EHC Q1 Earnings Call: Capacity Expansion and Demand Drive Updated 2025 Guidance

Health care services provider Encompass Health (NYSE: EHC) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 10.6% year on year to $1.46 billion. The company’s full-year revenue guidance of $5.89 billion at the midpoint came in 0.5% above analysts’ estimates. Its non-GAAP profit of $1.37 per share was 15% above analysts’ consensus estimates.

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StockStory’s Take

Encompass Health’s first quarter results were driven by higher patient volumes and a favorable shift in payer mix, leading to stronger-than-expected revenue and operating margins. Management emphasized broad-based discharge growth across geographies, lower reliance on contract labor, and effective cost control as core drivers of operational leverage. CEO Mark Tarr highlighted that the company maintained high patient outcomes while expanding capacity, attributing improvements to ongoing clinical staff development and reduced turnover rates.

Looking ahead, management’s updated full-year guidance reflects confidence in sustained demand for inpatient rehabilitation, with planned increases in new hospital openings and bed additions. CFO Douglas Coltharp explained that while some favorable trends, such as the uptick in Medicare fee-for-service discharges, may not persist, the company is prepared for continued strong occupancy and intends to prioritize capital toward capacity expansions. Management noted ongoing monitoring of potential headwinds like benefit cost inflation and evolving payer dynamics, but pointed to a robust development pipeline and continued joint venture activity as key to future growth.

Key Insights from Management’s Remarks

Encompass Health’s leadership attributed the quarter’s outperformance to broad-based volume growth, operational efficiency, and capacity expansion. Management addressed workforce trends, payer dynamics, and the company’s strategic approach to meeting growing demand for rehabilitation services.

• Volume and Occupancy Gains: Patient discharges rose across all regions, supported by a broad payer mix and higher occupancy rates. The company’s discharge to community rate reached 84%, which management described as competitive relative to industry norms.
• Operational Leverage from Staffing: Lower contract labor usage and improved staff retention reduced labor costs. Management noted annualized registered nurse turnover fell to 20.1%, and contract labor made up just 1.3% of full-time equivalents—a multi-year low.
• Favorable Payer Mix Shift: The quarter saw a higher proportion of Medicare fee-for-service and Medicare Advantage patients, both of which have higher reimbursement rates. Management clarified this shift was not due to targeted strategy, but contributed to higher revenue per discharge.
• Capacity Expansion Pipeline: The company opened a new joint venture hospital and added beds to existing sites, with plans for six additional de novo hospitals this year. Leadership highlighted a growing pipeline of projects and emphasized the capital-intensive nature of expanding inpatient rehabilitation facilities.
• Leadership Change: Pat Tuer was promoted to Chief Operating Officer, reflecting organizational growth and the need for dedicated operational leadership across the expanding hospital network.

Drivers of Future Performance

Management’s outlook for the rest of the year centers on capturing unmet demand for inpatient rehabilitation while carefully managing cost pressures and executing on expansion plans.

• Continued Capacity Investments: Encompass Health plans to add new hospitals and expand bed count at existing facilities, aiming to match rising demand driven by an aging population. This expansion is expected to support long-term volume growth.
• Labor Market and Benefit Costs: The company anticipates ongoing challenges with benefit expense inflation, though it expects some moderation in the second half of the year. Leadership remains focused on minimizing contract labor and strengthening staff retention to control wage-related costs.
• Payer Mix and Reimbursement Risk: While the recent shift toward more favorable payer categories boosted revenue, management cautioned that payer mix could normalize. Ongoing negotiations with Medicare Advantage plans and monitoring of regulatory developments remain key priorities.

Top Analyst Questions

• Pito Chickering (Deutsche Bank): Asked if the increase in Medicare fee-for-service discharges reflected a new trend or strategy. Management responded that this was unexpected, not the result of deliberate action, and is not assumed to continue in guidance.
• Whit Mayo (Leerink Partners): Inquired about the impact of tariffs on supply costs and construction expenses. CFO Douglas Coltharp said current projects are insulated from tariffs, but the team is monitoring for longer-term effects.
• Ann Hynes (Mizuho Securities): Questioned whether higher occupancy and success in expansion would prompt accelerated growth. Leadership stated that bed additions are being increased but large-scale new hospital openings remain a multi-year process due to staffing and capital demands.
• Joanna Gajuk (Bank of America): Asked about the competitive landscape and why few peers are expanding as aggressively. Management cited high capital requirements and clinical complexity as barriers, noting that some joint ventures with hospital systems are expanding.
• John Ransom (Raymond James): Sought updates on negotiations and trends with Medicare Advantage payers. Management reported success moving to episodic contracts and noted a higher-than-expected price increase, but does not expect this trend to be sustained.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace of new hospital openings and bed expansions to assess whether Encompass Health can meet growing demand, (2) any shifts in payer mix that could affect revenue per discharge, and (3) the company’s ability to control benefit expense inflation and contract labor usage. We will also watch for further joint venture announcements and updates on regulatory developments that could impact reimbursement rates.

Encompass Health currently trades at a forward P/E ratio of 23.7×. Should you load up, cash out, or stay put? Find out in our free research report.

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