Encompass Health ((EHC)) has held its Q2 earnings call. Read on for the main highlights of the call.

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Encompass Health’s latest earnings call struck an upbeat tone, with management emphasizing robust revenue, EBITDA and EPS growth alongside improving occupancy and stronger de novo ramps. While noting headwinds such as wage pressure, higher preopening costs and a reduced net provider tax benefit, executives framed these as manageable against a backdrop of rising guidance, workforce gains and supportive reimbursement trends.

Top-Line and Profitability Growth

Encompass Health reported Q2 revenue growth of 9.6% year over year, reflecting both higher volumes and richer case mix. Adjusted EBITDA climbed 9.2% to $348 million, while adjusted EPS rose 10.7%, underscoring solid operating leverage even amid higher wage and development costs.

Raised Full-Year 2026 Guidance

Management raised its 2026 outlook, now projecting net operating revenue between $6.41 billion and $6.49 billion. Adjusted EBITDA is expected at $1.365 billion to $1.395 billion, with adjusted EPS guided to a range of $6.02 to $6.25, signaling confidence in sustained growth and margin resilience.

Strong Discharge and Quality Metrics

Quality outcomes remained a key talking point, with Q2 discharge-to-community at 84.7% and discharge-to-acute at 8.4%. Discharge to skilled nursing facilities stood at 6.1%, and management highlighted that these metrics exceed industry averages, reinforcing the company’s clinical differentiation.

Volume and Pricing Drivers

Q2 discharge growth reached 5.6%, while net revenue per discharge increased 3.9%, driven largely by higher patient acuity. Looking ahead, the company expects the Medicare IRF 2027 final rule to lift net revenue per Medicare discharge by about 2.3% beginning October 1, 2026, providing an additional pricing tailwind.

Medically Complex Case Growth

The mix continued to tilt toward medically complex cases, with stroke volumes up 7.9% in total and 5.5% on a same-store basis. Brain injury cases grew 8.0% total and 3.9% same-store, while lower-extremity joint cases increased roughly 1%, supporting higher average revenue per patient.

Capacity Expansion and Development Pipeline

The company has opened three hospitals year to date, adding 139 beds, and expanded existing facilities by 54 beds. In Q2, Encompass Health brought online a 50-bed hospital in Concordville, Pa., and a 40-bed facility in Loganville, Ga., with plans to open five more hospitals and add 100 to 150 beds by year-end.

Occupancy and Census Improvements

Occupancy reached 77.4% in Q2, up 290 basis points from a year earlier, reflecting better utilization of the growing bed base. Average daily census trends were particularly strong, with Q1 and Q2 marking the first time in company history that ADC exceeded 9,000 in consecutive quarters.

Workforce Development and Retention Gains

Workforce initiatives are bearing fruit, with 43% of eligible registered nurses participating in the career ladder program and nursing turnover running near 19%, the lowest in more than 12 years. Turnover among laddered RNs is roughly 5% versus about 25% for non-ladder peers, while therapy turnover sits near 7%, the best in five years.

Labor Cost Improvements and Efficacy

Premium labor costs fell by $2.6 million to $25 million compared with the prior-year quarter, and contract labor represented just 1.1% of total FTEs, a 20-basis-point improvement. SWB per FTE rose 3.4% in Q2, reflecting investments in ladder programs that management believes enhance productivity and retention despite raising the wage baseline.

Capital Allocation and Balance Sheet Actions

Encompass Health continued to return capital to shareholders, repurchasing about 704,000 shares for $74.2 million in Q2 and 1.412 million shares year to date for $145.8 million. The company lifted its share repurchase authorization to $1 billion, raised its quarterly dividend to $0.21, refinanced debt with a $500 million 2034 note issue and ended the quarter with net leverage of 1.9x.

De Novo Ramp Efficiency

New hospitals are ramping quickly, with de novo facilities typically generating four-wall positive EBITDA around month six. Occupancy in these sites generally surpasses 70% by month 10, and recent openings are tracking at or better than those benchmarks, supporting confidence in the capital-heavy expansion strategy.

Admit-and-Appeal Pilot Success

The company’s admit-and-appeal strategy for Medicare Advantage prior-authorization denials is showing strong results, with 298 patients admitted under the pilot so far. Of 144 cases adjudicated, Encompass Health has prevailed in 128, an 89% success rate, indicating clinical strength and offering a template to push back on restrictive payer behavior.

Net Provider Tax Retroactive Adjustment

Results were weighed down by an $11.5 million year-over-year decrease in net provider tax benefit tied to out-of-period Florida Medicaid accrual revisions. Management now expects the 2026 net provider tax benefit to adjusted EBITDA to be about $10 million, down from a prior estimate of roughly $21 million, trimming a previously anticipated tailwind.

Increased SWB Assumptions and Wage Pressure

The company lifted its full-year SWB-per-FTE growth expectation to a range of 3.5% to 4.0%, up from earlier assumptions. The change reflects a 50-basis-point increase in second-half wage assumptions, adding near-term expense pressure but aligning guidance with the realities of a tighter labor market and expanded career programs.

Rising Preopening and Ramp-Up Costs

Net preopening and ramp-up costs reached $6.9 million in Q2, up $2.9 million from the prior-year period, and totaled $10.9 million year to date versus $6.1 million last year. Full-year preopening and ramp-up spending is now projected at $18 million to $22 million, running above the prior-year pace as the development pipeline accelerates.

Medicare Advantage Denial Trends

Despite appeal successes, management emphasized that Medicare Advantage denials remain significantly higher than Medicare fee-for-service. Pre-authorization hurdles add administrative complexity and cost, and the company cautioned that these frictions could continue to create access barriers for some patients even as it refines its response strategies.

CapEx Intensity Near Cycle High

Capital expenditures are running at about 15% of revenue, which management characterized as near a cycle high, driven by aggressive capacity expansion and an enlarged development pipeline. While this raises near-term capital intensity, the company argues that returns from new hospitals, bed additions and higher occupancy justify the elevated investment levels.

Regional and Operational Headwinds

Operationally, Encompass Health cited some administrative and rollout challenges, including less-than-ideal MAC readiness in California, though trends are improving. Pennsylvania RCD inclusion was deferred for certain hospitals, and occupancy dipped sequentially from Q1 to Q2 by 130 basis points, even as year-over-year levels improved.

Limited Further Contract Labor Gains

With contract labor down to 1.1% of FTEs and an annualized cost around $175,000, management signaled that most of the easy gains in this area have been realized. Further reductions may offer diminishing returns, suggesting that future margin expansion will rely more on volume, mix, pricing and productivity than on additional cuts in contract staffing.

Guidance and Forward-Looking Outlook

The company’s raised 2026 guidance rests on strong Q2 trends, including 5.6% discharge growth and a 3.9% rise in net revenue per discharge, plus the anticipated 2.3% Medicare pricing boost starting in Q4. Updated assumptions also bake in higher wage growth, a smaller net provider tax benefit and elevated preopening costs, while capital actions such as expanded buybacks and debt refinancing support EPS and balance-sheet flexibility.

Encompass Health’s call painted a picture of a growth business investing heavily in capacity and its workforce while managing through mixed reimbursement and cost pressures. For investors, the combination of rising guidance, improving operational metrics, disciplined capital allocation and clear acknowledgment of risks sets a constructive backdrop, provided the company continues to execute on volume growth and capital deployment.