable outcome for Q1. It's uncertain to us how much of that is sustainable for the balance of the year. And so we've maintained a lot of the annual assumptions that we had in the guidance considerations. Another area of favorability, we were at the low end of the bad debt assumption, right at 2%. That owed in large part to the fact that we had only a de minimis amount of TPE activity during the quarter. And as we all experienced last year, we know that TPE audit activity can be very lumpy. And so we've left that assumption for the full year the same. It's only the first quarter. Obviously we'll be more informed about the sustainability of any of these trends after we are able to book another quarter.

Great. Thank you.

We'll take our next question from Joanna Gushuk with Bank of America. Please go ahead. Your line is open. Morning, Joanna. Hi,

good morning. Hey, morning. Thanks so much for taking that question. So maybe on the demand, where you spoke about a lot of online demand for the services where you, like you said, you keep expanding your expansion plans. So can you give us a little bit more there, are there some geographies that stand out or is it grow base? Can you talk about maybe also competitive environment? Like why you're the only one, I guess, aggressively building and adding that?

Yeah, Joanna. So this is Mark. I'll start. I'll say that the demand was across all geographies. As you know, we have eight geographic operating regions and we saw nice growth in the majority of our markets and certainly across all those operating regions. As we've noted before, I mean, we certainly benefit from the aging demographic. And I think that's exactly what we're seeing with non-discretionary patients and patients that have multiple comorbidities and the issues that require first and large part acute care level care and then ready for inpatient rehabilitation care. So the demand continues to grow closely linked to the aging demographic. Yeah, to give you some

specifics that we've

cited

before, if you look going backwards, for more than a decade, the age cohort that is most served by us and by IRFs in general has been growing at a CAGR of close to 4%. And over that same decade plus period, the total supply of IRF beds in the U.S. has increased less than 3% in total. That's not a CAGR. That's total. So what already started as an inadequate supply of IRF beds in this country widened substantially over that period. Why are, and we're not the only one who is adding capacity here. I think if you look at Select Medical, they've announced plans to substantially ramp up their capacity on the home. And why is that the case? Well, it's really difficult to do this. First of all, it requires very substantial capital outlays to build a freestanding hospital or even to add capacity to existing hospitals. We mentioned before, we feel good about we've been able to stabilize the cost per bed on de novo construction at about $1.2 million. And even for bed expansions, the cost per bed now is north of $800,000. So the capital outlay is very extensive. The clinical expertise is, to treat these very medically complex patients is also a barrier to entry, as is the need for a robust compliance function. And one of the things that we really benefit from is the fact that we enjoy substantial economies of scale that allows us to get operating leverage across these platforms and also to extrapolate best practices. So yeah, if it were easy to do, given the attractiveness of the market, we'd probably see a lot more capacity coming in. But that's just not the case. It is highly complex and expensive.

All right, exactly. Thanks for that. And finally, I guess a related question on your bed extensions. It sounds like you expect or generating more free cash flow, than you also raising your bed extension outlook. I mean, I guess it's a question also about occupancy being higher. So should we expect additional free cash flow to just go towards these bed additions? Can you remind us the returns you get on these bed additions and maybe contracted with de novo? Thank you.

Yeah, so consistent with our previous statements, the highest and best use of capital for us is on capacity expansions through both de novo and bed expansions. And bed expansions are the highest return of capital we have because we're leveraging components of the fixed infrastructure. And we're building into a market where we already enjoy a presence and where the demand curve has already been established. The occupancy rates are driving our decision to put more capital into the bed expansions. Fortunately, we have the capabilities, again, within our design and construction area to push forward some of those projects. As we, and Mark mentioned in his comments, we've now run 11 straight quarters with same store growth north of 4%. And so as a result, the pipeline of our hospitals that are qualifying for bed expansions based on their occupancy rates is increased. And so we're definitely going to give a prioritization with regard to capital allocation to adding capacity so that we're able to serve the needs of the patients in those markets.

Thank you.

Take our next question from Brian Tenquillic with Jefferies. Please go ahead. Your line is open.

Hey, Brian.

Hey, guys.

Good morning. Congrats on the quarter. Thank you. Yeah, Doug, maybe I'll follow up just on the comments made to Joanna's question. So as we think about some of these challenges that hospitals are staring down with DPP payments, you know, probably going away or getting cut and whatnot, are you seeing anything in the market in terms of maybe either increased interest in partnering with you guys or the opposite where they're pulling back from plans to open earth beds if that's the path that they were looking at? Just curious what you're seeing.

Yeah, I think it's the former. I think we continue to see more and more interest from various acute care hospitals about wanting to partner. And that's reflected in our pipeline. So we continue to believe that probably at least half of the novos that will be opening over the next several years are likely to be in joint ventures. You know, we get a great example again. Mark mentioned in his comments, we've now got seven hospitals as part of the Piedmont joint venture. And that's the kind of success that really, I think, makes other acute care systems take notice of the effectiveness of these types of partnership relationships.

And Brian, so we also have a note. I mean, there are a number of our existing partnerships, systems that currently have one or more rehab hospitals, JV with us, that continue to look at their marketplace. And as they expand their presence, they are also taking into account the needs for rehabilitation. So, you know, you can look at Piedmont, our partnership in the St. Louis marketplace with BJC. Those are two examples of partners where we have multiple rehab hospitals as part of that overall relationship.

And I think what the acute care hospitals are increasingly aware of is that either a formal or an informal relationship with us in terms of having a freestanding earth in the market can increase their capacity in one of two ways. One is we have demonstrated consistently that we have the ability to take highly complex medical patients out of the acute care hospitals earlier than other providers in their stay without in any way endangering the patient's recovery path. And so we're allowing them to free up that bed more quickly. The second and more tangible way is when we use our model of going in and removing a unit from an acute care hospital and folding it into a freestanding hospital so that that space within the acute care hospital can be repurposed for general medical and surgical purposes and increase their overall capacity to address those patient needs.

I appreciate that. And then maybe my follow-up, Mark, as I think about maybe an economic slowdown here, you guys have been there at Encompass for a while and experienced previous recessions. Just curious how you're thinking about the durability of demand. And maybe, Doug, just to kind of layer onto this, any comment you can make on like exchange subsidy exposure or just exchange exposure within your patient populations? Thanks.

So, I'll take the first question. I mean, the demand for our services does not fluctuate with economic status. I mean, it's, you know, patients are nondiscretionary and therefore, if you look back historically during periods of recession or high growth in the economy, it doesn't necessarily reflect and influence the need for our services. So, I would not anticipate any decline in a recessionary economy.

And your second question, Brian, we have de minimis exposure to these changes.

Awesome.

Thank you.

We'll take our next question from AJ Rice with UBS. Please go ahead. Your line is open.

Hello, AJ. Hi, thanks, everybody. Talk to everybody. First, I guess on the benefit expense, I think you called out that it was up 14%. This is sort of the second quarter where you've called that out. I wonder how much of a headwind is that? I don't know if you've sized benefit as a percentage of your SWMB, but it would be just interesting to know that. And is there anything you can do where you just have to wait until your anniversary that and then it'll moderate as a pressure point? Or is there anything you can proactively do to manage that in a different way?

Yeah. So, first part of your question is benefit expense in total typically runs about 10 or 11% of total SWBs. In terms of what we can do, we proactively work with our third party consultants kind of assessing our trends versus broader trends within the U.S. with large employers and specifically within the healthcare community. We look at things like any changes to the composition of our benefits programs, the relationship between employee and employer responsibility and so forth. And so on a regular basis, we're making changes to those programs to contain the cost, but also to make sure that we're offering the most competitive benefits program we can from an employee's perspective because that's a big aspect of retention. And we'll continue to do that proactively. We do think, and you pointed this out, AJ, that we're going to see that growth rate begin to moderate as we move into the second half of the year simply because we saw that step up in the second half of last year. In our discussions with our consultants, what we're seeing in our program apparently is pretty consistent with the peer group that's out there.

Okay. And then the follow-up question. I know last year about this time there was some noise in the numbers with the Palmetto audits and the TPE program and how that was playing out. Any updated thoughts on where all that stands at this point? And are you back to sort of a normal situation pretty much to hear?

You know, I think there's a potential for some of the same dynamic to exist. And so this is the interplay specifically with Palmetto between RCD and Alabama and TPE. And as a reminder, Palmetto is our largest MAC who are responsible for approximately 80% of our hospitals, including the seven that we have in Alabama. And so they remain consumed with the RCD program in Alabama, under which, by the way, our performance has gotten better, but it is not where it ought to be. It remains a lot of -to-hand combat and trying to overcome very inconsistent treatment by Palmetto on those claims. But with regard to TPE, what we've seen at least since RCD has been in place is that they seem to lack the capacity to run a consistent TPE program and administer RCD. And so the TPE activity, at least last year, proved to be very lumpy. We have left some room for that kind of lumpiness in our assumption regarding bad debt for the full year. As corollary to that, I'll remind you we had that big step up when those claims were selected by Palmetto under TPE for review of the second quarter. But what we've seen is those had played out over a multi-quarter period of time is that our recovery rate against those claims or our success rate against those claims selected from review has been highly favorable. So there's the chance that you might see a blip just based on our reserve methodology, if we see the same kind of pattern under TPE that we saw last year. But I don't think it causes us concern that the aggregate level of bad debt expense is on the rise.

Okay,

thanks a lot.

And as a reminder, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll take our next question from Jared Haas with William Blair. Please go ahead, your line is open.

Hey Jared.

Morning Jared. Hey, hey good morning. Thanks for taking the questions and I'll echo the congrats on a strong quarter. Maybe I'll ask one on the quarter just to kind of put a fine point on things and specifically the strong EBITDA performance. I know we've obviously focused a lot on the trends around labor but curious if there were any other, I guess, areas in OPEX where you saw good leverage or operating efficiency and if you could talk about, you know, the durability of some of those areas of leverage if you saw any.

Thanks. Yeah, anytime you're running at high volumes and particularly with the density that comes with the higher occupancy rate, you're creating OPEX leverage throughout the P&L. But definitely the most pronounced area of that and it's because it's our single largest expense category was in the SW line. I think we pretty well already addressed our thoughts regarding sustainability of that. We expect the, as the primary measure productivity, we expect the EPOB number to move north over the balance of the year just based on the seasonality and based also on the capacity expansions that are coming on through the course of the year.

Perfect. That's helpful. And then maybe I'll go back to something you talked about in the prepared remarks, just some of the consistent performance you've had and your discharge rates and quality metrics. And I guess I'll just ask what are the sort of biggest drivers in your view in terms of the ability to sustain that level of performance on quality, just considering how rapidly you've grown the business over the last couple of years?

Yeah, we, as Doug noted earlier, bringing new staff in and making sure as we add capacity that we are appropriately staffed, that we have the staff onboarded, that even at our existing hospitals as we bring on new staff, we are training them and getting them oriented. So I feel like our quality, and if you just look at our trends, we continue to increase the quality. If you look at our discharge of community, the reduced number of discharges being sent to skilled nursing facilities, you know, we always focus on patient satisfaction with our net promoter scores. So we would not be adding growth if we couldn't assure ourselves that we could show and produce the quality outcomes that we do as an organization. So I think it's very sustainable. We're very proud of where we're headed, particularly in those discharge status metrics, and we continue to focus on our, with our clinical teams, on how can we get incremental outcomes every day? Just to

underscore what Mark said there, because I think it's important to note, we have experienced very rapid growth, both in terms of on the same store basis and through the past expansions over a multi-year period of time. And yet we now have the highest net promoter scores and the highest employee engagement scores that we've ever had. And that's something that we're really proud of.

That's great to hear. Thank you.

We'll take our next question today from Andrew Mock with Barclays. Please go ahead. Your line is open.

Hi, good morning. Morning, Andrew.

Morning. The revenue discharge, per discharge number, was pretty strong in the quarter at .9% and finished above the underlying pricing expectations. So I know that number contemplates a number of items, including core pricing, acuity, and bad debt. Bad debt came in on the lower end of expectations, but it still looks like it's strong. Can you flesh out the underlying drivers of that number and how we should expect that to trend for the next year? Thanks.

No, you're exactly right. And there are a number of things that go into it. The largest ones I'd point out were that bad debt was at the low end of the range, as you just cited. The second is that we had that shift in the payer mix, which I alluded to earlier. And it was not only that -per-servers grew faster than Medicare Advantage. It's when you look more broadly at the change in the overall mix that whereas Medicare Advantage and Medicare -per-service as a percentage of the payer mix in total for the quarter moved up 150 basis points, and those are our two highest reimbursement categories, you had Managed Care and Medicaid, Medicaid by far being our lowest, moved down 140 basis points. So that's a real favorable shift there. We also had some favorable trends within our quality metrics to help improve our reimbursement as well. In terms of our assumptions on a go-forward basis, again, we don't believe that one quarter makes a trend. So we're not assuming that this flip in the growth rates between Medicare Advantage and -per-service will sustain itself for the balance of the year.

Great. And then maybe a follow-up on share repurchase. You lowered the share count number in the guidance, but how are you thinking about the level of share repurchase contemplated in the guide? Did you give that number and how do you expect that to evolve over the next 12 to 18 months?

Thanks. We did not put out a specific number. I will note that with the share repurchases that we made in the first quarter actually slightly exceeded those that we made to all of 2024. We've talked previously about the fact that we find ourselves in the enviable position of being able to fund all or at least the vast majority of our capacity expansions with internally generated funds. We've also been seeing based predominantly on the growth in our EBITDA, the net leverage ratio come down. So that is creating capacity for us to allocate more capital to share repurchases. And we think that's an appropriate utilization and a good complement to the growth capex we have. So I think you should anticipate continued activity under the share repurchase program.

Great. Thank you.

And we'll take our next question from John Ransom with Raymond James. Please go ahead. Your line is open.

Morning,

John. Hello, John. So you're a Q-Care, I wouldn't call them peers, but the Q-Care industry has been kind of reporting some issues and changes of behavior with Medicare Advantage. Are you guys, I mean, they've been under a lot of stress as you know, but are you guys seeing anything new or different in your managed care negotiations, not just rates but other behavior changes as they try to manage their cost-trump?

You know, I think from a contracting perspective, we continue to have success and we're already at a very high level of moving away from per diem contracts to episodic contracts and tying those new contracts, even if they initially started to discount directly to the service reimbursement. I will say at the overall level of price increase that we saw within our Medicare Advantage book of business in the first quarter was a bit higher than we anticipated. It came in at about 5%. Again, not ready to call that a new normal. So I don't know whether it's reflective, John, of the overall environment out there with Medicare Advantage, but we do feel like we're having good success with regard to our Medicare Advantage contract.

So I would say that just the whole pre-authorization process continues to be challenging and I would say it's probably a little early to say whether or not we're seeing significant differences or new trends enter around the pre-authorization process in most of our markets. And some things

that we noted before continue to persist, which is the ratio of admits to referrals for Medicare Advantage is substantially below what it is for -for-service. We see no reason why that should exist. And then also the number of days between a referral and ultimately a decision coming through Medicare Advantage plans is much slower than it is for -for-service, which is not inured to the benefit of the patient or the acute care hospital housing patient.

5% is pretty stout. Thank you, guys. Appreciate it. Thank you. Thank you.

And there are no further questions on the line at this time. I'll turn the program back to Mark Miller for any additional remarks.

Thank you, Operator. If anyone has additional questions, please call me at -970-5860. Thank you again for joining today's call.