Encompass Health (EHC) Q2 Revenue Up 12%

Encompass Health (EHC 0.89%), one of the largest providers of inpatient rehabilitation services in the U.S, released its second-quarter 2025 earnings on August 4, 2025. The standout news centered on robust financial and operational results. The company delivered $1.46 billion in GAAP revenue in Q2 2025, topping consensus by $30.47 million (GAAP), and reported non-GAAP earnings per share (EPS) of $1.40, also surpassing analyst expectations on a non-GAAP basis. Compared to Q2 2024, both revenue and profits saw double-digit growth. Management responded to these results by increasing full-year guidance across key metrics. The second quarter reflected stronger-than-expected utilization and operational efficiency, with most metrics ahead of internal projections.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q1 2025 earnings report.

Company Overview and Strategic Focus

Encompass Health is a national operator of inpatient rehabilitation hospitals, providing therapy and related care for patients recovering from major illnesses or injuries. Its core business is operating 169 hospitals across 38 states and Puerto Rico, serving patients through a network of dedicated rehabilitation facilities.

The company’s recent strategy emphasizes expansion—both through new hospital openings and adding beds to existing sites—to meet rising demand. Management also focuses on delivering quality patient outcomes, maintaining compliance with healthcare regulations, and building strategic partnerships via joint ventures. Key drivers for long-term success include regulatory navigation, operational efficiency, investment in growth, and outcomes that appeal to both payors and patients.

Quarter Highlights and Performance Drivers

During the period, total discharges—the count of patients released after treatment—climbed to 65,237, a 7.2% increase from last year. Same-store discharges, which measure growth excluding acquisitions or new hospitals, grew by 4.7%. Revenue per discharge reached $21,670, up 4.2% year over year, reflecting not just higher patient flow but improved pricing and a shift toward higher-paying insurance categories.

The company’s payer mix—meaning the breakdown of insurance coverage for patients—continued to favor higher-reimbursement government programs. Combined Medicare fee-for-service and Medicare Advantage made up a larger category share, rising 1.5 percentage points. In contrast, Medicaid and Managed Care—lower-paying segments—dropped 1.4 points. Management linked these shifts to higher net patient revenue per discharge. Bad debt expense—a measure of unpaid bills—remained at the low end of expectations, aided by fewer Medicare audits this period.

Profitability measures also showed improvement. Adjusted EBITDA grew 17.2%, driven by increased revenue and expense leverage. Employees per occupied bed and the use of contract labor—temporary staff brought in when permanent staff are unavailable—both reached record efficiency levels, although leaders noted these may normalize in future quarters. Labor and benefits costs did rise 14%. Management stated that the cost growth is expected to slow over the back half of the year.

The company made notable progress on its physical footprint. It opened a new 60-bed hospital in Fort Myers, Florida, and added 26 beds across existing facilities. As of quarter-end, Encompass Health operated 169 hospitals. Joint ventures with acute-care hospitals continue to be a pathway for new growth, with at least half of future new openings expected to follow this model. The pipeline includes ten new hospitals planned for opening beyond 2025.

Cash flow and balance sheet metrics remained solid. Adjusted free cash flow increased by 30.5% compared to Q2 2024, supporting both investment in expansion and share repurchases. Net leverage, a debt-to-earnings measure, declined to 2.1 times from 2.2 at year-end. The company reported strong liquidity, with the majority of its capital needs for expansion likely to be covered by internally generated cash flows.

There were no material one-time financial or operational events disclosed in the quarter. Management did not announce any sudden or atypical corporate changes. A quarterly dividend of $0.17 per share was maintained.

Product and Service Context

This specialization distinguishes it from general hospitals or skilled nursing facilities, with the private room share increasing from just over 40% in 2020 to 56% at the end of the most recent quarter.

Hospital openings and bed expansions are integral to the company’s product offering, complementing efforts to improve discharge-to-community rates—a measure of patients able to return home rather than be sent to skilled nursing facilities. High net promoter scores and employee engagement measures indicate a consistent focus on patient and staff satisfaction.

Looking Ahead: Guidance and Future Watchpoints

Management raised its outlook. Full-year net operating revenue (GAAP) is now projected between $5.88 billion and $5.98 billion, versus earlier guidance of $5.85 billion to $5.93 billion. Adjusted EBITDA guidance increased to $1.22 billion–$1.25 billion (from $1.185–$1.22 billion), and Adjusted EPS is expected in the $5.12–$5.34 range (up from $4.85–$5.10). These updates reflect confidence in ongoing patient demand and operational effectiveness but also factor in a degree of caution around trends that may not persist.

Looking at future quarters, investors should monitor regulatory developments, especially around Medicare reimbursement. The Centers for Medicare & Medicaid Services has proposed a 2.6% rate update for FY2026, which could enhance future reimbursements but remains subject to finalization. Labor and benefits cost trends bear watching, alongside any changes in contract labor use or audit activity affecting bad debt. Management expects growth in capacity to continue via new hospitals and bed expansions, targeting 6 to 10 new inpatient rehabilitation hospitals and 80 to 120 beds added to existing hospitals per year, with strong internal funding anticipated for these projects.

The quarterly dividend was kept at $0.17 per share.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.