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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 ______________________________
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-10315
______________________________ 
Encompass Health Corporation
(Exact name of Registrant as specified in its Charter)
Delaware63-0860407
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
9001 Liberty Parkway
Birmingham, Alabama 35242
(Address of Principal Executive Offices)
(205) 967-7116
(Registrant’s telephone number)
 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareEHCNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐Non-Accelerated filer☐
Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒
 
The registrant had 100,625,306 shares of common stock outstanding, net of treasury shares, as of July 24, 2024.


TABLE OF CONTENTS
NOTE TO READERS
As used in this report, the terms “Encompass Health,” “we,” “us,” “our,” and the “Company” refer to Encompass Health Corporation and its consolidated subsidiaries, unless otherwise stated or indicated by context. This drafting style is suggested by the Securities and Exchange Commission and is not meant to imply that Encompass Health Corporation, the publicly traded parent company, owns or operates any specific asset, business, or property. The hospitals, operations, and businesses described in this filing are primarily owned and operated by subsidiaries of the parent company. In addition, we use the term “Encompass Health Corporation” to refer to Encompass Health Corporation alone wherever a distinction between Encompass Health Corporation and its subsidiaries is required or aids in the understanding of this filing.
i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to, among other things, future events, changes to Medicare reimbursement and other healthcare laws and regulations from time to time, our business strategy, labor cost trends, our dividend and stock repurchase strategies, our financial plans, our growth plans, our future financial performance, our projected business results, or our projected capital expenditures. In some cases, the reader can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties, many of which are beyond our control. Any forward-looking statement is based on information current as of the date of this report and speaks only as of the date on which such statement is made. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, the factors described below could cause, and in the case of the COVID-19 pandemic has already caused, actual results to differ materially from those estimated by us.
•Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2023, as well as uncertainties and factors discussed elsewhere in this Form 10-Q, including in the “Executive Overview—Key Challenges” section of Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our other filings from time to time with the SEC, or in materials incorporated therein by reference.
•We are highly concentrated in our primary line of business, particularly with respect to Medicare regulations and reimbursement.
•Reductions or delays in, or suspension of, reimbursement for our services by governmental or private payors, including our inability to obtain and retain favorable arrangements with third-party payors, could decrease our revenues and adversely affect other operating results.
•Restrictive interpretations of the regulations governing the claims that are reimbursable by Medicare could decrease our revenues and adversely affect other operating results.
•Reimbursement claims are subject to various audits and such audits may lead to assertions that we have been overpaid or have submitted improper claims, and these assertions have in the past and will in the future require us to incur additional costs to respond to requests for records and defend the validity of payments and to refund any amounts determined to have been overpaid.
•The use by governmental agencies and contractors of statistical sampling and extrapolation may substantially expand claims of overpayment or noncompliance.
•Substantive and procedural deficiencies in the administrative appeals process associated with denied Medicare reimbursement claims, including from various Medicare audit programs, have in the past and could in the future delay or reduce our reimbursement for services previously provided, including through recoupment from other claims due to us from Medicare.
•Efforts to reduce payments to healthcare providers undertaken by third-party payors and conveners could adversely affect our revenues or profitability.
•Changes in our payor mix or the acuity of our patients could reduce our revenues or profitability.
•Changes in the rules and regulations of the healthcare industry at the federal, state, and local levels, including those contemplated now and in the future as part of healthcare reform and deficit reduction (such as the Inpatient Rehabilitation Facility Review Choice Demonstration, the re-basing of payment systems, the introduction of site neutral payments or case-mix weightings across post-acute settings, and other payment system reforms) could decrease revenues and increase the costs of complying with the rules and regulations and have done so in the past from time to time.
•Alternative payment models and value-based purchasing initiatives could decrease our patient volumes and reimbursement rate or increase costs associated with our operations.
•Compliance with the extensive and frequently changing laws and regulations applicable to healthcare providers, including those related to patient care, coding and billing, data privacy and security, consumer protection, anti-trust, and employment practices, requires substantial time, effort and expense, and if we fail to comply, we could incur
ii

penalties and significant costs of investigating and defending asserted claims, whether meritorious or not, or be required to make significant changes to our operations.
•Our inability to maintain proper local, state and federal licensing, including compliance with the Medicare conditions of participation and provider enrollment requirements could decrease our revenues.
•Incidents affecting the proper operation, availability, or security of our or our vendors’ or partners’ information systems, including the patient information stored there, or business continuity could cause substantial losses and adversely affect our operations and governmental mandates to increase use of electronic records and interoperability exacerbate that risk.
•Any adverse outcome of various lawsuits, claims, and legal or regulatory proceedings, including disclosed and undisclosed qui tam suits, could be difficult to predict and could adversely affect our financial results or condition or our operations, and we could experience increased costs of defending and insuring against alleged professional liability and other claims.
•Our inability to successfully complete and integrate de novo developments, acquisitions, investments, and joint ventures consistent with our growth strategy, including realization of anticipated revenues, cost savings, productivity improvements arising from the related operations and avoidance of unanticipated difficulties, costs or liabilities that could arise from acquisitions or integrations could adversely affect our financial results or condition.
•Our inability to attract and retain nurses, therapists, and other healthcare professionals in a highly competitive environment with often severe staffing shortages and potential union activity could increase staffing costs and adversely affect other financial and operating results and has done so in the past.
•Competitive pressures in the healthcare industry, including from large acute-care hospitals that would typically serve as referral sources for us, and our response to those pressures could adversely affect our revenues or other financial results.
•Medicare quality reporting requirements could adversely affect our operating costs or Medicare reimbursement.
•Our inability to provide a consistently high quality of care, including as represented in metrics published by Medicare, could decrease our revenues.
•Our inability to maintain or develop relationships with patient referral sources, including our joint venture hospitals, or managed care payors could decrease our revenues.
•Acute-care hospitals that participate in joint ventures with us may experience, and in the past some have experienced, operational or financial challenges that, in turn, affect our joint venture inpatient rehabilitation hospitals.
•A pandemic, epidemic, or other widespread outbreak of an infectious disease or other public health crisis, and governmental responses to those events, could decrease our patient volumes, pricing, and revenues, lead to staffing and supply shortages and associated cost increases, otherwise interrupt operations, or lead to increased litigation risk and, in the case of the COVID-19 pandemic, has already done so in many instances.
•A regional or global socio-political, weather, or other catastrophic event could severely disrupt our business, particularly in areas such as Texas or Florida where we have a concentration of hospitals.
•Regulatory and other efforts to promote a transition to a lower-carbon economy may result in significant operational and financial challenges for us.
•Our inability to maintain infectious disease prevention and control efforts that are required and effectively minimize the spread among patients and employees could decrease our patient volumes and revenues, lead to staffing shortages or otherwise interrupt operations, or lead to increased litigation risk.
•Our debt and the associated restrictive covenants could have negative consequences for our business and limit our ability to execute aspects of our business plan successfully.
•The price of our common stock could adversely affect our willingness and ability to repurchase shares.
•We may be unable or unwilling to continue to declare and pay dividends on our common stock.
iii

•General conditions in the economy and capital markets, including inflation, any disruption, instability, or uncertainty related to armed conflict or an act of terrorism, a governmental impasse over approval of the United States federal budget or an increase to the debt ceiling, an international trade war, or a sovereign debt crisis could adversely affect our financial results or condition, including access to the capital markets.
The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.
iv

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
 2024202320242023
(In Millions, Except Per Share Data)
Net operating revenues$1,301.2 $1,187.1 $2,617.2 $2,347.5 
Operating expenses:  
Salaries and benefits700.5 636.2 1,412.1 1,265.2 
Other operating expenses189.9 172.7 393.8 350.6 
Occupancy costs14.2 14.3 28.2 28.1 
Supplies57.6 52.0 116.1 105.8 
General and administrative expenses50.5 55.4 100.7 98.8 
Depreciation and amortization72.9 72.6 143.2 136.5 
Total operating expenses1,085.6 1,003.2 2,194.1 1,985.0 
Interest expense and amortization of debt discounts and fees34.3 36.3 69.5 72.7 
Other income(3.3)(2.7)(8.7)(6.3)
Equity in net income of nonconsolidated affiliates(1.4)(0.9)(2.1)(1.3)
Income from continuing operations before income tax expense186.0 151.2 364.4 297.4 
Provision for income tax expense38.3 32.8 76.6 64.7 
Income from continuing operations147.7 118.4 287.8 232.7 
Loss from discontinued operations, net of tax(1.2)(1.2)(2.5)(2.2)
Net and comprehensive income146.5 117.2 285.3 230.5 
Less: Net and comprehensive income attributable to noncontrolling interests(32.4)(25.8)(58.7)(51.4)
Net and comprehensive income attributable to Encompass Health$114.1 $91.4 $226.6 $179.1 
Weighted average common shares outstanding:  
Basic99.9 99.5 99.9 99.5 
Diluted102.0 101.1 102.1 101.0 
Earnings per common share:
Basic earnings per share attributable to Encompass Health common shareholders:
 
Continuing operations
$1.14 $0.92 $2.28 $1.81 
Discontinued operations
(0.01)(0.01)(0.03)(0.02)
Net income
$1.13 $0.91 $2.25 $1.79 
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$1.13 $0.91 $2.24 $1.79 
Discontinued operations
(0.01)(0.01)(0.02)(0.02)
Net income
$1.12 $0.90 $2.22 $1.77 
Amounts attributable to Encompass Health common shareholders:
  
Income from continuing operations$115.3 $92.6 $229.1 $181.3 
Loss from discontinued operations, net of tax(1.2)(1.2)(2.5)(2.2)
Net income attributable to Encompass Health$114.1 $91.4 $226.6 $179.1 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
1

Encompass Health Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
June 30,
2024		December 31,
2023
 (In Millions)
Assets  
Current assets: 
Cash and cash equivalents$154.4 $69.1 
Restricted cash
27.7 35.1 
Accounts receivable
589.7 611.6 
Other current assets166.3 126.0 
Total current assets938.1 841.8 
Property and equipment, net3,438.9 3,301.0 
Operating lease right-of-use assets216.3 208.5 
Goodwill1,284.0 1,281.3 
Intangible assets, net303.0 278.2 
Other long-term assets208.4 191.6 
Total assets(1)
$6,388.7 $6,102.4 
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt$32.5 $24.8 
Current operating lease liabilities26.6 24.1 
Accounts payable164.2 170.0 
Accrued expenses and other current liabilities471.2 437.5 
Total current liabilities694.5 656.4 
Long-term debt, net of current portion2,684.1 2,687.8 
Long-term operating lease liabilities202.0 196.1 
Deferred income tax liabilities91.2 87.0 
Other long-term liabilities186.9 177.9 
Total liabilities(1)
3,858.7 3,805.2 
Commitments and contingencies
Redeemable noncontrolling interests48.6 42.0 
Shareholders’ equity:  
Encompass Health shareholders’ equity1,839.4 1,647.5 
Noncontrolling interests642.0 607.7 
Total shareholders’ equity2,481.4 2,255.2 
Total liabilities(1) and shareholders’ equity
$6,388.7 $6,102.4 
(1)Our consolidated assets as of June 30, 2024 and December 31, 2023 include total assets of variable interest entities of $204.1 million and $207.7 million, respectively, which cannot be used by us to settle the obligations of other entities. Our consolidated liabilities as of June 30, 2024 and December 31, 2023 include total liabilities of the variable interest entities of $45.1 million and $42.2 million, respectively. See Note 2, Variable Interest Entities.
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
2


Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)


 Three Months Ended June 30, 2024
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common
Shares Outstanding		Common StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling
Interests		Total
Balance at beginning of period100.7 $1.2 $1,797.2 $503.7 $(560.2)$620.4 $2,362.3 
Net income— — — 114.1 — 30.9 145.0 
Dividends declared ($0.15 per share)
— — 0.1 (15.4)— — (15.3)
Stock-based compensation— — 13.6 — — — 13.6 
Distributions declared— — — — — (27.6)(27.6)
Capital contributions from consolidated affiliates— — — — — 18.2 18.2 
Repurchases of common stock in open market(0.2)— — — (16.8)— (16.8)
Other0.2 — (4.1)(0.1)6.1 0.1 2.0 
Balance at end of period100.7 $1.2 $1,806.8 $602.3 $(570.9)$642.0 $2,481.4 

 Three Months Ended June 30, 2023
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common Shares OutstandingCommon StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling InterestsTotal
Balance at beginning of period100.2 $1.2 $1,739.1 $188.3 $(545.1)$542.2 $1,925.7 
Net income— — — 91.4 — 23.6 115.0 
Dividends declared ($0.15 per share)
— — — (15.1)— — (15.1)
Stock-based compensation— — 15.6 — — — 15.6 
Distributions declared— — — — — (27.5)(27.5)
Capital contributions from consolidated affiliates— — — — — 4.1 4.1 
Other— — 0.3 — (0.4)— (0.1)
Balance at end of period100.2 $1.2 $1,755.0 $264.6 $(545.5)$542.4 $2,017.7 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
3


Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity (Continued)
(Unaudited)

 Six Months Ended June 30, 2024
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common
Shares Outstanding		Common StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling
Interests		Total
Balance at beginning of period100.3 $1.2 $1,787.0 $406.5 $(547.2)$607.7 $2,255.2 
Net income— — — 226.6 — 55.7 282.3 
Receipt of treasury stock(0.2)— — — (12.1)— (12.1)
Dividends declared ($0.30 per share)
— — 0.2 (30.8)— — (30.6)
Stock-based compensation— — 22.9 — — — 22.9 
Distributions declared— — — — — (58.1)(58.1)
Capital contributions from consolidated affiliates— — — — — 36.6 36.6 
Repurchases of common stock in open market(0.2)— — — (16.8)— (16.8)
Other0.8 — (3.3)— 5.2 0.1 2.0 
Balance at end of period100.7 $1.2 $1,806.8 $602.3 $(570.9)$642.0 $2,481.4 

 Six Months Ended June 30, 2023
 (In Millions)
 Encompass Health Common Shareholders  
 Number of Common Shares OutstandingCommon StockCapital in Excess of Par ValueAccumulated IncomeTreasury StockNoncontrolling InterestsTotal
Balance at beginning of period99.8 $1.1 $1,730.2 $115.7 $(536.7)$516.0 $1,826.3 
Net income— — — 179.1 — 47.1 226.2 
Receipt of treasury stock(0.1)— — — (7.7)— (7.7)
Dividends declared ($0.30 per share)
— — — (30.2)— — (30.2)
Stock-based compensation— — 23.5 — — — 23.5 
Distributions declared— — — — — (58.7)(58.7)
Capital contributions from consolidated affiliates— — — — — 38.0 38.0 
Other0.5 0.1 1.3 — (1.1)— 0.3 
Balance at end of period100.2 $1.2 $1,755.0 $264.6 $(545.5)$542.4 $2,017.7 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
4


Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 Six Months Ended June 30,
 20242023
 (In Millions)
Cash flows from operating activities:  
Net income$285.3 $230.5 
Loss from discontinued operations, net of tax2.5 2.2 
Adjustments to reconcile net income to net cash provided by operating activities—  
Depreciation and amortization143.2 136.5 
Stock-based compensation22.9 23.5 
Deferred tax expense4.2 0.3 
Other, net14.2 3.1 
Change in assets and liabilities, net of acquisitions— 
Accounts receivable0.9 11.5 
Other assets(48.4)(8.4)
Accounts payable1.8 4.0 
Other liabilities32.3 34.3 
Net cash used in operating activities of discontinued operations(2.7)(2.9)
Total adjustments168.4 201.9 
Net cash provided by operating activities456.2 434.6 
Cash flows from investing activities:
Purchases of property, equipment, and intangible assets(296.3)(221.7)
Proceeds from sale of restricted investments17.0 1.0 
Other, net(8.8)(11.8)
Net cash used in investing activities(288.1)(232.5)
Cash flows from financing activities:
Principal borrowings on notes— 20.0 
Principal payments on debt, including pre-payments(2.4)(5.7)
Borrowings on revolving credit facility50.0 60.0 
Payments on revolving credit facility(50.0)(115.0)
Principal payments under finance lease obligations(10.7)(9.5)
Taxes paid on behalf of employees for shares withheld(12.1)(7.7)
Contributions from noncontrolling interests of consolidated affiliates33.3 46.3 
Dividends paid on common stock(30.8)(30.5)
Distributions paid to noncontrolling interests of consolidated affiliates(52.5)(59.4)
Repurchases of common stock, including fees and expenses(16.8)— 
Other, net1.8 — 
Net cash used in financing activities(90.2)(101.5)
Increase in cash, cash equivalents, and restricted cash77.9 100.6 
Cash, cash equivalents, and restricted cash at beginning of period104.2 53.4 
Cash, cash equivalents, and restricted cash at end of period$182.1 $154.0 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
5


Encompass Health Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Six Months Ended June 30,
20242023
(In Millions)
Reconciliation of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents at beginning of period
$69.1 $21.8 
Restricted cash at beginning of period
35.1 31.6 
Cash, cash equivalents, and restricted cash at beginning of period
$104.2 $53.4 
Cash and cash equivalents at end of period
$154.4 $117.5 
Restricted cash at end of period
27.7 36.5 
Cash, cash equivalents, and restricted cash at end of period
$182.1 $154.0 
Supplemental schedule of noncash operating, investing, and financing activities:
Accrued purchases of property, equipment, and intangible assets$(3.4)$19.0 
Operating lease additions and adjustments24.9 7.6 
Joint venture contributions11.8 18.0 
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed statements.
6

Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements

1.Basis of Presentation
Encompass Health Corporation (the “Company” or “Encompass Health”), incorporated in Delaware in 1984, including its subsidiaries, is a provider of inpatient rehabilitation services. Our national network of inpatient rehabilitation hospitals stretches across 37 states and Puerto Rico, with concentrations of hospitals in Florida and Texas. As of June 30, 2024, we operate 163 inpatient rehabilitation hospitals. We are the sole owner of 99 of these hospitals. We retain 50.0% to 97.5% ownership in the remaining 64 jointly owned hospitals.
The accompanying unaudited condensed consolidated financial statements of Encompass Health Corporation and Subsidiaries should be read in conjunction with the consolidated financial statements and accompanying notes contained in Encompass Health’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 28, 2024 (the “2023 Form 10‑K”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC applicable to interim financial information. Certain information and note disclosures included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted in these interim statements, as allowed by such SEC rules and regulations. The condensed consolidated balance sheet as of December 31, 2023 has been derived from audited financial statements, but it does not include all disclosures required by GAAP. However, we believe the disclosures are adequate to make the information presented not misleading. Certain prior year amounts may have been reclassified for comparative purposes to conform to the current-year financial statement presentation.
The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. In our opinion, the accompanying condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state the financial position, results of operations, and cash flows for each interim period presented.
Net Operating Revenues—
Our Net operating revenues disaggregated by payor source are as follows (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Medicare$841.6 $763.2 $1,695.3 $1,520.7 
Medicare Advantage
224.2 198.1 448.4 384.5 
Managed care
138.7 133.5 281.1 260.6 
Medicaid43.0 48.8 88.1 96.2 
Other third-party payors10.7 10.6 20.3 21.5 
Workers’ compensation6.8 7.3 13.8 13.0 
Patients3.7 4.0 7.6 6.6 
Other income32.5 21.6 62.6 44.4 
Total$1,301.2 $1,187.1 $2,617.2 $2,347.5 
See Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements accompanying the 2023 Form 10-K for our policy related to Net operating revenues.


7
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Noncontrolling Interests in Consolidated Affiliates—
Effective July 1, 2024, we expanded our existing joint venture with Piedmont Healthcare (“Piedmont”), which we control, by contributing the assets and operations of our previously wholly-owned 70-bed hospital in Augusta, Georgia. Piedmont contributed approximately $90 million on July 1, 2024, which indirectly resulted in Piedmont obtaining a 50% ownership interest in the hospital. As a result of this transaction, we expect to record a post-tax gain of approximately $23 million increasing Capital in excess of par value on the condensed consolidated statement of shareholders’ equity for the nine months ending September 30, 2024.
On July 1, 2023, we entered into a joint venture agreement with the University of Maryland Rehabilitation Institute of Southern Maryland, LLC (“UM Rehab”) to operate our previously wholly-owned 60-bed hospital in Bowie, Maryland. As a condition of the joint venture agreement, UM Rehab paid $26.3 million on June 30, 2023, for a 50% ownership interest in the hospital which became effective on July 1, 2023. This payment is included in Contributions from noncontrolling interests of consolidated affiliates on the condensed consolidated statement of cash flows for the six months ended June 30, 2023.
Recent Accounting Pronouncements—
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which requires all public entities, including entities with a single reportable segment, to provide disclosure of (1) significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, (2) the amount and description of the composition of other segment items which reconcile to segment profit or loss, and (3) the title and position of the entity’s CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and allocating resources. ASU 2023-07 is effective for our annual periods beginning January 1, 2024 and interim periods beginning January 1, 2025. Early adoption is permitted with retrospective application required for all prior periods presented in the financial statements. We are currently evaluating the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which intends to improve the transparency of income tax disclosures by requiring companies to (1) disclose consistent categories and greater disaggregation of information in the effective rate reconciliation and (2) provide information on income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are required to apply the guidance prospectively but have the option to apply it retrospectively. We are currently evaluating the requirements of this standard and any potential impact it may have on our condensed consolidated financial statements.
We do not believe any other recently issued, but not yet effective, accounting standards will have a material effect on our condensed consolidated financial position, results of operations, or cash flows.

8
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
2.Variable Interest Entities
As of June 30, 2024 and December 31, 2023, we consolidated eight limited partnership-like entities that are variable interest entities (“VIEs”) and of which we are the primary beneficiary. Our ownership percentages in these entities range from 50.0% to 75.0% as of June 30, 2024. Through partnership and management agreements with or governing each of these entities, we manage all of these entities and handle all day-to-day operating decisions. Accordingly, we have the decision making power over the activities that most significantly impact the economic performance of our VIEs and an obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These decisions and significant activities include, but are not limited to, marketing efforts, oversight of patient admissions, medical training, nurse and therapist scheduling, provision of healthcare services, billing, collections, and creation and maintenance of medical records. The terms of the agreements governing each of our VIEs prohibit us from using the assets of each VIE to satisfy the obligations of other entities.
The carrying amounts and classifications of the consolidated VIEs’ assets and liabilities, which are included in our condensed consolidated balance sheets, are as follows (in millions):
June 30, 2024December 31, 2023
Assets 
Current assets: 
Cash and cash equivalents$0.5 $0.2 
Accounts receivable
36.7 36.7 
Other current assets5.1 5.0 
Total current assets42.3 41.9 
Property and equipment, net133.9 128.8 
Operating lease right-of-use assets1.3 1.4 
Goodwill15.9 15.9 
Intangible assets, net1.1 1.2 
Other long-term assets9.6 18.5 
Total assets$204.1 $207.7 
Liabilities
Current liabilities:
Current portion of long-term debt$0.9 $0.9 
Accounts payable8.2 7.6 
Accrued expenses and other current liabilities21.5 18.7 
Total current liabilities30.6 27.2 
Long-term debt, net of current portion13.1 13.6 
Long-term operating lease liabilities1.4 1.4 
Total liabilities$45.1 $42.2 

9
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
3.Long-term Debt
Our long-term debt outstanding consists of the following (in millions):
June 30, 2024December 31, 2023
Credit Agreement—  
Advances under revolving credit facility$— $— 
Bonds payable—
5.75% Senior Notes due 2025
349.0 348.5 
4.50% Senior Notes due 2028
786.7 785.0 
4.75% Senior Notes due 2030
782.8 781.5 
4.625% Senior Notes due 2031
392.0 391.5 
Other notes payable76.7 66.0 
Finance lease obligations329.4 340.1 
2,716.6 2,712.6 
Less: Current portion(32.5)(24.8)
Long-term debt, net of current portion$2,684.1 $2,687.8 
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter (in millions):
Face AmountNet Amount
July 1 through December 31, 2024$12.7 $12.7 
2025387.4 386.3 
202636.0 36.0 
202743.2 43.2 
2028831.7 818.4 
202940.5 40.5 
Thereafter1,404.8 1,379.5 
Total$2,756.3 $2,716.6 
On July 15, 2024, we issued notice for redemption of $150 million of the outstanding principal balance of our 5.75% Senior Notes due 2025 (the “2025 Notes”). The associated redemption date will be August 15, 2024, and the redemption price will be 100.0% of par, plus accrued and unpaid interest pursuant to the terms of the 2025 Notes. We plan to use cash on hand to fund the redemption. As a result of this redemption, we expect to record an approximate $0.4 million loss on early extinguishment of debt in the third quarter of 2024.
4.Redeemable Noncontrolling Interests
The following is a summary of the activity related to our Redeemable noncontrolling interests (in millions):
Six Months Ended June 30,
20242023
Balance at beginning of period$42.0 $35.6 
Net income attributable to noncontrolling interests3.0 4.3 
Distributions declared(4.9)(0.6)
Contribution to joint venture8.5 — 
Balance at end of period$48.6 $39.3 

10
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The following table reconciles the net income attributable to nonredeemable Noncontrolling interests, as recorded in the shareholders’ equity section of the condensed consolidated balance sheets, and the net income attributable to Redeemable noncontrolling interests, as recorded in the mezzanine section of the condensed consolidated balance sheets, to the Net and comprehensive income attributable to noncontrolling interests presented in the condensed consolidated statements of comprehensive income (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Net income attributable to nonredeemable noncontrolling interests$30.9 $23.6 $55.7 $47.1 
Net income attributable to redeemable noncontrolling interests1.5 2.2 3.0 4.3 
Net income attributable to noncontrolling interests$32.4 $25.8 $58.7 $51.4 
See also Note 5, Fair Value Measurements.
5.Fair Value Measurements
Our financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in millions):
  Fair Value Measurements at Reporting Date Using
As of June 30, 2024Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Valuation Technique (1)
Equity securities (2)
$117.3 $4.0 $113.3 $— M
Redeemable noncontrolling interests48.6 — — 48.6 I
As of December 31, 2023
Equity securities (2)
$126.2 $4.0 $122.2 $— M
Redeemable noncontrolling interests42.0 — — 42.0 I
(1) The two valuation techniques are: market approach (M) and income approach (I).
(2) As of June 30, 2024, $37.4 million are included in Other current assets and $79.9 million are included in Other long-term assets in the condensed consolidated balance sheet. As of December 31, 2023, $37.6 million are included in Other current assets and $88.6 million are included in Other long-term assets in the condensed consolidated balance sheet.
There are assets and liabilities that are not required to be measured at fair value on a recurring basis. However, these assets may be recorded at fair value as a result of impairment charges or other adjustments made to the carrying value of the applicable assets. During the three and six months ended June 30, 2024 and 2023, we did not record any material gains or losses related to these assets.

11
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
As discussed in Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2023 Form 10‑K, the carrying value equals fair value for our financial instruments that are not included in the table below and are classified as current in our condensed consolidated balance sheets. The carrying amounts and estimated fair values for all of our other financial instruments are presented in the following table (in millions):
 As of June 30, 2024As of December 31, 2023
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Long-term debt:    
5.75% Senior Notes due 2025
$349.0 $349.0 $348.5 $349.3 
4.50% Senior Notes due 2028
786.7 759.0 785.0 763.6 
4.75% Senior Notes due 2030
782.8 748.4 781.5 755.0 
4.625% Senior Notes due 2031
392.0 367.4 391.5 369.4 
Other notes payable76.7 76.7 66.0 66.0 
Financial commitments:
Letters of credit— 36.3 — 31.9 
Fair values for our long-term debt and financial commitments are determined using inputs, including quoted prices in nonactive markets, that are observable either directly or indirectly, or Level 2 inputs within the fair value hierarchy. See Note 1, Summary of Significant Accounting Policies, “Fair Value Measurements,” to the consolidated financial statements accompanying the 2023 Form 10‑K.
6.Share-Based Payments
During the six months ended June 30, 2024, we issued a total of 0.5 million restricted stock awards to members of our management team and our board of directors. Of the restricted stock awards issued to members of our management team, 0.2 million contain only a service condition, while the remainder contain a service and/or performance condition as well as a market condition for certain members of management. For the awards that include a performance and market condition, the number of shares that will ultimately be granted to employees may vary based on the Company’s performance during the applicable three-year performance measurement period and the applicable three-year market condition measurement period. Additionally, we granted 0.1 million stock options to members of our management team. The fair value of these awards and options was determined using the policies described in Note 1, Summary of Significant Accounting Policies, and Note 14, Share-Based Payments, to the consolidated financial statements accompanying the 2023 Form 10‑K.
7.Income Taxes
Our Provision for income tax expense of $38.3 million and $76.6 million for the three and six months ended June 30, 2024, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate partially offset by tax benefits resulting from share-based compensation windfalls. Our Provision for income tax expense of $32.8 million and $64.7 million for the three and six months ended June 30, 2023, respectively, primarily resulted from the application of our estimated effective blended federal and state income tax rate.

12
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
8.Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):
 Three Months Ended June 30,Six Months Ended June 30,
 2024202320242023
Basic:
Numerator:  
Income from continuing operations$147.7 $118.4 $287.8 $232.7 
Less: Net income attributable to noncontrolling interests included in continuing operations(32.4)(25.8)(58.7)(51.4)
Less: Income allocated to participating securities(0.8)(0.6)(1.6)(1.2)
Income from continuing operations attributable to Encompass Health common shareholders114.5 92.0 227.5 180.1 
Loss from discontinued operations attributable to Encompass Health common shareholders(1.2)(1.2)(2.5)(2.2)
Net income attributable to Encompass Health common shareholders$113.3 $90.8 $225.0 $177.9 
Denominator:
Basic weighted average common shares outstanding
99.9 99.5 99.9 99.5 
Basic earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$1.14 $0.92 $2.28 $1.81 
Discontinued operations
(0.01)(0.01)(0.03)(0.02)
Net income
$1.13 $0.91 $2.25 $1.79 
Diluted:
Numerator:
Income from continuing operations$147.7 $118.4 $287.8 $232.7 
Less: Net income attributable to noncontrolling interests included in continuing operations(32.4)(25.8)(58.7)(51.4)
Income from continuing operations attributable to Encompass Health common shareholders115.3 92.6 229.1 181.3 
Loss from discontinued operations attributable to Encompass Health common shareholders(1.2)(1.2)(2.5)(2.2)
Net income attributable to Encompass Health common shareholders$114.1 $91.4 $226.6 $179.1 
Denominator:
Diluted weighted average common shares outstanding
102.0 101.1 102.1 101.0 
Diluted earnings per share attributable to Encompass Health common shareholders:
Continuing operations
$1.13 $0.91 $2.24 $1.79 
Discontinued operations
(0.01)(0.01)(0.02)(0.02)
Net income
$1.12 $0.90 $2.22 $1.77 

13
Encompass Health Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
The following table sets forth the reconciliation between basic weighted average common shares outstanding and diluted weighted average common shares outstanding (in millions):
Three Months Ended June 30,Six Months Ended June 30,
2024202320242023
Basic weighted average common shares outstanding99.9 99.5 99.9 99.5 
Restricted stock awards, dilutive stock options, and restricted stock units
2.1 1.6 2.2 1.5 
Diluted weighted average common shares outstanding102.0 101.1 102.1 101.0 
See Note 17, Earnings per Common Share, to the consolidated financial statements accompanying the 2023 Form 10‑K for additional information related to our common stock.
9.Contingencies and Other Commitments
We provide services in the highly regulated healthcare industry. Furthermore, operating inpatient rehabilitation hospitals requires significant staffing and involves intensive therapy for individuals suffering from significant physical or cognitive disabilities or injuries. As a result, various lawsuits, claims, and legal and regulatory proceedings have been and can be expected to be instituted or asserted against us. The resolution of any such lawsuits, claims, or legal and regulatory proceedings could materially and adversely affect our financial position, results of operations, and cash flows in a given period.
Other Matters—
The False Claims Act allows private citizens, called “relators,” to institute civil proceedings on behalf of the United States alleging violations of the False Claims Act. These lawsuits, also known as “whistleblower” or “qui tam” actions, can involve significant monetary damages, fines, attorneys’ fees and the award of bounties to the relators who successfully prosecute or bring these suits to the government. Qui tam cases are sealed at the time of filing, which means knowledge of the information contained in the complaint typically is limited to the relator, the federal government, and the presiding court. The defendant in a qui tam action may remain unaware of the existence of a sealed complaint or its specific claims for years. While the complaint is under seal, the government reviews the merits of the case and may conduct a broad investigation and seek discovery from the defendant and other parties before deciding whether to intervene in the case and take the lead on litigating the claims. The court lifts the seal when the government makes its decision on whether to intervene. If the government decides not to intervene, the relator may elect to continue to pursue the lawsuit individually on behalf of the government. It is possible that qui tam lawsuits have been filed against us, which suits remain under seal, or that we are unaware of such filings or precluded by existing law or court order from discussing or disclosing the filing of such suits. We may be subject to liability under one or more undisclosed qui tam cases brought pursuant to the False Claims Act.
It is our obligation as a participant in Medicare and other federal healthcare programs to routinely conduct audits and reviews of the accuracy of our billing systems and other regulatory compliance matters. As a result of these reviews, we have made, and will continue to make, disclosures to the United States Department of Health and Human Services Office of Inspector General and the Centers for Medicare & Medicaid Services relating to amounts we suspect represent over-payments from these programs, whether due to inaccurate billing or otherwise. Some of these disclosures have resulted in, and may in the future result in, Encompass Health refunding amounts to Medicare or other federal healthcare programs.
Other Commitments—
We are a party to service and other contracts in connection with conducting our business. Minimum amounts due under these agreements are $32.3 million for the remainder of 2024, $40.3 million in 2025, $29.9 million in 2026, $24.9 million in 2027, $22.4 million in 2028, and $62.3 million thereafter. These contracts primarily relate to software licensing and support and contract services.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) relates to Encompass Health Corporation and its subsidiaries and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this report. In addition, the following MD&A should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2023, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 1, Business, and Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed on February 28, 2024 (collectively, the “2023 Form 10‑K”).
This MD&A is designed to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. See “Cautionary Statement Regarding Forward-Looking Statements” beginning on page ii of this report, which is incorporated herein by reference for a description of important factors that could cause actual results to differ from expected results. See also Item 1A, Risk Factors, of this report and to the 2023 Form 10‑K.
Executive Overview
Our Business
We are the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals. We provide specialized rehabilitative treatment on an inpatient basis. We operate hospitals in 37 states and Puerto Rico, with concentrations in Florida and Texas. As of June 30, 2024, we operate 163 inpatient rehabilitation hospitals. For additional information about our business, see Item 1, Business, and Item 1A, Risk Factors, of the 2023 Form 10‑K.
2024 Overview
During the three and six months ended June 30, 2024, Net operating revenues increased 9.6% and 11.5%, respectively, over the same periods of 2023 due primarily to volume growth. See “Results of Operations” section of this Item for additional volume information.
In our continued development and expansion efforts during 2024, we:
•began operating our new 50-bed inpatient rehabilitation hospital in Kissimmee, Florida in May 2024;
•began operating our new 40-bed inpatient rehabilitation hospital in Atlanta, Georgia with our joint venture partner Piedmont in May 2024;
•began operating our new 40-bed inpatient rehabilitation hospital in Louisville, Kentucky with our joint venture partner Baptist Health in June 2024;
•continued our capacity expansions by adding 115 new beds to existing hospitals (inclusive of our new 40-bed satellite inpatient rehabilitation hospital in Ballwin, Missouri which began operating in May 2024); and

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•announced or continued the development of the following hospitals:
Expected open dateNumber of New Beds
202420252026
De novo projects(1)
Johnston, Rhode Island(3)
3Q2450——
Fort Mill, South Carolina3Q2439——
Houston, Texas4Q2461——
Athens, Georgia(2)
1Q25—40—
Fort Myers, Florida(2)
2Q25—60—
Daytona Beach, Florida2Q25—50—
St. Petersburg, Florida3Q25—50—
Lake Worth, Florida3Q25—50—
Danbury, Connecticut3Q25—40—
Amarillo, Texas——50
Concordville, Pennsylvania——50
Norristown, Pennsylvania——50
Loganville, Georgia(2)
——40
Irmo, South Carolina——50
Palm Beach Gardens, Florida——50
Avondale, Arizona——60
San Antonio, Texas——50
Remote and satellite hospitals (included in bed additions)(1)
Wildwood, Florida (in The Villages, Florida)—50—
Other bed additions~110~80~80
(1) Opening dates are tentative
(2) Expected joint venture
(3) Opened in July 2024
We also continued our shareholder distributions during the six months ended June 30, 2024 by paying a quarterly cash dividend of $0.15 per share on our common stock in January 2024, April 2024, and July 2024, respectively. On July 24, 2024, our board of directors approved an increase in our quarterly dividend and declared a cash dividend of $0.17 per share, payable on October 15, 2024 to stockholders of record on October 1, 2024. In addition, we repurchased 0.2 million shares of our common stock in the open market for $16.8 million during the six months ended June 30, 2024. For additional information see the “Liquidity and Capital Resources” section of this Item.
Business Outlook
We remain highly optimistic regarding the intermediate and long-term prospects of our business. Demographic trends, such as population aging, should continue to increase long-term demand for the services we provide. While we treat patients of all ages, most of our patients are 65 and older, and the number of Medicare enrollees is expected to grow approximately 3% per year for the foreseeable future, reaching approximately 73 million people over the age of 65 by 2030. More specifically, the average age of our Medicare patients is approximately 77, and the population group ranging in ages from 75 to 79 is expected to grow at approximately 5% per year through 2026. We believe the demand for the services we provide will continue to increase as the U.S. population ages. We believe these factors align with our strengths in, and focus on, inpatient rehabilitation services.
We are committed to delivering high-quality, cost-effective patient care. As the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated, revenues, and number of hospitals, we believe we differentiate ourselves from our competitors based on, among other things, the quality of our clinical outcomes, our cost-effectiveness, our financial strength, and our extensive application of technology. We also believe our competitive strengths discussed in Item 1, Business, “Competitive Strengths,” of the 2023 Form 10‑K, give us the ability to adapt and succeed in a healthcare industry facing regulatory uncertainty around attempts to improve outcomes and reduce costs.

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The healthcare industry faces the prospect of ongoing efforts to transform the healthcare system to coordinated care delivery and payment models. The nature, timing and extent of that transformation remains uncertain, as the development and implementation of new care delivery and payment systems will require significant time and resources. Our goal is to position the Company in a prudent manner to be responsive to industry shifts. We have invested in our core business and created an infrastructure that enables us to provide high-quality care on a cost-effective basis. We have been disciplined in creating a capital structure that is flexible with no significant debt maturities in 2024. We continue to have a strong, well-capitalized balance sheet, including a substantial portfolio of owned real estate, and ample availability under our revolving credit facility, which along with the cash flows generated from operations should, we believe, provide sufficient support for our ability to adapt to changes in reimbursement, sustain our business model, and grow through de novo hospitals and bed additions. See also Item 1, Business, “Competitive Strengths” and “Strategy and 2024 Strategic Priorities” of the 2023 Form 10‑K.
Key Challenges
Healthcare is a highly regulated industry facing many well-publicized regulatory and reimbursement challenges. Medicare reimbursement for inpatient rehabilitation facilities (“IRFs”) has recently undergone significant changes. The future of many aspects of healthcare regulation generally and Medicare reimbursement specifically remains uncertain. Successful healthcare providers are those able to adapt to changes in the regulatory and operating environments, build strategic relationships across the healthcare continuum, and consistently provide high-quality, cost-effective care. We believe we have the necessary capabilities—change agility, strategic relationships, quality of patient outcomes, cost effectiveness, and ability to capitalize on growth opportunities—to adapt to and succeed in a dynamic, highly regulated industry, and we have a proven track record of doing so. For a detailed discussion of the challenges we face, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Executive Overview—Key Challenges” of the 2023 Form 10‑K.
As we continue to execute our business plan, the following are some of the key challenges we face.
•Operating in a Highly Regulated Industry. We are required to comply with extensive and complex laws and regulations at the federal, state, and local government levels. More specifically, because Medicare comprises a significant portion of our Net operating revenues, failure to comply with the laws and regulations governing the Medicare program and related matters, including anti-kickback and anti-fraud requirements, could materially and adversely affect us. These rules and regulations have affected, or could in the future affect, our business activities by having an impact on the reimbursement we receive for services provided or the costs of compliance, mandating new documentation standards, requiring additional licensure or certification, regulating our relationships with physicians and other referral sources, regulating the use of our properties, and limiting our ability to enter new markets or add new capacity to existing hospitals. Ensuring continuous compliance with extensive laws and regulations is an operating requirement for all healthcare providers. See Item 1, Business, “Regulation,” Item 1A, Risk Factors, “Reimbursement Risks” and “Other Regulatory Risks” of the 2023 Form 10‑K for detailed discussions of the most important regulations we face and our programs intended to ensure we comply with those regulations.
•Changes in Medicare Reimbursement and Regulatory Requirements for Operating IRFs. On July 31, 2024, the Centers for Medicare & Medicaid Services (“CMS”) released its notice of final rulemaking for fiscal year 2025 for IRFs (the “2025 Final Rule”) under the inpatient rehabilitation facility prospective payment system. The 2025 Final Rule will implement a net 3.0% market basket increase (market basket update of 3.5% reduced by a productivity adjustment of 0.5%) effective for discharges between October 1, 2024 and September 30, 2025. The 2025 Final Rule also includes changes that impact our hospital-by-hospital base rate for Medicare reimbursement. Such changes include, but are not limited to, revisions to the wage index, updates to outlier payments, and updates to the case-mix group relative weights and average lengths of stay values. Based on our analysis that utilizes the acuity of our patients annualized over a twelve-month period ended June 30, 2024, our experience with outlier payments over this same time frame, and other factors, we believe the 2025 Final Rule will result in a net increase to our Medicare payment rates of approximately 3.3% effective October 1, 2024.

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Beginning August 21, 2023, IRFs located in Alabama began participation in CMS’s five-year review choice demonstration (“RCD”), under which Medicare reimbursement claims are assessed for compliance with applicable coverage and clinical documentation requirements. On March 1, 2024, CMS announced the expansion of RCD, effective June 17, 2024, to include IRFs located in Pennsylvania and billing to a certain Medicare Administrative Contractor (“MAC”). We do not bill to this MAC, so we are not subject to RCD in Pennsylvania at this time. CMS plans to expand RCD further to Texas and California, but the timing for doing so is not known. We operate 47 inpatient rehabilitation hospitals (representing approximately 29% of our IRF Medicare claims) in the four RCD states. CMS has also announced it will expand RCD to include additional IRFs based on the MAC to which those IRFs submit claims.
Under RCD, participating IRFs have an initial choice between pre-claim or post-payment review of 100% of Medicare claims submitted to demonstrate compliance with applicable requirements during the first six-month review period or cycle. We elected the pre-claim review option for our IRFs in Alabama for the first cycle. Under the pre-claim review choice, services can begin prior to the submission of the review request and continue while the decision is being made. The pre-claim review request with required documentation must be submitted, reviewed, and approved before the final claim is paid. If a certain percentage of the claims reviewed are found to be valid, the IRF may then opt out of the 100% review. For the first cycle ending in February 2024, that validation percentage was 80% or greater. The validation percentages for cycles two and three are 85% or greater and 90% or greater, respectively. In opting out, the IRF may elect spot prepayment reviews of samples consisting of 5% of total claims or selective post-payment review of a statistically valid random sample. Our claim validation rate for cycle one exceeded 80% at our IRFs in Alabama. For cycle two, which began on May 1, 2024, we elected not to opt out, so our IRFs in Alabama remain subject to the 100% pre-claim review. We cannot predict the impact, if any, RCD may have on the collectability of our Medicare claims over its five-year term and ultimately our financial position, results of operations, and cash flows.
•Maintaining Strong Volume Growth. Various factors, including competition and increasing regulatory and administrative burdens, may impact our ability to maintain and grow our hospital volumes. In any particular market, we may encounter competition from local or national entities with longer operating histories or other competitive advantages, such as acute-care hospitals who provide post-acute services similar to ours or other post-acute providers with relationships with referring acute-care hospitals or physicians. Aggressive payment review practices by Medicare contractors, aggressive enforcement of regulatory policies by government agencies, and restrictive or burdensome rules, regulations or statutes governing admissions practices may lead us to not accept patients who would be appropriate for and would benefit from the services we provide. In addition, from time to time, we must get regulatory approval to expand our services and locations in states with certificate of need laws. This approval may be withheld or take longer than expected. In the case of new-store volume growth, the addition of hospitals to our portfolio also may be difficult and take longer than expected.
•Recruiting and Retaining High-Quality Personnel. Recruiting and retaining qualified personnel, including management, for our inpatient hospitals remain a high priority for us. We attempt to maintain a comprehensive compensation and benefits package that allows us to remain competitive in this challenging staffing environment while remaining consistent with our goal of providing high-quality, cost-effective care. Additionally, our operations have been affected and may in the future be affected by staffing shortages. In recent years, staffing shortages and competition have resulted in increased labor costs, including significant sign-on and shift bonuses, and increased use of contract labor. See Item 1A, Risk Factors, of the 2023 Form 10‑K for further discussion of competition for staffing, shortages of qualified personnel, and other factors that may increase our labor costs and constrain our ability to take new patients.
We remain confident in the prospects of our business based on the increasing demands for the services we provide to an aging population. This confidence is further supported by our strong financial foundation and the substantial investments we have made in our business. We have a proven track record of working through difficult situations, and we believe in our ability to overcome current and future challenges.

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Results of Operations
Payor Mix
We derived consolidated Net operating revenues from the following payor sources:
Three Months Ended June 30,Six Months Ended June 30,
 2024202320242023
Medicare64.7 %64.4 %64.8 %64.7 %
Medicare Advantage
17.2 %16.7 %17.1 %16.4 %
Managed care
10.7 %11.2 %10.7 %11.1 %
Medicaid3.3 %4.1 %3.4 %4.1 %
Other third-party payors0.8 %0.9 %0.8 %0.9 %
Workers’ compensation0.5 %0.6 %0.5 %0.6 %
Patients0.3 %0.3 %0.3 %0.3 %
Other income2.5 %1.8 %2.4 %1.9 %
Total100.0 %100.0 %100.0 %100.0 %
For additional information regarding our payors, see the “Sources of Revenues” section of Item 1, Business, of the 2023 Form 10‑K.

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Our Results
Our consolidated results of operations were as follows:
 Three Months Ended June 30,Percentage ChangeSix Months Ended June 30,Percentage Change
 202420232024 vs. 2023202420232024 vs. 2023
 (In Millions, Except Percentage Change)
Net operating revenues$1,301.2 $1,187.1 9.6 %$2,617.2 $2,347.5 11.5 %
Operating expenses:      
Salaries and benefits700.5 636.2 10.1 %1,412.1 1,265.2 11.6 %
Other operating expenses189.9 172.7 10.0 %393.8 350.6 12.3 %
Occupancy costs14.2 14.3 (0.7)%28.2 28.1 0.4 %
Supplies57.6 52.0 10.8 %116.1 105.8 9.7 %
General and administrative expenses50.5 55.4 (8.8)%100.7 98.8 1.9 %
Depreciation and amortization72.9 72.6 0.4 %143.2 136.5 4.9 %
Total operating expenses1,085.6 1,003.2 8.2 %2,194.1 1,985.0 10.5 %
Interest expense and amortization of debt discounts and fees34.3 36.3 (5.5)%69.5 72.7 (4.4)%
Other income(3.3)(2.7)22.2 %(8.7)(6.3)38.1 %
Equity in net income of nonconsolidated affiliates(1.4)(0.9)55.6 %(2.1)(1.3)61.5 %
Income from continuing operations before income tax expense186.0 151.2 23.0 %364.4 297.4 22.5 %
Provision for income tax expense38.3 32.8 16.8 %76.6 64.7 18.4 %
Income from continuing operations147.7 118.4 24.7 %287.8 232.7 23.7 %
Loss from discontinued operations, net of tax(1.2)(1.2)— %(2.5)(2.2)13.6 %
Net income