Encompass Health delivered a strong performance in Q4 and full-year 2025, with Q4 revenue increasing 9.9% to $1.5 billion and full-year revenue rising 10.5% to $6.0 billion, driven by 6% discharge growth and pricing benefits. Adjusted EBITDA grew 15.9% in the quarter and 14.9% for the year to $1.16 billion, fueled by significant operating leverage and a decline of over $21 million in premium labor costs. The company generated $818 million in free cash flow for the year, an 18.5% increase, allowing for $158 million in share repurchases and $71 million in dividends while maintaining a net leverage ratio of 1.9x. Management issued confident 2026 guidance, projecting revenue of $6.365B-$6.465B and adjusted EBITDA of $1.34B-$1.38B, citing resilience against regulatory changes like the TEAM model and RCD, and announcing a new 'small-format hospital' strategy for 2027.
| Metric | Value | Change |
|---|---|---|
| Q4 Revenue | $1.5 billion | +9.9% |
| Q4 Adjusted EBITDA | $335.6 million | +15.9% |
| FY 2025 Revenue Growth | 10.5% | N/A |
| FY 2025 Discharge Growth | 6.0% | N/A |
| Q4 Net Revenue per Discharge | N/A | +4.1% |
| Q4 Premium Labor Costs | $23.8 million | -$5.8 million |
| FY 2025 Free Cash Flow | $818 million | +18.5% |
| Net Leverage Ratio | 1.9x | Flat YoY |
| Q4 Bad Debt Expense | 2.1% | Flat YoY |
Management announced a strategic evolution in capacity expansion by introducing 'small-format hospitals,' a 24-bed chassis model set to launch in 2027. This hub-and-spoke approach allows the company to enter dense markets or expand in locations where the main hospital cannot physically grow, leveraging existing management teams and Medicare provider numbers to accelerate ramp-up and improve returns.
In response to a 500 basis point drop in conversion rates from a specific national Medicare Advantage payer in Q4, management is pivoting to an aggressive 'admit and appeal' strategy. They plan to admit patients meeting Medicare criteria and pursue appeals through the Administrative Law Judge level, signaling a willingness to incur legal costs to protect revenue and patient access.
Operational efficiency improved significantly, with premium labor costs declining $5.8 million in Q4 and over $21 million for the full year, reaching the lowest levels since Q1 2021. This was driven by reduced turnover (Nursing 20.2%, Therapy 7.8%) and the successful ramp-up of de novo hospitals, four of which achieved positive adjusted EBITDA in Q4.
The company is leveraging technology partnerships, specifically with Palantir, to streamline admission documentation and enhance responses to claims denials. Additionally, the successful migration to the Oracle Fusion ERP system provides a flexible cloud-based infrastructure to support growth and data analytics.
Management views the Review Choice Demonstration (RCD) and the TEAM model as manageable risks. With a 93% affirmation rate in Alabama and anecdotal evidence of no volume impact in TEAM markets one month in, they are proceeding with capacity investments, reinforcing their belief that underlying demand for Inpatient Rehabilitation Facility (IRF) services remains robust.
A specific national Medicare Advantage plan significantly reduced its conversion rate by 500 basis points in Q4, which management characterized as being in 'direct contravention of Medicare coverage requirements.' While management plans to fight this, the persistence of this issue could pressure volumes and increase bad debt or legal costs in 2026.
The company is facing headwinds from unit consolidations and closures, including units in Sewickley, PA, Cincinnati, OH, and a SNF unit in Lexington, KY. A planned closure in Bridgeport, WV in February 2026 is expected to create a 70-basis-point headwind to 2026 discharge growth, indicating challenges with certain legacy assets or lease terms.
While management is confident about the TEAM model, the long-term impact remains uncertain as acute care hospitals take on more risk in subsequent years. Management noted that target prices for TEAM conditions often cannot be achieved unless the patient bypasses post-acute care entirely, which could incentivize acute care partners to alter referral patterns over time.
The affirmation rate for RCD in Alabama (93%) is lower than the 98-99% rate seen in Pennsylvania. The expansion of RCD to Texas and California introduces execution risk, and the CFO acknowledged that the MAC in Alabama (Palmetro) remains 'a pain in the butt,' suggesting potential for continued friction and appeals costs.
Overall: Management exhibited a high degree of confidence and operational discipline throughout the call, dismissing regulatory headwinds such as RCD and the TEAM model as 'ordinary course' business rather than existential threats. They were notably assertive regarding payer issues, specifically a drop in Medicare Advantage conversion rates, signaling a shift to a more aggressive legal and operational stance to defend patient access.
Confidence: HIGH - Management supported their confidence with specific data points, such as a 93% affirmation rate in Alabama RCD audits and the lowest premium labor costs since 2021. They provided detailed rebuttals to analyst concerns regarding volume and regulatory risks, citing historical success and early data showing no impact from the TEAM model.
$6.365 billion - $6.465 billion
$1.34 billion - $1.38 billion
$5.81 - $6.10
2.0% - 2.5%
Hedging & Uncertainty: Management generally used strong, definitive language regarding their operational capabilities ('we are prepared,' 'we will continue investing'), but employed hedging when discussing external factors outside their control. For example, they used qualifiers regarding the MA payer situation ('if this persists into next year, we may be inclined to name names') and the timing of Medicare certifications ('we don't control that'). They also used temporal hedges regarding the TEAM model ('anecdotal evidence,' 'early to call') to manage expectations while maintaining a confident outlook.
Regulatory change is a constant in our business, and we have a long track record of successfully adapting... - Mark Tarr, President and CEO
We're going to admit those patients. And we're going to go through the different levels of appeal process... - Patrick Tuer, COO
The pond for us to fish out of is plenty big. - Douglas Coltharp, CFO
Look, Palmetro is a pain in the butt in Alabama. - Douglas Coltharp, CFO
Our company has never before been presented with greater opportunity... - Mark Tarr, President and CEO
We're not going to wait and to see the effect of that before we get more aggressive... - Douglas Coltharp, CFO
Analyst Sentiment: Analysts were focused on the sustainability of growth in the face of regulatory headwinds (TEAM, RCD) and payer dynamics (MA rates). Questions were detailed, probing the mechanics of the TEAM model and the specific drivers of the MA conversion drop.
Management Responses: Management was responsive and data-rich, often pushing back on the premise of risk by providing historical context or specific early data (e.g., 'no impact' from TEAM yet). They were particularly candid about the 'pain in the butt' MAC in Alabama and the aggressive strategy toward the MA payer.
Volume trends and same-store comparisons, specifically the impact of de novo ramp-ups and unit closures.
Medicare Advantage conversion rates and the specific impact of a national payer's denial practices.
The mechanics and potential impact of the TEAM model and RCD expansion on volume and reimbursement.
Labor cost drivers, including wage inflation, premium labor usage, and turnover rates.
Capital allocation strategy, focusing on leverage targets, dividend growth, and share repurchases.
The new small-format hospital strategy and its returns compared to traditional de novos.
Encompass Health is executing at a high level, successfully navigating a complex regulatory environment while delivering double-digit top and bottom-line growth. The significant decline in labor costs combined with strong pricing power (4.1% NRpD growth) drove margin expansion in Q4. Management's confident handling of RCD and the TEAM model, supported by a 93% affirmation rate and anecdotal evidence of no volume disruption, suggests these risks are overstated. The pivot to a more aggressive stance on MA denials and the introduction of small-format hospitals demonstrate strategic agility. With a strong balance sheet (1.9x leverage) and robust free cash flow generation ($818M), EHC is well-positioned to fund growth and return capital, making it a compelling pick despite macro and regulatory noise.
Management noted a 'softening in the labor markets,' which contributed to a $5.8 million decline in premium labor costs in Q4 and a reduction in contract labor FTEs to 1.1%, the lowest since Q1 2021.
A specific national MA plan significantly reduced conversion rates by 500 basis points in Q4, prompting management to threaten legal action and appeals, indicating growing friction between providers and MA payers regarding coverage criteria.
Management views the expansion of RCD and the TEAM model as manageable 'ordinary course' events, citing high affirmation rates (93% in AL) and lack of volume impact in early TEAM data.